By Roberto Herrera-Lim

It's easy to disparage Vietnam, whose reputation as the poster child for the economic potential of frontier market countries has taken a beating in recent years. Inflation is a persistent threat, growth is slowing, and the country's banks and state-owned enterprises (SOEs) are struggling with a potentially destabilizing level of bad debts. And to top it all off, Vietnam's political leaders are fighting among themselves when the situation calls for firm action. As a result, foreign investors are left scratching their heads and wondering if Vietnam will be able to build the institutions and capabilities needed to move into the ranks of the emerging market nations.  

Vietnam's institutions were not prepared for strong growth. That much is clear from the crisis that has played out over the past few years during which Vietnam's institutions and leaders mismanaged capital inflows, resulting in inflation, bad investment decisions, and near-rogue banks and SOEs. All this occurred on Prime Minister Nguyen Tan Dung's watch, and while he has survived at least two challenges to his leadership, he is weakened and chastened. As a result, consensus decision-making will play a greater role in coming years, while Dung's competitors (including President Truong Tan Sang) reduce his control over policymaking and tighten oversight. The near-term consequence of this dynamic will be a greater likelihood that factional competition will result in uneven policies and conflicting signals.

But don't count Vietnam out of the game yet. Historically, crises have been effective at forcing effective policy choices from the government (such as the 2001 ouster of the party's then general secretary Le Kha Phiu). The current situation is unlikely to result in Dung's exit, but it will spur a serious reexamination of economic policy, especially when it comes to better allocating investment. There is, after all, still a broad consensus among Vietnam's elites that previous reforms should remain in place and that long-term growth and sustained, equitable improvements in the quality of life are needed to ensure the survival of the communist party. The country's economy could also benefit from structural factors that are encouraging investors to consider manufacturing locations other than China.

It may be tempting for manufacturers to look to other countries in Asia, but they should not discount Vietnam's reemergence as a viable investment destination. The country's leaders may be squabbling, but they understand that failure to reform is a larger threat to their primacy than the uncertainty that comes with change.

Roberto Herrera Lim is a Director in Eurasia Group's Asia practice.

Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.

1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.

2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.

3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.

4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.

5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.

6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.

7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.

8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.

9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.

10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.   

In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.

Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.

Eurozone breakup -- This is probably the single most overrated risk of 2012. The political will to maintain the eurozone remains strong among all the major political parties in the core Eurozone states, almost across the board in the European periphery and, just as importantly, among eurocrats in the ever-growing European bureaucracy. And there's no effective political mechanism for a Eurozone breakup.

China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.

Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.

Over the next three weeks, we'll be posting more ideas and information on each of these risks.

I hosted a dinner last night along with a couple of Harvard folks -- economic historian Niall Ferguson and economist Ken Rogoff. It seems Ferguson and I have been facing off a lot recently -- him doing the run-up to today's changing geoeconomic environment (starting from about the 14th century) and me looking ahead. This time, Ken was there to keep us honest on facts and figures.

Niall's pretty much a Davos fixture, with a studied but effortless presentation style and pretty extraordinary range when it comes to European/Eurasian/Asian historical trends. He also tends to get a haircut right before the summit, and so looked disarmingly boyish. (I guess that puts me in the middle, since Rogoff has a rather more adult do.)

The talk moved swiftly to whether Asia (and China in particular) has the ability to structurally eat the west's lunch. Niall thinks so -- and points to six "killer apps" that the west has dominated for a couple of centuries that now the east has picked up (things like innovation and competition). I'm skeptical on the innovation side, but generally they're strong drivers.  

My primary rejoinder was to what extent China has also imported some killer apps from the west that are going to prove, well, problematic, for their model. The first, and the less controversial, is growth. When they get to around $10,000 per capita (from just under half that at present), growth's going to slow substantially. The economy has to be restructured, and largely into the hands of consumers ... out of the hands of the state. An extremely difficult thing for a consensus-driven state capitalist system to do.

But there's a second, more controversial "killer app": representative government. Not in the sense that Beijing is moving towards western-style democracy. But rather that over time, the Chinese government has indeed become much more responsive (and has had to become much more responsive) to the demands of the domestic constituency. That's a trend that's likely to prove extremely difficult to slow down. It's also one that likely makes the Chinese government more short term...and less strategic. One of the biggest advantages China has had (in addition to extraordinary amounts of productive cheap labor) is the ability to direct resources strategically in a way that the west, with their continual electoral cycles and need to placate constituents, really can't. When does that start seriously changing in China? Quite possibly at the worst possible time...when there's a slowdown.

Anyway, at the end of the presentation, we did a snap poll of the roughly 75 attendees at the dinner: how many thought emerging market growth was, on balance, a good or a bad thing for the developed world? A plurality actually voted "bad." (I'd say 40/45 percent, 25 percent good, and the rest thoughtfully abstaining). Food for thought.

By Roberto Herrera-Lim

Western governments recently cheered Aung San Suu Kyi's release, but don't expect any major changes to their Myanmar (formerly known as Burma) policies in the near term. By contrast, Asian countries will probably increase their level of engagement, no matter what the country's politics, because they want access to its natural resources. So what does this all mean for Myanmar's relations with the East and West?

Divining the intentions of Myanmar's generals is never easy, especially their calculations around the release of the country's most famous dissident. It could be an act of economic desperation, the result of a power play between the old guard and relatively more moderate factions within the military, or simply the regime's efforts to achieve some form of normalization. Regardless of the motives, however, the effects are clear: While the West remains distrustful of recent moves, other Asian countries will increase their dealings and investments with Pyinmana, giving these governments greater leverage with the generals who effectively run the country (albeit in civilian clothes). In other words, there will a widening gap between how the West and Asia deals with the Burmese regime, for the next year at least.

The current U.S. administration, whose priorities in Asia lie elsewhere, will not expend much political capital on the country. Influential pro-democracy constituencies in Washington can easily find arguments for continued sanctions and against engaging with the country's nominally "civilian" leadership. While the country held its first general election in 20 years on Nov. 7, it was not free, fair, nor credible. Furthermore, most Myanmar watchers are mindful of May 2003 when, barely a year after Suu Kyi's first release from detention, an armed group apparently recruited by the regime's front, the Union Solidarity and Development Association (USDA), attacked her convoy, killing about 100 people. Senior generals seen as responsible for the attack are now in the new parliament as part of the government-sponsored majority belonging to the Union Solidarity and Development Party (USDP), the successor of the USDA. ??

Meanwhile, many countries in Asia (including China, India, and Thailand) will continue to pursue policies toward Myanmar based on their economic interests and a sense that the country is an arena for strategic competition with rivals. China is already Myanmar's de-facto regional patron. Other countries are now pursuing postures more similar to Beijing's than to Washington's, which, in turn, eases the environment in Asia for further Chinese pursuit of Burmese resources such as natural gas. This year, for instance, CNPC started construction for its oil and gas pipeline projects from Arakan (Rakhine) state off the Andaman Sea to the southern Chinese province of Yunnan. The gas pipeline will draw its supply from the Shwe fields off the Arakan coast in the Bay of Bengal and transport it to Kunming and Nanning in China. The oil pipeline, meanwhile, will transport oil offloaded by tankers from the Middle East at Ramree (Maday) Island in Kyaukphyu to Ruili in China's Yunnan province; it will be able to carry roughly 10 percent of China's imports from the Gulf. For Thailand, meanwhile, Myanmar supplies about a fourth of Thai gas needs, and the amount is expected to increase by 2013, based on new agreements by Thai state energy company PTT.

The next few months will be critical for Myanmar's political and economic trajectory. In the days after her release, Suu Kyi was understandably vague about her plans. She did, however, emphasize "national reconciliation" and flirted with the line that Western sanctions might need to be rethought. Increasingly, Suu Kyi will likely test the limits of the government's tolerance and willingness to pursue political reform. But she'll have to be careful, as the generals will probably be assessing whether their experiment of releasing Suu Kyi succeeds -- and they'll recalibrate as necessary. If they sense that increased instability is the likely outcome of her freedom, the leadership will likely revert to old practices, including increasing the military's role in maintaining order and possibly finding an excuse to again arrest Suu Kyi. On the other hand, if Myanmar's leaders believe their gamble has paid off -- and that the economic and diplomatic gains from her release outweigh the risks to their control over the country -- the pro-democracy movement could be given some breathing room. In this case, if the regime can claim it has fulfilled former prime minister Khin Nyunt's seven-step roadmap (announced in 2003), then a more significant, though slow, thawing of ties with the West becomes more likely. This process will, of course, take time. But if the momentum generated by Suu Kyi's release is sustained, some change might become a more realistic expectation within a couple of years.

Roberto Herrera-Lim is a director in Eurasia Group's Asia practice. 

By David Bender

Remember when Iraq was all about the oil?

Bush administration officials predicted that a post-war spike in Iraq's oil production would pay for both the conflict and ease the country's transition to democracy. Anti-war protesters countered that the war itself was little more than an oil grab. Now that the American combat mission is officially over, where is all that oil, and how will it change Iraq and the world?  

It seemed for years that violent chaos inside Iraq made a big increase in oil production entirely unrealistic; but now there are growing signs that oil project work could begin on several fields in the south over the next six months. If these projects move ahead, over the next decade, Iraq could begin to contribute enough production to significantly influence the global oil market, providing enough supply to undermine assumptions that energy demand from emerging Asia and increasing production costs will squeeze energy markets and add serious upward pressure on prices in the mid 2010s.

Iraq is now producing about 2.4 million barrels per day. The 12 contracts signed with some of the world's largest oil companies fuel hopes that Iraq can increase production nearly fivefold by 2020. That target is unrealistic, but even the likelier tripling of production levels will have important implications for the global economy and raise interesting questions about regional political dynamics. For the moment, Saudi Arabia is the only producer with enough spare capacity to single-handedly move prices. How will the Saudis respond if Iraq can produce enough oil to usurp some of that market power? How will Iran react if a surge in Iraqi production drives down oil prices, depriving Tehran of badly needed revenue? Globally, will Iraqi oil power Chinese and Indian growth? Will it kill the electric car? Iraqi oil production increases will have widespread effects-if they happen.

But Iraq will be a politically volatile and potentially unstable place to do business for the foreseeable future, and a spike in the country's oil production is anything but a sure thing. Nearly six months after parliamentary elections, U.S. combat troops leave behind a country without a government. Vote winner Iyad Allawi, incumbent Prime Minister Nouri al Maliki, an array of Shia sectarian leaders (including firebrand cleric Muqtada al Sadr), and the Kurds remain locked in a seemingly endless battle of diplomatic nerves, holding fruitless rounds of negotiations, forming and breaking alliances, and making declarations of principle with little bearing on political realities.

Read on

I believe that intelligently regulated, market-driven capitalism is the worst economic system ever devised -- except for all the others. No system lifts every boat, but broader participation in a system that relies on market forces to determine what should be produced, in what quantities, and at what price has created a global economy that provides more opportunity for more people around the world than at any time in human history.

The skeptic then points to the financial crisis/market meltdown/global recession of the past 21 months and asks the same question posed to me by a Chinese diplomat in the opening of my book: "Now that the free market has failed, what is the proper role for the state in the economy?"

He's convinced that all this turmoil -- and the various state-driven responses to it in the capitals of supposedly free market countries around the world -- will prove that China's state capitalism is a superior system for market stability. Where's my evidence to prove him wrong?

Should I point to the $787 billion state-directed stimulus package that Washington has used to kickstart growth? Or to America's 17.1 percent real unemployment rate? Should I brag about the success of the eurozone, the world's largest-ever experiment in capitalism without borders? How about the dynamism of Japan's economy?

The jury is beginning to wonder if I'm actually trying to win this case.

We'll have to take a longer view. With the exception of developing countries in the very earliest stages of development, at no time in the past have political officials ever proven more effective than fundamental market forces at valuing assets and allocating resources over the course of several years. Market-driven capitalism is a game that can benefit all who participate in it, if the referees have the power to enforce intelligently crafted rules and if they're paying attention to the game. In America, for the past several years, the players have too often been allowed to rewrite the rules in ways that serve their short-term interests.

Read on

By Ian Bremmer

As 2009 draws to a close, Turkey appears high on the list of good-news stories gone bad. Central to the country's political stability and open investment climate over the past several years has been the popularity of Prime Minister Recep Tayyip Erdogan and his moderate religious Justice and Development Party. Known by its Turkish acronym AKP, the party first swept to power in 2002. Five years later, the AKP captured nearly 47 percent of the vote in a field that included more than a dozen parties, allowing it to govern without a coalition partner that might have obstructed reform and foreign investment.

But a sluggish economy and high unemployment have pushed the AKP's popularity below 32 percent, and the party finds itself in an increasingly bitter standoff with the country's most determined secularists -- including leading opposition politicians, the military brass, much of the media, and some of the country's most powerful businessmen. Negotiations with the European Commission over the country's bid to join the EU have all but ground to a halt.

Things took another turn for the worse last week, when Turkey's Constitutional Court voted to shutter the country's main Kurdish political party and to ban 37 of its members from politics for the next five years. The verdict has effectively scrapped the AKP's ill-fated "Democratic Opening," an attempt to boost the party's declining popularity with the country's Kurdish minority ahead of elections now scheduled for mid-2011 and to promote the kind of reforms that keep the EU process on track. If the move provokes more violence from alienated Kurds, the AKP could also face tough criticism from nationalists, who will accuse the government of being "soft on terrorism."

The AKP is also feeling pressure from conservative religious circles. The Islamist Felicity Party is picking up support among religious voters who aren't satisfied with the ruling party's commitment to their agenda and who are turned off by a series of corruption scandals involving senior AKP officials.

In other words, the AKP remains the dominant force in Turkish politics, but its latest actions have antagonized players across the country's political spectrum. We knew the next elections would provoke all kinds of tensions between the AKP and its secularist critics, but it's becoming more likely that the AKP will have to form a coalition government next year, putting an end to the single-party rule that has provided real momentum behind economic reform and welcomed much-needed foreign investment in Turkey's future.

Ian Bremmer is president of Eurasia Group.

ADEM ALTAN/AFP/Getty Images

By Ian Bremmer

As President Obama works toward finalizing a new plan for Afghanistan, here are five reasons why the challenges U.S. forces face in building stability there are more formidable than those in Iraq:

1) Political legitimacy. Parliamentary elections in Iraq scheduled for January will spark violence, the results will create controversy, and the eventual leaders will take their places within a system that pits lawmakers and cabinet ministers against one another in a more-or-less direct struggle for power. But voters will turn out in large numbers, and Iraq's new political institutions are slowly developing a broad popular legitimacy. That's not true in Afghanistan, which might have been better off without elections earlier this year. Virtually no one believes President Hamid Karzai won the August vote; few will embrace him when he claims victory following the November 7 run-off. He may hold the office, but he has virtually no natural political base in the country. Karzai is not exactly a reliable partner in efforts to build lasting stability.

2) Training of local forces. U.S. forces have had real success in helping the Iraqi government build its police and security forces. The large-scale drawdown of U.S. troops beginning next year will create a power vacuum that encourages battles over political turf and control of oil revenues. We've seen an uptick in violence in recent weeks, and we'll see more in months to come. Corruption remains a serious problem. But the Iraqi government has shown considerable progress over the past year in asserting control over territory and in beating back challenges from insurgents. In Afghanistan, there's almost no local support for a national professionalized military. Because Karzai's government has so little legitimacy, and few local leaders believe he can offer protection against Taliban attacks, very few people are lining up to don a uniform and pick up a rifle.

3) International coordination. In the battle against insurgents in Iraq, the United States has called most of the shots -- with significant (though now more modest) help from Great Britain. American and British forces have been well coordinated from the start, both operationally and strategically. Afghanistan's International Security Assistance Force has included troops from 43 countries with widely varying degrees of professionalism, morale and operational capability. Short of the U.S. military accepting responsibility for the entire mission, there's no short-term fix here.

4) Tribal/warlord patronage networks. More than any other factor, the willingness of Sunni tribal leaders to partner with U.S. forces against a common external enemy has been central to improvements in Iraq's security over the past two and a half years. In Afghanistan, tribal leaders and local warlords face US requests for help against a domestic foe, the Taliban, with whom they may find themselves negotiating long after NATO forces have left the country.

5) Resource base. Iraq has enormously underdeveloped oil reserves, a relatively well-educated urban elite, a population with some limited but real sense of national identity, and a favorable geographical position for development of trade and investment ties with other countries in the region and beyond. For the foreseeable future, the bulk of Afghanistan's cash will come from foreign aid and opium production. Neither offers much hope as a source of long-term stability.

Iraq's government has a long way to go before it can function as a set of independent, secure and self-confident institutions and as guarantor of Iraq's long-term stability. But in Afghanistan, it will be years before local leaders can move from coping with serious problems to solving them. 

Ian Bremmer is president of Eurasia Group.

Majid Saeedi/Getty Images

by Ian Bremmer

In Afghanistan, even the good news isn't so good. The country managed to hold a presidential election in August, but there aren't many people inside or outside the country who considered it free and fair. It looks increasingly like Hamid Karzai will win without a second round, but his legitimacy will remain under a very large, very dark cloud. He'll face open revolt from Tajiks in the north, who overwhelmingly opposed his candidacy. And as evidenced by the significant recent expansion of terrorist bombings in Afghanistan's major cities and the assassination last week of the country's second-ranking intelligence officer, it will even become harder to secure Kabul. No one should have much confidence that a second round would do much to restore Karzai's credibility.

In addition, military operations against the Taliban inside Pakistan achieved some actual success this summer, but that has probably pushed some militants across the border into Afghanistan to harass coalition forces there. U.S. casualties have increased, though that's not surprising given the more aggressive operations of larger numbers of US troops. But last week's U.S. bombing on a Taliban target, which killed dozens of civilians, is just the latest in a series of setbacks for coalition military operations.

More worrisome: It's becoming increasingly clear that Afghanistan won't be able to stand on its own anytime soon. U.S. military officials report that the training of Afghan soldiers is well behind schedule. For the next two or three years, with coalition forces at their present levels, Afghan troops won't be nearly strong enough to maintain even the current level of security, let alone make any meaningful contribution to an aggressive counterinsurgency effort.

Inside Afghanistan, more locals than ever want the US out, whatever the cost. There's also dwindling support for the war in the United States, as the American media increasingly turns its attention from an economy beginning to improve toward the growing death toll in Afghanistan.

Within the Obama foreign-policy team, there looks to be a growing divergence of opinion on what to do next. There appears to be an internal consensus that the current strategy isn't working. But senior officials appear more divided on whether to "go long" or "go home." In the go long group, those who want more troops and more resources because "failure isn't an option," we see Secretary Clinton, envoy Richard Holbrooke, most of the generals on the ground, and most Republicans in Congress. In the go home camp, those who want to pull troops out before things get much worse, are Vice President Biden, most of Obama's political team, and a growing number of senior Democrats. Even Defense Secretary Robert Gates appears to have grown much more skeptical.

In short, Afghanistan is becoming Obama's first lasting foreign-policy crisis. A major terrorist attack somewhere in the world carried out by militants trained in Afghanistan could shift international public opinion toward greater engagement. Short of that, U.S. public opposition to the war will likely grow steadily over the coming year, bringing the issue to a head just in time for U.S. midterm elections and driving a wedge between members of the president's own party.

MANPREET ROMANA/AFP/Getty Images