A generation ago, many wondered how many years would pass before American dominance and, by extension, the clout of Western-led financial institutions like the IMF and World Bank faced a serious challenge. So far, no single rival has proved its staying power. For better and for worse, the IMF and World Bank remain core components of international politics and development. And that's what makes collective action among the BRICS-Brazil, Russia, India, China, and South Africa-so intriguing. The BRICS carry considerable weight as models for the next wave of developing countries-particularly following an American-made financial crisis and ongoing turmoil in the Europe.
It's no surprise then that plans announced last month to create a BRICS development bank have generated so much buzz. In particular, the ability of leading emerging market governments to finance big infrastructure construction projects across the developing world has interesting potential implications.
Yet, for many of the same reasons that the BRICS have so far struggled to institutionalize a working partnership in other areas, this bank will take longer to build than its architects think and will never realize the grand ambitions of its most forceful advocates.
It's no secret that Brazil, Russia, India, China, and South Africa are home to quite different political and economic systems and face different sorts of challenges. Less well understood is the diversity of their interests in creating a bank. Questions of seed money, oversight, purpose, and where the bank might be headquartered are certain to arouse controversy.
But the larger problem is that all the BRICS except China are grappling with sharper-than-expected economic slowdowns-and Brazil, India, South Africa, and Russia are all looking to spend their revenue on infrastructure projects at home to help bolster growth. For the moment, none of them can afford to invest substantial sums to build someone else's roads, bridges, and ports.
These governments face a choice. They can contribute to a BRICS bank funded in equal (modest) parts by each member and lacks the capital to accomplish much. Or they can lend their names to a much-better funded institution that is thoroughly dominated by China.
Yes, Brazil's government is interested in promoting a South-South development strategy, but the Dilma Rousseff administration is now focused mainly on reviving domestic growth following a significant slowdown last year. Its strategy rests in part on using state development bank BNDES to fund ambitious infrastructure projects inside Brazil. If the BRICS bank can be used to finance projects outside Brazil to which BNDES is already committed, it might be useful, but don't expect the Rousseff administration to offer significant new cash commitments toward these projects.
Russia's government, also faced with sluggish growth, will talk up the need for a counterweight to U.S.- and European-dominated institutions, but tepid pledges of support for the bank from Russia's finance minister and the recent tragicomedy in Cyprus make clear that Moscow is not ready to finance its bid for greater international prestige with substantial sums of cash.
Political officials in India, where national elections loom next year, are too preoccupied with a steady stream of domestic troubles to devote much capital to a BRICS development bank, and the government remains deeply ambivalent about its often troubled relations with fast-expanding China. That's in part why India's finance minister has said that the BRICS bank will complement, not challenge, existing international lending institutions.
Then there is South Africa, a country with a growing middle class but chronic high unemployment and an economy the size of China's sixth largest province. The ruling African National Congress sees obvious value in deepening trade and investment relations with China, but its greatest near-term contribution to a BRICS development bank will probably be limited mainly to providing its headquarters a home.
Finally, the bank faces obstacles even within China, the one country than can afford to give it heft. China already has a development bank. It's the most powerful financial institution in the country, one that answers only to the State Council, giving it the status almost of a government ministry. In fact, though the China Development Bank and the China Export-Import Bank may lack the perceived legitimacy of multinational institutions, they don't lack for borrowers. Together, they already lend more to developing countries and companies -- more than $100 billion per year -- than the IMF and World Bank do, extending China's strategic influence throughout Africa and Latin America, in particular.
Why share credit and benefit for these efforts with the other BRICS, especially when the rest have so much less to contribute? And why give others a say in where Chinese funds are invested?
All five of these governments have an interest in choreographed displays of unity and rhetorical challenges to U.S. power. But like so many other aspects of BRICS cooperation, there is less to this bank than meets the eye.
Willis Sparks is director in Eurasia Group's global macro practice.
ALEXANDER JOE/AFP/Getty Images
Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
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.
HOANG DINH NAM/AFP/Getty Images
By Scott Seaman and Stephen Majors
Many Japan watchers -- and the market -- are hoping for a breakthrough in Prime Minister Yoshihiko Noda's efforts to secure passage of a consumption tax increase. The general expectation is that raising the tax from 5 percent to 8 percent in April 2014, and then again to 10 percent in October 2015, wouldn't just be a solid step forward in addressing Japan's ballooning public debt, which is projected to reach 239 percent of GDP by year's end. It would also demonstrate that Japan's political parties are able to work through their differences to tackle tough problems in a country that has had seven prime ministers in the past six years.
But this view wrongly focuses on a narrow, short-term outcome rather than on the broader political malaise such a victory could prolong -- which, in Japan's case, is the most salient factor for long-term reforms. The passage of the tax hike is not necessarily a good sign for the country's ability to tackle its many pressing problems unless it leads to snap elections and a major realignment of Japan's sclerotic party system. The best outcome would be the failure of the tax hike measure, followed by Noda's call for a snap election; or the passage of the hike based on Noda's agreement with the opposition Liberal Democratic Party (LDP) that he would call an election in return for their cooperation. Outside of these two scenarios, the party realignment that is necessary for Japan to make deep economic reforms and boost competitiveness is very unlikely to happen.
Without major party system realignment, political gridlock on most reforms would persist, undermining medium- to long-term prospects for deeper economic restructuring. A core problem of Japan's political system is that the ruling Democratic Party of Japan (DPJ) and the LDP are both characterized by deep internal schisms over greater openness to economic competition and trade, as well as on fiscal and social welfare reform. Such internal cleavages have blurred distinctions between these parties and made maintaining party discipline and cohesion almost impossible. In addition, a "twisted" Diet (Japan's parliament) in which the DPJ controls the lower house, but lacks a majority in the upper house, allows opposition parties to block legislation with ease. The policy gridlock that often results has contributed to a loss of public support for parties of every stripe and a general sense that Japan's politics is essentially dysfunctional.
Noda has set a deadline to bring legislation for the tax hike to a vote in the lower house of the Diet before the end of the current session on 21 June. Strong opposition outside -- and inside -- the DPJ keeps the odds of enacting legislation for the hike during the current Diet session low. Despite the challenges, Noda may still find a way through threats and horse-trading to pass the increase. Numerous members of the DPJ, LDP, and other parties feel electorally vulnerable and would prefer to avoid a near-term snap election, strengthening their desire to pursue inter- and intra-party compromises. If Noda's government passes the hike without a snap election, markets will likely view this positively based on the argument that any success reduces the risk of a rise in Japanese bond yields and provides a signal that Japan's prospects for better fiscal management have improved.
But focusing on the short-term market spike in such a scenario would risk overlooking the larger implications of successful passage of the hike. Beneath it would lay the perpetuation of a largely dysfunctional status quo. Party system breakdown would be traumatic, and any realignment that follows would be fraught with uncertainty. But if it sets the stage for reform-minded politicians from the DPJ, LDP, and other parties to coalesce into a single party with a majority in both houses of the Diet, the outlook for future reform efforts would be brighter.
Scott Seaman is an analyst in Eurasia Group's Asia practice. Stephen Majors is an editor with Eurasia Group.
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.
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
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.
By Risa Grais-Targow
By all rational measures, Cuba is effectively irrelevant to the United States. The island is small, its economy is about the size of New Hampshire's, and since the collapse of the USSR it poses no strategic threat. Yet the Castros have a habit of popping up in the headlines. In part, that is because of the inevitable fascination with a small country that has been a foreign policy irritant for the United States since 1959 and, more recently, its outsized role in Florida politics. But change is coming to Cuba, slowly but surely, and with change comes the possibility of unexpected volatility.
Cuba is gearing up for the first Cuban Communist Party (CCP) congress in 14 years, to be held April 16-19. Much of the event will be focused on formalizing Raul Castro's small steps toward economic liberalization (e.g., trimming the state's workforce and allowing more room for entrepreneurs) outlined in a November 2010 wish-list of 300 reforms. Another, perhaps more important, development will be the identification of the next generation of leaders, including the appointment of a new second-in-command for the CCP (the second most powerful position in Cuba). The long delay since the previous CCP congress suggests that there has been much internal wrangling over that issue.
The Castros are clearly on the way out (Fidel is 84 and Raul is 79), and the CCP has promised that the congress will usher in a new generation of leaders. Just how new and young they will be remains to be seen. On March 25, Raul Castro announced that the 50-year-old Economy and Planning Minister Marino Murillo, who has been the architect of much of the economic reform agenda, would now oversee its implementation as a sort of economic czar, signaling Raul's devotion to the reform process. The CCP may, however, simply shuffle senior party members into new positions rather than appoint younger reformers.
Such developments could also be important for the U.S. and perhaps trade with Cuba. Unless Congress decides to revisit the issue, the Helms-Burton Act of 1996 stipulates that the Cuban embargo cannot be lifted while the Castro regime is still in power. A shift in the leadership could also open the way to dealing with other potential concerns. For example, Cuba is actively exploring for oil in the Gulf of Mexico, raising U.S. concerns about how it would handle disasters similar to the 2010 Macondo well blowout.
But the CCP faces deeper challenges than this round of leadership refreshment. Most young Cubans are disenchanted with the regime. They have spent most of their lives in post-Soviet Cuba dealing with grinding economic hardship. Finding true believers among that generation is likely a difficult task and the regime's ability to implement meaningful reforms will affect the stability of Cuban politics further down the line.
Risa Grais-Targow is an analyst in Eurasia Group's Latin America practice.
ADALBERTO ROQUE/AFP/Getty Images
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.
FABRICE COFFRINI/AFP/Getty Images
By Heather Berkman
In September, we noted that Cuba was likely on the verge of major economic reforms, given a struggling economy and Raul Castro's announcement of state-worker layoffs, agricultural reforms, and the granting of licenses for some types of self-employment. Since then, Cuba's president has laid the groundwork for an upcoming April 2011 meeting of the Cuban Communist Party, where the Cuban congress is likely to approve guidelines for economic reforms that the government published in early November. The 32 page, 291-point "guidelines for socio-economic policy" clearly aims to tackle some of Cuba's major challenges: a heavy reliance on food and energy imports; an inefficient export sector; a bloated state payroll; crumbling transportation and vital infrastructure; and a rampant black market that the government now sees as a potential source of tax revenues via the legalization of informal jobs.
Given their government's on-again-off-again approach to reform in the past, many Cubans are skeptical that the government will follow through. Is Cuba really ready for plans to create wholesale markets, delegate more responsibility to local governments, and diversify exports? These changes will be tough to undertake in a country where the population has for decades depended on the state for jobs, healthcare, food rations, and education.
Whatever its tolerance for setbacks, Cuba certainly appears eager to attract investment in key sectors, and that will present its foreign allies and other international investors with a huge opportunity to influence the path the country takes. Foreign governments and businesses will have more leeway to invest in infrastructure, construction, electricity generation and transmission, oil and gas exploration and production, and transportation. These countries may also offer input that could shape the Cuban government's future policy decisions. The road ahead for Castro and his cronies will be fraught with difficulties, but Cuba's allies will be along for the ride.
Countries like China, Brazil, and Venezuela already have investments in the works to help upgrade Cuba's port infrastructure, oil refining capacity, and electricity generation. Oil companies from Norway, Spain, Russia, and Canada are focused on boosting oil exploration and production in the Gulf of Mexico off Cuba's coast. With an eye on the Cuban government's commitment to revitalizing its domestic agriculture sector, South African officials hope to export agricultural machinery and supplies to the island -- and have forgiven $137 million in debt to restore the two countries' relationship. Just last week, France reestablished bilateral cooperation with Cuba following a seven-year freeze.
The United States will be left out of the game. As Cuba reaches out to its allies and interested foreign investors for help -- and makes efforts to deal with its foreign debts, promote industrial production, and revamp its energy matrix -- its government, once cornered by the U.S. economic embargo, is making it abundantly clear that an economic opening can and will be made without U.S. help or influence. The Cubans can't get Texas-based oil drilling technology, but China's ready to help build a rig. U.S. agriculture exports are tied up in legislative and regulatory knots, but Vietnam's happy to export rice to the island until Cuba's domestic production recoups.
The incoming chair of the House Foreign Affairs Committee, Ileana Ros-Lehtinen (R-FL) wants to isolate Cuba and cut funding for the State Department and assistance to foreign governments. Castro and his advisors don't care. They're working around Washington -- and creating opportunities for the governments, companies and investors that are ready to seize them.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
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 Roberto Herrera-Lim
Cast as "China-lite," Asia's next major export tiger, Vietnam plays the part with gusto. Its bureaucrats look north to learn China's way of growth. And at first glance Vietnam seems perfect for the role -- affordable labor and plenty of both public and private investment (foreign and domestic) in everything from office buildings and new industrial zones to oil refineries and deepwater ports.
But when Hanoi decided in August to devalue Vietnam's currency, it demonstrated that following China's path to prosperity just isn't that easy. Investors are now taking a step back to watch carefully as Vietnam wrestles with inflation, large trade and balance of payment deficits, and a frothy urban real estate market. They also worry over longer-term problems like official corruption, bureaucratic confusion, shortages of skilled workers, and large gaps in infrastructure investment.
Maybe China is the wrong model. Beijing is wrestling with some of these same problems and makes plenty of mistakes along the way, but China's enormous economy and its access to capital provide advantages that little Vietnam -- and maybe a lot of other small frontier economies -- can't match. China's size and advantages of scale have so far helped Beijing absorb many a self-inflicted blow over the past two decades.
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.
ALI YUSSEF/AFP/Getty Images
The 11 people arrested and accused of spying for Russia have titillated the tabloids and reminded Cold War veterans of the good old days. But they won't do much damage to U.S.-Russian relations. In fact, the two governments are getting along much better at the moment. There are three major reasons for this, and all of them have to do with the view from the Kremlin.
recently ailing economy is now feeling much better. The financial crisis
inflicted more damage on Russia
than on most other emerging markets, in part because of a steep drop in oil
prices. When Obama first proposed a "reset" in U.S.-Russian relations, Moscow was hemorrhaging
reserves, and Kremlin officials hadn't arrived at any clear idea on what to do
about it. Prime Minister Vladimir Putin was traveling the country assuring local workers
that complacent oligarchs, not state officials, were to blame for the
volatility, and that their government would ensure that all would again be
well. President Dmitry Medvedev and his more western-oriented advisors were
beginning to look like convenient scapegoats should the public become restive
and Putin run out of businessmen to punish.
Things have changed. The economy has picked up thanks to some skillful economic management and a rise in oil prices out of the danger zone.
is feeling much better about its neighborhood. The Orange Revolution is now a
distant memory. In 2004, a presidential election in Ukraine lifted the Putin-endorsed
Viktor Yanukovych over Viktor Yushchenko. But Ukrainian nationalists and
several Western governments charged fraud, and the race was re-run. Yushchenko
won the do-over, fueling suspicion and hostility in Moscow. But his leadership earned little
public confidence during his five-year tenure, and Ukraine's latest election elevated
Yanukovych, who has now taken his country's bid to join NATO off the table for the foreseeable future.
Alex Wong/Getty Images
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.
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A few years ago, Vietnam looked set to lead the pack among "frontier markets," the next wave of emerging players to offer cutting-edge growth and investment opportunities. Banks were setting up Vietnam funds. Unfortunately, the country's sometimes profoundly inadequate civil service, its amateurish management of economic risk, and the continuing power of more advanced emerging markets to dominate investor interest combined with the global slowdown to hit the country harder than some of its neighbors. The highest inflation rate in the region in 2008 threatened the political survival of reformist Prime Minister Nguyen Tan Dung. For all these reasons, Vietnam's sunrise dropped back below the horizon.
Day may finally be about to break. Vietnam remained politically stable through the tough times, and, despite pressure from conservatives, the bureaucracy has largely remained committed to reform. The new buzzword is stability, not growth at all costs, but investors are again buzzing about opportunities in Vietnam's major cities and its provinces with export zones, and we're seeing a spike in interest (particularly from Japan, South Korea and the multilateral institutions) in Vietnam's export infrastructure. The government is now both willing and able to spend more on power generation, roads and rail. There's good reason to believe these investments will soon bear fruit.
Outsiders are impressed. Eager to showcase one of their few genuine successes,
the World Bank and Asian Development Bank have ample incentive to double down
on Vietnam's growth. The prime minister has kept their confidence by pressing
ahead with market-oriented reforms despite the spike in inflation in 2008 and
the economic turbulence of recent months. A few concessions to
conservatives -- meant to bolster social stability with targeted social spending
projects -- will probably see him through to a second term in 2011.
The predictability his government provides will only brighten the country's investment outlook, particularly with so much uncertainty in the neighborhood. Japanese and Korean investors, in particular, are looking toward Vietnam to hedge their bets on China. Given the uncertainty surrounding Thailand's industrial policy (exemplified most dramatically by the ongoing controversy over work at Map Ta Phut, the country's most important petrochemical hub), and the political volatility that's likely to follow the death of Thailand's king, Vietnam has never looked sunnier.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
Aude GENET/AFP/Getty Images
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
Brazil's emergence as an investor-friendly, free market democracy has been one of the world's most encouraging stories of the past several years. As Venezuela's Hugo Chavez perfects his Castro impersonation, Ecuador and Bolivia follow Chavez's example, and Argentina's economy flounders, Brazil's President Luiz Inacio Lula da Silva has maintained responsible macroeconomic policies -- while redistributing wealth to narrow the still-considerable gap between the country's rich and poor. But as he begins his final year in office, a huge off-shore oil find has emboldened his government to deepen state control of the energy sector, clouding the investment picture.
Lula now looks likely to win a legislative battle over the future of Brazil's
oil sector. State-owned oil company Petrobras will then hold exclusive rights
to operate all new exploration and production in off-shore fields that are
believed to contain one of the world's largest deposits of crude oil discovered
in recent years. Brazil's government will then control all activity in the
new fields, making the big decisions on project operation and management. Over
time, Petrobras will become a much larger but less profitable and less efficiently
No surprise then that multinational oil companies resolutely oppose this plan. Despite the tremendous potential in the offshore fields, many of them may simply opt not to work with Petrobras under the terms the Brazilian government has proposed. That's why there's a real risk that Brazil will have to turn to Chinese and other state-owned energy companies for the resources they'll need to bring this oil to market. That will be bad news for those who import oil because, though Petrobras has the technical expertise for the job, the company is already approaching overstretch on development of existing projects. The fact that Petrobras can do the job doesn't mean it should. Partnership with oil multinationals with much more experience managing projects to recover maximum quantities of deep sea oil deposits would bring more oil to consumers -- and do it more quickly and efficiently.
Brazil's opposition isn't happy with Lula's plan either, but his popularity (near 80 percent) has kept the opposition quiet. Even Sao Paolo Governor Jose Serra, the candidate most likely to defeat Lula's preferred successor (Chief of Staff Dilma Rousseff) next October is keeping most of his reservations to himself. Lawmakers who would normally oppose a government-managed plan are eager to remain in Lula's good graces as elections approach.
Multinational oil companies are moving cautiously, as well. They've aired their criticisms through Brazil's Petroleum Industry Association, but have avoided direct involvement in Brazil's election dynamic.
Without determined opposition, the legislation will probably pass. If Serra wins next fall's presidential election, he will probably try to reverse the legislation. But that would be a long process. If Dilma wins, international oil companies can only hope for an eventual victory in court on the reform plan's constitutionality. Either way, Brazil's energy sector will be much less investor friendly for the next several years.
Ian Bremmer is president of Eurasia Group.
ANTONIO SCORZA/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
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
The most obvious long-term effect of the financial crisis is a shift in economic decision-making power from capitals of finance to capitals of politics. We see this trend in the United States, where decisions on how best to value assets and allocate capital are now made in Washington on a scale unthinkable until about this time last year. Outside the United States, nowhere is this development more obvious than in the United Arab Emirates, where power and wealth have shifted at startling speed from Dubai (until recently a financial powerhouse) to Abu Dhabi (the seat of political power). But the American trend is temporary; the UAE's might not be.
Remember when newspapers, magazines, and TV business reports produced feature after feature on lavish investment in Dubai's newest architectural marvel and the corporatist management style of its ruler, Sheikh Mohammed al Maktoum? As foreign investment stopped flowing into Dubai, large-scale infrastructure projects ground to a halt. Thousands of foreigners lost work permits in the construction sector. Thousands more saddled with loans they could no longer repay simply abandoned their property and left the country. By January 2009, local police complained that about 3000 cars had been abandoned at the airport. Dubai found itself buried beneath a mountain of IOUs, and for a few days in February 2009, the financial world lost faith. The emirate's credit rating tanked, and foreign investors began to plan for the once unimaginable risk that Dubai would default on its sovereign debt.
Faced with that, Dubai announced a $20 billion bond program to raise the needed cash. In February 2009, Abu Dhabi moved in with $10 billion bailout, underwritten by the UAE's central bank. So far, Dubai has yet to find the other $10 billion, and Abu Dhabi may have to step in again. But the bursting of Dubai's real estate bubble and the sudden collapse of its economy have already allowed Abu Dhabi's ruling al Nahayan family to buy a big share of the al Maktoum's assets.
On a recent
visit, I saw the evidence for myself. Abu Dhabi is bustling as the city
state prepares for its first Formula One championship this Sunday. In Dubai, the traffic jams
are gone, the hotels are struggling, and everyone's waiting for something to
change. What a difference a year makes.
There's plenty of reason to fear that things won't get better soon. Real estate prices are now at about half their peak, but overbuilding on many projects continues because the state controls many of the emirate's largest construction companies. Many of Dubai's biggest construction projects are still underway, because the government wants to minimize further job losses. That's likely to continue through 2010, leaving the emirate with large amounts of unused commercial space.
In many cases, local firms haven't paid their employees in weeks,
and there have been some moderately violent protests. The government
appears aware of the seriousness of the problem and is working to improve
healthcare and living facilities for the laborers. Dangerous levels of unrest
are unlikely given that most guest workers can't afford to risk
But there's another cloud on the horizon. If the United States moves to intensify sanctions on Iran next year (a good bet given the low likelihood that the current diplomatic optimism will last), Dubai will be vulnerable. Much of Iran's financial flows move through Dubai, and sanctions would hit the emirate especially hard.
Ian Bremmer is president of Eurasia Group.
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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.
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
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
By Eurasia Group analyst Sean West
Earlier this month, the G8+5, the world's leading industrial states plus some other important developing states, committed to finishing the Doha Round of trade talks by the end of 2010. U.S. and Chinese officials paid lip service to finishing Doha this week during the inaugural bilateral "Strategic and Economic Dialogue." World Trade Organization chief Pascal Lamy will likely cite both announcements as cause for celebration. Healthy skepticism is in order.
Overblown fears of oncoming protectionism were all the rage just weeks ago. But as Ian Bremmer wrote in this space back in March, the financial crisis need not trigger as many new trade barriers as some feared. Still, the global liberalization envisioned by a completed Doha Round by the end of next year is likely a bridge too far.
Pledges aside, there's not much reason to be optimistic that a deal can be concluded in the near future. Personality conflicts may have receded, as both Susan Schwab and Kamal Nath -- who banged heads last year -- no longer represent the United States and India respectively. But domestic conditions in the wake of the financial crisis won't help much with trade liberalization. While there's ample reason to be skeptical that neither China nor the EU are any more ready conclude an agreement than in the past, all other countries can play wait-and-see unless and until the United States shows serious leadership.
Obama has yet to lay out a clear strategy for the Doha Round. U.S. Trade Representative Ron Kirk has said several times that the United States considers Doha completion as critical, but there's no evidence yet that he'll have the political support he needs to set policy and to bargain. Comments from Obama himself on Doha have been ambiguous at best, warning of an "imbalance" in potential trade-offs on the table in current negotiations. It's also not yet clear how much political capital Obama will put at risk at a moment when he needs the support of organized labor for a host of other domestic priorities. And in a nod to agricultural interests, he allowed his budget proposal to cut farm subsidies -- a critical sticking point in the Doha negotiations -- to die on arrival.
Real movement on trade policy remains on hold until the president explains publicly how trade policy fits into his administration's broader agenda -- a speech he might give in advance of the September G20 meeting in Pittsburgh. But he'll have to use that speech to persuade an anxious American public -- and many trade skeptical US lawmakers -- that trade deals can spur growth without killing jobs. Obama has an advantage. His history suggests that he believes in the benefits of trade, and in a Nixon-goes-to-China way, he can spend political capital earned on the campaign trail to bring trade-wary Democrats along with his initiatives. But he has so far provided no indication that he's ready to accept the political risks that come with the push needed to get Doha done within 18 months.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.