By Roberto Herrera-Lim
With the threat of flooding still the main day-to-day concern in Bangkok, the political effects of the crisis remain muted. But the government of Prime Minister Yingluck Shinawatra will come under intense pressure as the waters recede over the next few weeks to implement programs that compensate farmers and worst-hit residents for their losses, help small businesses get back on their feet and improve flood defenses around Bangkok and the main industrial zones. The shape and details of the recovery plan will be discussed and deliberated over the next few weeks, but the cost will be significant.
Crisis management will remain focused for the next week on managing the flow of water from the north to the Gulf of Thailand and controlling flooding in the capital and the threatened industrial estates. About a fifth of Bangkok is already under water. Water levels may still rise with the tide and industrial zones are still under threat at Bangchun and Lat Krabang, but the flood waters have started to flow into the Gulf of Thailand. Estimates as to when firms in the industrial estates hardest hit by the crisis can restart production (even partially) vary from four weeks to a couple of months.
Attention will quickly turn to the government's plans to help individuals and businesses hurt by the flooding, as well as efforts to prevent a repetition next year. The government received substantial criticism for its handling of the flooding, particularly the lack of information, a sense that local politics determined which areas would be protected or sacrificed, and weak coordination between local and central government agencies. The government's efforts have improved, but the real test will be the recovery effort. The opposition will try to capitalize on the situation, but it is not exactly blameless. There is some evidence that the Irrigation Department's reluctance to release water from two major dams when heavy rains started in March (the opposition Democrats were still control) may have increased the amount of water that needed to be released in August, when the flooding threat rose substantially
Still, the government needs to show that it is responding and failure will boost dissatisfaction with the prime minister and result in a more distracted government, which could further hurt the government's response to the economic fallout from the crisis. That may ultimately increase the domestic clamor for an early (and potentially destabilizing) return by the former prime minister, Yingluck's brother Thaksin Shinawatra. Yingluck's government likely recognizes this risk, which will probably prompt a strong rehabilitation effort and substantially higher spending in the first half of next year.
There has been much talk of an 800-billion baht ($27 billion) "New Thailand" project to help the economy and build new infrastructure to manage future flooding threats. But given the budget process, the government is unlikely to any program in place within the next six months, which is the critical window for the government to show that it has dealt with the crisis.
The near-term focus is instead likely to be a patchwork of programs. Predicting the actual size of these programs as well as how much they could add to the deficit is difficult. The cabinet has agreed to raise the 2012 budget deficit to 400 billion baht ($12.3 billion) from 350 billion baht ($10.7 billion) to assure some funding for relief programs). Most numbers regarding the damage and the needed measures to reduce future threats are early, impromptu estimates; businesses, individuals and farmers will register for benefits only once the crisis ends. So far, the near-term measures in place remain unchanged from a few weeks ago and include about $1,000 in aid for each flood-affected household (estimated to number around 3 million), and government guarantees for 325 billion baht ($10 billion) in low-interest loans for small and medium sizes businesses, industrial estate operators, individuals, and corporations.
Roberto Herrera-Lim is a director with Eurasia Group's Asia practice.
Paula Bronstein /Getty Images
By Scott Rosenstein
Contamination reports out of Japan have prompted more than just Jeremy Piven to second-guess their consumption of sushi and other Japanese delicacies. With many countries including the United States, Hong Kong, Australia, and Singapore banning selected food imports from Japan, fears of a global food supply riddled with radioactivity have been on the rise. The World Health Organization has characterized the situation as "serious." As a result, Japanese food is suffering from a burgeoning branding crisis.
Continued contamination revelations, including recent reports of plutonium in the soil around the Fukushima Daiichi Nuclear Power Station and trace amounts of radioactive cesium and iodine reaching the United States, will likely exacerbate the situation. For Japan, the resulting economic dislocation will be a small (agriculture only constitutes 1.1 percent of the country's GDP) but notable addition to the long list of challenges it faces.
But should we all stop eating food associated with Japan? When it comes to food safety, emotion sometimes trumps reality. The United States, for example, imports less than two percent of its seafood from Japan. The Food and Drug Administration is now monitoring those imports closely, and many restaurants have already halted whatever remaining food orders they have with Japan. France, Germany, India, China, and South Korea have announced similar measures. These are prudent steps to take. But whether they reassure consumers remains to be seen. Even if none of the food on diners' plates is from Japan, ongoing fears could dent the popularity of Japanese-style cuisine worldwide.
Either way, the risk of elevated trade tensions remains low. As long as the import bans are temporary and not perceived as blanket restrictions intended to favor domestic producers, it is unlikely that conflict will arise. China, for example, consumes a significant proportion of Japan's food exports -- much of which is sold at a premium to high-end consumers with promises of quality and safety. Beijing will need to appear proactive for the sake of public opinion at home, but it won't be easy to replace Japanese imports domestically, making the government less likely to do anything drastic. China probably also wants to maintain good trade relations with its neighbor in order to increase exports of Chinese-made food into Japan, particularly if food shortages there worsen or if consumer confidence in Japanese food takes a serious hit. (Considering China's poor record on food safety, however, confidence in Japan would need to plunge considerably for the latter scenario to play out.)
To be sure, health concerns about the issue are not unfounded. The majority of illness stemming from the Chernobyl accident in 1986 resulted from contaminated dairy consumption. Simply instructing children not to drink milk from affected areas in Chernobyl would have drastically reduced the suffering there. Continued monitoring of the situation in Japan therefore remains critical. But we are still very far from Chernobyl levels of contamination. And as the headline risk about food safety in Japan continues to rise, so too does the possibility that much more immediate emergencies in Japan will receive proportionately less international attention.
Scott Rosenstein is an analyst in Eurasia Group's Global Health practice.
TED ALJIBE/AFP/Getty Images
By Damien Ma
In the midst of strident declarations that the global nuclear renaissance is over, it is worth pointing out that in China at least, the rebirth of nuclear power is for all intents and purposes a done deal, especially now that Japan's nuclear crisis seems to have turned a corner. Many thought Beijing's immediate announcement of a safety review and a freeze on new approvals meant the industry was effectively on life support. But that's not true. Nuclear power features prominently in the 12th Five-Year Plan (FYP) as an essential base-load alternative to coal. And because there are no easy substitutes, nuclear power is a key part of achieving China's clean energy goals.
The recently ratified 12th FYP contains binding targets to have non-fossil fuels account for 11.4 percent of China's primary energy mix and for a carbon intensity reduction of 17 percent by 2015. Those goals are likely to be reached only by meaningfully expanding nuclear power because renewables alone (including hydro) are unlikely to be sufficient in offsetting coal and meeting the plan's objective. Nuclear capacity is expected to quadruple from the current 10.8GW to around 40GW by 2015. The State Council has reportedly already approved 34 plants totaling 36.9GW, with work on 25 of those projects (totaling 27.7GW) having already started. Even if the new regulatory review delays construction of the remaining nine projects on the drawing board, China's nuclear power capacity would eventually still be just shy of 40GW.
The review process will have some effect though. Yet-to-be approved projects may be shelved. Existing projects and those yet to break ground could temporarily see delays or receive more scrutiny to determine whether they need to be retrofitted. But decommissioning reactors seems unlikely. China's fleet of reactors is relatively young, compare to the 40-year-old ones in Fukushima. Siting future plants in interior China, such as in Chongqing and Hunan, may also be reconsidered because of their proximity to notable quake zones. It is also worth noting that though China stated in 2010 that it is aiming for 70GW-86GW of installed capacity by 2020 (with some proposing total capacity as high as 100GW), that figure could ultimately err on the conservative side once Beijing reassesses its energy needs for the 13th FYP. But even at 70GW, China would be one of the largest nuclear markets in the world.
The support for nuclear energy reflects the political strength of its champions in the Chinese government. Top energy officials, such as former National Energy Administration (NEA) head Zhang Guobao and current NEA chief Liu Tienan, have publicly stated in recent days that China needs to develop its nuclear industry, with safety as a prerequisite. Other officials from the environment ministry, which has a hand in managing the nuclear sector, have also argued that China needs nuclear power to ensure energy security amid growing demand. Indeed, energy security and clean development have been invoked as compelling arguments. The head of the China National Nuclear Corp., one of the country's two nuclear giants, recently pointed to data indicating that China's existing nuclear capacity reduced annual emissions (67 million tons less of CO2 and 250,000 tons less of SO2) compared to equivalent coal-fired capacity.
Yet the effusive support elides legitimate concerns about whether China can produce a sufficient number of properly trained operators and managers that can keep up with the expansion of plants. (The Chinese obviously would prefer technicians like those handling the Fukushima crisis.) And the Japanese crisis has lent ammunition to some critics of the pace and scope of China's nuclear pursuit, with some likening it to a "great leap forward." The episode could perhaps inspire a more open debate about China's nuclear trajectory. It is also possible that bottom-up populism, particularly in a more "progressive" province such as Guangdong, could fight local governments over future plant sites. But ultimately, a sudden reversal of the civilian nuclear program that began in earnest 20 years ago seems unlikely.
Damien Ma is an analyst in Eurasia Group's Asia practice.
2009 Getty Images
By Ross Schaap
The devastation in Japan, the enormous human suffering, and the rising anxiety over ongoing problems in the country's nuclear facilities are well-documented. But assuming the nuclear crisis remains localized with no direct impact on economic activity in Tokyo, here are a few reasons for (cautious) confidence in Japan's resilience.
In 1995, when an earthquake struck the important industrial city of Kobe, many observers forecast that the impact of the disaster on Japanese production would last for many years. Yet, economic activity in the affected area reached 98 percent of pre-quake levels within 18 months, and the cleanup was largely complete within two years. This is a reminder that the seismic magnitude of a quake is a less reliable indicator of long-term economic damage than the strength and resilience of the country in which it occurs.
Long-term damage to Japan's economy is limited by the reality that the country's industrial core lies outside the region most badly damaged by the earthquake, the tsunami, and the nuclear emergency.
Japan's economy has excess manufacturing capacity on most fronts and, in time, will adjust.
As Robert Madsen and Richard J. Samuels have written, the disaster has temporarily secured Prime Minister Naoto Kan's government. For the moment, no one within his Democratic Party of Japan (DPJ) is willing to risk a party split or is strong enough to launch a leadership challenge. Further, the Japanese public will have no tolerance for attempts to oust the DPJ government or for a national election in a time of such crisis.
As a result, Kan should now finally be able to pass budget-related legislation that will authorize the debt issuance needed to execute the government's budget.
Reconstruction will spur industrial activity and long-term investment in housing, commercial and industrial infrastructure. That's a source of long-term economic stimulus.
The magnitude of the government response will be driven by need, not by fear that markets will constrain it. Gross debt has surpassed the 200 percent of GDP threshold, but net government debt is at about 110 percent of GDP. That's high, but it's not above the level managed by other countries in the past. Government notes are mostly held domestically, and Japan has a healthy external balance, with a net international investment position of $2.8 trillion.
Japan, a country already treated in much of the international media as a fading economic power, now faces a crisis of enormous proportions. But it is a mistake to underestimate the country's ability to meet the challenges it now faces.
Ross Schaap is director of comparative analytics at Eurasia Group and an analyst of Japanese politics.
ROSLAN RAHMAN/AFP/Getty Images
By Maria Kuusisto
Even before the heavy rain began to fall, Pakistan was suffering through more than its share of political, economic, and security worries. The Pakistan Peoples Party (PPP) government and President Asif Ali Zardari face fast-falling approval ratings, and multiple political and legal challenges that distract them from governing the country more effectively and creating a working, civilian-led counterterrorism strategy to target safe havens that militants have established in tribal areas along the country's border with Afghanistan, particularly in North Waziristan. That has helped the various Taliban and al Qaeda-linked terrorist groups, which now coordinate their work more closely, to launch a bombing campaign in Pakistan's largest cities, killing thousands of Pakistanis in recent years in response to US and Pakistani military strikes.
The political distractions have also made it more difficult for the government to tackle the country's considerable economic troubles, which include the need to stabilize a deepening fiscal crisis, stimulate a stagnant economy, expand the tax base, cut subsidies, and tackle high inflation. The recent flooding, which covers about 20 percent of the country, has made matters much worse.
Over the past three years, Pakistan has experienced a major economic slowdown. Local manufacturers have been hit hard by reduced demand for Pakistani goods in many countries, higher operating costs, and frequent work slowdowns thanks to a worsening electricity shortage and a volatile security situation in many areas. That's an especially large problem, because manufacturing accounts for about 25 percent of Pakistan's GDP, 60 percent of the country's exports, and nearly half of Pakistan's jobs.
The flooding was just the latest bit of extraordinarily bad news. State officials hoped that this year's expected bumper crop for cotton, the country's second biggest crop (after wheat), would stimulate textile production, the largest sub-section of Pakistan's manufacturing sector. The flooding will probably cost Pakistan at least 2 million bales of cotton this year of the 14 million that was expected. Faced with shortages, the textile sector will be forced to pay dearly for imported cotton, which will then make Pakistani textiles more expensive -- and, therefore, less competitive.
These problems risk large-scale layoffs in the textile sector, a development that would deepen the country's economic troubles, further undermining the government's credibility. The inevitable ripple effects through the rest of Pakistan's economy can only make it easier for Taliban and other militant groups to expand their influence in the country's poorest provinces and to recruit in larger numbers.
The Pakistani government is not about to collapse. Though the country's major opposition parties and military will compete with the government to claim credit for aid to flood victims, they would rather let Zardari and his ministers take full blame for the hard times to come than to claim power for themselves. And they certainly have an interest in protecting the country's baseline security and stability.
Yet, the devastating floods ensure that a tough year for a struggling country will become tougher still -- and could fuel a level of unrest not seen since independence.
Maria Kuusisto is an analyst in Eurasia Group's Asia practice.
ADEK BERRY/AFP/Getty Images
I just spoke at an interesting lunch panel on fragile states, which was surprisingly substantive given that all of the panelists got roughly four minutes for their interventions.
My basic point -- political stability and electoral openness frequently work at cross-purposes in times of state crisis. The West tends to fetishize early democratization, even when it leads to Hamas in Gaza ... or uncontested fraud-ridden polls in Afghanistan. (Quick thought experiment: If we had free and open elections in China, how would the resultant government handle, say, Google?)
A more interesting and nuanced point: Even when elections are the right way to go, what kind of elections/institutions/legal system/government structure is worth a great deal more consideration and tailoring to on the ground conditions than generally appreciated? The Indian political structure's durability comes in part from being vastly more decentralized than the United States. I'd suspect that's exponentially more true in Afghanistan.
Former Haitian Prime Minister Michele Pierre Louis was impressive and almost shockingly thoughtful given everything her country has been through. She offered her thoughts on the distractions of elections and governance in "normal times" in Haiti and what that would mean in the context of reconstruction. As a complete outsider, it sounded like she'd like to get back into politics...
Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.
By Ian Bremmer and David Gordon
Over the next two weeks, The Call will feature the political risks that we at Eurasia Group consider the most important for 2010. We begin today with an overview and a few introductory comments.
We've just been through a year of enormous economic turbulence,
and yet in most ways 2009 was mercifully quiet. The financial crisis hit the
previous September and most things that could have gone wrong didn't, allowing
the world to focus on the digging out. 2009 saw no big geopolitical crises, no
tussles with North Korea or Iran. The war
on drugs in Mexico
didn't spill across the American border in a big way. Iraq didn't
blow up. There were no massive terrorist attacks (though Christmas saw a close
call in the United States).
No killer hurricanes, no huge earthquakes, and the H1N1 virus didn't prove
that threatening a pandemic after all. Governments around the world focused
overwhelmingly on the domestic, putting tough policy decisions on hold. (And
when they didn't, as with President Obama's Afghanistan and healthcare plans,
the results were seriously watered down, and actual policy risk was limited.)
This year, that's going to be much harder to accomplish. If the 2009 top risks
were first and foremost about developed states having their wits sufficiently
about them to get through the financial crisis (with the U.S. Congress leading
the pack), as the world now emerges from recession, the risks begin to shift to
the challenges created by the emergence of a new global order -- developed vs.
developing states, the old unipolar system vs. the emerging non-polar one, and
the old dominant globalized system of regulated free market capitalism vs. the
growing strength of state capitalism.
The biggest risk for 2010 comes from the point at which these three trends converge: U.S.-China relations. Simply put, 10 (percent unemployment in the United States) plus 10 (percent growth in China) does not equal 20. There's been an enormous effort by the leadership of both governments to keep a functional U.S.-Chinese relationship in place, much like the international approach to the G20, so that everyone could see the seriousness of the enterprise. But with the world's principal actors under less immediate strain, there's less pressure to keep up appearances. This year, the gloves start coming off.
Next up is Iran, where a deteriorating domestic and international environment combined with toughening sanctions pressure will create greater incentives for Tehran to provoke conflict. Along with the continuing (though limited) risk of Israeli military strikes on Iran's nuclear sites, this is the year to watch for serious trouble emanating from the Islamic Republic.
We'll also still see significant concerns within developed states this year -- weaker states in Europe under massive fiscal pressure; financial regulatory reform in the United States; and the impact of a political revolution in Japan. A few surprises from emerging markets -- Brazil's at risk this year, as coming elections are more troubled than people expect. India-Pakistan risk resurfaces after years of quiet engagement (while Afghanistan, making headlines throughout the year, is effectively pushed as a top risk to 2011 by the U.S. troop surge). Unemployment coupled with a spate of elections merit a spot for Eastern Europe in the top ten. And a host of domestic and international stresses puts Turkey on the list too, though barely.
Terrorism doesn't make the list. It's a growing global concern, but as a specific risk, it's a fat tail. It can really upset markets when an attack hits, but short of that it's principally a growing drag on global growth. Yemen is emerging as a focus for al Qaeda, and no doubt we'll see significant fighting there ... with direct American engagement. But short of Yemen actually failing as a state (unlikely in the nearest term), it won't have significant impact globally -- or even on neighboring Saudi Arabia. After many years, climate change finally sees its place on the top 10 list, mostly because of the growing policy and market impacts of the continued absence of effective international coordination on responses, a trend we'll see more often in our increasingly non-polar world.
There are all sorts of country risks that don't quite make the list -- Colombia, Dubai, Malaysia, Mexico, Nigeria, and Thailand to name a few. Each is worthy of concern for those with direct exposures in these economies, but none will grow to the level of global risk in 2010.
And then some interesting red herrings. These include U.S. and British financial centers, the death of which has been greatly exaggerated; Iraq, where investment and new oil will be a much bigger story than security risks; the Persian Gulf, which we generally like quite a bit (Dubai's problems notwithstanding); and the dollar, where really slow and steady-ish still wins the race.
First up, risk #1: turbulence in U.S.-Chinese relations...
Ian Bremmer is president of Eurasia Group. David Gordon is the firm’s director of research.
SAUL LOEB/AFP/Getty Images
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.