As we wrote last August, some governments are watching political developments in Venezuela more closely -- and with more anxiety -- than others. For the past decade, that country's Petrocaribe program has helped 18 Central American and Caribbean leaders avoid the kinds of tough economic choices that sometimes drive angry citizens into the streets -- and helped Hugo Chávez extend his regional influence. Each of these countries has benefited from concessional financing schemes for their imports of Venezuelan crude oil, as well as Venezuelan support for infrastructure projects and social programs. Beneficiaries, especially Cuba, will be watching closely as Venezuelans go to the polls on April 14 to elect Chávez's successor.
They can expect good news and bad news.
The good news for them is that acting-President Nicolas Maduro, Chávez's hand-picked successor, is highly likely to win. Opposition leader Henrique Capriles Radonski is back for another run after losing to Chávez in October, but following a campaign that is likely to prove nasty, brutish, and short, Maduro will benefit from still-strong popular support for Chavismo, public sympathy for those close to Chávez, and fear that the opposition would reverse the late president's most popular policies. Maduro and his allies will also have the resources and political leverage to boost spending and mobilize supporters.
The bad news is that policy is unlikely to improve under a Maduro administration, and political conditions within the country could deteriorate over time as internal dissent becomes more difficult to manage and worsening economic conditions stoke social unrest. Maduro is likely to maintain Petrocaribe, but in the medium term, domestic fiscal constraints may well force him to reduce foreign aid, since among the spending commitments of state-run oil firm and government piggy bank PDVSA, help for foreign governments is the easiest area to cut. Maduro will have to care more about support at home than friends abroad.
Venezuela is currently giving away about one-third of its oil production at below-market prices, including as part of the Petrocaribe program. At today's prices, the volumes that go to Petrocaribe partners amount to more than $6 billion in lost revenue -- about 2 percent of Venezuela's total GDP.
The new president will probably prioritize aid to Cuba, since the Castro brothers are strategic allies and high-profile friends who likely played a role in vetting him for the presidency. Maintaining strong relations with the Castro regime is also a means for Maduro to protect his revolutionary credentials as he works to establish himself as Chávez's legitimate political heir.
But for other Petrocaribe countries, aid reduction will likely be substantial. The Dominican Republic and Nicaragua would likely face the toughest economic challenges, forcing policymakers to make sharp policy adjustments. Reduction or elimination of Petrocaribe financing would put the DR's Danilo Medina in an especially tight spot. Given the size of its economy and its access to international financial markets, the Dominican Republic is better placed than Cuba or Nicaragua to weather the storm, but Medina is already looking for new sources of state revenue.
Cuts to Petrocaribe would also be bad news for Daniel Ortega's government in Nicaragua. Some estimates have Venezuelan support -- in the form of direct loans to Ortega, energy projects, and oil -- at about $500-600 million a year. That's 7-8 percent of Nicaragua's GDP. Petrocaribe has allowed Ortega to subsidize electricity rates and public transportation, boost public sector wages, spend on infrastructure improvements, and enhance food security. A significant cut to Petrocaribe might even persuade Ortega to make new friends in Washington.
These are a few of the reasons why there will be so much international interest in Venezuela's election -- and in what comes next.
Risa Grais-Targow and Heather Berkman are analysts in Eurasia Group's Latin America practice.
Ronaldo Schemidt/AFP/Getty Images
By Risa Grais-Targow
With Venezuelan President Hugo Chavez gravely ill and the Castro brothers in their twilight years, debate has begun to focus on the future of Chavez's brand of leftist politics in Latin America. There is widespread speculation as to which leader might assume Chavez's role in the region, even though his influence has arguably been on the decline. Among the possibilities bandied about is Ecuador's President Rafael Correa. Correa easily won a third term in the Feb. 17 elections, beating his closest opponent, Guillermo Lasso, by more than 30 percentage points. Correa also expanded his base of support in the National Assembly, where his Alianza Pais looks likely to achieve an absolute majority. Correa, like Bolivia's Evo Morales and Nicaragua's Daniel Ortega, owes much to Chavez, who served as a model for socialist policies, anti-imperialist rhetoric, and doled out hundreds of millions of dollars to his regional allies. While Correa may aspire to use his strong mandate to assume leadership of the Chavez-created Bolivarian Alliance for the Americas, his ability to do so will be limited.
First and foremost, Correa simply lacks the resources. Ecuador is a relatively small country (its GDP is about 20 percent of Venezuela's), and while it is a major oil producer, it does not boast the quantity of oil that can sustain Chavez-like regional "petro-diplomacy" and aid programs. Moreover, in the likely event that Chavez's chosen successor, Vice President Nicolas Maduro, wins a new election, there is no evidence to suggest that he doesn't want to fill Chavez's regional leadership role himself. So far, Maduro's actions suggest that he will represent policy continuity. He is close with the Cuban regime and has imitated Chavez's playbook thus far, including cracking down on the private sector and suggesting that foreign agents were planning an assassination attempt against him.
That doesn't mean that Correa won't try. He boasts much of Chavez's charisma, and has taken every opportunity to vault himself, and Ecuador, onto the international stage, typically at the expense of US policy interests. This has been particularly true since Chavez first became ill in June 2011. Correa boycotted last year's Summit of the Americas in protest of Cuba's absence, and more recently made headlines by granting Julian Assange political asylum. While Venezuela grapples with its internal transition challenges, rather than its regional agenda, Correa could heighten his anti-imperialist rhetoric. Regardless, however, Correa's decisive victory-along with the endurance of Morales in Bolivia, Ortega in Nicaragua, and more center -- left governments in Peru and Brazil -- suggests that the left in Latin America has staying power, with or without Chavez.
Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.
RODRIGO BUENDIA/AFP/Getty Images
By Ian Bremmer
A few days ago, I took a quick, informal survey around Eurasia Group on power and global politics. The question: Who are the world's most powerful people? We're defining power as "a measure of an individual's ability to (singlehandedly) bring about change that significantly affects the lives and fortunes of large numbers of people."
Here's what we came up with:
1. Nobody -- In a G-Zero world, everyone is waiting for someone else to shoulder responsibility for the world's toughest and most dangerous challenges. The leaders you'll see named further down this list are preoccupied with local and regional problems and don't have the interest and leverage needed to take on a growing list of transnational problems.
2. Vladimir Putin -- In Russia's personalized system, this is still the person who counts. He isn't as popular as he used to be, and his country has no Soviet-scale clout or influence, but no one on the planet has consolidated more domestic and regional power than Putin.
3. Ben Bernanke -- The world's largest economy is still struggling to find its footing. To help, no one has more levers to pull and buttons to push. The world needs the U.S. economy back on its feet, and Bernanke has more direct influence than anyone else on when and how that happens.
4. Angela Merkel -- For the moment, her commitments are the glue that binds Europe. Merkel's ability to bankroll Europe's emergency funds, win concessions from the governments of cash-strapped peripherals, and maintain solid popularity at home continues to be a remarkable political and policy achievement.
5. Barack Obama -- Even at a time when Washington is focused almost entirely on Washington, the elected leader of the world's most powerful and influential country carries a lot of water. The Obama administration will watch the eurozone from the sidelines and keep commitments in the Middle East to a minimum, but America will continue to broaden and deepen security and commercial relationships in East Asia, and Obama's decisions on how far and how fast to move will be crucial.
6. Mario Draghi -- Europe's backstop. Europe's Central Bank has kept the continent's blood flowing at a crucial moment in its history, and his work is far from done.
7. Xi Jinping -- China's forward progress is the world's most important variable, and Xi Jinping is now the man behind the wheel. Over the next decade, economic and political reforms will be needed to keep China on track, and Xi will make some difficult (and profoundly important) decisions.
8 (tie). Ayatollah Khamenei -- The supreme spiritual and political authority in a country at the heart of a volatile region. Halfway through 2013, Ahmadinejad will give way to a new president, but it is still Khamenei who will decide how the international fight over Iran's nuclear program plays out -- and what the future holds for the Islamic Republic.
8 (tie). Christine Lagarde -- The world's fire marshal. Here is that rare leader whose contribution will be crucial in multiple regions at once. But nowhere will the IMF's work be more important than in keeping Europe on track.
10. King Abdullah Bin Abd al-Aziz -- King of a kingdom with a unique power to move markets. The Saudi monarch is not in the best of health, but the choices he makes in determining who lead the world's hydrocarbon powerhouse into the next generation will help shape the entire global economy for many years to come.
What do you think?
Ian Bremmer is president of Eurasia Group.
ALEXEI NIKOLSKY/AFP/Getty Images
By Cliff Kupchan
In Iran last week, sanctions pressure pushed frustration into violence. Iran's currency has lost half its free market value over the past month, and a clumsy policy response made matters worse.
The rial's dramatic depreciation is stoking a level of inflation that has become the most serious threat now facing the regime. The official inflation rate stands at 23.5 percent, but anecdotal evidence suggests the rate is much higher and climbing. The government's lack of a coherent anti-crisis strategy, economic mismanagement, corruption, and heavy transaction costs imposed by sanctions suggest the worst is yet to come. Sporadic protests are likely to become a fact of life in Tehran.
As a result, the bickering within Iran's political elite is becoming more vitriolic. President Mahmoud Ahmadinejad blames foreigners and their sanctions for the current crisis; parliamentary speaker Ali Larijani instead points the finger at the incompetence of Ahmadinejad's government. Ahmadinejad can't seek re-election next June, but his exit won'tprevent these fights from heating up in advance of the vote.
Yet, there is no evidence that Iran is
close to the boiling point. Following the controversial presidential election
of 2009 and the street demonstrations that followed, the regime proved it can
and will use deadly force to intimidate Iran's fractious opposition. Nothing
has happened to suggest that new protests would produce a different result.
So what should Western governments, anxious to slow Iran's momentum toward a nuclear program, be hoping for? Iran's economic turmoil is unlikely to topple the regime, at least not anytime soon, but it just might bring about a more conciliatory Iranian approach to nuclear talks after the U.S. presidential election -- and especially after Iran's presidential election next year.
Over the past half decade, Tehran has demonstrated an almost existential commitment to the nuclear program, but the sanctions-induced pain is squeezing Iran's economy ever tighter, and that could make Iran more flexible. In turn, it's now very important for Western negotiating partners to offer a diplomatic proposal that allows Iran's government to save face before its people.
The Iranian government will never negotiate away its domestic legitimacy, but there might be room for a crucial compromise on the nuclear issue. Without such a breakthrough and relief from tightening sanctions, the Iranian regime has a bleak future -- and the country's leaders know it.
Cliff Kupchan is director of Eurasia Group’s Eurasia practice.
ALI AL-SAADI/AFP/Getty Images)
By Daniel Kerner
Argentina is once again rattling the nerves of foreign investors. The country that has been struggling to move on after its 2001 default and checkered economic history has recently nationalized the country's largest private company, Repsol's YPF, without any signs of providing compensation. Additionally, there have been growing rumors and divergent signals that the government might "pesify" its debt obligations -- in other words, convert dollar-denominated debt into the less valuable local currency -- to contain the outflow of dollars.
Government officials have denied such rumors, knowing that debt is a very sensitive issue for its own voters. Indeed, the near-term probability of debt pesification seems low given that the government is, in part, imposing tough foreign exchange restrictions so that it has enough reserves to meet debt payments. That being said, the risk will probably increase over time. Economic dynamics will likely worsen in the next few months, and the government is likely to double down on interventionist measures even as economic distortions grow.
Argentina has experienced high rates of economic growth since 2003 (with the exception of 2009), but in a context of growing macroeconomic problems. Now, with economic growth faltering, and the central bank increasingly financing the treasury, Argentina seems to be headed toward a negative equilibrium of low growth and high inflation. But fear of following more orthodox policy prescriptions that, in the government's view, caused the last crisis (and Europe's recent troubles), may be generating the next economic crisis.
Financial investors clearly have a reason to be concerned. Argentina still has debt in default and has been tweaking official statistics in part to pay less debt. The paradox, however, is that the government is imposing trade and foreign exchange restrictions precisely to have enough dollars to meet its debt obligations. To some extent, this is because the effects and memory of the 2001 debt default are still alive. Fernandez de Kirchner's government is a product of the economic crisis, and during her presidency and that of her husband, the late Nestor Kirchner (2003-2005), the government was willing to take interventionist actions to service the debt for fear that financial troubles could cause them political troubles, even if these measures are now generating inflation and a sharp economic slowdown. In fact, the memory of the crisis can also be seen in the government's obsession with maximizing short-term growth and consumption, and in its reluctance to implement needed macroeconomic adjustments (especially if they are seen as orthodox measures).
At the center of the problems is rising inflation. Official inflation is at 9.9 percent, but the credibility of those figures has been questioned since 2007 (private estimates put inflation above 25 percent). Inflation first picked up following Argentina's 2002 devaluation and has been rising over the past few years due to expansionary fiscal and monetary policies. In contrast to most of its neighbors where independent central banks actively fight inflation, the government has been increasingly relying on the central bank to finance the treasury, and even reformed the bank's charter earlier this year to gain further support.
High inflation, and the government's reluctance to let the currency depreciate substantially, has led to a rapid increase in imports and capital flight ($21 billion in 2011), all of which have put pressure on the currency. Low investment in the energy sector, a result of low prices and interventionist policies, has led to ballooning energy imports (which increased by 113 percent in 2011). The government responded to the deterioration in the external accounts by restricting purchases of dollars, limiting imports substantially, and nationalizing the largest energy company, all measures that have aggravated the country's problems.
Argentina seems to be caught in economic limbo. It is aware that making its debt payments is of paramount importance, but is unwilling to adopt the economic policies that would make it easier to do so without causing more economic damage. Foreign investors are right to be experiencing flashbacks.
Daniel Kerner is an analyst in Eurasia Group's Latin America practice.
JUAN MABROMATA/AFP/Getty Images
By Carroll Colley
While Russia will enter the WTO in late August, U.S. industry will be left on the sidelines until Congress removes the Cold War-era impediment to greater trade between the former foes. But it's a safe bet that Congress won't graduate Russia from the Jackson-Vanik amendment, which is necessary to grant permanent normal trade relations to Russia and take advantage of its accession to the WTO, before the November election. The reason? Russia is perpetually steeped in controversy, and U.S.-Russia relations have become a campaign issue in the race between Republican Mitt Romney and President Barack Obama. U.S. industry likely won't be able to take advantage of greater market access in Russia until the lame-duck session at the end of the year, and possibly later.
The White House is much more focused on November 6 (Election Day) than August 23 (the approximate date of Russia's WTO entry). Only after repeated requests from Republican lawmakers for senior level officials to testify on the Hill -- widely viewed as a Republican maneuver to force the administration to speak on the record about its Russian policy -- did the administration relent by sending the duo of Deputy Secretary of State William Burns and U.S. Trade Representative Ron Kirk to testify before the House Ways and Means Committee and the Senate Finance Committee. The White House calculates that a "yes" vote on graduating Russia from Jackson-Vanik (a 1974 provision that ties trade relations to freedom of emigration and other human rights considerations) would have little electoral upside, and might even harm Obama before the election.
Obama's meeting on June 18 with President Vladimir Putin on the margins of the G20 in Los Cabos seemingly failed to produce a breakthrough on Syrian policy. Headlines about ongoing arms shipments bound for Syria and the potential for continued Russian intransigence at the U.N. Security Council also represent potential political liabilities during the election home stretch, not to mention a host of domestic political issues. Romney, meanwhile, has called Russia the U.S.'s greatest political "enemy" -- and later changing that description to "foe" -- because he senses a potential weakness in an Obama foreign policy that has otherwise produced several notable successes.
It would be much simpler, politically, if supporters of graduating Russia from Jackson-Vanik could cast it as a vote for American business, as Secretary of State Hillary Clinton did in a recent opinion piece. But they can't. Passage is complicated by the Magnitsky bill, human rights legislation that targets government officials involved in the case of Sergei Magnitsky, a Russian lawyer who died in police custody in 2009. Largely viewed as a replacement for Jackson-Vanik, the stated aim of the bill is to deny visas to corrupt officials, freeze any U.S. accounts they have, and publish their names. The reality is that the Obama administration last summer instituted its own visa ban and any potential offenders have long ago transferred any funds from the U.S.. The net effect of the bill, therefore, is the "naming of names," which would represent a significant embarrassment to the Putin regime. The bill enjoys broad bipartisan support, with a number of lawmakers stating publicly that passage of the Magnitsky bill is a prerequisite for their vote on Jackson-Vanik.
The Obama administration has sent contradictory messages about its support for the Magnitsky bill. While originally opposing the bill, the administration seems to have accepted the inevitable and has been working with its primary author, Democratic Sen. Ben Cardin of Maryland. One recent Senate version provides for the public list as well as a confidential annex, which would largely allow the administration to circumvent the thrust of the bill by invoking national security exemptions. This is strongly opposed by a number of senior lawmakers, including Sen. John McCain, who was a co-sponsor of the effort to repeal Jackson-Vanik on the caveat of corresponding passage of the Magnitsky bill.
As the August recess rapidly approaches, the window for graduating Russia from Jackson-Vanik prior to its WTO accession closes. Obama appears to have little room to maneuver in expending political capital on the matter without raising the risk of elevating Russia-and its collateral baggage including Syria, Georgia, Iran, and domestic protests-to a legitimate campaign issue. Unless Congress moves forward on its own prerogative-which appears unlikely-the repeal of Jackson-Vanik won't get passed before November, or later, leaving the world's largest economy unable to take advantage of the accession of the WTO's newest member.
Carroll Colley is the director of Eurasia Group’s Eurasia practice.
By Naz Masraff
The recent move to breathe new life into Turkey's stalled EU accession process is unlikely to have much effect beyond providing Ankara with a minor domestic and international public relations boost. On 17 May, Turkey's EU minister and chief negotiator Egemen Bagis and European Commissioner for Enlargement Stefan Fule launched what they dubbed a positive agenda for EU-Turkish relations. The agenda introduces new mechanisms for communication, including specific working groups, intended to accelerate Turkey's compliance with the acquis communitaire in eight chapters, including two that are blocked for political reasons. But the efforts are insufficient to counter the underlying structural problems impeding Turkey's now long-stalled EU accession.
Turkish authorities have not opened any new chapters of the EU acquis since 2010; talks on 18 of the 34 chapters cannot move ahead because of political issues and open ones cannot be provisionally closed. An important obstacle continues to be Turkey's failure to move on politically difficult reforms needed to bring the country's laws in line with European standards, especially on the judiciary and fundamental rights. Bagis's statements suggesting that Turkey would be in full compliance with the EU acquis by 2014 are largely political rhetoric with little substance.
Cyprus is a huge stumbling block. U.N. Secretary-General Ban Ki-moon has decided not to call a follow-up international conference on Cyprus because there has been no advance since the January talks on the issue. This makes it impossible for the conflict to be resolved before July, when the Republic of Cyprus (RoC) government assumes the EU presidency. Turkey will freeze its relations with the EU presidency for six months in protest, though contacts with the European Commission and the European Parliament will continue.
The RoC's exploration for hydrocarbons in the eastern Mediterranean has exacerbated its contentious relations with Turkey. Turkey claims some areas included in the RoC's new licensing round for further explorations extend onto Turkey's continental shelf, and that any revenues must be shared with the Turkish Republic of Northern Cyprus (TRNC). While the dispute is not likely to escalate into a military conflict, Turkey may continue its gunboat diplomacy, further intensifying tensions. Turkey is now also considering fallback options including pressing other Muslim states to recognize the TRNC.
The new agenda may not result in major advances on EU accession, but it will give the Turkish government some advantages. Ankara can secure public recognition from the EU and boost its domestic popularity even when minor steps are taken. The effort also has bureaucratic advantages, providing another way for both the Turkish Ministry for EU Affairs and the European Commission's Turkey desk, the largest desk operating under the Directorate-General for Enlargement, to justify their existence.
Naz Masraff is an associate with Eurasia Group's Europe Practice.
By Alexander Kliment
Russian President Vladimir Putin's last minute decision to skip a G8 summit with President Barack Obama is a snub to Washington, but the Russian president's no-show may in fact increase the chances for a constructive relationship between the two countries.
Last week, just days after his inauguration, Putin let it be known that he would not attend the upcoming G8 summit at Camp David, where he and Obama were set for a one on one meeting.
The White House, in turn, said Obama wouldn't attend the 2012 Asia Pacific Economic Conference (APEC) summit this fall in Vladivostok, Russia -- though it was always hard to imagine Obama skipping the Democratic National Convention.
According to the Kremlin's official explanation, Putin can't leave Russia right now because approving the cabinet nominations submitted to him by Prime Minister Dmitry Medvedev is too sensitive a task for Putin to oversee by phone from Maryland. So Medvedev will send the list to Putin and head to the summit himself.
Putin's decision is a breach of G8 protocol, which expects that sitting heads of state will attend the group's summits. French President Francois Hollande, for example, will attend, just days after his 15 May inauguration. And by sending his number two to an organization in which Russia is already something of a second fiddle, Putin is raising questions about the wisdom of keeping Russia in the group at all.
Accordingly, many analysts have cast the move as a brazen rebuke to the U.S., which Putin alleges is behind the unprecedented street protests that have become a feature of Moscow life since last December.
It's true that the Kremlin's official explanation isn't wholly credible. Most cabinet decisions have likely been agreed upon already, Putin's re-election was never in doubt, and the G8 summit's date has been known for some time. That said, he reassumes the presidency amid rising popular opposition, which has sowed fresh doubts about his legitimacy. Keen to prevent infighting or, worse, insubordination among Russia's powerful elites, Putin could well be preoccupied with some last minute horse-trading at home.
The timing may, in fact, be no better in Washington than it is in Moscow.
Obama is entering a challenging re-election campaign in which he has already drawn fire from his Republican opponent Mitt Romney about the pursuit of a reset with Russia and his broader foreign policy track record. U.S.-Russia ties have deteriorated recently -- on account of disagreements over Syria, continuing friction over missile defense, and Putin's allegations of U.S. complicity in the protest movement -- meaning the U.S. president would be under pressure to take a hard line with Putin.
But that could risk an unpredictable flare-up with the notoriously sharp-tongued and pugnacious Putin. At the very least, it might complicate White House attempts to secure congressional support for granting Russia normal trade relations status so that U.S. companies can benefit from Russia's WTO accession.
In short, with both men facing heightened domestic concerns and pressures, Obama's meeting with Medvedev, who has warmer relations with Obama and who is seen chiefly as a messenger for Putin, carries much less political significance, but also much lower political risk. The practical result is that it leaves open the chance of greater flexibility between Washington and Moscow that could help maintain a pragmatic relationship in the medium term.
Alexander Kliment is an analyst with Eurasia Group's Eurasia practice.
JEWEL SAMAD/AFP/Getty Images
By Damien Ma
Though the curious case of blind Chinese dissident Chen Guangcheng has badly embarrassed China's leaders, it has provided them one important benefit -- it has diverted attention from the far more dangerous story of Bo Xilai. Regardless of the outcome in either case, the Communist Party's image has been badly tarnished. For a Chinese government that seems bent on investing in soft power, these last few months have offered clear reminders that soft power cannot be bought. It must be earned.
For a Chinese government that prefers to keep its differences behind closed doors, the Bo Xilai episode is a nightmare, in part because the involvement of the U.S. and British governments in the case has brought an unusual degree of international media scrutiny. (One of Bo's deputies briefly took refuge in the U.S. embassy, and Bo's wife has been implicated in the murder of a British businessman.) China's familiar tools of propaganda have been overwhelmed by frenzied speculation about the case in the Western press and China's social media echo chamber -- yet another reminder that Beijing can no longer afford to ignore Sina Weibo, China's version of Twitter.
The party leadership has dismissed the Bo Xilai saga as a sideshow and Bo himself as an aberration within the country's otherwise upstanding roster of senior officials. But little of China's blogosphere appears to be buying it. Instead, Bo's story signals for many that China remains a corrupt and opaque place, that the unbridled capitalism practiced in China has mainly benefited politically-connected VIPs, and that greed has infected the leadership right to the top.
And though the drama surrounding Chen Guangcheng has given the public something new to speculate about, in some ways, the story reinforces the cynicism that Bo Xilai has exposed. Chen and Bo -- a powerless and once illiterate legal activist and a powerful political scion who long stood above the law -- seem polar opposites. But they have something important in common; both were left without a place to hide when the leadership decided they should be punished.
Few within the country believe that Bo or his wife will have their day in court, reinforcing public fear that average citizens have no real protection within a system manipulated for the benefit of the party. That Chen, like Bo Xilai's deputy, first sought sanctuary in the U.S. embassy underscores a point not lost on the Chinese public: The United States, not China's own government, offers protection of last resort in times of political turmoil.
These stories are engendering a growing trust deficit between the government and the informed public -- the very elites that the party counts as its crucial constituency. A perception of systemic "rot from within" and the lack of legitimacy it implies undermine the regime's monopoly hold on domestic political power.
Despite Premier Wen Jiabao's constant talk of political reform, the last decade of the Hu Jintao/Wen Jiabao administration saw an economy that raced ahead and a political system that changed very little. But to repair this latest damage to its "brand," the party may feel it has to produce some real change. Some within the leadership are already using this opportunity to push for political liberalization. In his closing arguments as premier, an increasingly legacy-conscious Wen Jiabao is making a final pitch for real political reform. But Wen is a lame duck.
Over the course of the next few months, China will introduce a new generation of top leaders. Any political changes they might produce are unlikely to fundamentally recast Chinese politics or to appear soon. But they may soon find that delivering go-go growth is no longer enough. They may find that, particularly in the online public square provided by social media, a growing segment of China's people will expect a new degree of accountability -- and a new kind of change.
Damien Ma is an analyst in Eurasia Group's Asia practice.
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By Ayham Kamel
It may be tempting to view the plethora of recent gatherings -- the Arab League summit, the U.S.-Gulf Cooperation Council Strategic Cooperation Forum, and the Friends of Syria conference -- as evidence that the global community is getting more serious about addressing the violence in Syria. But the summits really just exposed the rifts among the relevant players that will prevent a viable and coordinated response. Syrian President Bashar al Assad, in turn, will profit from the lack of coherence; he will only nominally entertain Kofi Annan's peace plan as he maintains his grip on power, and the bloodshed will worsen.
International powers remain hesitant regarding any form of direct intervention. They considered initiatives calling for buffer or humanitarian zones, but ultimately no country seems prepared to act. Key powers appear to be pursuing their distinct policies, with only a hint of coordination.
Saudi Arabia and Qatar will provide extensive support -- including arms -- to the Syrian opposition, but are unlikely to supply the heavy arms that would lead to an immediate change in the balance of power. Heavy arms are more difficult to smuggle and training rebels would be much more challenging than during the Libyan conflict. Moreover, the escalation could provoke an un-calculated response from Assad's military. While their interests differ, the two powers see Assad's survival as a threat to their influence. Riyadh's purpose is to limit Iran's regional influence. Meanwhile, Doha has invested significant diplomatic and political capital in the struggle against Assad and any failure to deliver would represent a tangible setback to its prestige. Behind the armament policy is also a deep concern that if Assad regains control, Damascus and Tehran would aim to destabilize the al Saud and al Thani ruling families' grip on power.
Arming the rebels, who have had trouble obtaining ammunition sine the regime began its extensive military campaign in early February, will provide much needed psychological support and will help weaken Assad's forces. While the resolve of Syria's opposition will not abate, arms from the Gulf will neither arrive overnight nor will they immediately change the balance of military power, which is still heavily tilted in the regime's favor. An equally important element of the Gulf strategy is providing monetary incentives to officers in the Syrian army to incite defections. But Assad has built multiple safeguards to prevent defections, a tactic he inherited from his father.
The U.S. is willing to overlook, perhaps even support, GCC efforts to weaken Assad. But Washington is definitely not interested in playing an active role. It is concerned about Saudi Arabia's and Lebanon's support of Salafist rebels and al Qaeda leader Ayman al Zawahiri's call for jihad in Syria. While Sunni monarchies in the Gulf benefit from rising sectarianism in Syria, the U.S. interest in long-term regional stability could be compromised if the Sunni-Shia confrontations spread to Iraq and other countries. U.S. officials believe that a political settlement will be needed to prevent prolonged instability. Verbal support for the Annan process is a reflection of the desire to keep negotiations open, but U.S. officials are convinced that under current conditions the Annan plan will only enable Assad to retain power.
Assad will probably not implement key elements of the Annan peace plan, which calls for a halt of hostilities from all sides, and a negotiated settlement between the regime and the opposition. The regime views cooperation with the UN envoy as a way to secure the successes achieved by its military strategy and to gain some breathing space. While Annan is a shrewd diplomat, there are few reasons to think that success is in reach. Syria's opposition will probably not negotiate with Assad or agree to a settlement that keeps him in power. Meanwhile, there are no indications that the Lion of Damascus has reached a point where he would accept his own ouster.
Ayham Kamel is an analyst in Eurasia Group's Middle East and North Africa practice.
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By Roberto Herrera-Lim
Economic reforms that are the most significant in Burma since the 1990s confirm that the country's recent awakening has repercussions that go farther and deeper than politics alone. The news that the local currency will be floated on April 1, coupled with the likely passage of a new investment law, signals that the reform agenda has strong support throughout the leadership, not just with the visible President Thein Sein. The floating of the kyat -- with its potential to upset entrenched corruption and deny state enterprises and well-connected businesses privileged access to foreign currency -- reveals that reformers are relatively secure in pushing through with this change despite the risks to powerful interests. By doing this, the government is also showing a willingness to deal with near-term popular risks such as inflation, which may increase as state enterprises are forced to price their goods and services at market rates. The kyat float sets the stage for unwinding distortions that have led to corruption, lack of transparency in official transactions, and ineffective monetary policy. It will also enable Burma to use development aid more efficiently; the EU has already promised an additional $200 million in aid over the next two years. Meanwhile, the new investment law will allow foreigners to set up businesses without the need for local partners, and may provide a five-year tax holiday.
None of this would have been possible if the leadership were fracturing. Burmese politics, for the most part, remains very opaque despite the changes of the past few months. This creates near-daily speculation regarding the positions of the different cliques and institutions on the trajectory and pace of reform; serious disagreement can give hardliners the upper hand. Every instance of disagreement or lack of coordination -- whether between parliament and Thein, or between the central government and local military commanders -- is micro-analyzed for signals of dissent and fracturing of the senior leadership. This is why the substantive steps forward on economic reforms provide such a clear signal of a sustained commitment to reform.
On April 1, the former pariah nation will also hold its first free elections since the 1990 vote won by the opposition (but which the military refused to recognize). By the numbers alone, the outcome shouldn't matter much in the parliamentary balance of power. Up for grabs are a measly 40 seats in the 440-seat house, six seats in the 224-seat senate, and two for regional chambers. Including those regional assemblies and the 25 percent of seats automatically allocated for the military, Burma's legislature totals 1,158 seats. But the vote will be an important marker for democratic reforms-an idea that no one was willing to connect to Burma even a year ago -- because it opens the next political chapter for opposition leader and democracy symbol Aung San Suu Kyi. Suu Kyi and her opposition allies in the National League for Democracy (NLD) are expected to win most, if not all, of the seats being contested. Suu Kyi has not given any signals about her future political role, whether as an opposition leader validating the process of political change or as a more integrated participant in Thein's push for reform.
Burma is not yet fully out of the woods -- there are still several ways in which the reform process can be derailed. But with the raft of economic reforms, this is starting to look more and more like the highly praised "doi moi" (renovation) of Vietnam. It might be a bit too early to call it that, but it is becoming more and more difficult to bet against it.
Roberto Herrera-Lim is a director in Eurasia Group's Asia practice.
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With this week's Davos edition of The Economist, the concept of state capitalism has now graduated from provocative idea to conventional wisdom. The magazine's report on this trend is a must-read.
What exactly is state capitalism? No one knows better than Chinese and Russian leaders that communism doesn't work. They know from personal experience that the state can't engineer lasting long-term growth and that markets are crucial for the rising standards of living that autocratic governments must deliver if they are to remain in power. But these leaders also know that if they simply let markets decide who wins and who loses, they deny themselves control of the money needed to keep people in their jobs and off the streets in times of trouble -- and they risk enriching and empowering some who might use their newly won wealth to challenge for political power.
The goal of state capitalism then is to allow the state to play the largest possible role in controlling the wealth that markets generate within their borders. China, in particular, has used state-owned companies, privately owned national champions, sovereign wealth funds, and state influence over bank lending to build a powerhouse economic engine that its political leaders continue to drive.
This is a subject close to my heart. In fact, I've been invited to take part in an online debate on The Economist's website in which I argue that state capitalism is not a viable long-term alternative to the free market variety. In general, I was impressed with The Economist's excellent comprehensive coverage of this trend.
Until the very end of its report.
The Economist argues that "both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private investors. If these companies are as good as they boast they are, then they no longer need the crutch of state support.
It's no surprise that The Economist would argue against the use of this system. Pretty much everyone here at Davos who is not part of the Chinese, Russian or Gulf Arab delegations would agree. I know I do. But The Economist is telling China's leaders to immediately begin shedding the system that has made their economy the second largest in the world while helping them maintain their monopoly hold on political power-and to opt instead for the brand of capitalism blamed for the financial crisis, the global recession which followed, America's economic malaise, and the Eurozone's current crisis of confident. While we're at it, why don't we ask the Chinese leadership to become a "responsible stakeholder."
As I've said, I agree entirely with the larger point that state capitalism is not a viable long-term alternative to liberal capitalism, but there is no reason for the governments that use it to ditch it this year.
Why not? Look again at China. The vast majority of its state-owned enterprises and privately owned national champions lag far behind multinational corporations in access to state-of-the-art technology, branding expertise, and market share. They still have work to do and can use every advantage their government can provide to narrow the gap with their foreign competition. In addition, China remains a hugely important market for foreign companies and investors. This provides Beijing with the leverage needed to help more Chinese companies find their footing.
In other words, China has not exhausted its opportunities to "level the commercial playing field" (from China's point of view) or "further stack the deck" (from everyone else's).
One day, the changing competitive landscape in China will make that market much less attractive for outsiders, and things will have to change. A rising standard of living will make China's plentiful labor and capital much more expensive, encouraging companies to look elsewhere in Asia for these advantages. This process is already underway, and even some Chinese companies are joining their foreign competitors in opening up shop in places like Vietnam, Thailand, Indonesia, Malaysia, and the Philippines.
In the end, the Chinese government will have to liberalize its economy. It won't be easy, because all these state-owned companies will have their defenders within the political elite and the bureaucracy. But for the time being, it is clearly in China's interest to stay the course awhile longer.
Not that China's leaders care very much what we think.
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
FABRICE COFFRINI/AFP/Getty Images
Today, we turn to risk #2 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
G-Zero and the Middle East - The inability/unwillingness of major powers to bolster the region's balance of force will create new turbulence across North Africa and the Middle East in 2012 as unresolved political, sectarian, and ethnic tensions threaten more unrest. Continuing protests, autocracies under pressure, new democratic regimes fighting to establish stability, and the lack of a viable regional security framework will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, neighborhood heavyweights -- Saudi Arabia, Iran, and Turkey -- will vie for influence and generate friction.
Q- What does 2012 have in store for the Arab Spring?
A- Last year's Arab world uprisings will have lasting impact on North Africa and the Middle East. Protesters in Egypt and Tunisia proved they could force an autocrat from power. Demonstrators in Syria and Yemen have pushed their governments to the brink. Muammar al Qaddafi, in power since the Beatles were cutting albums, is dead. Saudi Arabia had to send troops across the King Fahd Causeway to prevent insurrection in Bahrain.
But let's not overstate the lasting impact of last year's upheaval. In Egypt, Mubarak is gone but his support structure lives on, and the country's next president won't be the Egyptian equivalent of Vaclav Havel. The military remains firmly in charge and will share power with the Muslim Brotherhood. The protesters who made themselves famous in Tahrir Square last year will be the odd man out as Egypt looks to form its next government.
In Syria, Bashar Assad's presidency may not survive the year, but for the moment he remains in power. Military defections are a serious worry, but so far they've been limited. Sanctions hurt, but the business elites in Damascus and Aleppo haven't yet begun siding with the opposition and calling for his ouster.
In Libya, oil production is ramping back up, though not as quickly as the new government claims, but powerful militias show no signs of renouncing their individual ambitions and joining the new Libyan army.
Bahrain continues as a majority Shia state ruled by a Sunni monarch. Monarchs in Jordan and Morocco remain firmly in place.
The governments of Saudi Arabia and Iran face no existential internal threats. The Saudis appear poised for a smooth process of succession when King Abdullah dies, and though Iranian President Ahmadinejad remains on shaky ground, Supreme Leader Ayatollah Ali Khamenei faces no direct near-term challenges.
That said, there is plenty of ongoing turmoil in some of these countries -- especially in Egypt, Syria, and Libya -- and Americans and Europeans don't believe they can afford direct intervention. U.S. troops are leaving Iraq, and there is no other outside power or alliance of powers capable of maintaining the region's delicate balance of power. That leaves local heavyweights -- especially Turkey, Saudi Arabia and Iran -- to compete for influence. None of them wants to get too involved in the complicated problems of its neighbors, but as the stakes rise in these less stable countries, they also face the risk of doing too little to bolster stability and to counter-balance their local rivals.
In short, the Middle East is top risk #2 this year because the absence of outside powers and the rivalries of local players could further destabilize a region that has already had its share of uncertainty and local violence.
Q- Syria remains in the headlines and there seems to be more violence in Iraq these days. What can we expect in these two countries?
A- In Syria, the risk is that prolonged stalemate will force the neighbors to intervene and bring things to a head. So far, the Arab League, led by Qatar, is most directly involved. As outside pressure on Assad increases, Iran may feel it has to bolster his government, one of the Islamic Republic's few reliable friends. The Saudis may decide that bringing the turmoil to a close means using their leverage to force Assad out, empowering Syria's Sunnis in the process. Turkish Prime Minister Erdogan's government may join them to put an end to the violence that has pushed many Syrians across the border into Turkey. Assad's fate may not be resolved quickly or easily, however, and Syria's troubles may extend well into 2012.
In Iraq, sectarian rivalry is filling the vacuum left behind by departing U.S. troops. Until recently the most exciting investment story in the Middle East, Iraq's stability is again in question. Nouri al-Maliki's government is no longer intent on accommodating Sunni Arab powerbrokers to keep the peace. In response, Sunnis who once opposed Kurdish demands for greater autonomy are now pushing to create a semi-autonomous bloc of their own in the Sunni-majority western provinces of the country. Here again, Iran, Saudi Arabia, and Turkey may calculate that they can't afford to hang back and let their rivals build new influence inside this country.
Q- What about Israel?
A- On the one hand, Israel will become more isolated. The Obama administration wants to reduce its risk exposure in the Middle East -- at least to the extent possible given the region's lasting importance for the United States -- and to focus more of its attention and resources on East Asia. In addition, Israel recognizes the surge of populism across the Arab world, and relations have become much more complicated with Egypt, Jordan, and Turkey. Add Iran's determination to continue development of its nuclear program and Israel will be on edge throughout this year. The risk has increased in recent weeks that Israel will face more violence in 2012 -- both within Israel and perhaps with Lebanon.
That said, whatever the differences between President Obama and Prime Minister Benjamin Netanyahu, U.S.-Israeli relations remain central to the domestic political health of both governments. Israel is not going it alone. And an Israeli military strike on Iran remains unlikely for two reasons. First, sanctions weaken Iran, even if only by forcing Tehran to sell oil to Asian states that will pay well below market prices for it. Second, sabotage, including via cyberattacks, appears to have slowed Iran's momentum in centrifuge development. This is a much less expensive and less dangerous approach than the conduct of bombing raids on Iranian territory.
Next up, another year of uncertainty for the eurozone.
Majid Saeedi/Getty Images
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 Ian Bremmer and David Gordon
Individual hackers and organized crime organizations have targeted businesses for years, but cyberattacks have rarely created political risk. They do now. The centralization of data networks -- both in energy distribution (the move to the smart grid) and information technology more broadly (the shift to cloud computing) -- is increasing the vulnerability of states to potentially debilitating cyberattacks. As governments become more directly and actively involved in cyberspace, geopolitics and cybersecurity will collide in three major ways.
First, new cyber capacity allows governments to project power in a world where direct military strikes are much more costly and dangerous. There have been plenty of stories about well-funded efforts from inside China to manipulate access to the Internet, but it's the almost-certainly state-sponsored Stuxnet attacks on Iran's industrial infrastructure that provide the clearest early glimpse of what tomorrow's carefully targeted state-sponsored attack might look like. When a missile is launched, everyone knows where it came from. Cyberattacks are a very different story.
Second, we'll see more cyber conflicts between state-owned companies and multinational corporations, providing state capitalists with tools that give them a competitive commercial advantage. China and Chinese companies are by far the biggest concern here. Throw in Beijing's indigenous innovation plans, which are designed to ensure that China develops its own advanced technology, and this is probably the world's most important source of direct conflict between states and corporations.
Third, there is the increasing fallout from the WikiLeaks problem, as those sympathetic to Julian Assange unleash attacks on governments and the corporations that support them in targeting WikiLeaks and its founder. In fact, the principal cybersecurity concern of governments has shifted from potential attacks by al Qaeda or Chinese security forces to radicalized info -- anarchists undertaking a debilitating attack against critical infrastructure, a key government agency, or a pillar of the financial system. Whether attacks are waged for power (state versus state), profit (particularly among state capitalists), or for 'the people,' (as in the WikiLeaks case), this will be a wildcard to watch in 2011.
On Friday, we'll talk about Top Risk no. 4: China -- and why its policymakers will frustrate much of the international community this year.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
JIM WATSON/AFP/Getty Images
By Ian Bremmer and David Gordon
We've now released our annual report on the ten most important political risks for 2011. Over the next two weeks, we'll be discussing each risk in more depth in this space. We begin with a brief overview.
In the past, our coverage of political risk has centered on particular countries, regions, issues, or events. We worry about elections in brittle countries and their ability to generate unrest, military confrontations involving unpredictable governments, or a policy shift with serious implications for a country's business climate and growth trajectory. For 2011, we're focused on a fundamental ongoing change in the global order.
As we step into 2011, headlines in the United States suggest a little more optimism about recovery, but market players and business decision-makers aren't convinced. Gold prices remain relatively high, and trillions of dollars that could be invested remains on the sidelines. Why the caution?
We're entering an entirely new world order with new ways for states to relate to one another, both politically and economically. That problem could provoke new areas of conflict, and it will highlight an emerging vacuum of power in international leadership -- and the uncertainty that comes with it.
We're calling this new order the G-Zero, because no country or bloc of countries has the political and economic leverage today to drive an international agenda. The G-20 helped build a useful crisis response when the financial crisis hit, but as the sense of urgency evaporated, so did the unity. The G7 is an anachronism. The G2 (the United States plus China) won't work, because the United States can't afford to keep up its role as primary provider of public goods, and China (like other emerging states) is much more interested in protecting domestic growth and stability than in accepting new burdens abroad. The G3 (the United States, Europe, and Japan) isn't viable, because Europe is shoulder deep in a bid to save the eurozone, and Japan's government is dysfunctional.
There's no international leadership, and each government will increasingly protect its gains at the expense of others. That's why the dominant economic trend of the last 50 years, globalization, now faces a direct challenge from geopolitics. Governments in both the developed and the developing world have every incentive to throw up barriers to commerce and investment that are designed to protect their own workers and companies -- and no country or bloc of countries has the will or the muscle to reverse this trend.
Our list of risks for 2011 includes the potential for crisis in Europe, tensions at the intersection of cybersecurity and geopolitics, China's unwillingness to bow to a growing surge of international pressure for economic policy changes, provocations from North Korea, and the risk of a spike in currency controls. All these risks are intensified by this transition to a G-Zero order.
Next up, we'll look at the G-Zero in greater depth, because it's our top risk for 2011.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
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On Thursday, my new book makes its debut. It's called The End of the Free Market: Who Wins the War Between States and Corporations? Here's the book in a nutshell:
A generation ago, the collapse of communism made clear that government can't simply mandate lasting economic growth. To fuel the rising prosperity on which their long-term survival will depend, political leaders in China, Russia, the Arab monarchies of the Persian Gulf and other authoritarian states have accepted that they have to embrace market-based capitalism. But if they leave it entirely to market forces to determine winners and losers, they run the risk of enriching those who will use their new wealth to challenge the state's power.
Instead, they have embraced state capitalism. Within these countries, political elites use state-owned and politically loyal, privately owned companies to dominate entire economic sectors -- like oil, natural gas, aviation, shipping, power generation, arms production, telecommunications, metals, minerals, petrochemicals, and other industries. They finance all these institutions with the help of increasingly large pools of surplus foreign cash known as sovereign wealth funds.
In the process, the state uses markets to create wealth that can be directed as political officials see fit. The ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival).
And with Europe in turmoil, a politically paralyzed Japan, and high unemployment with rising public anger in America, state capitalist China's robust recovery from the slowdown is looking awfully attractive for would-be imitators across the developing world.
I've been comparing notes with my colleague and close friend Nouriel Roubini on political and economic expectations for a few key regions in the year ahead -- a back and forth that's resulting in a global forecast for 2010.
Today, we begin with Latin America.
Ian Bremmer: I do think we can expect a solid
recovery in Latin America in 2010, as most governments in the region profited
from sharply improved macroeconomic fundamentals to survive the slowdown with
minimal damage. But a busy electoral calendar over the next two years,
highlighted by Brazil's presidential election in October, will tempt
policymakers to inflate their political popularity via heavy state spending.
Governments like those in Brazil, Mexico, Chile, and Peru will benefit from the
sound macroeconomic policies of recent years. Political officials in places
like Argentina, Venezuela, and Ecuador may find their popularity built atop
shifting sands. The Cristina Fernandez de Kirchner government in Argentina, faced
with rising inflation and an increasingly hostile congress, will prove
The really interesting story this year is in Brazil, where oil wealth and President Lula's popularity have seduced the government into less disciplined macroeconomic policy and a more statist approach to foreign investment and strategic economic sectors. Lula's preferred presidential successor, Dilma Rousseff, should be considered a slight favorite to win. If she does, she'll deepen state involvement in Brazil's economy. If opposition candidate Jose Serra wins, we'll see less bias toward state-owned enterprises and tighter fiscal policy. Whoever wins, there is one obvious wide-open sector for foreign investment: transport infrastructure. There's a lot of work to do to prepare Rio for the World Cup in 2014 and the Olympics in 2016.
Nouriel Roubini: Latin America is divided between economies that follow market-oriented policies (while attentive to social issues) such as Brazil, Chile, Uruguay, Colombia, Peru, and more populist governments in Venezuela, Bolivia, Argentina, and Ecuador. The latter group maintained its political popularity and solid economic performance given that commodity prices recovered, but some of these regimes are fragile and weakening. Venezuela's recent devaluation is a signal of a seriously mismanaged economy; in Argentina, the popularity of the Kirchner duo is faltering and the next president -- whoever he may be -- is expected to be more moderate and market friendly; Ecuador's Correa populism is kept in check by the popularity of dollarization.
Even in market-oriented economies, important structural reform challenges remain. In Brazil, Lula maintained macro stability (sound fiscal policy and independent central bank but with some recent slippages in fiscal discipline), but he failed in implementing structural and micro reforms that would accelerate the potential growth of Brazil. Implementation of those reforms will depend on whether Jose Serra or Dilma Rousseff is elected president. In Chile, Pinera will have to work hard to ensure that more aggressive market-oriented reforms don't lead to a return to greater income and wealth inequality.
Throughout Latin America, democratic transitions require that presidents (i.e., Uribe, Lula, Correa, and Chavez) avoid tinkering with constitutions and electoral laws to seek endless terms in power. Otherwise, the nefarious regional tradition of strongmen and caudillos will return. Alternation of power is necessary to strengthen democratic institutions.
Ian Bremmer is president of Eurasia Group. Nouriel Roubini is a professor of economics at New York University's Stern School of Business and chairman of RGE Monitor.
JUAN MABROMATA/AFP/Getty Images
By Ian Bremmer
Two years ago, there was a debate in Washington about whether a strong Europe or a weak
Europe was preferable. There's no disagreement today. A more multilateral U.S.
foreign policy needs a stronger Europe. As the G20 weakens the West's global
strategic position, the United States will increasingly need coherent policies from its
principal allies to maintain its international influence and leadership.
Europe, however, appears to be fragmenting.
Witness Germany moving away from EU fiscal targets, which will make it harder for the European Commission to compel other countries to develop credible and consistent fiscal policy. Meanwhile, European tax policy changes need to be implemented to cover the costs of interventions, stimulus packages, and revenue shortfalls-but they have barely begun. Upcoming elections in the United Kingdom could produce major ripple effects next year. And the risk of a complete breakdown in negotiations over Turkey's bid to join the EU could further divide the continent.
Overall, political issues will be tougher to deal with in 2010 than they were at the height of the economic crisis. As things unraveled in late 2008 to early 2009, governments had no choice but to use existing policy tools. Now they may have to take up the difficult task of developing new ones.
The European agenda next year will be full of challenges, many of which require policy coordination. There will be impediments to effectively managing a crisis in a truly pan-European bank; uncertainty over corporate refinancing, particularly in eastern Europe; and emerging political problems combined with social discontent as the difficult tasks of footing the bill for crisis responses become more pressing. At this point, a real move toward greater European consolidation looks like it's still a long way off.
Photo: ERIC FEFERBERG/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.