By Shaun D. Levine
The unexpected and surprising late-October promotion of Indonesia's Tourism Minister Jero Wacik to energy minister confirms that President Susilo Bambang Yudhoyono is more interested in electoral results than he is in securing changes to the regulatory environment. The decision also highlights the president's infatuation with loyalty and exposes his penchant for weaving complex webs of vested interests that further knot these groups into Indonesia's economic and political fabric. Wacik's selection provides an excellent look into Indonesian politics and its ongoing democratic transition.
Wacik's selection is related to two factors: it is a reward for loyalty and helps Yudhoyono access the network of vested interests that dominate Indonesia's political and economic environment. With the Energy Ministry facing a host of technical and political issues, Yudhoyono could have picked an experienced technocrat with some independence from vested interests. But rewarding loyalty won out-as it often does in Indonesia. After joining Yudhoyono's Democrat Party (PD) in 2003 Wacik established his credibility by effectively winning Bali for Yudhoyono in the 2004 campaign. His reward was the appointment to tourism minister in 2004. Wacik then repeated the win in the 2009 election. His continued loyalty and close relationship with Yudhoyono's wife Ani Yudhoyono has now earned him one of Indonesia's most important ministerial portfolios.
One of Wacik's greatest challenges will be his lack of industry knowledge. It is a common problem for members of Indonesia's cabinet, and can result in vested interests securing the advantage given their persistence and political clout. Wacik has admitted he will have to take some guidance from the industry and that could lead to increased cronyism.
Wacik may also be subject to pressure from his contacts. Early in his career, Wacik worked at Astra International, which was owned and controlled by one of the founders of Adaro Coal, Edwin Soeradjaja. Additionally, Wacik is a former classmate of Aburizal Bakrie, who heads the Suharto-era Golkar party and controls Indonesia's largest coal mining group. These relationships complicate a government decision to purchase shares in a large mining company, pitting political parties and business interests against the government.
Yudhoyono knows these risks, but views Wacik's business connections as critical for the PD. Wacik's relationship with Adaro Coal and that company's influence on policies will lead to increased financial support for the PD in the 2014 electoral cycle. The relationship with Bakrie could also soothe political tensions between Golkar and the PD, where Golkar occasionally acts more like the opposition than part of Yudhoyono's coalition.
Time may prove to be the ultimate limiting factor for Wacik. The new cabinet's tenure officially runs from the end of 2011 to 2014; but election noise will pick up in 2013, which, given Wacik's likely political role during the campaign, gives him only slightly more than a year to run the ministry. As one of Yudhoyono's valued fund raisers, it is likely that Wacik will be distracted or have to resign as the campaigning and fundraising work for 2014 heats up by early 2013. Wacik's ties to Bali would also likely see him spending more time there rather than pursuing ministry work.
Shaun D. Levine is an analyst with Eurasia Group's Asia practice
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By Michal Meidan
The Senate bill that aims to punish China for holding down the value of its currency and that is now in the hands of the House will not trigger a trade war between China and the United States (as feverish speculation has suggested). That said, as both Beijing and Washington head toward political transitions in 2012, politicians will have to take tough stances on sensitive issues to please domestic audiences-while trying to keep bilateral relations stable. Maintaining its footing between these sometimes opposing demands will become increasingly challenging for Beijing as its campaign season revs up.
China's leaders aren't formally campaigning the way U.S. presidential candidates do, but jockeying for the country's top political positions is underway. Current leaders, as well as the younger crop they hope to promote, are therefore vulnerable to criticism from hardliners within the government, as well as from an increasingly nationalistic public. China's expanding economic clout, combined with a sense that American primacy has reached its end, is fuelling calls for more assertive responses to perceived provocations from Washington. In the run up to the Senate vote, Beijing therefore made every effort to lobby U.S. lawmakers to reject the bill. And once the bill had passed, Chinese politicians were compelled to express their displeasure vociferously. Government spokespeople slammed the bill as a protectionist move that could hinder the global economic recovery, while the state-run media denounced Washington's attempts to use the yuan as "a scapegoat for the U.S. politicians' incompetence."
Now that Beijing's rhetorical dues to its people are paid, though, it is unlikely to rock the boat further. By retaliating with currency devaluation or a trade war, Beijing could embolden lawmakers in Washington to push the bill forward. Instead, Beijing reckons that as things stand there's only a slim chance that the bill will become law. Even if the bill moves forward, China's leaders will likely wait for President Barack Obama to either water it down or veto it altogether. That is, Beijing will give the White House a chance to uphold the tacit bilateral agreement to keep cool.
Such conciliatory logic prevailed around the $5.9 billion arms sale to Taiwan that the United States announced last month. The Obama administration agreed to refurbish the F-16 jets it sold to Taiwan in 1992, but did not sell the island the latest model of the fighter plane, as some in both Washington and Taipei had hoped. China's response was low-key: Beijing called off a few military-to-military dialogues but did not sever ties (as it did after the previous announcement, in January 2010), despite strong calls at home to be more assertive. As long as Washington keeps its side of the bargain, Beijing can get away with such moderation.
But appeasing nationalistic voices while keeping bilateral ties on an even keel will be increasingly difficult for Beijing in the coming year, as contentious issues are likely to emerge. Presidential elections in Taipei in January could rattle nerves in both Beijing and Washington, as might flare-ups in the South China Sea. Particularly as the two countries grapple with an uncertain global economic outlook and try to coordinate their approach to the Middle East, any or all of these issues could make the campaign season acrimonious.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
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By Yael Levine
On Sept. 16, the Kremlin's latest experiment in "managed democracy" ended in disaster when Russia's third-richest man, Nets owner and oligarch Mikhail Prokhorov, made his dramatic exit from the Right Cause party and exposed Russia's behind-the-scenes political dealings. In an abruptly called press conference replete with zingy one-liners, Prokhorov declared that representatives of the president's administration had mounted a raid on Right Cause. Cameras flashed and journalists tweeted as Prokhorov signed and displayed a document ordering the party's executive committee dissolved and its most prominent members fired. Less than a day later, he resigned. But far from auguring change, the hubbub will likely only encourage the Kremlin to consolidate around Prime Minister Vladimir Putin's United Russia party and forgo building even the façade of a multiparty system.
Right Cause was born in 2008 as the product of three liberal parties that had watched their popular support dwindle to 1 percent or less of the voting population by the end of Putin's presidency. When Prokhorov unexpectedly stepped up to head Right Cause in June, everyone assumed he was part of a Kremlin ploy to reinvigorate the party as an avenue for disaffected liberals to let off steam-harmlessly. As poster boy, Prokhorov's job was merely to provide the funds and cache the party required to mount a respectable campaign for the Duma elections this December.
So it was surprising to many when Prokhorov seemed to take being an opposition leader seriously. A Right Cause manifesto he published last month on the party's website (which has been "in reconstruction" since last week) and on his blog was harshly critical of Russia's authoritarian political system and hollow judicial one. He was likewise insistent about adding Yevgeny Roizman, a controversial anti-drug activist and former Duma deputy that the Kremlin disapproved of, to the party's ranks. And he reportedly planned to organize some sort of tent camp for Right Cause supporters -- a throwback to Ukraine's Orange Revolution and to what is probably Putin's worst nightmare. By the time the party congress came around, the Kremlin, it would seem, had had enough. During the first day of the party congress, a split emerged between the pro-Prokhorov faction (some of whom were literally locked out of the day's meetings) and the anti-Prokhorov faction (who seemed to have been sent expressly to hijack Right Cause).
The height of the drama came when Prokhorov called Vladislav Surkov (Russia's answer to Karl Rove) a puppet-master and said that he blocked real political competition. This affront to Russia's democracy "manager" likely went unnoticed by the bulk of the population, since only a sanitized version aired on television. But those who followed the events closely were among Russia's newspaper- and blog-reading elite -- precisely the constituency Right Cause was designed to placate. They watched as a Kremlin that thought it could have its cake and eat it too was chastened. And the Kremlin itself was surely paying attention as Right Cause, a party it had co-opted for public consumption, morphed into an embarrassment that needed covering up. Shaken by the fiasco, the Kremlin will be careful to limit its electioneering efforts in the run up to the Duma elections and to the presidential race in March to pumping up United Russia.
Yael Levine is a member of Eurasia Group's Eurasia practice.
NATALIA KOLESNIKOVA/AFP/Getty Images
By Anne Frühauf
Nationalization is the topic of the moment in South Africa and will likely continue to dominate political debate until the end of 2012, when the African National Congress (ANC) will elect its next president. The most likely long-term outcome, however, will not be too far from the government's current incremental approach to tighter regulation, which may be sold as "nationalization by other means."
The debate is largely being driven by political infighting within the ruling alliance. The ANC Youth League (ANCYL) and its populist leader Julius Malema are trying to use the issue to gain traction ahead of the December 2012 party conference, by tapping into popular grievances over economic and racial inequalities that persist nearly two decades after the end of apartheid. The ANCYL has said it will not support any candidates who do not favor nationalization, but its attacks against President Jacob Zuma (also the ANC head) have become increasingly personalized.
Zuma, fearful of alienating key constituencies ahead of his reelection campaign, is unlikely to lay the debate to rest once and for all. Malema won reelection as ANCYL leader in June and he has exploited the issue to maximum effect. Malema presents a growing threat to Zuma, not as a direct successor but as a detractor. His political future, however, may be undermined by investigations into his business dealings and ANC disciplinary procedures. Still, the ANC is finding it increasingly difficult to control the ANCYL. As a result, it prefers to attack the Malema and the populist youth wing on non-core issues rather than by openly debunking nationalization. But even if Malema's political career takes a knock, the nationalization debate is unlikely to fade.
The factional fighting will only intensify ahead of the party congress, and the nationalization issue is easily exploited for political gain. The ANCYL is supported by some African nationalist elements within the ANC. The Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP) are internally divided on the issue but worry that the ANCYL may simply be using it to secure political clout and bailouts for indebted black entrepreneurs. But the unions are equally concerned that the ANCYL is trying to invade their traditional left-wing turf and hijack their popular appeal. Pushed on to the back foot by the ANCYL, they may only give nationalization a lukewarm endorsement.
The mining sector has been the main target. (The ANCYL, however, has occasionally eyed the financial, agricultural, and industrial sectors as well.) But, the various constituencies also differ on the definition of nationalization, and options include expropriation without compensation; expropriation with compensation or alternative measures such as more taxes, royalties, black economic empowerment (BEE) policies, and greater state participation. Possible policy proposals over the next two to five years could include a mining tax like that recently implemented in Australia, and efforts to tighten BEE equity transfer targets. It is, however, far from clear whether the current equity transfer target (26 percent by 2014) will be increased. The government may instead more strictly enforce the existing target. Greater participation by the state-owned African Exploration Mining and Finance Corporation may also form part of this agenda, but the government faces real capitalization and management challenges.
At the ANC congress, party delegates are unlikely to endorse outright nationalization, nor complete rejection. Instead, their resolution is likely to be a muddled middle of the road call for greater public benefit. This lack of clarity is unlikely to reassure investors unnerved, not only by questions over South Africa's long-term policy trajectory, but also the existing regulatory burden. What many in the industry would consider a best-case scenario-a firm rejection of the nationalization proposals and efforts to ease the regulatory burden-is increasingly unlikely given South Africa's political dynamics. A worst-case outcome such as outright expropriation (even with compensation) is limited by constitutional and fiscal concerns, however. Nationalization without payment would result in capital flight and severe economic damage (as in Zimbabwe), while payment for mining assets would bankrupt the government. (For example, the mining industry's current market capitalization of around $270 billion is about twice the government's total budget). As a result, a "muddle through" scenario probably implies no radical departure from the status quo, but may allow the government to sell its policies to disgruntled voters as nationalization by other means.
Anne Frühauf is an analyst with Eurasia Group’s Africa practice.
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By Alex Brideau
President Viktor Yanukovych's government will face negative political, diplomatic, and economic effects from the Aug. 5 arrest of former Prime Minister Yulia Tymoshenko and the accompanying legal proceedings. Tymoshenko was detained on contempt of court charges during her trial for overstepping her authority as prime minister in concluding the 2009 gas import agreement with her Russian counterparts, and for pressing the local gas company Naftohaz Ukrainy to sign the contract. She could face up to ten years in prison if convicted.
Protests against the arrest and trial won't represent a threat to the government's short-term stability, but the arrest will help the opposition unify ahead of next year's parliamentary elections. It will also reinforce EU and U.S. views that the cases against Tymoshenko and her allies are politically motivated.
Tymoshenko's arrest is symbolically important because of the strong political overtones of the charges. Despite government claims to the contrary, investigations over the past year into corruption and misuse of government power have overwhelmingly targeted members of Tymoshenko's government, some of whom are still important opposition figures. Yanukovych's Regions of Ukraine party, which saw its support in June sink to only 11.7 percent in one poll and 16 percent in another, remains concerned that Tymoshenko could lead the opposition against them in the October 2012 parliamentary elections. If convicted, Tymoshenko would be automatically disqualified by law from running in the election.
Ongoing protests could grow if Tymoshenko is convicted and sentenced to prison. Yet protests are unlikely to grow to a size that would threaten order in the capital. Opposition parties do not appear to have the strength to sustain protests against the detention, and Tymoshenko's popularity -- polls show her support between 10 percent and 16 percent -- do not guarantee a large turnout. Furthermore, many of the capital's residents are on their summer vacation.
The arrest will nonetheless provide a rallying point for opposition parties ahead of next year's election campaign. Opposition parties aligned with supporters of the 2004 Orange Revolution have been divided since the 2007 parliamentary election, but local sources hint that they may work to overcome their differences and the arrest would make it easier.
The Russian Foreign Ministry's reaction may have the biggest impact in the short term. Moscow is unlikely to be overly critical of the Yanukovych government. But Russian officials do appear worried that the Tymoshenko trial is also an attempt to delegitimize the 2009 gas contract, and part of efforts to force its renegotiation.
Tymoshenko's trial is proceeding quickly, and it could end within the next month. With political figures and foreign governments believing that the case against her is politically motivated, the verdict in her trial will be viewed as a barometer of the trajectory of the Yanukovych government. A conviction could further strain ties with the West (and with Russia -- depending on how the government uses the verdict in gas talks). Yanukovych's supporters, on the other hand, might see acquittal as a sign that the president's power is weakening, which would hurt internal cohesion in the Regions party.
Alex Brideau is an analyst with Eurasia Group's Russia practice.
GENYA SAVILOV/AFP/Getty Images
By Christopher Garman
Over the past decade, Brazil has undergone a quiet socioeconomic revolution. From 2003 to 2009 nearly 30 million Brazilians entered the middle class, which now accounts for more than half of the population. These new entrants are now clamoring for improved quality of life, not just access to steady jobs and wages. The change in aspirations is remaking Brazilian politics, a process which can be seen in President Dilma Rousseff's recent overhaul of the Ministry of Transportation following allegations of corruption.
Rousseff's comprehensive housecleaning of the Transportation Ministry followed the early July publication of corruption allegations in the weekly newsmagazine Veja. It sent a strong signal to congressional allies that she wants to improve government efficiency and will be less tolerant of corruption. Rousseff dismissed 18 people, most of them political appointees, including ex-transportation minister Alfredo Nascimento, from the Party of the Republic, or PR (an ally in the lower house), and senior ministry officials from the ruling Workers' Party. The president also announced other ministries could follow and signaled that no political appointees would be spared if corruption were found.
Rousseff's stance could be explained by her own technocratic profile. She is pragmatic and wants results, particularly in the run-up to the 2014 World Cup and 2016 Olympics. The cost of turning a blind eye to corruption among those running agencies and ministries is growing. But the rise of the middle class is a more important structural factor.
As recently as 2005, jobs and wages were the top demands of voters. But greater economic prosperity has brought greater aspirations. The new middle class unsurprisingly wants better health care, better education for their kids, and better neighborhoods to live in. Polling conducted by Ipsos Public Affairs, for example, demonstrates a significant increase in concern over these three issues from 2005 through 2010 and a proportionate drop in concern over wages and income. According to Ipsos Public Affairs, quality-of-life issues were ranked as primary concerns by roughly a quarter of middle class voters in 2005, while economic issues were the primary concern of close to 50 percent. But by 2010 middle-class concern with economic issues had fallen to 36 percent, behind quality-of-life issues, which rose to 38 percent. These demands will shape the types of candidates that will be successful in future elections and act as powerful incentives for elected officials.
Two conclusions emerge from this appraisal. First, Rousseff is unlikely to back down. While Rousseff may be forced to make strategic concessions to congressional allies on occasion (don't expect the president to quickly conduct similar overhauls in other ministries), the focus on better governance is here to stay.
Second, Rousseff's relations with congress will likely become more difficult. Voter demands may change quickly, but the intricacies of Brazil's political system (specifically coalition management in a multiparty presidential system) will evolve more slowly. For example, Rousseff's decision to strip the Brazilian Democratic Movement Party (PMDB) of key ministries early in her term contributed to her difficulties during the scandal implicating her chief of staff. If her public-approval ratings decline, the PMDB and the PR may be inclined to show their displeasure with open dissent -- likely with support of populist spending measures. And in a context in which the government is struggling to keep inflation at bay, more spending by congress is that last thing Rousseff needs.
Christopher Garman is Eurasia Group's Latin America practice head.
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By Heather Berkman
Guatemala's presidential campaign has been full of twists and turns, with the most recent bump coming on Wednesday, when the indigenous organization Waqib Kej presented a letter to the United Nations denouncing former Army General Otto Perez Molina for his alleged involvement in acts of genocide and torture during the country's long civil war. Perez Molina also happens to be the right-of-center Patriot Party presidential candidate and favorite to win Guatemala's September 11 election. His competitor is former first lady Sandra Torres, who last March divorced her husband, current President Alvaro Colom, in order to "marry the people of Guatemala" -- or, in other words, to claim eligibility for her own presidential bid. The turbulent campaign only mirrors Guatemala's larger woes. And no matter who secures the presidency, the country seems unlikely to get it together anytime soon.
Guatemalan politics over the past few years have been reminiscent of a dark and twisted telenovela. This is the country where a lawyer planned his own death and posthumously released a video blaming the government for it, and where just last week famed Argentine singer Facundo Cabral was gunned down in his car. Since the May 2011 start of the election period, more than 30 candidates for office -- ranging from local councils to mayorships -- have been murdered, and members of the supreme election tribunal have received death threats. The alarming events led Jose Miguel Insulza, the secretary general of the Organization of American States, to express concern about rising tensions leading up to the national elections.
The country's troubles are also what have enabled Perez Molina to soar to the top of public opinion polls. While the allegations of human rights abuses are nothing new, little concrete evidence has been presented to date, and Perez Molina has capitalized on his anti-crime stance to curry favor with voters. Torres, meanwhile, is waging an uphill battle to reverse the election tribunal's decision that her former marriage makes her ineligible to run for president.
But whatever happens on election day, the new administration will have a tough time lifting Guatemala out of the morass it finds itself in. Since he entered office in January 2008, President Colom has seemingly lurched from one disaster to the next and has failed to build enough support in Guatemala's unruly and fragmented legislature to pass much-needed tax reforms. Meanwhile, drug traffickers from Mexico have extended their networks through the country, crime and violence have sapped government resources and stymied investment, and the government repetitively has had to turn to multilateral financial institutions and foreign governments for support. Perez Molina may promise to usher in change and a heavy hand on security, but following through on his agenda and bringing Guatemala back on track may be more than what this former military man has bargained for.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
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By Christopher Garman and Jefferson Finch
At first glance it would appear that Brazilian President Dilma Rousseff has successfully weathered her administration's first political crisis: a scandal that led to the resignation of her chief of staff, Antonio Palocci (his second departure from a Workers' Party government due to accusations of shady dealings). Indeed, it'd be easy to think that it might be smooth sailing for the rest of the year. The president substituted Palocci with Gleisi Hoffman, a senator whom she knows well and who is loyal to her; the market's trepidation about inflation appears to be receding for the moment; and the latest unemployment data, released yesterday, reveal that seasonally adjusted unemployment has reached an all-time low of 5.9 percent. What's more, a public opinion survey conducted by Datafolha in June found that Brazilians' impression of the Rousseff administration had improved a little since March, with 49 percent of respondents saying her government was "good" or "great," compared with 47 percent before.
But Rousseff's political future might not be as rosy. If you dig a little deeper, a different, more challenging picture emerges. The same Datafolha poll found that the share of respondents who think inflation will stay high jumped from 41 percent in March to 51 percent in June. Likewise, the portion of respondents who think their purchasing power will increase dropped from 43 to 33 percent. Meanwhile, the National Confederation of Industry found that 71 percent of the people they spoke to expect inflation to increase over the next year, the highest percent in roughly a decade.
To make matters worse, consumer confidence is starting to drop. Datafolha discovered that 17 percent of respondents think the economy will worsen, almost double the number (9 percent) who felt that way in March. These shifts in popular sentiment may not be dramatic enough to change the political calculus of Rousseff's advisors, some who think her popularity might even rise later this year. But they do hint that the economic foundation of Rousseff's popularity is splintering. As Brazilians feel their purchasing power sapped, the rosy halo around Rousseff will likely start to fade. That said, the president's downhill slide will probably be gradual. After all, we're talking about higher inflation, not runaway inflation, and slower growth (just under 4 percent for 2011), not recession.
Christopher Garman is head of Eurasia Group's Latin America practice. Jefferson Finch is an associate in the practice.
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By Wolfango Piccoli
British voters are set to reject electoral reform in the May 5 referendum and deal a blow to the incumbent Conservatives and Liberal Democrat Party (LDP) in local and regional elections held concurrently. The fight over the electoral reform will damage the relationship between the coalition partners, but the government will survive and early elections are unlikely.
The referendum lies at the heart of the power-sharing deal struck between the Conservatives and the LDP. The LDP demanded the vote as a key condition for joining the coalition after the Tories, who want to retain the existing first-past-the-post system, failed to win a clear victory in last year's general election. The Labour party is split on the issue, but its leader Ed Miliband supports a system in which voters rank candidates in order of preference.
Local government elections will also be held in Scotland, Wales, and much of England, providing the first comprehensive indication of how the main parties have fared since last year's general election. Labour is expected to make the most gains, with some pollsters suggesting the party could gain more than 1,000 council seats. Prime Minister David Cameron's Conservative Party is expected to suffer big losses, possibly as many as 900 seats. The LDP meanwhile could lose control of around half of the 22 councils it is defending, possibly including prized possessions such as Bristol, Hull, Newcastle, and even Sheffield, where party leader Nick Clegg's seat is located.
In such a scenario, Nick Clegg will have to contend with disgruntled party members (mainly from the left of the party), who may step up their criticism of the coalition and he may even have to fight a leadership challenge. But there is no viable replacement and he will continue as party leader. To recover, Clegg is likely to champion (with the prime minister's consent) an accelerated reform for the House of Lords, push ahead with his social mobility agenda for higher education, and fight for changes to the National Health Service.
The Liberal Democrats will not, however, leave the coalition. The party would cede all credibility if it were to walk away. Also, the LDP is down in the polls, which provides no incentive to provoke an early election. Neither will the Tories be tempted to end the relationship. They are unlikely to win a parliamentary majority in a snap election. But it will not be business as usual after 5 May. Clegg's party will strike a more independent tone, reminding the Conservative Party that it owes the LDP for its ability to govern.
Wolfango Piccoli is a director in Eurasia Group's Europe practice.
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By Ian Bremmer and David Gordon
Many investors wrongly assume that congressional gridlock will present few risks in 2011 and may even provide the predictability that investors look for. But a divided government can throw up unnecessary roadblocks to necessary policy changes. It can also push the White House to rely more heavily on executive powers, which are harder to predict and influence, to get things done. At a time of sluggish economic recovery and still high unemployment numbers, congressional gridlock is especially damaging.
U.S. gridlock poses three major risks this year:
First is the risk that there will be no movement on policies that investors and business leaders want to see. The most important of these is housing finance reform. Democrats and Republicans are not far apart on potential solutions, but the tough issues of winding down Fannie Mae and Freddie Mac and deciding what to do on affordable housing limits prospects for success. Failure to resolve the issue would prolong a key driver of the weak recovery, as would failure to take substantive action on the recommendations of President Obama's bipartisan deficit commission.
Second, in 2011, headline risk will be driven by both parties promoting priorities for which there is no path forward. The Republicans want to substantially revise the Dodd-Frank financial regulation bill, but they don't have the power to do it, even if they threaten to hold up funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission. President Obama will resuscitate immigration reform despite the fact that the legislation will not pass the Republican-controlled House.
Third is the risk that a road-blocked White House takes heavier-handed administrative actions that are hard to predict or influence. As President Obama finds little room to legislate next year, he is likely to turn to the things he can accomplish on his own. Understanding how the president can use his powers will be critical to getting 2011 forecasts right.
On Monday, we'll take a closer look at Top Risk no. 8: Pakistan, which faces a near perfect storm of political, economic, and social crises.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
NICHOLAS KAMM/AFP/Getty Images
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.
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By Willis Sparks
Vladimir Putin is an amazing man. You may have seen him co-piloting an aircraft recently and dumping 12 tons of water to extinguish two of the many wildfires raging across Western Russia. But did you know that in 2008 he used a tranquilizer gun to save a group of scientists and a television camera crew from a charging tiger? In 2009, he saved Russian shoppers from high prices by ordering a grocery store executive to put sausages on sale, forced one of the world's richest men to restore laid off workers to their jobs by reopening a cement plant, taught judo to the Russian national judo team, and went to the bottom of the world's deepest lake in a submarine. In April, he hugged a polar bear. He swims Siberian rivers for exercise and enjoys bare-chested summer horseback rides. Without question, women love him. It's said that he will never have a heart attack, because his heart isn't foolish enough to attack him. Or maybe that's somebody else.
What's all this about? Yes, Putin's approval numbers have fallen to their lowest levels in four years as next year's Duma elections loom. President Dmitry Medvedev, his handpicked successor, has dropped ten percentage points since January. Suicide bombings in March and a mining disaster in May haven't helped. The Kremlin is only now containing the wildfires, which have killed dozens of people and left thousands homeless. The worst drought in 100 years and fears of food inflation have forced the government to ban the export of grain.
To some extent, Putin's penchant for action-man poses reflects recognition of past mistakes. Ten years ago this month, the Russian submarine Kursk sank to the bottom of the Barents Sea. At a time when it appeared a rescue mission might still save the 118 crew members aboard, Russia's newly inaugurated president famously refused to cut short his vacation at a Black Sea resort, inviting a firestorm of criticism. Just as the loss to folksy populist Kent Hance for a House seat in 1978 taught George W. Bush that he must never be "out-Christianed or out-good-old-boyed again," so Putin appears ready to prove he is the ultimate man of the people. He has been constantly on television during the wildfire crisis, even as other officials, including Moscow Mayor Yuri Luzhkov, appeared reluctant to admit that anything's amiss.
Yet, all these stunts reveal less about Putin's strength than his country's weakness. Russia remains a nation not of laws but of men, and the public is losing confidence that the men in charge are willing and able to improve their lot. Recent polls have found that 43 percent of Russians don't expect "anything positive" from their prime minister. 56 percent are "unsatisfied with what's happening in the country." As president, Putin eliminated direct election of regional governors in favor of Kremlin appointments. 59 percent of Russians surveyed would like to see that decision reversed. A poll from another agency found that 82 percent say state officials don't respect the law.
Nor do Russians have much reason for faith in the integrity of public institutions. United Russia, the party that holds more than two-thirds of Duma seats, represents little beyond loyalty to Putin. Courts inspire minimal confidence. Russia's media remains far from free.
Putin has enjoyed strong popularity for more than a decade. Though his numbers have fallen, the end of a long hot summer will likely offer him a boost. He'll probably get most of what he wants from next year's legislative elections, and there is no coherent opposition in Russia to block his plans for the presidential vote in 2012 -- whatever those plans may be. Perhaps he'll want his old job back.
But over the longer term, outsiders are left to wonder what a Russia without Putin might look like. Even Russia's resident superhero can't live forever, and it's not at all clear what personality or institution will have the public credibility to take his place.
Willis Sparks is an analyst in Eurasia Group’s Global Macro practice.
ALEXEY DRUZHININ/AFP/Getty Images
The most obvious clue that Alexander Lukashenko's MySpace page is a fake is that it claims he has 315 friends. The Belarusian President has no friends -- at least none that can help him maintain his political footing. It's nice to have pals in Venezuela and Iran, but Hugo Chavez and Mahmoud Ahmadinejad have moribund economies of their own to manage. That's why Belarus could become the latest former Soviet republic to face an economic and political storm.
Elections are coming in Belarus sometime in the next six months, and it doesn't take a crystal ball to know who's going to win. The opposition remains badly divided, and Lukashenko still controls the levers of power. He probably didn't need to rig the polls in 2006, yet he did it anyway. The need for a boost is more obvious this time, and he's likely to cheat again. In 2006, the fraudulent result triggered large public protests and scattered violence on the streets of Minsk. This time it's likely to be worse, and Moscow, the only valuable ally Lukashenko has ever had, is highly unlikely to throw him a life preserver.
In fact, the Russian government has had it with Lukashenko because it considers him a freeloader and an ingrate. The Belarusian president has scored political points at home by criticizing Moscow. Belarus has provided asylum to ousted Kyrgyz leader Bakiev, another authoritarian president who has antagonized neighboring Russia. Lukashenko has held up establishment of a customs union with Russia and Kazakhstan with demands for continuation of cheap oil and gas supplies from Russia.
The Belarusian economy is vulnerable. The economic slowdown among major trading partners in Europe and the former USSR has stalled the country's growth. Its current account deficit stands at 13 percent of GDP. Rising energy costs add to the problem as Gazprom, Russia's state-owned gas monopoly, pushes Belarus closer to market prices for gas.
With elections looming, Lukashenko's government is highly unlikely to cut state spending. He's right to wonder how long he would remain popular if he cut subsidies to help consumers buy fuel, froze wage and pension increases, and ended state spending that protects jobs.
And in response to the phony election of 2006 and the state crackdown on demonstrations that followed, the United States and the EU imposed sanctions. There's little reason to think they won't do it again if Lukashenko turns to the same old tricks.
Moscow won't shed any tears as Lukashenko flounders. Russian media have opened up on him in recent weeks, portraying him as an obnoxious, narcissistic thug. Prime Minister Putin doesn't work very hard to disguise his contempt.
Moscow is in best position to make Lukashenko more uncomfortable. As his relations with Moscow have worsened, Russia has moved to sharply reduce the energy subsidies that fuel the Belarusian refining industry -- and the broader economy. This year, Russia imposed full oil export duties on supplies and threatened to charge netback parity prices for gas next year. When Russia cut gas deliveries by 60 percent, Belarus threatened to up the stakes by passing the pain onto Europe. Russia supplies a quarter of the European Union's gas demand and pumps about 20 percent of the total through Belarus. The Russians, who can simply reroute those supplies through Ukraine, were not impressed. The two sides reached a compromise on Moscow's terms.
Russian-Belarusian energy supply and transit contracts must be renegotiated by the end of this year. A fight over energy is likely, and Belarus may face more supply cuts and damage to trade relations in other sectors that could generate turmoil throughout the Belarusian economy -- in the dead of winter and the middle of an election campaign.
If Russia really wants to punish the Belarusian president, it could refuse to recognize the election results. Moscow is highly unlikely to push that hard, but Belarus certainly looks like the next former Soviet state that could see some dangerous upheaval in coming months.
JUAN BARRETO/AFP/Getty Images
By Hani Sabra and Willis Sparks
In many ways, Lebanon has recovered from the devastation of Israel's war with Hezbollah in 2006. And the country's recent political stability has held up nicely despite the turbulence of recent years. A record number of tourists have arrived this year.
But the possibility that a U.N.-sponsored tribunal will indict Hezbollah members later this year for the February 2005 assassination of former Prime Minister Rafiq Hariri threatens to shake things up. In a speech last week, Hezbollah leader Hassan Nasrallah predicted the tribunal would target members of his organization, rejected the tribunal's legitimacy, and accused the March 14 movement led by Hariri's son and political successor Saad of blaming Syria and Hezbollah for the murder simply to win broader political support. He also accused March 14 of fomenting sectarian tension.
The speech was a power play. Nasrallah called on March 14 leaders to make amends for offenses against Syria, Hezbollah, and the opposition and to help Lebanon enter a new phase of political harmony by pressuring the U.N. tribunal to halt its investigation.
Given its weakened political position, March 14 will probably accept some of Nasrallah's demands. Hariri can't allow his Sunni base to believe he is willing to see his father's murder go completely unpunished, but he doesn't want to push Hezbollah hard enough to send the country spiraling toward violence for which he might be blamed. Nasrallah is in a tough spot too. He knows an indictment is likely and wants to keep his political base happy by launching a pre-emptive strike on its findings.
In years past, Lebanese politics at a similar simmer would have quickly boiled over, but erstwhile adversaries and regional heavyweights Saudi Arabia and Syria are working together this time to keep things cool. They can't afford to see Lebanon descend into violence again either.
Can the current standoff be resolved without a credible resolution to Rafiq Hariri's murder? More to the point, can the country's political stability withstand the tribunal's ongoing investigation? No one has faced justice, raising still more questions about the Lebanese government's commitment to rule of law. Saad Hariri wants justice, but is unwilling to push the country over the edge. Nasrallah says he's committed to finding the truth -- so long as truth doesn't implicate Syria or Hezbollah.
MAHMOUD ZAYAT/AFP/Getty Images
By Nicholas Consonery
On Saturday June 19, Beijing shook Washington and global markets with a landmark announcement that its currency, the renminbi (RMB), would become more flexible. The move caught many by surprise, including yours truly. I thought -- and argued earlier on this blog -- that Beijing's concerns about the fiscal crisis in Europe (which still seems to be getting worse) would likely delay action on the RMB. I was wrong.
At the onset, I'll say that my fundamental understanding of the Chinese government's economic priorities has not changed. Beijing still has tremendous incentive to protect its export-focused industries in the short-term, and the leadership has already made clear that it is very concerned about the potential spillover of a financial or even sovereign debt implosion into the European real economy. This could threaten the strength of Chinese exports to the continent and risk slower growth in China. So even though the RMB has become a bit more flexible, I expect we will only see very slow, crawling-upward appreciation against the dollar this year for these very reasons.
But if Beijing is so concerned about the strength of its exports, why pursue even slow upward movement in the RMB -- which would make Chinese-made goods more expensive? Especially when the currency is already appreciating on a trade-weighted basis; up by 3.37 percent according to the Bank of International Settlements?
The short answer is that Beijing is not impervious to foreign pressure, and became convinced that the potential downside costs of doing nothing outweighed the risks behind a small move.
This leads me to the current discussion over whether Beijing was more motivated by political or economic factors in moving on the currency. I think it's a false paradigm, because both factors were at play, and in China, everything economic is political. To my mind, the decision was economic, but the timing was political.
Let me explain my thinking:
First, Beijing's move on the RMB might actually have done more to protect Chinese exports than if they had done nothing. In moving on the RMB, Beijing is seeking to avoid foreign policy turmoil that could disrupt its economic goals. In other words, it became clear to Beijing over the past few months that if they did nothing on currency, the Obama administration might not be able to hold back congressional pressure to impose concrete punitive measures against imports from China. Beijing's move on the RMB made it far less likely that these punitive steps are taken, and thus the outlook for China's ability to continue (mostly) unhindered exports to the United States remains strong.
Beijing must have sensed -- more than I gave them credit for -- the growing likelihood of a punitive response from the United States on currency, and they were aware that the more visible and direct the critics in D.C. became, the harder it would become for them to sell a move domestically (which goes back to the point of risking a much more confrontational trade relationship with the United States). So they timed the move to accrue maximum political benefit -- perfectly coordinated to coincide with the G20 summit in Toronto this week. And they gamed us all ahead of time by greatly lowering everyone's expectations -- making even a very small move that much more gratifying. In doing so, they have all but silenced the international criticism and (momentarily?) eroded any broader support for the more punitive moves called for by leading China skeptics in Washington.
But another important point is that I don't believe Beijing would have made any change in their currency policy unless at least some contingent in the bureaucracy was arguing that it was in China's best economic interest to do so. And this is exactly the argument that's been waged within the Chinese bureaucracy for the past six months, where we've observed a consistent back-and-forth between policymakers at the Chinese central bank (PBoC) and the Ministry of Commerce (MOFCOM) on whether and when to proceed with exchange rate reform.
PBoC officials have been arguing consistently that RMB reform must move forward, both because of its immediate function in combating inflation, and because of its longer-term role in promoting the economic restructuring discussed above. But MOFCOM officials have been generally opposed, citing the potential downside risks of appreciation for export-focused industry. At the end of the day, it looks like May's positive economic data -- which showed a nearly 50 percent increase in Chinese exports year-on-year and a slight uptick in consumer price inflation -- convinced the top leadership that the PBoC was right, and that the domestic economy could still benefit from a very gradual appreciation of the currency despite the ongoing fallout in Europe.
The final point is that China's economic priorities are not simply limited to protecting exports. It has been clear, especially for the past year, that Beijing is becoming more serious about taking steps to reduce the economy's reliance on export and investment-intensive growth. The crawling appreciation I'm expecting for this year won't help much in this regard, but in a longer-term sense, Beijing clearly needs a stronger, more flexible currency to accomplish many of its economic goals, from promoting domestic consumer spending to strengthening the ability of Chinese firms to purchase inputs abroad (like natural resources), and fostering the domestic financial industry. The rising generation of Chinese leaders is clearly focused on pursuing these adjustments. In late May, Vice Premier Li Keqiang (who will likely become the next Premier in 2012) promoted this kind of economic restructuring in a consequential speech published in the leading Chinese Communist Party journal Qiushi. In his speech, Li specifically discussed the role that the RMB reform could play in rebalancing the domestic economy. Next time I'll take his words (a bit) more seriously.
Nicholas Consonery is a China analyst at Eurasia Group.
FREDERIC J. BROWN/AFP/Getty Images
If this past week is any indication of what's to come, Israel could be in for some serious heat this summer. Iran is well on its way to developing a nuclear program, the international community is taking aim at Israel's ambiguous approach to its own nuclear weapons, and Israel promptly lost what was, in all fairness, a no-win situation when it confronted a humanitarian flotilla steaming toward the blockaded Gaza. On top of these issues, the most worrying near-term risk is on the Lebanon and Syria front.
Since April, the Israeli government has been saying that Syria is supplying Hezbollah with scud missiles provided by Iran. The rhetoric flared last week, when Prime Minister Benjamin Netanyahu said that Hezbollah is now operating the scuds out of Syrian territory. If true, this situation would be a real game changer for Hezbollah -- given that the scuds could reach Tel Aviv and Jerusalem, creating a very different threat level than the group has ever posed before.
The Israelis have responded by ramping up the diplomatic pressure, publicly castigating Lebanon and Syria, and launching overflights of Lebanon. In the past week, the Israelis also launched a 5-day nationwide military-readiness exercise, publicly insisting it had nothing to do with the crisis (but predictably causing hysterics among Israel's neighbors). Lebanese Prime Minister Saad Hariri was sufficiently worried that he hopped a plane to meet with President Obama for urgent discussions. Obama's reaction wasn't quite what Hariri expected, though, as the U.S. president used the meeting to scold him for weapons transfers, which violate U.N. Security Council resolutions passed after the 2006 Israel-Hezbollah war.
MENAHEM KAHANA/AFP/Getty Images
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.
There are several fascinating elections due this year. Next month, we can look forward to Britain's most unpredictable outcome in 100 years. In Poland, former Prime Minister Jaroslaw Kaczynski has become a presidential candidate in hopes of succeeding his twin brother Lech, killed in a plane crash earlier this month. Japan's ruling DPJ faces a referendum on its first turbulent months in power with upper house elections this summer. In November, recession-weary Americans will go to the polls to elect a new congress.
With all that going on, you probably haven't thought much about next month's local elections in North Rhine-Westphalia, Germany's largest state. Eager to institutionalize a post-bailout era of greater fiscal discipline, the German government is preparing to push for a major revision of eurozone rules in the form of a new European Union treaty. The aim is to build momentum behind a drive for fiscal consolidation and greater powers to enforce rules across the currency union.
But it's hard to imagine that Chancellor Angela Merkel's government will get what it wants. Irreconcilable differences remain among key European states, and Germany doesn't have the political power it held a generation ago in the run-up to introduction of the euro. Today's union is much larger, and the perceived benefits of convergence are worth less. The contentious debate over a new treaty will unfold just as the battle is heating up to replace Jean-Claude Trichet as president of Europe's Central Bank.
The immediate concern is that Standard & Poor's lowered Greece's debt rating to junk on Tuesday and Portugal by two steps. The big longer-term worry for Europe is that politicians locked into tough deflationary programs (in Greece and beyond) will take the once-taboo step of pushing for debt restructuring. We're not talking about the break-up of the eurozone, no matter how much apocalyptic rhetoric we hear in days to come or how many pundits write articles this fall with titles like "Who killed Europe?" But the less dramatic risks for European fiscal policy are plenty serious.
That's where Germany's local elections come in. The balloting in North Rhine-Westphalia, home to more than 20 percent of Germany's citizens, will provide a real test of Angela Merkel's center-right government. A bad result would jeopardize Germany's shot at tax reform. More to the point, it would weaken the entire eurozone by undermining support for fiscal discipline at the heart of Europe.
A return of the German left, even a modest one, will generate much more expansionary policy than we saw during the grand coalition period between 2005 and 2009. That will create stronger institutional support for German labor demands, driving a rebalancing within the eurozone as German labor costs begin to rise. That will undermine European competitiveness at a delicate moment in the union's recovery from recession. Over the longer term, it's hard to imagine Europe's fiscal woes improving in that environment. That's why I believe strongly in the eurozone, but not in a strong eurozone.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
AXEL SCHMIDT/AFP/Getty Images
By Roberto Herrera-Lim
The on-the-ground situation in Thailand is changing quickly at the moment, and unrest could persist for quite some time. Red shirts are building forts out of spears and rubber tires in the middle of Bangkok's commercial district. Anti-Thaksin yellow shirts are threatening to take back the streets. Multicolored shirts are demanding that the government take a tougher stand on the red shirts. But one thing's for sure: The key elites that have -- for better or worse -- dominated Thailand's political landscape appear to be as incoherent and uncoordinated as they have been in decades in dealing with the polarization in the streets. That's why, regardless of the near-term outcome of the current crisis, the prospects for long-term stability are weak.
The so-called red shirts, anti-government demonstrators who support former Prime Minister Thaksin Shinawatra, now in exile, have occupied parts of Bangkok for the past 25 days. Clashes between protesters and security forces have so far killed at least 26 people and injured more than 1,000. Their numbers have dropped in recent days, though some red shirts in the countryside have reportedly removed their colors to pass undetected through military checkpoints as they enter the capital looking for a fight. The protesters have demanded early elections; the government has refused. In short, the government is close to a point of no return.
King Bhumibol Adulyadej offered the clearest signal yet on Monday that Thailand stands perilously close to serious bloodshed. With his first public comment on the unrest that has plagued his country for the past month, the ailing 82-year old monarch appeared briefly on national television to call on a group of the country's judges to "do the right thing" in maintaining law and order. The monarchy has been deliberately vague in the past, to fulfill its perceived role of guiding the country while maintaining an apolitical stance. Unfortunately, the long-awaited message from the king did not directly address the protests themselves, a sign perhaps that the monarch, hospitalized for the past seven months, fears he no longer has the clout to back the red shirts down.
Meanwhile, the military leadership, while still nominally on the side of the government, has hemmed and hawed on how to best deal with the protesters on the streets, maybe a sign of some hesitation on the part of army commander Anupong Paochinda to take responsibility for what will likely be a bloody crackdown so near his September retirement. It also reflects some doubt on the part of senior commanders on whether the lower ranks will hold in the worst case scenarios; talk of watermelon soldiers ("green on the outside, red on the inside") is rife. For this reason, Anupong may be trying to hold off some of his more conservative deputies, who believe that Thaksin, and by extension the red shirts, should be removed from any political equation.
Prime Minister Abhisit Vejjajiva, British-born and Oxford-educated, has raised alarms of "terrorist behavior" by the red shirt protesters, and wielded the royalist flag by claiming that the current crisis involves a "plot to overthrow the monarchy." Normally, the test for a leader hit by a crisis that, on its face, has the support of significant segments of the population, would test his mandate through elections, rather than revert to bogeymen.
And finally Bangkok may no longer be the elite's stronghold. Some local residents have taken to the streets, many under cover of darkness, to give aid and comfort to the red shirts.
Ominously, the government's warnings are based on assumptions that the old relationships will work, and that the key players can deliver the government from the red shirts, either by outlasting them or beating them back. Maybe the government's strategy will work. If the king's call for calm can help restore order, as it did during anti-establishment protests in 1973 and 1992, serious bloodshed can be avoided. Or the red shirts, many of them poor, will fade away as their resources wane. His government might then survive another few months, but the divisions will remain, and the center of power will continue to fray. In this case, the red shirts will simply return to fight another day, and the next protest, the next round of volatility, will only be a matter of time.
Roberto Herrera-Lim is an Asia analyst at Eurasia Group.
Paula Bronstein/Getty Images
By Willis Sparks
Political figures of the left and right feud constantly, but in this case, the differences may be irreconcilable. Sue Lowden, Republican candidate for U.S. Senate from Nevada, suggested this week that chickens might serve as a useful means of exchange to help control America's rising health care costs:
I'm telling you that this works. You know, before we all started having health care, in the olden days our grandparents, they would bring a chicken to the doctor, they would say I'll paint your house. I mean, that's the old days of what people would do to get health care with your doctors. Doctors are very sympathetic people. I'm not backing down from that system."
Recent polling gives Lowden a solid lead over the incumbent, Senate Majority Leader Harry Reid.
But Bolivia's President Evo Morales apparently thinks that's a bad idea. On Tuesday, he warned that men who eat too much chicken will go bald and have "problems being men."
It remains unclear who might be able to resolve this dispute.
In Britain, David Cameron, leader of Britain's Conservative Party, has been stalked on the campaign trail by a tabloid reporter wearing a chicken suit. On Wednesday, a 16-year old hit Cameron with an egg.
Can't we all just get along?
Willis Sparks is an analyst in Eurasia Group's Global Macro practice.
Justin Sullivan/Getty Images
Hugo Chavez will hold his congressional majority in September's legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.
But beneath the surface, his popularity across the country is headed downhill as Venezuela's economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.
Venezuela's GDP shrank by 3.3 percent in 2009 -- and by 5.8 percent in the last quarter of the year -- according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela's mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.
But the single biggest challenge to Venezuela's economic health may well come from strains on the country's power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country's ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.
Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez's popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez's approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela's economy running on fumes and the government unable to turn things around, Chavez's numbers will probably sink further.
Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela's resources and will take advantage of both higher oil prices and the fiscal boost provided by January's devaluation of the country's massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela's sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters' votes and limit potential opposition gains.
After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they've enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won't make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they're unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.
The country's oil wealth won't help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.
Given Chavez's tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government's latest efforts to court these firms to develop new projects in the Orinoco region. With the country's oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.
With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition -- and who make up half the electorate -- could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.
It will be harder than ever for Chavez to control what happens next.
Patrick Esteruelas is an analyst in Eurasia Group's Latin America practice.
PABLO COZZAGLIO/AFP/Getty Images
What makes a country stable?
Political stability is a measure of the ability of a country and its government to withstand shock. Poland suffered a tremendous shock last weekend with news of the plane crash that killed the country's president, his wife, several leading political, military and religious leaders, and more than one hero of the country's Soviet-era resistance movement.
Yet, despite the horror of the event and the pain it inflicted on Poles at home and abroad -- including on some who would never have voted for Lech Kaczynski -- no event could better have demonstrated the underlying strength and durability of Poland's political system.
The legitimacy of the transition of presidential power is beyond question. In accordance with the country's constitution, speaker of the lower house of parliament Bronislaw Komorowski now serves as interim president. Poland's next presidential election, scheduled for this fall, will take place even sooner. It was highly likely even before the crash killed Kaczynski and another candidate, Jerzy Szmajdzinski, that Komorowski would win. His Civic Platform party will probably quicken the pace of existing economic reforms.
So as we wait to see the details on the latest effort to stabilize Greece, to see if Kurmanbek Bakiyev will publicly accept that he is no longer president of the Kyrgyz Republic following his violent ouster last week, and to see if Thailand's irresolute government, reluctant military and ailing king can figure out how to move increasingly aggressive protesters off Thailand's streets, let's give Poland its due. The country will mourn and move forward.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
JOE KLAMAR/AFP/Getty Images
Remember the "colored revolutions," the mostly peaceful uprisings that were said to mark a turning point in the history of the post-Soviet space? In 2003, we had Georgia's Rose Revolution, which replaced President (and former Soviet foreign minister) Edvard Shevardnadze with a young U.S.-educated lawyer named Mikhail Saakashvili. In 2004, a fraudulent presidential election result was overturned by popular outrage in Ukraine, lifting Viktor Yushchenko past Viktor Yanukovych. In 2005, Kyrgyzstan's Tulip Revolution elevated Kurmanbek Bakiyev to the presidency. Georgia and Ukraine have since talked of joining NATO. Kyrgyzstan continues to allow American forces to use an air force base in its territory as a line of resupply for troops in Afghanistan.
Western media celebrated these events as victories for democracy, and the Kremlin fumed over what it considered further Western encroachment into Russia's sphere of influence.
Since then, Saakashvili has stumbled into a brief but costly war with Russia, and he faces a rising chorus of complaints at home. Yushchenko left the presidency with a single-digit approval rating, and Ukrainian voters have elected Yanukovych president. And now Kyrgyzstan's Bakiyev has come face to face with a depth of fury he was not prepared to handle.
We shouldn't be surprised by the trouble in the Kyrgyz Republic. Half the population lives below the poverty line. Remittances from Kyrgyz working abroad, a vital source of revenue, have not recovered from the global slowdown. Rising fuel and utility prices, a crackdown on media, and public anger over widespread corruption and nepotism add to the list of grievances. Bakiyev won elections widely considered fraudulent in 2007 and again in 2009. In 2007, he claimed his party had won every seat in parliament.
Whatever the cause of this latest bout of post-Soviet turmoil, we've reached an important point: The last of the colored revolutions has gone south, and Russia may soon regain more of its lost influence across this strategically important region.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
VYACHESLAV OSELEDKO/AFP/Getty Images
Last week, I wrote about a wave of good news for political and market stability in several Latin American countries.
Then there's Argentina.
Faced with an increasingly uphill struggle in financing a highly expansionary fiscal policy and with no desire to reduce government spending, Cristina Fernandez de Kirchner's government has refused to back down. They've now doubled down on a bid to reassert political control by claiming ownership of central bank funds with no clear room for compromise. The ruling Peronist party has already lost control of congress, and now it has drawn the judiciary into the fight over funds.
Argentina's opposition doesn't agree on much, but there is consensus that the Kirchners have now forced a fight worth having. A government battling for its survival won't have much time or political capital to spend on anything else. The current political crisis might even delay Argentina's plans to restructure the $20 billion debt in default. As early as next week, both houses will probably reject a presidential decree establishing a "Deleveraging Fund" that the government hopes to use to tap $4.3 billion in central bank reserves to meet the debt obligations.
This is the most serious political crisis in Latin America. Fernandez de Kirchner's term will end in December 2011. She's determined to prove she's no lame duck, but her aggressive style may prevent her from even reaching the finish line.
Ian Bremmer is president of Eurasia Group.
MIGUEL ROJO/AFP/Getty Images
By David Bender
On March 7th, Iraq
will hold its second parliamentary election and the world will again see
pictures of Iraqis' purple fingers. But these images of democratic
participation may obscure more than they reveal: Iraq's democracy is in
trouble. Currently, only 28 of more than 500 banned opposition candidates will
be permitted to run in the election. Through clever political and judicial
manipulation, the opposition has been eliminated before election day and left
with no clear constitutional or legal recourse.
Since January, an aggressive campaign to ban more than 500 largely Sunni and secular Shia candidates -- mostly from Iyad Allawi's largely Sunni and secular Shia Iraqiyya Alliance for alleged Baathist links -- has started to undermine the weak democratic process that was beginning to take shape in 2009. The Iraqiyya Alliance presented a non-sectarian alternative to the increasingly unpopular Iraqi Prime Minister Nuri al Maliki; and as a pro-US, secular nationalist, Allawi is a nightmare for pro-Iran factions in Iraq. With Maliki's support, the Justice and Accountability Council (JAC), which is charged with de-Baathification and is run by two notoriously pro-Iran figures, Ahmed Chalabi and Ali Faisal al Lami, ordered electoral bans against many Iraqiyya candidates linking them to Baathism.
Tim Boyle/Getty Images
My conversation with colleague and friend Nouriel
Roubini continues today on our political and economic expectations for key
regions in the year ahead. Today, we move to the Persian Gulf.
Bremmer: It's much smoother sailing this year in the Persian Gulf, despite Dubai's well-publicized troubles and the multiple-front fighting in Yemen. Saudi Arabia is looking especially strong. The oil price rebound has boosted the Saudis more than many other oil producer thanks to its conservative budgetary assumptions, and it looks as though the eventual political succession process will be handled smoothly. Most importantly, the Saudis are realizing the potential of long-neglected sectors, regions, and segments of the population. The socially more liberal Bahrain is doing the same. Abu Dhabi has politically stabilized the UAE.
Roubini: The collapse of oil prices during the global recession led to a massive slowdown of growth in the Middle East, but the recovery of oil prices from a low of $30 in early 2009 to levels ranging from $75-$80 in recent months has triggered a recovery of growth and an improvement of fiscal conditions. Dubai's troubles may reverberate in other parts of the Gulf, where a real estate bubble took place, but they will otherwise be contained. Policymakers throughout the Middle East have the medium- to long-term challenge of investing in infrastructure, education, health, and other public services to improve the skills and economic opportunities of growing numbers of young people, diminishing the political threats that rising Islamist movements in both Sunni and Shia countries engender. As long as oil prices remain at current levels, the budgets of the region's energy-exporting economies will allow this crucial structural transformation and modernization of these economies while containing risks of social and political unrest. These structural reforms need to be accelerated. In countries like Saudi Arabia, a lost generation of youth raised on Islamic education alone lacks the skills to be productive in a modern economy.
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.
YASSER AL-ZAYYAT/AFP/Getty Images
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 and David Gordon
Now for the red
herrings, the places and problems where
we think there is less risk than meets the eye.
In Iraq, elections in March will spark violence as foreign militants try to undermine the transition to Iraqi national sovereignty. A U.S. troop withdrawal beginning right after the elections will invite more violence. We could see a Sunni election boycott. But compared to what we've seen before, and what might have happened, the overall story is remarkably positive. For the markets, Iraq is suddenly an opportunity. The institutions are becoming legitimate (even with the unresolved Kurdish issue), the army is starting to work, and most importantly, political leaders from all communities are beginning to recognize the value of Iraq's tremendous natural resource base from which all can benefit if they make the compromises to maintain stability in the country. For all their basic governance problems, there's very little chance of Iraq actually becoming a failed state at this point -- a meaningful risk even a year ago. It's not a place we're ready to vacation in, but we're bullish on Iraq.
Iraq is also moving in a positive geopolitical direction. Ties with Turkey have grown particularly quickly -- not just in the Kurdish region in the north, but in Baghdad. That's one of the few positive stories for Ankara this year. Arab states in the region are still hesitant to build ties with Iraq as they wait for clarity on its next government. Maliki hasn't been a popular figure with neighboring gulf Arabs, but they recognize that Iraq's economic consolidation won't wait for another four years, and they'll start making political overtures to Baghdad if Maliki's mandate is extended. And if the Iraqi prime minister isn't returned (which is certainly plausible), we'll see a stream of head of state visits to place relations with a new leader on a more solid footing. So whatever the electoral outcome in March, we're likely to see Iraq on a faster path to integration with regional political and economic infrastructure next year. Meanwhile, Iran's role in Iraq has quietly receded. Iran's controversial presidential election and subsequent state violence did nothing to improve Tehran's influence among Iraq's Shia population, where Iraqi nationalism has been steadily growing.
The headlines for Iraq next year will undoubtedly be the timing/delays/pace of the US troop withdrawal. But the real story is going to be a moderate government, growing geopolitical influence, and the most exciting new investment opportunities the region has seen in a decade.
AHMAD AL-RUBAYE/AFP/Getty Images
By Ian Bremmer and David Gordon
By far the biggest purely geopolitical risk in 2010 comes from Iran. Its
government now faces growing pressure on three fronts. At home, the regime has
had a tough time since last June's presidential election; hardliners had
initially consolidated, but are now under intensifying pressure as domestic
protests continue. Regionally, Tehran has lost
considerable influence, with elections in Lebanon
turning against Hizbullah, rising Iraqi nationalism making it harder for Tehran to exert influence upon their principal historic
competitors, and Iran's
financial outpost in Dubai put at risk by the
growing influence of Abu Dhabi.
Globally, Iran faces a considerably tougher sanctions regime over its nuclear program, a push spearheaded by the United States, Europe, and Japan, with even Russia and China unhappy over Tehran's aggressive rhetoric. A Western push for negotiations will continue, but divisive local politics and insufficient leadership coordination make it very unlikely that Iran's leadership could reach a negotiated settlement even if it wanted one. And it doesn't. Even under considerable domestic pressure, the hardliners in charge of the regime will continue to try to buy time to achieve their nuclear ambitions.
That's why the government is likely to overreact to sanctions when they hit. 2010 carries the highest risk to date of Iranian provocation in the region, in the form of harassment of shipping in and around the Strait of Hormuz, support for radical organizations in neighboring countries, and instigation of trouble for Iraq and other neighbors in demonstrations of muscle. The Iranian regime looks increasingly like a cornered, wounded animal. In 2010, it's likely to act like one.
Israeli military strikes have actually become less likely -- certainly for the first half of the year as sanctions are put in place. Faced with strong opposition from the Obama administration (even as it uses the threat of strikes to gain support for sanctions and to pressure Tehran), mounting intelligence challenges on the location of key Iranian targets, and recognition of the military limitations of Israeli strikes, some Israeli government officials now privately are beginning to discuss how to cope with an eventual nuclear Iran as much as the nature of its "existential threat." Still, the perceived Israeli national security issue is enormous. Looking toward the final months of the year, the Israelis remain an important question mark.
Over time, if the regime in Tehran remains in power, the Iran danger will become more diffuse and start to look more like North Korea. It's clearly a significant long-term negative for global stability. Though for Iran itself, by 2011, we'll probably see a bunch of countries start thinking about how they'd like to start investing there, even as the Western powers seek to prolong sanctions.
Next up: Fiscal issues in Europe
Ian Bremmer is president of Eurasia Group, and David Gordon's is the firm's head of research.
AMIR SADEGHI/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.