An alternative perspective

01 February 2010

Top Global Risks for 2010


In 2010, the world will emerge from recession, shifting concerns toward challenges created by the emergence of a new global order, one that pits developed against developing states, a US-dominated international system against one characterised by a growing vacuum of leadership, and a globalised system of regulated free market capitalism against the growing strength of state capitalism.


The biggest risk for 2010 comes from the point at which these three trends converge: US-Chinese relations. In fact, 10 per cent unemployment in the US plus the potential for 10 per cent growth in China has already added to various forms of frictions in relations between the two governments. Presidents Hu Jintao and Barack Obama continue to try to prevent tentative cooperation and low-level criticism from becoming open political competition and a torrent of mutual recrimination. But the end of recession eases pressure to keep up appearances, and November’s US mid-term elections will give US lawmakers good reason to pick populist political fights with Beijing.

To ensure China’s economy has fully stabilised, its leaders will continue to promote a growing role for the state as lead domestic economic actor via support for state-owned companies and privately owned “national champions,” both at home and abroad. It will resist US pressure for a change in its trade and currency policies, more stringent enforcement of intellectual property rights protections for American firms operating inside China, and a greater willingness to compromise with Washington on contentious issues like climate change policy, nuclear programmes in Iran and North Korea and a more robust financial regulatory framework. In the US, we’ll see more intense politicising of exchange rate and investment policies. When the White House introduces climate change legislation for congressional debate, China will face rhetorical attacks from US legislators of both parties who demand to know why America should accept binding targets on carbon emissions while fast-growing China refuses to do the same. We are sure to see an extension of last year’s trade tensions and, thanks to Google, we have already witnessed the opening round in an intensifying conflict over cyber-security. If any new “product safety” scandal emerges involving Chinese manufactured goods, we’ll also see a populist American push against goods “made in China”.


Iran ranks high on the list again this year, this time for reasons that extend well beyond the international fight over its nuclear programme. Its government now faces setbacks and new challenges on several fronts. In June 2009, Hizbullah, Iran’s ablest regional proxy, suffered a stunning setback in Lebanon’s parliamentary elections. Syrian President Bashar al-Assad, looking to diversify his regional risks, has since made overtures to Saudi Arabia, Iran’s main regional rival. A more assertive government in Baghdad now threatens Iran’s influence in southern Iraq. In addition, the financial crisis has badly shaken Dubai, where Tehran often executes banking transactions beyond international scrutiny. As Abu Dhabi, which is much less friendly with Iran, uses Dubai’s misfortune to increase its authority within the UAE, Tehran will lose access to an important conduit for capital.

But the regime’s most serious problems are domestic. The global recession has pushed oil prices sharply lower since July 2008, adding considerable strain to Iran’s badly managed state budget. Last June, when a rigged presidential election provoked large-scale civil unrest, Supreme Leader Ayatollah Ali Khamenei fundamentally compromised his domestic authority by siding publicly with Ahmadinejad’s unpopular government. Anti-government rallies involving unprecedented numbers of people continued into December. There is little risk of regime collapse in 2010, but the government’s domestic standing has sustained lasting damage.

This is why Ahmadinejad’s beleaguered government will move from predictably aggressive to unpredictably belligerent this year. We caught a glimpse of the possibilities when Iranian troops poured across the border into Iraq in December, planting a flag and seizing an oil well before retreating. The move was probably intended to embarrass Iraqi Prime Minister Nouri al Maliki ahead of Iraq’s March parliamentary elections, to divert attention from turmoil at home, and to show the world that adversity had not weakened the government’s nerve. That is also why Iran test fired a medium-range missile in December and promises to unveil more hardware in February.

Now that Iran has backed away from hints that it might compromise on the nuclear issue, Washington and its European allies will push for UN sanctions, probably in the spring. Once the Russian and Chinese governments make clear their opposition to the toughest measures, Washington will try to build a coalition of willing states to impose sanctions of their own. It is impossible to predict exactly where, when, and how Iran might respond. Its troops might well harass shipping traffic near the Strait of Hormuz or even US or British naval vessels operating in the Persian Gulf. It could make life more difficult for departing US troops in Iraq or use Hizbullah or Hamas to provoke tensions with Israel. Whatever the means, President Ahmadinejad has proven far more willing to tolerate risk than political or economic pressure. So far, Khamenei has signaled no desire to stop him.


Political risk has returned to the Eurozone as the line separating mature from emerging markets has narrowed. Fiscal policy coordination has been eroding for some time and member state political processes are highly uneven. Greece, Ireland, Spain, Portugal and Italy face the most complex fiscal challenges. Defaults remain possible, because EU support cannot be considered automatic and unlimited. But policy changes will have far-reaching implications even without a default, as a new set of risks arise from fundamentally new political drivers at play within the Eurozone – and a consequent growing importance of political factors within healthier European economies.


In Eastern Europe, historically high levels of unemployment weaken the popularity (and limit the flexibility) of incumbent governments, making political leaders especially sensitive to domestic economic and social constituencies, and increasingly tempted by protectionist, populist and possibly xenophobic policy options. That is particularly true where elections are on the horizon, as candidates look to capitalise on the frustration and anger of the unemployed. Governments will increasingly come into conflict with international lenders like the International Monetary Fund, which may in turn send negative signals to capital markets investors, introducing another set of risks to financial stability. Ukraine, Hungary and Latvia appear the most vulnerable, but even solid regional performers like Poland may face stresses in the coming year.


Finally, a few clouds have entered the picture in Brazil’s otherwise sunny investment climate. In short, 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 successor, Dilma Rousseff, should be considered a slight favourite to win this fall’s presidential election. If she does, she will deepen state involvement in Brazil’s economy. If opposition candidate Jose Serra wins, we will see tighter fiscal policy and less bias toward state-owned enterprises. 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 de Janeiro for the World Cup in 2014 and the Olympics in 2016.


Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC.

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