Last Build Date: Tue, 24 Mar 2009 05:30:00 -0600Copyright: Copyright 2009
Tue, 24 Mar 2009 05:30:00 -0600President Obama expanded the likelihood of backlash by taking a strong opening position against the bonuses, increasing the vulnerability of his own Secretary of Treasury Tim Geithner and, more problematically, opening the floodgates for congressional overreaction to popular anger (creating, ironically, the first bipartisan bill to come out of the new house of representatives--undoing the AIG bonuses through the tax code). More from RealClearPolitics: 10 States in the Biggest Budget Trouble This was the first significant policy misstep of the Obama administration (though he's been blamed in many quarters for a too-gradual approach to the financial crisis, that's more a matter of degree)--on previous episodes of congressional populism, like the protectionist impulse, Obama's response has been more balanced, and accordingly he has served as a moderating influence. Geithner's probably still safe for now (shored by President Obama preemptively saying he "wouldn't accept" a resignation over the weekend). But there's a hornet's nest of political risk now emanating from Washington. Given that, it seems well worth a broader look into the risk environment at both ends of Pennsylvania Avenue. Bank rescue fails to attract participation The Obama administration appears set to launch its "toxic assets" program in the midst of a strong congressional (and public) backlash against the financial services industry as a whole; a climate that may not have the room for nuance the administration tried to push this weekend when Obama surrogates took to the airwaves trying to draw distinctions between AIG and "good guy" financials that would be subsidized to come to the rescue. The unveiling of further details about the plan should be a net plus-except that parts of the plan call for the American public to take as much as 97% of the risk, an all but radioactive proposal in the present political environment. Created under massive time pressure and in the absence of critical staff, Treasury Secretary Geithner's broad framework will take months to implement and will still require many details to be finalized. But by pushing forward with the plan on the heels of the AIG bonus flap, the administration is drawing attention to the fact that it's not just American banks receiving major taxpayer subsidies but also a multitude of others (including foreign banks, hedge funds, and other financial institutions). Congress won't be able to stop the administration, but it can potentially attach compensation rules and disclosure requirements to anyone in the process, scaring away participants and causing other unintended consequences... causing the plan to fail. The related risk from this conflict is that it generates a heavy political focus on how the American taxpayer will be made whole in the event that bailout investments have no upside. That focus might in turn promote ideas such as future fees on the financial industry (which the Obama administration has cautiously mooted). It's easy to see how such a policy stance could unravel--Congress laying down markers that it has no intention of giving the White House any more money, causing public confidence in the administration's handling of the crisis to fall further, dragging with it much of the rest of Obama's agenda. Relations between the legislature and the executive could then deteriorate into veto threats and boisterous grandstanding as Treasury Secretary Geithner (and, by association, the administration) is linked to Wall Street, while members of Congress try to distance themselves from donations received from financials. Progress on the bailout/economic recovery would stumble badly in that instance, and the economic and financial crisis would persist amid inaction. Ad hoc overregulation The broader lesson of the executive compensation fiasco is that Congress and the administration appear willing to revisit the same issue over and over again. With an eye toward the tough battle over executive compensation that had jeopardized initial TARP authorization last October, the new administration [...]
Mon, 16 Mar 2009 10:30:00 -0600RCP: What are some of the political risks that may stem from the current global financial crisis? Bremmer: In response to this particular fat tail risk, governments around the world (especially in developed states) are using stimulus packages, direct intervention in financial institutions, and regulatory reforms to deepen their direct involvement in domestic economies. Detailed understanding of the motives and incentives that guide political officials and lawmakers as they make decisions on economic policy will help us forecast how the crisis will separate winners from losers. After all, some companies, industries, investors and governments will benefit from this crisis-at least relative to others. There are three broad types of fat tail risks in the current environment: 1) Geopolitical. These are the traditional forms of political risks that flow from international conflict. Some are the direct result of greater global volatility. Some have grown because political leaders are now so focused on economic problems that political and security questions have been neglected. Looking at the major sources of political risk today country by country, the only marked improvement from 2008 is, ironically, the stabilizing security environment in Iraq. On virtually every other meaningful geopolitical front-from the prospects of failed states and growing terrorism in Afghanistan and Pakistan to the deteriorating security environment in Mexico and US-Mexican border tensions; from international tensions emanating from an increasingly troubled Moscow to the prospect of conflict between Israel and Iran-geopolitical risks this year are substantially greater. 2) The new capitals of capital. President Obama made the point clearly just before Congress passed the stimulus package: If Washington didn't act quickly and effectively, the United States faced economic catastrophe. In other words, whatever the banks do, whatever plans the automotive companies draw up, however many hundreds of thousands of layoffs come from other US economic sectors, it is Washington (not New York) that will determine the economic future of the country. A similar dynamic is unfolding elsewhere: economic power has shifted from Shanghai to Beijing, from Mumbai to New Delhi, and from Dubai to Abu Dhabi. As a result-in developed and developing states-domestic political factors will drive the performance of markets. 3) Political instability. The global recession is itself the focus of our attention, but the fallout created in unstable markets creates a host of second-order risks which, in many cases, will overshadow the recession itself in severity and the breadth of their impact. In fact, US Director of National Intelligence Dennis Blair has warned that political instability triggered by worsening economic conditions will likely prove the largest threat to US national security over the next year. RCP: In which countries around the world is risk overstated? Bremmer: Despite a swirl of media attention on the possibility for social unrest in China, we can expect that country to remain stable for 2009. The slowdown now underway is causing some pain. We've seen six consecutive quarters of slowing growth. Thousands of manufacturers have shut their doors in recent months. More than 30 million are now unemployed, many of them economic migrants without affordable housing. But three decades of double-digit economic growth have helped the Chinese Communist Party leadership amass considerable political capital and capitalize on growing national pride across the country. There is risk for the party elite, but the real risks are probably further down the road when many of the contradictions of China's rapid rise-the environmental damage, the growing gap between rich and poor, and the policy challenges that come with an aging population-begin to have a greater impact. For now, risks for China's stability are over-rated. And despite the sharp slide in oil prices-from $147 per barrel in July 2008 to around $45 today-the countries of the Persian [...]
Mon, 02 Mar 2009 00:30:00 -0600Voters are increasingly expecting Obama to deliver economic recovery sooner than they did two months ago. According to Gallup, the number of voters who expect the economy to recover within a year has increased from 16 percent to 24 percent from mid-December until now, with a median expectation of recovery declining from three years out to two years. At the same time, the number of voters who think Obama is moving too slowly on "major problems facing the country" has held firm at only 10 percent between the end of January and now. This indicates Obama has breathing room to deliver results, but the risk of Obama's optimism in his speech to Congress is that voters begin to expect progress sooner than he can deliver. This would eat away at his current 60-plus percent approval rating if the economy stays in the tank, which, in turn, would limit his ability to manage an ambitious legislative agenda. Obama's first major piece of legislation -- the stimulus package -- should have been a clear victory. Given a strong majority in Congress, even stronger approval ratings and a clear mandate to address the issue, it was apparent from the beginning that the stimulus package would pass pretty much as Obama asked for it, pretty much on time, and with three very easy to identify Republican senators crossing party lines. The process, though, required much more expenditure of political capital than expected. Leadership affects policy trajectory: Though the Obama administration itself is centrist, that doesn't necessarily translate to policy if Congress exerts strong control over resulting policy. With the stimulus, Congress demonstrated an unwillingness to follow the new president as a matter of course. Obama lost control of the issue for most of the Congressional debate, only to later reassert his positions through a media blitz and face-time scramble that kept the package on track but could not rid it fully of "Buy America" provisions or unwanted revisions to executive-compensation rules. Perhaps more problematically, rank-and-file members of the House of Representatives demonstrated a considerably restrained sense of crisis or urgency that surely did not mirror that of the president, the markets or constituents. Geithner's bank-rescue plan speech on Feb. 10 further hurt the administration's leadership credentials, at least in the short-term; indeed, the shadow of the speech lingers as investors increasingly move on the latest rumor from Washington. The contrast between Obama's address to Congress and Geithner's speech demonstrates a conflict. Obama's natural leadership style stems from his campaign experience -- where responding with grandiose rhetoric but cautious policy commitments in order to buy enough information to get policymaking right was acceptable. Yet, the type of leadership necessary in an economic situation where mood is critical and markets are seeking decisiveness is much different. Obama and his team have yet to prove they can lead on specifics. The administration continues to be both guarded and reactive on the future of the nation's major financial institutions. At the same time that it released details on bank stress tests and capital injections, Obama's team has had to scramble double-time -- and often in reaction to the market -- to underscore that the administration does not want to outright nationalize banks. That the administration needs to consistently restate this intention is a result of lost credibility in the eyes of investors, who still have not seen the comprehensive approach to solving the financial crisis promised by Obama. The political risks of a gradualist approach on bank rescue are to the downside, and many are intangible -- persistent uncertainty being foremost among them. It could prove to be a decisive leadership moment that the administration was willing to take short-term heat -- and market response -- for holding back on specifics rather than committing to specifics that would later be revised. But first the administration has to ge[...]
Fri, 20 Feb 2009 00:25:00 -0600Why is China vulnerable? Much of its growth continues to depend on the supply of manufactured goods to the United States and European Union, where recession has sharply reduced consumer demand. China's government reported GDP growth of 9 percent in 2008 -- a healthy number, though not on par with figures of the past several years. Despite a sharp slowdown in recent months, Chinese officials say publicly that they expect 8 percent growth in 2009, though some privately concede that 7 percent is more likely. Some analysts warn it could fall to 5 percent. Yet, despite the slowdown, the Chinese leadership is unlikely to face a dangerous public challenge this year. A $586 billion stimulus package announced in November will help limit job losses by targeting funds at enormous infrastructure projects that create work for millions of migrant workers moving between China's countryside and its booming eastern cities. The Chinese government will also spend to buoy the export sector, slowing the hemorrhaging of manufacturing jobs. Aware of the risk of social unrest, the Chinese leadership has publicly acknowledged the need for security troops to remain loyal and on alert. For the moment, the risks the central government face are limited. Several years of double-digit economic growth and the opportunities it creates for hundreds of millions to join a growing middle class have helped the Communist Party leadership build its domestic political capital. And if Chinese blogs and Web sites are any guide, many appear to blame the slowdown almost entirely on the United States and the Western free-market system. Over the longer term, however, the global financial crisis will harm the Chinese economy and threaten the country's stability by delaying much-needed reform. If the leadership is to continue to create millions of new jobs each year -- essential for social order -- it knows it must shift its economy from export-driven growth toward a model that relies on spending from increasingly wealthy Chinese consumers. Officials hoped to manage that transition over a period of 10 to 15 years, but the severity of the economic crisis has persuaded some within the leadership that they won't have nearly that long if they are to avoid the risk that an extended slowdown will trigger dangerous levels of civil unrest. Even if the Chinese bureaucracy has the means to avert a near-term crisis, there are several factors worth watching that will contribute to longer-term problems. First, there is China's reliance on state-managed capitalism. The details of Beijing's current stimulus package suggest the leadership will continue for the next several years to rely on the state to manage China's economy. As the global recession discredits those within the leadership who favor go-go growth based mainly on trade and foreign investment, the government will strengthen and protect "national champions" at the expense of foreign competitors. This will add to growing trade tensions with the United States and European Union, both of which may well speed efforts to protect domestic industries of their own. Protectionist tit for tat will slow the recovery everywhere -- including China. In addition, there is the ongoing issue of environmental degradation. The country's dirty air and a shortage of clan water have become well known, and the government has directed resources in recent years toward serious efforts to address the growing problem. But the economic slowdown has shifted priorities, and the ministry of environmental protection is now green-lighting construction projects at a faster rate and with fewer rejections than at any time in several years. The risks of both environmental accidents (from chemical spills to the poisoning of groundwater) and the public anger they provoke are on the rise. Further, as Beijing authorizes the disbursal of billions, the risk is higher than ever that local officials will pocket unprecedented amounts of money. Corruption is yet another problem that [...]
Mon, 19 Jan 2009 13:54:31 -0600
With oil prices well below what the Russians can afford, but Putin's (& Medvedev's) popularity still high, the initial moves have been to consolidate power. Yet despite no organized political opposition to speak of, we're still starting to see social unrest. For the first time in years, there have been widespread demonstrations in Russia--in 30 cities, following the imposition of import duties on used cars. We're likely to see much more turbulence in 2009, as factories providing employment for entire cities are shuttered. That's a sort of suffering that Russians are certainly used to, but only in the context of a very different kind of political system.
Where could this go? There will be near-zero state tolerance for dissent. And the strongest level of anti-Americanism (and, in many quarters, of broader xenophobia) of any significant emerging market in the world, creates the potential to make security a serious concern--and possibly lead to unrest that disrupts supply chains. The Obama administration is unlikely to quietly tolerate a crackdown, and will put plenty of focus on human rights and democracy. So American and some European nations' relations with Russia will continue to deteriorate over the course of 2009 (with the Germans, who are more dependent on the Russians economically and, to some extent, politically, playing the role of wild card).
Support within the Kremlin for better relations with the west will also diminish. The real question is how far that actually goes. So does Deputy Prime Minister Alexei Kudrin remain strong, get scapegoated, or actually get fired? Are western-leaning oligarchs brought under tighter scrutiny and economic control...or forced out completely? And, most fundamentally, to what degree are the Russians prepared to go back to soviet-style authoritarianism? At worst, it's conceivable that western organizations of all sorts (media, NGOs, and corporates) will be, to varying degrees, seen as increasingly unwelcome within the country.
I don't expect such serious risks on the foreign-policy side. Russia has achieved its principal objectives in Georgia, at least for now, and we'll see less direct conflict over NATO enlargement and missile defense as the west takes a breath and reassesses both issues. Nor will we see Russian tanks in Ukraine. The Russians are too connected into the Ukrainian economy and have too much to lose (though Russian minorities in Ukraine--a majority in Crimea--could see some violence and make headlines. More on that later.) Nevertheless, Russia will be a troublemaker in international relations--if a more unpredictable and opportunistic one than in 2008. As the latest gas cutoff to Ukraine shows, the Kremlin puts realpolitik and national interests first. "market discipline" in the aftermath of Georgia did not prevent Moscow from again turning off the tap to Ukraine, and more instances of bare-knuckles foreign policy are likely in 2009.
Sun, 07 Dec 2008 00:30:00 -0600But the massacre in Mumbai represents an unprecedented shock for the Indian nation. One of the terrorist targets, the Taj Mahal hotel, has stood for more than a century as a monument to India's modern identity and its triumph over colonialism. Jamsetji Tata, the "father of Indian industry," is said to have built the Taj after he was refused entrance to a nearby British-operated whites-only hotel. The iconic nature of the Taj helps explain why terrorism-weary Indians consider this latest attack "India's 9/11." More killings at the Oberoi and Trident hotels have added to fear among international investors and business leaders that foreigners, particularly Westerners, are not safe in the country's commercial capital. No sooner had the smoke begun to clear than Indians pointed fingers toward Pakistan. Suspicions are widespread, in India and elsewhere, that the militants arrived in Mumbai via Karachi -- though Pakistan's civilian government is almost certainly guilty more of negligence than of complicity. But some Indian officials charge that the attackers could not have carried out such an ambitious plan without active support from sympathetic elements within Pakistan's intelligence services. India's beleaguered Congress Party-led government now has every incentive to talk tough on Pakistan, and the attacks will halt further diplomatic progress between the two countries for at least several months. But the risk of military conflict is minimal, and longer-term damage to Indian-Pakistani relations will be minor. India has little to gain from destabilizing Pakistan's already fragile government or in provoking the Pakistani military. Indian officials are well aware that their country's growing importance for global financial markets means that stability at home and peace with the country's neighbors remain paramount. Its government also knows that it must avoid actions that spark conflict between majority Hindus and the country's 150 million Muslims. Across the border, the Pakistan Peoples Party-led government has far too many enemies at home to risk creating new ones in New Delhi. Like India's Congress Party, the PPP faces an opposition ever ready to profit from its mistakes and a military as likely to veto government orders as to execute them. In addition, Pakistan has security problems of its own. The country suffered fewer than 10 suicide bombings in both 2005 and 2006. In 2007, the number climbed to 56. More people have died this year in suicide attacks in Pakistan than in either Iraq or Afghanistan. Saddled with a growing economic crisis, the Pakistani president has turned reluctantly to the International Monetary Fund for loans worth billions of dollars and hopes for more support from Washington in the future. War with India is not on the agenda. But the aftershocks from the bloodshed in Mumbai will likely be felt across the Indian political landscape. The Congress Party must survive national elections in the spring. Even before the terror attacks, it faced an uphill struggle. Despite several consecutive years of robust growth, the global financial crisis has triggered fears for the safety of bank deposits, a steep stock market drop, and threats of job losses that have forced senior government officials, including Prime Minister Manmohan Singh, to reassure the public in recent weeks. Power cuts this spring left millions in the north of the country without water and electricity, sparking riots. Not surprisingly, the party has troubled relations with some of its coalition partners. Sensing an opportunity, the opposition Hindu-nationalist Bharatiya Janata Party (BJP) wasted little time in blaming the ruling coalition for the horror in Mumbai. Before Indian commandos had finished off the last of the attackers at the Taj, the BJP had purchased an eye-grabbing front-page ad in a leading daily newspaper featuring a not-so-subtle message: "Brutal Terror Strikes at Will. Weak Government U[...]
Thu, 27 Nov 2008 00:00:00 -0600But there's an opportunity here, as well. The goodwill that Obama has already generated abroad can help him forge foreign partnerships -- tactical alliances that will help with management of a host of pressing international problems. Skeptical Israelis and indifferent Russians aside, the citizens of many countries will support their governments' willingness to share a few burdens with the new U.S. president. Imagine President Obama's first visits overseas. We caught a glimpse of the welcome he can expect in many countries in the throng of exuberant, flag-waving Berliners he addressed in July and the jubilant Kenyans who danced and sang in celebration on election night. Even as the new president's focus remains on complex challenges at home, public partnerships with foreign allies can lend them some of Obama's political capital -- as they provide the experience, expertise and leadership needed to implement on-the-ground solutions to a broad range of chronic international problems. Here are a few of the opportunities these partnerships can create: Obama's first trip to Africa will trigger an extraordinary spectacle. In Kenya, homeland of his late father, plans are reportedly under consideration to upgrade an airport in the west of the country to accommodate the hoped-for arrival of Air Force One. Obama can expect a similarly warm welcome across much of the continent. But it is Britain and France, not America, with deepest experience in managing Africa's instability. In early November, the election-obsessed American media barely noticed that British Foreign Secretary David Milliband and French Foreign Minister Bernard Kouchner visited the war-ravaged Democratic Republic of the Congo, a country where violence has generated a humanitarian catastrophe. Imbue British and French leaders with some of Obama's appeal and their efforts at regional diplomatic breakthroughs stand a better chance of success. Obama should invite Gordon Brown to join him on his first visit to the continent. African problems ultimately require African remedies. But as regional leaders South Africa, Nigeria and Kenya wrestle with immediate domestic political challenges, outsiders can help the region cope with several of its crises. Obama can supply the popularity; Brown and others can take the lead on implementing confidence building, crisis management and development solutions in countries like DR Congo, Zimbabwe and Sudan. Partnerships will help on other issues, as well. Officials in Japan are understandably worried that a U.S. focus on the Middle East, China and Russia might foster neglect in the new administration's relations with America's closest Asian ally. That's why Obama's first stop in East Asia should include a visit to Hiroshima. No sitting president has ever visited the city. It's time one did. Beyond the powerful symbolism, the visit could inaugurate a joint U.S.-Japanese push to revitalize an increasingly anachronistic global nonproliferation regime. Japan has unique legitimacy to lead on this issue. The transparency of its government and the technical expertise at its disposal would prove invaluable. U.S.-Japanese coordination would reinvigorate their vitally important alliance, and Tokyo's renewed commitment to pacifism would help assuage China's fears that Japan might one day develop nuclear weapons of its own. French President Nicolas Sarkozy has demonstrated a willingness to help manage the West's relations with Russia, and his encounter with Obama in Paris in July suggests the two can build a strong working bond. An Obama-Sarkozy alliance designed to ease Kremlin concerns over U.S. and E.U. ties with the governments of Ukraine and Georgia and to secure whatever Russian cooperation is possible in efforts to thwart Iran's nuclear ambitions might bear fruit. Even if it doesn't, Obama will have taken a concrete step to restore trust in transatlantic ties. Finally, Oba[...]
Tue, 11 Nov 2008 00:00:00 -0600A second group of likely losers includes countries in which upcoming elections are diverting government attention from economic woes. In India, the embattled Congress Party faces national elections in the next few months. Substantial off-budget spending on petroleum subsidies, debt relief for farmers, and higher wages for public-sector workers may boost the party's electoral fortunes, but it shifts energy and resources from much-needed longer-term reforms. In Turkey, a wide range of political challenges to the ruling Justice and Development Party has the leadership more focused on corruption charges, a battle with the opposition-dominated media, and terrorist attacks by Kurdish separatists than on the economic plans needed to ensure that Turkey avoids a tough economic hit. In Ukraine, rivalry between former political allies, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, has allowed the country's two most powerful politicians to hold economic reforms hostage to political games -- though help from the International Monetary Fund may finally be on the way. The third group of losers includes badly governed authoritarian states like Iran and Venezuela. For the time being, in neither country does the current political leadership have to worry much about elections -- or any credible domestic opposition. Both have amassed deep financial reserves over the past several years, and neither is in immediate danger of serious civil unrest. But gasoline rationing and 30 percent inflation will take a longer-term toll on the popularity of Iran's theocrats. In Venezuela, high inflation and a shortage of consumer products -- the country imports virtually everything except crude oil -- will eventually pose challenges for Hugo Chavez. When oil prices reached $147 per barrel in July, both governments could afford some complacency. With crude now selling for less than half that amount, both are aware that longer-term problems loom. The "winners" from the crisis are those well placed to absorb the global shock. In several countries, some democratic and others authoritarian, governments have deep enough reserves of political and financial capital to weather the near-term storm. China, Russia and Brazil fall squarely in this group. In China, growth has slowed for five quarters in a row. But three decades of successful economic liberalization ensure that "slow growth" still equates to a 9 percent expansion for the third quarter of this year. The Chinese Communist Party has earned plenty of credit with China's people over that time, and the triumphalist pageantry of this summer's Beijing Olympic Games has added to the leadership's popularity. Nearly $2 trillion in foreign exchange reserves will allow the government to continue to create jobs and generate growth via spending on ambitious infrastructure projects. In Russia, Prime Minister Vladimir Putin and President Dmitry Medvedev remain broadly popular, and the August conflict with Georgia has helped swell national pride. Stabilization funds created from windfall state oil profits over the past half decade have helped the government support a stock market that has lost two-thirds of its value in recent weeks and inject much-needed cash into banks now under heavy stress. In Brazil, President Luis Inacio Lula da Silva remains popular, and his adherence to conservative macroeconomic policies over the past several years helps the country attract foreign investment and keep inflation in check. States like Saudi Arabia and Singapore have deep enough pockets and enough social stability to avoid serious turmoil, as well. Unlike fellow OPEC members Iran and Venezuela, the Saudis have stuck to conservative estimates on oil prices when planning state spending. Second are smaller developing states, where green-field investment opportunities and a low-cost business environment allow for durable hi[...]
Wed, 01 Oct 2008 00:25:00 -0600This is classic bluster, a self-serving attempt to portray Russia's increasingly confrontational foreign policy as a matter of necessity and of self-defense. But Rogozin is right about one thing: 9/11 and 8/8 are the most important post-Cold War dates for the evolution of international politics. For Americans, 9/11 revealed the heavy political, economic and military cost that the world's only superpower must always be prepared to pay. Over the past seven years, a reversal of economic fortunes, a substantial transfer of American wealth toward emerging powers and energy-rich states, political push-back from some of its traditional allies, and a nuclear challenge from Iran have eroded Washington's self-confidence and generated demand from many Americans that others share the burdens of international leadership. The United States can no longer lead on free trade if a growing number of Americans lash out over its long-term economic impact and as lawmakers change the rules that have traditionally encouraged foreign investment in U.S. assets. It cannot claim to lead on nuclear nonproliferation as Iran ignores U.S. threats and moves full speed ahead with uranium enrichment. It cannot lead on climate change when it offers little beyond political hot air. Yet, despite the erosion of America's ability and willingness to play a dominant global role, the underlying vulnerability of the post-Cold War U.S.-led international order remained a relatively well-kept secret. That's largely because no potential challenger had emerged to test the strength of the system. Like a house sitting peacefully atop a fault line, there had been no quake large enough to reveal its instability. That false sense of security ended on Aug. 8, when Russian air strikes on Georgia exposed Washington impotence in the face of a genuine international crisis. The political standoff that followed -- and Kremlin defiance of U.S. criticism -- has revealed just how far U.S. influence has diminished. The next shock to the U.S.-led order will come when the international conflict over Iran comes to a head. That will happen when Iranian scientists achieve a technological breakthrough that pushes its nuclear development past the point of no return or when the U.S. or Israel calculates that military strikes on its nuclear sites will create fewer dangers than a nuclear-empowered Tehran. In either case, Americans will again face the limits of Washington's power in the 21st century international system. Some will continue to treat China as the greatest long-term threat to U.S. hegemony and the current global order. That's a mistake, because Beijing has far too much to gain from the existing international system. The Chinese Communist Party knows well that the country's domestic tranquility will depend for the foreseeable future on steady economic growth. That growth will depend on strong and predictable commercial relations with the United States, the European Union and Japan -- China's most important commercial partners. As China has grown, it has become a status quo player. For the moment, Russia and Iran are the world's only significant revisionist powers. The Kremlin means to right what it believes are the wrongs visited upon Russia following the humiliation and chaos of Soviet collapse. The five-fold rise in oil prices over the past several years has provided Russia's leadership with the self-confidence and the cash to reassert Moscow's influence at the expense of its former adversaries in the West. Iran has seen the United States invade two of its neighbors in recent years, removing two of the Islamic Republic's most dangerous rivals -- Saddam Hussein and the Taliban -- and encircling the country with U.S. troops. Iran may prefer a form of nuclear ambiguity to a public test of a future nuclear weapon. But even the mere suspicion that Tehran might co[...]
Mon, 07 Jul 2008 00:22:27 -0600Most developing states outside of Latin America are currently contending with regional political instability. But now that historically hostile relations with neighboring Pakistan have stabilized and relations with China have improved, there are few urgent foreign-policy challenges to distract Indian policymakers from the process of economic liberalization. Throw in the number of younger Indians who speak English and the contributions of capital and know-how from the global Indian diaspora and it's not difficult to see why things are going so well. India also benefits from the steady growth of its labor force. Within five years, China will begin to face a serious demographic problem, as the one-child policy throws population growth into reverse. In Russia, the population is already falling, as poor public health conditions take their toll on Russian workers. Half of all Indians haven't yet celebrated their 25th birthday, and the population continues to grow in harmony with the country's demand for labor. It gets better. At a time of surging global demand for increasingly expensive energy resources, off-shore discoveries of substantial quantities of natural gas can help feed India's growing appetite for energy and limit its reliance on imports from Iran and the Gulf States. The Indian firm Reliance Industries has helped India become a global leader in both refinery construction and deep-water exploration projects. Yet, there are several emerging problems that may cool off India's economy over the next several years. First, its political party system is fragmenting, as a growing number of small regional and caste-based parties are becoming increasingly important for the country's political balance of power. The vote share of the two largest parties -- the Congress Party and the Bharatiya Janata Party (BJP) -- has fallen steadily in recent years. Smaller parties are winning more and more votes, and their support has become ever more critical for the formation of a durable government. The greater the number of politically relevant parties, the greater the number of concessions that must be made as reform projects are formulated. In addition, the opposition BJP is gaining strength at the expense of the ruling alliance. With the U.S.-India nuclear deal generating frictions between the Congress Party and some of its leftist allies -- and food inflation running at about 20 percent -- the BJP looks like an increasingly strong contender in upcoming elections (due by May 2009). Sweeping grassroots criticism of Congress Party leader Sonia Gandhi and the inability of the Congress-led government to satisfy its traditional constituencies -- the urban poor and rural workers -- aren't helping. Whatever the elections outcome, the next coalition government will likely include more regional and caste-based parties. That means that a larger number of entrenched local interests will have to be accommodated if the government is to forge the political deals that further economic liberalization will require. Further, nationwide infrastructure problems continue to drag on economic growth. India can't afford more of the political infighting that already slows efforts to meet surging demand for better roads, railways, bridges, ports, airports, communications networks and additional power-generation capacity. Private investment has made a difference in recent years, particularly in the telecommunications and civil aviation sectors, but political opposition to privatization in many areas leaves much of the spending burden on India's central government. Finally, and crucially, much of India's current growth comes from advanced industrial sectors -- services, software and information technology. These are areas in which bureaucrats and local politicians aren't able to create roadblocks. This has cleare[...]