What are the biggest political risks for 2014?
There are plenty of potential crises to keep us up at night in 2014. There are tensions between China and Japan in the East China Sea and elite-level executions in North Korea. Violence continues to worsen in the Middle East with a resurgence of a more localized Al Qaeda, a deteriorating security environment in Iraq, and 2014’s biggest geopolitical pivot point: the make-or-break Iran nuclear agreement. If the P5+1 and Iran strike a deal, it would be a huge boon for the Obama administration, but it would leave Iran economically emboldened and looking to backstop Shia initiatives across the region, putting it even more at odds with Saudi Arabia. A deal is, on balance, more likely than not. But if it falls through, it means a spike in oil prices, in addition to the likelihood that Israel strikes Iran before it can sprint to nuclear-breakout capacity. All of these geopolitical concerns are front and center for the coming year.
But above all, two essential questions best categorize the major political risks of 2014. For many of the world’s predominant emerging markets, it’s an internally focused question: How will key developing countries adapt to upcoming elections or implement ambitious agendas—and what does it mean for their behavior beyond their borders? For the United States, the question is externally focused. The international community perceives America’s foreign-policy behavior as increasingly unpredictable. Is the United States disengaging internationally? How will policymakers define the role that the US should play in the world? Much depends on these concerns, as America’s relationships with its allies become increasingly fraught.
When you add these two questions to the more conventional geopolitical security uncertainties, there is one clear answer: the erosion of global leadership and coordination will become more apparent and pronounced in 2014.
How will emerging markets respond to internal challenges?
This year, we will see domestic distractions in emerging markets, from election cycles to unprecedented reform agendas; do not expect them to play a significant role internationally that does not cohere with their more pressing priorities at home. We are in the midst of a new era of political challenges for emerging markets, as slowing growth, sputtering economic models, and rising demands from newly enfranchised middle classes create heightened uncertainty. As recent protests in Brazil, Turkey, Thailand, Colombia, Ukraine and Russia have shown, new middle classes have new demands—and are willing to take to the streets if they go unmet.
It is in this context that six of the world’s largest emerging markets—Brazil, Colombia, India, Indonesia, South Africa and Turkey—will hold national elections in 2014. In all six countries, the incumbent party will have ruled for a decade or more, but since coming to power, few of them will have faced an electoral cycle quite like this. Political, social, and economic dynamics in each of these countries vary immensely, but elections raise the risk of prevote populist policymaking in all of them. As emerging-market growth wanes, many of these countries need to implement economic reforms in order to enhance productivity and continue enriching their citizens. But as elections loom, the fears of politicians grow, and substantive reform of pensions, privatization, labor markets, and taxation will stall. Nor will the outlook improve substantially post-elections. We are likely to see second mandates of weaker leaderships—a political environment that is by no means ideal for big-bang reforms.
While these six emerging markets are the most important players for the global economic community, the emerging market elections story extends much further. A total of forty-four democratic emerging-market countries accounting for 36 percent of the world’s population will hold national elections this year. Growing middle classes across the emerging market space are expecting more and better services precisely as governments’ capacity to deliver (economically and politically) is diminishing. That leaves emerging market governments with their hands full at home.
Among emerging markets, Turkey is especially vulnerable in 2014. The country faces spillover effects from the civil war in Syria and a re-emergence of the Kurdish insurgency. More worryingly, Prime Minister Erdogan’s increasingly aggressive behavior is a huge variable at a time when he is likely to become president. Expect uncertainty and conflict over the division of powers between him and the prime minister.
China, by far the most important emerging market in the world, certainly does not face electoral pressure; in fact, the new leadership under Xi Jinping has consolidated power quickly and efficiently since the leadership transition in late 2012. But China will face demands from its constituents and domestic distractions all the same, as its economy is now undergoing a dramatic shift. The new leadership has embraced far-reaching reform to a greater degree over president Xi Jinping’s first year than we’ve seen in the past two decades. Beijing will prioritize reform over more rapid economic growth in 2014, likely focusing on reforms that address public concerns to bolster its political strength and popular legitimacy. Expect social-policy reform at the forefront, with energy policy as another priority. We could also see financial reform moving more quickly than current consensus would indicate.