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2014: A Risky Year in Geopolitics?

2014: A Risky Year in Geopolitics?

The biggest political risks ahead.

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.

These reforms constitute a huge potential positive for China’s investment climate and potential integration into the world economy. Beijing must, however, tread carefully: there are many dangerous moving pieces attached to the reform agenda. There will be losers in the reform process as industries go out of business, officials get purged, and firms come under heavy regulatory scrutiny. If reforms move too quickly, they could destabilize the ruling party from within, as these key stakeholders push back to protect their vested interests. To protect against public and bureaucratic backlash, the leadership is using anti-corruption and reeducation efforts to intimidate reform opponents within the party while using new technologies to mitigate public dissent. But if the reforms fail or are widely perceived to be moving too slowly, political instability and popular protest could grow. That is only magnified by the fact that Beijing is doing this in the context of a fundamentally changed information environment, where the proliferation of information leaves the ruling party more beholden to the demands of its citizens—and where rapid shifts in popular sentiment can arise quickly and unexpectedly. Missteps could undermine the broader reform process and the leadership itself.

 

If— or perhaps, when— there are bumps in the road, Beijing will try to divert public anger toward foreign targets. Xi Jinping’s first substantial foreign-policy move was to announce an Air Defense Identification Zone in the East China Sea; that caters to widespread anti-Japanese sentiment within China. Should trouble emerge domestically, the Xi government might be willing to deflect attention by playing up this antagonism. On the other hand, in the longer run, if China implements its reform agenda successfully, it could empower the regime to project its regional influence still further.

Russia is one emerging market where, under President Putin’s rule, there is a great willingness to intervene on the international stage—but often in unpredictable ways. Putin remains the single most powerful individual in the world, but two worrying trends are converging: his popularity has slipped, and after a decade of rising expectations, Russia’s economy is stagnating. This makes Russia under Putin, a leader unusually capable of getting big things done quickly, far less predictable at home and abroad.

Is the United States disengaging internationally?

As Putin injects uncertainty by intervening abroad, the United States is doing so as well—but predominantly by disengaging.

Some of this decline in consistent US foreign-policy engagement is determined by structural international changes. First, there are too many increasingly influential countries that need to be at the table for a negotiation to have global impact, making it more difficult to coordinate effectively at the multilateral level. On top of this, a distracted German-led Europe is focusing inward on economic prerogatives of repairing the eurozone and restoring competitiveness; for foreign-policy engagement, the United States would much prefer the more geopolitically aligned UK and France driving European affairs. Emerging markets, particularly Russia and China, are more willing to challenge US preferences abroad.

Some of this new American foreign policy tack derives from tectonic shifts in the US domestic picture. In the 2012 election, just 5 percent of voters ranked foreign policy as their priority, and widening income inequality is persuading many Americans that they do not share the benefits of US engagement abroad. With a reactive, risk-averse approach to foreign policy along with a weaker second-term foreign-policy team, the Obama administration’s preferences and recent actions have magnified the issue considerably. The White House has made a handful of important missteps in the last year, even if many were at least partially the product of circumstance. The NSA scandal in the wake of the Snowden revelations has undermined the United States around the world. The need for attention at home amidst congressional infighting, a government shutdown, and the Obamacare rollout fiasco has come with significant foreign-policy opportunity cost—perhaps most importantly, Obama’s need to miss the APEC summit. Obama’s vacillation on whether to strike Syria undermined US credibility, and when the chance for a chemical-weapons agreement arose (thanks to an internationally engaged Vladimir Putin...), Obama jumped at the chance to take the deal and chalk it up as a justification for Washington remaining a spectator to the broader civil war.