2013’s top 10 political risks

January 8, 2013

It was a close call at times, but we made it through 2012. Now we’re set to encounter a new set of risks ‑ but not in the world’s advanced industrialized democracies, which are much more resilient than feared. This year, with the global recession on the wane, attention shifts back to emerging markets, the economies that are usually the ones that pose the most political risk. You can read the whole report from my political risk firm, Eurasia Group, here, but an executive summary of this year’s top 10 risks, in video and text, is below:

10.) South Africa: Africa overall looks like it will continue its recent growth. But South Africa, one of the continent’s most complex and important economies, is floundering. Its dominant political party, the African National Congress, is resorting to populism to maintain its base among the urban and rural poor. That means more state intervention, more labor unrest and more assertive unions. We’re not predicting a fundamental political crisis, but the country is moving along a path that offers little reason for optimism.

9.) India: We’ve all read the predictions that India is poised to become the world’s next infinite-growth country. Not so fast. Despite initial optimism, the 2009 election hasn’t freed Prime Minister Manmohan Singh to reform the country as anticipated, with the tough choices continually being kicked to the next parliamentary session. (Americans should find this familiar.) Corruption continues to reign, and as we’ve seen in the rape protests of the past few weeks, there are fundamental cultural issues that India has yet to resolve. As general elections draw closer, the government’s ability to execute robust economic policies will decline even further.

8.) Iran: When is the United States or Israel going to bomb Iran? That’s the question that followed us through all of 2012. But a war-wary President Barack Obama and a more-diplomatic-than-you-think Prime Minister Benjamin Netanyahu mean that the risk of military strikes this year is less than most observers believe. Nevertheless, there is still a significant risk: We’re likely to see a sharp escalation in the shadow war between Iran and Israel and the United States, a cycle of mutual killings, cyber-attacks and proxy battles that has been ongoing for several years. As new sanctions are put in place against Iran, as we predict they will, efforts to sabotage the Iranian nuclear program will escalate. That’ll force Iran to escalate its side of the shadow war.

7.) East Asian geopolitics: For the past decade, the main risks in this region have been North Korea’s nuclear provocations and tensions around the status of Taiwan. Now new risks have taken their place. China has veered away from its “charm offensive” approach to Southeast Asia, and the United States is stepping into the void. Tensions between the two powers could put decades of economic growth at risk, as I’ve written about in past columns.

6.) Europe: The euro zone is headed for neither breakup nor resolution, and in 2013 the risk shifts from the threat of financial crisis to a loss of momentum in creating a redesigned euro zone. The weak economic outlook and the politics of crisis fighting will be the uncertainties this year. Big compromises will be needed to make further progress toward an integrated policy framework. It’s still unclear whether the politicians in power—or those who will come to power through elections—are willing to make those compromises.

5.) JIBs—Japan, Israel, Britain: The losers of 2012’s most important trends are all staunch American allies. Japan, Israel and Britain find themselves in similar positions: Their relationships with the United States aren’t as useful as they once were, they’re outside the major geopolitical changes under way and they’re constrained domestically from responding to the challenges of our new G-Zero era. As a result, Japan is scrapping with China, Britain is stuck in a no-win situation with the European Union and Israel is left watching an Arab Spring that hasn’t bloomed.

4.) Washington politics: It might not look like it, but the United States is on the brink of big developments—a domestic energy revolution, the potential for major trade agreements, a rebounding housing sector and businesses emerging from the financial sector in good condition. Of course, the ongoing drama in Washington threatens to derail all of it.

3.) Arab Summer: When the Arab Spring didn’t provide any fruit last year, it sloughed into an Arab winter. Now, in 2013, expect a long, hot Arab Summer. Radicalized movements are going to play a much more important role. An increasingly violent confrontation between Sunni and Shia both within and between countries is bringing the region a sectarianism that, before the Arab Spring, had gone largely dormant. But now Syria’s descent into chaos is spreading insecurity into Iraq, Jordan and Turkey. Meanwhile, new regimes are having a difficult time balancing governance with populism.

2.) China vs. information: The risk that the Chinese government can’t necessarily manage is the commodity that’s most unruly: information. A larger, better-educated middle class is demanding more unfiltered access to the Internet just as media reports are revealing secrets about Chinese leaders’ personal wealth. That’s forcing the Chinese to become more risk-averse, and become more nationalistic. That could easily isolate China even more than it already is.

1.) Emerging markets: Emerging markets are responsible for about two-thirds of the world’s economic growth, and their share will get even larger in the next 10 years. That raises the stakes for their future growth, and thus also the risks in case of an economic shock. Brazil, Mexico, Colombia, Turkey, Malaysia and the Philippines hold immense promise, and immense risk. At the same time, some emerging markets that are submerging: Egypt, Iraq, India, Indonesia and Peru, among others, are all struggling to scale their growth. The global economy can only hope they straighten themselves out.

You can read all of Eurasia Group’s 2013 political risk report here.

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