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Which Emerging Markets Will Stall or Fall?

Ian Bremmer on why economics is taking a backseat to politics.

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molotov bombAs a speaker at this spring's Global Investment Conference in Rancho Palos Verde, CA (April 8 to 10), Ian Bremmer, president of Eurasia Group and author of "Every Nation for Itself: Winners and Losers in a G-Zero World," will tackle "The New Global Disorder."  In advance of the conference, we asked Ian a few questions about why politics is now in the forefront of investing, and what risks and opportunities that may present. To find out more about Ian's presentation and the Global Investment Conference, click here.

Has economics taken a backseat to politics in recent times? Is the economic crisis over?

Economics has absolutely taken a backseat to politics as of late. Since the financial crisis, the world's biggest risks—as perceived by media and markets—have been overwhelmingly economic. Between a eurozone meltdown, worries surrounding a Chinese hard landing, and a U.S. debt crisis, headline and systemic economic risks have dominated over the last five years.  A lot of the expectations were overblown, as none of these feared crises was as likely to take place as expected.  Today, the storm clouds are mostly gone. The EU has pulled itself out of recession. The 'hard landing' in China has been very soft indeed; the government is engaging in real reform for the first time in a long time.  In the US, the recovery is proceeding at an acceptable clip.

This is good and bad news.  It's certainly a positive that these blockbuster fears are receding.  But at the same time, there are a host of emerging political risks that will impact markets in the years to come.  The eurozone's longer-term concerns have become more political: even as it's clear that a top-down economic threat to its survival has passed, Europe will face huge disruptions from the bottom up as citizens become increasingly embittered with austerity, record-breaking youth unemployment, and an inability to return to robust, sustainable competitiveness.  U.S. allies increasingly perceive Washington's foreign policy as inconsistent and disengaged, with significant attendant market risks and political impacts. In China, the new leadership is undertaking economic reforms that are cause for tremendous excitement—and trepidation.

Perhaps the chief political risk, however, stems from emerging markets. Since the financial crisis, the presumed logic has been a 'rise of the rest' where emerging markets take on an increasingly prominent role in providing global growth and shaping the international order.  That is clearly no longer panning out: perhaps the biggest thing that emerging markets have in common is just how unique they are in terms of their particular development issues and the set of political hurdles that threaten them most.  Some will rise, but many others will stall or fall.

What problems do emerging markets face? Inflation, currency runs, a decline in export-led growth? What are the policy options?

Yes to all the above—many emerging markets face inflationary and currency pressures, as well as overreliance on exports or particular resources. We've entered an environment where it is more difficult for developing countries to get capital. Many of them face a growth slowdown, just at a moment when new middle classes' demands on government are steadily rising. Social instability comes as a consequence, and that may very well be the biggest danger, given what we witnessed in Turkey and Brazil last year, as well as the turbulent situations in Venezuela, Ukraine, and Thailand today.  The bottom line: the pressures and hindrances to development in particular emerging markets differ perhaps more than ever before.  Overall, though, governments need strong leadership, and courage to push for the right policies for long-term development even when there are growing populist pressures in the other direction.  That is only getting harder…most of the emerging markets aren't getting there.

How is the U.S. refocusing its foreign policy? What does this mean for the Middle East and for China?

There are concerns that the United States has been pulling back on its foreign policy engagement altogether; that makes sense in an environment where just 5% of voters in the 2012 presidential election indicated that foreign policy was the chief priority.  The 'pivot to Asia,' one of the cornerstones of Obama's first term, has taken a back seat with new personnel—it was really a creature of Hillary Clinton and her team.  It's not as much that the pivot has been downgraded in importance; rather, it's more a matter of other issues bubbling up.   Some of that is Secretary of State John Kerry and his more Middle-East-centric agenda.  But on top of that, there have been constant fires that require immediate attention and reactive policymaking, from Syria to Ukraine.   In terms of the Middle East, John Kerry's active engagement in Israel-Palestine is, unfortunately, somewhat of a distraction, as it is a low probability gambit that requires a significant portion of Kerry's time that would be better spent elsewhere.  Iran is the big opportunity in the region, where there is a real chance for a comprehensive nuclear agreement and a big win for the administration.  But outside of that, every geopolitical situation in the region is deteriorating.  When it comes to U.S.-China bilateral relations, we've experienced relatively calm waters of late—that's in large part because the U.S. is struggling to implement its pivot (much to the consternation of Asian allies like Japan, Malaysia, and the Philippines), which is a perfectly pleasant development for Beijing.

To learn more about the Global Investment Conference, please visit the conferences section of the CIR website. If you are interested in attending this event, please email Alison Webb to be considered, as limited space available.

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