Ian Bremmer

As protests sweep the developing world and Europe struggles through an austerity hangover, China and the U.S., relative to their peers, look like the best in class. They are both comfortable with their modest growth rates (compared to their norms of the past decade), and insulated from the kind of social unrest we are seeing in Egypt, Turkey or Brazil. But both countries have a deeper intractable challenge that will, in the longer-term, get worse. What’s interesting is that they’re the inverse of each other: in the U.S., wealth and private sector interests capture the political system. In China, politicians capture the private sector and the wealth that comes with it.

The U.S.’s struggles with lobbying, pork-barrel spending, and the corporate sector’s general overlord status in Washington are well documented. Campaign finance reform is long past. Corporate personhood is well-entrenched. Super PACs are ascendant. A representative democracy is being crowded out by a capitalist one.

The cycle is hard to break. Politicians’ interests become aligned with those of the corporations that help them get elected. But even more troubling is that so many American politicians are gearing up to join the lobbying machine after they retire from government. In 1974, 3 percent of retiring members of Congress became lobbyists. Today, the figure stands at half of senators, and 42 percent of the House.

China has a related but different problem: its politicians control too much of the money themselves. Politicians and elites in China enrich themselves, their friends, and their families by managing and siphoning China Inc. — China’s state capitalist enterprise. Chinese industry is controlled by the state, and thus it’s the property of the people who run the state. Last year, state-owned enterprises and affiliated businesses accounted for over half of Chinese economic output and employment. There were 70 mainland Chinese companies on the 2012 Fortune Global 500 list; 65 of those were state-owned.

As an example, look no lower than China’s People’s Congress. The United States’ House of Representatives and Senate has no billionaires. China’s parliament has 83. According to Bloomberg, “The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.” If you’re part of the state, state capitalism is the best — even if the system is centralized, corrupt and calcified.

Eurasia Group’s weekly selection of essential reading for the political-risk junkie — presented in no particular order, and shared from ForeignPolicy.com. As always, feel free to give us your feedback or selections by tweeting at us via @EurasiaGroup or @ianbremmer. 

Must-reads

“Spanish frustration with Germany grows as austerity bites” – Tobias Buck, Financial Times

What a difference a year makes. A little more than a year ago, Spaniards dubbed Angela Merkel their most admired leader in Europe. Now she ranks below the leaders of France, Italy and the UK. What’s causing the shift in sentiment?

At the beginning of this year, Eurasia Group, the political risk firm I lead, released its top 10 risks of 2013. We forgot to put Pepsi-guzzling whistleblowers on the list, but we did give our top slot to increasing turmoil in “emerging markets.” In a global economy that has become more reliant on countries whose economies are vulnerable to political shocks, emerging markets are our new economic fulcrums. What is causing this growing uncertainty in emerging markets? How much stress can they take without upsetting the balance for everyone else.

The protests in countries like Brazil and Turkey are not Arab Spring-style uprisings: they’re the anger and frustration of newly empowered middle and lower-middle classes, the same consumers who were the catalysts and beneficiaries of this growth in the first place. In emerging markets, politics have at least as big an impact on market outcomes as the underlying economics — that’s why these kinds of protests can strike seemingly out of the blue, and bring business-as-usual to a halt. Compare the impact of protests (and leaders’ responses) in Brazil and Turkey to the Occupy Wall Street movement. In a developed country like the United States, the political system is consolidated in a manner that forces fringe movements to choose one of two paths: go mainstream or lose steam. In emerging markets that have experienced dramatic and rapid changes, governments can’t keep up with citizens’ evolving demands. Protests are far more likely to swell, with severe economic ramifications.

Why are the protests in Turkey and Brazil happening? There are immediate triggers. In Brazil, it was a small raise in bus fares; in Turkey, it was the imminent demolition of sycamore trees in Gezi Park. But these triggers are the narrow manifestations of larger, systemic grievances playing out on a country level, and trends in the global economy at large. So what are the larger factors that make even model emerging markets more ripe for unrest?

Eurasia Group’s weekly selection of essential reading for the political-risk junkie — presented in no particular order. As always, feel free to give us your feedback or selections by tweeting at us via @EurasiaGroup or @ianbremmer.

Must-reads

“China Court Ruling Could Threaten Foreign Investments in Country” – Sue-Lin Wong, International Herald Tribune

Many Chinese sectors such as media, finance, and technology are off-limits to foreign direct investment. Variable interest entities (VIEs) have allowed Chinese companies such as Baidu, Sina, and Alibaba to raise billions in foreign capital while avoiding the regulatory hurdles. A new court ruling may make these entities illegal—with severe implications.

This past weekend, centrist candidate Hassan Rohani won the Iranian presidential election by a landslide. Rohani beat the two perceived front-runners who were hand-selected conservative loyalists to supreme leader Ali Khamenei — and he did it with an outright majority, bypassing an expected run-off. According to the interior ministry, turnout topped 72 percent — a level that the United States hasn’t attained in a century

During the campaign, Rohani declared, “We will open all the locks which have been fastened upon people’s lives.” But while Rohani’s sweeping victory comes as a big surprise, it’s no shock to the system in Iran. Don’t expect Rohani to open the locks fastened upon Iranian policy. He simply doesn’t hold the keys.

All major decisions on foreign policy go through the Ayatollah. In Iran, the president doesn’t have the last word on the most important security matters, like the nuclear program and Syria. Sanctions will remain in place for the foreseeable future, putting a ceiling on the near-term economic improvements that Rohani can implement. Lastly, even if Rohani did have free rein, he would not upend the system. He is a consummate insider, working his way up within the Iranian establishment: he ran Iran’s national security council for almost two decades, spent three years as the top nuclear negotiator, and he maintains the trust of the clerics. He campaigned as a moderate, not a reformer.

Eurasia Group’s weekly selection of essential reading for the political-risk junkie — presented in no particular order, and shared from ForeignPolicy.com. As always, feel free to give us your feedback or selections by tweeting at us via @EurasiaGroup or @ianbremmer.

Must-reads 

“Africa: Continent of Plenty” – G. Pascal Zachary, IEEE Spectrum

In the early 1960s, Africa supplied 8 percent of the world’s tradable food; that figure has dropped below 2 percent today.  Can Africa feed itself—and even help feed the world?  Here are ten reasons to believe it can.

“Putin’s Self-Destruction” – Ivan Krastev and Vladislav Inozemtsev, Foreign Affairs

The past weeks’ revelations about PRISM, the National Security Agency’s broad electronic surveillance program, follow a grand American tradition of major disclosures that undermine the high standards to which the United States holds itself — and the world. In this case: How can the U.S. tell other countries to stop using the Internet to pursue their aims at the expense of others when it has been systematically spying on foreigners for years? 

This contradiction is nothing new in American foreign policy: it’s the flip side of American exceptionalism. The United States is so eager to cast itself as a pinnacle of various behaviors and values that when it inevitably falls short, it leads to awkward contradictions. That’s a shame, because the United States actually does have substantive differences from many other countries on civil liberties, human rights and democracy — it’s just that its stance ensures any slipups and embarrassments overshadow everything else.

Look no further than last weekend, when the NSA disclosures spoiled the Obama administration’s plans to corner China on its own cyber practices. Instead, publications like the Guardian were running headlines like “U.S.-China summit ends with accord on all but cyberespionage.”

Eurasia Group’s weekly selection of essential reading for the political risk junkie — presented in no particular order, and shared from ForeignPolicy.com. As always, feel free to give us your feedback or selections by tweeting at us via @EurasiaGroup or @ianbremmer.

“Not always with us” – The Economist

How have we made so much progress eradicating poverty in recent decades? Between 1981 and 2010, China lifted 680m people out poverty—more than the entire current population of Latin America. China alone accounted for around three quarters of the world’s total decline in extreme poverty over the past 30 years. Where does progress need to come from going forward?

“Cristinanomics: Argentina’s crazy plan to save the economy through money laundering” – Douglas Farah, Foreign Policy

In the past week thousands of people have mobilized across Turkey, protesting Turkish Prime Minister Recep Tayyip Erdogan’s efforts to consolidate power and impose his agenda. Erdogan’s heavy-handed response — he sent riot police in to disperse the largely peaceful protesters in Istanbul — led to widespread condemnation,  and even bigger protests.

The facile interpretation of what’s happening in Turkey is that it’s the next stage of the Arab Spring, when the rage of a region spreads even to its most stable, democratic outlier. But that’s not the case here. There are real differences between what’s happening in Turkey and what happened in the Arab Spring — and they’re a testament to how successful Turkey has been as a nation, and how successful it will continue to be.

Arab Spring protests in a country like Egypt were an outcry against the political system as a whole. In Turkey, the anger is directed at one man, whose ouster would not topple the political system more broadly — and Erdogan still holds the key to mitigating the conflict if he can take a more conciliatory stance (though for him, that might be easier said than done.)

If you believed the conventional wisdom, this week’s meeting between Chinese Premier Li Keqiang and Indian Prime Minister Manmohan Singh was bound to be fraught. The leaders of the world’s two largest countries, only a month removed from a standoff in the Himalayas, were meeting. Acrimony was sure to follow, right?

No. Instead, Li said he offered India a “handshake across the Himalayas” and mused about how China and India could increase their trade to $100 billion by 2015. China and India, you see, aren’t as antagonistic as pundits make them out to be.

Aside from each having more than 1 billion people, China and India actually have very little in common. The two are divergent — yet their economies are largely complementary. India is struggling to regain its torrid growth of the mid-2000s; China is closer to maintaining it. India, thanks to corruption and regulation, doesn’t build much infrastructure; China can’t stop. Indians have started to bring their entrepreneurship to China, since their domestic market is so flawed and because China itself has so few entrepreneurs. China, meanwhile, has started to send some basic low-scale manufacturing to India, as the cost and quality of Chinese labor rises.