Eurasia Group, a global political risk research and consulting firm, puts the "unintended consequences" of government rescue measures in the current economic crisis at the top of its risk areas to watch for global investors.
"It's not hard to paint a negative outlook as we begin 2009, given the political instabilities that naturally emerge from such a serious global economic downturn. But underlying the market volatility over the coming months will be two important structural forces, an understanding of which should provide useful context for a year with unprecedented levels of political risk," Eurasia Group President Ian Bremmer said in a report to clients today.
"First, we'll see more state intervention in the global economy," he said. "Second, that intervention will be both reactive and uncoordinated by a series of local, regional, and national political actors who have decidedly nonglobal (and in many cases nonmarket) views of the cost/benefit equations that attend their policy decisions.
"In short, politics will drive the global economy more directly, and more inefficiently, in the coming year than at any point since World War II."
The following is the summary from Eurasia Group's Top Risks for 2009 report:
1. US financial regulation and the rise of Congress: A stronger Congress is likely to be more assertive in driving the U.S. economic policy agenda, with three broad areas to watch: (1) legislative and regulatory changes in the financial industry; (2) direct government involvement/control over economic enterprises; and (3) fiscal policies meant to spur economic growth. The degree to which political populism plays a role in the response to the financial crisis will have a host of unintended consequences.
2. South Asia security: The security environment in India, Pakistan, and Afghanistan will deteriorate significantly, and the U.S. and Europe will find themselves more directly involved in conflicts in all three states, with little benefit to show for it by the end of 2009.
3. Iran /Israel: Iran is expected to have the capacity to develop a nuclear bomb (if it so chooses) by the end of the year. While the likelihood of US strikes against Iran has diminished considerably, 2009 is the critical year for conflict (both direct and through proxies) between Iran and Israel.
4. Russia : The challenges of the financial crisis are likely to produce increased social unrest in Russia—with nearly zero state tolerance for dissent. Given that the Barack Obama administration will probably not keep quiet during a crackdown in Russia, relations between Russia and the US, as well as Russia's relations with some European nations, are likely to continue to deteriorate. Russia will be a troublemaker in international affairs, though military intervention in Ukraine or a direct conflict over Georgia, NATO enlargement, and missile defense are unlikely.
5. Iraq : The Iraqi government will face a series of political tests that will determine its ability to keep the country united and move it toward stability. President Obama will face pressure to fulfill his promise to withdraw U.S. combat troops within 16 months, but he may have to revise his timetable. The looming prospects of U.S. withdrawal, combined with provincial and the parliamentary elections, will expose Iraq to high risks of renewed unrest, while the unresolved dispute over the oil-rich city of Kirkuk will remain a source of long-term volatility.
6. Venezuela : President Hugo Chavez's plan for a referendum to reform the constitution and abolish term limits is unlikely to succeed. Faced with defeat, Chavez is likely to take an increasingly authoritarian approach, which will raise social and political turmoil domestically.
7. Mexico : Rising violence and corruption scandals associated with narco-trafficking will continue to raise questions about the government's strategy against organized crime. However, growing public concerns will not affect political stability or the government's increasingly aggressive efforts to weaken the drug cartels.