RiskMap 2007

RiskMap 2007

Control Risks

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Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG

Control Risks Group Limited (‘the Company’) endeavours to ensure the accuracy of all informationsupplied. Advice and opinions given represent the best judgement of the Company, but subject toSection 2 (1) Unfair Contract Terms Act 1977, the Company shall in no case be liable for any claims,or special, incidental or consequential damages, whether caused by the Company’s negligence (orthat of any member of its staff) or in any other way.

Copyright: Control Risks Group Limited 2006. All rights reserved. Reproduction in whole or in partprohibited without the prior consent of the Company.

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Contents

Introduction ............................................................................................................................. vii

Emerging global risks to business in 2007 ............................................................................ 1Barking up the wrong money tree .......................................................................................... 2Bird flu: Don’t count your chickens ........................................................................................ 5

Brazil: Growing pains ............................................................................................................... 7The Saudi Arabia of ethanol? ................................................................................................ 8

China: Market liberalisation under threat? ........................................................................... 10Keeping social unrest in perspective ................................................................................... 11

Congo (DRC): Consolidation or conflagration ..................................................................... 13

EU: Eastward expansion, westward migration .................................................................... 16An expanded EU pauses to take stock ................................................................................ 18

India: Time to hang up on outsourcing? .............................................................................. 20

Iran: Nuclear ambitions .......................................................................................................... 23

Japan: Sowing the seeds of a ‘new cold war’ in Asia? ....................................................... 25

Kazakhstan: Pretenders to the throne .................................................................................. 28

Lebanon: The post-conflict political order ........................................................................... 31

Mauritania: The challenges of democratisation ................................................................... 33

Nigeria: Fanning the flames of instability ............................................................................. 35

Russia: The dangers of resource nationalism ..................................................................... 38Electoral machinations ........................................................................................................ 40

South Africa: The man who would be president .................................................................. 41

Thailand: After the coup ......................................................................................................... 44

US: Political stalemate ahead ................................................................................................ 46The very long arm of US law ............................................................................................... 48

Venezuela: The end of the Bolivarian Revolution ................................................................ 49Losing the war on drugs ...................................................................................................... 51

Africa ........................................................................................................................................ 53Transnational insecurity in the southern Sahel .................................................................... 55Africa’s brain drain ............................................................................................................... 59Resource nationalism in sub-Saharan Africa ...................................................................... 68

Americas .................................................................................................................................. 71Is kidnapping still a risk? ..................................................................................................... 73Cuba after Castro ................................................................................................................ 75Caribbean ............................................................................................................................ 76Caribbean ............................................................................................................................ 77Global warming and the North-West Passage .................................................................... 80

Asia and the Pacific ................................................................................................................ 81Failing states, failed interventions ....................................................................................... 85Piracy: Still making waves ................................................................................................... 86Marching to political power? ................................................................................................ 93

Europe and the former Soviet Union ..................................................................................... 95The return of the city state ................................................................................................... 97Chechen terrorism after Basayev ...................................................................................... 107Crawling towards a federation of unequals? ..................................................................... 109The high costs of transnational bribery ............................................................................. 112

Middle East and North Africa ............................................................................................... 113Terrorism and tourism........................................................................................................ 114Kurdistan: The other Iraq ................................................................................................... 115Divestment campaigns against Sudan .............................................................................. 119Labour activism in the Gulf Arab states ............................................................................. 122

Control Risks ......................................................................................................................... 123Political and security risk analysis ..................................................................................... 125Control Risks Information Services: Contacts ................................................................... 127

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Political risk

INSIGNIFICANTThe environment for business is favourableand likely to remain so. Government policy isstable and the economy is secure. Businessfaces no legal or regulatory disadvantages.There are no significant non-state threats tooperations.

LOWBusiness can operate with few problems.Political institutions are stable but there issome possibility of negative policy change.Legal guarantees are strong but businessmay face some regulatory or judicialinsecurity. Non-state actors may occasionallyhamper operations.

MEDIUMForeign business is likely to face somedisruption from state or non-state actors ORlong-term investment security cannot beguaranteed. There is a risk for business ofexposure to some or all of the following:corruption; strong and hostile lobby groups;absence of adequate legal guarantees;restrictions on imports or exports; weakpolitical institutions; and capricious policy-making. In some Medium risk countries thereis a latent threat of military or other illegalintervention.

HIGHBusiness is possible but conditions aredifficult or likely to become so in the nearfuture. Political institutions effectively do notfunction, the regulatory framework is poorand judicial decisions are arbitrary. There islittle security for investments. Business maybe exposed to the following risks: economicand political conditions may become rapidlyunstable; international sanctions arepossible; non-state actors actively targetbusiness; or there is a risk of contractrepudiation or re-negotiation by state actors.

EXTREMEConditions are hostile to/untenable forbusiness. There is no investment security.The following conditions may apply: theeconomy has collapsed; law and order hasbroken down and state bodies have ceasedto function; there is a state of war or civilwar; non-state actors cause suspension ofoperations; or the state is actively hostile toforeign business and expropriation of assetsis likely.

Security risk

INSIGNIFICANTAssets and personnel are not at risk exceptfrom isolated incidents or petty crime. Levelsof violent crime are low, the authoritiesprovide effective security and there isvirtually no political violence.

LOWAssets are generally secure and theauthorities provide adequate security.Companies and personnel face onlyinfrequent exposure to violence fromterrorists or criminals; companies areunlikely to be systematically targeted forasset theft.

MEDIUMThere is a reasonable possibility of securityproblems affecting companies, but there isno sustained threat directed specificallyagainst foreign companies. Targeted crimeor violence poses some risk to foreign assetsand personnel OR they are at reasonablerisk from violence by terrorists or unrest.State security is inadequate.

HIGHThere is a probability that foreign companieswill face security problems; specialmeasures are required. Assets andpersonnel are at constant risk from violenceor theft by state or non-state actors OR thereis a high risk of collateral damage fromterrorism or other violence. State protectionis very limited.

EXTREMEThe severity of security risks to assets orpersonnel is likely to make businessoperations untenable. There is no law andorder; conditions may verge on war or civilwar. Foreign companies must stronglyconsider withdrawal.

Definition of risk levels

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Definition of risk categories

Political risk

The political risk rating evaluates thelikelihood of state or non-state politicalactors negatively affecting businessoperations in a country. It assesses theextent to which the state is willing and ableto guarantee contracts and the extent towhich non-state actors may threaten theviability of business operations. State actorscan include domestic and foreigngovernments, parliament, the judiciary andthe security forces; non-state actors caninclude insurgent groups, labour unions,lobbies, organised crime, environmentalists,ethnic and indigenous groups as well asinternational organisations. The impact ofpolitical risk on companies can includenegative government policy, judicialinsecurity, exposure to corruption,reputational damage, expropriation andnationalisation, and international sanctions.It assesses the extent to which political,economic and institutional stability mayenhance or diminish the likelihood of theserisks taking place. Political risk may vary forcompanies and investment projects becauseof factors such as industry sector andinvestor nationality.

Security risk

The security risk rating evaluates thelikelihood of state or non-state actorsengaging in actions that harm the financial,physical and human assets of a company. Itassesses the extent to which the state iswilling and able to protect those assets andthe extent to which state or non-state actorsare capable of harming those assets. Actorsthat may pose a security risk to companiescan include political extremists, terrorists, thesecurity forces, foreign armies, pettycriminals, organised criminals, computerhackers, protesters, workforces, localcommunities, indigenous groups, corruptofficials, business partners, and in-countrycompany management and staff. The impactof security risk on companies can includetheft, injury, kidnap, damage to installations,information theft, extortion, fraud,expropriation and loss of control overbusiness. Security risk may vary forcompanies and investment projects becauseof factors such as industry sector, investornationality and geographic location.

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The annual preparation of country forecastsfor RiskMap always provides vital insight intobroader patterns in world developments. Aswe survey the national landscapes for cluesto the year ahead, we also build a collectiveunderstanding of global trends and theirpotential risks for business. It is clear that2007 promises to be a year of seismicactivity in the global geopolitical and securityenvironments.

Several issues that have been brewing overthe last decade will come to the fore. It’sdecision time for the big players. Theinternational community will respond to thenuclear challenges posed by Iran and NorthKorea, but solutions will remain elusive;Russia will maintain its course of resourcenationalism; and US policy in Iraq will signala retreat from the grand Middle Eastrestructuring programme. This augurs aperiod of uncertainty, before clarity willemerge towards the end of the year.

Changing leaders

Elections loom large in a number of keycountries. Venezuela’s Hugo Chávez will winanother term in power, but will becomeincreasingly reliant on the instruments ofstate to maintain his regime, abandoning inall but name the redistributive socialist aimsof the ‘Bolivarian Revolution’. For better orworse, Nigeria will weather an election – andan election campaign – that will test itsmoves to liberalise the economy andredistribute power and oil revenues.

Further distant, the US presidential electionwill cast its long shadow over US domesticand foreign policy as Bush’s term comes toan end. In Kazakhstan and South Africa,manoeuvring will begin among thosecompeting to succeed leaders whose timeis near.

Elsewhere, new – or newly elected – leaderswill try to bed in. At the heart of Africa,Congo (DRC) will need to seize the chanceto consolidate 2006’s electoral experience toemerge from the chronic insecurity of thepost-Mobutu era. In China, Hu will establishhis position, and bring a subtle change to the

direction of economic and market policies.More difficult will be Lebanon’s recoveryfrom war, and Mauritania and Thailand’sefforts to re-establish democracy aftermilitary intervention.

Act local

As a consequence of these and other issues,the main security challenge in 2007 will be tofocus on the immediate risks, rather than thebig-picture threats. Terrorism will continue todominate the headlines, but its real threat tobusiness needs balanced, localassessment. Likewise, local governmentfailures, corruption, capricious policy-makingand intractable militancy will all claim moremanagement time and lost profitability thanthe threat of nuclear sanctions. In essence,while it is important to think globally, it isvital for business to act locally to mitigatesecurity risks.

Across all these issues will blow the rhetoricof global warming and climate change, whichis attracting recognition as a crucial securityissue. The debate is unlikely to monopolisegovernments’ attention in 2007, but will beloud enough to command regional and localaction. Where international organisationsand member states have failed to acteffectively, sub-national entities andmunicipalities will continue to step in –witness California’s leadership within the US,and the efforts of cities such as New Delhiand London to legislate to reduce emissionsand conserve energy.

One of our ‘bite-sized’ articles looks at oneof the longer-term consequences of climatechange: a functional North-West Passagejoining the Atlantic and Pacific. The scientificconsensus is that climate change demandsimmediate attention, regardless of theimminence or otherwise of a crisis.Businesses are already facing localisedresource conflicts and environmentaldisasters, and these issues show no signsof abating.

Jennifer Harbison, Research DirectorLondon, October 2006

Introduction

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Emerging global risks to business in 2007

Thailand’s bloodless military coup inSeptember 2006 was a useful reminder thatchanges of government or political difficultiescan cause problems for investors in aspecific country, or – as North Korea’snuclear test illustrated – a wider region.However, underlying such threats arebroader challenges to global business thathave little respect for territorial borders.James Smither and Matthew Hulbertaddress the fact that risk, like business, is aglobalised phenomenon.

The onus remains squarely on businesses toestablish measures to limit the impact ontheir assets and operations from issues suchas global terrorist threats, climate change,natural resource depletion, pandemicdisease and economic shocks. At the sametime, there is growing pressure for business’role in these trends to be more closelymonitored and constrained.

The general array of transnational threats in2007 is likely to be similar to that of 2006,but in an era of global inter-connectednessand global supply chains, internationalbusiness must always be prepared for newand unforeseen risks to reputation, securityand – ultimately – profitability.

Terrorism tops the agenda

Terrorism – or perceptions of the terrorismthreat – have a disproportionate andpernicious impact on political andcommercial decision-making. The globalthreat is unlikely to recede in 2007, and theannual Transatlantic Trends surveyconducted in the US and 12 EU statesshows that concern about terrorismcontinues to rise.

Terrorism remains largely regionally focused.Most active terrorist groups have a narrowagenda that focuses on a specific state orgeopolitical claim. Headline figures on thenumber of attacks can appear alarming:according to the US National Counter-terrorism Center (NCTC)/State Department2006 report, there were 11,111 attacks in2005, compared with 3,168 in 2004 and 208in 2003. However, these figures aresignificantly distorted by the Iraq insurgencyand changing definitions make year-on-yearcomparison difficult. The number of terroristincidents outside the Middle East and Asiahas been falling – though average lethality isrising – and outside Iraq, incidents with tenor more deaths have remained at roughly the

same level as 2003-04. Despite the rhetoric,this is not an age of catastrophic globalterrorism.

No end in sight

Islamic extremists worldwide are increasinglyinformed by a common jihadist outlook.Groups within al-Qaida’s ideological orbitthat historically received its support nowemulate it. They have evolved to follow thevision and mission of a universal jihad. Al-Qaida’s most enduring impact has been toinstil other groups with a sense of duty tofight local enemies, but also the distantenemy – the US.

Al-Qaida actively promotes its connections toregional and local Islamic extremist groups,such as Jemaah Islamiyah (JI) in South-eastAsia; Kashmiri separatist groups; andorganisations operating in North Africa,Europe and elsewhere. The fact that terroristnetworks are increasingly diverse, dispersedand independent complicates the threat andencourages heightened threat perceptions.Al-Qaida has effectively engineered aprocess of self-radicalisation, with majorimplications for counter-terrorism measuresover the next decade and beyond.

Targeting trends

The sense of fear associated with terrorismis reinforced by trends in targeting methodsand tactics. The number of attacks targetingprivate citizens and property has continuedto increase, and 2007 is likely to see non-combatants remain in the cross-hairs. Therewill be a continuing focus on ‘soft’ civiliantargets – particularly tourist sites or masstransport infrastructure – that require limitedexpertise and resources to attack usingsuicide or other bombs. Islamic extremistswill also prioritise recruiting female and whitevolunteers and seeking ever more innovativeexplosive-delivery systems. They willcontinue to exploit thousands of onlinesources to ensure that new recruits do notappear on the authorities’ radar by physicallytravelling to Afghanistan or Pakistan to beinspired or trained.

Energy and environmental vulnerabilities

A persistent terrorist focus on explicitlyeconomic targets, illustrated by a February2006 attack on a Saudi oil installation, is justone in a range of threats to energy andenvironmental security in 2007 and beyond.These threats are linked to instability in the

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Middle East and Nigeria, capricious OPECdecision-making, economic nationalism inLatin America and state ‘expansionism’ inRussia. All those involved – fromVenezuela’s president to militants in theNiger delta – have an increasinglysophisticated understanding of their leverageon oil price and supply.

Tight supplies, rising demand (especially inIndia and China) and geopolitical instabilitycombined to push crude oil prices to $78 abarrel in 2006. The macroeconomic impactwas more moderate than expected, but anynew major shock would be likely to disrupt oilmarkets to the detriment of global economicgrowth. The impact would be more severe inlow- and middle-income countries, withpotential repercussions on often fragilepolitical and security stability.

The uncertainty of energy supplies fromRussia and the Middle East has prompted anumber of EU states to start thinking moreseriously about reducing demand. Thecurrent consensus is that this thinking may

be ‘too little, too slowly’. As carbonemissions continue to escalate, researchshows that the world temperature hasincreased by one degree Fahrenheit (0.6degrees Celsius) and that sea levels haverisen by four to eight inches (5-10cm) in thelast century (a rise of three feet (just under1m) would inundate low-lying areas fromFlorida to Bangladesh).

Without urgent action, global warming couldlead to an increase in resource conflicts,mass human displacement and disruption toagriculture and food supplies over the next15 years. Some estimates claim that, by theend of the 21st century, rising sea levels andcrop failures could result in 150m refugees.Long-term solutions will be required toreduce the likelihood of this occurring and tomitigate the impact if it does.

The continuing problem of failing states

Acute vulnerability to the sharper effects ofenvironmental degradation characterisesmany of the world’s weak and poorly

Barking up the wrong money treeUS-led efforts to combat terrorist financing are prompting growing business concernover their increasing costs and the protection of confidential data. The US claims thatthese measures have had some success, pointing to the arrest in 2003 of theIndonesian militant Hambali, who orchestrated the 2002 Bali bombings, and theAugust 2006 disruption of a plot to attack airliners departing from the UK.

Yet these measures are not a complete solution and have several limitations. Terroristfinancing is a complex, constantly shifting process; terrorists do not need to rely onone method to fund their activities. While banks struggle to comply with new legislationto combat sophisticated money-laundering, terrorist cells are increasing their relianceon cash to leave a minimal trail.

At the same time, the evolution of autonomous ‘home-grown’ cells means thatlaundering large amounts of money is often unnecessary. Such cells are self-financedvia legitimate jobs, personal finance and low-level crime. The perpetrators of the July2005 London bombings raised the necessary cash through work, small personal loansand credit cards, methods that would be extremely difficult to identify as related toterrorism or other serious criminality.

In addition, the trend for attacking ‘softer’ targets such as bars, hotels and publictransport means that the average cost of a terrorist attack is falling. A single suicidebombing may cost as little as $150; the London bombings cost only a few thousandpounds.

These trends are balanced by a parallel (and paradoxical) adoption of moresophisticated methods of financing involving connections to criminal activities such asdrug-smuggling, counterfeiting and fraud. The terrorists behind the 2004 Madridbombings raised money by selling counterfeit CDs and trafficking drugs.

This combination of methods, along with exploitation of the global free market, meansthat terrorist financing will remain difficult to intercept. The impact on business of newregulations will be onerous; the impact on terrorists is less clear.

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governed states. These will continue to posea significant threat to international securityand foment difficult environments for manyemerging-market business operations.International institutions are alreadystretched in their efforts to manage aproliferation of fragile states. Since the mid-1980s, around 50% of ‘resolved’ conflictshave relapsed within five years; thispercentage could increase in 2007.

According to the World Bank, the number of‘fragile’ states has risen from 17 to 26 since2003, with Nigeria, Kosovo, Cambodia, EastTimor and Gaza joining the list. Fragilestates are now home to more than 500mpeople, half of whom live in severe poverty,and often offer safe havens for drugproduction and weapons-smuggling.Corruption also presents an endemicproblem to businesses operating in thesejurisdictions. The global result in 2007 islikely to see regional spill-over of conflict,terrorism, mass migration and a failure tomanage epidemic diseases, underminingbusiness environments.

Sophisticated transnational crime

Cybercrime

Cybercrime will maintain its exponentialgrowth rate, while the electronic channelsthat criminals exploit will be used by othernon-state actors. Global business integrationwill be mirrored by an ever more mobilecriminal and campaigning community. A USgovernment report highlighted informationtechnology infrastructure as highlyvulnerable to terrorist and criminal attack.While the links between cyber attacks andterrorism are expected to grow as terroristorganisations become more technologicallysophisticated, conventional cybercrimeremains the pre-eminent problem.Manufacturing and financial services sectorsare the principal business targets for attack.Globally, the US continues to suffer thelargest number of cyber attacks, with Chinaand Russia being the main sources.

Illicit trade and counterfeiting

Despite well meaning initiatives, someconcrete legislative steps and much lipservice, intellectual property rights (IPR)theft and counterfeiting will show no sign ofabating. The global trade in illicit goods isgrowing; according to Interpol, the number ofcounterfeits has grown eight times the speedof legitimate trade since the early 1990s.This has caused global commercial losses inthe region of $500bn (5%-10% of the total

value of world trade), for the most partaround the same complex global distributionchains associated with legitimate trade flows.

Although China has made legislativeimprovements, it remains a key IPRoffender; estimates suggest that more than$16bn of counterfeit goods are sold eachyear in the country, with exports worth inexcess of this figure. Other major offendersinclude Taiwan, Vietnam, Philippines,Malaysia, Russia, other former Sovietrepublics, parts of Latin America and Africa.Corporations are at risk through their ownpartners, suppliers and customers. Theinternet is another factor – conservativeestimates place the annual value of illicitgoods traded on the web at $25bn. Thistrade remains a high-profit and low-riskexercise for criminal syndicates, but is linkedto more violent organised crime andoccasionally terrorism (the Madrid bombersraised money through counterfeiting rings).

Human-trafficking

Human-trafficking is one of the fastest-growing illicit trades in the world. Cautiousestimates of cross-border trafficking stand at800,000 people per year according to the USState Department, while inclusion ofinternally trafficked people brings the total tobetween 2m and 4m people. Human-trafficking generates $9.5bn annuallythrough links with organised crime, money-laundering and corruption; China alone hasa $1bn-$3bn annual trade in people.

Many countries lack legal provisions toenforce anti-trafficking measures; there wereonly 58 convictions in 2005 for human-trafficking in Africa and 59 in the Americas.The persistence of dual labour markets –one legal, the other underground andunregulated – means that the trade willcontinue. As well as the human tragedies,trafficking fuels organised crime and fundsterrorism.

Tied up in red tape

The corruption and regulatory weaknessesthat can facilitate such illegal trafficking alsohave a significant impact on business.Requirements affecting registration, taxation,operation and import/export arrangementscan seriously affect profit and businessviability. This is compounded by overlappingproblems such as bribery demands,smuggling and copyright infringement.Regulatory procedures can also be vehiclesfor nepotistic or anti-competitive practices,not least because the countries that regulate

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the most are often least able to enforce theirrules.

Despite this, the World Bank has notedimprovements in regulatory environments in2005-06. The key improvements weregenerally around starting a business, with 43countries taking active steps to simplifyprocedures and reduce costs and delays.Progress has also been seen on reducingtax rates and the administrative burden. Thetop ten reforming countries were Georgia,Romania, Mexico, China, Peru, France,Croatia, Guatemala, Ghana and Tanzania,albeit many of these started from a low base.Interestingly, the bank’s studies indicatedthat, even in top-performing economies,nearly 85% of reforms occurred within thefirst 15 months of a new administration.

Reputation and responsibility

Even as emerging markets are urged toreduce regulatory obstacles to business,companies are facing a proliferation ofinternational expectations, principles andbest-practice guidelines. These combine withthe threat of national and extraterritoriallitigation, notably through the US’ Alien TortClaims Act (ATCA), Patriot Act and ForeignCorrupt Practices Act (FCPA). Othercountries are also acting to regulatedomestic business: Denmark introduced alaw as early as 1995 calling for ‘greenaccounts’ and France in 2002 passed an actobliging listed companies to include socialand environmental evaluations in annualreports. A crucial development will come inMarch 2007, when the UN SpecialRepresentative on business and humanrights issues will decide whether existinghuman rights guidelines that affect businesswill be given legal teeth and become moreenforceable.

Amid rising concern about corporateresponsibility, a key challenge for globallyintegrated enterprises is to ensure thatstandards of governance, transparency,privacy, security and quality are maintainedeven when producers and operations arehandled by various organisations worldwide.There are roughly 70,000 transnationalcompanies, together with approximately700,000 subsidiaries and millions ofsuppliers. This underlines the need foreffective management of these issuesacross the supply chain.

The more obvious risks include associationwith repressive governments; involvement incriminal activities, such as corruption andmoney-laundering; and complicity in third-

party abuses, especially when working inconflict areas. Other concerns includeenvironmental degradation and socialdislocation, such as that linked to disruptionof local indigenous populations, concernsaround forced labour, and health and safetyissues. Association with such issues cantranslate into negative publicity, consumerboycotts, non-governmental organisation(NGO) campaigns and protests. As well asdamage to reputation, companies could facebusiness interruption, blacklisting for futurecontracts, loss of operating licences, high-level security risks to operations andpersonnel, and loss of financial backing – allof which hit the bottom line.

Scrutiny at every level

As multinational companies have becomeincreasingly powerful, social actors – bothlocal and transnational – are looking toprovide countervailing pressures. NGOs useinternational corporate social responsibility(CSR) instruments to hold multinationalcompanies to account, especially in difficultemerging markets where transgressions areoften viewed most critically. The level ofscrutiny is severe: 30,000 NGOs nowoperate international programmes; 1,000have memberships drawn from three ormore countries. Significant reputationaldamage can result when companies areaccused of defaulting on obligations.

Western-based corporations complain thatthe higher ethical and reporting standards towhich they are expected to adhere arerendering them uncompetitive againstincreasingly strong emerging-countryparastatal and private companies, especiallythose from China and India, which aretypically less subject to such constraints. Along-term question is the extent to whichsuch companies will gradually conform to‘Western’ standards to secure presence andcapital in the West, but in 2007, this willremain distant.

At the extreme lies the militant anti-corporateagenda, a phenomenon ranging fromindigenous campaigns against high-profileenergy projects in ecologically sensitiveareas through mass protests at internationalsummit meetings to the extremist tacticsfavoured by some animal rights groups.These problems will be perpetuatedthroughout 2007. In some ways, this is theperfect encapsulation of the risk landscapefacing companies. Such groups learnsophisticated targeting and propagandalessons from terrorist campaigns and eachother, are prodigious in their exploitation of

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new technology and the mass media, andself-consciously benefit wherever andwhenever possible from gaps in statecapacity and regulatory frameworks. Withthe environment and energy security risingup the political agenda, resource exploitationand emissions are likely to become anincreasing focus for such activity.

2007 and beyond

Global business in 2007 will hope forimproved global security and a sense oforder and predictability, but this will beincreasingly hard to achieve in an age ofmanifold globalised as well as local threats.Corporations must also set against thisuncertainty the fact that ‘south-south’corporate investment – investment amongand within emerging markets – now standsabove $60bn annually. If developed marketsare not willing to take on the risks ofinvesting in frontier countries and their smallbut often highly profitable markets,developing markets assuredly are.

Furthermore, they are doing so on theirterms. Asia accounts not only for 40% of theworld’s population but also for 20% of globalproduction. China is expected to have alarger economy than the US by 2040, andthe Indian economy is set to outstrip theJapanese by 2032. These states’ highgrowth rates, hunger for natural resources

and growing political and economic powerare reshaping the world economy, and with itthe risk landscape. Both New Delhi andBeijing are shifting from being recipients ofinternational aid to major donors. China hascommitted to provide $10bn in concessionalloans and preferential export buyers’ creditsin the next three years, and is now theworld’s third-largest donor of food aid. Indiais also considering increasing its fundingprovision to Africa to roughly ten times thelevel of 2004-05. Emerging powers arestrengthening their position in the developedworld, challenging Western businesses. Thedeveloped world will soon need to respond.

What could happen in 2007

Terrorists acquire CBRN capability…

The use of co-ordinated suicide attacks oncommercial aircraft using improvisedexplosive devices (IEDs) remains apersistent threat as the UK’s failed Augustterrorist plot illustrated. However, a numberof terrorist organisations have longharboured the ambition to acquire achemical, biological, radiological or nuclear(CBRN) capability. The global Islamicextremist network’s ambition to stage aCBRN attack can be assumed to remainundiminished following an upsurge inreporting relating to mass-casualty CBRNprogrammes. While al-Qaida is unlikely to

Bird flu: Don’t count your chickensBird flu largely disappeared from the news in late 2006, following a brief frenzy ofWestern media coverage of the first cases of the highly pathogenic H5N1 strain inEurope. The swift containment of the outbreaks and the lack of human infectionsseemed to refute predictions of an imminent health crisis. However, the nucleus of thethreat is and will remain in Asia, where countries such as Indonesia show that the riskof a pandemic will remain undiminished in 2007.

Indonesia saw the first confirmed human-to-human transmission of the virus in mid-2006, but the long-term threat is posed by its seemingly unstoppable spread in poultry.The front line of the battle is again Indonesia, where woeful under-funding has left theauthorities vainly trying to control a virus that is endemic across a vast territory.Further isolated cases of human transmission are likely in 2007, and Indonesiaremains the probable setting for the emergence of a more threatening strain.

Even countries that seemed to beat the virus in 2006, such as Cambodia andThailand, have suffered renewed outbreaks. South-east Asia and China will seefurther upsurges in 2007, with more isolated human cases. The same is true acrossAfrica, central Europe and Central Asia. If wild birds are the main vessel for the virus’spread, North America will see outbreaks during the migration season in 2007, andwestern Europe will again have its response strategies tested.

The risk of a pandemic remains as strong as ever, and businesses must remainvigilant, ensuring that contingency plans are in place and monitoring the developmentof vaccines to minimise disruption from any serious outbreak.

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have already obtained both suitableradiological material and a reliable means ofdelivering it, this is almost certainly a focusof current activity. Intent and any form ofconcrete capability would make for acatastrophic mix.

… or shift their focus to the shipping sector?

The linkages between terrorism andmaritime security could grow. A number ofhigh-profile maritime terrorist attacks haveoccurred in recent years, including on theUSS Cole in 2000, the MV Limburg in 2002(both off the Yemeni coast) and the MVSuperferry in the Philippines in 2004. Themethods range from the relativelystraightforward to the complex, but it is worthnoting that such attacks are generally evenmore difficult to carry out than attacks onaviation. Scenarios could include militantsramming vulnerable vessels or blowing upvessels in ports. Cargoes could also beinfiltrated, with containers used to conveyhazardous materials into target jurisdictionsor serve as weapons. Such an eventuality isyet to materialise, but port and containersecurity measures remain weak.

A natural catastrophe…

Natural disasters pose major operationalrisks to business and society, as shown inrecent years by the Asian tsunami, HurricaneKatrina and a series of major earthquakes.The UN calculates that there has been afive-fold rise in the number of naturaldisasters worldwide between 1975 and 2005,with losses per year increasing from $10bnto $159bn. The World Bank estimates that3.4bn people – more than half the world’spopulation – live in areas where at least onehazard could significantly affect them.

More than 90% of the populations ofBangladesh, Nepal, the Dominican Republic,Burundi, Haiti, Malawi, El Salvador andHonduras live in areas at high relative risk ofdeath from two or more natural hazards. Theareas most critically exposed are largelythose that would be least able to cope withthe impacts. However, areas of Japan arealso notably vulnerable, and anotherbusiness hub, Taiwan, is one of the mostvulnerable areas to natural hazards on earth.The impact on the global economy of amajor incident in such a location could besevere: the 360 natural disasters recorded in2005 accounted for $159bn in damages,though $125bn was caused by HurricaneKatrina in the US alone.

… or a global pandemic?

Depending on the severity of a possible birdflu outbreak, a combination of lost outputdue to illness, deaths, absenteeism, andprivate and public efforts to avoid infectioncould lower global GDP by between 2% and5%. A 5% fall would imply a global recession.One crucial caveat is that the likelihood of asevere outbreak remains highly limited.

Protests reborn…

The Singaporean authorities clamped downon activism during the 2006 World Bank/IMFmeetings, but this is not to say that anti-globalisation dissent does not remain high.2007 is likely to see a higher level ofactivism against multilateral institutions, andin the vicinity of their meetings, as suchbodies continue to be seen as failing tomake sufficient progress towardsdevelopment objectives. However, recentprotests have generally not been marked bythe extreme violence that had accompaniedprevious events in Genoa and Seattle, morebecause meetings have since been held inmore remote (or closed) locations thanbecause of any decline in protest sentiment.

… and a new age of urban unrest?

Anti-globalisation movements are likely to beparalleled by increased levels of more locallymotivated urban unrest in 2007, adevelopment of particular interest to urban-focused retail and service companies.Increasing domestic and internationalmigration to cities, and arguably an ever-diminishing level of participation inrecognisable democratic discourse amonglarge sections of the world’s urbanpopulations, combine explosively withtenacious socio-economic problems indeprived areas.

It is fair to speculate that there will be noshortage of catalytic ‘spark’ events in 2007,with the potential to ignite tensions amongand between alienated ethnic or religiouscommunities, along similar lines to theDanish cartoon controversy. More than adecade after the notorious Los Angeles riots,the US witnessed a virtual state of anarchyin New Orleans in the post-Katrina period,while Europe has seen serious riots in theNetherlands and France. Latin Americacontinues to tread a delicate path in keepingdisparate social strata content, and Chinahas seen a rise of activism in second-tiercities such as Guangdong following landacquisitions and Anhui province afterperceived police corruption.

7

Brazil: Growing pains

Rio de Janeiro, São Paulo, Salvador da Bahia, Recife, tri-border area

A continent-sized country with vast economicpotential, yet plagued by persistentinequality, corruption and crime, Brazilseems forever on the cusp of great powerstatus. Americas analyst Nicholas Watsonexamines the economic and politicalchallenges facing the country over the nextfour years.

There are few clichés more hackneyed thanthe one that says ‘Brazil is the country of thefuture… and always will be’. However, like allgood clichés, it expresses a great truth.Brazil’s role on the world stage hasincreased strikingly since Luiz Inácio ‘Lula’da Silva of the leftist Workers’ Party (PT)assumed the presidency in 2003. Yet if Brazilis to mature into a confident internationalplayer, it must first tackle a number ofpressing economic and political challenges.Otherwise, that other cliché that Brazil nevermisses an opportunity to miss an opportunitywill surely resurface.

Brazil on the world stage

Via its leadership of the G20 group, Brazilhas successfully presented a unified front ofdeveloping countries while pushing for theelimination of international trade barriers.Closer relations with India, South Africa,China and the Middle East have made Brazila leading proponent of ‘south-south’ relationsamong developing countries. Brazil is also amember of the BRIC group of leadingemerging economies, along with Russia,India and China.

Within the western hemisphere, Brazil leadsthe UN Stabilisation Mission to Haiti(Minustah), while continuing to dominate theSouthern Common Market (Mercosul/Mercosur). Additionally, Brazil represents amoderate voice in South America amid thepolitical din caused by Venezuela’s PresidentHugo Chávez, who continues to project hisincreasingly confrontational brand ofpopulism throughout the region and beyond.

However, despite such headline-grabbinggestures, the reality is that Brazil is punchingabove its weight on the international stage.The country must overcome a number ofobstacles before it can achieve fullrecognition as a major international player.

Within the BRIC group, Brazil risks beingseen as something of a poor cousin; it hadthe lowest economic growth of the fourcountries in 2005 and still accounts for lessthan 1% of global trade. If forecasts that theBRIC countries will overtake the G7 leadingeconomies within the next 40 years are tocome to fruition, Brazil must improve itsperformance or risk sinking into the so-calledN11 – the Next Eleven countries (after theBRIC group), comprising the likes of Mexico,Indonesia, Egypt and Iran.

Equally, Brazil’s aspiration to secure apermanent seat on the UN Security Councilmay yet cause ructions within Latin America;Argentina has already voiced its oppositionto the plan amid concerns over Brazil’sputative ambition to become a regionalhegemon. Mercosul remains economicallyand politically stagnant; with Venezuela’srecent entry, the bloc threatens to becomeincreasingly politicised and inward-looking.Meanwhile, Bolivia’s nationalisation of its gasindustry has created a headache for Brazil,its principal investor.

Overcoming domestic obstacles

Brazil’s realisation of its internationalambitions will hinge on its ability to resolve arange of thorny domestic issues over thecoming years. However, campaigning for theOctober 2006 presidential election offeredencouraging evidence that a consensus hadbeen reached on how these challengesmight be addressed. Both of the leadingcontenders – Lula and former São Paulogovernor Geraldo Alckmin – recognised theneed for far-reaching political and economicreforms. Indeed, one of the notable featuresof the contest was the lack of cleardifferences between the two candidates’policy proposals. Either candidate wouldface similar challenges and pursue broadlycomparable policies in office.

Barring external shocks, the direction ofeconomic policy will remain largely unalteredover the next four years, reflecting thepositive economic progress made under theLula government. Fiscal discipline aimed atreducing the debt burden will continue andmonetary policy will remain tight; inflation isexpected to remain below 4% in 2006. This

Risk ratings Political Security

8

should allow for the continuation of gradualmonetary easing, which is likely to spurgreater investment, putting the country’sgrowth track within the 4%-4.5% rangeduring 2007-08.

Nonetheless, despite progress on a numberof vital issues, plenty will remain on theeconomic ‘to do’ list. Although public debthas been reduced from 58% of GDP in 2002to slightly above 50% in 2006, the debtburden remains a source of vulnerability,while debt-servicing remains a significantdrain on resources.

Meanwhile, government expenditure remainsexcessive; spending on social securitycontinues to represent a major outlay,despite the partial reforms enacted by theLula government in 2003. At 37% of GDP,the tax burden is equal to that of Germany orSweden, but Brazil offers a fraction of thepublic services available in those countries.

Additionally, the tax system is in desperateneed of simplification; under the presentsystem, each state has its own taxes, whilethe main ICMS tax has no fewer than 55different rates.

Investment in transport infrastructure iscrucial if Brazil is to create a platform forsustained and more balanced development.More than half of the total interstate roadnetwork is in need of urgent repairs, at a costof up to $1.7bn; in practice, the word ‘repair’is often a polite term for ‘reconstruction’.Meanwhile, at the country’s largest port, theSantos freight terminal in São Paulo, 30containers can be loaded in one hour,compared with a rate of 100 per hour inSingapore. In addition, a much-touted seriesof public-private partnerships (PPPs) hasfailed to get off the ground; the biddingprocess for the first PPP project is expectedto be concluded in early 2007, more than twoyears after Congress approved the initialPPP legislation.

The Saudi Arabia of ethanol?In his 2006 State of the Union address, US President George W Bush unveiled plansto move the US ‘beyond a petroleum-based economy’. Key to this ambition was theincreased use of biofuel derived from plants such as sugarcane, corn and maize.

The US is not alone in seeing biofuel as a cheap, renewable alternative to foreign oil.China recently built the world’s biggest ethanol plant, while many European countriesare increasing their biofuel output. But one country has led the way in biofuelproduction for three decades.

Brazil is the world’s biofuel powerhouse; ethanol production hit 16.5bn litres in 2005.Three out of four new cars have ‘flex-fuel’ engines that run on ethanol, petrol (gas) ora mixture (gasohol). Ethanol powers 40% of ordinary cars in Brazil and is available at95% of the country’s 30,000 filling stations.

Can Brazil become a world leader in alternative energy? Its low production costs andvast capacity will sustain its biofuel leadership. However, tariff barriers will impedeparticipation in the US market. Furthermore, the US and other developed countries willbe reluctant to swap dependency on Middle Eastern oil for reliance on Brazilianbiofuel. Consequently, Brazil is more likely to export its expertise than its ethanol.

So what can the Brazilian experience tell us? Its attempts to wean itself off oildependency have not been easy. Enthusiasm for alternative fuels could wane if oilprices drop significantly. Global take-up of biofuels will also require governments toprovide incentives for both production and consumption.

Meanwhile, questions remain over biofuel’s benefits. The production process isenergy-intensive and requires significant fossil fuel inputs. Concerns also persist thatincreased production might crowd out land needed for food cultivation and acceleratedeforestation of the Amazon rainforest.

Nonetheless, governments worldwide appear set to embrace biofuels, andtechnological advances will improve the efficiency of their production. This shouldensure that biofuels represent one of the most significant energy and agriculturaldevelopments of the century.

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Profligate – and more often than notmisdirected – government spending,combined with an onerous tax system, mustbe addressed if Brazil is to overcome thestuttering growth phenomenon thatBrazilians call the ‘chicken flight’ (vôo degalinha). However, with the presidentialelection resolved, the new administration’sability to tackle these reforms and unlockBrazil’s growth potential will depend to agreat extent on the political conditions that itwill face over the next four years.

Politics – a dirty game

The government will face a highlychallenging domestic political environmentfrom 2007, and its ability to advancelegislation will depend on its skill in coalition-building. The need to forge a workablelegislative coalition that can maintainmajority control in both the Senate (upperhouse) and Chamber of Deputies (lowerhouse) will mean that political bargainingand ‘pork-barrel’ patronage will continueunabated, though perhaps with rather moresubtlety following the exposure of the Lulaadministration’s cash-for-votes scheme in2005.

Political manoeuvring will be more intensefollowing the recent introduction of newthreshold rules, which stipulate that partieswill no longer be entitled to representation inCongress if they fail to secure at least 5% ofthe valid votes nationwide and 2% in at leastnine states. The rules will create a host of

new ‘independent’ legislators whose loyaltywill effectively be up for grabs, even if theyattempt to circumvent the new rules byforming some kind of loose ‘confederation’.

With the largest contingent of governors andcongressional representatives of any party,the amorphous and non-ideological BrazilianDemocratic Movement Party (PMDB) is likelyto play a crucial role in the formation of anylegislative coalition. However, the PMDB willbe an unreliable partner, requiring constantnurturing and political incentives. Anunwieldy coalition will hamper thegovernment’s ability to advance structuralreforms, particularly given the profounddivisions within the PMDB, and there is adanger that urgently needed initiatives willget bogged down in Brasília.

Conclusions

Before Lula’s 2002 election victory, therewas considerable trepidation over what sortof government he would lead. Yet during the2006 presidential electoral process, themarkets remained steady and investorsentiment maintained buoyancy, reflectingthe financial community’s confidence in thecountry’s adherence to economic orthodoxy.Although governability will remain achallenge, continuity in economic policybeyond 2006 will help Brazil to maintain itscurrent path of stability, enabling the countryto advance its claim to a role on theinternational stage.

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China: Market liberalisation under threat?

Risk ratings Political Security

Guangzhou-Dongguan-Shenzhen corridor area (Guangdong province), border areas withIndo-China (far south-west), Russian far east (north-east), Central Asia (north-west)

North-East Asia analyst Andrew Gilholmassesses speculation that a key ruling partymeeting could herald a policy shift that willharm foreign investors.

In late 2007, the ruling Chinese CommunistParty (CCP) will hold its five-yearly nationalcongress in the capital Beijing, at which keypolicies, plans, targets and appointments forthe next five years will be announced. Thestaid ceremonies and formulaicpronouncements of the congress traditionallyinduce sleep rather than interest (includingamong the delegates), but those with a stakein China should be paying attention.

At the last congress, in 2002, President HuJintao and Premier Wen Jiabao weretentatively taking over leadership of thecountry amid speculation that formerpresident Jiang Zemin would continue to runthe show from behind the scenes. By thetime the 2007 congress starts – the realaction takes place during the 12 monthsleading up to the event – Hu will be firmly incontrol and ready to make his mark. In 2002,China had just entered the World TradeOrganisation (WTO) and was embarking ona timetable of market-opening requiredunder the terms of its accession. In 2007,that timetable will have just ended, and amajor focus of debate will be the relativecosts and benefits it has brought the nation.How will this debate, and Hu’s ascendancy,shape policies towards foreign investment?

WTO backlash?

Events in 2006 raised many questions aboutwhether progress on market liberalisationwas grinding to a halt. In July, US Under-Secretary of Commerce for InternationalTrade Franklin Lavin said that he feared aloss of momentum, or even retrogression, inthe liberalisation process. Developments ofconcern included potentially restrictive newguidelines on foreign mergers andacquisitions, and a slowdown in approvalsprocesses. The resistance faced by USprivate equity company Carlyle Group in itsefforts to take control of Xugong, a maker ofconstruction machinery, became symbolic ofthe trend. Meanwhile, leaked minutes from ameeting of a think-tank aligned with the StateCouncil (cabinet) showed some influential

figures voicing dire warnings of the dangersof unrestrained foreign competition.

These may be signs of the growing influenceof ‘new left’ and nationalist thinkers, whoappear to have tapped into serious concernsabout the inequality brought by capitalismand about foreign dominance of theeconomy. Some warn that by failing tocontrol the level of foreign participation,China risks the destruction of domesticcompanies (which will be unable to compete),and will lose control of both its financialmarkets and its own destiny. This is oftenarticulated in national security terms; someChinese have drawn pointed parallels withthe US’ blocking of the state-owned ChinaNational Offshore Oil Corporation (CNOOC)’sattempt to buy US oil company Unocal.

To some extent, developments like these arepart of a broader political trend, one thatplaces greater emphasis on social andpopulist goals, and less on rapid economicgrowth. This is a trend closely associatedwith the leadership of Hu and Wen. Sincecoming to power, they have repeatedlystressed the need for a ‘harmonious society’,‘people-centred’ development and balancedgrowth, with a focus on tackling inequalityand creating economic growth that issustainable and equitable, not simply rapid.This agenda was given greater prominencethan ever at the CCP Central Committee’sannual plenum in October 2006 (animportant event on the road to the 2007congress). To some observers, the populistovertones of such policies are bound up withthe nationalist overtones of resistance toliberalisation, and they are thereforeconcerned by the increased politicaldominance of the leaders who promote them.

The ‘Hu faction’

There is little doubt that in 2007, thepresident will complete consolidation of hisposition as the ‘core’ of the fourth-generationCCP leadership. In 2006, he reached anaccommodation with Jiang to remove himfrom the active political scene. He followedup by ordering major corruptioninvestigations around the country, includingin Beijing and, most importantly, in Shanghai,where local party secretary Chen Liangyu

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was removed from his post. This furtherundermined the influence of Jiang’s‘Shanghai faction’, strengthened theauthority of the central government andincreased Hu’s ability to place supporters inkey posts and shape policy plans to beissued at the 2007 congress.

Broadly speaking, members of the ‘Hufaction’ are characterised by backgrounds inpoorer, inland provinces, and in theCommunist Youth League (where manyworked under Hu himself). This contrastswith the Jiang-era leadership, who weremore closely associated with the richer,coastal provinces and with experience indynamic sectors of the economy, such asforeign trade. These characteristics haveadded to the perception that the currentleadership could begin to move away fromeconomic reform.

No U-turn

Although the picture painted above is aworrying one for foreign investors, in realitythere is no prospect of any serious departurefrom global economic engagement, and

foreign companies are not about to findliberalisation reversed. The impact of China’sentry into the WTO in 2001, which many inthe CCP fiercely opposed, was alwayscertain to hurt particular domestic industriesand interest groups, and to cause a backlashagainst opening the economy to foreigncompetition. This will continue to bemanifested in resistance to opening, andperiodic surges of pressure for greaterprotection from foreign competition.

There is clear evidence too that thegovernment wants to ensure that strongChinese companies emerge, with protection ifnecessary, to secure a leading position in theirsectors and expand abroad. More generally,the idea that China has already concededenough, or too much, to foreign businessunder its WTO commitments is resurgent.However, none of this should come as asurprise, and it does not mean abandoningthe shift towards a market economy.

The CCP never saw opening up, freecompetition and liberal market economics asgoals in themselves. They were always seenas means to achieve the party’s real goal –

Keeping social unrest in perspectiveChina in the first half of 2006 saw 39,000 incidents of social unrest in cities, towns andvillages nationwide, according to official figures. Some cases involved tens ofthousands of people and pitched battles between protesters and security forces.These will continue to make headlines in 2007, and the press stories will at times painta picture of a nation on the brink of revolt or collapse.

Clients investing and operating in China need not be unduly concerned by thismisleading portrait of social chaos. Those involved in unrest are ordinary peopleseeking to protect their livelihoods in a time of extraordinary, wrenchingsocioeconomic change, not a new generation of political revolutionaries. Protestersare not seeking to overthrow the government and there is no wave of democracyheaded for Chinese shores. Social tensions are of course a huge headache for thegovernment, and it is not yet clear whether the current system can cope as thecountry’s transformation continues at lightning speed. However, that question is morelikely to be answered in 2027 than in 2007.

‘Big-picture’ political stability must feature in companies’ strategic outlooks, but theseshould not obscure the emergence of more immediate potential threats. At present,foreign companies are very rarely affected by social unrest, but while risk levelsremain low, taking China’s benign security environment for granted could prove costly.

In 2006, a South Korean-invested manufacturing operation was among thoseransacked during a violent demonstration against pollution, while reports emerged ofprotesters targeting businesses inadvertently caught up in a land-compensationdispute. As companies continue to move further from well established investment anddevelopment regions in search of reduced costs, the risk of such incidents willincrease. Local partners and officials will invariably assure prospective investors thateverything is rosy in their town, but smart investors will be armed not only with abrochure and a draft contract, but also with independent information and a fullunderstanding of potential risks.

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rapid development and economic growth tocreate a strong China and to ensure its ownpolitical survival. As such, there was neverany question that the government wouldseek to maintain control over the pace andextent of liberalisation, both to protectspecific interests and because the mentalityof central planning and control lingers on inthe CCP to some extent. There are manyinfluential figures who see full transition to amarket economy as the logical extent of thereform project, but those who see this as ashort-term goal are very much in theminority.

Pragmatic party

Those worried about a U-turn on reformshould remember that the fundamental logicthat pushed the CCP to liberalise theeconomy in the first place remains strongand, though critics of China’s transition havefound a strong voice, no coherent alternative

is being articulated. Self-preservationremains the order of the day for CCP leadersfaced with a rising tide of social unrest andebbing legitimacy other than that based oneconomic performance. The party knows thatit must continue to deliver material gains tothe population and, as a result, has provedhighly pragmatic in shelving ideologicalconsiderations and overcoming engrainedfears in pursuing economic reform.

Progress will not be smooth, and will includebackward steps in certain sectors at certaintimes (financial-sector opening will remainparticularly sensitive), but will ultimatelycontinue; most policymakers are aware thatpartial reform is dangerous. It will remainimperative that foreign companies areattuned to the shifting political influencesaffecting their area of operation, and seek topresent their interests as compatible withthose of the government. However, mosthave no reason to fear a backlash.

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Congo (DRC): Consolidation or conflagration?

Risk ratings Political Security

North-east

If the post-war transition is followed throughto its logical conclusion, in 2007 Congo(DRC) can look forward to a year ofdemocratic consolidation, gradual reform,and improving levels of economic growthand investment. However, as Africa analystChris Melville explains, this outcome is notinevitable and significant challenges remain.

Democratic opportunities

The lengthy 2006 election season providedsome grounds for optimism. The electoralprocess was generally conducted freely andfairly, even if it clearly privileged thosecandidates with greater financial resources.President Joseph Kabila, who headed thewidely criticised ‘1+4’ transitionaladministration between 2003 and 2006, nowhas a democratic mandate and will presideover a government of his choosing. DespiteKabila’s need to shore up important dealswith his leading rivals – including AntoineGizenga of the Unified Lumumbist Party(PALU) and Jean-Pierre Bemba of theCongolese Liberation Movement (MLC) – theexistence of an elected and unified nationalgovernment should reduce the risk of thepolicy deadlock that undermined thetransitional administration. Equally asimportant, for the first time in 40 years theCongolese people enjoyed the freedom tochoose legislative and provincialrepresentatives. The latter, who should belocally accountable to an unprecedenteddegree, are in a prime position to addressthe problems facing local communities,particularly the absence of infrastructure andinvestment in remote rural areas.

The election process has revived popularaspirations for change, if not making itinevitable. More interestingly – given theelectoral prominence of former warlords, ex-Mobutists and career opportunists – the pollsappear to have inspired renewed confidencein the ability and willingness of the politicalclass to manage the country’stransformation. Of course, significantdifferences of opinion exist as to who is bestplaced to carry out the necessary measures.However, in many parts of the country thereis a sense that, as long as the newgovernment governs well enough and thevictors do not punish the vanquished, the

Congolese people will be largely satisfiedwith the new democratic dispensation.

The powerful expectations of a dynamic andastute population offer a real opportunity tothe new government to drive through post-conflict reforms and to consolidate itslegitimacy by going some way to meetingpopular demands for enhanced provision ofsocial services and economic opportunities.The Mobutist strategy of managingexpectations through song, spectacle andsuppression should have no place in the newcontext, particularly in a situation whererivals for power compete – if still imperfectly– for popular affection, and where adherenceto standards of fiscal probity and goodgovernance is a crucial determinant ofinternational legitimacy and continuedfinancial aid. However, institutionalweaknesses and the engrained behaviour ofpolitical elites may compromise the fulfilmentof such popular ambitions.

Accountability deficits

The main problem, of course, is that socialexpectations only partially conditiongovernments. In sub-Saharan Africa, thesituation is particularly bad; party institutionsare weak and the need for political leaders tomaintain the support of elite constituenciesfrequently distracts from any developmentalagenda. Campaign promises are oftenforgotten and the indigenous civil-societyorganisations that might serve as importantmediators between elite and popularinterests are frequently treated as a threat tothe ruling power or are co-opted, becomingmerely another implement for the impositionof ‘legitimacy’.

Congo’s experience in this regard isparticularly grave. Although some partieshave roots in the nationalist struggle of the1950s and 1960s, or in the stalleddemocratisation of the early 1990s, manymore have been established simply to exploitthe political and economic resources madeavailable by the post-conflict transition andthe liberalisation of the political arena. Onlyrarely do they represent more than thepersonal ambitions of a single individual andhis supporters. At a provincial or evenlegislative level, this may not pose a

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significant risk to democratic consolidation –witness the high number of independentcandidates elected on the basis of genuinestanding within their communities.

However, at the national political level –where power is most removed from thecountry’s problems – the absence of strongparty structures and social basesundermines accountability and encouragespolitical leaders to pursue personal agendas.In Congo, this situation is aggravated bydeeply entrenched political behaviours,which seek to transform political office intoan opportunity for self-enrichment and theexclusion or co-option of potential rivals.

It has been suggested in some quarters thatKabila’s democratic mandate will enable himto sideline those of his personal counsellorsmost associated with the opaque wartimeexploitation of natural resources, such asminister to the presidency Katumba Mwanke.While Katumba will lose his formal positionin government, having been elected to aLubumbashi parliamentary seat, he andother counsellors such as Kikaya Bin Karubi(elected as a Maniema province deputy) willremain significant influences over thepresident, in many instances enjoyinggreater power over policy than mostministers. Both from a political and personalstandpoint, Kabila cannot afford to excisesuch elements.

Paradoxically, his ability to maintain thestability and peace that were thecornerstones of his electoral appealdepends on his capacity to incorporate suchkey powerbrokers. However, the importanceof such individuals militates against theformalisation of politics and entrenches aculture of political patronage that thrives inthe absence of strong formal institutions. Itwill also impede the development ofsystematic and far-reaching anti-corruptionstrategies.

Regional instability

Although Kabila’s Alliance for a PresidentialMajority (AMP) secured a majority in boththe presidential and parliamentary polls, itscontrol over the country is far from total; thefirst year of Kabila’s government will givecrucial indications of his ability to maintainstability and prevent the resurgence ofchronic insecurity in key areas. Political andsecurity risks in north-eastern Ituri district(Orientale province) will remain extreme.Joint operations between the Armed Forcesof the Democratic Republic of Congo(FARDC) and the UN Mission in the

Democratic Republic of Congo (MONUC)are set to continue and the geographicalscope of militia activity will recede furtherfrom its 2003 high. However, the situationwill remain fluid and subject to reversals.

Most militias now appear willing to disarm inreturn for integration into the armed forces.However, the militias will largely dictate theterms of this process, with periodic raids andkidnaps serving as a reminder to thegovernment that they will not go easily.Indeed, it is difficult to see a long-termsolution to the Ituri problem that does notinvolve some level of transfer of civilianauthority to the militias; individuals withmilitia links are already well entrenched atvillage-administration level, and they areunlikely to cede control over lucrative bordercrossings into Uganda without significantcompensation.

A more aggressive military campaign byMONUC and the FARDC could, in theory,accelerate the decline of hardcore militias,but it is unclear whether sufficient resourceswould be made available for such a costlyand risky enterprise. Moreover, until thedeep social and ethnic cleavagesentrenched by and underpinning militiaactivity are resolved, Ituri will remain aproblem area and unresponsive to moves toencourage investment in its substantialnatural resources.

Arguably, the situation in North and SouthKivu provinces in the east poses a fargreater challenge to government authority.Kabila’s huge majority in the regionparadoxically renders it more vulnerable tothe spoiling tactics of renegade FARDCgeneral Laurent Nkunda. The electionprocess, and the country’s gradualrapprochement with Rwanda, saw thedecline of Nkunda’s provincial and externalsupport. In an effort to regain it, and to raisequestions about Kabila’s claim to be apeacemaker, Nkunda may well seek toprovoke the FARDC into a heavy-handedcounter-insurgency operation, in the hopethat this would revive Rwandan andinternational concerns about Kinshasa’sattitude towards the vulnerableBanyamulenge (Congolese Tutsi) populationthat Nkunda claims to represent.Interestingly, the much vilified leader of theCongolese Rally for Democracy (RCD),Azarias Ruberwa, may help to mitigate therisk of such a conflagration. Although takinglittle more than 1% of the popular vote in thepresidential election, Nkunda has used theelection process as an opportunity totransform his image and to position himself

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as the key mediator between Kinshasa andthe Banyamulenge population; he may cometo enjoy enough influence over thegovernment, and sufficient leverage overRwanda, to perpetuate the marginalisation ofthe errant Nkunda.

Challenges will also present themselves inKabila’s home region, reflecting the shift indynamics generated by the new democraticdispensation. In the key mining province ofKatanga – generally regarded as Kabila’sfiefdom and frequently viewed as being morehomogeneous than other regions – electoralcompetition saw local powerbrokersincreasingly exploit social cleavages. Keyamong these powerbrokers is formergovernor of Katanga Gabriel Kyungu waKumwanza of the Union of CongoleseNationalists and Federalists (UNAFEC), whoorchestrated pogroms against ethnic Lubain the early 1990s at the instigation of then-president Mobutu Sese Seko (1965-97).Kyungu hopes to re-establish links withKinshasa, but has been repeatedlyoverlooked and is appalled at the rise ofKabila’s new agent in Katanga, MoïseKatumbi Chapwe. Having made great playof his ‘partnership’ with the AMP in the firstround of the election, Kyungu revived hisrivalry with Moïse in the second round,strongly challenging the latter’s claims to

carry Katanga for the president. AlthoughKyungu’s capacity to foment disorder hasgreatly diminished since the 1990s, unlessKabila and Moïse can find a place for theformer governor in the new order, the risk ofpolitical instability in the province willincrease.

Another key question is whether Kabila caneffectively straddle the east-west dividereflected in the election results, which sawJean-Pierre Bemba perform best in the westand north-west and Kabila perform moststrongly in the east. The alliance withGizenga, which afforded Kabila theconditional support of western Bandunduprovince, and the creation of a governmentof national unity based partly on maintaininga ‘geopolitical’ balance will mitigate the risksposed by regional divisions. However, theissue may be more acutely felt in Kinshasa,which voted heavily for Bemba – a westerner– in the first round of the presidential poll.Although Kabila improved his share of thevote in the second round, Bemba’scampaign, which stressed Kabila’s status asa non-westerner, has left a legacy ofsuspicion towards Kabila in the capital. Thiscould create trouble for the new governmentif it is seen to have punished Bemba, and ifKabila’s claim to be the one truly nationalcandidate proves a hollow one.

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EU: Eastward expansion, westward migration

The accession to the EU of eight formercommunist states in central and easternEurope in 2004 was the first serious test ofthe union’s commitment to the freemovement of labour, one of the guidingprinciples of its single internal market.Europe analysts David Lea and AdamStrangfeld examine the impact of EUenlargement on labour markets andmigration.

The accession of the ‘EU8’ – the CzechRepublic, Estonia, Hungary, Latvia,Lithuania, Slovakia, Slovenia and Poland –widened the gap between the EU’swealthiest and poorest economies. Prior to2004, EU economies had relatively equalstatus, limiting enthusiasm for migration. Thenumber of nationals from poorer statesseeking work in richer states was onlyslightly higher than pre-EU levels. Of the tennew joiners in 2004 (Cyprus and Malta alsoentered), eight were below average in termsof GDP per capita. In that year, only Sloveniawas wealthier than any of the established EUstates, at 78% of the 25-member average,compared with Portugal’s 73%. Latvia wasthe poorest state, at 43% of the average. Anumber of EU states forecast that this wouldresult in a large migration of workers fromlow-wage economies with highunemployment to the more stable economiesamong the established ‘EU15’.

Labour market restrictions

Fearing that an oversupply of cheap labourwould have a negative impact on theirunemployment figures, most countries choseto exercise their right under the accessiontreaties to restrict the numbers permitted tomigrate from new member states. EU15countries are allowed to maintain limitedderogation of the principle of free movementduring a seven-year transitional period,which includes reviews of the labour marketrestrictions after two, five and seven years.After each review, the first of which was inApril 2006, EU15 countries have theopportunity to relax the agreement. The finalreview in April 2011 will see the irrevocableabolition of all restrictions on the 2004accession states.

In 2004, only Ireland, Sweden and the UKchose to open their labour markets fully tothe eight new members. All three had above-average income and below-averageunemployment at the time, and Ireland andthe UK in particular were experiencing

shortages of skilled and semi-skilledpersonnel. All three witnessed a greater-than-expected influx of migrant workers,particularly from Poland and Slovakia(though Latvia saw the greatest percentageof its population leave). Migrants from theEU8 constituted 3.8% of Ireland’s activelabour force in 2006; while their impact wasalso felt in Sweden and the UK, theyconstituted less than 1% of the workforce inthose countries.

Political and social reactions

Despite significant media attention in the UKand Ireland, the issue of migration from theEU8 has remained largely peripheral topolitical debate. Even far-right Britishparties appear to have relatively little interestin the issue, preferring to concentrate onMuslim populations.

The right-wing media have attempted togenerate anger at the extent of immigration,particularly over the British government’sunderestimate of the likely total (governmentforecasts in 2004 suggested a net inflow of12,000, while figures released in late 2006suggest that more than 600,000 haveentered, though many may have returned totheir countries of origin, with others makingmultiple visits). However, most British votersappreciate the improvement in serviceindustries that has coincided with the adventof the ‘Polish plumber’, limiting their anger.Fears of ‘benefit tourism’ appear to havebeen unfounded, with nearly all immigrantsseeking to work and few claiming from themore generous welfare systems in theirdestination countries.

In France, the influx of labour from the EU8has met some resistance. Trade unionsadopted a largely protectionist stance,fearing that the migrant workers would putdownward pressure on wages and crowd outFrench workers. The issue was also linked tothe more fundamental debate on the futuresocio-economic direction of the EU, withFrance defending its ‘social model’ against amore liberal, ‘Anglo-Saxon’ model favouredby the accession states. Moreover, the‘Polish plumber’ was also regarded as asymptom of the European Commission’sdrive to further liberalise and deregulate theinternal market. Such concerns, paired withunease over further EU enlargement, playeda key role in the French ‘no’ vote in thereferendum on the EU constitution in 2005.

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Business reaction

Business reaction has been mainly positive,with employers’ organisations lookingfavourably on the increased supply of labour,and no strong evidence of a generaldepression in wage rates or of increasedunemployment among local populations.However, the Irish employers’ organisationrecently expressed concern that migrationfrom the EU8 to Ireland may be a fashionand that, once the initial wave of migrantworkers returns home or finds opportunitiescloser to home, the economy will struggle tosource replacements at equivalent cost.Similarly, some fear that the use of migrantworkers to plug the skills gap temporarily willonly postpone much-needed structuralreforms aimed at addressing problems linkedto the ageing workforce in EU15 countries.

In relative terms, EU15 labour markets havehardly been flooded: in the first quarter of2005, the proportion of the EU8 working-agepopulation within the EU was limited,ranging from 0.1% in France and theNetherlands to 1.4% in Austria and 2% inIreland. The percentage of non-EU nationalsin the EU15 labour force remainssignificantly higher than that of EU8nationals. While in part explained byhistorical reasons, it implies that immigration

from non-EU countries is a more importantphenomenon than intra-EU mobility.

Positive effects in EU15

Migrant workers have generally played a keyrole in filling a skills gap and in alleviatingproblems caused by the EU15’s ageingworkforce. Rather than crowd out theexisting workforce and increaseunemployment, migrant workers from theEU8 have tended to complement the skillsset of the labour force.

The employment rate of EU8 nationals tendsto be comparable to that of nationals of thehost country and of other EU15 countries –and generally higher than for non-EUnationals. This implies that EU8 workers,rather than burdening the welfare system,positively contribute to overall labourmarket performance, sustained economicgrowth and the state of public finances.Moreover, an increase in the employmentrate of EU8 nationals in EU15 countriessince 2004 indicates that enlargement mayhave contributed to bringing undeclaredworkers to the surface and reducing the‘grey’ economy.

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The effects of labour market restrictions

Contrary to the intention of the transitionalagreements, there is no evidence suggestinga direct link between the extent of labourflow from EU8 member states and the labourmarket restrictions in a particular EU15country. Labour migration into Sweden andthe UK is comparable to that into countrieswith restrictions. The experience of theNordic countries, which have similar labourmarkets and economic performance, seemsto confirm this pattern: migration from EU8countries into Norway (a non-EU country) issignificantly higher than for all other Nordiccountries combined, regardless of whetherthey have restrictions. This implies thatlabour mobility is primarily driven by factorsrelated to market conditions of demand andsupply. Arguably, not only will labour marketrestrictions simply delay labour marketadjustments, they may promote illegalimmigration and prompt workers andemployers to resort to undeclared work.

Review of transitional agreements

Of the 12 countries that maintainedrestrictions, four – Finland, Greece, Portugaland Spain – abolished them completely in2006, while only Austria and Germany, whichborder ‘new’ states, will maintain them fullyuntil the next review. Nevertheless, Germanyhas issued more than 500,000 work permits,a figure roughly similar to the likely netmigration into the UK. As restrictions are

An expanded EU pauses to take stockRomania and Bulgaria on 1 January 2007 will achieve their long-pursued goal ofbecoming full EU member states. However, concern remains over their ability to curbcorruption and strengthen their judicial systems. The European Commission willcontinue to monitor the implementation of specific reforms in both countries for up tothree years and may impose tough sanctions should reforms lag after accession.

Such penalties could include the suspension of structural funds worth billions of eurosor, should their judiciaries remain corrupt, a refusal to recognise national courtjudgements at EU level. The main areas under scrutiny will be judicial independenceand the fight against corruption and organised crime, as well as the administrativecapacity to absorb EU funds.

While the accession of Romania and Bulgaria will only mark the end of the so-calledfifth round of EU enlargement, it will also signal a temporary halt in the expansionprocess. With 27 member states, the EU will need time to reform its institutions anddevise more effective decision-making mechanisms appropriate to its size. Moreover,the strict provisos imposed on Romania and Bulgaria will serve as a warning to futureaccession candidates, especially Croatia and Turkey, that they are likely to face toughconditions before being accepted into the EU club. The prospect of postponed entryand stricter requirements threaten to discourage political reformers in the Balkans andTurkey, who may lose ground in 2007 to radical nationalists and eurosceptics.

relaxed and the larger economies ofcontinental western Europe emerge from thesluggish growth that has afflicted them formuch of the present decade, EU8 nationalsare likely to seek work closer to home, andthe effects seen in the UK, Sweden andIreland will be diluted.

A mixed blessing for accession states

While the restrictions on migration are atemporary breach of the commitment to thefree movement of labour across the EU, theirpractical implications are not limited toprotectionism. Many officials in Bulgaria andRomania (scheduled to join the EU inJanuary 2007) are concerned that ageneration of young, skilled workers maychoose to emigrate in search of improvedemployment prospects, creating a skillsvacuum at home and stifling hopes ofmassive flows of inward investment thatwere a key factor in securing domesticsupport for accession. A number ofcompanies with pre-accession investmentsin Poland and Slovakia are already reportinglabour shortages in those countries;ironically, migration from the two incomingmembers is likely to help fill those gaps ifmore lucrative employment further westcannot be secured.

However, since acceding to the EU, labourmarket developments in the EU8 have beenlargely positive, with unemployment ratesdecreasing significantly in most countries.

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With strong economic growth forecasts andincreasing job opportunities, there is little tosuggest increased pressure for labourmigration from the EU8 in the future.

Immigration from outside the EU

The focus on internal migration from the EU8has, in many countries, turned the spotlightaway from immigration from outside the EU.However, the continent’s southern fringes –the Canary Islands, Spain’s Mediterraneancoast and its exclaves in Morocco, Italy’ssouthern coast and islands, and Malta – areexperiencing significant inflows of migrants,chiefly from sub-Saharan Africa. Smallislands such as Lanzarote, Fuerteventura,Lampedusa and Malta lack the infrastructureto manage large inflows of illegal immigrantsand all have requested EU help to preventsuch migration. However, traffickers will notgive up easily. Tensions have alreadyemerged in Malta as a result of the influx ofimmigrants, with a number of far-right groupsemerging; clashes erupted on the island inJune 2006 after an ‘immigrants’ rights’ march.

The next enlargement round

The entry of Bulgaria and Romania into theEU will see the debate over labour market

restrictions resume. Domestic politicalpressure has led the British government tosuggest that it will impose some restrictionson migrant workers from these two countries,though it has not yet formally stated itsintentions. Ireland has suggested that itmight follow the British lead, while Sweden islikely to impose restrictions.