China
Having guided China through the worst of the economic crisis, Premier Wen Jiabao, the head of China’s sprawling state bureaucracies, now faces the equally difficult task of shifting Chinese policy from stimulating the economy to containing inflation and preventing asset bubbles. As part of this transition, Wen will have to navigate the critical and controversial issue of whether China allows its currency to appreciate. While growth-promotion policies (essentially handing out money) are generally popular, the new policy choices facing Wen and China’s President Hu Jintao may cause pain for key constituencies and pit political factions against each other. Political leadership in this environment will be more difficult. Wen will also be a key player in increasingly tense US-China relations. Less visibly, Wen (and his deputy Li Keqiang) will be instrumental in shaping the 12th Five-Year Plan, China’s economic blueprint through 2015. The plan will offer the most definitive look at whether Beijing intends to seriously “rebalance” the Chinese economy over the next several years.
United States
This year may define the presidency of Barack Obama. He enters 2010 with diminished approval ratings, high unemployment, a massive deficit, and poor prospects for the Democratic Party in mid-term elections in November. On issues of critical importance to his agenda, he has ceded considerable responsibility to Congress to determine timelines and details—which the legislature will be reluctant to give back. Obama will continue to keep a domestic-oriented focus, with healthcare, financial regulation, and cap-and-trade being his three big initiatives at the start of 2010. These efforts, however, have bogged down in Congress, and will require Obama’s direct engagement to move forward. Meanwhile, increasing tension with China, a complicated withdrawal from Iraq, the challenge of securing Afghanistan, and renewed concern for domestic safety will keep Obama engaged on security and foreign policy issues. As the mid-term elections approach, Obama must balance his interest in energizing the liberal base with his interest in pursuing more moderate policy initiatives that will support his own reelection bid in 2012.
Japan
If he survives the scandal that threatens to engulf him, Ichiro Ozawa has the opportunity to maneuver the ruling Democratic Party of Japan (DPJ) to victory in upper-house elections in July, giving it firm control over the government. Ozawa holds no cabinet position, but he is the most powerful politician in the DPJ, controlling its finances, electoral strategy, and the candidate-selection process as its secretary-general. Ozawa is content to leave policymaking to others, although he intervenes forcefully to resolve policy impasses or issues that affect his own agenda. Ozawa is being investigated for alleged political financing irregularities. If he is forced from the political arena, the policy impact would be marginal but the electoral implications could be tremendous. His departure would upset DPJ campaign efforts and darken its electoral prospects. Depending on the outcome, upper-house elections could give the DPJ unfettered control of government, or push Japan back toward policy gridlock.
United Kingdom
If, as expected, the Conservative (Tory) Party wins national parliamentary elections in May, its leader David Cameron will take over as prime minister of a troubled country. The UK is still struggling to overcome a recession, a real estate bubble, and a serious crisis in its all-important financial sector. The Labour government’s response to date has generated additional concerns about rapidly rising deficits and a ballooning debt-to-GDP ratio. As the Bank of England pulls back from monetary easing, there could also be problems for UK sovereign debt. Additionally, the new “bankers’ bonus tax” is generating concerns for the viability of London as a financial center. As such, Cameron will come under immediate pressure to deliver on a number of policy fronts ranging from fiscal policy to financial regulation. If his government were not to act coherently and decisively, then market concerns about the outlook for the UK would grow quickly, and he and his Tories would own the problem.
Brazil
As President Luiz Inacio Lula da Silva begins his final year in office, he looks set to go out with a bang. Brazil is quickly recovering from the global economic downturn; Lula and his relatively market-friendly economic policies are closely associated with Brazil’s economic success. Internationally, he will utilize this appeal to pursue a larger role for Brazil in developing multilateral policies—in forums like the G20 and at climate change negotiations. However, this more assertive international posture makes Lula vulnerable to foreign policy missteps, as was the case with his ill-considered overtures toward Iran in 2009. Domestically, Lula will play an outsized role in shaping the October presidential election. A strong popular preference for policy continuity means that his efforts to secure a victory for his current Chief of Staff Dilma Rousseff are likely to pay off. If she wins, Lula will also play an important role in shaping her administration.
Iran
Former president Ayatollah Akbar Hashemi Rafsanjani could play a key role in shaping the Islamic Republic’s trajectory in 2010. Since Iran’s domestic upheaval began, Rafsanjani has kept a low profile—reportedly trying to mediate behind the scenes, but he retains significant power. He heads two influential councils in Iran’s governing structure and has strong ties to most political constituencies—including the business community, the Revolutionary Guard, and the opposition. If the regime decides that continuing repression will not bring stability to Iran, it may look to figures who can mediate. Rafsanjani is one of few Iranians who, because of their broad influence, could broker a pact among elite camps that would stabilize Iran (involving the release of political prisoners and other steps). Alternatively, if Rafsanjani throws his support behind the opposition in 2010, civil unrest would probably increase.
Pakistan
As the senior military officer in Pakistan, Chief of Army Staff General Ashfaq Kayani will play a critical role in Pakistani politics and security policy, and have a powerful impact on the US counterinsurgency campaign in Afghanistan. With Pakistan’s civilian government weakened and distracted by contentious domestic politics, Kayani is increasingly driving foreign, defense, and counterterrorism policy. The US is pushing hard on Pakistan to subdue militants operating in the Federally Administered Tribal Areas (FATA) and gain control of its border with Afghanistan. Kayani will play a major role in deciding how intensively the Pakistan military pursues these goals, and against which targets. He and the military have a strong interest in consolidating control of the FATA and containing militant violence. But, Kayani will also come under strong popular, political, and institutional pressure to moderate the military’s campaign. If he accedes, the US campaign in Afghanistan may be seriously undermined.
Russia
Two years into the dual-power arrangement with President Dmitry Medvedev, Prime Minister Vladimir Putin overwhelmingly remains the most powerful and popular political figure in Russia. While Medvedev’s relatively more liberal political instincts contrast with Putin’s generally more hard-line views, there is little specter of destabilizing conflict between the two leaders. As Russia’s economic recovery gathers steam on the back of robust oil prices and reviving domestic demand, longer-term issues relating to Russia’s trajectory after the crisis will come into focus. Putin can either propel or derail the liberal reform agenda that Medvedev has recently been putting forward. Putin must also begin laying the groundwork for whatever political outcome he desires for 2012, when Medvedev’s term ends. Putin’s views on both economic and political issues will be decisive, and will have a long-term impact on Russia’s place in the global economic and geopolitical order. As such, close attention to his statements and actions remains as important as ever.
United Arab Emirates
Like the 160-story Burj Khalifa that bears his name, Abu Dhabi’s leader and UAE President Sheikh Khalifa bin Zayed al Nahyan towers over his country. When the emirate of Dubai found itself in serious financial trouble in late 2009, Sheikh Khalifa stepped in, and Abu Dhabi covered critical Dubai obligations. This has altered the relationship between the emirates; Dubai is now subservient to Abu Dhabi and Khalifa will consolidate power and dominate UAE policymaking. Khalifa maintains close ties with Washington, and in this critical year, the UAE’s policies in the region will probably be more favorable to the US. As the likelihood of sanctions on Iran increases, Khalifa will put some distance between Dubai and Iran. Abu Dhabi, as the UAE’s political capital, will also limit Iranian use of Dubai’s banks and the use of Dubai as a transit point for Iranian goods.
European Union
Olli Rehn is beginning his term as European Commissioner for Economic and Monetary Affairs just as fiscal policy pressure in Europe is becoming acute. Rehn’s most important task will be to quickly establish a credible framework for fiscal policy coordination between eurozone countries. To succeed, he will have to cajole member governments, manage market expectations, and reconcile a wide range of interests. He may also face crises over several very serious financing problems, notably in Greece—an immediate test with far-reaching consequences. Rehn does not come to the economics post with very much relevant experience: He was previously the European Commissioner for Enlargement. In that capacity, however, he was skillful at managing the politically charged process of expanding the EU and developing consensus among its current members. He also gained valuable experience in internal EU diplomacy. The upcoming job will be even tougher.