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Feb 7, 2005 | 23:59 GMT

Decade Forecast: 2005-2015

Introduction This is STRATFOR's third Decade Forecast. We publish one every five years, so they overlap. It is interesting to see how these forecasts have evolved. Our first forecast was only a few pages long; this one comes in at 45 pages. It is not clear to us whether increased size makes for increased accuracy, but there is no question that increased staff makes for increased size. We were quite pleased with our first forecast's accuracy, particularly with our forecast of an economic meltdown in East Asia. Our second forecast suffered a deep flaw when we failed to forecast the U.S-jihadist war and, in fact, miscalculated on the Middle East as a whole. However, the rest of the forecast was stronger. We included evaluations of our past performance in each of the sections, continuing our belief that our credibility rests both on accuracy and on honesty when we fail. A decade forecast is the longest we attempt at this time, because anything greater than a 10-year forecast encounters history's tendency to have wild discontinuities. Even a 10-year forecast has discontinuities built in. A 10-year forecast in 1980 would have had to forecast the collapse of communism in Eastern Europe. A forecast in 1910 would have contained World War I. The art and science of forecasting requires that you recognize that the least likely outcome is simple extrapolation. You can draw straight lines for a year, but drawing them out for 10 years is dangerous. A decade forecast, therefore, is about predicting the unexpected. But it is precisely the wildly unanticipated that a decade of history throws up at you. Predicting in 1995 that the United States would invade Afghanistan in 2001 would have been enormously difficult. It would have been far easier to draw a straight line showing that the post-Cold War interregnum would be eternal. It follows from this that expecting the U.S.-jihadist war to continue to dominate the world in 2015 — 14 years after the war started — is fairly unrealistic. If the Islamic world remains the focus of the international system, it will be on very different terms than today. In fact, it is our view that the jihadist issue will not go away, but will subside over the next decade. Other — currently barely visible — issues are likely to dominate the international scene. Perhaps our most dramatic forecast is that China will suffer a meltdown like Japan and East and Southeast Asia before it. The staggering proportion of bad debt, enormous even in relation to official dollar reserves, represents a defining crisis for China. China will not disappear by any means, any more than Japan or South Korea has. However, extrapolating from the last 30 years is unreasonable. We also expect there to be significant political consequences. At the moment, there appears to be a buying frenzy in China, similar to the meltdown. Irrational exuberance rules the day. At the same time that we see China shifting into a dramatically different mode, Russia is in the process of transforming itself once again. After 20 years of following the Gorbachev-Yeltsin-Putin line, which sacrificed geopolitical interests in return for strong economic relations with the West, the pendulum is swinging sharply away from that. The Russians no longer see the West as the economic solution, but as a deepening geopolitical threat. It is not clear whether it will be Putin or his successor who changes Russia's course definitively, but we expect a dramatic change to come during this decade — a more authoritarian, state-dominated economy, coupled with intense efforts to recover its sphere of influence. There is one curve that will not reverse itself. The long wave that has lifted the United States since 1880, perpetually increasing its economic, military and political power in the world remains intact. We see the U.S. economy continuing to be the consistent, dynamic presence in the world. The coming demographic crisis that will hit the rest of the world will not hit the United States nearly as hard. Not only is the United States not contracting its population domestically, but its ability to manage its population through relatively painless immigration patterns cushions what other problems might arise. Militarily, we expect the United States to maintain control of the seas as well as of space, ensuring strategic global domination. As a result, the United States will continue its domination — and the world will increasingly resist that domination. Our core forecast is that the United States will remain an overwhelming but not omnipotent force in the world, and that there will be coalitions forming and reforming, looking for a means to control the United States. We expect the main focus of the international system to gradually move away from the region between the Levant and the Hindu Kush, south to the Arabian Peninsula, farther north and east. The Eurasian heartland and the Western Pacific are both more likely to dominate world attention in a decade than the Middle East. In particular, the economic weakening of China and insecurity in the region is likely to create a focus for instability later in the decade. The world will remain what it always has been: a dangerous place in which nation-states, and occasional non-nation-state actors, continue to struggle, compete and make war. What follows is our estimate of who the main actors will be, where the struggles will be, what sort of competition will take place and where wars might occur. United States In our first decade forecast, published in late 1995, we wrote: "The key to understanding the next decade will be to understand that the international system is in massive disequilibrium. One power — the United States — has an overwhelming economic and political advantage. Ordinarily, it would be in the interest of such a power to impose a pax on the world. However, because of geography — the location and size of the United States — the costs of imposing such a pax substantially outweigh the benefits. Any given intervention in Eurasia carries with it a higher cost than the benefits. The only exception to this might be interventions in the Persian Gulf, where the economics of oil occasionally make intervention beneficial." In our second decade forecast, published in January 2000, we wrote: "The United States remains at the center of the international system. It is the pre-eminent global military, economic and political power. Militarily, the U.S. Navy controls the world's oceans more completely than any empire in history. As important, the United States exercises almost complete control of space, enabling its intelligence apparatus to see deep and its military to shoot deep and with precision. Economically, the United States is experiencing an unprecedented boom, surging past all other regions of the world. This military and economic power yields unprecedented political influence. This is complemented by geography. As the only great power native to both the Atlantic and Pacific oceans, it can influence events globally with an ease that magnifies its inherent power. Thus, the fundamental question of the next decade — for both individual countries and the international system as a whole — will revolve around the United States. The question, increasingly, will be this: How can other countries limit American power and control American behavior?" Concerning the American economy, we wrote in 1995: "The United States is by far in the best financial and demographic position to capitalize on this tendency [increased wealth creating further investment and further consumption]. Interestingly, the national deficit, which is declining as a proportion of GDP, has not had the effect feared. The primary problem of the deficit — that it crowds out private borrowers and raises interest rates — has simply not happened and it will not happen. What it has done is cripple the federal government's ability to finance new social initiatives. The key structural issue — the U.S. deficit with East Asia — is primarily a political rather than economic problem, and will be dealt with as such." We went on to say in 2000: "The United States will continue to lead the world economically, in spite of the probability of a recession some time in the first half of the decade. However, structural problems, including an aging population liquidating capital holdings in retirement and a severe labor shortage, indicate serious problems later in the decade." We regard these forecasts as generally accurate and continue to see the United States moving along this general path. The United States continues and will continue at least for the next 10 years to be the center of gravity of the international system. It continues to be economically, militarily and politically pre-eminent. The events of Sept. 11, 2001 — which we did not forecast — nevertheless fit with our general forecast that the United States will remain generally aloof from international entanglements, unless they affect the Persian Gulf and the region surrounding it. That will be — and has been — the primary cause of American intervention. It has resulted in the fulfillment of a second forecast. The international system continues to revolve around the question: "How can other countries limit American power and control American behavior?" The U.S.-jihadist war has caused the United States to surge into the region between the Mediterranean and the Hindu Kush with overt, covert and political power. This has unbalanced the U.S. global posture militarily, and accelerated the process of resistance to U.S. power globally. The United States is, first and foremost, a global hegemon. It has interests throughout the world, which it manages with tools ranging from economic influence to military intervention. The foundation of its power has been — and continues to be — the control of the seas. That control remains unchallenged, and the United States is therefore free to intervene in Eurasia as its interests dictate. All interventions in Eurasia, however, pose a fundamental challenge to the United States: demography. The force that the United States can field, the force that it can deploy and the force that it encounters in Eurasia are always out of balance. Having inserted forces in Eurasia, the United States always finds itself at a massive demographic disadvantage if it must engage in manpower-intensive forms of warfare. In Korea, Vietnam and Iraq, the core demographic disadvantage of warfare in Eurasia created serious difficulties. The greatest difficulties did not necessarily arise in the immediate theater of operations. Rather they arose from a trend toward an unbalanced force. The United States has global interests. U.S. naval and air power may or may not be engaged to its full capacity in a Eurasian war, but the Army always is. These wars tend to draw in ground forces disproportionately. As a result, an unsustainable imbalance in America's global posture emerges. These postures always are corrected by systematic disengagement. We expect the United States to disengage from Iraq — and also from the rest of the Islamic world — during the first half of the decade this forecast covers. This does not mean that a force may not be left in any or all of these countries. However, inasmuch as we forecast a general decline of jihadist capabilities and the emergence of an internal containment system in the Islamic world, we would expect that the level of effort in the region will decline. This also will be driven by increasing resistance to American power that will manifest itself not so much in mere criticism of American policies, but in the formation of coalitions that can resist the United States. Most European states will lack sufficient interest in challenging the United States, but we expect that East Asia will become increasingly an area of instability, where resistance to the United States will become increasingly rational. Therefore, we expect that by the end of this decade, U.S. focus on the Islamic world, while far from disappearing, will become less significant than U.S. interest in the Pacific Basin. U.S. alliance structures currently driven by the U.S.-jihadist war will shift once again, to reflect increased tensions in the Western Pacific. We would expect a decline in U.S. foreign involvements in the years on either side of 2010, followed by increased involvement in Asia. Economically, the United States continues to lead the world in spite of the recession in the first half of the decade. It is indeed facing serious structural problems — though the obstacles presented by an aging population should not crop up until around 2015. We do not expect a return to growth rates seen in the 1990s, except sporadically. We would expect to see another recession during the first half of the decade, as we return to a more traditionally spaced expansion. However, we do not expect to see a major, long-term economic contraction or period of stagnation. We do not anticipate a return to the 1970s and certainly not to the 1930s. The central factor we have been concerned with has been demographic. The United States has the least significant demographic problem of any major power. First, like the rest of the developed world, and unlike most of the developing world, the United States has a bulge in its population — there are more 40- to 50-year-olds than there are in any younger 10-year bracket. A similar, although less pronounced, bulge existed in the United States from 1995 to 2005. While young workers are net consumers of credit, older workers who have often paid off their mortgages and already sent their children to college are net providers of credit. Having an unprecedentedly large demographic bulge in that age bracket enjoying unprecedentedly high per-capita incomes injects an unprecedentedly large amount of capital into the economy as their savings are converted into investments. That abundance of capital radically reduces borrowing costs, allowing firms to successfully finance the complete replacement of their industrial plant in just a few short years. The positive impact on worker productivity formed the basis of the United States' 1995-2005 economic boom. It also allowed American firms to capitalize on the technologies of the computer revolution and take them forward. Research and development costs money. Implementation costs money. The golden age of the U.S. baby-boom generation allowed most firms to do both. Repeatedly. The bulge in the next 10 years will be significantly larger than the bulge from the past 10. During the next decade the bulk of the baby boomers will be net creditors and moving toward retirement. They represent the largest demographic bulge in U.S. history. Furthermore, the U.S. population is the youngest — and fastest-growing — population among all the major economies. U.S. baby boomers had kids — lots of them. So many that some demographers refer to them as the echo boomers, although they are more popularly known as Generation Y. But in the United States — unlike in Japan and most of Europe — there was no sharp contraction in birth rates before or after Gen Y. The American Gen X is certainly smaller than the baby-boom generation, but only by about 15 percent. In Germany, Italy and Spain the gap is around 35 percent. This pattern is set to replicate in successive generations as well. The U.S. population increased by 13.2 percent between 1990 and 2000, while the European and Japanese populations barely held steady. The United States is set to grow even more; birth rates are up across all regions and races — even the dominant white population grew between 5.9 percent and 8.6 percent (depending upon how one defines "white") between 1990 and 2000. Conversely, other countries such as Japan, Germany, Italy and Spain all face the prospect of shrinking populations in the decade to come. The net result of this population structure is that the U.S. investment boom of the 1995-2005 decade is not only replicable, but repeatedly replicable. Also, by having a relatively robust demographic in younger generations, the United States can — for the next 10 years at least — manage both an investment boom and the funding of its social security system. Elsewhere, in contrast, smaller successive generations are creating a financial crunch. Italy already is spending about 13.8 percent of its GDP on funding its pension program; with its relatively youthful population, the United States spends only about 4.4 percent. Far more important — and the single most important fact about the United States — is its institutionalized capacity to absorb immigrants. Unlike Europe or Asia, the United States is capable of relatively seamlessly absorbing migration at virtually any social level, from impoverished Central American immigrants to highly skilled professionals. As a result, it can shape whatever demographic order, within a matter of years, it requires. It generated an industrial working class in less than 20 years in the late 19th century and supplemented its skilled technical class during the 1980s. This means that many fears about a collapsing social security system or housing prices based on existing demographics are inherently flawed. The United States can shape its demographics at will. Europe can do this only with massive social dislocation. Asia cannot do it at all on a broad scale. This, plus the fact that the worst-case scenarios have by now already been factored into expectations and therefore into the market, means expectations of calamity are irrational. At the same time, there is a serious structural issue in the economy: the trade deficit. When we look at the federal deficit, we see that there really is nothing out of the ordinary going on. Particularly when we look at a five-year moving index, we can see that we continue to operate well within normal bands. It is the trade deficit that has broken new ground. The U.S. balance of trade broke into negative territory in the mid-1970s and has remained there since. This first break was driven by the surge in oil and other commodity prices. What is important about this index is not only that it has remained in negative territory since then but also that it has continued to trend higher, particularly when smoothed out by a five-year moving average. The five-year moving average reached a peak in the mid-1980s, fell back until the early 1990s and then began an uptrend that has continued until this point, rising to near 5 percent of GDP in 2004. What is interesting about this 30-year trend is that it has had no impact on the economy. To the contrary, the massive expansion that began in the 1980s coincided with the expansion of the deficit, and the tremendous surge of the 1990s coincided with a major surge in the trade deficit. The deficit broke new highs in 1995, yet that period also saw the greatest economic expansion in history. The issue facing the United States consists of two parts: the trade deficit has now moved from 3 percent to 5 percent of GDP. First, is there a percentage of GDP at which the trade deficit begins to do structural — as opposed to sectoral — harm to the U.S. economy? Second, are there any limiting forces on the expansion? Empirically, this is an extraordinarily difficult question to answer, simply because, first, the U.S. economy has not had deficits of this level since World War II, and second, the conventional wisdom about trade deficits has always been wrong. The argument about trade deficits has always held that they represent an underlying weakness in the American economy and that they cause further damage. That argument has always, in the past, turned out to be false. That does not mean it will continue to be false. It does mean the deficit is not self-evidently harmful. To understand the deficit, it is essential to understand how intimately it is linked with Asian economic dysfunction. As Asian economies mature, they surge exports to maintain cash flow for their banking system. These are low-profit to non-profit export surges. The surge in the 1980s represented Japan's meltdown, concluding with a last surge in 1991. The mid-1990s surge represented the East Asian meltdown of 1997. It continued to surge as China cut in and is peaking now in a surge of profitless exports from there. Therefore, this is, in our view, a self-limiting phenomenon. As the Chinese surge subsides and China increases profit margins on its exports, the surge will end. This is not to say this does not cause pressure on the economy. These surges are not devastating because they are transitory, they rotate by sector, and because they free capital for productivity rises in the United States. The Japanese surge destroyed sectors of the American economy. This clearing also left space for the emergence of new industries, such as the personal computer. This in turn opened the door for growths in productivity that helped, temporarily, compensate for structural damage. It is our expectation, based on our Asian forecast, that pressure on the trade deficit will subside before the end of the decade. At the same time we continue to forecast productivity growths and smoothed demographic curves throughout this period. We expect two or more recessions during the coming decade — at least one of which will be triggered indirectly by Chinese problems. When China's own version of the Asian model falters, China's export sector will cease its current red-hot growth. This will gut Chinese exports to the United States, thereby removing China's need to heavily invest in American government debt. For the past two years, China has not only been a leading source of U.S. trade deficit, it also has been a leading purchaser of U.S. government debt to finance that deficit. The Chinese crunch and step-back from U.S. debt purchases will cause the U.S. dollar to plummet on international markets, most likely triggering a recession until the U.S. economy's inherent efficiencies allow it to regain its strength. We do not expect to see a return to 1990s growth rates. At the same time, we regard the American economy very positively indeed. Global Economy In STRATFOR's 1995-2005 decade forecast we wrote: "The decade ending 2005 will be marked by two contradictory trends. On one hand it will be a period of unprecedented global economic prosperity and growth. On the other hand, it will become a period of increasing fragmentation and tension in the international system. As in the period prior to World War I, prosperity and instability will go hand in hand." As we said 10 years ago: "Prosperity leads to greater economic integration and dependency resulting in greater insecurity by increasing the importance of international economic relationships and therefore increasing the opportunities for friction. This, in turn, leads to greater insecurity." This pattern did not end with World War I or World War II. During the past 10 years we have seen record global economic growth accented by the Sept. 11 attacks and new heights of development as the computer revolution put down roots. This was in stark contrast to the financial crisis that struck Asia with its worst-ever recession at the same time. Europe is (unsuccessfully) attempting to square its internal political commitments with its newly diverse membership in the European Union, while Asian states are walking the love-hate tightrope of historical hatreds and economic cooperation. The world is richer than it has ever been but it is far from the united world that many dreamy-eyed forecasters predicted in the early years after the Cold War ended. The United States has a number of advantages over potential competitors. From a military and economic standpoint, its single most important advantage is location: The United States is the only major, united continental economy with easy access to both the Atlantic and Pacific oceans. Though "Europe" controls a continent, it is not a united economy, no matter what Brussels says, and the Continent certainly does not bow to a singular economic and political structure. Japan is a united economy, but its reach is limited by location and it is not continental in scope. Russia might have (albeit constrained) access to global markets, but the tyranny of distance — not to mention the debris of empire — prevents it from unifying its internal economy. The United States' location guarantees it the opportunity to shape the global economic system — but opportunity does not equal fact. What will ensure that the United States will continue for the next decade as the center of the global economy is the same unique feature that STRATFOR identified in 1995: demographics. Demographically, the United States is unique among the world's major economic centers. First, its population is aging — which results in the aforementioned "bulge" in the 40- to 50-year-old age group. This bulge will not be replicated in the other major developed economies in this decade, leaving the United States by far as the largest pool of capital. Japan had a bulge, but it peaked in 2000, and its near-retirement generation is among the smallest in Japanese history. Most European countries have such a bulge, but are 10 to 15 years behind the United States.' Only France has demographic patterns that indicate there will be anything but a dearth of investment capital outside the United States. From 1995 to 2005, Europe also lacked such a bulge, to which Europe's lackluster growth rates attest. Japan did possess a bulge during this period, but the government's spendthrift policies soaked up all available local credit. During that period, Japan transformed from the largest sovereign creditor in human history to the largest sovereign debtor. The youth and growth rate of the U.S. population is also not being replicated in other major economies. In the case of Japan, the World War II population bulge signaled the beginning of a slow hollowing out of the Japanese population. Their bulge already has passed and, with the exception of a smaller bulge that will mature around 2030, each successive Japanese generation has gotten smaller. In the decade to 2015, Japan faces a credit crunch that will only magnify its other problems. After 2030, Japan will have an ancient population that will likely number 10 million fewer than it does today. In Europe, the problem is that there is no replacement bulge for the generation that will mature around 2020. With the possible exception of France, all the major European countries face a feature that demographers call a "population chimney," as each successive generation is smaller than the one before it. Finally, there is really only one way that Europe and Japan can correct this problem without drastically increasing their birth rates — a process that would take 50 years to work its way through the system. That solution is immigration. But again, the United States is the outlier, having proven itself the only country capable of absorbing wave after wave of immigrants. At their core, Europe and Japan define themselves by ethnicity. Non-Japanese make up less than 1 percent of the Japanese population. Europe is far more diverse than that, but no major European states can approach the diversity of the United States, in which 25 percent of the citizenry defines itself as not purely white. Even then, many of Europe's "minorities" are actually ethnicities from other European states (i.e., Germans living in the Netherlands). In all, the total non-European makeup of Europe is less than 10 percent. For Europe and Japan, replicating the American success is structurally impossible. In theory, Europe could allow in massively increased numbers of immigrants — who would be almost exclusively Arab Muslims — in order to plug the demographic gap. And in theory, the Europeans could radically alter their labor laws and social contract and eliminate the expensive cradle-to-grave social welfare model that keeps their societies quiescent. But even if they did both of these things — which could shatter their societies — they would then face an industrial plant flooded with imported labor and an insufficiently large mature population — such as the U.S. baby boomers — to supply enough capital to upgrade the overtaxed industrial base. Such a state of affairs would generate the same inflationary pressures that so effectively suppress economic growth and technological advances in the developing world. At the end of the day, the United States is set for a decade of high investment, and by extension, high productivity growth. Europe and Japan simply cannot replicate these developments — even if they were willing to restructure their economies from the ground up. Building such an environment requires a generational effort, not one that can be implemented in a "mere" decade. The replicability of economically healthy demographics in the United States does not mean it consistently will be the state of affairs. As workers retire, income shrivels and the torrent of money reverses. Instead of being large-scale net suppliers of investment capital, former workers become hoarders and spenders. The bulk of their financial assets are switched from high-growth stocks into low- to no-growth bonds and even cash so they cannot lose their shirts in the stock market crash of the moment. In short, aside from their spending — which usually decreases after retirement — retirees cease to participate in the national economy and capital formation. At that point, investment slows, credit becomes far more expensive and growth falls off. A reduced supply of capital means two things. First, the cost of doing any sort of financing — anything from getting a car loan to building a skyscraper — will increase, setting the stage for lessened consumption and, by extension, slower growth across all sectors of all economies. Second, less supply always increases volatility. Crunches are next to impossible in well- or over-supplied markets; lower supply means the swings from economic booms to busts will be far more rapid and far more disruptive overall. For the United States, the above description will manifest itself sometime around 2015, as the bulk of the U.S. baby boomers pass into retirement. For Japan, it begins here and now. East Asia In its 1995-2005 decade forecast, STRATFOR said: "We strongly feel that the last decade's surge in East Asian economies will be peaking early during the 1997-98 cycle." This proved very prescient. We also said it was "extremely unlikely" that China's growth spurt would continue. And while China did see a dip in its growth rates following the Asian economic crisis, it hopped back on the wagon relatively quickly. The 2000-2010 forecast for East Asia centered on China and Japan. Regarding the latter, we noted that "the country likely to take a leading role in Asia is Japan" — an assessment we see playing out. Japan's shift toward formalizing its role as a military player rather than remaining solely an economic player has accelerated since the Sept. 11 attacks in the United States. Japan's movement toward military power also illustrates STRATFOR's core idea for East Asia in the 2000-2010 forecast: Nations that had relied on their economies in the previous decade as the sole measure of their international standing and influence would move toward a "more balanced reality in which economic power by itself will be supplemented by political and military power." On China, we said, "Our forecast is for a deeply troubled China, increasingly torn by domestic strife, with a government, in the face of it, alternating between brutal repression and helplessness." China appears to be facing no such intense struggle, at least on the surface. However, not far below these placid waters swirls a mix of economic, social, political and security issues waiting for the slightest external stimulus to bring them bubbling to the top. As for the rest of East Asia, we said, "The Korean Peninsula will become the epicenter of tensions in Northeast Asia" — a forecast we see taking shape. In Southeast Asia, we said, "Indonesia will continue to be the center of attention as it struggles to maintain unity and redefine its role among its neighbors" - again, a prediction we still stand by. On the whole, STRATFOR's long-term East Asian forecasts have been right on the money. However, we have always been bearish on China — not for ideological reasons but for structural ones — and our forecasts, which we believe remain fundamentally accurate, have not matched the bullish view that others give to the Chinese economy and national status. Our view of China's future is in stark contrast with the positive outlooks we see coming from investment houses and others. One key reason for the difference is that most forecasts on China are linear — in essence they say that since the Chinese economy is clipping along at 8 percent or 9 percent GDP growth each year, in 10 or 20 years China will dominate the global economy. Our basic supposition, however, is that the shape of the world today is probably the least likely shape of the world a decade or two out. The world operates in cycles, long and short, and linear extrapolations fail to take into account the reactions and arrestors on growth or decline. For example, in 1990, a year after the Tiananmen Square incident, the prediction that China would be the regional economic engine a decade later would have been laughable, as foreign investors fled the country and the hands of repression were clearly seen. A decade later, it was hard to keep foreign money out of China, and Beijing was even beginning to look at ways to slow the economy. China is obviously a major factor for East Asia in the next decade. And in looking at China, the status of the economy — particularly growth — is the core issue. It is our view that China's economic growth rates, driven largely by foreign investment, trade and government spending, will continue to slow. This slowing will exacerbate underlying structural tensions in the Chinese economic system — between the urban and rural areas, between the coast and the interior, between the north and south, between the rich and poor and between the center and the periphery — and at its core between the state-controlled and market economies. Why, then, if STRATFOR sees a China on the verge — if not already in the midst — of massive internal upheaval, is there a general global acceptance of the idea that not only is China on an unstoppable rise, but that people should pour their money into the Chinese economy? In part, this is due to tunnel vision — assessors of the Chinese economy are looking only at the booming center-coastal economies in and around Shanghai. In part, it is intentional self-delusion, a failure to connect the dots. There is no shortage of reporting on the underlying weaknesses of the Chinese banking system, the state-owned enterprises (SOEs), the unemployment problems, the uneven distribution of wealth and labor and myriad equally troubling and seemingly insurmountable problems. However, the holy grail of selling a single orange to each of the 1.3 billion Chinese continues to blind others to the reality of the situation, and the desire for a piece of what someone else might get has fed a steady stream of investment into China, keeping the system on life support and "justifying" the positive outlooks. But on this last point, something has been overlooked: In recent years, foreign direct investment (FDI) moving into China has declined, but this trend is hard to see clearly. U.S. investment in China was the key driver in bringing China up from the Asian economic crisis. Weary of waiting for the return on investment in China, U.S. investors slowed the flow of FDI. However, the herd mentality and the shiningly optimistic assessments of China as the next golden goose led to a successive wave of European investments. This was followed by Asian investors, who did not want to be left behind. This rush of foreign investment and interest in China has masked the Chinese economy's underlying weaknesses and given the government tools to maintain control. But it will not last. Already there is dissent forming in the international community, and the need for quicker profits — or any profits — is driving companies and investors to look elsewhere. Rising interest rates and the perception of strong market fundamentals are bringing investments to the United States. High energy prices, sector bubbles and the resurgence of "China threat" fears are taking the shine off the Chinese economy. Beijing has enjoyed a brief respite from these fears. The external pressures on China were set to increase in late 2000 with the election of U.S. President George W. Bush. By early 2001, China and the United States were in a tense standoff as a U.S. E-P3 sat on a Chinese runway on Hainan Island. The incident was resolved, but the strains on U.S.-Chinese relations were not relieved. The came the Sept. 11 attacks in the United States, and suddenly China became a back-burner issue. Beijing even became, briefly, a fellow "target" of international terrorism, convincing Washington that Uighur militants were tied to Osama bin Laden and out to create a greater Islamist state in western China and Central Asia. But while Beijing had some time — and took advantage of it to effect a relatively smooth transition from Jiang Zemin to Hu Jintao, the so-called Third and Fourth Generation leadership — Washington's overwhelming infatuation with bin Laden, al Qaeda and international jihadism began taking a more proportional position in the American global strategy. For China, this means the return of U.S. pressure. The same factors that led to the downfall of the Qing Dynasty in 1911 are still inescapable today. China is showing classic symptoms apparent before the end of dynasties: the disruption of internal economic wealth, increasing gaps between rich and poor and between regions, the economic encroachment of outside powers and the undermining of the social contract with the state. The central government has lost its legitimacy after trading ideology for money that is now supplied from afar rather than from within. The balance between the center, which seeks to pacify and stabilize the vast interior population, and the coastal periphery, whose economic and political interests lie in foreign trade and are therefore ultimately aligned more with foreign nations than the center of China, continues to create friction. The center, in order to maintain control of the interior, must take money from the periphery. Fears of issues of social stability lead the center to take action in the interior, which might be anathema to the interests of the coastal provinces. China today has two economies: the import/export economy based in the densely populated coastal regions and the remains of the old Maoist SOE-based economy in the interior and the Northeastern "rust belt." FDI supports the import/export economy, while the central government must keep the SOEs afloat. In 2003, SOEs employed 375 million of 750 million workers and controlled 57 percent of the country's industrial assets. The SOEs are kept alive — and at times bailed out — by preferential bank loans, but the inefficient enterprises are giant capital vacuums, compounded by corruption and continued mismanagement. Bad loans in China, most of which stem from lending to SOEs, have been estimated to reach as high as $500 billion — by no less than the investment houses who have a vested interested in making this number appear as low as possible. That is not far off China's $609.9 billion — as of Jan. 1, 2005 — in foreign currency reserves. Beijing is constantly pulling from its own reserves to feed the state banks, which in turn feed the SOEs. Since 1999, Beijing has spent about $275 billion in asset transfers and bailouts in attempts to solve the bad loan problem. All such "fixes" have failed, since they do not require the SOEs to change their operating policies. The SOEs, in turn, feed the people who, under the communist system, came to expect — and depend on — the continued existence of a state-sponsored Iron Rice Bowl. The coastal areas, where the import/export economy is based, received 87 percent of China's FDI in the last three years, but western China, which is home to many SOEs and farming operations, received only 3 percent of FDI in the same period. In these areas, where nearly a quarter of China's population lives, per capita income fell from 84 percent of the national average to 56 percent from 1980 to 1999. The forces at work within China's SOE-based economy are preventing the country from capitalizing on its current growth and will eventually drain the energy from the import/export economy. Fearing the urban unemployed even more than the rural unemployed, since poor farmers at least have land and can feed themselves, Beijing is offering life support; but unemployment, which in 2002 was between 6.2 percent (official data) and 13.1 percent (estimated by a 2004 University of Michigan study), continues to rise. This triggers wave after wave of demonstrations and protests — which have thus far been isolated incidents — but the chances for coordination increase daily. And Beijing's only response will be repression, sending in troops to end by force whatever opposition it perceives, as it did at Tiananmen Square. China recovered from Tiananmen not because of the continued crushing of the students and their supporters but through capitulation to the population, which resulted in the state taking a steadily decreasing role in the lives of the average Chinese. But this capitulation to the masses, while initially resulting in pacification, also has served to raise material expectations. Turning back is no longer an option. Beijing is, therefore, stuck. It options are limited and time is running out. The mandate of heaven, it appears, is being repealed. Beijing knows the troubles it is in. The strains between the coast and the interior, the rich and poor and the north and the south are growing more and more tense, and Beijing's ability to maintain the system is fading. This is compounded by corruption, which not only drains government coffers but further de-legitimizes the Party. China's leadership is presented with few options. First, it can implement a sudden and swift overhaul of the entire economic system, similar to South Korea's actions following the 1997 economic crisis. This, however, would require a government characterized by lethargy and fear of social instability to make a sharp, painful and — if done effectively — relatively swift move. The massive social dislocation of such a move makes it untenable. Second, Beijing could revert to the Deng and Jiang method of encouraging unabated and unequal growth at the expense of profit, occasionally trimming dead wood in SOEs, pumping money into the banks to recycle into the insolvent SOEs and thereby maintain the bare minimum of social stability to avoid significant unrest. Any small stirrings are met with crackdowns on social movements. This, however, only furthers the underlying structures that have rotted out China's economic expansion, and, in relying on the "Asian" model and the "Communist" model, it fails to address the true problems. A third method is that being attempted by Jintao. This involves slowing growth a few percentage points, more closely regulating the economy from the center and trying to direct FDI into the worst of the SOE areas, namely the northeast. In the midst of this, Beijing seeks to take a million small steps toward addressing underlying weaknesses. This simply prolongs the pain — even if regionally isolated — and builds tensions between haves and have-nots. And it relies on foreigners' good will or poor judgment to invest in the worst of the Chinese state institutions. Ultimately, if social stability can be maintained (and this seems unlikely for long), China's best case is a sustained slump, reminiscent of the past few decades in Japan. The fourth option is the "Mao" method: Close the country and economy and undertake a massive social restructuring. This is not really an option among the Chinese leadership, which has a vested interest in expanding trade with the outside world. It also would result in a loss of international power, at least for a decade or so. Without the ideological underpinnings that allowed Mao Tse-Tung's social revolutions, gaining any sense of national buy-in for another "Cultural Revolution" would be highly unlikely, and the opposition to such a path would be anything but quiet. The first and fourth options appear untenable now and in the foreseeable future. The fight is not over closing the economy or keeping it open, but over the pace and scope of economic growth versus economic fundamentals. It is a core question of defining strength. While the "Hu" method has won out for now, if things start to bite — and they likely will — there will be a renewed push for the "Jiang" method, though whether China can entice others into a new "boom" too many times is unclear. The government is challenged now to prove its legitimacy as the center of the nation. Under Mao, the underpinning was ideology and a sense of international embattlement. Under Deng and Jiang, that underpinning was the promise of money and material goods. China's rapid growth economy is very young, and tearing that promise away — even in the name of market fundamentals — is extremely dangerous. The only way South Korea managed it was to rely on a very close sense of ethnic nationalism and to put the blame for the pain on a non-state actor, the International Monetary Fund. China has neither the ethnic homogeneity nor pervasive sense of nationalism to ask for much self sacrifice, and the stresses on the system will continue to compound. If China adheres to the World Trade Organization (WTO) accession agreement and opens its banking system in 2006, the SOEs will collapse, since China's banks would no longer able to funnel money to bail out non-performing companies. Strengthening the SOEs through reform creates massive new pools of unemployed labor, leaving even more disgruntled and disillusioned former state workers with no jobs and nowhere to turn. Ending bank lending to the state institutions creates hundreds of millions of new unemployed. A social cataclysm of that magnitude will tear the country apart — or at minimum lead to the collapse of the Party and the government. Therefore, China will choose another path. Beijing will want to prop up the SOEs as long as possible to buy time to convert them into productive members of China's economy. However, time is not on China's side; the country must open its economy before the SOEs can be converted. The center will want to forestall this as long as possible and is therefore unlikely to accede to its full obligations under the WTO agreement. Beijing, then, will seek to mitigate the internal upheavals now apparent from the 1979 economic opening and reform the system. Mismanagement, rampant corruption and the combination of an Asian (growth-driven rather than profit-driven) and Communist (social control over profits) economy has left Beijing with few immediate solutions. If China slows its opening and reforms — the most likely path, albeit done in a subtle Chinese way — FDI will begin to dry as foreign investors shift away from China. When FDI dries up, growth in the import/export economy will slow down. When growth slows down, social stability issues will become more pronounced, since there will be less and less money to pump into the SOEs. Capital flight by Western investors already has begun, with Asian investors making up the difference, but they will be unable to sustain adequate levels for very long. FDI decreases also factor into the rifts between the center and the periphery in somewhat unexpected ways. A decrease in FDI is what triggered the 1999 corruption crackdown. In 1999, FDI going into China decreased by more than 11 percent as a result of the Asian financial crisis. With less money coming into the country, the center tried to keep the SOEs afloat with money from the import/export economy. This was met with resistance in the periphery, and the center responded by moving in and taking what it wanted under the guise of a crackdown on corruption. In extreme cases, the periphery reacted violently; in others it simply took the money and ran. China will struggle on through 2008. The Olympics are a powerful force, driving economics and providing a rallying point to keep divergent interests temporarily subdued. That will not last. Nationalistic entreaties playing off the Olympics, space programs and the like can do little to hold the disparate interests and factions together. Intentionally or not, the face of the Chinese Communist Party will shift in the years shortly following the Olympics. The turmoil this will likely cause will lead to a loss of central control and a regionalization of power, as has often been seen in Chinese dynastic transitions, in which the country — while nominally unified — will in fact become a cluster of fiefdoms, effectively modern warlord states. The capital will have a national leader but the center's reach and influence will be at the mercy of the regions. In a place such as Afghanistan, this is called status quo; in China, warlordism — only this time, there will be nuclear weapons in play. As China's economy triggers social upheaval, other Asian states will look for different sources of strength and regional leadership. The alternative to China is Japan, and Japan is embarking on a more aggressive assertion of its leadership role in Asia and seeking to spread its influence and security sphere along its energy supply lines through the Indian Ocean to the Middle East. This process will continue through the decade. Japan already has the capability of projecting its military power better than China. Although the Chinese possess a larger fleet of Landing Ship Tanks (LSTs) and landing craft, they lack important logistical and support elements necessary to project maritime power. China's navy also lacks a sufficient number of large-scale and advanced landing ships — amphibious assault ships and dock landing ships. Although China can eventually build these capabilities, Japan already has the experience and the technical ability to sustain forces overseas for extended periods of time. Its involvement in Iraq — where Japan has 900 troops, naval vessels, helicopters and aircraft (the biggest deployment since 1945) — and Aceh, Indonesia, demonstrate that. By the end of the decade, Japan also intends to have a significant aerial refueling capability, which is essential for power projection. China's aerial refueling capability continues to be based around the aging H-6. With no deliveries of the Backfire bomber, the H-6 continues in the bomber role and few have been converted to aerial refueling. Finally, Japan has the experience of training with the United States and its allies for decades. Japan is a modern state suffering from a lasting economic malaise and looking to reshape its role while seeking new economic strength and security. The Japan of the Cold War was content to rely on Washington for its security needs, and the unnatural state of the world's largest economy protecting the fundamental interests of the world's second largest economy with little outlay by Tokyo is long gone. Japan sits in a volatile region, and the United States is looking to establish Tokyo as a cornerstone of an enhanced regional security alliance system. With Japan watching a fading China, however, Tokyo is unlikely to stand by and simply watch the downturn — and unrest — and wait to see what happens. Tokyo will seek to exploit the economic advantage, supporting coastal areas of China, backing Taiwan and generally assisting in the disintegration of the Chinese state apparatus. Looking at a China that is fanning the flames of nationalism, Taiwan will seek to align itself with Japan, because Tokyo can offer Taipei security benefits that Beijing cannot. This situation will feed on itself: China will react strongly to a Taipei-Tokyo axis, and Chinese reaction will prompt closer cooperation between Taiwan and Tokyo. That the confrontation between China and Japan will move beyond the political and economic sphere toward the military realm before the end of the decade appears likely. Should there be a war between China and Japan, Korea will attempt neutrality, though leaning toward one side — China. However, Korea will seek U.S. assistance to stand between its two neighbors. If Washington is unable or unwilling to stop Beijing and Tokyo, Korea will be left dangling. Korea is clearly defined by its geography. A peninsula situated between two regional, historic, competitive powers, Korea has been a conduit for technology and culture and the main avenue for invasion — in several directions. Korea's traditional solution was to pay suzerainty to China — its contiguous neighbor — while isolating itself from Japan, its maritime neighbor. When faced with invasion, Korea calls on outside powers, be they China, Russia or the United States. This pattern is ingrained in the geographic features of Korea, and has been unchanged by the division of the peninsula. Korea is, therefore, a reactive state — whether the reaction is expressed as isolationism or as an invitation to foreign powers. Korea's future is rarely shaped by domestic desires or strategic planning because its size and location leave it always vulnerable to the designs and actions of its neighbors. The divided Korea has exploited its neighbors in an attempt by each side to gain the upper hand. The Cold War gave Korea tremendous strategic importance in the confrontation between the Soviet Union and the United States, as well as in the often contentious relationship between the Soviet Union and China. Seoul clearly benefited from the former, Pyongyang from the latter. The end of the Cold War also ended the support network that kept Korea divided. That is not to say the situation cannot continue, but the interests of the two Koreas have rarely been different — only the ideology has. Both Koreas seek a strong, independent Korea, and with the Cold war structures shattered, the two are working closer together to achieve this — in spite of their ideological differences. Over the next decade, this cooperation will become more apparent, though ideology will still present a barrier for significant cooperation early on. While there is concern in the South for the economic affects of unification, it is ideology — seeking a face-saving way for neither ideology nor elite to be de-legitimized — that stands in the way of unification. Friction points between Japan and China will include areas beyond Korea and Taiwan, with competition for sea-lane control, however one-sided. The wild card is whether the tensions between Beijing and Tokyo at some point exceed Washington's comfort zone — or interests. Intervention between two Asian powers is something not readily leaped into, and Washington could engage in a balance-of-power strategy between the two, keeping them occupied in East Asia and preventing either from ever rising to challenge U.S. control of the seas. The Indonesian archipelago will be a friction point while Australia peruses a policy of using Indonesia and the Pacific Islands as a bulwark against encroachment from the mainland and the South China Sea. Indonesia could be out of oil by then, but Canberra must ensure Jakarta (or Australia) remains in control of the islands in order to keep the Chinese (or multiple militant groups, criminal gangs and other powers) away from the Australian heartland and prevent them from having interdiction capabilities in the major shipping lanes. Australia can expect U.S. support in this endeavor. Russia/Former Soviet Union Ten years ago, STRATFOR said Russia would regain lost parts of its empire by 2005. Our mistake was taking for granted that the Russian people and leadership at the time would have the political will to do so. Russia remained capable of attaining its former greatness — despite the fall of the Soviet Union — but the desire to use its capabilities never materialized. Russia's moderately pro-Western leadership for the past decade — under former President Boris Yeltsin and during the early years of President Vladimir Putin's regime — has driven the country toward the West, and the Russian people have tolerated this course so far, albeit grudgingly. In 2000, STRATFOR said that, by 2010, Russia would re-emerge and reclaim its former territories, beginning with the Baltics and Georgia; return the Russian army to the Polish and Romanian borders; and cooperate with China to block the United States. As of 2005, we have again been wrong — and for the same reasons. Until now, Russian and Chinese leaders have thought they could gain more by cooperating with Washington than with each other. STRATFOR believes our forecast from five years ago will come true, if not by 2010 then by 2015. We base this belief on objective reasons, such as the hard geopolitical realities Russia has faced for hundreds of years. Pro-Western governments' content with supporting roles in a U.S.-dominated world might come and go, but Russia and its inevitable geopolitical challenges remain. We believe Russia is at the beginning of a reversal that will take it on an anti-U.S. course. The turning point could come soon, or it could be years away. Russia's deepening systemic crisis and a fierce and continuous struggle between nationalist forces and pro-Western, Washington-supported factions will make for a very painful reversal of indeterminable length and depth. A series of policy failures — possibly including the loss of territories, such as those in the Caucasus, or even Russia's disintegration to the point where Moscow has only nominal control and some regions declare independence — will happen during the next decade. But by the end of 2015, Russia will be more of a nationalist and statist entity. Russia's current geopolitical phase — marked by continuing decline — began in 1992, after the disintegration of the Soviet Union. Given that Russian phases usually last 25 to 45 years (such as the building of Soviet Russia as the second superpower from 1917 to 1961 and a period of stagnation from 1962 to 1991), the current phase might end as early as 2014 or 2015. Even before then, however — it is unclear exactly when, but sometime in the next decade — centripetal forces will replace the current centrifugal forces as Russia's center of gravity. What do we think will bring about Russia's reversal in the coming decade? Geopolitically speaking, with Russia's brother state Ukraine — vital to Russia's survival — joining the West as a geopolitical junior ally in 2005, Russia is running out of room to hide from a coming conflict with the West. Moscow and central Russia will become indefensible if there is a war between the North Atlantic Treaty Organization (NATO) and Russia. The prospect of a pro-U.S. "revolution" — the likes of which already have changed regimes in several former Soviet republics — adds urgency, too. Central Asia, the Caucasus, Moldova, Belarus and virtually all of the former Soviet Union (FSU) will see attempts — with varying degrees of success — to replace even moderate pro-Western regimes with openly pro-Western governments. Furthermore, on its current course, Russia has been collapsing slowly but surely — and there is no reason to believe this decline will stop without a change in strategic course. As an independent geopolitical power and perhaps even as a sovereign united state, Russia must either strike back at foreign interlopers soon or die. The odds are currently against Russia. Centrifugal forces tearing it apart and bringing it down prevail. Inside the country, Russia's post-Soviet elite has been Westernized, and many would not mind seeing Russia go the way of the Soviet Union. Members of this elite also value their checkbooks more than their country, and since economic ties between Russia's center and its outlying regions are becoming weaker than those between the outlying regions and foreign neighbors, the elite has little use for areas beyond the center. Russia's fundamental crisis also is deepening; separatism among ethnic minorities is on the rise; Islamist militancy is spreading from Chechnya to other Muslim-populated regions; militant attacks continue unabated; and demographics show that ethnic minorities with no allegiance to Moscow outlive ethnic Russians. Meanwhile, foreign interest in getting something from the crumbling Russia and FSU — from control of largely untapped natural resources to chunks of territory — is greater than it was even during the period of foreign intervention in Russia from 1918 to 1922. Even tiny Estonia has territorial claims to Russia. However, we think Russia will preserve — or restore — its territorial integrity and sovereignty and again become a major international player with a traditional anti-Western geopolitical course. The main geopolitical threat to Russia this coming decade comes from the U.S.-led West, which threatens Russia more than all other players combined, so it will be against the West that Russia responds. An understanding of Russia's fundamental geopolitical patterns is required to understand why Russia is not about to go quietly into oblivion. A power more than 1,000 continuous years in the making, Russia is not about short-term trends; it should be analyzed and predicted in its entirety, in terms of long-standing geopolitical traditions. One such tradition is that, even at its lowest, Russia has always remained essentially an integrated, vital state. Also, foreigners' previous attempts to use Russian collaborators to remake Russia to their liking have invariably failed. Traditionally, Moscow's strategic response to life-threatening events has always been slow — from outsiders' perspectives, too slow — and we suspect Russia will again take its time in the course of its upcoming reversal, no matter how risky it is to move slowly in this situation. Another long-term Russian tendency is to show its best and, in fact, succeed every time its very existence is in mortal danger. There is no reason to believe Russia will behave differently this time around. Russia has always been saved by movements that begin outside the country's centers of power, with new forces frequently emerging from within Russia to preserve the nation. This time, we expect Russia's geopolitical revival will not begin in Moscow or St. Petersburg — which have less to do with the real Russia than New York or Washington, D.C., have to do with the real United States — but in the outlying areas. Intelligence shows that, while pro-Western tendencies still dominate Moscow, an anti-Western backlash is growing in the provinces and within many strata of Russian society — even in some parts of the current elite (though Russia might form a new elite to make its upcoming move a success). There are two schools of thought on how to revive Russia from within, i.e., how to strengthen its economy. One was represented in the early 1980s by then-Communist Party General Secretary Yuri Andropov, who argued the regime could only be saved by opening to the West and modifying the Soviet system while accommodating Western geopolitical appetites in exchange for economic benefits. Communist Party General Secretary Mikhail Gorbachev used this theory to develop his policies of glasnost and perestroika. After Gorbachev failed, the same camp decided the Soviet Union should be disintegrated, though the same elite would remain in power as new capitalist Russian leaders. Putin is an heir to that thread. Right now, the levers of power and the state apparatus are essentially in the hands of the Andropovites. The state itself has consistently re-evaluated its position out of increasing discomfort with the cost-benefit analysis. Putin does not want to change Russia's fundamental strategy, but he hopes to make a few technical changes. However, his continuing drive toward the West has not brought Russia any success and has left it with an ever-deepening internal crisis, raising Shakespeare's question of "to be or not to be" for the Russian nation. The other school of thought on Russian revival is that Andropov was wrong and the current and coming consequences are not because of Yeltsin and Putin's mismanagement but because of a fundamental misunderstanding of the forces driving Western policies and the effect of the market on Russia. The Andropov position calls for technical changes in Russia's economy and marketization; the second position argues that Russia's current policy is a fundamental failure and must be adjusted. In Russia — and this is dramatically different from China and India — pro-market forces have been pro-Western at the expense, it seems, of Russian national interests. Many pro-Western reformers in Russia do not see themselves as part of Russia; some of them argue they are citizens of Earth rather than Russia, and that they must contribute to the success of the global market rather than the Russian market. This attitude cannot help but alienate these pro-Western members of the elite from many other Russians. Because the Andropovites failed to deliver, we expect the second school of thought to take over in the coming decade. We already see the first two issues that will take Russia in this direction: Ukraine and the retirement problem. Ukraine is an issue of foreign encroachment and shows Russia's former allies moving toward the West. Russia's retirement situation, where the elderly are no longer paid benefits and have no savings to draw from, is an enormous problem affecting more than a quarter of Russia's population — and, as an extension of the marketization of Russia, it points to the failure of the country's current course. The retirement issue might be the impetus for genuine popular resistance to any further market system inroads — and it could escalate into a struggle against Russia's current pro-Western course. Certainly, the existing protests are a far cry from what is usually required for a change of regime or course. These particular protests likely will die down, but new demonstrations will arise because the overall crisis in Russia will not go away anytime soon; on the contrary, it will deepen. STRATFOR senses a powerful counterforce coming gradually but certainly to confront Russia's current regime. This movement will come from those population segments the Russian oligarchic elite has excluded systematically from wealth acquisition — Russians from rural areas and small cities and the elderly — who seem to be stirring for more and larger protests. This, coupled with Russia's being pushed from the FSU and its internal systemic crisis, indicates that a defining moment for Russia is coming. One such moment came in the 1980s, when the KGB realized the Soviet Union might not survive and the Andropov strategy was born. Another such moment was when Yeltsin and Gorbachev faced off over the question of Soviet survival, and the Soviet Union was dismantled. Yet another pivotal moment came after NATO's Kosovo war, when Russia had the chance to confront the West, and Yeltsin decided the costs of doing so would outweigh the benefits, so he stayed his pro-Western course. It seems to us that in the coming decade, Russia's decision will be different, even if Putin has to be replaced to clear the way for Russia to strike at the West. The Russian people see the state as essentially a Jewish monopoly exploiting the Russian masses — a majority of Russia's top oligarchs are Jewish — to enrich a very small, cosmopolitan and pro-Western segment of Russian society (the segment the West sees as the whole of Russia). Though Russia has money and reserves, these are not in the hands of the country but of individuals — from state officials to oligarchs — who are out for their own interests. For example, though there are people literally starving in some provincial areas, Russia's agricultural industry exports food and reaches out to only some inside the country. Likewise, Russian end users rarely see the effects of Russian oil industry revenues. It can no longer be argued that the West is benign or that the market economy is working for most Russians; the only argument that can be made is that the current difficulties are temporary, and over time, Russia's current course will work out. But if Ukraine joins NATO, Russia will lose the buffer between itself and the West, and Russia will have no time to wait and see if Westernization will work in its favor. Furthermore, an attempt by Washington to replace Putin with a more accommodating Russian president might happen soon — but that attempt could spiral out of control and result in anti-Western forces backed by Russian masses taking power instead. And beyond that, death tolls from HIV/AIDS in Russia will probably snowball three years from now and remain high for a long while, finally driving home the point that the Russians and their nation are dying — and not as gradually as in the past. Thus, a reversal of Russia's course is highly probable. We are not sure how it will take place, but there are several possibilities: 1. The elite holds on to Russia's capital and center while the rest of the country crumbles. St. Petersburg and Moscow remain Westernized enclaves in a country that has no interest in what goes on there. This could result in the delegitimization of the Russian state and hence disintegration, with nationalist enclaves emerging in the provinces. 2. A popular uprising from the streets overthrows the regime and introduces a more traditional Russian government with anti-Western characteristics. 3. A palace coup pushes Putin or his successor aside, and Russia's course changes from within the government. 4. Under undeniable pressure from a majority of Russians, Putin changes his tack and becomes nationalist and statist. On the whole, we expect a fundamental Russian crisis and prolonged fighting in various forms — including military conflict at times. A number of scenarios could play out, but in the end, Russia will become the nationalist, statist entity it was before the last 20 years of openness and marketization. The question now is what the reversal will look like. The Communist Party is likely finished in Russia; it will not be the driving force. A new, anti-Western leading force will emerge from street protests and popular anger. Moreover, a completely new elite will probably form from this period of turmoil. The new elite will consist of national capital representatives, mostly from the production economic sector; patriotic intellectuals; officers in the military, security and intelligence; and popular resistance leaders. By 2015, the regime will probably be religion-oriented, with the Russian Orthodox Church taking a leading role, joined by moderates from other large religious traditions in Russia, such as Islam and Buddhism. A new regime will have to draw upon one resource or another for its strength; traditionally, Russian morality and human capability have been vital to the country's success. With the communist ideology in crisis and the market ideology inspiring relatively few Russians, moral strength can be drawn from revived religious values that argue for a strong Russia and a just society. Also, it will probably be a very conservative regime, resting on the foundation of a production economy, with low-paid workers, intellectuals and peasants as well as those dependent on social benefits. As the largest continental power and chief influence over Eurasia, Russia cannot escape its geopolitical fate: to maintain its territory by fighting seafaring powers (the United States, the United Kingdom and Japan) looking to assert influence in the strategically valuable Eurasian region. Russia and its immediate neighbors — within whose borders Russia has direct security interests — happen to be located in a very strategic area. If Russia disagrees with the U.S., U.K. and Japanese visions of its future and that of its neighbors, then Russia will have to fight. Thus, no matter the extent to which Russia's current pro-Western government shies away from confronting these forces, it will not be able to avoid the fight forever. It will probably join forces with other continental powers — Germany, China and India — by 2015. The regime will accept the idea of private property and adopt some form of market economy with state control. The economy will give priority to the development of Russian national capitalism, caring for Russian internal economic development and creating Russian competitive high-tech products. It will not cater to Western monopolies or be based on selling Russia's natural resources as it is now. The government will be much more geopolitically assertive, having as its foundation the principle of respected international power and Russia's international greatness. Similar struggles between pro- and anti-Western forces will take place in all FSU countries this decade, with Muslim FSU countries also experiencing an upsurge in Islamist militancy and radicalism, which is attractive to the impoverished. The Islamist force with the most potential to succeed is not a militant group, such as the Islamic Movement of Turkestan — militant groups have drawn the attention of intelligence and security services and are thus more likely to be crushed. A radical organization called Hizb ut-Tahrir, which is not militant in nature, could avoid defeat as it spreads the message of overthrowing secular regimes in Central Asia during the coming decade. As in Russia's case, various outcomes are possible in these countries — from the disintegration of some states to armed conflict in others. In the end, when a reversed, militarily and politically stronger Russia emerges sometime in the next decade, some FSU nations will realign themselves with Russia while others will remain in the pro-U.S. camp. Though we do not forecast the re-emergence of the Soviet Union within the next 10 years, some new Russian-led alliance consisting of several FSU countries — or parts of these states — will emerge by 2015. This would not be "the end of the fall" in terms of the Russian and FSU economic crisis. The region already is in freefall, and nothing can stop that immediately or even in 10 years. This reversal is about the system's structure and direction, changes in which will attempt to address the economic crisis over time — probably beyond the coming decade. In such a reversal, economic and other problems will intensify. But Russia has proven many times that it and its people can survive any hardship, as long as the struggle for Russia's greatness is made and is shared by its leadership and the masses. U.S. Military The peaks and troughs and localized strains the U.S. military has felt during the war on terrorism in general and the Iraq war in particular will prove to be immaterial in the coming decade. Regardless of the outcome of the war — though STRATFOR suspects it will end in Washington's favor — U.S. military dominance will remain absolute during the next decade. The U.S. military is the unquestioned and sole global military power; this is based primarily on the ability of the U.S. Navy to dominate the world's oceans. This condition of hegemony is only partially based on the superior numbers and technology of U.S. naval vessels and augmented significantly by U.S. dominance in space-based reconnaissance technology. On a broad scale, this situation will not change in the next 10 years — especially regarding U.S. naval dominance — but the next decade probably will see the emergence of cautious challengers to U.S. dominance over space. Fundamental technological breakthroughs have often driven fundamental changes in warfare, and STRATFOR expects the next decade to be no different. The next step in revolutionary warfare likely to become operational by 2015 is hypersonic scramjet technology. Having been developed by the United States for going on two decades now, this technology — capable of traveling at 15 times the speed of sound, meaning an aircraft with a weapons payload could fly from Seattle to Beijing in less than half an hour — will have a coming-out party of sorts over the next 10 years. The availability of such a unique standoff weapon will allow for rapid response and battlefield dominance in every corner of the world. This already is provided in part by the U.S. Navy, but now weapons can be delivered to a target far from any substantive naval presence and rapidly enough to negate any conventional countermeasures an enemy might have on hand. Technology like this solves many logistics-associated force projection problems simply because assets do not have to be in theater in order to launch a strike. Naturally, this will be another warfare tool for the United States and will not supplant traditional tactics and techniques. As situations require, ground forces will still have to be sent in to hold ground and force a political outcome favorable to the United States. This weapon would, however, give the United States rapid first strike or retaliatory capability in corners of the world where U.S. forces cannot instantaneously interdict or where the overriding geopolitical concerns do not require the physical presence of traditional U.S. military assets. This will force those seeking to counter the United States to look to asymmetric methods and toward the one area the U.S. military is still subject to competition — space. After all, the quickest, stealthiest, most expensive aircraft in the world is still rendered useless if it cannot navigate or if intelligence on the target cannot be gathered quickly. Given the virtual inevitability of U.S. naval dominance, state and non-state actors' only viable recourse will be the pursuit of asymmetric naval forces to limit Western mercantile and U.S. military access. Guerrilla navies are limited to regionally focused militant organizations (Tamil Tigers) and oceangoing pirates; in 10 years, however, the use of these navies might rise. Considering the ability of a single small craft to disable a U.S. naval vessel — as evidenced by the attack against the USS Cole — it is a logical step for anyone seeking to disrupt U.S. naval operations but without the conventional military strength to do so. Southeast Asia is the most likely area for this development, since the region already plays host to a number of maritime pirates and criminal organizations that can find safe sanctuary in areas of limited security and governance — the Philippines, Indonesia, Thailand and Malaysia, for example. Elsewhere, increased naval activity in and around the Gulf of Guinea might inspire guerrilla navies to use the existing pirate havens of Nigeria and the surrounding area to launch attacks against mercantile and U.S. naval vessels and ships of allied navies. Though a strategic competitor is not likely to emerge by 2015, missile technology will continue to develop. States such as Iran and North Korea could be able to deliver first-strike nuclear weapons to targets within their regions, including U.S. military bases and staging points. This is part and parcel of the unconventional threat that could trump the U.S. military's ability to project power wherever and whenever Washington sees fit. Of course, hypersonic payload delivery technology partially mitigates this threat, since it is best used against fixed infrastructure targets. The broadening of the U.S. missile defense umbrella is another line of defense for countries within range of regional nuclear powers, but missile defense technology is still spotty, will likely lag behind offensive technology and will never be 100 percent reliable. The possibility of non-state actors acquiring nuclear weapons either through collusion with or because of the incompetence of a state government cannot be ruled out. A non-state actor in possession of nuclear weaponry allows for the weapons' use without political encumbrances and throws a volatile variable into military planning and operations in the next decade. There will be at least six potential rivals emerging to challenge the United States' sole ownership of global, real-time, space-based reconnaissance and navigation: Russia, China, Japan, India, Iran and Europe. All six have their own internal limits on what they can and will do as far as space-based technology goes, but each will attempt to deploy such assets one way or another. Russia is the only competitor with an outside shot of actually reforming its existing space program to the point of creating a near-global, near-real-time reconnaissance system. Add this to existing ballistic missile technology, and a space-capable Moscow would pose a genuine threat to U.S. hegemony. The variable here is the economic and political status of Russia throughout the decade; the country is in a cycle of decline, but STRATFOR expects that to reverse sometime in the next decade. Once that reversal kicks in, Moscow will pay far more attention to improving its space-based capabilities as the only viable hedge to U.S. global naval dominance. India and China are hamstrung by their indigenous space programs' limitations and the limitations created by economic difficulties, such as those forecast for China. Nevertheless, both countries maintain fairly substantial missile programs they will seek to augment with space-based assets to multiply their missiles' capabilities and deny the perception of free passage through their territorial waters. A rise in Chinese nationalism/militarism could serve as an impetus for this despite economic and social limitations. India's economy will continue to grow, and a severe economic crunch will not negatively impact its fledgling space program. It is possible — and probable, in India's case — that a limited space program, coupled with indigenous and exogenous missile development, could provide checks to U.S. naval dominance on a regional scale. Japan's national security interests currently are in line with U.S. global and regional interests. In the long term, however, Japan likely anticipates its interests diverging from Washington's and could seek to use good relations now to incrementally launch a space-based reconnaissance and navigation program further down the road. This will be done slowly and innocently — dual-use satellites, for example — so as not to raise the United States' hackles and likely will not be completed by 2015, given Japan's economic and political limitations. Iran and Europe are even further behind the power curve than other potential rivals. Europe has demonstrable space-based and satellite capabilities but does not, and likely will not, have the internal structure or political willingness to pursue a militaristic space program — though Europe might be interested in a purely defensive domestic intelligence/surveillance space program. Iran has the motivation and the initiative, demonstrated by its planned March 2005 launch of its very first satellite. Additionally, Iran has a relatively capable missile program that will continue to improve, unless indigenous and exogenous factors interfere with Iranian military development. Their space program is still in its embryonic stages and not likely to be robust enough to challenge U.S. naval power even regionally. The limiting factor for all these programs is not so much time as it is indigenous political willpower and economic capability. With the exception of Russia — should its reversal come sooner rather than later — none of the potential rivals has the necessary political willpower and economic leeway to complete a space-based defense program by 2015 that would be robust enough to challenge U.S. space hegemony. Of course, geopolitical and military alliances between any of these rivals could accelerate indigenous programs and capabilities. It is worth noting that Russia has made a virtual cottage industry out of exporting its own space expertise and technology to countries such as India, China and Iran. Whenever Russia reverses course and begins to rebuild its military and space programs, this cooperation is likely to be somewhat curtailed, mitigating the benefits of these relationships. Since U.S. naval dominance will not be challenged and power projection capabilities will remain near absolute, the United States will naturally respond in kind to a growing threat to its space hegemony. STRATFOR expects a substantial increase in research and development into yet-to-be-realized anti-satellite technology to counter the potential rise of competing space powers. Whatever system is decided upon — kinetic energy, high energy lasers, satellite parasites, jamming or chemical lasers — it is not likely to be operational by 2015. Working prototypes, however, could be seen in limited operation by 2015. These will become even more indispensable when satellite-dependent hypersonic scramjet aircraft are put to use. Middle East STRATFOR's first decade forecast did not have much on the Middle East. In a general treatment of the region we accurately predicted that, along with Africa, Middle Eastern states were either breaking down or the regimes were losing their grip on power — a process that gradually continues. That said, our major miscalculation in 1995 was that we did not foresee the rise of Islamism, particularly its militant genre. In our specific mentioning of Turkey, we correctly said it would be contained by regional forces, since it did not assert itself as a major player until the Islamist-leaning Justice and Development Party came to power in the November 2002 elections. After that, Ankara began asserting itself in the Middle East and accelerated its efforts to gain membership in the European Union. In our 2000-2010 forecast we said the Iraq war has little meaning and would be discontinued. It goes without saying that we were off track with that prediction. This was because, prior to Sept. 11, no context existed in which the Iraq conflict could evolve beyond dissolution. Resuming a ground war was unimaginable in the context of the late 1990s. The events of Sept. 11 changed all that, and Iraq took center stage. We also noted that the Middle East was not strategic, but at the time we were referring to the Israeli-Palestinian conflict as the core of the Middle East. Obviously, much has changed since then. Three key elements will drive Middle Eastern geopolitics in the coming decade: continuing domestic and regional political upheaval in the Muslim world, the United States' status as a superpower and the demand for energy (oil). What the region will look like in the next 10 years will depend on the way current situations develop — most notably, the outcome of the U.S.-jihadist war and the state of technology with respect to fuel and energy. The U.S.-jihadist war will end in favor of the United States. Al Qaeda, hit hard by U.S. military and intelligence offensives, will be unable to sustain major operations in the Western world. As a result, it will settle down inside its own core sphere of operations — the Middle East and Southwest Asia — and pursue more modest objectives. After Sept. 11, the threat was that al Qaeda would launch a wave of attacks directed against the United States. However, barring the March 11, 2004, attacks against the Spanish train system in Madrid, the group has not been able to maintain a tempo of operations in pace or scope. Before al Qaeda's infrastructure was massively hit by the international countermilitancy offensive, it was capable only of occasional operations of major proportions, followed by several small-scale attacks. This means the initial evaluation of the threat might have been in error. The unexpected and unprecedented nature of the Sept. 11 attacks contributed immensely to the perception that Islamist militants under the leadership of al Qaeda had evolved into a powerful non-state actor with the capability to conduct operations in the United States. It was not until a couple of years after the attacks that it became apparent that al Qaeda's attack in the United States represented a special and singularly spectacular operation. What is becoming apparent is that the jihadist movement was never capable of launching sustained attacks; al Qaeda has either been much overrated or much degraded. Thus, our forecast for al Qaeda is given in light of the organization's capability to stage a Sept. 11-style attack only every five years or so — which also assumes a retention of capabilities. Therefore, if al Qaeda attacks on U.S. soil again, it is unlikely to be on the scale of Sept. 11 — both in terms of grand geostrategic implications and the physical impact. That said, there is always the wild-card scenario of an attack involving weapons of mass destruction, i.e., nuclear weapons, somewhere inside the United States or overseas, which has the potential of altering the global geostrategic calculus — with respect to both transnational non-state jihadist actors and "rogue" states. The other key development for the Middle East will be the emergence of a Shiite-dominated Iraqi state — one in which Iran will wield significant influence. This will allow Tehran to emerge as a dominant player in the Persian Gulf and Middle East — and, as a result, in the broader Muslim world. The United States and Iran are engaged in a complex chess game over Iraq. On one hand, the Bush administration wants to secure Iranian cooperation regarding the Iraqi Shia support of U.S. objectives in the country, while ensuring the Iranians are incapable of using this interaction to reach their goal of dominating Iraq. Tehran wants to avoid war now, but it also wants to eventually dominate Iraq (and the region), whereas Washington wants to rebalance the power between Iran and Iraq. The United States wants to ensure the relationship between Iran and Iraq is not based on pan-Shiite loyalty but is characterized by the Persian-Arab divide, and that the Iraqi Shia view their Iranian counterparts as a permanent threat. The Iraqi Shia understand that if they choose to align with Iran, they will be caught in an intense struggle between Iran and the mostly Sunni Arab Middle East. This is because, if the Shia dominate Iraq and align with Iran, the Arabian Peninsula will lose the buffer zone that keeps the Iranian military from overrunning its oil fields. The Shia in the Iranian-Iraqi arena — especially in the state of Iran — are at a historic juncture, with an unprecedented opportunity to establish an Iranian-led Shiite powerhouse state and upset the balance of power in the region. The question is whether they actually will take the opportunity. Three scenarios could emerge after a Shiite victory in Iraq on Jan. 30, 2005: 1. Iraq will emerge with a Shiite-dominated coalition government incorporating Sunnis and Kurds, pursuing Iraqi interests and maintaining a confrontational stance toward Iran. 2. Iraq will have a Shiite government and engage in an entente with Iran. 3. The Shia do not form a coalition government with Sunnis and Kurds and, as a result, Iraq undergoes a civil war that draws in Arab states and Iran. The country is fragmented, with southern Iraq allying with Iran, putting the Arabian Peninsula's oil fields at risk. The least likely scenario is a united Iraq dominated by pro-Iranian Shia, since this would destroy the region's balance of power. If the Shia take hold of the Arabian oil fields, they will become the region's economic and political powerhouse. The likelihood of enormous arrestors stopping this process is very high. Iranians realize they will lose in the end, given the Sunni domination in the region and beyond. Though the historic opportunity for Iran remains huge, Tehran will not want to make a high-risk move, since it plays chess several moves out and its foreign policy has been singularly cautious. So not only do the Iraqi Shia not see it in their best interests to align with Iran, the Iranians are not willing to risk their current position; therefore, the Iraq-Iran balance of power in the region probably will be unaltered. Iraq's Shiite-dominated government will still face threats and attacks by Sunni guerrillas and al Qaeda. If Shia take office and remain as passive as they have been thus far, they could succumb to the assault. There are indications that the Shia expect the U.S. military to protect them, but Washington will help only if the Shia take action as well and not align themselves with Iran. The U.S. military already is in Iraq, and Iranian help would require Iranian forces to enter Iraq — an act that would trigger a massive response from the Arab states in conjunction with Washington. Facing a short-term threat from the Sunnis and the long-term threat of being the battleground for Iranian-Arab rivalry — one in which the United States will likely get involved — the Iraqi Shia probably will seek U.S. assistance. As the U.S.-jihadist war winds down, an intra-Islamic struggle in the Muslim world will begin to take shape. This conflict will pit Islamists against non-Islamists and will alter the nature of U.S. involvement in Muslim states from military action to political engagement, where Washington will — on a case-by-case basis — negotiate with Islamist forces. This trend already is under way — most visibly in Iraq, where Washington has been working with the country's Islamist-leaning Shia first to oust Saddam Hussein's regime and then to effect a political reconstruction of the country — obviously in keeping with U.S. geostrategic objectives in the region. Thus far, we have seen three different Islamist trends: moderate, radical and militant (jihadist). Sept. 11 and its aftermath, though representative of the unleashing of militant Islamism, also has caused the militant movement to weaken, given the U.S. response to the attacks. In the next 10 years, jihadism will be relegated to the status of a low- to medium-intensity phenomenon, active for the most part within the Muslim world. Iraq and Saudi Arabia will remain as the epicenters of jihadist activity in the Middle East. The last four years also has led to the Muslim world's significant radicalization along religious lines. This has boosted several radical (non-militant) Islamist groups, which have been able to leverage societies' religious currents to advance themselves. Though they have remained secure from much of the destruction that has befallen their militant counterparts, the radicals — given their dogmatic predisposition — are unable to provide the masses with more than an outlet for protest. Here is where moderate Islamist groups increasingly will come into play, providing an expression for socioeconomic frustrations and a forum for identity politics. Moderate Islamist groups will make significant political gains in many Middle Eastern and Muslim states in the coming decade, as the establishments buckle under pressure from calls for change from within and without. That said, there are other non-Islamist political forces that will compete with the rise of moderate Islamists. This will bring about a struggle over the question of moderate Islam. Since the Sept. 11 attacks, there has been an upsurge in the global discourse involving moderate Muslims and moderate Islam. This issue is complicated not only by the U.S.-led West's attempts to seek out the moderates in the Islamic world but also by the diverse set of groups in Muslim states who claim to be the upholders of moderate Islam. What is curious in all of this is not the Western demand for moderation but the ample Muslim supply of moderation. There are at least four different types of Muslims who advance themselves as the adherents of moderate Islam. They are moderate Islamists, traditional Muslims, liberal Muslims and certain moderate Islamic regimes. An intense struggle will take place over ownership of moderate and authentic Islam in the course of the next decade. Another significant consequence of the U.S.-jihadist clash is that social and political space has opened up. This will lead to the decline of key authoritarian regimes in the Muslim world. The decline will not necessarily lead to the ouster of current ruling elites, but before the decade is out a situation will emerge in which they no longer enjoy a monopoly on authority and will have to co-opt disenfranchised but influential cross-sections of society. In this regard, pending leadership transitions in Egypt, Syria and Saudi Arabia will be major events. Egypt and other North African countries — while economically moving toward the West because of geography, natural resources and more advanced populations — will make such moves to include members of Islamist parties in the power structure. These Islamists might not bear the names of the groups they support (i.e., Egypt's Muslim Brotherhood [MB] or its counterpart moderate Islamist groups in other North African states), but they will bring their ideas to the table and make Islam a more visible fixture in the region's governments. Algeria is in an advanced stage of this process. Because the country has already seen a civil war, it understands the threat of an Islamist current running through the country and has decided to deal with each group in a different manner. The government has fought the militant groups tooth and nail, but dealing with the Islamic Salvation Front has come to be recognized as a way to appease calls for Islam within the government while maintaining power. Algeria will be the first North African state to openly try this balancing act, since there are broad-based calls for such a move and Islamist leaders who have come into the government's "good graces." In Egypt, the process will take longer, since the government has not reached the point at which it trusts the Muslim Brotherhood. However, Cairo realizes the coming leadership of the MB — more of an Islamist movement than a party — will be able to control some of the Islamist currents in the country and not just inside the government. The MB's "old guard" is still in power, however, slowing the process. Over the next decade, as "post-Islamist" leaders emerge inside the MB, the movement will gain momentum while Egypt's long-standing regime is forced to bring Islam into the government. Elsewhere in the region, the Israeli-Palestinian conflict will remain a non-strategic issue. However, the emergence of a Palestinian state — which will be under strict Israeli oversight — is a major event likely to take place toward the middle of the next decade. Additionally, rising demands for energy coupled with the near improbability of major technological innovations regarding alternative fuel sources — at least within the coming decade — will leave the United States very much interested in the Middle East, where political instability will keep Washington occupied with the region for the better part of the next 10 years. South Asia In our 1995-2005 decade forecast, STRATFOR correctly said that India, as South Asia's leading player, would be contained by regional forces. India might continue to claim the title of regional hegemon, but the last 10 years have demonstrated New Delhi's inability to overcome social and political impediments to achieving superpower status. Furthermore, as the global hegemonic power of the early 21st century, the United States will undoubtedly extend its influence — already felt in Pakistan — into the Indian subcontinent. As India enters the next decade, its center of gravity will be the economy. Economic growth is the key to a country's success or failure, and India is fully aware that it has the potential to create a position for itself among the world's leading nations. Though the popular message in international media is that India is on the brink of explosive growth and is following the path of its eastern neighbor, China, STRATFOR holds a slightly more pessimistic view of India's future. India has grown at an average annual rate of 6 percent during the past decade and will be able to sustain a strong level of GDP growth at rates reaching as high as 6 percent to 8 percent in the coming decade. However, India will not be able to reach China's current level of economic growth in the next 10 years. On the surface, India has several factors favorable to rapid economic growth. With a population of more than 1 billion, it has a massive and highly-educated labor pool from which to draw its resources. In addition, India does not face the language barrier China has, since English is prevalent throughout the country. This significantly contributes to its fast-growing software development sector by facilitating communication with India's Western trading partners. India will continue to occupy the profitable niche of value-added services driven by the information technology (IT) and telecom sectors. The states that have most benefited from these industries include the "Silicon Valley" cities of Bangalore and Hyderabad. However, the economic successes of these pockets of "Shining India" are not easily replicable and have not been adopted by India's other state governments. Even if these successes were to be replicated at the state level across the country, it would take at least another 20 years and a more diversified economy for India to reach economic growth levels comparable to China. To a large extent, India faces the same immense developmental obstacles it did at the beginning of its cycle of economic liberalization in 1991. On a basic level, the poor conditions of roads, railways, ports, airports and power supplies illustrate the enormity of India's task of modernizing its infrastructure to attract more FDI and allow businesses to operate more efficiently. While India's IT-driven states require only minimal levels of infrastructure, particularly in fiber-optic networks and electricity, the rest of India is largely underdeveloped. Thus, India is not in the position to become a highly industrialized country. The India-China comparison has become common discourse, but is not an easy comparison to make. China began its economic reforms in 1979 under an extremely focused and strategic "period of readjustment" that has been successfully implemented through the effective central control of China's authoritarian regime. In contrast, India is arguably a highly diverse, massive and fractionalized democracy lacking the central control necessary to put policy reforms into action. No democratic country comparable to India in terms of size and diversity has succeeded in implementing wide-scale democratic reforms to achieve rapid economic growth. Though India's current government is economically focused, actually getting state governments to implement reforms is a chore. In addition to rampant corruption and bloated bureaucracies in the Indian public sector, the Indian government's democratic structure and competing views of India's openness to trade and investment allow the states' chief ministers to ignore government policy reforms and pursue each political party's agenda, which is usually designed to garner votes through populist appeals. An important distinction to make is that while FDI is strongly sought after and encouraged in China, it is merely approved of and often resented by state governments in India. These differing attitudes toward reform define the contrast between the Chinese and Indian approach to economic development. With about one-fourth of the population living in absolute poverty, India has a significant number of voters who are not interested in FDI or global competition; the average voter is more concerned with where his next meal is coming from. This poverty is a developmental issue that must reach a manageable level before ruling governments can think past elections and toward long-term economic reforms. However, as local governments are forced to leverage poverty reduction and economic liberalization, the downward trend of poverty levels and upward rate of liberalizing India's markets will counter each other, thus preventing a rapid pace of economic development or poverty reduction. Given the number of developmental constraints on its economic potential, India still has a long way to go before it can catch up to China's current economic growth rate. The good news for India is that its economy is in a stronger position than the Chinese economy as we look into the coming decade. STRATFOR has forecast the burst of the Chinese economic bubble, signaling the inevitable halt to China's unprecedented growth trajectory. Combined with a massive and highly-skilled labor force, India's vital sectors provide a solid foundation for the country to pursue policy reforms at a strong yet gradual rate. On the geopolitical front, India will view Russia's disintegration as an opportunity to build its strategic alliance with the U.S. superpower. Although China will slow down economically, the East Asian giant will continue its attempts to tilt the balance of power on the Asian continent in its own direction, providing more reason for India to align with the United States and become part of the "winning" team in the global arena. India also will use this alliance to counter its historical opponent to the west — Pakistan. India realizes the United States values the Indo-U.S. alliance in the long-term over its short-term alliance with Pakistan, which was primarily built in the last half of the previous decade because of the U.S.-led war on terrorism. The dispute over Kashmir is the driving factor of Indo-Pakistani relations. Domestic constraints in India and Pakistan lead STRATFOR to believe the issue of Kashmir will not be resolved in the coming decade. However, New Delhi and Islamabad will continue the process of normalization and will likely reach a point by 2015 at which the two states will begin implementing a "road map" solution. The United States' final battle against al Qaeda will be fought within Pakistani territory early in the coming decade. STRATFOR has been forecasting a U.S. incursion onto Pakistani soil targeting al Qaeda militants with or without Pakistani President Gen. Pervez Musharraf's cooperation. We expect the operation to be successful for the United States but costly for Musharraf, as domestic instability will rise in opposition to U.S. forces in the region. With the Pakistani government centered around Musharraf's leadership, political instability in Pakistan will continue to loom over the horizon. Regardless of the domestic upset Musharraf is bound to face when U.S. troops enter the region, STRATFOR expects the current military regime in Pakistan to stay in power until 2007, given that there are no viable opposition forces strong enough to unseat Musharraf. The balance of forces among the military, bureaucracy and centrist political groups ensures the survival of the state, despite any instability that occurs at the regime level. After 2007, Musharraf probably will reach a deal with his regime to step down as military commander of Pakistan, enter a civilian role as the elected president of Pakistan and assume leadership of the ruling Pakistan Muslim League. The centralization of power around Musharraf does not suggest that the Pakistani government would collapse in his absence. In accordance with historical precedent, the military and bureaucratic establishments would reach a consensus and Pakistani politics would shift back to increased civilian control until the domestic situation settled. Pakistan will undoubtedly be influential in the nation-building effort in Afghanistan, given the large presence of ethnic Pashtuns in the two Pakistani provinces — Northwest Frontier and Balochistan — located along the Afghan-Pakistani border and the fact that Pashtuns account for at least 40 percent of Afghanistan's population. The United States also will maintain its military presence in Afghanistan as part of its operation against al Qaeda. Opposition to U.S. forces in Afghanistan is significantly less than in Iraq, and the U.S. presence in the region will allow for much-needed stability to aid Afghan President Hamid Karzai's emerging state. The Taliban movement has collapsed and evidently splintered into at least three different factions, one of which wishes to lay down its arms and become part of the developing political system. As a result, the Taliban will be unable to make a comeback in the next decade. However, Karzai's government does face effective opposition from Afghan warlords, Uzbeks and Tajiks, all of whom have a vested interest in representing their respective communities in the government. STRATFOR expects a consensus to be reached among the key players of each major ethnic community to work toward extending Kabul's influence to the 29 Afghan provinces. European Union In previous decade forecasts, STRATFOR correctly said that a hoped-for Franco-German-Russian axis would fail, since every other state in Europe has either been at war with or occupied by France, Germany or Russia multiple times. Additionally, the other states have completely rejected those countries' political views, whether on a unified Europe or the invasion in Iraq. We also were right in our forecast that European institutions would fail to contain centrifugal forces. European political integration has been a resounding failure, with a very visible death caused by the Iraq war. We were wrong on a few accounts, too. We forecast that the European Monetary Union (EMU) would not form, or that if it did, it would fall by the end of the decade. That is incorrect. While the EMU is not without its faults, the eurozone mostly recognizes the benefits of a common market and common currency. We also said that Britain, France and Germany would argue over what do to with Central Europe. Although competition did occur among these countries, it was not in regard to Central Europe, which everyone agreed needed to join the European Union and NATO. Instead, the competition was over France and Germany's view of Europe compared to the rest of the EU's perception, as well as the nature of U.S. influence on the Continent. Political disintegration is one of the major developments for the European Union in the next decade. The EU has been falling apart for some time, and STRATFOR wrote in the beginning of 2004 that the EU would begin sliding into chaos in 2004. Even if the EU does not yet recognize that its experiment in political cohesion is a failure, when the bloc looks back to when it all started to unravel, it will point to 2004. The fact that countries will never give up their national sovereignty is the reason behind the EU's coming turmoil. No country is willing to join a commission or sign on to a foreign or defense policy that it feels does not entirely represent its interests. No country is willing to have its national laws trumped by lawmakers in Brussels and Strasbourg. And, finally, none of the EU members see the benefit in forcing countries as diverse as those in the Union to implement the same legislation and policies. The EU probably will officially collapse as a political union by 2015. Political disagreement will persist to the point that one of its major countries — either France or Germany, in all likelihood — will leave the Union. The departure of either of those states would mean the EU's most ardent backers have given up on the idea of getting 25 countries to unify, and it is unlikely the remaining countries would be strong enough to keep the EU going. With its political ambitions over, the EU can and will successfully operate as a common economic zone. "Success" in the European economy is a relative term, however. Substantial changes to the labor market, bureaucracy and social welfare system will need to occur before Europe can even hope to attain the level of growth sustained by the United States. European economic prosperity will simply not happen until major structural reforms are implemented by national leaders, and they will be hamstrung by vehement opposition from their voters. The European Monetary Union (EMU), unlike the political union, will not fall apart in the coming decade. At present, there are more countries trying to join the EMU than are trying to leave it. Estonia, Lithuania and Slovenia will likely join in 2007, followed in 2009 by Latvia and Cyprus. Similar to the political union, the demise of the eurozone requires the departure of one major country — Germany. But Berlin, as the EU's largest economy, has more to gain from being in the eurozone than not being in the eurozone, simply because Germany is the undisputed leader and exemplar of the European economy. Demographics present the EU with a looming economic problem. Most European countries are experiencing low or even negative population growth. That is a major problem as the post-World War II boom population ages and begins to draw pensions out of government funds. Since there are fewer young workers being added to the system, pensions will suck money out of national coffers. Immigrants to the EU will make up some of the difference, but often they work lower-wage jobs that will pay less into pension funds or work informally without paying at all. The average retirement age in the EU is 59.9 (three years younger than the average U.S. retiree), and by 2015, large amounts of the population in some countries will be about five years away from retirement. Although pension reform is a popular issue for governments, it is not a popular issue for citizens of Europe, who have been guaranteed — and feel entitled to — cradle-to-grave support. Pension payouts will not collapse the social welfare model in the next decade, but the possibility of that collapse will force national leaders to embark on pension reforms in addition to general structural changes. Social issues will arise, bringing with them the possibility of major changes in the EU during the next decade — most notably in the area of immigration. For centuries, Europeans have identified themselves most strongly by their ethnicity, and interaction between ethnicities in Europe is rarely peaceful. Europe already is experiencing rising unemployment and increased immigration, and many traditional Europeans blame migrants from Turkey and North Africa for the EU's rising jobless rates. Immigration is already nearly equal to 1992 levels (then, increased migration was due to the Balkan wars, whereas now, more immigrants are Muslims originating from Africa and the Middle East). Beginning in 2007, the restrictions on labor movement that were built in to Central European accession treaties will be lifted, allowing those workers to move freely throughout Europe. Although the workers' overall migration will be limited, their movements will still reinforce the perception that foreigners are taking jobs. Perceived job shortages, plus tensions between white Christian Europeans and everyone else, will create a clamor for immigration restrictions for non-European countries. There also are likely to be mass-scale deportations of illegal immigrants — and possibly even legal immigrants. Some EU members already are pondering asylum camps as a solution; we look for Europe to make that idea a reality — albeit not on European soil — by 2015. Europeans will eagerly kick out non-Europeans, and if they perceive that Poles and Czechs — who will have a legal right to work in Western Europe — take jobs, they will try to keep out non-European immigrants, who do not have that legal right. On the foreign relations front, there is one key issue: Russia, whose relations with the EU are tenuous. Russia is one of the exogenous forces that could turn Europe into a pressure cooker. Some Western European countries — France and Germany, namely — have no real problem with Moscow, but the Central Europeans vividly remember their experience under the FSU and might have to make difficult decisions on what their national priorities are. There are two Europes: One is Europe as an economic union, the other is Europe as a military entity with a common defense position. The two are completely separate, but the Central Europeans are in the tough position of trying to straddle the division between economics and defense. These countries realize the benefit of economic ties to Europe, but they rely on the United States — all the way across the Atlantic — to guarantee their national security. The Central Europeans will run into a problem if a situation arises in the next decade in which an economic relationship with Europe and a military relationship with the United States are incompatible. For example, let us say the EU suffers a massive recession. Then, either simultaneously or a few years later, Russia decides to reintegrate Ukraine and position nuclear weapons near its border with Europe. In that hypothetical situation, the benefits of Central Europe's defensive relationship with Washington would outweigh those of its economic relationship with Brussels, and the Central Europeans would ally themselves with the United States. If Russia should go into a reversal and reassert itself toward Eastern Europe, other European countries also would be in trouble. The political and economic cost for Europe to rearm is unbearable, but the only other option is to invite NATO and the United States in to help protect the Continent. That too is an unbearable choice, since many EU countries would see U.S. intervention as a threat to their sovereignty. Europe also could be torn asunder by an intensification of Islamist-related attacks. Europe's relationship with Muslims became extremely uneasy following the 2003 Madrid attacks. Europeans need Muslims as a work force and yet are loathe to allow Turkey into the EU or give immigrants full citizenship rights; further, Europeans espouse cultural "integration" rather than multiculturalism. An increase in attacks would most certainly lead to extreme controls on immigration, mass deportations or even a pogrom against Muslims. This presents a problem — each EU country has its own policies and needs regarding its Muslim population. Exogenous shifts make a European common position — on anything — much harder to achieve. A resurgent Russia forces Europe to choose what it hates more: U.S. troops on the ground, the costs of rearmament or Moscow calling the shots. Some countries would not mind U.S. troops, but for others, they would represent the complete destruction of national sovereignty. Islamist militant attacks force the Europeans to take action against immigration — but some states need Muslim immigrants to make up for declining populations. These difficulties add to the probability that the political union of the EU will break apart in the next decade. Of course, it is possible that no major problems will arise. If the world stays the same for the next 10 years, Europe will not be forced to change and might hold together. Considering the events of the previous 10 years, however, stasis is not likely. Latin America As the world's sole superpower, the United States will be the most important force influencing Latin America and the Caribbean from 2005 to 2015. The region's geopolitical developments will reflect how its governments respond to U.S. economic, military and technological dominance. The United States will use this power to advance its strategic interests in Latin America. These interests include assured access to oil and gas reserves, battling "narcoterrorism" regionally and eradicating drug trafficking, opening up markets for U.S. exports and investment and locking the region's governments into U.S.-centric trade agreements that Washington will leverage to achieve U.S. security objectives. Latin American and Caribbean governments will have basically three possible responses to U.S. dominance: alignment, reluctant accommodation or rejection. However, the decisions Latin American and Caribbean governments ultimately make will be influenced by geography. Regardless of which option current governments in the region adopt, a decade from now Latin America and the Caribbean will remain dependent on exogenous forces for their growth — including the United States, China, Europe and fluctuations in the price of oil and other commodities. This vulnerability to factors that its governments cannot control or influence implies that Latin America might experience new external shocks over the coming decade that will hurt its economic growth and fuel social turmoil and political instability. For example, an economic downturn in China would hurt South America's largest economies — Argentina, Brazil and Chile — with ripple effects likely in the region's smaller economies. Other powers such as China, Russia, India and the European Union will make economic and political inroads in the region during the next decade, particularly in South America. Their main motivation will be to open new markets for their exports and develop new sources of raw materials in Latin America, which is rich in energy and other commodities. However, as their commercial presence grows in Latin America, these countries will compete with the United States for the region's raw materials and consumer markets. A larger economic presence implies greater political influence in some countries. For example, we see China supporting Brazil's opposition to an expanding U.S. military footprint in the Andean Ridge countries of South America's Pacific Coast, which Brazilians see as blocking one of their chief national interests: development of Brazilian-controlled inland transportation corridors to the coast. These corridors would enable Brazil to expand its trade and investment with China and the rest of Asia. However, U.S. interests in the Andean region ultimately will prevail over Brazil's — with a caveat. Washington would have a strategic edge over Brazil in the Andean countries as long as the current pro-U.S. governments are not replaced with new leaders with political agendas opposing those U.S. interests. New anti-U.S. governments could come to power in some Andean countries in the next five years or sooner — a development that could result in setbacks for U.S. regional interests. Latin America's endogenous problems — sub-par economic growth rates, widespread poverty and social and political instability — will persist through the decade because old and new ruling elites are unable or unwilling to reform their political institutions and economies. At the core, there is both an institutional and cultural resistance to change in the region. As a result, a decade from now Latin America and the Caribbean will have larger populations and economies, but social and political instability will persist throughout the region. Also, populism and nationalism still will be forces in governance and politics. Latin America and the Caribbean will divide more sharply into three geopolitical sub-regions or spheres during the coming decade. One of these sub-regions includes Mexico, Central America and the Caribbean. Demographic, economic and political factors will draw this group of countries more tightly into the U.S. sphere of influence. However, the countries' relationship with the United States will be uneasy at best because Washington essentially will dictate the terms of engagement. Security, immigration and trade will be the major U.S. priorities in relations with this group of countries. U.S. involvement in Central America's security crisis involving the "maras," or street gangs, will get deeper. Trade and immigration will bind Central America more closely to the United States over the coming decade, deepening the roots maras have in both Central America and the United States. For Washington, helping Central American governments control the maras more effectively will become an important component of a broader U.S. national law enforcement effort to contain the proliferation of maras in the United States. Self-interest also will compel Mexico to cooperate more closely on regional security issues with the United States, because rising gang-related insecurity in Central America increasingly will spread into Mexico. The second sub-region consists of the Mercosur customs union countries — Argentina, Paraguay and Uruguay — that will be influenced by Brazil's drive to make itself South America's most influential power and a global player in the realm of multipolar strategic alliances that commonly reject U.S. hegemony. Brazil will displace Mexico as Latin America's largest economy early in the coming decade — we think by 2007. However, Brazil's increasing economic influence in South America will not displace U.S. economic dominance there. Brazil's economy is less than one-twentieth the size of the U.S. economy. Moreover, STRATFOR thinks internal commercial differences in Mercosur — particularly between Argentina and Brazil — likely will affect its political unity over the coming decade. Brazil's political influence in South America will outweigh its economic clout. However, other countries in the region will continue to place their own interests ahead of Brazil's demands for regional political and economic integration that would place it at the hub of a South American community of nations modeled in many respects after the European Union. Brazil's ability to advance its interests and position itself as Latin America's largest economy and dominant regional political power also will be affected by social and political developments in countries such as Bolivia and Argentina. The Andean region will be an unstable flashpoint during the coming decade, during which the United States will be the dominant power in terms of security. Politics in the core Andean countries — Bolivia, Ecuador and Peru — will be shaped by indigenous activism, ethnic separatism and new populist political leaders with nationalist agendas that appeal to the poor. Already weak political institutions probably will become more unstable. Popular rejection of U.S. influence will be an incremental force in the Andean region during the decade. This popular rejection might intensify more rapidly if free trade agreements (FTAs) with the United States are implemented. STRATFOR thinks Washington is likely to implement FTAs with Colombia, Peru and Ecuador by 2007. However, U.S. plans to negotiate an FTA with Bolivia could be delayed by persistent political instability in that country. The key countries over the coming decade in terms of affecting regional geopolitical developments will be Colombia, Venezuela, Brazil and Cuba. Bolivia also could be a flashpoint for broader regional instability. The Colombian conflict will intensify early in the coming decade as a result of extended U.S. support for a sustained Colombian military offensive against rebel groups such as the Revolutionary Armed Forces of Colombia (FARC). The government will not completely eradicate the FARC. By the latter half of the decade the intensity of the conflict in Colombia likely will subside, but it will never end completely. At the same time, the military offensive in Colombia will push the narcotics trade and irregular armed groups into neighboring countries, expanding the frontiers of the original Colombian battlefield. We expect President Alvaro Uribe Velez to be re-elected in the first half of 2006. The FARC will seek to assassinate him between now and those elections. If he wins, the rebels likely will redouble their efforts to kill Uribe in an effort to slow or derail the military offensive against them. Even if Uribe is killed, we believe it would not substantially slow military operations against the FARC. The Colombian government would be plunged into a major political crisis and the Colombian people would be shocked. However, a constitutional successor to Uribe likely would assume power quickly, and the Colombian army's U.S.-backed offensive against the FARC would continue. After five years and more than $3 billion in mainly military aid from Washington, the Colombian army's war against the FARC has a life and momentum of its own. Geography, nationalist political agendas and economic and social needs will fuel the existence of irregular armed groups in the Andean region. Some will have political agendas, others will be bandit gangs disguised as political movements. As Washington seeks to bind these countries into its sphere of influence with FTAs, it also will expand its security demands on their governments. However, unstable governments will make it difficult for the United States to advance its regional interests, which include both battling "narcoterrorism" and winning assured access to gas and oil reserves. Venezuela under President Hugo Chavez will continue to distance itself from the United States. However, Chavez's development model is based on high oil revenues and continual public spending increases. It is an unsustainable model based on uncertain exogenous forces. If oil prices drop to around $25 per barrel or less in the next five years, Venezuela's economy could suffer a crisis that undermines popular support for Chavez. However, we think Chavez has sufficient foreign exchange reserves to weather an economic downturn through the end of 2006, when new elections will be held. If we are right, Chavez likely will be re-elected, although he might not reach the end of his second term in 2013. We do not expect Chavez to change course and align himself with the United States. This means Chavez will continue to challenge U.S. security interests in the region, particularly in Colombia. Chavez also will seek to expand his Bolivarian revolution regionally by establishing political and financial support networks with like-minded Bolivarian or extremist political leaders and organizations throughout the region. We expect Washington to respond to the obstacles Chavez represents by seeking to isolate him politically, and perhaps economically. If Venezuela's economy spirals into a prolonged crisis — which would happen if oil prices drop and hold in the mid-$20s per barrel for several years — Chavez probably would face renewed threats to his regime from among his own "chavista" supporters. Some Chavez opponents in Washington, D.C., think the Bolivarian revolution would not survive the loss of its maximum leader. STRATFOR disagrees. We think the Bolivarian revolution could continue in Venezuela for years, even without Chavez. After six years in power, "chavismo" controls all governmental institutions, including the legislature, courts, electoral authorities and the military. Chavez might be the maximum leader, but his government and revolution are populated with thousands of people with an economic stake in keeping the process going. Cuba will experience a political transition early in the coming decade. We expect that time will resolve the longstanding U.S. goal of getting rid of Cuban leader Fidel Castro. However, Castro's death likely will not lead to an immediate collapse of the Cuban regime, though Washington will move quickly to assert its interests in Cuba over those of other countries in the region. We also think different groups inside the current Cuban regime — including top civilian and military officials — will jostle internally to position themselves as the legitimate transition negotiators with Washington and other interest groups such as Cuban exiles. We also see Spain and China showing direct interest in a post-Castro Cuba — the Spanish for historical and cultural reasons, and Beijing because Castro's demise could upset a regional Chinese intelligence network based in Cuba. If Castro does die in the first half of the coming decade, it also is likely that governments in the region that consider themselves socialist or leftist — including Brazil, Argentina, Chile, Venezuela and Uruguay — will align themselves with Havana against Washington. Castro's death will not end the current "Bolivarian" movements that originated in Venezuela under Chavez and are now spreading throughout the region. This suggests that, as the decade advances, relations between the United States and a Chavez-ruled Venezuela could deteriorate to such an extent that the U.S. government would move to actively contain and isolate Chavez. Africa In previous 10-year forecasts, STRATFOR was correct about Africa's role in the world. STRATFOR's prediction that South Africa would emerge from its legacy of apartheid and develop a fairly stable political system has proven correct, as seen in South African involvement as a fundamental player in the creation and continuing work of the African Union. The continued emergence can also be seen as South African leaders spread their influence as attempted brokers of African conflicts, most recently in Cote d'Ivoire and the Democratic Republic of the Congo. Nigeria, as predicted, also has made great strides toward the status of a major player on the continent, enabled for the most part by its financial security as a major oil producer and its increasing military power, especially compared to its less successful neighbors. Africa will be strategically important to the United States for two reasons — natural resources and the war on terrorism — and the continent's next 10 years will revolve around the United States and its actions. Exploitation of natural resources in Africa's interior will not increase significantly over the coming decade. The sustained high commodity prices of the early 2000s did not lead to wide-scale exploitation of resources in Africa, indicating that although the continent holds vast reserves of many resources, extracting them is still too costly to turn a profit. Because STRATFOR does not expect commodity prices to increase dramatically, we do not expect the extraction of resources in Africa's interior to significantly increase. The problems that have plagued Africa in recent decades — poor infrastructure and the uncertain nature of political regimes — will continue to contribute to the lack of investment flowing into the continent. The notable exception to this rule will be oil and natural gas, especially in areas of potential offshore development, since transport infrastructure already exists and political stability can be better guaranteed by building operations on the water. The world will continue to explore and drill for oil in countries such as Nigeria, Algeria, Libya and Angola. As world demand for oil and natural gas grows to near output capacity, tapping hard-to-reach quantities of oil located offshore in countries such as Mauritania, Equatorial Guinea, Cote d'Ivoire and Ghana will be increasingly economically attractive. Neighboring countries and ambitious entrepreneurs — possibly with Western powers' silent backing — will take advantage of all opportunities to replace regimes in order to find the best deal possible for their newfound businesses (this was demonstrated in the recent plot to overthrow President Brig. Gen. [Ret.] Teodoro Obiang Nguema Mbasogo in Equatorial Guinea). The U.S. military will continue building up military forces in several countries as part of its war on terrorism, as well as seeking out militants located in Africa to prevent them from using parts of Africa as safe havens, training grounds or staging grounds for attacks. However, as the war on terrorism comes to a gradual conclusion, U.S. strategic interest in this area will decrease substantially. The tragedy of HIV/AIDS will continue to affect the continent significantly over the coming decade. The extremely high population growth rates found in most African countries will be sufficient to counteract deaths from HIV/AIDS in nearly all countries, with the exception of those countries in the south, including South Africa, Lesotho, Swaziland, Zimbabwe and Botswana, where the infection rate is much higher. The demographic effects of HIV/AIDS will be felt because a sizable portion of the population at the peak of its economically productive years has been infected. Assuming there is no cure or breakthrough in treatment or prevention methods, HIV/AIDS will add another drop into the bucket of most African countries' problems of political and economic stability. In the southern African countries, where the demographic effects of HIV/AIDS will be strongest, unemployment rates hover between 35 percent and 75 percent, indicating there will be no shortage of available workers. South Africa will continue to be the pre-eminent economic power in sub-Saharan Africa, even after the HIV/AIDS-related losses are accounted for. South Africa's GDP is more than 300 percent of the GDP of the second highest producer in sub-Saharan Africa, Nigeria. Even though South Africa will be one of the countries most directly affected by the problem of HIV/AIDS, its military might, political stability and economic dominance will allow it to move forward in pursuit of its strategic interests. South Africa will again attempt to broaden its influence in Africa over the next decade — a process it was forced to abandon in 1990 because of internal problems and international pressure. Though the apartheid governments should not be confused with the African National Congress regime currently in power, South African national interests are the same now as they were under apartheid. Now that many of the internal problems that impeded South Africa's ascension to a true position of regional power have been resolved, South Africa will be able to begin the process of truly expanding its sphere of influence beyond its borders. The first test of the country's expansion abilities will be the coming disarray of the ruling Zimbabwe African National Union-Patriotic Front in neighboring Zimbabwe. Although South Africa will not annex the country, it will use the instability as an opportunity to move military forces into the country to conduct peacekeeping operations and ensure the installation of a friendly government. South Africa will again act in its own national interest by continuing to fund infrastructure development in Zimbabwe and countries further north, since such development would be a means of exploiting the resources found there and would help secure South Africa's border with Zimbabwe. South Africa will also jump on any similar opportunities presented in Mozambique and Botswana.

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