Why are emerging markets in political turmoil?
The fighting between Prime Minister Recep Tayyip Erdoğan and Islamic cleric Fethullah Gülen seems to have come to a halt. Investors are happy, as they feel that the conflict has been resolved for good, with Erdoğan having emerged victorious.
They could be making a fatal mistake. Maybe, we are just in the middle of a temporary ceasefire in trench warfare. This paper’s editor-in-chief Murat Yetkin, who is known to be well-connected in Ankara, argues that the second round will kick off after March 2, the deadline for replacing candidates for the upcoming local elections.
Turkey is not the only country in political turmoil. While Ukraine seems to have cooled down, there are still violent conflicts in Venezuela and Thailand. In addition, South Africa, Nigeria, Russia, Argentina, Brazil and Bosnia have experienced significant public unrest during the last few months.
Each of these countries is under unique circumstances. After all, “all happy families are alike; each unhappy family is unhappy in its own way.” However, could it be coincidence that all these countries are experiencing political turmoil around the same time? Similarly, it is highly unlikely that “international powers” are trying to destabilize them all, as Erdoğan is claiming. Maybe, they share common factors.
Paul Krugman notes the revival of macroeconomic populism among developing countries. According to academics Rudiger Dornbusch and Sebastian Edwards, who coined the term in 1991, this is “an approach to economics that emphasizes growth and income distribution and deemphasizes the risks of inflation and deficit finance, external constraints.” Krugman simplifies it as “the belief that the orthodox rules never apply.”
I don’t agree with him that only Venezuela was making that mistake until recently. Populism has been the bread and butter of emerging market politicians in the last few years. They were able to get by unnoticed thanks to strong capital flows. Economists Dani Rodrik and Arvind Subramanian are right in arguing that, with the end of the global liquidity flush and the accompanying credit boom, emerging markets are simply reaping what they sowed.
The countries hit with political turmoil have another defining characteristic: In all except Thailand and Ukraine, ruling parties have been in office for at least a decade, as emphasized by economics consultancy Capital Economics. Incumbents’ wear and tear is well-known, but the standard narrative cannot answer the question “why now?”
A paper titled “Political Booms, Financial Crises” offers an explanation: The authors argue that “governments concerned about their reputation and popularity ride the benefits of credit booms and delay corrective actions to prevent crises.” They note that crises in emerging markets, unlike those in developed countries, are preceded by a strong increase in government support.
If they are right, the recent political unrest in several countries may just be the tip of the iceberg for a couple. I hope Turkey is not one.