Emerging, maturing, protesting markets
At the beginning of this year, Eurasia Group, the political risk firm I lead, released its top 10 risks of 2013. We forgot to put Pepsi-guzzling whistleblowers on the list, but we did give our top slot to increasing turmoil in “emerging markets.” In a global economy that has become more reliant on countries whose economies are vulnerable to political shocks, emerging markets are our new economic fulcrums. What is causing this growing uncertainty in emerging markets? How much stress can they take without upsetting the balance for everyone else.
The protests in countries like Brazil and Turkey are not Arab Spring-style uprisings: they’re the anger and frustration of newly empowered middle and lower-middle classes, the same consumers who were the catalysts and beneficiaries of this growth in the first place. In emerging markets, politics have at least as big an impact on market outcomes as the underlying economics — that’s why these kinds of protests can strike seemingly out of the blue, and bring business-as-usual to a halt. Compare the impact of protests (and leaders’ responses) in Brazil and Turkey to the Occupy Wall Street movement. In a developed country like the United States, the political system is consolidated in a manner that forces fringe movements to choose one of two paths: go mainstream or lose steam. In emerging markets that have experienced dramatic and rapid changes, governments can’t keep up with citizens’ evolving demands. Protests are far more likely to swell, with severe economic ramifications.
Why are the protests in Turkey and Brazil happening? There are immediate triggers. In Brazil, it was a small raise in bus fares; in Turkey, it was the imminent demolition of sycamore trees in Gezi Park. But these triggers are the narrow manifestations of larger, systemic grievances playing out on a country level, and trends in the global economy at large. So what are the larger factors that make even model emerging markets more ripe for unrest?
In the wake of the financial crisis, global markets paid outsized attention to crises in the developed world. In Europe, there was the specter of austerity and a euro zone breakup. In Japan, it was crushing debt and the Fukushima disaster. The United States had debt ceiling debacles, a fiscal cliff, sequester and poisonous political gridlock in Washington. But all along, we underestimated the resilience of developed markets as these crises all had less market impact than anticipated. The outlook is now less bleak throughout the developed world: Europe is still foundering, but the Eurozone survives intact and most of the crushing austerity is behind us. The U.S. is rebounding, and Japan’s Abenomics are a welcome surprise compared to the status quo. These developed governments have much more capacity to protect against chaos than was widely assumed.
Today, these fears are shifting towards emerging markets. That’s because emerging markets are experiencing headwinds, with growth slowing somewhat throughout much of the developing world. On top of that, the Fed has introduced the idea of tapering. That means the days of easy liquidity are numbered — and higher U.S. bond yields means less money pouring into emerging markets in search of better returns.
There is another factor within emerging markets themselves. For decades we’ve looked at emerging markets’ middle classes as an empowering force. For corporations, the reason to invest in an emerging market was all of these newly-enriched consumers. But with riches come power and rising expectations, and the middle class in Turkey, Brazil and other emerging markets are beginning to make demands. Middle classes begin to value quality of growth over sheer quantity — and in an environment where even the quantity has diminished, the stage is set for discontent.
What these middle classes are demanding is, from a Western standpoint, familiar: accountability, transparency, better social services and quality of life over sheer growth. All of that isn’t just understandable, it’s inevitable. What’s happening now is, despite how it looks, a sign of emerging markets’ maturation. Even though the protests themselves are about radically different things, all of them are about strengthening the rights of the body politic and airing grievances surrounding governments’ inadequate responses to change. This is how emerging markets become developed ones — democracies have to be shaken before they strengthen. (Assuming, of course, that the leaders respond by reforming rather than strong-arming.)
But despite this broad trend across many emerging markets, if there is one thing that is finally becoming widely understood, it’s that emerging markets are not a homogenous asset class. Even if these countries share growing pains, their specific challenges and their capacity to meet them vary immensely. How protests take shape — and how the government responds — plays out quite differently. And not every emerging market government can successfully use these tensions as an opportunity to better respond to constituents’ demands.
Just compare Brazil and Turkey. In both instances, their emerging market status made protests more likely and more impactful. But their protests have played out in dramatically different ways. In Turkey, it’s about antipathy and hostility toward Prime Minister Erdogan as a person. His authoritarianism has stoked anger — and his heavy-handed response to the protests compounded it. This makes it exceedingly difficult for him to respond to grievances.
In Brazil, protests aren’t aimed against President Dilma Rousseff specifically. They’re about policy. Brazilians don’t like the billions being spent on World Cup preparations while the basic needs of the middle and lower classes are not provided. They want improvements in education, infrastructure and security — and more accountability from elected officials.
So what can we expect going forward? We’ll see many more risks cropping up in emerging markets: Brazil and Turkey are just the beginning. Protests like these are very hard to predict. The things that will make middle classes happy — like better governance, more balanced and effective spending, and reduced corruption levels — are hard to implement politically until the people, and subsequently foreign investors, demand it. Even then, it is no easy feat and it’s a painstaking process. The path of emergence is never clear-cut. Countries can stall or fall. Take Greece, which is perhaps the world’s first “submerging market” — MSCI recently stripped it of its developed market status.
We’ve spent too long thinking of emerging markets as bastions of economic growth with a one-way ticket to development. They’re also places for political bumps in the road. Since our new global economy is fueled by these countries, we better get used to how turbulent they can sometimes be.
This column is based in part on a transcribed phone interview with Bremmer.
PHOTO: Anti-government protesters wave flags and shout slogans during a demonstration in Ankara late June 25, 2013. Turkish anti-terrorism police detained 20 people in raids in the capital Ankara on Tuesday in connection with weeks of anti-government protests across the country, media reports said. REUTERS/Umit Bektas | A demonstrator, with a Brazilian flag wrapped around himself, participates in a protest on the streets of Belo Horizonte June 26, 2013. REUTERS/Ueslei Marcelino