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.