The Kapali Carsi

Why are emerging markets in political turmoil?

Do you think that it is a coincidence that quite a few emerging markets have seen public unrest, and some even thrown into political turmoil, in the last few months? Or do you think that this is all a conspiracy by dark powers to cut emerging markets down, as Turkish PM Recop Tazyik Gazbogan believes to be the case for Turkey. Even if he is right, why now? How come most of the countries in political chaos have been ruled by the same government for over a decade?

In my latest Hurriyet Daily News (HDN) column, I go over some stylized facts about the countries in political turmoil before offering a unified framework that attempts to explain these facts. As usual, you can read the whole thing at the HDN website. Also as usual, I have a few additional comments:

First of all, as I mention in the column as well, I do not claim that “political booms” is the sole explanation to what is going on in these countries. On the contrary, it works for some countries, like Brazil, Venezuela, South Africa and Russia better than others, like Turkey, Ukraine and Bosnia. But even then, I feel that it does a pretty good job in explaining how these governments managed to stay in power for such a long time. It of course also offers an explanation to why the likes of Turkey delayed important structural reforms although they had the political power to pursue an aggressive reform agenda: Precisely because they got their support thanks to delaying the reforms- and they could afford doing that because of the strong capital flows.So the direction of causality could be the opposite of what many believe it to be.

However, I would not want to discount the other reasons for why these governments were in power for such a long time. Take Turkey, the country I know best: The 2001 crisis killed off the ruling Justice and Development Party’s (AKP’s) competition, leaving it as the major contender for Turkey’s right-wing votes, which have traditionally made up 2/3 or so of total votes. Before, we usually had two major right-wing parties in the 20-25 percent range, with the nationalists and Islamists getting another 15-20 percent (except in the 1990s when the main Islamist party at the time managed to increase its votes to over 20 percent) and 30 percent or so going to socialists (social democrats, Kurds, etc). Of course, when the economy started to perform well, thanks to the IMF-Dervis recovery program, and then seemed to be performing well, thanks to capital flows, the AKP’s political support strengthened.

How does the economy fit into all this? As capital inflows are decreasing, these countries have been caught vulnerable. Besides, as growth is slowing down, the poor are not supported as before, as economist Atilla Yesilada notes (in Turkish). Again, this is not why Turks are revolting:), but in Thailand, farmers who did not get their rice subsidies joined the protests as well…

BTW, I would strongly recommend you to read the political boom paper I hyperlinked in the column, but here’s a very interesting quote: “As can be seen, there is a stark difference between advanced and emerging economies. Government popularity increased substantially prior to major emerging market crises, including all countries that went through the Asian crisis, but also prior to the major crises in Russia and Argentina… The opposite holds for crises in advanced economies. On average, governments see a notable decrease in popular support and their ability to carry out its agenda. This is true for crises of the late 1980s or early 1990s, but also for the recent crisis events in the UK the US and peripheral Europe…”

You might have noticed that this framework fits Turkey less than many peers. Yes, the AKP did delay structural reforms and is in power for 12 years now, but the public unrest had nothing to do with the economy. While the recent graft scandal is a case by itself, I would explain the summer’s Gezi protests, and the more recent protests to PM Gazbogan’s autocratic policies, by noting that “democracy is a luxury good” and that “you need at least some democracy to ask for more”. For the latter, you would not expect North Koreans out in the streets, right?:) As for the former, you could always give me the example of the Arab Spring, but I would counter that economic conditions were quite bad in all these countries. That’s why the likes of Jordan and Yemen were able to quell the protests with pork-barrel spending and supporting the poor…

Finally, one small comment on the Krugman quote in the column: “the belief that the orthodox rules never apply”. That would accurately summarize the Central Bank of Turkey’s policies from 2010-2011 to (hopefully) the end of January. Or maybe not- as I have always argued that the Bank was well aware of the limitations of its policies- they were forced to try heterodox policies as a second-best when PM Gazbogan did not let them hike rates…

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