Two major emerging markets, India and Turkey, started the new year in political turmoil, and that may be a good thing.
In India, a year-old political party surged to victory in a key regional election, potentially throwing a monkey wrench into what had looked like predictable national elections due by May of this year. In Turkey, long-time Prime Minister Recep Erdoğan is engulfed in a Watergate-style corruption inquiry that reaches ever further into his inner circle and threatens to tarnish his outstanding legacy as a leader.
What these disparate developments have in common is that they crystallize the disgust newly empowered populations across the emerging markets feel with the old graft-ridden ways of doing political business – a great global leitmotif of the early 21st century. The events also illustrate that the two countries’ democratic systems allow them to react in a meaningful way, rather than accumulating discontent beneath the surface until it explodes.
In India, the Aam Aadmi (Common Man) Party -- which grew out of a civic anti-corruption movement in November 2012 -- stunned the nation by winning 28 out of 70 seats in elections for the Delhi regional assembly last month. The upstarts went on to form a governing coalition with the incumbent Congress Party, which voters humiliated with just eight seats. Aam Aadmi leader Arvind Kejriwal was sworn in as chief minister of Delhi on December 28, 2013. He lost no time announcing that his party will contest the upcoming national poll.
India’s energetic, chattering classes are in high gear debating whether Kejriwal and the Aam Aadmi are a momentary curiosity, or a tectonic political catalyst. The truth is likely somewhere in between.
With two-thirds of India’s population still rural, a party rooted in the urban intellectual/business class, as Aam Aadmi seems to be, probably cannot control the national government. But the passion it is exciting reflects how fed up the country’s productive vanguard feels with the existing political duopoly: Congress, which is fading fast after nine years in control at the national level, and the Bharatiya Janata Party, whose most definitive characteristic is Hindu chauvinism in explosively multi-cultural India. Supporters from across the country flocked to Delhi to witness Kejriwal’s swearing-in ceremony, which was held in the open air. “The suffering of the people at the hands of government officials and the system will go away with the rise of people like Arvind Kejriwal,” a software engineer named Ayush told The Diplomat
Recent developments in Turkey have been darker. Since mid-December, prosecutors have arrested dozens of well-connected people, including the sons of three cabinet ministers, on charges of arranging or accepting bribes from construction companies to fuel the country’s runaway building boom. Erdoğan, whose AK Party has controlled the government since 2002, responded by blaming the scandal on unnamed foreign powers. Then, in shades of Richard Nixon’s Saturday Night Massacre, he fired the top prosecutor coordinating the massive corruption probe. On another front, Erdoğan has been resisting the interest rate hikes that his central bank says are necessary to buttress a plummeting Turkish lire. When he is not denouncing outside political meddling, he has been denouncing the “interest rate lobby.”
Financial markets have reacted severely. The iShares MSCI Turkey ETF
(NYSEARCA:TUR) has lost 18% of its value since the first corruption arrests on December 17, 2013, bringing its drop since late May to 37%. The lire has slid by a scary 7% against the dollar over the past month. Turkey’s sovereign bond yield curve has inverted, with two-year bonds trading a bit wider than 10-year paper, and both yielding above 10% annually.
It’s a sad conclusion to Erdoğan’s years as prime minister (he wants to run for president now), who has seen Turkey double GDP per capita, conquer its traditional cycles of hyperinflation, and become a sought-after partner for Europe rather than the poor cousin begging on the doorstep. But imagine what would happen in a similar situation in one of the big authoritarian emerging markets like China or Russia.
What would, and does, happen is exactly nothing. The baksheesh and string-pulling that Turkish law enforcement is bringing to light are a way of life in Moscow and Beijing, which the power elite makes scant efforts to disguise. The odd minister or mayor is locked up for abuse of office every now and then, but everyone knows this is a sign of political disfavor, not systemic change. Turkey and India, imperfect but functioning democracies, have at least some chance to evolve as the law or an upstart party challenges the prevailing order.
Correlating democracy and economic achievement has long presented emerging-markets-watchers with a moral dilemma. The hard fact is many or most of the recent leaps forward in development have been overseen by authoritarian governments – in Chile, China, Malaysia, Singapore, etc. The great third world democracies – India, Brazil, Indonesia, Philippines, South Africa – have a profoundly mixed record.
Yet democracy does seem a necessary ingredient for nations to proceed to the next level, rising altogether from emerging market status on the model of Japan, South Korea, or Taiwan. In a world where prosperity increasingly depends on spontaneous innovation, seamless global integration, and trust in an intangible legal and regulatory order, the freedom advantage may be moving further down the economic chain. In any case, “instability” in India and Turkey may prove beneficial in the long run.
No positions in stocks mentioned.
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