Monitor
PUBLISHED : Monday, 24 June, 2013, 12:00am
UPDATED : Monday, 24 June, 2013, 5:58am

Rising economic stress behind protests in Brazil and Turkey

When times are good, people are happy to ignore politics, but, as the unrest in Sao Paulo and Istanbul attests, things can change dramatically

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.
 

There is a school of thought that all popular political uprisings have economic causes.

So, for example, the Communist Party's 1949 victory in China's civil war was attributable not to the justice of its cause, nor even to superior military strategy, but rather to runaway inflation under the Nationalist government.

Similarly, the Arab Spring of 2011 was triggered by the twin blows of rising food prices and a growth slowdown caused by the euro-zone crisis.

Closer to home, Hong Kong's 500,000-strong demonstration of July 1, 2003, may on the face of it have been a protest against the government's proposed anti-sedition law. But behind the discontent stood 8 per cent unemployment, declining incomes, and a deflationary trend that had seen the value of home-owners' properties fall by two-thirds in just six years.

As with China, Tunisia and Hong Kong in past years, so with the popular protests in Brazil and Turkey today.

Both economies benefited enormously from the long period of low interest rates and plentiful liquidity that followed the dotcom bust of 2000. Both became favourites with rich investors.

Famously, Goldman Sachs tagged Brazil as one of the BRIC emerging super-economies, along with Russia, India and China. Money duly poured in.

Yet despite being on the receiving end of the global commodity boom, growth rates in Brazil struggled to approach those of China or India. The high point came in 2010, when annual growth surged on a tide of liquidity to hit 7.5 per cent.

However, the influx pushed Brazil's currency higher, eroding the country's competitiveness. Meanwhile, the government instituted generous welfare programmes that pushed state spending up to 40 per cent of output, fuelling inflation and crowding out productive investment.

As a result, growth slumped below 1 per cent last year, and money began to flee the country. The local stock market has fallen 23 per cent so far this year. With international liquidity now tightening, commodity prices weakening, and the central bank forced to intervene to prop up the currency, Brazil's economic prospects are rapidly deteriorating even as discontent mounts.

In the 2000s, Turkey also emerged as an investors' darling. Following the lira crisis of 2002, the incoming government of prime minister Recep Tayyip Erdogan won praise for stabilising the currency, defeating inflation and bringing down interest rates.

Flushed with its success, the government embarked on a major investment programme of infrastructure spending, which helped push growth rates up to 7 per cent or more in the years preceding the financial crisis.

More recently, however, economics has taken a back seat to politics, as the government has launched a series of trophy projects, like a giant (15,000 square metres) mosque on one of the last green hilltops overlooking Istanbul and the proposal to build a shopping mall in place of the city's Gezi park which triggered this month's protests.

Unfortunately, with a low domestic savings rate, the spending has been funded largely with foreign debt, which has now climbed to 40 per cent of GDP. Much it is short-term.

Meanwhile, the euro crisis and the war in Syria have hit tourism revenues. The tens of thousands of Syrians that used to visit Turkey each week to go shopping have been replaced by refugees.

Last year, economic growth fell to just 2 per cent. Now, with short-term capital leaving the country in a hurry, financial stresses are multiplying. The local stock market is down 23 per cent in the last month alone, while the lira is sliding fast.

All of which demonstrates an old truth: when times are good, people are happy to ignore politics. But when the economy turns down, political grievances rapidly become a focus for mass discontent.

tom.holland@scmp.com

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