Growing pains

At the beginning of this year, Eurasia Group, the political risk firm I lead, released its top 10 risks of 2013. We gave our top slot to increasing turmoil in "emerging markets". 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 are 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 with 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 cannot 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 rise 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. But all along, we underestimated the resilience of developed markets, as these crises all had less market impact than expected. The outlook is now less bleak throughout the developed world. Europe is still foundering, but the euro zone survives intact and most of the crushing austerity is behind us. The US is rebounding, and Japan's Abenomics is a welcome surprise. 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 US Federal Reserve has introduced the idea of "tapering". That means the days of easy liquidity are numbered, and higher US bond yields means less money pouring into emerging markets in search of better returns. There is another factor. For decades we have looked at emerging markets' middle classes as an empowering force. For companies, 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. 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 is not just understandable, it's inevitable. What is 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. Brazil and Turkey are just the beginning. 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. 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 have 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 fuelled by these countries, we'd better get used to how turbulent they can sometimes be. Reuters

Growing pains

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Market watchers are learning they also to have to keep an eye on the middle classes in emerging markets as the development ride can be rocky

Market watchers are learning they also to have to keep an eye on the middle classes in emerging markets as the development ride can be rocky