The State of Emerging Markets: Up, Down, and Up—but Still Forward

As many developing countries face the beginning of a potentially long currency crisis, let's not forget how far they've come—and will still go—toward democracy, freedom, and rising affluence.


The start of the year has not been an easy one for financial markets. The Federal Reserve is continuing its policy of trimming its bond purchases by $10 billion a month, and the immediate result has been a sharp pullback of the currencies, and to some degree equities, of countries such as Indonesia, Turkey, India, South Africa and Argentina. The reason? According to traders, commentators, and even the head of Brazil’s central bank, Fed policy will trigger interest rate rises around the world, staunching the flow of easy money that has purportedly fueled global growth — and leading to struggles everywhere.

That thesis is hardly new. It was widely circulated last summer, when the Fed first hinted that it might begin to wind down its more aggressive measures to stimulate economic activity, which it introduced after 2009. In this reading, the boom times of many countries around the world has had nothing to do with the change in economic fortunes, or skilled leadership, or shifting global sands. It was and is simply a derivative of U.S. policies.

This view has wide play, and goes nearly unchallenged. That does not make it correct.

Indeed, it is likely wrong for at least two major reasons: it forgets that financial markets are not perfect proxies for real world economies, and it misses the fundamental transformation in countries around the world that has taken place over the past few decades and is about to accelerate this year.

As I wrote in a column last August, a U.S.-centric view extends well back into the 20th century, and the only wrinkle today is that China has now entered the mix. Low and behold, China, too, has recently seen some slowing of its growth, largely because of the determination of the Chinese government to shift the mix of its economic growth from state-led infrastructure and exports to domestic consumption. That transition will, inevitably, result in diminishing demand for commodities and raw materials, and that demand had also been a key factor in the strength of other economies, including many of the ones above.

Yes, China’s voracious demand for raw materials did provide a boost to countries as far-ranging as Chile, South Africa, Indonesia and Brazil. And yes, easy money from the Federal Reserve did get deployed to more speculative currencies ranging from Turkey to Argentina. But that speaks only to the narrow — albeit attention-grabbing and important — financial markets. Financial markets are roiling, as they do from time to time, but that doesn’t result in less activity by companies such as Unilever or Starbucks, nor a halt in the emergence of a global middle class in numerous countries.

We shouldn’t overweight the significance of financial markets when evaluating the status of emerging markets; to do so is to espouse a particularly U.S.-centric view of how the world works. More voters, and more Starbucks lattes, are bellwethers for progress, irrespective of how markets are performing.

Even more, what financial markets miss, in addition to the factors above, is that this year will see a massive democratic surge around the world. In fact, in a span of several months more people than ever before will go to the polls. In part, that is a natural consequence of more people living on the planet than any other time in history, but between now and this fall, massive democracies will elect parliaments, congresses and presidents.

Many of those countries, in fact, are the ones currently experiencing financial market volatility. Turkey, which has seen a run on the lira and then aggressive action by the Turkish central bank to raise interest rates, will have an election in August to determine the fate of the embattled prime minister, Recip Erdogan, and his Islamist party. Indonesia, the world’s largest Muslim democracy with more than 250 million people, will chose a new president and parliament over the summer. In October, more than a hundred million Brazilian voters will decide whether Dilma Roussef has earned another term in the midst of questionable economic growth and after hosting the World Cup. And in May, India — the world’s largest democracy — will elect a new government and see whether it can at last break the political knot that has constrained its economic potential.

The sheer volume of this democratic activity is unusual, and combined with the inevitably partisan midterm elections in the United States in November, it is a recipe for some volatility. Democracy, as we all know, is messy, noisy, chaotic, often bitter and frequently inconclusive. It is a perfect recipe for the kind of uncertainty that financial market participants frequently say they dislike. As such, it also provides the perfect excuse for sharp swings in sentiment and short-term-ism as traders attempt to game outcomes and as longer-term investors sit on the side awaiting the verdict of the polls.

Yet, if you had asked Americans or Europeans in the middle of the 20th century and indeed the parents of the hundreds of millions who will vote this year to define their ambitions for the early 21st century, their dreams would have been the world as it is today: one of democratic inclusiveness, increasingly open markets, rising affluence, and more and more freedom of movement, of economic life and of personal life than ever before, all capped by imperfect but radically improved political systems.

The coming months will see no end of obituaries written for the emerging world, and of the perils they face. There is nothing new about these prognostications, and they all miss the glaring realities of democratic transformation and its sometimes tumultuous consequences. They miss as well the degree to which hundreds of millions have seen vastly increased living standards, and are willing to demand some degree of accountability from their governments. That is a recipe for global security, and long-term prosperity, even if far too many declare the opposite.

This post originally appeared on, an Atlantic partner site.