Why Emerging Markets Should Look Within

In recent weeks, Argentina, Turkey, Ukraine and Thailand have endured plunging currencies, capital flight and political disruptions in varying combinations. While they have all been affected by global economic tides, these nations are facing crises because of problems in their national governance. And if we look elsewhere around the world, we find that governance has been re-emerging as a major factor behind success or failure in many emerging nations.

It’s not that macroeconomic quandaries have gone away in all of those countries. There are still many such issues: how to deal with current account deficits, for example, or how to face the consequences of tighter monetary policy in the United States. But these concerns were foreseeable, and some countries have been meeting them, if imperfectly, while others are letting these problems push them over the precipice. In this context, good governance means directing political energies at strengthening the economy rather than trying to cement power and keep down the opposition.

This new world contrasts with two earlier waves of change. The first started in the 1990s, when a rising China bought and invested in raw materials at an unheard-of pace. That flow of purchasing power was so strong that it brought better times to other emerging nations, including many in South America and Africa, regardless of whether the individual countries had good governance in place.

The second major wave was the recent global recession, which damaged the commercial prospects of many nations. For instance, in the first quarter of 2009, the gross domestic product of Singapore fell at an annualized rate of 8.9 percent. That wasn’t because Singapore had bad economic policy, but because exports were hit by a global downturn beyond the country’s control.

The two waves have had such noticeable effects that we’ve become unaccustomed to evaluating political fundamentals in individual nations. But these waves, though not quite over, have slowed. Many of the advanced economies have returned to financial normalcy, albeit with stunted employment. And the Chinese growth juggernaut is slowing.

Let’s consider the role of governance in four countries facing some of the most pressing crises:

Argentina: Not long ago, Keynesian economists were heralding Argentina’s economic policy as an example of successful economic stimulus. But the government continued to inflate the currency excessively, legally suppressed accurate economic statistics to cover up this inflation and confiscated pensions to pay the government’s bills. The results have been a currency crisis and a hemorrhaging of reserves.

Turkey: Its once-heralded political turnaround turned out to have serious flaws, including a government that imprisons many journalists and is arguably heavily influenced by secret internal cliques that are sometimes called “shadow states.” Turkey has a well-diversified and fairly productive economy, but its central bank is facing speculative attacks on the currency as market confidence in Turkish policies has plummeted.

Ukraine: Having rejected a European trade deal, the country accepted Russia’s guarantee of part of its budget, temporarily stemming a financial crisis. Now Ukraine is torn between building closer ties to Russia or to the European Union. There is political chaos and violence, possibly to be followed by a financial crisis after all.

Thailand: Like Turkey, Thailand was widely considered a middle-income country that had turned the corner on governance and sustained economic growth. Yet now there is regular violence in Bangkok, andsignificant political forces want to suspend democracy. Tourists and foreign investors are growing wary of the country, which probably faces an economic slowdown and possibly worse.

What is striking about these stories is how rooted they are in each country’s daily internal struggles. Indonesia, India, South Africa, Brazil and Russia also appear vulnerable — and, again, it’s largely because of an inability to solve domestic problems. It’s not primarily because they have been whipsawed by unstoppable global trends.

But by no means are all countries headed down such dangerous paths. Chile, Mexico and Malaysia are a few more positive examples. They have persistent problems, but the economic data in each case indicates a brighter future. Mexico, for instance, has had a marked economic slowdown, but it has pressed forward with liberalizing its energy sector and has begun some much-needed reforms to primary education. Drug-related violence is worsening in Michoacán, but subsiding in some northern cities. Democracy appears robust.

It’s not yet clear how to characterize China, as far as governance goes. For all of its economic progress, there are still many signs of dysfunction in political institutions, like corruption among the party elite and an unwillingness to take on state-owned factories and energy companies to fight worsening air pollution. It’s also not clear whether the Chinese are succeeding at rebalancing their economy toward consumption. Most important, we don’t how robust its political system would be in a serious economic downturn. Yet China is important enough globally that if its economy imploded, many other nations would have crises, too, no matter what they did on their own.

So we’re now at a point where many global macroeconomic factors have been muted. That means tougher tests, including political ones, for quite a few emerging-market nations. And maybe 20 years from now, we will no longer be calling this entire group of countries “emerging.” It’s not only that many will have emerged — it’s also that some may fall off the track of progress altogether.