Home / Opinion / Columns /  Strongmen are turning emerging markets into submerging markets

Examining the tea leaves for 2022, one prediction seems quite straightforward: Emerging markets may need to be renamed submerging markets. Exhibit A in this investment class to avoid is Turkey, whose currency lost almost 40% against the dollar last year, in large part because, prodded by its erratic president, its central bank has been cutting interest rates as inflation soars. In late 2021, things became riskier still when it launched a scheme to encourage depositors to hold money in Turkish lira by guaranteeing them against future currency losses. The scheme boosted the lira for a little while, but the central bank has had to step in, expending billions to shore up the lira.

The underlying problem is that President Recep Tayyip Erdogan, who has ruled Turkey for almost two decades, manages the economy in a riveting soap opera of institutional chaos: Central bankers are abruptly sacked for raising interest rates, while the country has had three finance ministers since 2018. Even Erdogan’s son-in-law resigned as finance minister without explanation via an Instagram post in November 2020.

In Brazil, meanwhile, inflation is out of control, hitting double digits last year. This is blamed on President Jair Bolsonaro’s populist spending to boost his chances of getting re-elected in 2022. Bolsonaro famously told Brazilians to “stop whining" about covid less than a year ago. He has refused to get vaccinated. But Brazil propped up its economy with pandemic outlays reaching 11% of gross domestic product (GDP). Coupled with global commodity price increases, this sent prices spiralling up. In emerging-markets folklore, Brazil is synonymous with battles against hyperinflation in the past. This creates a vicious cycle: the country indexes wages to inflation to sustain the purchasing power of Brazilians, but this creates inflation of its own.

The list of mismanaged emerging economies that happen to be led by illiberal, populist strongmen who pursue unorthodox economic policies is long, circa January 2022. Sri Lanka managed to pay a $500 million bond this week as it announced a $400 million swap facility with India. It needs to repay $4 billion in debt this year. President Gotabaya Rajapaksa announced plans this week to fast-track investments in industries that would boost exports and tourism. But the country’s human rights record—its treatment of its Muslim and Tamil minorities as well as indiscriminate use of an anti-terrorist law—may put its preferential trading agreements with the EU at risk. Last June, the European Parliament called on Sri Lanka to honour its human rights obligations if it wanted to keep the trade arrangement.

Sri Lanka’s problems have been made worse by white-elephant projects funded as part of the One Belt One Road (OBOR) initiatives devised by Beijing to boost its own infrastructure firms and offer financing to developing countries as an alternative to funds from the International Monetary Fund and World Bank. For all the development mistakes of the past decades by those two West-dominated institutions, OBOR may prove to be in a league of its own. Almost $150 billion was loaned to African countries between 2000 and 2018 for infrastructure projects by China. Angola and Ethiopia are among the largest debtors. Several countries are now in the process of renegotiating their debt with China, just as Sri Lanka has recently been doing.

Doing ground work for a China-India book proposal in 2010, I travelled to Hambantota in Sri Lanka with a Financial Times colleague to witness the construction of a deep-water port there and a new airport. Chinese workers and engineers were everywhere and both looked like vanity projects. Hambantota was the long-time constituency of then president Mahinda Rajapaksa. In April 2010, his son Namal was elected from Hambantota.

Russia is yet another example of erratic strongman decision-making. Its needless brinksmanship over Ukraine aside, the Kremlin in effect orders large companies to pay out about half their profits in dividends. As an FT columnist noted last week, “From the Kremlin’s perspective, every dollar a corporate insider siphons from company cash flow into property on the Cote d’Azur (in the south of France) is a dollar lost." Capital flight could be tackled with regulatory moves, however, and making Russia more business friendly.

I abandoned my China-India book idea after deciding the two had little in common, other than having continent-sized populations. But, via productivity-linked-incentive schemes, India’s government has embraced subsidy schemes skewed to capital-intensive big business that Beijing pursued, an idea borrowed from Korea and Singapore.

Still, Beijing understands the way supply chains work better than India appears to. As former chief economic advisor Arvind Subramanian observes, tariffs raised on 3,200 items since 2014 hobbles our exporters as they seek to compete with, say, Vietnam. India’s slow progress over three decades in reforming labour laws does no less damage. Employed Indians as a proportion of our working-age population fell to 43% in pandemic-hit 2020, as Mahesh Vyas of the Centre for Monitoring Indian Economy noted. This ratio is 53% in Bangladesh and 63% in China. India, unfortunately, looks unlikely to reap its demographic dividend. Instead, moves to reserve jobs for locals will probably become routine as state elections approach, along with the doling out of subsidies and perhaps high-decibel minority bashing.

As Shakespeare wrote, “I wasted time and now doth time waste me."

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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