Don’t underestimate Turkey’s turmoil: Not all emerging markets will succeed

John Hulsman
TURKEY’S often-fickle political system may not make its current domestic turmoil seem particularly important. But the country’s troubles hold lessons for the likely success – or failure – of other emerging markets in 2014 and beyond.

More and more, Turkish Prime Minister Recep Tayyip Erdogan looks like a man who has outlasted his usefulness. If he had left office six months ago, he would have gone down in modern history as the most consequential and successful Turkish leader since the founder of its modern state, Mustafa Kemal Ataturk. Now, much of what he has achieved since coming to office in 2003 lies in peril.

Erdogan’s success has been built upon three substantial accomplishments. First, his mildly Islamist Justice and Development Party (AK) has seemed far less corrupt than its bumbling, secular forebears. Second, after a great struggle, Erdogan managed to tame Turkey’s generals, getting them out of politics and back into the barracks. Third, he presided over a decade of unparalleled economic growth, with Turkey morphing from perennial IMF basket case into a leading emerging market economy.

Now two of these three pillars are straining under the weight of recent events. The AK leadership (AK means “white” or “pure” in Turkish) has shown itself to be just as corrupt as the secular governments that preceded it. In mid December, the police arrested 50 people on the grounds that they were tender rigging, engaging in secret transfers of gold to Iran, and bribery.

Damningly, the suspects included the sons of three AK cabinet ministers (all of whom have since resigned) and the manager of Turkey’s second biggest bank, in whose home authorities reportedly found $4.5m stashed in shoeboxes. Erdogan has tried to quash the investigation by reassigning hundreds of police chiefs working on the case, firing a senior prosecutor, and attempting to rewrite laws to allow the government to stop corruption probes against itself.

He may well get away with this in the short run, with nationwide municipal elections to be held in March 2014, which will undoubtedly prove to be a referendum on Erdogan and AK rule itself. The main secular opposition Republican People’s Party (CHP) is weak, divided, and with no coherent programme for taking Turkey forward. As such, even a wounded and discredited AK could still dominate the coming elections, allowing Erdogan to run for a strengthened presidency, as he wishes to, in August 2014.

But in a sense, all this tumult is merely the foreground; the political repercussions matter most in terms of endangering Turkey’s economic success story. For Turkey is one of the Fragile Five (along with India, Indonesia, South Africa and Brazil), major emerging market economies dependent on massive foreign capital inflows. With the US Federal Reserve committed until recently to injecting $85bn a month into the US economy, ultra low borrowing costs for the Fragile Five became a comfortable norm.

This was already unsustainable, as evidenced by the economic swoon all five countries experienced when the Fed – somewhat maladroitly – signalled mid-last year that QE would not last forever. Once Fed chairman Ben Bernanke backtracked and said that the taper was not imminent, the Five bounced right back. Now, of course, the party is over. The taper has begun.

This has been met with a collective and complacent yawn by most western analysts, as they fail to connect politics with economics. But the name of the game in the coming era will not be whether emerging markets are here to stay (they are), but rather which emerging markets make it, and which do not; analytical disaggregation will be the key.

Some of the Fragile Five will undoubtedly succeed; for instance, if business-friendly Narendra Modi of the centre-right BJP can win coming elections, he will likely jumpstart India’s economy. But that is precisely because the politics of a BJP-led coalition will allow for this. In Turkey, however, things look bleak for a wounded Erdogan still in power – precisely because the political ructions caused by recent scandals, coupled with the taper, mean that international capital matters more to Turkey just at the moment investor trust has reached its lowest ebb. It is this political-economic reality, rather than the usual garden variety political opposition, that is likely to doom Erdogan’s dream. Emerging market analysts should take note.

Dr John C Hulsman is president and co-founder of John C Hulsman Enterprises (, a global political risk consultancy. He is a life member of the Council on Foreign Relations, and author of Ethical Realism, The Godfather Doctrine, and Lawrence of Arabia, To Begin the World Over Again.