Dani Rodrik
When Turkey’s Justice and Development Party (AKP) defied pundits and pollsters by regaining a parliamentary majority in the country’s general election on November 1, financial markets cheered. The next day, the Istanbul stock exchange rose by more than 5%, and the Turkish lira rallied.
Never mind that one would be hard pressed to find anyone in business or financial circles these days with a nice thing to say about Recep Tayyip Erdoğan or the AKP that he led before ascending to the presidency in 2014. And make no mistake: Though Turkey’s president is supposed to be above party politics, Erdoğan remains very much at the helm.
Indeed, it was Erdoğan’s divide-and-rule strategy – fueling religious populism and nationalist sentiment, and inflaming ethnic tension with the Kurds – that carried the AKP to victory. Arguably, it was the only strategy that could work. After all, his regime has alienated liberals with its attacks on the media; business leaders with its expropriation of companies affiliated with his erstwhile allies in the so-called Gülen movement; and the West with its confrontational language and inconsistent stance on the Islamic State.
And yet financial markets, evidently placing a premium on stability, hailed the outcome. A majority AKP government, investors apparently believed, would be much better than the likely alternative: a period of political uncertainty, followed by a weak and indecisive coalition or minority administration. But, in this case, there was not much wisdom in crowds.
It is true that the AKP had a few good years after first coming to power in late 2002. But the party’s room for mischief was constrained by the European Union and the International Monetary Fund abroad and secularists at home. Once those limits were removed, Erdoğan’s governments embraced economic populism and authoritarian politics. Investors’ apparent optimism following the AKP’s victory recalls Einstein’s definition of insanity: doing the same thing over and over and expecting a different outcome.
Turkey certainly isn’t the only case where financial markets have misread a country’s politics. Consider Brazil, whose currency, the real, has been hammered since mid-2014 – much worse than most other emerging-market currencies – largely because of a major corruption scandal unfolding there. Prosecutors have revealed a wide-ranging kickback scheme centered on the state-owned oil company Petrobras and involving executives, parliamentarians, and government officials. So it may seem natural that financial markets have been spooked.
Yet the most important outcome of the scandal has been to highlight the remarkable strength, not weakness, of Brazil’s legal and democratic institutions. The prosecutor and judge on the case have been allowed to do their job, despite the natural impulse of President Dilma Rousseff’s government to quash the investigation. And, from all appearances, the probe has been following proper judicial procedures and has not been used to advance the opposition’s political agenda.
Beyond the judiciary, a slew of institutions, including the federal police and the finance ministry, have taken part and worked in synch. Leading businessmen and politicians have been jailed, among them the former treasurer of the ruling Workers’ Party.
Financial markets are supposed to be forward-looking, and many economists believe that they allocate resources in a way that reflects all available information. But an accurate comparison of Brazil’s experience with that of other emerging-market economies, where corruption is no less a problem, would, if anything, lead to an upgrade of Brazil’s standing among investors.
Going back to Turkey, leaked recordings of telephone conversations have directly implicated Erdoğan and his family, along with several government ministers, in a hugely lucrative corruption ring involving trade with Iran and construction deals. It is an open secret that government procurement is being used to enrich politicians and their business cronies. From all indications, corruption reaches higher and is more widespread than in Brazil.
But today it is the police officers who led the corruption probe against Erdoğan who are in jail. Some of the media outlets that supported the probe have been closed down and taken over by the government.
The AKP argues that the police officers are adherents of the Gülen movement and that the investigation was politically motivated, aiming to unseat Erdoğan. Both claims are most likely true. But neither justifies the blatant lawlessness with which the AKP government has clamped down on the corruption allegations. The upshot is that Turkey’s institutions, unlike Brazil’s, are being captured and corrupted to an extent that will hamper economic growth and development for years to come.
Nor is Turkey the only country where large-scale corruption is left unchecked. In Malaysia, Prime Minister Najib Razak has been at the center of a major political scandal since nearly $700 million in unaccounted funds was found in his bank accounts. Billions of dollars are said to be missing from the government investment fund 1MDB, which Najib controlled. Najib has promised a full reckoning, but he has sacked Malaysia’s attorney general, who was investigating 1MDB.
In Latin America, Argentina and Mexico both rank among the bottom half of countries in controlling corruption and maintaining transparency – much lower than Brazil. The dramatic abduction and gruesome killing in 2014 of 43 students north of Mexico City is only the latest example of collusion among the country’s criminal gangs, police, and politicians.
We know from painful experience that financial markets’ short-term focus and herd behavior often lead them to neglect significant economic fundamentals. We should not be surprised that the same characteristics can distort markets’ judgment of countries’ governance and political prospects.
