Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

When Financial Markets Misread Politics

Dani Rodrik 11th November 2015

Dani Rodrik

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.

© Project Syndicate

Dani Rodrik
Dani Rodrik

Dani Rodrik, professor of international political economy at Harvard University’s John F Kennedy School of Government, is president of the International Economic Association and  author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press).

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834664e04a 8a1e 4ee0 a6f9 bbc30a79d0b1 2 Closing the Chasm: Central and Eastern Europe’s Continued Minimum Wage ClimbCarlos Vacas-Soriano and Christine Aumayr-Pintar
u421983467f bb39 37d5862ca0d5 0 Ending Britain’s “Brief Encounter” with BrexitStefan Stern
u421983485 2 The Future of American Soft PowerJoseph S. Nye
u4219834676d582029 038f 486a 8c2b fe32db91c9b0 2 Trump Can’t Kill the Boom: Why the US Economy Will Roar Despite HimNouriel Roubini
u42198346fb0de2b847 0 How the Billionaire Boom Is Fueling Inequality—and Threatening DemocracyFernanda Balata and Sebastian Mang

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

KU Leuven advertisement

The Politics of Unpaid Work

This new book published by Oxford University Press presents the findings of the multiannual ERC research project “Researching Precariousness Across the Paid/Unpaid Work Continuum”,
led by Valeria Pulignano (KU Leuven), which are very important for the prospects of a more equal Europe.

Unpaid labour is no longer limited to the home or volunteer work. It infiltrates paid jobs, eroding rights and deepening inequality. From freelancers’ extra hours to care workers’ unpaid duties, it sustains precarity and fuels inequity. This book exposes the hidden forces behind unpaid labour and calls for systemic change to confront this pressing issue.

DOWNLOAD HERE FOR FREE

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641