Until the past year, the consensus view on the world economy cast the West as a spent force, and ceded the future to the BRICs: Brazil, Russia, India and China. Then, following the eruption of protests from Brazil to Turkey in early summer, the flight of capital from emerging markets a few weeks later and a broad slowdown in the BRIC economies, the story shifted. Wall Street stopped using the BRICs to celebrate emerging markets and started referring to the BIITS, or the Fragile Five, to raise alarms about the vulnerability of emerging markets.
These silly shorthands fail to capture the vast differences among emerging nations. The BRICs never had much in common, and neither do the BIITS: Brazil, India, Indonesia, Turkey and South Africa. Their common feature was a high current-account deficit, which is a measure of vulnerability to foreign creditors. But by fall, this deficit was shrinking in India and Brazil, and still high in the other three — dangerously so in Turkey and South Africa.
In 2014, these countries are likely to part ways more sharply, because all five will hold national elections with dramatically different implications for their economies. As a rule, the most successful leaders tend to be charismatic newcomers, with a basic grip on economic development and the mass appeal to enact reform. Only one of the front runners, Indonesia’s Joko Widodo, shows all these qualities. Here’s how the elections could play out:
Brazil. Once seen as a less charismatic reflection of her Workers’ Party predecessor, Luiz Inácio Lula da Silva, President Dilma Rousseff soon proved much more prone to meddle in the economy. The markets, which came to embrace Lula, now root for Anyone but Dilma. To no avail: facing a weak opposition, she remains the front runner. Still, the summer protests and the currency seesaw have compelled her to stop interfering in the private sector. At best, Brazil can hope to muddle through under Rousseff.
India. Democratic India looks poised to bet on an authoritarian personality. As the Congress-led ruling coalition waffles in the face of slowing growth and rising inflation, voters are defecting to regional parties and the opposition Bharatiya Janata Party, led by Gujarat state leader Narendra Modi, a dynamic but domineering figure. The risk: while democratic regimes and authoritarian regimes tend to produce similar growth rates, authoritarian regimes produce more extreme results. For every success like Lee Kuan Yew, there is a Hugo Chávez.
Indonesia. Growth has stalled in the second term of President Susilo Bambang Yudhoyono, who plans to retire. His likely replacement: Widodo, the popular governor of Jakarta, who’s expected to run for the presidency. He has cut deals to remove street vendors from crowded intersections, saved a historic fort from the wrecking ball and brought minority Christians and Chinese into his administration. Widodo is the kind of leader who can rally his country behind reform.
Turkey. The country needs to restore calm. Festering discontent with the decadelong reign of Prime Minister Recep Tayyip Erdogan erupted again in January with calls for his resignation over a construction scandal. There is no viable opposition to the ruling Justice and Development Party or to Erdogan, who can’t run for another term as PM. Hope for calm lies with party moderates, led by Abdullah Gul, who is likely to be the next Prime Minister. But the wild card is Erdogan, who is still fighting to hold on to power — he will probably make a run for the presidency.
South Africa. Prospects for reform are weakest in the nation that needs it most. Two decades after toppling apartheid, the African National Congress (ANC) still rules with the same allies. This alliance looks likely to return embattled President Jacob Zuma to office, despite GDP growth of just 2% last year. The most plausible challengers are breakaway factions of the ANC, but none has the momentum to win in 2014, and none favors progrowth reforms.
So the prospects for postelection reform look best in Indonesia, worst in South Africa, muddled in Turkey and Brazil, unpredictable in India. Throw in the diverging paths of their current-account deficits, and it is clear that analyzing emerging markets as arbitrary groups makes no sense. The Fragile Five are not equally fragile.
Sharma is the head of emerging markets and global macro at Morgan Stanley Investment Management and the author of Breakout Nations
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