The crisis brewing in emerging markets

Covid-related political unrest and financial collapse in the developing world are the biggest threats right now, says Matthew Lynn.

Over the last month, South Africa has seen some of the worst rioting and looting since the end of the apartheid era. More than 200 people were killed, many towns started to run out of food as supplies were disrupted, and troops had to be deployed on the streets across the country to restore order.

Turkey is looking more unstable by the day. In Cuba, there have been widespread protests against the government as the country’s economy has been battered by one of the worst outbreaks of Covid-19 in the Americas (see page 12). Worries have been starting to stack up in other countries too. Markets are getting jittery. The South African rand slumped. Cuba’s economy is under severe pressure. The effects are rippling out across the wider emerging markets, with all the main indexes and currencies sold off. 

An age of Covid revolutions

It may just be a coincidence. Perhaps the protests will blow over without any wider consequences. Yet there are also reasons to fear that this could mark the beginning of a wider period of Covid-related political turmoil in the developing world. First, slow vaccination means the pandemic is hitting far harder, and lasting far longer, than it has done in the major economies.

Europe and North America have hit 60%-plus vaccination levels, enough to dramatically reduce hospitalisation and death rates even as new variants emerge. South Africa has only managed to vaccinate 5% of its people so far, and rates in the rest of Africa are even lower. The result? While much of America and Europe is opening up again, many developing countries have no choice but to impose fresh restrictions. The Covid emergency is stretching to two and perhaps three years, putting pressure on society. 

Next, economies can’t be bailed out. Europe, the US and Japan all have credible central banks and secure currencies and can print money on a vast scale to get economies back on their feet. Furlough schemes protect jobs, tax breaks and soft loans keep companies afloat, and huge spending programmes keep demand buoyant.

The pandemic has done remarkably little damage to developed economies, but it is a different story in the emerging markets. None can print money and governments can’t step in with unlimited support. In many places, the pandemic means food and medicines are in short supply, unemployment has soared, and businesses have had to close down. Inevitably, that puts far greater pressure on political systems than in the developed world. People are angry and widespread corruption, as in both South Africa and Cuba, hardly makes it any better. It is not surprising that protests and riots are starting to emerge – people have plenty to be angry about. 

Reasons to be fearful

Finally, in many cases we are starting to see state failure. Dealing with a pandemic requires an effective government. Even France and Germany, with some of the most efficient state machines in the world, have struggled to come up with an effective response. In much of the developing world, the government is riddled with corruption, appointments are dished out to cronies, and there are hardly any civil servants with the expertise to respond to an emergency. It is failing governments that are most at risk of revolutions – and a crisis such as this exposes every weakness in the system. 

In the developed world, vast borrowing has allowed economies to sail through the pandemic without any real damage. But there will be a price to be paid somewhere and it looks like it may well come in the form of a series of Covid revolutions across the developing world. Markets are worrying about inflation, debt and how quickly growth will get back to normal. But political unrest followed by financial collapses in the emerging markets are the real threat over the next six months. 

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