Thursday 1 August 2013

What the world’s middle classes are really protesting

By Ruchir Sharma, Published TODAY, 31 Jul 2013

Still-smouldering protests from Egypt to Brazil have set off a race among scholars and journalists to identify the roots of this summer of discontent in the emerging world. Each major theory starts at the bottom, with the protesters on the street, and notes a common thread: Young, Twitter-savvy members of a rising middle class.

In this telling, the protests represent the perils of success, as growing wealth creates a class of people who have the time and financial wherewithal to demand from their leaders even more prosperity and political freedom as well.

This is a plausible story, often well told. Yet, it is a bit too familiar to be fully persuasive.

The middle class has been rising for many decades; in the last 10 years, rapid economic growth has spread with rare uniformity across most nations in the emerging world. So why are protests erupting now, and in only a scattered selection of emerging countries?

FIGURES DON’T TALLY

The middle class was not rising particularly fast in the countries recently hit by protests. According to data from the Brookings Institution, in 20 of the largest emerging nations, the middle class has grown over the last 15 years by an average of 18 percentage points to comprise a bit more than half the population.

However, since 2010, protests have broken out in countries where the Brookings data identify the middle class as growing most rapidly, such as Russia — and least rapidly, such as India.

The biggest protests have struck in countries where growth of the middle class is near the average: Egypt (14 per cent), Brazil (19 per cent) and Turkey (22 per cent).

There is also no clear link between the protests and dashed middle-class fortunes. Since 2008, the average growth rate in emerging nations has slowed to 4 per cent from 8 per cent, so virtually every new middle class has cause for disappointment.

Some protest-stricken nations have seen particularly severe slowdowns, including Brazil recently and Russia before it. But others were growing faster than their emerging-world peers, including Turkey and even Egypt before the fall of former President Hosni Mubarak in 2011. So why are these nations among the cauldrons of middle-class rage?

LONG TIME IN POWER

Maybe the place to start searching for a common thread is not in the streets, but in the halls of power.

Among the 20 largest emerging nations, the ruling party has now been in power for slightly more than eight years on average, or roughly double the average 10 years ago. Of the nine countries where the ruling party has held office for longer than eight years, there have been significant protests targeting the national leadership in at least six: Argentina, Brazil, Turkey, Russia, South Africa and India.

Of the 11 countries in which the ruling party has been in office for less than eight years, there have been major protests in only one: Egypt. And, in Egypt, liberals protested against the Muslim Brotherhood for bringing back the economic stagnation and political autocracy of the previous leadership — in essence, a revolt against the character of the old dictatorship. Now, with Islamists challenging the military “coup”, the middle class feels caught in the same conflict that has long haunted Egypt.

These are revolts against the ancient regimes, revealing the peril of staying in power too long, a familiar risk since the days of France’s King Louis XVI.

Often, even successful leaders have gotten complacent or overconfident, failing to enact reforms fast enough to sustain a balance of growth across different regions and classes. Eventually, enough people get fed up with the old regime that the population turns on even the giants of post-war economic development, such as former President Suharto in Indonesia or former Prime Minister Mahathir Mohamad in Malaysia.

In the end, wrote Ralph Waldo Emerson, every hero becomes a bore.

LOSING PATIENCE WITH LEADERS WHO DON’T ADAPT

It is not clear why so many older regimes are in power now, but the last decade was a great one for emerging economies, with rapid growth in virtually all 150 developing countries. That gave many ruling parties the momentum to stay in office. Today, as growth slows, many populations are losing patience with leaders who are not adapting to a tough post-crisis world.

In Brazil, the Workers’ Party has been in power for 10 years and, under President Dilma Rousseff, follows the statist approach to development set by her predecessor, even as falling commodity prices depress growth in a commodity-dependent economy.

Similarly, in Russia, protests erupted in 2011 and last year against President Vladimir Putin and his party, motivated in part by the failure to diversify its oil-focused economy after 13 years in power. In Turkey, the issue is the overconfidence of a ruling party that is pushing the same model that has produced strong growth for the last 10 years. In South Africa, the mine strikes that first flared in 2010 remain a simmering threat to the 20-year reign of the African National Congress.

In India, protests against corruption and mishandled rape cases have given voice to deep frustrations with the nine-year rule of the Congress-led coalition government.

The potential for these protests to reignite depends, at least in part, on whether people have the power to change old regimes. In genuine multiparty democracies such as India and Brazil, coming elections provide that opportunity. But, in countries such as Russia and South Africa, where there is no clear alternative to the ruling regime, the risk of protests recurring is much greater.

If protests have been erupting primarily against older regimes, the reverse is also true: New regimes are getting a free pass from the rising middle class. In Mexico, the Philippines, Nigeria and even Pakistan, relatively fresh leaders are using their political capital to push needed reforms.

In these countries, the young, the educated, the newly prosperous have no reason to tweet their friends and hit the streets. For now, they are content to watch politics unfold on TV.


Ruchir Sharma, the author of Breakout Nations, is head of emerging markets and global macro at Morgan Stanley Investment Management.

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