Warnings for emerging markets

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Warnings for emerging markets

Upon hitting the bulk of Brazilian territory sticking out into the Atlantic, the ocean current turns northward and carries warm equatorial waters to northern Europe. Thanks to this subtropical stream, civilizations on the northern tip of Europe, sitting on a higher latitude than much of Russia, were able to flourish.

Portugal could colonize Brazil in the 1500s thanks to this current. Pedro Alvares Cabral, a Portuguese nobleman, set off on an expedition to India to explore the westward reaches of the Atlantic in hope of finding an easier route to Asia. He instead landed on what is now known as Brazil, led by the current. Coincidences, errors and natural forces all played a part in making history.

The current that ran peacefully between Portugal and its new colony were soon swept up in turbulence following Napoleon’s conquest campaign. The Portuguese ruler and his royal court fled to Rio de Janeiro to escape from the French invasion in the early 19th century, making it the capital of the Kingdom of Portugal for decades. After the Napoleonic Wars (1803?1815), the monarchy found itself divided between those wishing to return home and those wishing to stay. Prince Pedro declared he would stay in Brazil and pushed for its independence. After independence in 1825, the country was battered by political and social upheavals with one military coup and revolt after another.

Democracy finally arrived in the 1980s, and under the helm of President Lula da Silva since 2003, Brazil has prospered on political stability and economic reforms. His political leadership shone on the riches of the massive land, natural resources and a population of over 200 million. After joining the club of new emerging economic powers referred to as the BRIC - an acronym for Brazil, Russia, India and China - Brazil was among the fastest growing major economies. Portugal, facing fiscal crisis, ran to its former colony three years ago for financial aid. The country is now enjoying new global power and status after being designated as host of the 2014 FIFA World Cup and 2016 Summer Olympics.

Behind Brazil’s staggering economic prosperity lies the foreign capital that flowed into the economy to make easy money in the emerging market on low interest rates. Brazil even had to introduce taxes on financial transactions in an effort to curb the massive inflow of speculative foreign capital. But the economy is now shaken by the rapid outflow of foreign money. After its panicky flight to emerging economies following the Wall Street meltdown in 2008, cash flow is returning to the United States - and investment turns to stocks away from bonds - all amid signs of economic recovery and the Federal Reserve’s winding down of ultra-loose monetary policies in Washington.

Analysts say such an ominous phenomenon is taking place even at the beginning of the so-called Great Rotation in market trends. To deter the sudden exodus of foreign capital, the Brazilian government has scrapped financial transaction taxes and raised interest rates. But the side effects have already taken a toll on the economy. Individual bankruptcies have surged and housing bubbles have begun to burst. The alarming signs are everywhere. Some are already predicting Brazil could become ground zero for crises of emerging economies.

Brazil is going through another stage of political and social turmoil. A hike in bus fares have triggered an explosion in previously muted social grievances over wealth imbalances. Protests have reached a new level of widespread violence for the first time in two decades. The middle class, who played a pivotal role in the country’s remarkable economic growth, are leading the movement - just like in Turkey. The anti-elite and anti-rich Occupy Wall Street protests may have had a limited impact on advanced economies like the United States, but anti-corporate and anti-government activities can deal a heavy blow to emerging markets.

The global economy is increasingly relying on emerging economies that are relatively vulnerable to domestic political turbulence - largely due to the advanced economies’ lethargic responses to the debt crisis in the euro zone, the nuclear reactor meltdown at Fukushima and the U.S. fiscal conundrum. But prospects are getting brighter on the advanced economic front. The euro zone, albeit slow, is picking itself up while loosening up on its rigid austerity measures. The advanced economies proved to be more resilient and wiser in combating their crises than we first thought.

The advanced countries have not earned their rank overnight. The emerging group actually has bigger problems to tackle. The money current is flowing out of the emerging markets and back to the advanced economies. In a strange coincidence, both Brazil and its founding country Portugal are in crises. The peripheral countries all look hazardous as the ebb is on the horizon.

*The author is business and industry news editor of the Korea JoongAng Daily.

by Heo Kwi-sik
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