Why Crisis Is Good For Some Powers That Be

One would think that the worst global economic downturn since the Great Depression would place sitting political leaders in peril. In fact, in many developing countries, it's just the opposite. Ruling parties have been on a roll in Asia, Latin America, and parts of Eastern Europe and face few signs of revolt, despite the slump in global growth. Most recently came the Congress Party's big win in India and, last week in Indonesia, the decisive victory of President Susilo Bambang Yudhoyono, who looked likely to take 60 percent of the popular vote even as the economy slows with the rest of Asia.

So why not throw the incumbents out? For much of the 1990s and the beginning of this decade, many emerging markets battled currency instability, runs on their banking systems, volatile inflation, and relatively low economic growth. The average GNP growth in emerging markets during the 1990s was 4 percent, and inflation often ran well into the double digits. All this generated resentment toward the ruling class, and brought in a new breed of populist leaders—from Luiz Inácio Lula da Silva in Brazil to Recep Tayyip Erdogan in Turkey.

These men scared global markets, at first. Their election rhetoric made it seem that they were bent on attacking big business, disrupting free trade, and employing the heavy hand of the state to spread the wealth. Instead, they pursued moderate reform paths, strengthening trade, welcoming outside investors, and focusing on financial stability above all else. As a result they were well positioned to prosper when the global economy took off in 2003, and over the next five years, emerging market growth sped up to 7 percent, and inflation has averaged just 5 percent. Following a long history of economic instability, big emerging markets including Russia, Brazil, and Chile used the boom years to build up foreign exchange reserves and consolidate their fiscal position. Today, they have the money they need to fight the global downturn, by spending heavily to stimulate their economies, and to defend their currencies.

So they look wise men, not bums. The blame factor is critical. In past conflagrations, like the peso crisis of the early '90s or the Asian contagion of the late 1990s, the debt problem began in the developing economies, and emerging-market voters did punish their leaders for it. Indonesia, where the Asian crisis triggered protests that set fire to Jakarta and drove the dictator Suharto from power, is only the most spectacular example. This time around, many of the larger, poorer nations are the responsible lenders, and the rich are the troubled debtors. The credit crisis began in the United States and has hit hardest in rich nations, which now must borrow even more to fight the downturn. Public anger over this mess helped unseat America's ruling party, and threatens the tenure of Gordon Brown. Polls also show incumbents in trouble in Japan, Ireland, Portugal, and Greece, all major casualties of the economic slump.

Follow the trail of blame, and it does lead to a few hard-hit emerging markets, mainly in Eastern Europe. Hungary is going through the classic boom-bust cycle, with its economy already running on an IMF lifeline and estimated to shrink by 6 percent in 2009. The latest polls show Hungary's ruling Socialist Party has an approval rating of only 18 percent. The Romanians and the Latvians, also hard hit, appear to be similarly disenchanted with their political class. But in Poland, the largest regional economy, the incumbent Civic Platform Party continues to enjoy high approval ratings and was the big winner in the European parliamentary elections held in June this year. The Polish economy has fared much better than its neighbors, and the feeling among locals is that they are being judged guilty by location in the crisis zone.

This tendency to rally behind the national government in a crisis, particularly when the leadership is seen as battling nefarious external forces, is continuing to help emerging-market leaders such as Lula and Russia's Vladimir Putin. They are riding on the good will created by the relatively high economic growth rates of the past few years, and have very effectively assigned all blame for falling growth to the United States. Voters will be less tolerant of such explanations if recovery does not materialize soon enough. And it is very early yet: while recession hit the United States in late 2007 it only spread to the emerging markets late last year, so it may be but a matter of months before voters lose their patience. The looming threat of inflation, which could be fired up by the massive stimulus programs, could also unleash popular anger, and fast. But for now, the voting populations of the developing nations are content with their captains in this storm.