It’s the institutions, stupid

The eruption of anti-government protests in several emerging economies over the past month has led many investors to add “political risk” to the lengthening list of reasons to be cautious on EMs. But in truth political risk has always been an issue for emerging markets – their institutions are inherently weaker than those in advanced economies, meaning they are more susceptible to political turbulence. The key to understanding long-run growth performance is to distinguish between those EMs with good (or improving) institutions and those where governance is either bad or is deteriorating.