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Why markets love strongmen

Now more than ever, amoral markets are rallying behind autocrats who promote growth.

TNN & Agencies|
Sep 30, 2019, 11.14 AM IST
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It is not that people on Wall Street are amoral, indeed many personally detest strongmen.
By Ruchir Sharma

Wall Street has long existed as a parallel universe where leaders cast by critics in the media as autocratic villains can be feted as heroes, if their actions bode well for the economy. Lately, this split has reached new extremes.

In the critics’ view, we live in an increasingly illiberal age, populated by dangerously erratic strongmen. Leading examples include President Jair Bolsonaro of Brazil, widely accused of turning a blind eye as the Amazon burns; President Abdel Fattah el-Sisi of Egypt, whose tough military-backed regime has been the target of protests over the past week; and Crown Prince Mohammed bin Salman of Saudi Arabia, often linked to the assassination of journalist Jamal Kashoggi by Saudi operatives.


Yet global investors view the same trio as promising economic reformers, following a mainstream playbook that could have been written (indeed sometimes is written) by analysts at the International Monetary Fund. Markets reward them accordingly. Brazil under Bolsonaro and Saudi Arabia under Crown Prince bin Salman have both ranked among the world’s hottest stock markets. Until the latest Cairo protest, this year’s top performing market was Egypt.

The harsh reality is that markets are amoral, instinctively neutral barometers of economic performance, and they will at times ignore the excesses of strongmen for a simple reason. Facing little or no resistance from legislatures, courts or independent watchdogs, strongmen can push through sweeping reforms – particularly in emerging economies, where rule of law is relatively weak.

Looking at the records for 150 countries between 1950 and the present, I found 43 cases in which an economy grew at an annual pace of 7 per cent or more for a full decade. An astonishing 35 of those economies – more than 80 per cent – were run by an authoritarian government.

The downside is that nations subject to the unchecked whims of autocrats are also vulnerable to wild growth swings – and long slumps. Among the same 150 developing countries, I found 138 cases in which an economy grew at a pace slower than 3 per cent for a decade, and 100 of those economies were led by an autocrat.

Markets sense the erratic nature of economies run by strongmen, and will bet big on these figures until the moment economic reforms lose momentum. Stock markets enjoyed bull runs under autocrats who instituted high growth policies, like Augusto Pinochet of Chile, Suharto of Indonesia and Mahathir Mohamad of Malaysia in the 1970s, 1980s and 1990s.

After 2000 a new generation of autocratic market darlings arose, led by President Vladimir Putin of Russia and President Recep Tayyip Erdogan of Turkey. In their first terms, the stock markets of Russia and Turkey rose, respectively, by about 100 percentage points and 300 percentage points faster than the average for emerging countries. Later, investors would turn on Russia and Turkey, not because these leaders grew more autocratic, but because they stopped pushing tough economic reforms.

What markets look for perhaps above all is financial stability, a necessary precondition for strong economic growth. And Bolsonaro, el-Sisi and Crown Prince bin Salman have each taken steps to put their financial houses in order.

Bolsonaro plans to downsize the bureaucracy, and cut up to $250 billion from a nearly insolvent pension system. El-Sisi has raised taxes on capital gains and slashed energy subsidies by 60 per cent. Crown Prince bin Salman has cracked down on rich tax dodgers, including members of the royal family, and cut energy subsidies to pare back a large budget deficit.

Wall Street reports on Brazil, Egypt and Saudi Arabia barely mention autocratic tendencies. Instead, they describe Saudi reforms “still on track”, Egypt as “the best reform story” in its region and Bolsonaro as Brazil’s “last chance” for reform. The gap between market and mainstream media narratives is now a yawning chasm.

One trait the new strongmen share is a tendency to blur ideological lines. Illiberal politics often combine with eclectic economics in ways that make them hard to place on the traditional left-right political spectrum. President Donald Trump, a champion of blue collar jobs and tax cuts for the rich, is a prominent example.

More than any other US president, he has tried to please the stock market and as the impeachment battles heat up he is likely to do more, in his erratic way, perhaps by looking for a quick trade deal with China or further badgering the Fed to cut interest rates.

Not coincidentally, Trump has lavished praise on Bolsonaro, el-Sisi and Crown Prince bin Salman, who occupy the same ideological gray area. The Crown Prince has freed women to drive as part of an economic modernisation campaign, while suppressing activists who push for broader women’s rights. Is he right or left, progressive or reactionary, or beyond the old categories?

It is not that people on Wall Street are amoral, indeed many personally detest strongmen. It is that their day job is to filter through the raging debate around these figures and focus on whether their policies are likely to spur growth. Thus the collective mind of the market doesn’t care about headlines casting leaders as villains, until their behaviour threatens to destabilise the economy. And with illiberal leaders still on the rise worldwide, this political age is likely to produce more strongmen the market can love.

The writer is an author and global investor.
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