Strongmen are riskier the more they stay in power
World
Strongmen are riskier the more they stay in power
LONDON (Reuters Breakingviews) - Investors often get seduced by the hope that an autocrat will be pro-business. But Turkish President Tayyip Erdogan, Russian President Vladimir Putin and Chinese President Xi Jinping show that those hopes don’t last. The longer authoritarian leaders stay in power, the greater the risk they will make decisions that damage their economies.
Of course, the relationship between autocratic power and economic performance is far from straightforward. Historians consider rulers such as Roman Emperor Marcus Aurelius “enlightened despots”. In the post-war era, Lee Kuan Yew, who ran Singapore for over 30 years, is perhaps the best example of a long-serving leader who managed his country’s economy well.
For much of the last four decades, China’s Communist Party has pursued technocratic policies that created the conditions for the country’s extraordinary growth. But for most of that time, the People’s Republic was an oligarchy, managed by a group of officials, not dominated by one man.
Indeed, the country’s former leader Deng Xiaoping set up a system designed to prevent anyone from taking charge for more than two five-year terms, in an attempt to avoid a repeat of Mao Zedong’s catastrophic despotism. Xi, now in his third term, abolished this norm.
Democracies can also produce poor economic decisions. Just look at the costs of the United Kingdom’s Brexit vote, or how populist Greek governments drove their country close to bankruptcy. That said, when leaders entrench themselves as autocrats, there’s a particular danger of bad returns.
GOOD STARTS DON’T LAST
Investors are often enthusiastic when authoritarian leaders initially take power, figuring they will do things that are good for business. For example, the Turkish stock market rose nine-fold in dollar terms during Erdogan’s first decade in charge. Similarly, the Russian stock market rose five-fold in dollar terms during Putin's first 14 years in the Kremlin.
And Chinese stocks rose 60% in dollar terms during Xi’s first term as paramount leader.
Part of the explanation is that the three leaders inherited growing economies. Turkey was bouncing back after a financial crisis when Erdogan took power. He initially continued the orthodox policies that had brought it back from the brink. It was only later that he adopted the unorthodox approach of keeping interest rates low while inflation was soaring. The lira lost more than 90% of its value versus the dollar during its second decade - and the stock market has halved in dollar terms.
Even so, his rule seems set to continue after he gained a commanding lead in the first round of elections earlier this month. Erdogan has temporarily propped up the lira in the run-up to the votes. But once these are over, a further slide in the currency seems likely.
Meanwhile, Xi initially rode on the coattails of his predecessors, who had liberalised China’s economy and attracted foreign investment and technology, dragging hundreds of millions of people out of poverty in the process.
Xi also inherited problems, in particular, a rapidly aging population as a result of the country’s now-abandoned one-child policy. What’s more, the economy was too dependent on exports and excessive investment in infrastructure and property.
Debt started exploding as the government pumped out cheap money, especially after the 2008 financial crisis. But, under Xi, leverage kept rising. Total Chinese debt has doubled as a percentage of national income since 2008, reaching nearly 300%. This is storing up trouble. Xi’s zero-Covid policy meant the Chinese economy had a bad year in 2022 when the rest of the world was rebounding. And the crackdown on entrepreneurs like Alibaba (9988.HK), founder Jack Ma is stifling animal spirits.
The Chinese president has also abandoned Deng’s advice that the country should hide its strength and bide its time, and instead taken a more aggressive approach to international relations. This has provoked a backlash from the United States and its allies, which are seeking to derisk their exposure to China and stop it from gaining technology that could help its military.
Meanwhile, Putin inherited a commodity-rich economy, dominated by oligarchs, which had just bounced back from a financial crisis. The global crude price rose five-fold during his first eight years. What Putin failed to do was tackle the kleptocracy and build up non-commodity industries.
An even bigger error was to launch a series of wars, culminating in the Ukraine invasion. Putin has lost Europe as a customer for its hydrocarbons, as well as causing a collapse in foreign investment and high-technology imports, the death of many young men and a brain drain. In the last nine years, the stock market has lost nearly 20% of its value in dollar terms.
NO CHECKS, NO BALANCES
One reason authoritarian leaders do better at the start is they need time to establish the one-man rule. In their early days, they are forced to listen to colleagues, which can prevent them from going wildly off course. But as they become more entrenched, they often silence those who disagree with them. They instead surround themselves with sycophants who are too scared to challenge them.
What’s more, strongmen - and they are almost all men - are more prone to getting into fights because national virility is part of their image. But aggression toward neighbours can end up being catastrophic. This is most clearly seen with Putin, though Xi’s sabre-rattling towards Taiwan could end up being costly too.
This experience holds lessons for investors in countries led by other would-be strongmen such as Narendra Modi. India’s stock market is up 80% in dollar terms since he became prime minister nine years ago.
Modi, who has won two democratic elections, is not an autocrat. But his government is displaying some authoritarian traits, including making life difficult for independent journalists and opposition politicians. So far investors have turned a blind eye to this - partly because India may be a big winner as multinationals build up manufacturing in other countries to reduce their exposure to China.
Modi is widely expected to win a third term next year - and Erdogan shows that even democratic systems cannot always constrain autocratic tendencies. Investors should remember that strongmen eventually tend to suffer from diminishing, or even negative, returns.
