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Good news for illiberal politicians

Published at: 10-08-2018

Posted on: August 10th, 2018 by RaduC No Comments

In 1997 the well-known CNN journalist and political analyst, Fareed Zakaria wrote a visionary commentary entitled “The rise of the illiberal democracy” which predicted the rise of a new category of leaders: popular autocrats intent on governing without much regard to the rule of law or civil rights. And that despite the fact that the leaders in question had been  elected following a democratic process in the name of which they would later tarnish the democratic standards and the fundamental rights of citizens.

This is already happening, and Europe seems to be at risk of contamination starting from East, with Hungary, Poland as case studies. Is all this having any bearing on how attractive these countries are to foreign capital? Let us turn to Hungary where the Prime-Minister has been running the country for eight years in a row and has labeled himself as an illiberal politician. In the meanwhile, Hungary has benefited from substantial foreign investments which culminated with the announcement recently made by BMW of EUR 1 Bn worth of investments into a plant due to manufacture 150,000 electrical vehicles per year.

Indeed, investors` lack of interest in the democratic standards of the countries they invest in is also confirmed by other countries, such as Russia or China. The difficulty Chancellor Merkel had when overcoming the resistance by big German companies with huge investment appetites to sanctions against Russia is famous. And Western companies in China have been willing to make significant compromises regarding copyright and the governance of businesses with mixed ownership just to get a foothold in the country.

Moreover, the credit rating agencies themselves do not use democratic standards as a variable to be factored into their credit ratings and they focus first and foremost on economic and financial stability and economic policy sustainability. In other words, the presence of an “enlightened despot” is enough for good ratings.

What does really matter to foreign investors? I think that the above-mentioned examples point to the fact that the determining criteria are varied and may differ from country to country. In the case of countries such as Hungary and Poland, the quality of road infrastructure, the ratio between the education level of its labor force and its costs, geographic proximity and last but not least, the EU member statute status make all the difference. The order on the list is not accidental. Infrastructure quality gets clearly more decisive as foreign plants are part of an international supply chain.

As for Russia and China, what takes prevalence over the democratic standards is the size of the markets, and setting up business there makes up to some extent for poorer road infrastructure. We might add as an additional attractiveness factor, particularly for Russia, access to cheap natural resources.

However there is a common feature that all this countries share: teh economic and political stability and predictibility. Even of they are for the worse.

And yet, how can one explain Turkey slipping into a crisis despite being a sizeable market bound to draw in investors. I think that the reason lies in the fact that there is a red line that once crossed by the autocratic regime, will cause investors` interest in that country to plummet. It seems, as noticed by FT that in Turkey`s case, that was the crude interference by the president in the Central Bank`s monetary policy.

His phobia of high interest rates which he dubbed “the mother and father of all evil” causes investors to be more and more concerned about the country`s inflation trends. And rightly so, given that it already stands at 16%. Moreover, antagonizing large economic players, such as the EU or USA are also meant to cause growth setbacks in the country. Under these circumstances, the considerable devaluation of the Turkish lira is a snowball likely to wipe out all banks and businesses borrowing in Euros or US dollars.

Against this backdrop I think some conclusions can be drawn about the Romanian illiberal politicians, in so far as they exist, of course. And news is good for them.

Invest in developing the country`s infrastructure and in education and foreign investors will ignore the democratic standards you advance. The wealth that you create for the country will be transferred to its people who will turn a blind eye to the less orthodox ways or maybe even to the corruption that may come with excessive power. We should not forget that the Hungarian Prime- Minister and to a certain extent Poland`s PM were elected with a huge voter turnout and not by the majority abstaining.

Put in place a balanced budget policy that allows you to allocate resources to infrastructure development and also grant generous subsidies to large investors which was one of the reasons for BMW choosing Hungary. This requires significant budget revenues close to the EU average and a more moderate funding of public wages and pensions.

Romania is not Russia to have investors come in for the sake of the market size irrespective of the infrastructure (under)development. On the other hand, the EU membership is a clear plus with foreign investors.

Beware, however, of the few red lines which, once crossed, will put the country on investors` watch list.

The first line is tax predictability and economic policies. Both can be provided even by an illiberal regime.

Another red line is the interference in the Central Bank`s monetary policy. It can fast erode trust and lead to a general crisis situation.

You may employ an anti-EU or anti-USA rhetoric up to a certain extent as long as it remains nothing but a statement. But once the decisions that you take are serious and brazen, expect consequences that will also impact foreign investors` appetite.

As for those objecting to the standards purported by illiberal regimes and suspect corruption, there can be only one conclusion. Do not expect foreign investors to step up and solve that problem. They adapt.

The solution can only come from within the country.

Have a nice weekend!

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