The Economist UK - 27.07.2019

62 Finance & economics The EconomistJuly 27th 2019

2

Buttonwood The auto-technocrats

From rouble to rupee

Source: Bloomberg

Emerging-market currencies against the $

January 1st-July 24th 2019, % change

-15 -10 -5 0 5 10

Russia

Egypt

Thailand

Mexico

Philippines

Brazil

India

Tu r ke y

Argentina

Pakistan

A

good wayto start an argument that

never ends is to try to define popu-

lism. Dictionaries say it is politics direct-

ed at ordinary people who feel neglected

by elites. That leaves a lot out, not least

economics. In 1990 Sebastian Edwards

and the late Rudiger Dornbusch sketched

what is meant by “economic populism”.

It is an approach, they wrote, that denies

that budget deficits or inflation are con-

straints on economic growth. The Latin

American populists they studied printed

money to pay for public-spending

binges. It ended in tears.

There is no shortage of leaders in

middle-income countries who fit the

dictionary definition of a populist. But

economic populism in its purest form is

now quite rare (though its results are

sadly evident in Venezuela). These days a

lot of would-be champions of the people

prefer their macroeconomic policies on

the orthodox side: inflation targets, fiscal

restraints, free-floating currencies, that

sort of thing. They are happy to let tech-

nocrats get on with it.

This poses a mild dilemma for rich-

world investors—which is soon resolved.

They may be appalled by the social and

foreign policies of such strongmen. Yet

as professionals they are also unthrilled

by inflation, default, devaluation and

adverse shifts in politics, which are

hazardous to a bond portfolio. They tend

to favour autocrats who like technocrats.

You might call it the Putin Principle.

Russia’s president, Vladimir Putin, is

not much loved in the West. Buttressed

by suppression at home and military

adventures abroad, he is the archetypal

strongman. He combines this with an

affinity for well-qualified economists.

His finance ministry frames the budget

by a conservative fiscal rule. Inflation is

under control, helped by fairly high

interest rates. The central bank’s governor,

Elvira Nabiullina, is widely admired.

What pulls investors in or puts them off

is hard to pin down. It is never a single

factor; the world is more complex than

that. But a currency’s value is a clue to

general sentiment, because it is a shadow

price of a country’s assets relative to every-

body else’s. The rouble is one of the best-

performing currencies this year (see

chart). Just as telling is that countries led

by strongmen hostile to orthodox policies

have seen their currencies suffer—the

inverse of the Putin Principle. Recep Tay-

yip Erdogan, president of Turkey, is the

exemplar. For years he has bullied the

central bank. Earlier this month he sacked

its governor for keeping interest rates

high. The lira has suffered badly.

Other countries can be paired on the

Putin-Erdogan scale. Take Egypt and Paki-

stan. The army looms over both. Under the

imf’s auspices, Egypt has followed ortho-

dox policies. The Egyptian pound has

risen. Pakistan lost its policy discipline as

soon as its most recent imfprogramme

ended (though it has just signed up to

another one). The rupee is down.

The populist label also fits both Jair

Bolsonaro of Brazil and Andrés Manuel

López Obrador of Mexico. But when Mr

Bolsonaro was elected, investors sensed

that he might defer to technocratic advis-

ers such as Paulo Guedes, now his econ-

omy minister, who has a doctorate in

economics from the University of Chica-

go. Sure enough, Mr Bolsonaro recently

shepherded through Brazil’s lower house

a pension reform that is vital to the coun-

try’s fiscal stability. The real rallied.

Meanwhile, Mr López Obrador’s finance

minister abruptly resigned. He com-

plained bitterly that technocrats had

been sidelined in favour of unqualified

types. The peso wobbled.

The leader who is hardest to place on

the scale is Narendra Modi of India. He

has all the elements of a strongman:

strident nationalism, personality cult,

enfeebled opposition. He appears to

value technocrats. As prime minister

and, before that, as chief minister of

Gujarat, he has relied on a small band of

trusted civil servants. And though he is

no fiscal hawk, he seems to grasp that the

budget has limits. But there are marks

against him. He lost two well-regarded

central-bank governors in his first term

as prime minister. His madcap idea to

withdraw banknotes from circulation in

2016 was anything but orthodox.

The autocrat-plus-technocrat model

is not rock-solid. A frailty is that stability

is less valuable if it is not married to

policies to promote economic growth.

Such reforms often, or usually, founder

on vested interests on which the autocrat

depends. But if living standards are not

growing, there will be demand from

voters for old-style economic populism.

And that always ends badly.

Why investors favour political strongmen who like orthodox economics

can offer unlimited withdrawals.

The result is compelling for customers.

The savings account offers a juicy interest

rate of 2.69%, around 0.2 percentage points

higher than the best high-yield savings ac-

counts elsewhere. Federal insurance cov-

ers $1m, four times the usual limit. The cur-

rent account, due to launch later this year,

will have no minimum balance or account

or overdraft fees, and will reimburse all

fees for using an atm.

If successful, the shift in strategy could

put to rest worries about profitability that

have dogged both Betterment and the robo-

advisory industry more broadly. New ac-

count customers might be tempted to use

advisory services, too. Mr Stein also hopes

that the firm can encourage account-hold-

ers to save more. More than half of Better-

ment’s customers transfer money auto-

matically into their investment funds. If

the firm manages more current and sav-

ings accounts, it may be able to increase

that share.

The launch comes with risks, however.

The first is that it may irk regulators. De-

posits are supposed to be a reliable source

of funds for banks. If Betterment gets them

to compete for its customers’ funds, not

only would banks’ margins be squeezed

but deposits could become flightier.

The second is that the terms are too gen-

erous to be sustainable. Betterment has

raised $275m to fund its growth so far, but

has not had to raise capital since 2017, when

it added $70m, valuing the firm at $800m.

Mr Stein expects its account products to be

profitable from launch, but admits that

there may be a “learning curve” when it

comes to managing them. To offer custom-

ers compelling investments, Betterment

needs to be a sound investment, too. 7