Investment Strategy: Park High Risk Funds into Bloodless Coups

Part of a violent coup, one imagines. (iStockphoto/Getty Images)

The very neat and succinct blog Parapolitical took the opportunity provided by recent murmurs about the military coup that the Greek government could face as a result of failed austerity measures and a desire to stay in the European  Union to highlight a study conducted in 2004 by Harvard Business researcher Dr. Catherine Duggan. In it, Duggan surveyed the economies of 27 nations following coups each experienced between 1980 and 1997. She found that foreign investors prefer right-wing paramilitary coups over left-wing paramilitary coups by a landslide.

Duggan found that when the Left takes over — even peacefully — the economy of that nation takes a nosedive, seeing about an 8 percent drop in private investment. When the Leftist revolution is a violent one, foreign investors pull out to the tune of about 12 percent of that country’s gross domestic product.

Investors don’t like bloody regime change, no matter who’s staging it, Duggan found. Violent right-wing coups led to a loss of private investment equal to about 5 percent and change of GDP. But if your economy’s flagging, you could do a lot worse for it than staging a bloodless right-wing coup. Duggan’s analysis of the 27 coups found that when right-leaning groups manage to wrest power away from the establishment and install a new regime without the use of force, that country’s economy can expect to see an increase in private investment equal to nearly 8 percent of the country’s gross domestic product.

Why should this be? Presumably, the answer lies in the worldwide business friendliness the Right holds compared to the left. Take Guatemala in the 1940s. When the left-leaning president Arbenz was elected, he claimed unused land from foreign fruit and railroad companies and redistributed it to the peasantry to be put to use. It worked, creating a middle class in the country, but it also ended up getting him overthrown in a CIA-backed, right-wing paramilitary coup.

So the Left is all about redistributing wealth, which is often counter to the wishes of business leaders, but that doesn’t inherently equal a more pro-business attitude among the right wing in other nations. So where does this reasonably solid idea come from? Again, we turn to Latin America, this time to Chile. In 1973, right-winger Gen. Augusto Pinochet overthrew his predecessor Salvador Allende. Two years later, he found his economy in a mess, but he was not without luck. Several of his nation’s economists had studied under University of Chicago economist Milton Friedman. It was him who came up with the”shock treatment” concept for reviving an economy, reviving it from the horrors of inflation, price-wage spirals and sluggishness in exchange for increased unemployment, slashed social program spending and reduced government oversight of industry. It’s prosperity through every-man-for-himself. By suddenly opening the economy up to such a shock, the initial reaction should be catastrophe, but — in the hypothesis created by Friedman and his colleagues at the U of  C — it should soon rebound. Friedman wanted to see if his ideas could work and he found a dictator willing to hand over his country as a natural laboratory for an unprecedented experiment.

And work it did. After taking a nosedive, Chile’s economy began to climb back within two years. Between 1978 and 1981,  the economy grew 31 percent. Within a few years, Friedman’s policies began appearing in the U.S. in the form of deregulation, reduced taxes and massive cuts in entitlement spending seen during the Reagan years. It also led a couple years after the boom to a near-total bust: Foreign investment attracted by relaxed regulatory policies and cheaper wages led to increased prosperity, which led to increased spending and borrowing, which led to decreased savings, debt and ultimately, when the balloon burst, a credit crunch.

Yet the foundation had been laid that unfettered markets could lead to the generation of vast wealth and the link had been forged between the right-wing regimes and foreign investments. It may have already been there, but after Friedman’s great experiment in Chile, it seems to have become indelible.