Fisher Investments Editorial Staff

Welcome Changes

By, 10/09/2012

We often say markets are the ultimate judges of economic policy—sometimes they reward sensible initiatives, and sometimes they force policymakers to abandon less business-friendly agendas. The latter happened twice in recent days as India and Hungary each made notable policy shifts.

We start in India, where Prime Minister Manmohan Singh announced more plans to relax foreign investment restrictions last week. If enacted, these new rules would allow overseas companies to own up to 49% of insurance firms (up from 26%) and, for the first time, invest in Indian pension funds. This follows recent decisions to open the aviation and multi-brand retail industries to foreign investment, and government officials have suggested more reforms are on the way.

This isn’t the first time the government has proposed any of these changes. Plans to allow foreign investment in Indian supermarkets fell victim to political opposition late last year, and a measure to increase foreign investment in insurance firms stalled in Parliament four years ago. This time though, there seems to be substantially more political will behind the proposals, and they might actually see the light of day.

What’s changed between then and now is India’s economic situation. Growth has slowed in recent quarters from a previously torrid pace, and Singh’s government is seeking to step on the gas pedal. But two traditional means of doing so—fiscal and monetary stimulus—aren’t really options. Public spending is already bloated (a major political issue in the world’s biggest democracy), and persistent high inflation hamstrings the central bank. It appears officials have realized economic reform—specifically, reform aimed at attracting foreign capital—is their best shot at stoking growth. That’s a sound realization, in our view: Making India’s economy friendlier to businesses—especially foreign businesses—lays a strong foundation for future growth.

Over in Hungary, meanwhile, a recession, weak currency and high yields have apparently forced Prime Minister Viktor Orban to abandon his unorthodox deficit reduction methods. Since taking office in 2010, Orban has sought to shore up Hungary’s finances by nationalizing private pension plans and levying high “crisis” taxes on foreign telecom, energy, retail and financial firms—all measures that are rather hostile to businesses. But on Friday, the government all but admitted defeat, revealing the deficit has kept rising and lowering its 2012 economic forecast from +0.1% growth to a -1.2% contraction. And, tellingly, officials’ new deficit reduction program contained none of the windfall taxes or nationalizations of yore. Instead, it contained more “traditional” austerity measures, like capping subsidies, freezing some public sector wages and cutting spending. While not an instant fix for all that ails Hungary, exploring ways to reduce the deficit without waging war on businesses seems a step in the right direction.

The government made another key announcement on Friday: It’s scrapped plans to tax all of the central bank’s transactions. The planned tax was one of the last obstacles to resuming aid talks with the IMF and EU, who believed it threatened the bank’s independence and violated EU treaties. In his press conference, Economy Minister Gyorgy Matolcsy admitted the EU’s objection was behind the climb-down—Hungary’s bailout needs have trumped nationalism, just as they did when Orban agreed to amend other laws that would have further eroded central bank independence. Only time will tell whether Hungary resumes bailout negotiations, but either way, Hungarians should benefit from the change—removing political and tax considerations from monetary policymaking makes sensible policy decisions more likely.

Unfortunately, governments don’t always listen to markets’ signals. Markets have long called for a shift in Argentina’s economic policy, but President Cristina Fernández de Kirchner responds by manipulating data and going further in the wrong direction. And one shouldn’t expect Venezuelan strongman Hugo Chavez to accept markets’ indictment of his crippling socialism any time soon. But the latest developments in India and Hungary speak to markets’ power to help put countries on more productive paths.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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