#DevTalks: How Can Wall Street Avoid Funding Dictators?

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ricardo Hausmann: So it's a great honor to have with us Marcos Buscaglia, who just published a book that we are going to be discussing. Marcos is a graduate from UPenn, where he got his Phd in economics has worked for many years in Wall Street and Citibank, and then Bank of America, and now has his own, analytical firm of Latin American economics and politics and has been in this, business for quite some time. He's from Argentina. I'm from Venezuela, and both have been concerned about, democracy in our home countries and worried about, the role that Wall Street has in enabling or, you know, would be dictators or actual dictators. And so and that issue is what his book is about. And so, it's really it's really an honor to have that issue discussed because it's, it's an issue that I have, I have cared for, some time. And it's really, really useful to see, a treatment of it and, and come up with some, some solutions and understanding what's sort of like the structural incentives in the industry that may or may not help or hinder democracy and finance. We have Javier Murcio with us was also going to provide some comments on, on Marcos's book. Javier also comes from Wall Street, where he has been, a portfolio manager of emerging markets, fixed income, for Standish, Bank, Bank of New York Mellon and, and he has been working with several of major players in, in the industry like Paribas and and Credit Suisse. So without any further ado, I think, Marcos, we're going to sit to see your presentation more comfortably over here. [00:02:33][148.7]

Marcos Buscaglia: Okay. Thank you very much Ricardo for organizing this, and everyone for showing up. It's, my pleasure to be here. So I would make, presentation of, you know, taking some minutes, and then we can, you know, we can take questions and discuss. So let me, let me start by by telling you how this, this started, because it's not usual for an economist to write about democracy, of course. And, and, so it started with a conversation with a client in New York about the end of 2019, when Christina Kirshner was about to become, you know, vice president in this, this time, part of a ticket that she had chosen, you know, so she would be we all knew that she would be the president for the third time. And I had this conversation with this very smart, pleasant client. And he says, well, you know, if the government of Alberto Fernandez and Christina given her do the right things in economic terms, you know, like Wall Street always likes tight fiscal policy, you know, tight monetary policy, hawkish, you know, policy makers. We we're you know, the market is going to finance them. And I came out and I say, you know this is not right. This shouldn't be right, because I knew for a fact that 15 occasions I would try to undermine democracy in Argentina, as she did in the previous two terms, at least by undermining the judiciary to get a free from jail card. Why? Because she had so she has so many corruption cases, big corruption cases, the biggest in Argentina, etc.. You know, let me tell you that the bar is really, really high. So I wrote an article out of this idea. I wrote an article I published in the Financial Times blog, The Young BRICs, and I got a lot of attention. You know, I got people from journalists from Belarus saying, well, for instance, you know, one example we got we are being jailed. And at the same time, London investment houses are buying the bonds issued by, you know, the Belarus dictator, where there's no doubt that he's a dictator. 

Right. So that started the idea and I started, you know, digging and and what emerges is that. There is. It's not only that I was concerned about Argentina or regard about Venezuela. The world was immersed in a democratic recession, you know, in the 70s. And then in the 80s, there was a consolidation of the opposite, trend. You know, democracy flourished in Eastern Europe, first in Spain and, and, and Portugal. Then, you know, it went to Latin America, then Eastern Europe, when the, you know, the world, you know, came down. So there was a democratic, you know, flourishing. But that came to a halt about the year 2006. And from then on, what started to emerge is that many countries, the democracy in many countries started to suffer. And as you know, Harvard Professor Levitsky says, democracy started to suffer, not in the old fashioned ways, not, you know, through the dots, but basically through tinkering with the democracy in checks and balances. You know, in, in, in, in, in the countries, like tinkering with the independence of the judiciary, the independence of the press, etc., etc.. So, you know, these democratic processes took, you know, came down relatively slowly in most countries. And these guys build bridges, registered, you know, and I will talk about a lot. Freedom House and another, you know, houses that measure democracy. This has been registered in real time by democracy watchers like freedom House and Economist Intelligence Unit, we them and many others that measure democracy. So you see basically I mean, these are rankings of, you know, the the higher you know, the more democratic the country is. Basically these houses measure, you know, the sanctity of the electoral process, the independence of the press, of the judiciary, different measures, you know, like several variables. And there is a lot of discussion about this. But then I will talk, you know, more about the how they are useful, you know, useful measures. And basically you see that, that, democracy started to recede, particularly in the margin in the emerging markets. Right. The Economist Intelligence Unit, the same trend, same trend you see here. So basically, there is a Democratic, recession. 

And and what is important to note is, are at the same time, at the same time, portfolio flows to emerging markets countries, you know, saw, you know, increase significantly. You know, it's not only that foreign direct investment increased to emerging market countries at this time. You know, I'm talking about the year 2006. And you can see there, but also that if you look at the you have to look at the, at the red part of the bars. Right. These are the the flows portfolio flows started to increase significantly. Portfolio meaning you know, people here in Boston or in New York buying for pension funds in the US or Canada or Europe, buying bonds issued by these government. The governments of these countries are stocks of companies that are headquartered in these countries, portfolio flows. So if you look at the red bars, you know, by the year 2006, they started to increase significantly. You know, then they came down, you know, particularly pertaining to what happened to monetary policy policy in the US mostly. But at the end of the day, they at the same time that democracy was starting to be under attack, you know, for, you know, Western investors started to invest more in these countries. So I started to look at several countries, and that's what I do in the book. In the book I selected some stories, Venezuela, Turkey, Russia, China, Hungary. And, and then, you know, a little bit of, of Belarus and Poland and, and also a subset of, you know, Latin American countries, like Argentina, Bolivia, Ecuador. So, so basically trying to put together what was going on in the market and what was going on with democracy. And what you find is really, startling because you see that democracy was being dismantled. And at the same time, markets were totally oblivious to that, to that event. Let me start with Venezuela, you know, and I see, there is there is a typo here. This was not a presidential election, by the way, you will notice this, Ricardo, very, very fast. But basically, let me let me tell you what happened. Chavez came to power in February 1999. They won. He called for a referendum to change the constitution. Let me know. There was not the the mechanism to change the Constitution. There was. They got the Constitution, didn't have a referendum as a mechanism to change the constitution. So that was unconstitutional by itself. They the Supreme Court said nothing.

So basically he changed the Constitution where he got most of the votes in the in the Assembly discussing the. Constitution, and he got rid of all the checks and balances. He packed the court. After a few years, he, changed, you know the term eliminate the term limits. But the basic obliteration of democracy in Venezuela was done at the beginning of 1991. So February, right. June was the constitutional election, you know, for the Constitutional Assembly. In July, Chavez comes to Wall Street, he rings the bell in the New York Stock Exchange. He basically went to, you know, the well, the first story I gave a speech to the Plaza of all investors are not that big. The only cheer him up. Venezuela started to issue bonds in 2001 and 2003, when few emerging markets, you know, issued bonds. By then it was a very limited market. Why did markets love Venezuela? Because oil prices started to go up. So they, Venezuela and PDVSA issued, you know, a big amount of bonds, billions and billions of bonds, the government 43 billion bonds. You know, and PDVSA, another 36 year old company, the government oil company, 34 billion worth in bonds, which ended up by different mechanisms in the portfolios of Wall Street investors. And the market didn't care. The market only started to care about Venezuela about 2014 when oil prices came down. Right. But not as much come 2017. You know, there was outrage in the market. Decent. Bought 2.2. 8 billion worth of bonds. You know, an in in May 2017, the outrage was because a few days before a famous economist called Ricardo Hausmann published, an Op-Ed calling them hunger bonds. Basically saying, whoever buys these bonds is subjecting the Venezuelan population. Correct me, Ricardo, to starving because the government is willing to starve the Venezuelan population. If that needs to happen to repay these bonds. Right. And in spite of that, you know, this company base with well intentioned people, you know, both this bond and I will I will elaborate on why they bought that, you know, and why the market continues to buy these bonds. So basically, the point is here, you see that democracy in Venezuela, you know, deteriorated by 2016. 

Freedom House, the degraded Venezuela to not free country was already degraded to partially free in 1999, right well ahead of time. A economist intelligence unit degraded Venezuela to authoritarian regime in 2017. And in spite of that, the market continued to finance Venezuela up until what happened. The US imposed sanctions in 2017 and then bonds collapsed. One prices collapse and then they could not buy bonds anymore. And that's one lesson that is important. That is a big discussion. And we were discussing this with Ricardo before. That is there is not I will show you later, but there is not a definite conclusion about whether investing in democracies is better than investing in non democracies. But you see, as you go into the stories, you find so many examples of people that invested a lot in autocracies and they lost their share. So these guys disarm both the Venezuelan bonds and 30 cent to the dollar, you know, very cheap. But a few months after they went $0.05 to the dollar. Right. So they lost their share. So that's a case of Venezuela. You know, let me you know and like I would, I would just go over there and then we can you can distribute the slides. Of course. Let me tell you that the case of Turkey is, it's a very nice story. You know, it's another type of populism. You know, the populism in Venezuela is a populism of us against the leads, against Wall Street, against IMF, US, against Ricardo Hausmann. Maduro talks about Ricardo, against Ricardo. You know, in the case of Turkey is a populism based more on, on, on, the formation of religion, I would say. Right. And but the fact is that also Turkey has been, you know, the Erdogan has been attacking the judiciary, the free press, the bureaucracy, all the checks and balances in Turkey had been demolished in, you know, as, as time went by and these were recorded in real time by freedom House, economist Intelligence Unit beat. I mean, it's not that they it's not that nobody knew they wouldn't be registered and, and spread out the word that these countries were the democracy was basically endangered in all these countries. But they market, you know, like Turkish bonds or Turkey stocks. Not because you know, or not, not because of what was happening on the but what was happening with the fiscal deficit or, you know, exports. So so basically, let me tell you one, one nice story about, the one that I like the most about Turkey. So not to bore you is that, there were elections in last year in, in May, and all the polls pointed to Erdogan losing that election. 

Right. He already had eliminated term limits, you know. But he was. All the polls indicated that he would lose because the opposition was united. What happened? He would like all the populists to win the election. He was not only twisting electoral rules, but he was spending like crazy, you know, like giving the gas for free for households and giving handouts. Spending money. Government money like crazy. Well, it happened that 41 days before the election. Markets cheered the fact that Turkey, the Turkish government, issued the first green bond of Turkey. Green bonds are very important now that trillions of dollars of green bonds and are very good green bonds are very good. But if you look at who issued the green bonds, you know, oftentimes more than one third of them are issued by non-democratic countries. That's the case of Turkey. They they the government got $2.5 billion in bonds 41 days before the election. Money's fungible. You know how how come you know that that money wasn't directed for rather than to, to win the election, which he actually won, right. Let me go to Russia. You know, Russia's the same. The same story. I will make it short. You know, basically, Putin demolished democracy from day one. I mean, in the fourth day after he acceded to power in 1999, you know, he they the police raided, the the offices of Media Most Wanted, the biggest independent, you know, broadcaster and put the, you know, the, the owner in jail a few a few weeks after and in very different ways. You know, Putin has been undermining democracy. And basically, you know, freedom House already in 2004 labeled it that's not free. Right. So this was recorded in real time by democracy watchers, but the market was basically still like in Venezuela, the sorry, you know, Russia for the same reason as Venezuela. It produced oil and oil prices were up. So, for instance, by the when when Putin wanted to rip off the assets from Khodorkovsky, you know, the the all the owner of Yukos. Right. Western banks provided offered the financing to Russia's government to basically rip off his assets in a very illegal way. The guy was jailed by with no reason and stayed for ten years in prison. 

And basically the banks financing their operation were western banks. But let me tell you. And the Russian story provides us with another, you know, tale about, the importance of, you know, avoiding greenwashing. And this is, the following, basically, most investors in Wall Street. Follow tracks. What is called bond and equity indices? No. So if you higher have higher, you know, your company your pension fund want that have higher more sure standards to to manage your money. Typically companies like the one caveat, you walk in and say, well, I will track the emerging market. JP morgan's emerging market bond index that is, has a number of countries with different weights for each country. And I will show you that I can outperform the index. I am better than my my competitor here, you know, next door in managing your money because I will await I will make better than the index. But your benchmark the way, the way you are, the index that you're measured again is an index of bonds compiled by JPMorgan, you know, or other other banks. And in the equity inequity business is the same. The Morgan Stanley stock index is the the most track one. Well, it happens that a few years ago JP Morgan that has this call JP Morgan and be diversified bond index and the most track by the industry. Lounge and a similar one, but ESD corrected. You know, everyone knows what ISS SD is basically, you know, acronym for environmental, social and Governance Indicators. That basically emerged as a response of market pressure to for companies and governments to take account in the environment. You know, gender equity in the boards and, you know, care for labor, and for labor, rights. So a whole industry appeared to basically, take into account those those demand. So JP Morgan launched the m b ESG. Correct as well. Fun fact. Fun quote unquote. Fact. By the time Russia invaded Ukraine. If you were an investor tracking the ESG corrected version of the MBM, you should have had a bigger share of Russian bonds than in the non USD corrected. Is this clear? You know. So basically is my point here that what you think? I already told you that in the case of Turkey you could see that green bonds can be greenwashing. And what I'm telling you now is that ESG, which is a law very controversial. I think it's a very good development tool. You know, again, they care about investor concerns. 

You know, that's not correct for democracy. In fact, in the case of Russia, you would have had more bonds of Russia by the time Russia invaded Ukraine than if you were not tracking the ESG corrected version of the MBA. Okay. So let me let me skip China. Then we can talk a lot about China. But what is the connection between Wall Street and and autocrats. Is that worse than the City of London have financed the governments of countries such as Venezuela, Russia, when they were turning more autocratic? This still goes on. Oftentimes investors don't even know that they're doing that. You know, when I tell my my friends, you know, that I can bet you that if you go now and take your portfolio are financing, you know, you know, you're financing a lot of autocracies and you don't even know why. Because you you put your money in some professional investment manager, right? Like J.P. Morgan or Standish. And they track this in this or you buy ETF, you know. And I will tell you what an ETF and you yourself by an ETF that includes those countries or stocks of companies headquartered in those countries. An ETF is basically, a way to buy portfolios of securities like they and they track differently. So you can buy the most popular ETF, for instance, one that tracks the S&P 500 have higher. What is that is a is a composite of the 500 biggest stocks in the US market. So you don't need to go and buy each of the stocks. You just buy this ETF with a click of your mouse. And and the company let's say Vanguard or Blackrock. They replicate that for you. Okay. So they're ETF of all the colors and taste is including a lot of ETF that that track emerging market bonds and emerging market stocks. So when you buy an ETF for instance of emerging market stocks they have 30% typically invested in China. Okay. So this is this is what happens. and and again the main market mechanisms are that equity and bond benchmark indices constructed by banks such as Morgan and Morgan Stanley, hundreds of millions of dollars invested in ETF and mutual funds use these indices as benchmark. and are not they're not correct for democracy. For instance J.P. Morgan and be diversified that not the one corrected by ESG. The most widely followed one right includes 35 countries out of, sorry, out of 76 seven countries, 35 are non-democratic and 16 are highly autocratic in a way that I will define in a minute. 

I will define what it what non-democratic and what kind of autocratic mean. So my proposal, my proposal is that we can mimic what, investors have done with environment that, you know, gender equity and labor rights in the last few years, incorporating them into the decision process in the in your investment through ESG integration to do the same with democracy. Now, ESG is mainstream. One out of $2. Professional assets of professional managers manage in Europe, one out of two follow some ESG criteria and one out of three in the US. So this is mainstream already, so we can do the same with democracy, in my opinion. But first, and with this, I'm about to to finish. You need You need to be sure that you are measuring this, right? And of course, this is an issue of debate, right? You need to have to be sure that when you're saying, oh, this country is not democratic, that this is real. And, and and basically, you know what, what we found doing research on this is that, we took the three most common, you know, democracy workers, economist, Intelligence unit, freedom House and v them, v them stands for the realities of democracy. They have this, you know, they they they construct the synthesis, and then they label the countries, you know, in this 3 or 4 categories. What we found to our satisfaction is that the correlation between them is very high. Very, very high. Close to 90% is very different. You know, in the ESG world, there is a lot of controversy because companies that measure ESG score for companies, the correlation between them is very low. So if she was scoring Tesla, she would say Tesla is a very good ESG company, high score. And then Ricardo would say, no, it has a very low easy score. The correlation is well below 50% between a score ESG score providers. That doesn't happen with Democracy Index. Waters right. The correlation is very hard then tapping and then and the same underlying relay reality. So my proposal is to say well. Just to be sure. Let's. Let us label us non-democratic countries that are labeled in the lowest two. You know, buckets by two of these democracy workers. What I'm doing there is mimicking some, I talk a lot about, bond indices.

There are some money indices that only, invest in countries that are labeled as, investment grade by rating agencies like Standard Poor's and Moody's and and and Fitch. Right. So basically investment grade means that there is a very low probability of, of default. But to put them in this on the indices, you require that the country is labeled as investment grade by two. I do of these companies. Well I'm mimicking that and saying let's if two companies of this, sort of companies, institutions label the country as non-democratic, you know. Well, the country's non-democratic and you can excluded from your portfolio, or you can reduce the weight in your portfolio compared to the benchmark index, which can be the JP Morgan index, or at least to start with. You could exclude the highly autocratic one, which I define as being in the lowest, you know, bucket for two of these, investment democracy watchers. So you see the countries that appear, you know, I just put some examples in all of the countries in the emerging world that, you know, in the low was one you you would exclude the worst democracy, offenders. Just, to finish, a couple of things. There is this question about whether investing in democracies is not only good, but is profitable or not. Right. And the answer. You know, we were discussing this with regards. There's no, definite answer from academia. There's no there's very little research on this, actually. You know, the the most comprehensive one that I found this lately. And we, we ask basically they, they do find that there is a positive relation between in the stock market, they use stock market returns, the positive, you know, results between democracy and investment returns. But to be honest, that's I don't want to oversell this. I want to come like some ESG providers come and say buy ESG in their, you know, products. And you will not only do good you to do better in your portfolio. And that has been there has been a lot of scams about that. I don't want to oversell this, but what I do think is that what is has a lot more, consensus. I think, although there is always some debate, of course, is that democracies at the end of the day tend to grow faster and on democracies. 

So my take is, if that's really true, it should be the case where you know that companies that are headquartered in countries that are democratic end up doing better than in non-democratic countries. And for the same reason governments that are in democratic countries, you know, should be better payers over time than non-democratic countries. Finally, you know, just as an example, I'm not selling products here, but it's basically there are some ETF. This is a lever to fund democracy in business. These are two ETF. You can buy them in your with your own account on. And there are some institutional investors that are already implementing democracy connected investment strategies. All of them are in the equity world, not in the fixed income world in the bond bond. Well, with us and with this I finish. What I want to achieve with the book is first to raise awareness. You know, the raise awareness is to to let the world know that this is a problem, that markets have been financing autocrats. And this is not good, right. And they cannot be a solution to a problem that, you know, nobody sees as a problem. So I want to basically want to raise this issue that this is a problem. And the second is to start, you know, proposing some alternatives of of course, this is the first step, but I think there are ways to for you if you want to avoid financing autocracies, is there are ways in which you can implement that in your in your own portfolios. So with this I, I, I end and. Okay. 

Ricardo Hausmann: So very, very interesting. I have, many, many questions to you. But before I raise them, let me ask Javier for his comments. 

Javier Murcio: Thank you for inviting me. I mean, this is a very, very interesting, very topical issue. I took lots of notes before I came here, so, I'm not going to go through them because I will get lost. I want to first, present to, things one experience as a portfolio manager. Where does these present a challenge? How would one act around this very, very important issue? And the second, I would provide some ideas of my own, presenting maybe a question to the panel about this full challenge of the so-called democratic recession. Let me start with two numbers. Don't quote me exactly on them. They're very, very close. 5% and 7%. The world, as you know, is experiencing a demographic waved. That means that there are older people. Increasingly, even these so-called emerging markets and less and less, working age population. Which means that anybody who has a pension or any form of retirement provided by government is your own savings. It said that it said that less and less working people, have to work. To be, decent return and hopefully a decent standard of living to the retired people and the five and 7% number that I presented. And again, don't put them in them. Exactly, because those numbers tend to change depending on actuarial tables and so on. You need at this point a 5% real return. This is adjusted for inflation or a 7% nominal return. In nominal terms, you know, without adjusting for inflation. Of course, in the last couple of years, inflation has been up in the, in the world and so on. So that means that as a portfolio manager and I was a portfolio manager and institutional level, which means I was managing money not at the retail level, but for large pension funds, for insurance companies worldwide, governments and so on. I needed to at least get that, and not so much myself, because of course my partner Marcos was only part of a larger portfolio, but the clients would want at least that much more or less regular basis. 

We made sure that as, we heard through measuring against indices. So the challenges were to beat these indices and ideally to be the competition. However, when that is not all risk, investing in emerging markets you are dealing with. Basically any investor. Two challenges, which I would argue are more increased in the emerging market world, which is the ability and the willingness to pay and the law of the rating agencies, views on these countries basically are based on that. How do the numbers look and the current basis and towards the future? And what is the environment, political, social, etc., where we believe that the government is going to want to pay now, something that Marcos presented here, the growth in assets under management, in emerging markets, in some of these economies, which took place in the 90s, and, you know, part of 2000, coincided with a world where commodities were very important. There was a commodity cycle that defined the world economy. And as, client of mine back in the 80s when I was working for a large consulting firm, told me. And I asked him, he was the CEO of one of the very large, one of the largest, perhaps the largest oil companies. I said, how do you deal investing in both countries? I'm afraid of the real US civil war. You know, working in a jungle or all the challenges. You know, you're taking oil out of deep sea and so on. And he, Sunsilk, which I will always remember, was there is no oil in Switzerland. You have to invest in Nigeria. You invest in this team Venezuela. You have to invest in Mexico, in Saudi Arabia, where it is hard to get that there and only present that as an example, because as it happens, a lot of emerging markets happen to have a very reach in commodities. So they enjoy, period of growth, which coincided with what we call globalization and so on, which attracted a lot of capital. Because one of the things that capital goes after is growth. And these countries, as long as they grow faster than developed economies, they were a destination for investment. The other thing is that. Typically, if you were investment reasonable, I give you a large return in developed economies. You go for riskier and riskier assets. That changed in the last couple of years. Why? Because money was free, as I call it. But you go to the crisis in 2008.

Interest rates were zero, essentially in the developed world. So during the previous periods 1920, in most of my career, money was free. If you look at interest rates were very low, which means that investors started moving more and more into riskier assets, and these involved emerging markets because they offer you a higher rate of return. Lately, with us, you know, interest rates coming up in the developed world. It's it has been a challenge for people that want to capture investment because, you know, you can't get a 5% return in the investment in the United States, for example. However, as I said, getting there is not easy. You have to make sure you see the indices and so on. And let me give you an example of the challenge that you face. At some point, some of the indices that Marcus mentioned, the JP Morgan and B or so they are doing this is that if we want to get in the NBA, the NBA diversify. Venezuela, who by then was already in the way of being non democratic or whatever you want to define it and so on, represented only if I remember correctly at some point 3% of the index. The UCSF portfolio manager. I can do without any sweat. Right? They have another 40 countries or whatever to invest in. However, the yield on Venezuelan bonds was 40% at any given time because of the risk of a country. The market was asking Venezuela to pay that much. So if you do the math as a portfolio manager, you are punished by not investing in Venezuela because a little 3%, if you do the math. Give me 40%. If I happen to be completely out of Venezuela, whatever I get anywhere else. 5678 9%. Does not compensate for me having been out, or that little portion of it should have been as well. I was thinking out of the scene this a song which made life easy to view one. So what I want to share with you is precisely that this is a challenge, that, that, asset manager faces, ESG came a bit late in my career. And he's been very important and he's very encouraging, as you see these, I read something that caught my attention that, for example, I'm using history, of course, at this point as a proxy of of what we're dealing with. Companies, you know. That opera? You know, management. They are getting into it, not because they are being converted to the idea of ESG. We are getting into these because there is demand for it and there are serving the millennials. 

I didn't mind that. I'm going all the alphabet. Millennials Z what if I am ancient somebody me in the old category are becoming more and more aware or in this case of environment want. And they are demanding investments in there and companies are responding. So that is the positive side of it. Let me tell you, however, the negative side of the negative, but perhaps a bit more pessimistic, and this is a discussion that we would like to have, is a little bit out of what I should be talking about. But together with the so-called democratic recession that we are going through, and so the charts that Marcus presented and so on, I mean, concern and this is not new. For years now, and I would probably argue this goes back 15 or 20 years at least. Your research showing that many of these countries are disenchanted with democracy? And here I want to press in 2 or 3 cases if I remember them all. And again, this is more of the discussion. This this is a philosophical part of my presentation to you. I already told you of the experience as a portfolio manager. Number one, we will face a problem of radiation. Marcos has divided into autocratic rule. Call it totally authoritarian, whatever. Think of Poland. 2016 Poland changes into a Law and order party, which proceeds to look for these governments to, undermine the judiciary. And in their recent election, finally, these squirming results that we were about to democracy. What are you doing between. There are many races you know better than I. To define democracy. But lack of an independent judiciary is certainly not good. So? So do you help Poland in the process? You get out of Poland when the judiciary certainly under attack, and then go back when there is not another example. Mexico and insoluble. Mexico, there is less, you know, there is freedom of the press. What is under attack? The president, very openly, you know, those what populist governments do, which is undermine institutions. However, his ratings approval and I would call that client client. So of course, because he's giving money literally to poor people and so on. With all the discussion that this entails, he's got 60% of approval. You know, his candidate in this year's election is likely to win. He won majorities in Congress, majorities in state governments, and so on. Is that democracy? 

El Salvador. It is an election coming up this Sunday. But Kelly has, as you know, gone hard against, narco trafficking and all of that with all kinds of human rights abuses you can imagine. He's 90% popular in the polls. People want him and goes back to what I mentioned they do while ago. There is a certain disenchantment with democracy. I've heard the philosophical view that if we listed all the roles that you believe in the state. You know, to this day be provider of health or education infrastructure on companies. We can argue all of that. Shades of left or right, whatever. At the very least, when people got together as a society in a cave is because you had a leader with a bigger stick that at least could defend you against the others. And some people in these cases as well, you know, increasing the work for different ways, seem to want that. So these cases worry me. Because not only there is indeed any recession, but some people may do without it. If is going to provide them a either means to a living. You made the money. I don't care where it comes from or be. Deal with violence which is hurting us all. And the final one that I want to make a. This is something that Marcus is more of an expert in, but believe me, Argentina was in the in the minds of everybody 2019. Busy and not good at time. Of course, is he did a lot of good things. If you want, that that we would like to see. But we had a fear that Alberto Fernandez and Cristina Fernandez occasionally were going to come to power. The IMF gave the largest single long time I'm sorry in this history to Argentina. 44 billion, if I remember correctly, something Argentina right now is is struggling for the last couple of years and will continue to do so today. A few of us knew that that was the biggest mistake. For a number of reasons. There was no way that the money was going to be paid with the optics were very bad. In my mind, I defend this view. It was an open way to say we finance the candidate we want. Make you fail. He lost with money given away. That money went out immediately. But India has zero research at this point. Negative information. So as an investor, where did you play all of this to invest in Mexico, knowing that is an erosion of democracy. Do you get returns in a world that the commodity cycle seems to have come to an end? You still have the challenge to develop in these 510% whatever you want. 

You know, in general for finance, the population in the world or the aging population in the world. You see something gradual. Can you move from index to index? You went from autocratic to democratic back and forth. I'm thinking Poland, for example, in this case. So as you see, I think of it as a dynamic problem. So, I want to stop here. I would obviously like to hear your comments and questions, but I went to throw some ideas. As I say, first to share with you what I believe is a challenge for my colleagues in the industry. You know, asset managers, but also, if you want, from a philosophical point of view, where how do we get to this education and this synthesis and these indicators that an investor can feel comfortable in doing the right thing, which I hope people will do. Thank you.

Ricardo Hausmann: Okay. Thank you. Thank you. Marcos, I don't know if you want to respond to that before we go on, but let me let me pose to you a question. Him. And the question has to do with. Suppose we have the right measures of democracy and so on. And we. Access to the market of non democracies and so on. In. What goals will we have achieved? One is you will feel better. Where? And you know, we'll have some kind of moral kick because our money didn't go to fund unsavory people or. More optimistic. A description is that you will make the life of dictators harder, and consequently more likely that people in the country will want to. Kick them out. Move them out, and it will be harder for them to to keep their coalition going because they're more restricted, or there'll be payoffs to get rid of them, because then you'll have more market access. So. So actually you are achieving some good in the world. So is it about you feeling better? Is it about a plausible theory of change where the world gets better? What underlying worldview do you espouse? 

Marcos Buscaglia: Yeah, no, I'd say it's a very good question. And, and so, let me address that and then address the issue of, you know, how gradual this is. That is also a very good question. And I think that, of course, you know, the feel good is always there, like in the same vein, a green bond or, you know, going into the and mandate for investment is the feel good part is always there. But but I think that you, you can, you can bring some change, some change. Because at the end of the day, all these wannabe dictators that started not as if most often they started out, you know, in a democratic elections thank food intake job. You know, they. They. They were able to establish, you know, Tography because they were very successful in economic terms. They usually come when you study, particularly cases, you know, like like, Russia, Venezuela, even Argentina with a given. All these wannabe dictators come after a period of stagnation and depression. And people say, well, I want to change. I want, you know, new parties, new ideas, and they come. And they say I'm the new thing. But for different reasons. They are very successful. Each other's work, they're successful. The kids know what we're successful putting was very successful. You know, the Russian economy shrink every year, like four percentage points on average during the 90s. And then it started to grow like 7% on average the first few times. And so you say, well, so their their popularity and hence their capacity to have majorities in Congress which allow them to tinker. We know with democracy the judiciary and the press come out of success. So my take is that part of that success. Was financed by the market. So if you if you took that money out, let's assume for the sake of the of the explanation that there was zero money, they would probably have been less successful and less capable of, you know, bringing down the checks and balances by which they became dictators. I'm not sure about that, of course, but my take is that success, you know, although they are dictators, they they didn't become dictators in one day. They it was a process. And in that so if they if they didn't have that money from Wall Street, they would have probably been less successful for just, you know, fiscal adjustments are very unpopular. Well, if they didn't have financing from the market, they would probably have to have had to implement fiscal adjustment, rendering them unpopular. 

And then people say, well, I want change before it was too late because at some point it's too late. Look at Venezuela. You know, at some point it becomes too late. So that's that's my take. So I'm not sure about that of course. But my take is that success. This. This wannabe outlook is when they see the process, they they are able to undermine, you know, year of the year Democratic, say, checks and balances because they're successful. They're like, you know, like, Amlo in Mexico or they, they are very successful. And the market, I think, has something to do with that. And again, I'm not sure about that. It is the same debate as with sanctions, you know. You're very well aware of that. I mean, why do you impose sanctions to make their life more difficult? There is this debate or to kick them out? Well. I think that, at the very least, is to make the life of of them more difficult personally, you know. But that, you know, at some point you would like to introduce regime change. And I think the same about this, this issue. So that that is, your question and then what you mentioned about what do we do about Mexico? You know, these cases are not autocracies, but are not democracies. And, you know, there you look at the these indices are starting to go down. The case of El Salvador to me is a little bit more clear because he's running. Bukele is running against the you know, the Constitution has set a limit, which he he's basically not obeying. So it's a clear cut case. But but it is a very reasonable question. Poland. What do you do? Because democracy. I think there is. You know, Larry Diamond, this, democracy. Democracy is like a continuum variable is not one because there are no coupe de dots now, or fewer is not 1 or 0. You are democratic or undemocratic. It's like it's a continuous variable where, you know, one day one journalist is jailed, the next day you one when judges kick out without, you know, and so democracy starts winding down, you know, like they're gonna continue. So at which point you say, I will not embezzle. So there are ways to address that. I think that is, you don't need to have binary decisions in, in, in your investment as well, unless taking aside the the obvious the biggest democracy offenders. Right. 

But in countries that that are, you know, like cases that you see that they're racial but still. Well, you can, you can say I will not invest in Poland, but I will say, let's assume that the JP Morgan index has 5% of Poland. Well, I will have 2.5% or whatever, you know, like half of that in by doing that, you are also, I think trying to get the same result because if if all the investors would do the same, they the government of Poland, the, the the party, what was the name of PiS, right. PiS that was undermining democracy. It would have had less money, right, or more expensive money if it wanted to tap the market, you know, and basically, he would have rendered them less popular and, and force regime change even faster. By the way, Poland is the Polish government was under the PiS that also, you know, tinker with the Supreme Court, the, you know, freedom of press, etc. was the biggest issue of green bonds in the, in the world. Right. So, so, so basically, I think that there are ways to address your concerns, which is a very valid concerns. What you do with countries like Mexico, it's not clear the guy is undermining democracy, but it is still an electoral democracy. Well, I think that maybe avoiding binary systems in this, in the same way to SD, you have different ways to implement ESG. Some are called exclusion strategies. You don't invest in tobacco companies or oil companies, for example, but that's one type of ESG investment. Other other type of strategies is ESG inclusion. Well is inclusion is well, instead of having 10% of tobacco companies like my benchmark in Texas, I will have 5% in. So in that way, I will be investing more money in companies that do good for the environmental, for health, you know? So there are ways to address that that problem, which is a real concern because again, democracy I like this expression. It's like a continuous variable. You know, it's like, no, there are events that are drawing you down a democracy up or down, but often, oftentimes are very, you know, small steps.

Javier Murcio: Right. Can I sorry. A couple of things. As you say, investing less or more is what we would call being over, or underweight. Or you can have zero. And I put extreme case, like, if you get out of Venezuela completely, say when you as part of the index that you have zero, but you can still come in 3% with a 1% or whatever, or you could put five, 10% whatever, or their weight on their weighed against the index. But again, not only to to repeat that there is a way that there is, a cost to that decision. You know, even on their way, Venezuela, say from 3 to 1%. Can you do the math? No, it's a lot. You are punished, you know.

Marcos Buscaglia: So just to answer that, I my my proposal, of course, is that I hope all these index providers would offer what I call DSG indices so they, they wouldn't pass the burden to you as an institutional investor. You know, that of, of being underweight. So like another a new alternative. You have the J.P. Morgan Diversified and then you have the J.P. Morgan Diversified corrected for ESG. And then you have a new product, a new index call in the Midwest if I DSG correct. And so in that one you probably wouldn't have Venezuela or you have a smaller server, Venezuela. So it wouldn't put a burden on you as an asset manager. 

Javier Murcio: Let me give you, some good news I talked about before, because sometimes it comes on demand. When you do institutional, when you manage institutional money, as I said, large pension funds, governance, etc., etc., you pretty much dealing with only one institution or two, you know what I mean? Even, you know, a customized product anybody can go and buy, you know, robot store, you know, it's There were cases. That we were asked and mostly by by actually by northern European, yes, governments or, you know, pension funds and so on. They would specifically ask not to invest, for example, in ministry, you know, and that was good because it would be I won't judge you against the index. You know, I understand that you're going to underperform the index because you're going to be out of Venezuela. It's okay, you know. So. So that is the good news. The one thing I'll talk about dynamics. I mean, years ago, I came out with a term. It's not my copyright. But anyway, I tried. I tried to capture what was going on. They call it democratically populist, democratic, populist dictatorships. What happens when? After a while. And again, if you believe in populism as something that tends to undermine institutions, eventually they change institutions to the point that you are. Democratically elected because you change the electoral rules. Because you change the, judiciary. Whatever it is. Okay? People elected me this way. You can argue. Well, yes, because you don't know about opposition parties or something. But over time, that is something that seems to be happening in many places. And that is what worries me, that that deterioration, that's what I call the dynamic, probably that trend if you want, whatever some point represent that point. If you're moving in that direction, you are dealing with a democratically elected government that has to change the laws. And by the way, we fear about that in this country, in a way that. Yeah, what can you tell me? I mean, I mean, I could, you know, the right wing.

Attendee: Thank you. My name is Wil. I'm an MPP one here at the Kennedy School. And I really fascinating, discussion, and I appreciate it. I think my question is about, in response to your proposed solution. It seems like that there's a possible unintended consequence or risk of maybe strengthening anti-democratic coalitions. So it seems like there's this moment where, you know, countries like, Iran, Russia, China are coming together to propose alternate, institutions to kind of the, the global, system. Right. So an example of that might be the, spfs instead of the Swift system. So I guess I wonder if would this type of index that you're proposing, take developing countries, maybe in sub-Saharan Africa or South America, that are teetering on the edge and push them towards, you know, coalescing with anti-democratic coalitions.

Ricardo Hausmann: Before you answer, let me see if there's any other question in the audience. Sure. Yes. 

Attendee: Thank you so much for the for the talk. I was, wondering if you distinguish between, bond markets and equity markets and how you think about, penalizing, sort of a nation versus penalizing, governments. And, and this is you said you it's similar with the sanctions debate. And so I was wondering if you had more, more insight on that. Thank you. 

Marcos Buscaglia: Okay. Two very good questions and and just my, my, my I don't know if I have the answers, but. Yeah, it's a risk, right. You're saying, oh, I'm the government of and all Salvadoran markets are not, offering me money. So I will go to get the money from Russia or from, you know, from or from China for whatever that that has already happened in some way. I mean, China is now the biggest official creditor in the world. And the loan loans all by developing countries to to China are bigger than they were the ones. So to to the to the world Bank, you know, and the IMF. But but that's a, that's a risk for, for sure. But I think that it's not it's not a perfect substitute, you know, in the sense that inasmuch as China has emerged, you know, as a big creditor, you know, the size of what you can offer, it fails compared to what the market can offer. You failed. And and to be sure, you know, the conditions asked by China are a lot more, demanding, you know, in, in, in, in terms of interest rate, you know, maturity than, than and collateral, you know, than what the market would ask you if you are, if you are well behaved. So, so, I think it yeah, it is a risk. But but I think that the, the carrot, you know, of being a democratic country that gets funding from the market would, would be much, would await the, the cost, you know, the this, this thing. I see your question is again, also a very good question to, you know, in the bond market to me is very key in the government bond market, you know, and as a sovereign, you know, if you buy, if you buy the bond, you are, you know, financing the government of Chavez or Maduro. And then your you may or or the case of target I wrote down in the case of equity. It depends also let's, let's take let's say quasi sovereigns, you know, the, the market, you know, the biggest IPO by then in history was Saudi Aramco. You know, they this was in the working of investment banks just the same time as allegedly the you know the royal family killed the you know works the journalist Jamal Khashoggi in the consulate in Istanbul. Right. Markets do not care a few months. So my take is that in the case of quasi sovereign, you know, equity to me is very clear. Let's same with Gazprom. Gazprom was used, you know, by by Putin even I'm talking about before the invasion. You like to, to, benefit when, when, when the, you know, Ukraine government was pro Russia gas prices were lower than when the government was. anti-russia. So basically, by buying quasi sobering equity, you know, your ipso facto financing the, the government of the country in that in the case of private companies is a more broad line, to be honest, he said there are a lot more gray areas. Right? In, in there is one case in which I think it's more clear cut, the case of China. Why? Because when you read, the more you read, the more you realize that all companies in China are supposedly, you know, have CCP, committee, Chinese Communist Party committees inside, they are forced to obey the government to spy for the war. So yet when you buy Chinese stocks. You end up financing the Chinese government. There are other cases in which is, you know, not very clear, right? Because oftentimes companies in emerging markets are just trying to resist, you know, the government. But let me tell you that the more you read, the more you realize that for them to resist when you when you're buying companies in emerging market countries that are turned into dictators, the more to resist, they should bribe more officials. They should do going to projects that the officials want. I mean, so in some way you are also financing the government. So my thinking is that, to be honest, particularly for the democracy, was the worst offender. I wouldn't I wouldn't buy stocks of these countries.

Ricardo Hausmann: Thank you very, very much. Thank you for coming. 

Marcos Buscaglia: Thank you.