Why Markets Value Stability over Democracy

Do markets truly care about democracy? The evidence suggests that, above all else, they prefer predictability. While democratic systems promise transparency and institutional accountability, they also entail electoral cycles, policy swings, and much political noise. By contrast, authoritarian regimes—especially those formed by way of military coups—can offer a clarity that investors appreciate, provided that the new order appears competent, stable, and investor-friendly.

Chile’s example is instructive. In 1973, the military ousted socialist president Salvador Allende, and installed General Augusto Pinochet. Democracy was shelved, political opponents were crushed, and parties dissolved. Yet under the stewardship of the “Chicago Boys,” the regime swiftly enacted radical neoliberal reforms: budget cuts, mass privatisations,and trade liberalisation.

Markets approved. Between 1975 and 2019, Chile averaged 4.21% GDP growth—well above Argentina’s 1.93% and Brazil’s 2.8%. By 1981, Chile introduced a privately managed pension system whose assets would soon account for nearly one-third of national GDP, fuelling local capital markets.

The lesson? Markets don’t cheer on repression, but they do factor in how reliable the policies of the one doing the repressing are. International sanctions did little to deter inflows. Milton Friedman would later call it the “Chilean miracle”—a regime born of tanks but sustained by financial discipline.

A coup is judged not by method, but by message

Not all coups result in economic transformation. But some are enough to shock a system out of its political paralysis—and that, in itself, reassures capital.

Thailand’s 2014 military coup offers a case in point. After months of street protests and governmental deadlock, General Prayuth Chan-o-cha seized power. Investors initially panicked: foreign direct investment plummeted by 78% between January and November 2015, compared to the same period the year prior. But local capital stepped in. Institutional investors filled the gap, the baht strengthened by 6% within three months, and the SET Index rose 32% over the next year.

The junta’s economic performance was modest, but irrelevant. What mattered was that the uncertainty ended. The regime didn’t need to deliver prosperity—it only needed to project control.

Contrast this with Turkey’s failed coup in 2016. President Erdoğan crushed the revolt, declared a state of emergency, and purged the judiciary, military, and media. Markets reacted violently: the BIST 100 index dropped 7.1%, and the lira fell to historic lows. Yet within days, the losses were recouped. Erdoğan’s swift consolidation of power reassured investors that institutions—especially the central bank and fiscal apparatus—would remain operational.

In both cases, it was not democratic credentials that restored market confidence. It was institutional coherence and policy continuity. When the pillars of economic governance remain intact, markets forgive—and often forget—how power is seized.

When Capital Leads the Coup

In some cases, capital does not merely react to coups—it anticipates them.

A seminal 2009 study by Dube, Kaplan, and Naidu examined stock price movements around US-backed covert coups during the Cold War. The researchers found that multinational firms at risk of nationalisation saw statistically significant gains—often before the coups occurred.

In the four days following secret US approval of regime change, the stock prices of exposed firms rose by an average of 1.5%. Within two weeks, they were up 3%. The kicker: many of these gains came before the first soldier had even moved an inch.

The market, in other words, intuited that a coup was in the offing.

Or consider Iran in 1953. After Prime Minister Mohammad Mossadegh nationalised the Anglo-Iranian Oil Company, a CIA-backed operation toppled him, reinstating the Shah. Stock prices in oil interests jumped before news of the coup had been made public.

A year later, in Guatemala, President Jacobo Árbenz began redistributing land, directly affecting United Fruit’s holdings. Another CIA operation—PBSuccess—toppled him. United Fruit’s stock rebounded before any tank appeared on the streets.

Yet not every attempt pays dividends. In 1961, the CIA-backed Bay of Pigs invasion sought to overthrow Fidel Castro. Not even 72 hours later, the plot proved a spectacular failure. Markets had however not budged an inch. The takeaway? Without credibility and competence in protecting capital, any new regime by coup might soon face its own ouster..

Statement

Investors don’t crave democracy—they crave continuity. From Pinochet’s neoliberal pivot to Erdoğan’s resilience by authoritarian means , capital markets reward regimes that maintain economic clarity, regardless of how they came to power. For markets, coups are not moral failures; they signal whether to invest—or not.

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