August 2018

Country Ranking Trends

  • Magni completed a review of Accounting. Brazil is the only country where the review resulted in a change. The country has made enough progress in establishing an accurate, open, and complete accounting system that the country was upgraded to full compliance. The upgrade modestly improved the country’s overall Magni Country Score, however major weaknesses in areas such as Market Integrity and Securities Regulation keep Brazil ranked in the middle of the countries in the emerging markets. The ongoing corruption scandals, including the Odebrecht scandal (involving the Brazilian conglomerate Odebrecht), are public manifestations of the problems associated with weaknesses in governance.

Is the Recent Trade Deal Involving the US and Mexico a Big or Small Step?

  • The United States and Mexico have announced a new trade deal that could replace NAFTA, though an agreement with Canada has yet to be reached. It will require car companies to manufacture at least 75% of an automobile’s value in North America, up from the current 62.5%. It will also require a set proportion of auto components be made by workers earning at least $16 an hour. Mexico also agreed to abandon dispute resolution provisions that allow challenges to penalties imposed by the other nations to combat alleged dumping or subsidies. The US has increased its use of such penalties against Canadian exports over the past year. The US compromised by significantly watering down its demands for a “sunset” provision. The need to involve Canada and the upcoming Mexican presidential transition mean that the agreement likely won’t be finalized until at least the end of the year, which would push US approval into the new congress that will be seated in 2019. Further, the White House is still resolving the exact legislative process required to adopt the resulting agreement(s).
  • Implications: The new trade deal is the first tangible sign of progress from Trump’s trade actions. The optimistic scenario is that the deal: (1) has significant benefits from the specific terms in the revisions to NAFTA; (2) can be easily approved by the legislative bodies in both countries; and (3) becomes the “first domino to fall” in a long series of improved trade deals across multiple continents. The pessimistic scenarios involve one or more of the three points not happening. Such deals, in and of themselves, do not impact Magni Country Scores. However, trade barriers enable crony capitalists, while the concomitant opaqueness associated with country-level barriers tends to provide cover for corruption. Good trade deals are supportive of good governance.

Australian Game of Thrones

  • Conservative lawmaker Scott Morrison became Australia’s sixth prime minister in 11 years and marks a rightward shift for the ruling Liberal Party coalition. Not a single Australian prime minister has completed a full term in more than a decade. The revolt from more conservative lawmakers came in response to Prime Minister Malcolm Turnbull’s attempts to mandate Australia’s emission-reduction targets under the Paris climate accord. Mr. Morrison rose to prominence over his tough stance on immigration. He emerged as a compromise candidate capable of bridging the divisions between the Liberal Party’s moderates and harder-line conservatives. Polling suggests the government is losing support and could be headed for defeat in elections due next year. Australia has compulsory voting, making it even more important to capture swing voters who typically determine election outcomes.
  • Implications: Australia has a relatively high Magni Country Score. So far, the country’s Game of Thrones has not adversely impacted Australia’s high quality of governance. Given the populist sentiments inherent in the recent changes and the frequent decline in quality of governance from populism, we hope this “game”, unlike the HBO series, remains more superficial than substantive.

Populism in Sweden

  • On September 9th, Sweden will elect the members of the Riksdag which in turn will elect the prime minister. A string of shootings and arson attacks this summer have pushed the economy down the list of voter priorities and lifted immigration, as well as law and order. The currently governing Social Democrats are expected to record their lowest share of the vote in more than a century. There has been a backlash against immigration since 2015 when Sweden welcomed the highest per capita number of refugees in Europe. There is growing support for the Sweden Democrats, an anti-immigrant party with neo-Nazi roots. Sweden Democrats have campaigned on a nationalist platform arguing that Sweden’s immigration policy has been too generous. The other major parties have also promised various restrictions. While the proposals are popular with the electorate, Swedish businesses have expressed concern that the steps could hurt the country’s competitiveness. As in previous elections, every other party has vowed not to cooperate with the Sweden Democrats. That probably means there will be a minority government of the traditional center-left or center-right blocs.
  • Implications: Sweden has a relatively high Magni Country Score. While populism is generally destructive to good governance, there are no indications at this point of any substantive changes that would reduce Sweden’s score. The populist sentiments in Australia, Sweden, and the United Kingdom increase the chances that the countries remain slightly behind Canada for the top Magni Country Score.

The Greek Can Gets Kicked Down the Road (Again)

  • Greece this month completed its exit from its third bailout program over the past eight years. The Greek economy is growing again after a very deep recession where the economy contracted by 25%. In agreement with eurozone creditors, Greece will participate in surveillance that will monitor whether the country is maintaining agreed deficit targets. Greek governments will have to achieve a primary budget surplus of 3.4 percent of GDP for a decade, then 2.2 percent until the year 2060. Greece will also need to maintain previous reforms. In exchange, Greece has been given reduced interest payments and extended maturities – but no outright debt relief. Greece leaves the bailout with the largest debt burden in Europe at more than 180 percent of GDP. Given that long-run real GDP growth is only projected to be around 1 percent a year, the primary surplus targets are almost certainly overly optimistic.
  • Implications: Without additional economic reforms and restructuring of sovereign debt, these actions amount to a holding action, and another crisis will likely happen at some point in the future. There is internal political resistance to additional reforms, though the most effective reforms are likely less painful and more beneficial than prior reform efforts. One of the biggest benefits from good reforms would be faster growth. At the same time, underlying issues related to the future of the euro remain obstacles to agreement among the leading European nations regarding an approach to restructuring Greek debt.
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