December 2020

Country Ranking Trends

  • Magni recently completed a review of Market Integrity in Peru. Historically, Peru has made commitments to improve the many weaknesses documented in the country’s governance of markets. The country’s low score for Market Integrity contributes to one of the lowest overall Magni Country Governance Scores in the investible world. Even modest success in implementing recommended reforms would improve the score enough to pass other low-scoring countries, among them, Pakistan. Unfortunately, Peru has not achieved meaningful progress.

Another Last-Minute Brexit Breakthrough

  • With a year-end deadline for a trade agreement, the repeated Brexit pattern of missed deadlines and last-minute deals continues. Without a deal the UK and EU would have reverted to trading under WTO rules. Britain’s Prime Minister, Boris Johnson, and the president of the European Commission, Ursula von der Leyen, had agreed to an additional extension to the already-extended trade negotiations. Uncertainty already was causing trade disruptions. Compounding the issue was the discovery of a variant strain of COVID-19 in Britain, resulting in travel bans for the British in Continental Europe. However, in a holiday present for everyone involved, there was a last-minute deal. It has many components and covers many topics, including fishing rights, energy, and data protections. That said, as with prior steps in the Brexit process, key items remain unresolved. For example, the rules on geographical indications, designed to protect the quality and reputation of foodstuffs produced in a particular region (e.g., Champagne), will be determined later. Each of the major parts of the agreement has issues which are deferred into the future.
  • Implications: The deal will allow Britain to exit the EU as scheduled and with less disruption than the “crashing out” scenario some forecast. That said, we should expect more issues to surface, including renewed contention as the existing and future issues cannot be resolved easily. Britain and the EU now can shift focus to other matters. For example, will Scotland split from Britain? Also, will the EU begin addressing existential considerations related to its foundational structure? Time will tell. For now, Britain’s governance remains strong, despite political gyrations, while the EU provides governance benefits to the weaker member states.

Tactical Wins on the EU Budget Defer Strategic Issues

  • The European Union has agreed on a budget and coronavirus recovery package totaling more than $2 trillion, and for the first time it has agreed to issue joint debt (i.e., debt at the EU level instead of debt from a member state) to finance some of the recovery funding. The deal came together after a compromise was reached with Poland and Hungary to lift the two countries’ threatened veto of the budget package. Hungary and Poland objected to a provision that tied the disbursement of funds to whether each member state is upholding the EU’s rule-of-law standard. They argued the provision was legally vague and could be used to punish Warsaw and Budapest over political differences. The compromise allows the European Court of Justice to rule on the provision’s legality before it is applied. Also, the provision applies only to the new 2021-2027 budget and the recovery fund. Future payments for projects under commitments made prior to the current budgetary framework will be exempted. The legislative text on the rule-of-law mechanism remains unchanged, but the practical effect of the compromise will be to postpone its application. Hungary and Poland are the biggest net beneficiaries of EU transfers, and the delay makes it likely that Hungary will continue to get EU funding when Prime Minister Orban runs for re-election in 2022.
  • Implications: The complicated negotiations and resulting budget agreement allow events to unfold in a more orderly manner. At the same time, the underlying existential issues which could erode the foundation of the union get deferred. Even with Brexit issues being resolved, at least partially, the EU does not appear to have the appetite to address the bigger issues. The likely result is a weaker EU unable to become the European equivalent of the U.S., while the member states within the EU face less pressure to complete the reforms required to improve governance.

China Playing Hardball with Australia

  • Australia and China have been locked in an escalating trade dispute. China has started a series of punitive steps that began when Australia called for an independent investigation into the coronavirus pandemic. Beijing has announced 14 political disputes it expects Canberra to address. China’s complaints have to do with Australia’s positions on Taiwan, Hong Kong, and human rights in China. In response, Australia announced it will launch a formal appeal to the World Trade Organization (WTO) over China’s decision to impose an 80% tariff on imports of Australian barley. About 70% of Australian exports of the grain go to China. Australia has also said China would be violating WTO rules and a bilateral free trade agreement if media reports are correct about a planned ban on Australian coal. Evidence of the ban has surfaced as dozens of Australian ships carrying coal have been stranded off China since October after ports were told not to accept Australian coal shipments. Exports of wine, lobster, beef, timber, and cotton have all also suffered from the conflict. The WTO dispute resolution processes could take years, so Australia also is requesting formal negotiations with China to try and bridge the differences.
  • Implications: Chinese foreign policy has become more forceful. Countries are beginning to respond to Chinese actions. Australia may not succumb as easily as other countries. It has one of the highest Magni Country Governance Scores. The country has a long-standing reputation for playing by the rules. Australia likely will prevail in a dispute adjudicated by the WTO, though the dispute resolution process is slow. China has a low, though improving, Magni Country Governance Score. China could strengthen its position by focusing on needed reforms, thus positioning the country to be among the leaders of the emerging markets.

Even the Reasons for the Saudi-led Dispute with Qatar are not Transparent

  • Saudi Arabia’s foreign minister has said a resolution of his country’s dispute with Qatar was “within reach”. Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt severed diplomatic, trade and travel ties with Qatar in 2017 for several stated reasons, including its relationship with Iran and accusations of support for terrorism. The other countries involved were more cautious citing progress in talks mediated by the United States and Kuwait. The dispute has centered around 13 demands made by the quartet of countries. These include requiring Qatar to both close the Al Jazeera television station and cut links with the Muslim Brotherhood. A tentative deal may be announced at a Gulf Arab summit to be held in January. Any deal is unlikely to resolve all outstanding issues but instead would include confidence-building measures and principles for further negotiations. Saudi Arabia is eager to be seen as a peacemaker by the incoming Biden administration in order to offset the likely harder line to be taken by the new administration on issues such as the killing of the journalist Jamal Khashoggi.
  • Implications: Saudi leaders are more concerned with their inability to control or limit the negative portrayal of the country on Al Jazeera than most of the other issues in the dispute. Qatar is very rich and self-sufficient, while the royal family feels a high degree of security given a large U.S. military presence. Qatar has little incentive to compromise, despite the inconveniences resulting from the dispute. Three of the countries involved in the dispute are investible: Saudi Arabia, Qatar, and UAE. None of the three has strong governance. The high level of opaqueness common to governments led by royal families is the primary reason for the low scores. Reforms to make the countries more transparent would provide benefits to business activity, attraction of foreign investment, and citizenry of the countries.

Is “Groundhog Day” Returning to Israel?

  • Once again, Israelis will be returning to the voting booth. The prior round of voting ended when Prime Minister Benjamin “Bibi” Netanyahu and Blue and White leader Benny Gantz formed a coalition government. The coalition government included a rotation of prime minister with Bibi continuing in the role during the first period. While the press reported that the government fell due to a failure to pass a national budget, the real reason was much murkier. Bibi used a loophole in the deal to prevent Gantz from becoming prime minister. The stakes for Bibi are very high as his shield against prosecution in three criminal cases is deferred as long as he is prime minister. Both Bibi’s Likud and the rival Blue and White parties have weakened through key defections. Many on the right are disgusted by Bibi, while many in the center left could not forgive Gantz for violating a commitment to not form a coalition with Bibi.
  • Implications: It is unclear what will happen. The fragmented nature of Israeli political parties results in every government being a coalition. There is no easy path to a governing coalition. During the last set of elections, the repeated votes produced nearly identical results. Whatever the outcome, and however long it takes, Israel will not be focused on reforming its governance. It retains a relatively low Magni Country Governance Score among the developed countries of the world. Improvement in Israel will require resolution of the situation with Bibi.
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