July 2018

Country Ranking Trends

  • Magni completed a review of corporate governance infrastructure. Companies in countries with an infrastructure conducive to transparent, honest, and efficient business activity tend to grow and prosper more easily. The review identified many small changes to our scores for this economic standard. Australia, Belgium, India, Indonesia, and Portugal were upgraded for progress in implementing previous reforms. Conversely, the Czech Republic, Germany, Hong Kong, Italy, Japan, and Mexico were downgraded for a mix of less progress than previously identified and actual reversals of prior progress.
  • India and Indonesia are now the two most upgraded countries in the world over the last year. India is rapidly moving closer to the highest Magni Country Scores among the countries in the emerging markets. Indonesia lags a bit behind India, and just moved into the top third of the countries in the emerging markets.

The US on the Outside Looking In

  • The European Union and Japan earlier this month signed a major trade deal that when fully implemented will eliminate most tariffs between the two economies. The two together account for around 30% of global economic output making this the largest such deal the EU has ever signed. The deal was announced during President Trump’s European visit where he described the EU as a “foe” of the United States when it came to trade. Shinzo Abe, Japan’s prime minister, and European Council president, Donald Tusk, without mentioning Trump, acknowledged the political symbolism at the signing ceremony stating that they stood together against protectionism and for predictable international relations. Also significant in today’s digital economy, the trade deal included an agreement on data flows, recognizing each other’s frameworks for transfers and privacy protection as equivalent. This is the largest such data agreement ever reached and gives them a greater say in deciding the world-wide framework.
  • Implications: The trade deal is positive for both economies, though the deal does not change Magni Countries Scores for any of the countries involved in the deal. The benefits from the deal may be helpful as country governments pursue reforms, and thus accelerate future upgrades to Magni Country Scores. In addition to losing access to markets, the trade wars initiated by the United States are reducing US ability to lead as future global standards are negotiated; especially regarding technology.

A Lot of Drama That Sheds Little Light on Brexit

  • Two years after the United Kingdom voted to leave the European Union and less than nine months from the official March 2019 exit date, the details of the UK’s future relationship with the EU remain to be settled. A white paper published earlier this month after approval by Prime Minister Theresa May’s cabinet laid out in the most concrete terms yet the UK’s vision for post-EU arrangements. Under this proposal Britain would sign up for Europe’s rules for goods without being able to shape them. Services, which account for 80% of the UK economy, would be dealt with under a separate framework that would give Britain more flexibility in exchange for more restricted access to the single market. It also proposes replacing the EU’s freedom of movement with a “mobility framework” to be negotiated. However, this formulation upset the hard Brexit supporters and led to the cabinet resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson. On the other hand, by rejecting the indivisibility of the single market for movement of services, capital and people, May’s framework also crosses redlines for EU negotiators. The most likely outcome is to kick the can down the road by reaching a “backstop” agreement that protects Northern Ireland’s open border with the Irish Republic post-exit. This would allow enactment of a transitional period maintaining the status quo between the EU and UK that would last until at least December 2020, so that a definitive trade deal can be negotiated.
  • Implications: As with divisive issues in many developed countries, compromise agreements are currently difficult to enact. The partisans on both sides would rather scuttle an agreement than accept proposed compromises. Despite the Sturm und Drang, Britain and the EU are likely to muddle through. In the past, these muddles have become a series of incremental agreements that do just enough to keep the crisis at bay.

Mexico Approaching a Fork in the Road

  • On July 1st, leftist Andrés Manuel López Obrador (AMLO) won Mexico’s presidential election in a landslide. With over 50% of the vote he won by the largest margin since the nation transitioned to democracy – more than doubling the vote of his nearest rival. In another first, his party, the National Regeneration Movement (Morena) will also have a majority in both houses of Congress, though it will be less than the two-thirds required to change the constitution. This will allow him greater latitude to legislate without the input of political opponents and to pursue a more ambitious legislative agenda than that of his predecessors. AMLO ran a populist campaign against the political establishment with promises to clean up Mexico’s rampant crime and corruption. In a bid for broader acceptability, AMLO downplayed many of his more radical past policy positions. However, the priorities of the new government and how it plans to enact promises remain to be seen. The incoming finance minister has pledged that the new administration will be fiscally responsible though he was non-committal about specifics.
  • Implications: After significant positive reforms completed over prior decades, Mexico has stagnated for several years. With the election of AMLO, Mexico is likely to hit a fork in the road. The campaign promises are consistent with a path of renewed reform potentially reminiscent of prior successes. The populist nature of his campaign and AMLO’s comments prior to the campaign could conversely move Mexico in the direction of Brazil under Lula. Magni will assess actual results to determine which “fork” Mexico has taken.

How is Pakistan Like Mexico?

  • With Imran Khan’s victory in Wednesday’s election, Pakistan will get its fifth prime minister in seven years. As with Mexico, Pakistan faces a fork in the road. On one side is the “fresh face”, clean up corruption, find an accommodation with India, and make Pakistan the Sweden of Asia. On the other side is a candidate supported by the military, facing internal dissent, elected with irregularities and some probable fraud, and in a fragile position. Mr. Khan has promised much on his long road to power, and those promises are consistent with the first side of the fork. Now comes the hard part of delivering.
  • Implications: Pakistan was recently upgraded to the emerging markets. Successful reforms could move the Magni Country Score for Pakistan into the middle of the scores for the countries in the emerging markets. However, prior promising reformers have not been able to deliver on a reform agenda. We will see what happens here.
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