Country Governance Research Commentary – December 2016

Country Ranking Trends

  • Magni completed a review of country progress against its Economic Standard of Market Integrity. Market Integrity includes anti-money laundering and terrorist financing activities. While some country improvements were identified, they were not material and hence no country scores were changed.

Will Negotiating Room Become a Source of Volatility?

  • President Trump has continued his approach of attempting to overturn precedents and prior agreements, including the One China Policy, NAFTA, NATO, immigration, Mexican relations and Russian relations. He appears to take the view that he can replace the existing order with a new order more beneficial to the United States. Time will tell whether he is successful. Even if he is successful, the interim period with its likely disruption and uncertainty will probably give investors pause and perhaps indigestion. Volatility in equity markets may spike.
  • Implications: Nothing has occurred during the few days since inauguration to change the score of the United States or any other country. Magni will closely follow developments to determine if subsequent actions do have an impact on country governance.

India Gets Short-term Benefits at the Expense of Long-term Success

  • In a bid to root out corruption, Indian Prime Minister Narendra Modi made a surprise announcement to discontinue the country’s 500- and 1,000-rupee notes (representing 86% of the cash in circulation). Modi’s long-term economic aim is to change the overwhelming reliance on cash, which fuels the black-market economy and sustains illegal activities like tax evasion. Finance Minister Jaitley said direct tax collection had increased by 14.4 percent through December 19 and the federal government’s indirect tax collection was up by 26.2 percent as of the end of November. But the apparent success of Modi’s demonetization scheme has come at a cost for the country’s economy. India’s growth has slowed due to the adverse impact on cash dependent sectors of the economy, such as small business and farming.
  • Implications: This brute force technique to reduce corrupt activities should not be a substitute for economic reform. Such reform would help offset the negative impact of the withdrawn notes, increase the opportunities for long-term success, and raise India’s country score.

Controversies Masking Economic Gains in the Philippines

  • Media attention has been focused on President Duterte’s war on drugs and the resulting charges of human rights abuses. The economy has received far less attention and it is where he has largely carried over the reforms started under previous administrations. During his first six months in office the Philippines saw one of the fastest growth rates in Asia. From 2010 to 2016, GDP has grown by an average of 6.3% as the economy benefited from reforms in governance and transparency, as well as fiscal and budgetary reforms.
  • Duterte has also appointed a solid economic team that has given significant input on policy. Also guiding his economic decisions is a 10-point economic plan, announced last June, which includes tax reforms.
  • Implications: Magni has already incorporated the prior reforms into the country score for the Philippines. Additional reforms have the potential to drive further increases in its country score. Continued economic success will probably give Duterte the political capital to continue his war on drugs and drug dealers despite the allegations of abuse. The media will most likely continue to focus on that controversy and hence underreport the economic progress.

Will Consolidation of Power in Turkey Lead to Poorer Governance?

  • The Turkish parliament recently approved a constitutional amendment that would change the current system of government from parliamentary to presidential. The contentious voting process in parliament was marred by screaming matches and physical altercations that sent at least three legislators to a hospital. President Erdogan has said he will quickly approve the amendment so that it can go to a referendum, which is expected to be held in April.
  • The amendment would abolish the post of prime minister, curb governmental oversight by the parliament and give Erdogan the authority to unilaterally issue decrees. The proposed changes will also restart the clock on Mr. Erdogan’s term limits, meaning he could lead the country until 2029. While opposition parties have been resistant to the change, they have been unable to rally sufficient support to halt the process.
  • Implications: While many of the changes create governance risks, the proposed actions do not at this point change Magni’s assessment of the country and, hence, the country score is unchanged. Consolidation of power and opaqueness from a lack of oversight tend to lead to corruption. In recent years, Turkey had increased its score faster than other countries in the emerging markets. Magni will be watching to see if the improvement continues, stalls or switches to a deterioration in governance and hence a decrease in score.