May 2019

Country Ranking Trends

  • Argentina and Saudi Arabia are now considered part of the emerging markets. Following Magni assessments, the two countries have received initial rankings of 45th and 42nd, respectively. Argentina’s low score reflects weaknesses in monetary policy and significant regulatory deficiencies across most parts of financial services. Saudi Arabia’s low score reflects opaque government operations and a general lack of information about the economy. Weaknesses in property rights, particularly for shareholders, are also a drag on Saudi Arabia’s score.
  • The large number of elections and the significant implications of the elections means that the commentary is longer than normal. The third page we added in this commentary is temporary, and the two-page format is expected to return next month

May’s Exit May Impact Brexit in May (and beyond?)

  • British Prime Minister Theresa May resigned effective June 8th. What happens next remains as opaque as ever. Boris Johnson, a Brexiteer, may become Prime Minister. He favors the U.K. withdrawing from the European Union; even if Britain leaves without an agreement (a.k.a. the “no deal” exit). There may be a general election. There may be a new referendum.
  • Implications: As stated in prior commentaries, the basics remain the same. There is no majority within Parliament or the public to do anything. A “no-deal” Brexit is the default path, which will cause disruption for Britain, though the country will eventually be OK. For the EU, Brexit remains a distraction, thus keeping it from addressing existential issues.

EU Election Produced Polarized Parliament Which Portends Plenty of Procedural Problems

  • The 28 member states of the European Union (including the UK) held elections for seats in the European Parliament. In each state citizens vote for candidates from their national parties, who then gather into political groupings in the Parliament. For the first time in 40 years the traditional parties of the center-right and the center-left will not control a majority. While far-right populist parties did increase their representation, they did not make the significant gains some had predicted. Liberal, pro-European Union parties also gained ground at the expense of the status quo parties. The Green Parties improved on their past results and will be the fourth biggest group in parliament. The Greens will be particularly influential because the support of their members will be needed to form a working pro-EU majority in the assembly. The results mean there will be greater fragmentation in the 751-seat body, which will make consensus more difficult on future European budgets and legislation.
  • Implications: The pro-EU parties will likely form a coalition government, though the reforms required to move the EU toward its original aspirations will be more difficult and more attention will need to be given to divisive issues that could cause more voters to shift to anti-EU parties. Conversely, the anti-EU parties face the challenge of somewhat disappointing election results that is further complicated by the inherent dissonance created from an alliance of parties advocating forms of national sovereignty.

Scandal Backlash in Austria may help the EU

  • Chancellor Sebastian Kurz has ended his party’s coalition with the nationalist Freedom Party. This resulted after a video from 2017 surfaced of a woman posing as the niece of a Russian oligarch meeting with Freedom Party leader and Vice Chancellor Heinz-Christian Strache. In the video, Strache promised the woman government contracts if she acquired a controlling stake in an Austrian newspaper and switched its editorial position to support the Freedom Party. The scandal has amplified concerns about the links between Russia and nationalist movements across Europe. The dissolution of the ruling coalition ends the experiment of mainstream conservatives and the far-right governing together. Early elections are to be held in September.
  • Implications: As with many countries, populism in Austria has threatened to derail the quality of governance. The scandal may move the country away from populism and toward a return to an era of positive reforms. As with other European countries, there are implications at the EU level. The Freedom Party is part of an alliance of European nationalist parties and the scandal may have hurt its momentum coming just days before EU voting begins. In the short term, weakness among the nationalist parties would take potentially destabilizing pressure off the EU, though the EU does not appear ready to deal with the structural reforms required to achieve long-term stability and improved economic prospects.

“Down Under” Version of Populism Seems Compatible with Good Governance

  • Australian conservative Prime Minister Scott Morrison won a surprise victory by promising economic continuity in a county with one of the world’s longest stretches of consecutive years of growth. Morrison successfully argued that the center-left’s policy proposals of higher taxes and spending in order to address issues like climate change and income inequality were too risky. The desire to maintain the status quo won out over any upset with the tumult in conservative leadership that had led to five different prime ministers in the past five years.
  • Implications: The populist currents Morrison rode to victory have similarities with other recent votes and could have lessons for upcoming elections in the United States and beyond. It is notable that the Australian version of populism has not adversely impacted the quality of governance as Australian maintains one of the highest Magni Country Scores across all countries.

Can India Move Past a Nationalist Election to Continue Reforms?

  • Prime Minister Narendra Modi has won a second five-year term. His Bharatiya Janata Party (BJP) again won enough seats to reach a single-party majority in India’s lower house of Parliament, unlike most prior Indian governments that have needed coalition partners. The leading opposition Congress party had its worst performance since India’s independence. Unlike Modi’s last victory, this election focused less on economic development and reform and more on the issues important to Hindu nationalists. Having now received an overwhelming mandate the question will be how hard he will push the pro-Hindu agenda of his campaign, or whether he’ll pursue structural reforms that will facilitate growth.
  • Implications: After a slow start, Modi has led important economic reforms in India, and the country is one of the most upgraded over the last year. With even modest continued reforms, India is now on the cusp of joining the top quartile of countries in the emerging markets. Such reforms would help support the higher growth rates required to absorb the millions of young workers who will be soon entering the job market.

Can Ramaphosa Stop South Africa’s Slide?

  • In May 8 national elections, the African National Congress (ANC) and its presidential candidate, Cyril Ramaphosa, received 58 percent of the vote. Ramaphosa became president in February 2018 after a massive corruption scandal forced the ANC to remove his predecessor, Jacob Zuma, from office. While the results insure Ramaphosa will remain in office, the vote totals are the weakest national result on record for the ANC. Disillusionment was also evident in the low voter turnout. Voter apathy is understandable after a decade of escalating government corruption. Without Ramaphosa’s personal popularity the ANC would likely have done worse. The test now for the president will be to carry forward the reforms he started against resistance from some in his own party, many of whom currently hold senior positions in the ANC despite corruption allegations.
  • Implications: While Mandela did an amazing job of converting an apartheid country into a leader in the emerging markets, the country has been living off that legacy instead of continuing to improve. The rampant corruption weakens governance and the longer it lasts, the tougher it will be to eradicate. At times, Ramaphosa has talked about the reforms needed to improve governance. If he pursues such reforms, the country would be more transparent and corrupt politicians would have a more difficult time continuing their practices, while prior corruption would become easier to expose.

Will Erdogan Hear the Wake-up Call from Turkey’s Electorate?

  • Turkey’s national election board (YSK) earlier this month took the controversial step of canceling the results of the Istanbul mayoral race because of alleged irregularities. The race was won by an opposition party. However, the YSK did not annul the votes for the city council that were cast at the same time, and where Prime Minister Erdogan’s Justice and Development Party (AKP) won a majority of seats. Mr. Erdogan’s candidates were defeated in several other major cities, including in the capital Ankara. The loss was the most significant sign yet that support for AKP has begun to falter following a weakening economy. The opposition is now set to govern major Turkish cities for the first time in 17 years. The loss in Istanbul was particularly stinging because of the city’s importance; however, rerunning the election may backfire if it exacerbates the economic turmoil that has already led voters to support the opposition.\
  • Implications: Early in Erdogan’s tenure Turkey improved significantly. Currently, it ranks just below the median among the countries of the emerging markets. While other countries are improving, Turkey is now at risk of declining. Hopefully, the election provided a wake-up call for Erdogan. If he returns to the reform path he pursued prior the attempted coup in 2016, Turkey could keep or even improve its ranking. If not, countries such as Pakistan and now Saudi Arabia have an opportunity to move ahead of Turkey.