October 2018

Country Ranking Trends

  • Following Magni’s review of Fiscal Policy Transparency, no countries were upgraded or downgraded. Governments that are transparent about government expenditures are less likely to be corrupt or to have crony capitalist deals that extract economic rents for the benefit of the powerful. October was another of the occasional months where Magni scores for Country Governance are unchanged.

Can the Brazilian Trump of the Tropics Tackle Transparency?

  • On October 28th Brazil held its second-round presidential election. Jair Bolsonaro, a right-wing populist and winner of the first round, beat Fernando Haddad, the nominee of the Workers’ Party. Haddad assumed his party’s candidacy when courts ruled that former president Lula da Silva was ineligible as he was, and still is, serving a 12-year prison sentence for corruption. Bolsonaro is known as the “Trump of the Tropics” and his victory represents another anti-establishment success in the populist wave that has recently prevailed across the globe. Bolsonaro’s prior obscurity helped keep him from being tainted by the country’s myriad of corruption scandals. This clean image, along with his focus on law-and-order, has allowed voters to overlook his often-inflammatory rhetoric. Bolsonaro is seen as a pro-business candidate, but his party will be far short of a majority in congress, meaning compromise will be necessary as important issues such as pension reform loom.
  • Implications: Brazilian corruption, and the opaqueness that enables the corruption, has kept the Magni Country Governance Score relatively low. Should Bolsonaro be able to enact meaningful reforms, there is significant upside to Magni’s score for Brazil, though the lack of a congressional majority will be a challenge. Conversely, failed reforms, along with his inflammatory rhetoric, would empower his enemies which are the entrenched entities benefiting from corruption. If Bolsonaro fails, some disciple of Lula would probably be elected, and the corruption would continue.

EU Braces for Broader Backlash from Italian Budget Battle

  • The European Commission has rejected the Italian government’s draft budget as it projected a deficit exceeding the EU target and is inconsistent with the existing commitment of the prior Italian administration. If Italy refuses to submit a revised budget consistent with the commitment, the EU could attempt to impose sanctions. The newly elected populist government would prefer to allocate resources to its election promises of enacting a flat tax, increasing benefits spending, and reversing increases in the pension age. Italy believes that its additional spending would boost economic growth. However, EU officials are concerned it would also increase the country’s public debt, which at more than 130% of GDP is the eurozone’s second largest after Greece.
  • Implications: The European Commission is in a tougher position than the newly elected Italian government. The Italian government hurts its popularity if it is seen as buckling to EU pressure, while resistance to EU pressure and the potential imposition of sanctions would likely increase popular support. As a result, Italian officials see little incentive to heed the EU. The EU faces a lose/lose situation. The imposition of sanctions could fan anti-EU sentiments and boost the election of anti-EU candidates in multiple countries. Conversely, agreeing to the submitted Italian budget implies acceptance of a higher-than-target deficit, which would undermine EU authority.

Packing of Polish Court Puts EU in a Pickle

  • In the latest chapter in the three-year dispute, the European Union’s highest court ordered the Polish government to stop its modifications to Poland’s Supreme Court. The European Commission asked the European Court of Justice last month to freeze the changes until it could rule whether the changes comply with EU law. Poland’s ruling Law and Justice party had enacted reforms including retroactively lowering the retirement age and increasing the number of Supreme Court judges from 93 to 120. The ECJ agreed with the commission’s argument that the changes were inconsistent with EU rules and represented a threat to judicial independence. The court ordered the government to suspend implementing the 2018 law and reinstate all of the Supreme Court judges who were forced to retire and to refrain from any further attempt to replace them. Polish authorities have so far ignored pressure from the EU, but they have indicated they will allow Supreme Court judges forced into early retirement to return to work. The ECJ gave Polish authorities a month to explain how they will comply with its order.
  • Implications: As with the Italian budget battle, the clash of authorities contains broader EU implications. There appears to be little resolution and increased confrontation on the core issue regarding the authority of the EU over judicial decisions in a member country. As with Italy, the Polish government may have limited flexibility to be seen as buckling under EU pressure. Once again, the EU faces another lose/lose situation. They either stoke anti-EU sentiments or allow EU authority to be undermined.

Populist Pakistani Prime Minister Faces Precarious Finances

  • Former cricket star Imran Khan became the prime minister of Pakistan in August. He ran on an anti-corruption platform and pledged to create an “Islamic welfare state”. However, foreign debt under the last administration had grown to an unsustainable level with foreign-exchange reserves now barely enough to cover required sovereign-debt payments due in the short term. This deteriorating economic situation has compelled the government to seek an IMF bailout, and the strenuous conditions the IMF is likely to demand will preclude fulfilling any campaign promises of government largesse. In order to ameliorate IMF strictures, Khan says he will pursue both the IMF bailout and loans from friendly countries, namely China and Saudi Arabia. Saudi Arabia has agreed to give financial support worth at least $6 B, but investors will be looking for the assurance of an IMF monitoring program. The IMF is expected to demand full disclosure of the terms of Pakistan’s other recent borrowings. Pakistan has used significant Chinese financing for infrastructure projects under opaque terms. The United States and others have accused China of using “debt-trap diplomacy” by lending money to build infrastructure that the recipients can’t afford.
  • Implications: Pakistan has been considered an investible country for about a year. Magni gives Pakistan one of the lowest scores in the investible world for its governance. The process of negotiating the required financing may impose some mild transparency requirements, though these sorts of deals rarely require the systemic changes required for real improvement in governance. At the same time, the expansion of a welfare state may provide benefits to some struggling families, though it will not address the underlying governance problems that prevent Pakistan from improving its situation. Perhaps the anti-corruption campaign will lead to reforms, though it appears such reforms will lag behind financial and welfare priorities.
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