October 2020

Country Ranking Trends

  • Magni recently completed a review of Monetary Policy. As part of the review, Magni identified a new source which provided greater insight into key factors in our model. We now have better information on specifics regarding each country’s policies, especially the important topic of inflation. Most countries received an upgrade or a downgrade. The countries with the largest upgrades were Qatar, Pakistan, China, Egypt, and Singapore. Conversely, the countries with the largest downgrades were the United States, Canada, France, Germany, and Greece.

U.S. Governance Helps Hold Goldman Sachs Accountable

  • Goldman Sachs agreed to pay $2.9 billion in penalties to settle federal charges over its involvement in a Malaysian corruption scheme. Goldman had earned $600 million in fees for helping Malaysia’s 1MDB investment fund raise $6.5 billion to support energy development in Malaysia. Instead, it is estimated that insiders stole $4.5 billion of the fund’s money between 2009 and 2014. In charging the bank with violations of the Foreign Corrupt Practices Act (FCPA), prosecutors argued that the bank ignored signs of fraud in pursuit of fees. The settlement will be the largest fine ever paid under corporate criminal bribery law. The deferred prosecution agreement means the company avoids a trial and possible felony conviction, which could have crippled its ability to do business. The settlement also does not require a government-appointed monitor to oversee the bank’s compliance department. In total, Goldman’s dealings with 1MDB will have cost it more than $5 billion in financial penalties. Several current top executives are also expected to forfeit $174 million in salaries and bonuses, and the bank has said it intends to claw back $67 million from former executives, including from former CEO Lloyd Blankfein.
  • Implications: The fallout from 1MDB included a change of government in Malaysia. At the time there was a lot of excitement about the country’s future; this optimism has not been realized. The country’s score has stagnated mostly since the end of 2015. The United States did hold a company accountable for its activities, albeit slowly. FCPA is an example of good governance in this country.

China is on the Move

  • China became one of the first major economies to start growing again following the onset of the global pandemic. Annualized growth of 4.9% was recorded during the third quarter when compared with the same period last year, just below the country’s pre-pandemic pace. Both retail sales and industrial production gained. Retail spending rebounded to above pre-virus levels for the first time. This reversed a trend where China’s recent growth had been heavily tilted toward infrastructure spending from government stimulus. The return to growth is a dramatic reversal from the first quarter of this year when the economy contracted by 6.8% following the initial emergence of the novel coronavirus in Wuhan. As the first country to experience the coronavirus outbreak, China implemented drastic lockdown measures that have largely succeeded in stopping local transmission of the virus. This in turn enabled economic activity to resume with few restrictions. However, steps credited with aiding this success, such as comprehensive cellphone tracking of its population, are unlikely to be replicated in Western democracies, despite another acceleration of new cases.
  • Implications: Beyond the pandemic response, China has restarted reforms to improve governance after a three-year stagnation. The country has improved more than any other country over the past year. The country’s ranking has improved to somewhat better than average among the countries of the emerging markets and ahead of Brazil. Additional reforms, especially involving government transparency, would move the country ahead of India and Indonesia.

Will Thailand Have Its Economic Cake and Consume Democracy Too?

  • Protests recently have intensified after relative calm during the height of the coronavirus pandemic. The student-led movement began in February after the constitutional court disqualified a popular opposition leader and ordered his Future Forward party to disband. The protestors are calling for the resignation of the prime minister, a new constitution, and reform of the monarchy. The current Prime Minister, Prayuth Chan-ocha, was army commander when he led a 2014 coup. Last year, he was elected prime minister, though the election continues to be considered illegitimate as the military mandated election laws (established post coup) that stacked the process to favor the military by giving the military the power to appoint the members of Senate, which in turn voted for the prime minister. For the first time, the opposition is also directly confronting the country’s monarchy. It is calling for a repeal of Thailand’s harsh lèse-majesté law, which can impose jail terms of up to 15 years for insulting the royal family. This would have been unthinkable during the 70-year reign of Bhumibol Adulyadej, but his son, who took over in 2016 following his father’s death, is much less popular than his father. The new king has been criticized for his extravagant lifestyle, and the fact that he primarily has been living in Germany.
  • Implications: While Thailand has moved away from democracy, the economic infrastructure has improved. It is one of the most improved countries in the world and has one of the best economic infrastructures in the emerging markets. Magni will be watching to see if the country can have its improved economic infrastructure and democracy too.

Chile Stagnated and Now May Lose What It Created

  • On October 25, Chileans voted overwhelmingly to begin the process of writing a new constitution. The call for change started with protests that began in late 2019 over a small hike in public transportation fares. The protests often turned violent and thousands have been killed, injured, or arrested. Looting and rioting also led to billions of dollars of damage and losses to businesses. To quell the unrest, President Sebastián Piñera agreed to support the protestors’ demand for a referendum on a new constitution. Chile’s current constitution was adopted in 1980 under the dictatorship of Augusto Pinochet, without popular input, and critics contend it offers insufficient support for social welfare. The free-market economic model the country has pursued since its return to democracy in 1990 has been considered a success for its high-growth rates and reductions in poverty. But there has been growing dissatisfaction with widening economic inequality. The state provides the bare minimum of services, and the expectation is that the new constitution will lead to greater social spending and changes to certain pro-market rules. A second referendum will be held in 2022 to accept or reject the document authorized by the election.
  • Implications: In contrast to Thailand, where the focus on economics at the expense of other considerations led to significant improvements, Chile has not improved. It retains a ranking in the middle of the emerging markets countries with a score between Brazil and Colombia. The new constitution may become, at best, a temporary salve while undoing some of the good reforms from years ago and not starting the additional reforms required for improvement.