Country Ranking Trends
A review of Pakistan was conducted following recent developments relating to market integrity, but no changes were made to their overall country score. Improvements were reported around the supervision of non-financial businesses for money laundering risks. However, significant deficiencies still exist regarding providing mutual legal assistance in money laundering cases. Pakistan recently implemented a new law which imposes restrictive conditions on the provision of MLA including a new requirement that the subject be informed of the request. Progress in addressing the gaps identified will be needed before any upgrade.
Israel has a new government if they can keep it
After four inconclusive elections Israel finally has a new government. One hour before the deadline, the Knesset approved by one vote an unlikely eight-party coalition to be led by Naftali Bennett, head of the right-wing Yamina party. Bennett will serve as prime minister for the first two years then Yair Lapid, the leader of the centrist Yesh Atid party, is to replace him in August 2023 for the remainder of their four-year term. Given Netanyahu’s reputation for political tenacity there was apprehension up until the last moment whether the coalition would hold long enough to oust Israel’s longest serving prime minister after 12 consecutive years in office. Netanyahu is not going away, however, he will be the leader of the opposition and has said his goal will be to bring down what he calls a “dangerous left-wing government.” Now the challenge will move to governing with a cabinet consisting of such vast ideological differences including both far-right and far-left parties, as well as, for the first time, an Arab party. Bennett called for a spirit of compromise saying in his acceptance speech that his government will focus on what can be achieved rather than arguing about what cannot.
Implications: Beyond ousting Netanyahu and ending Israel’s governance crisis there are not particularly high expectations for what the new coalition can accomplish. There is not even certainty that the government will be able to survive for its full four-year mandate. One practical step it will be able to take is the passage of a budget, which has not happened during the last two years without a stable government. The new finance minister has said they will have a budget ready for approval by November. However, the prospect for more far-reaching reforms that could improve Israel’s governance score are not likely.
G7 agrees to a new international tax regime but hurdles remain
The Group of Seven nations have reached an agreement on a framework for rewriting the international tax rules for multinational corporations. The agreement represents a fundamental shift in the long-standing principle that corporations are only taxed in the locale where they are headquartered. In an increasingly digital economy, companies have been able to take advantage of this fact by keeping their intellectual property in low-tax countries while deriving untaxed revenue in countries where they lack a physical presence. The first pillar of the G7 plans call for the largest corporations to pay taxes on a portion of their profits wherever their product is consumed not just in their home country. The second pillar proposes a new 15% minimum tax on the global income of multinational companies. It would also require corporations that continue operating in countries with lower tax rates to pay the difference to their home government. While the US tech giants would pay higher taxes under such a regime, they have been largely supportive of the tax reform effort because the deal would also call for the repeal of digital service taxes many countries have moved to implement. These taxes are based on gross revenue streams instead of profits and vary from country to country. Many firms would be willing to pay more in taxes in exchange for greater certainty and less complexity.
Implications: While the G7 has laid out a broad outline for international tax reform most of the detail has been left for further negotiations amongst a wider range of countries. The OECD has convened a group of 135 countries to hash out the new rules with the hope that the G20 finance ministers can agree to a deal when they meet in July. A final agreement is hoped to be inked when G20 leaders meet in October. Even assuming such a deal will come together by the end of the year, the action will then turn to the myriad of national legislatures which will have to implement any final agreement. Whether all these hurdles can be cleared remains to be seen.
Mid-term election is a setback for AMLO
Earlier this month Mexico held its largest ever election to fill more than 20,000 posts throughout the country. This included all 500 seats in the lower house of Mexico’s Congress, as well as nearly half of the country’s governorships and thousands of mayoral and local legislative posts. The election was also one of the country’s most violent with over 100 political assassinations reported. President López Obrador, who is nearly halfway through his one six-year term as president, was not on the ballot, but the election was widely seen as a referendum on his populist agenda. AMLO, as he is commonly known, has remained broadly popular following his landslide election in 2018. However, his handling of the Covid-19 pandemic and his failure to crackdown on drug cartels has dampened his political standing. He has also been criticized for actions seen by detractors as weakening Mexico’s institutional guardrails. While the president’s Morena Party and its allies were the largest vote getters, the results fell short of expectations and will curtail his ability to implement his agenda. In particular, the Morena Party coalition lost its two-thirds majority in the lower house that would have made it easier for AMLO to push forward his desired constitutional changes.
Implications: Without a supermajority in Congress, it will be more difficult for AMLO to enact reforms he calls the “Fourth Transformation,” which would increase government control over key sectors of the economy, including the energy sector. The president will also now have to negotiate with the opposition parties in order to pass laws. It also makes it less likely that there will be any constitutional reforms that could harm the country’s independent institutions. The elections, having placed a check on AMLO’s ambitions, will likely be a net positive for the country’s governance or at the very least should help prevent any significant deterioration.
Peru elects a far-left former teacher
With all of the votes counted, Pedro Castillo won Peru’s presidential election by a margin of about 44,000 votes out of nearly 19 million votes cast. However, official result won’t be announced until the election board has ruled on his opponent, Keiko Fujimori’s appeals. Castillo is a leftist former teacher who has no prior governing experience. He heads a Marxist party that has called for the nationalization of major industries, though Castillo has pledged to respect the market economy. His opponent Keiko Fujimori comes from the other end of the political spectrum and was the preferred candidate of the political establishment. She is the daughter of former right-wing President Alberto Fujimori who is currently in prison for widespread human rights abuses during his years in office. While international observers have said the vote was clean, Fujimori and her supporters continue to allege fraud and have filed complaints seeking to annul as many as 200,000 votes.
Implications: The post-election wrangling has further divided an already polarized nation. Supporters of both candidates have taken to the streets to claim the other side is trying to steal the election. The process of certifying the election has resumed following a delay due to the resignation of one of the judges hearing election challenges. As the disputes drag on, allies of Fujimori have begun to call for her to accept defeat. While the final certification could take as long as several more weeks the final declaration of Castillo as the winner is in little doubt. Peru is near the bottom of our governance index, and whenever Castillo takes office, he seems unlikely to enact the types of reforms that would improve their position.