The difficult job of assessing governments

Assessing the performance of an employee is not the most difficult job (caveats exist!!!) in the world despite the subjective judgments involved. Nevertheless, I find that in Bangladesh (and possibly the world) top management and HR often fails in awarding the good performers and penalizing the bad ones. Rather, either nepotism wins or employees are promoted by ‘socialism’ which usually means that age determines position and rank.

When we extend the challenge to analyzing companies, it becomes slightly more difficult. However, it’s still quite doable by using a number or relative (benchmarking against key competitors) and absolute (Total shareholder returns, RoIC, Profit growth etc) metrics.

The toughest of these all is assessing the performance of a government in my view. The challenges actually start from the very basic level as we are still not sure if GDP growth is the single best indicator of economic progress. On top of that consider that, calculation methodologies and data collection ability also differs greatly between countries. Morten Jerven has done some great work on GDP calculation of African economies that highlights this challenge.

If we dig deeper there are bigger challenges. Major infrastructure projects started during one government’s regime may end in another where the latter gets all the benefits. The biggest challenge in my opinion is differentiating between growth happening due to real actions taken by governments versus growth happening due to favorable domestic and international tailwinds. To understand these two better lets look at a few examples.

A country privatizing extremely loss making state owned enterprises to ‘best private owners’ (and not to owners related to governments who gets them at cheap prices) will benefit the entire country. Reduction of subsidies that benefit the rich disproportionately will also help the country. These are examples of positive reforms that leads to real economic prosperity. On the other hand, large and young populations allow a country to increase output without high wage inflation. Similarly, for a large commodity exporter like Brazil or Australia, roaring commodity prices means economic prosperity even without the government doing much. As mentioned earlier the hardest part is to understand how much of the growth is attributed to internal and to external factors.

As demonstrated by Ruchir Sharma (Morgan Stanley), the decade from 2000-2010 has been extraordinary for emerging markets. They experienced one of the longest stretches of high GDP growth causing commentators to believe that such growth rates could be extrapolated to the future. The reality is that the rapid growth of India and China led to huge demand for commodities and thus all commodity exporters benefited tremendously. Many, like Russia became complacent, believing the fairy tale will continue forever and stopped the real internal reforms. Authoritarian regimes became even more autocratic, and tried to bribe the population using Petrodollars. Things did not end well when commodity prices collapsed as these economies which failed to diversify into other businesses (partly due to Dutch Disease and partly due to complacency) found themselves as naked as the emperor in ‘The Emperors New Clothes’.

One of the most interesting book I read (or rather skimmed through) in 2015 was a report by the World Bank called Puzzles of Economic Growth. It compared and contrasted pairs of countries which had different economic prosperity even though being at similar stages of development at one time. One of the biggest reasons was that lagging countries failed to create buffers and rainy day funds in good times. They fell apart in the bad times.

From this perspective, we can conclude one thing. The real capacity of a government will be understood by looking at their actions during both good and bad times. During good times (when global economic wind go in their favor) are they creating enough buffers or going into a spending spree without justification? Do they continue reforms even when the back in not against the wall? In my part of the world, the definition of a reform usually goes like ‘bad tasting pills taken by government’s when they have to beg to IMF/World Bank and stopped as soon as economy turns around’. Similarly, actions during bad times can also give good hints. Unfortunately, this sort of analysis can only work in an utopian world because almost all government except a select few will fall short of such standards.

This brings me down to South Asia and particularly Bangladesh. While the commodity crash has created havoc on the exporting nations, commodity importers in South Asia are now in a honeymoon period. Their external balances are performing better, inflation is low and fiscal deficits are under control. Such tailwinds, will obviously push growth higher making a lot of people incorrectly conclude that the government is doing a great job.

A $30/barrel oil world and a $100/barrel oil one are very different for exporters like Nigeria and importers like Bangladesh. Now is the acid test for the Buhari administration in Nigeria. The test for Bangladesh will come when oil rebounds.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

2 thoughts on “The difficult job of assessing governments

  1. Nice write-up. Its really interesting to read!

    I think the performance of any Govt. can be considered as its ability to drive any nation towards solvency, peace, strength, bargain power & moral issues. GDP growth may not be enough to measure a Govt’s performance if the per-capita real income is bad, unrest goes on, corruption takes place, long run plan is irrelevant and so on.

    A set of metrics can be formulate to track the performance of any Govt. and the combinations can be varied region to region, culture to culture & country to country.

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