Geopolitics has become fraught – which may be a rank truism, since the argument may be that geopolitics always is. Countries choose to deal or not with each other, perhaps transact, and often entreat with each other.
Underlying every assumed posture or action is an underlying tension, since a country incurs that tension from accommodating sometimes an irreducibly large or at least trace uncertainty over what that country’s counterpart might actually do – no matter how close an ally it may be.
Given that tension, re-invigorated “Westphalians” might approach the world more skeptically, being more attentive to national interest, and recognizing the limits to pooled sovereignty, international collaboration and perceived shared interests. Others look to the natural affinities in global regional associations, where geographic advantages are compelling.
To these observers, regional market proximity – along with closer and more efficient complementary ties – makes for more obvious benefits and smoother interaction. There may be a lot of truth to this.
What’s important however to direct- and portfolio-investors, savers and lenders, all of whom are subject to sovereign jurisdictions, is the question “How?”, or rather “How well?”, a country executes in addition to the question “Where?” a country may be, which a regional approach emphasizes.
In different environments, there are always different ways to improvise, there are always different ways to make money and win business. Obviously, some ways are less palatable, or not palatable at all. Participating in markets where the offer is clear, the incentives are plainly understood, and market institutions are impartial is preferable. All of these things provide, in essence, the best “field” for business and growth.
And on that score, we note that any risk taker should consider perhaps that perpetual motion machine: the virtuous circle. Where the virtuous circle presides, even with the business cycle, growth begets growth.
Effective and inclusive country institutions reinforce themselves and conjure the virtuous circle. They do so through their results – namely, through the environment effective institutions create, which fosters transparency and social trust, leading to growth, enhancing the benefits of the environment, thereby reinforcing those institutions and renewing the circle.
So, while regionalism may pay, because of the efficiency and synergy it can promise. For global risk-takers, it remains important to gauge country institutions and their quality, a due diligence exercise which will foster returns. We cite the World Bank’s “Ease of Doing Business” Index (WB Index) for the top ranked 20 countries according to this measure vs. country designation as a non-OECD or an OECD member. Of the top twenty countries per the WB Index, thirteen are OECD members, standing out like a sine wave.
Thus, the association: OECD members are strongly represented among countries showing high WB Index values; conversely, countries with high WB Index values are well represented among OECD countries.
Being an OECD country is another way of saying that you are a “rich” country.
While a few OECD countries are not that wealthy, many are. And, countries score well according to the World Bank’s “Ease of Doing Business” Index, when their institutions for starting a business are reasonable, access to financing is clear, contracts are enforceable, insolvency is workable, and property rights are clarified. Doing well by these criteria seems to kick-start a virtuous circle, growth and with that, compounding returns. Global investors should consider how countries are doing in addition to where they may be.