Populations are dynamic, so the demographers tell us. They are fruitful and stable, ably replacing themselves and then some. Or, they may be atrophying, having fewer children, making do. They are a phenomenon – like all of us, like each of the people they embody. But, for the cross-border lender or investor, the kernel question – the key one – remains: where can I lend or invest profitably? The state of country institutions can provide that needed guidance, maybe irrespective of demographics…One could almost say fostering strong country institutions may increasingly become the remit of the new ethical global commons.
Apparently, the United Nations recently published its updated record on the global demography, as reported recently in The Economist, one of the news and economics journals of record (see “People Watching”, The Economist, July 16th 2022).
Per findings from the UN, the world population will reach 8 billion people by some time this fall, and could very well reach 9.7 billion by 2050.
But no, there are no straightforward ongoing extrapolations over the next century. Things get complicated. Declining global fertility rates actually mean the variability of population growth into the next century is becoming very large. Some may be more fruitful, while many will not be. UN demographers estimate that by 2100, the world population could range between 8.9 billion to 12.4 billion people, with a “50/50 chance” of shrinking, as The Economist reports.
What struck me about the UN’s forecasts and analysis was the observation, as The Economist writes, “that 43% of the increase (in global population) between now and 2050 will come from (just) five (countries): the Democratic Republic of Congo, Ethiopia, India, Nigeria and Pakistan.” The United States will remain the world’s third largest nation by population size, coming in at an expected 375 million people by 2050. Hold on to that thought.
What may be tragic among these five noteworthy countries, in terms of their growing populations and all the potential that implies, are the relatively poor country institutional endowments each must contend with.
With a strong institutional endowment as a given, a growing population will mean greater prosperity for a country, stemming from greater domestic market breadth, greater productive capacity, etc. It’s almost as if a growing population “leverages” the benefits from an environment where country institutions work well. Conversely, demographic pressure can stress an environment exhibiting poor institutions.
To take a step back – what do we mean by “country institutions”? Institutions are those norms, laws, and conventions that govern how country residents interact with one another. They determine and shape how we lead our economic, political and for that matter our social lives. Countries where residents have confidence and buy-in for their institutions generally prosper, since the “rules of the game” are known to all, held to be legitimate, and our observed.
When everyone plays by the rules, so to speak, local confidence grows and uncertainty diminishes. Collaborative efforts are much easier to engage, and more efficient – not as much need (and expense) to hedge against defection.
One source on the relative quality of country institutions is the set of World Governance Indicators (WGI) which the World Bank updates and publishes on a lagged two-year basis. The indicators represent the compiled opinion survey work the World Bank puts together. Each indicator provides a percentage ranking of how well country residents view critical institutions such as freedom of the press/expression, or control of domestic corruption.
For country comparative purposes, MMD has utilized the WGI scores to develop what we call a “political risk curve” that measures country performance across four institutional dimensions: we graph the results of the process by which governments are selected, monitored and replaced, evidenced in the WGI scores for Voice and Accountability (VA) and Political Stability and Absence of Terror (PV), and the respect of citizens and the state for the institutions that govern economic and social interactions…the WGI scores for Rule of Law (RL) and Control of Corruption (CO).
For benchmarking, we’ve calculated the average WGI scores for these four measures for countries which have prompted the exercise of a political risk insurance claim, as compiled by Zurich Insurance, and the benchmark scores for countries which have never prompted the exercise of such a claim.
As reflected in the WGI data and the tracing of the MMD political risk curve, each of the five countries noted by the UN for their positive demographic growth prospects also performed very poorly in terms of their country institutional endowment.
To cite India as an example – that country will have the world’s largest national population, peaking at 1.7 billion by 2064, according to the modeling done at the UN. Yet, even with this considerable demographic asset and clout, India’s country institutions are relatively porous, in some ways precluding the full and effective mobilization of such a considerable population. Per 2015 data, India’s VA score posts at 60.59, just above the benchmark for the “non-defaulting” on political risk country benchmark. The PV measure stands at a much poorer 16.77, with respective measures for RL and CO posting only at modest levels of 55.77 and 44.23.
By contrast, take the example of the United States. Like India, it is a continent-sized sovereign entity with a considerable population, estimated by the UN to be at a level of 375 million by 2050. Per 2015 WGI data, the US scores respectively for VA, PV, RL, and CO at 81.28, 69.52, 90.38, and 89.90, all comfortably above benchmarks.
Make no mistake, India is an enterprising and dynamic country, with significant success in different high technology activities. The argument, or point, the WGI scores yield is that the country could probably be even so much more, if institutions were present to channel much more effectively that country’s talents and capacities.
Now consider for a second, the United States – put the gun ownership thing to one side for a moment. Here is a country now of about 330 million people, where hundreds of millions of tax returns are filed dependably every year, where tens of millions of mortgages are dependably paid and serviced, where vehicles are dependably registered, where people stand in line, where they wait their turn, and generally open the door for each other. It is a place where contracts are generally honored or legal recourse commands confidence. Such a place makes use and provides place for the efforts of millions – a desirable prospect for investing or lending.
In the decades ahead, the global investor or lender will have to have his or her ear to the ground, listening for the tumbling of geopolitical trends and developments which can yield exogenous shock. But that same individual will need to due-diligence ably country institutions, taking the measure of a country and the environment it offers for growth and wealth creation.