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EM structural reforms have died in the permacrisis but could revive in 2023

  • Structural reform is key to the investment prospects of many emerging markets but is sorely lacking at the moment

  • Countries are prioritising crisis management over long-term fundamentals

  • Political mandate (size of effective legislative majority, time before next election) point to where reform might revive

EM structural reforms have died in the permacrisis but could revive in 2023
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
22 November 2022
Published byTellimer Research

Structural reform is a powerful driver of the long-term investment case in emerging markets. However, it is sorely lacking at the moment as countries prioritise crisis management – Covid-19, high fuel and food prices, elevated sovereign debt across most of EM and climate emergencies – over long-term fundamentals.

Very few governments have initiated policies that are unpopular with the mass population or challenge vested interests – Indonesia's Omnibus Act (labour, land, regulation, tax reform) is an exception. Some have gone into reverse gear, eg: in Brazil, India and Pakistan

Where governments have launched fresh initiatives to take on vested interests, this has been motivated as much by consolidation of political power as economic reform; eg the regulatory crackdown on China Tech.

Moreover, in the era of globalisation, some of the shortcomings in domestic reform could be compensated for by the gains from more open trade, cross-border investment and technology transfer. However, as de-coupling (eg of the US and China, of the West and Russia), nationalistic regulation (eg in global tech and, potentially, global energy next) and greater regionalism has set in, the impetus for externally driven reform has diluted. 

The role of cross-border capital flows, motivated by geopolitics in a de-coupling world, as much as pure financial return, almost certainly does not lead to as efficient an outcome and as sincere a structural reform effort; Egypt and its inflows from the GCC, and Pakistan and its inflows from China, are two examples where tough reform decisions have been postponed because of support from 'friendly countries'.

Where might structural reform revive?

One way to judge the prospects of structural reform gaining momentum, once and if the global headwinds of commodity input prices and higher cost of funding subside, is the strength of the legislative mandate.

To what degree do governments have the capability to pass new laws, assuming they are of a reformist mindset in the first place? The effective legislative mandate might be quantified using two metrics:

  1. The size of the legislative majority, measured, objectively, in electoral democracies by the percentage of seats in legislative assemblies (for comparability, we use lower house seats), or subjectively, in monarchies and autocracies by the degree of absolute power enjoyed by the ruler; and

  2. The time left before the next (scheduled) election in democracies – to account for examples like Turkish President Erdogan, who may enjoy a legislative majority but the next election is within a year – with the maximum in the sample size of democracies assigned to monarchies, where rulers are in place until death.

Legislative mandate across the emerging markets and US

Longevity of legislative mandate in EM and US

Obviously, there are country-specific nuances, not captured in this framework, but given the heterogeneity of political systems this is a best-efforts attempt; eg

  • The balance of power between the executive and legislature and checks and balances exerted by the judiciary;

  • The influence of other actors behind the scenes, such as the military and intelligence services, or tribal, religious, landowning and industrial elites;

  • The potential for the mass population to protest (which requires a certain level of discontent, perhaps measured by youth unemployment, but also a legal and cultural environment that enables protest in the first place, perhaps measured by press freedom); and

  • The degree of insulation from international influence, particularly in quasi-client states, where political legitimacy or economic wellbeing is more dependent on external than domestic support.

We illustrate below a measure of political stability and absence of violence in order to identify which countries might be particularly sensitive, in terms of political stability, to structural reforms that challenge vested interests (although this metric could also be interpreted inversely, as pointing out which countries most urgently need structural reform to break the grip of those vested interests).

Sensitivity to (or urgency in need for) reform in EM and US

Read all of our Global Themes for 2023 here.