Investing with the Good Country Index

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Investing with the Good Country Index

Simon Anholt, a British policy advisor has been on the forefront of changing how we think about countries and how they should approach economic development. He became well-known due to his ‘Nation Brand Index.’ More recently, we have been following his work developing what he calls The Good Country Index. The premise is fascinating, and Simon explains it best here.

Measuring countries on the basis of what they contribute to the wider world is a fascinating concept, and one which we believe has merit from an investing perspective. Observe the figure below where we chart GDP per capita and the overall ranking of a country.

Figure 1: Good Country Index Ranking vs. GDP per capita ($USD, nominal)

Good Country - Figure 1

With the exception of a few outliers (which we have outlined in pink), you can see a clear and distinct relationship between wealth and relative rankings. The shaded region is what we are the most interested in. In particular the outliers such as Kenya and Guatemala which despite a low GDP per capita are able to be significant ‘net contributors’ to the world. We believe that those countries which provide a positive and sizable contribution to the world will, over time experience strong economic growth.

We find Mr. Anholt’s perspective to be rather refreshing, however there are some caveats to keep in mind when combing through his analysis. Primarily, the index is only as good as the data that goes into it. Many of the datasets that feed into the ranking are old (some as old as 2007). This has a significant impact on the quality of the analysis. Countries such as Syria, Egypt, Libya, Ukraine, and Israel were very different places in 2007 or 2011 than they are today. The speed at which events unfold is even quicker in Frontier Markets, and so we would caution taking all the analysis with a grain of salt. However, the website does make it clear which sources are being used, and how the data is being compiled so you are free to make your own adjustments.

We like looking for surprises or variations from trend. We looked at the exponential relationship between the ‘Good Country Index’ and GDP per capita. We plotted where the countries should rank, based on their GDP level and compared that to where they actually rank. The countries which ranked far higher than their wealth would indicate in our Frontier Market Universe are the ones we have highlighted below.

Figure 2: Predicted vs. Actual Rankings on ‘Good Country Index’

Good Country - Figure 2 - Actual ranking vs. GDP predictor

Some of the countries in the list above are unsurprising, such as Malta, Cyprus, Slovenia, Macedonia, Estonia. These are wealthy countries that are geographically small with low populations. However, others such as Kenya, Ghana, Zambia, Uganda, Jordan, and Tanzania are rather surprising.

We did a similar analysis focusing exclusively on science and technology rankings. See the figure below.

Figure 3: Predicted vs. Actual Rankings on ‘Good Country Index’ for Science and Technology

Good Country - Figure 3 - Actual ranking vs. GDP predictor - Science

Here we also find countries we would expect such as ex-communist nations such as Ukraine, Bosnia and Herzegovina, Bulgaria, Serbia, and so on. Here too, we find countries that surprise us such as Kenya, Jordan, Egypt, Zimbabwe, and Ghana.

We look forward to seeing this index evolve over time. We think it is very useful in assessing the long-term investment potential for a country. It can also be used to target specific sectors in an economy. As an example, if we know that Ukraine has a very high output in terms of science and technology, then we would be more willing to pay a premium for a science/technology company with operations in Ukraine.
You may be wondering who the most disappointing countries are (aside from the Petro states). Please see below:

Figure 4: Predicted vs. Actual Rankings on ‘Good Country Index’

Good Country - Figure 4 - Actual ranking vs. GDP predictor - Bottom

Looking at the figure above, after eliminating for security issues and the Petro states, we are left with a rather short list; Laos, Cambodia, Mongolia, Philippines, and Vietnam. These countries fail in various areas but the most significant is a lack of strong cultural exports and poor health and wellness.

Overall, we find the ‘Good Country Index’ a useful tool in educating ourselves on a particular country and seeing how it ranks relative to other major world countries. We hope you find it useful as well.
If you have any questions or comments related to The Good Country Index, please let us know.

We did not like how the data was represented on the Good Country website, so below you will find the raw data in Excel.

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