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The Global Reform Wave Rolls On

A global trend that is bringing to light the things that were once hidden bodes very well for economic growth and vitality in the countries where it is occurring.
Guild Investment Management ( is a registered investment advisor located in Los Angeles. The company was founded in 1971 by Montague Guild. We provide fully discretionary investment portfolio management services to U.S. and foreign individuals and companies with personal, pension and IRA accounts. We study the world, do the homework, make strategic asset allocations, and make buy and sell decisions so our clients don’t have to do this work.
Guild Investment Management ( is a registered investment advisor located in Los Angeles. The company was founded in 1971 by Montague Guild. We provide fully discretionary investment portfolio management services to U.S. and foreign individuals and companies with personal, pension and IRA accounts. We study the world, do the homework, make strategic asset allocations, and make buy and sell decisions so our clients don’t have to do this work.

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Almost two years ago, we wrote about the rise of populist and anti-corruption movements around the world, and told you that we believed these movements would expand, intensify, and disrupt global politics and economics, possibly for decades. Since then, many global events — including Brexit and the 2016 U.S. presidential election — have confirmed us in believing that public resentment continues to grow around the world as formerly unknown, hidden, or ignored misdeeds by politicians and other powerful figures come to light. Whether in developed or developing countries, ordinary people are expressing in many ways their unwillingness to continue to put up with what they view as a corrupt status quo.

We wrote:

“Currently, we see the restlessness and rebellion of citizens pushing back against corruption — and we see it rising to a global critical mass across the whole spectrum of the world’s economies and polities. From the global north to the global south, from developed economies to developing economies, looking different wherever it manifests, but still based in the same impulse: a refusal to continue to accept the corrupt status quo, whatever it may be.

“Whatever was hidden, tolerated, accepted, and ignored is now being brought into the light. Whatever remained unspoken by the ‘official’ voices of the economically and politically powerful, is being shouted by the masses from below — and they are finding political figures and forming political movements which will take up their cause and give it a voice.

“We believe that the global rise of this phenomenon is a matter of signal importance, and one that will shape an environment of political change and turmoil for decades to come.”

Social Media, Smartphones, and the New Global Middle Class

In the developing world, this trend of popular dissatisfaction, unrest, and demand for a cleanup of longstanding corruption is being driven by several big, enduring themes.

Facebook (FB), Alphabet (GOOG), and other big tech platforms are under intense pressure in the developed world at present, due to concerns about consumer data privacy. Social media seem to have an inexorable tendency to make data public. This seems to be a phenomenon larger than individual companies, and larger than specifics of platform security. The sheer quantity of data generated, and the intensity of network effects, is simply going to elevate the risk of exposure. This will also create a feedback effect as public interest and concern focus on subjects of political resentment.

• Much of the developing world — especially in Asia and Latin America — has been through a few decades of rapid development and has seen the rise of a much more educated and relatively affluent middle class. Education has raised consciousness and expectations, and so has constant exposure to western media with its implicit ideals of self-determination. The new global middle class is more demanding — it expects government to serve the people and is losing the old fatalistic acceptance of government corruption.

• The global downturn in 2008 and 2009 hit this new global middle class hard. The years that followed were not years of rapid growth for many. Expectations raised by the decades of growth were pinched. Corruption is more easily tolerated when there’s the feeling of plenty to go around, and citizens in emerging economies were long ready to excuse corrupt officials who at least could “get something done.” The downturn and its aftermath removed some of that feeling of toleration, and hit a population newly ready to demand honesty and performance.

Chaos and the Rule of Law

We just saw the closing chapters of two separate stories driven by this big anti-corruption theme — one in Brazil, and one in South Korea. Both ended with long jail sentences.

In Brazil, former populist superstar president Luiz Inácio da Silva — known to the world as Lula, and once the darling of the international stage — was sentenced to 12 years in jail for accepting a bribe from one of Brazil’s major construction firms. During the boom years of Brazil’s economic expansion Lula became hugely popular, particularly for his social welfare programs, which were relatively well-administered. (For example, one of his key aid programs for poor families, the Bolsa Familia, was distributed directly to mothers rather than to male heads of household.)

Brazil’s Lula Strikes A Defiant Pose

Source: Xinhua

But even this charismatic leader could not escape the dragnet of the years-long investigation into widespread graft involving hundreds of politicians and many of Brazil’s largest companies. His crime was a relatively minor one compared to some. But it’s deeply symbolic that even a politician of his stature, still beloved especially by millions of poor Brazilians, could be brought down.

Meanwhile, in South Korea, the former prime minister, who was the scion of one of the country’s most powerful families, received a 24-year prison sentence for accepting bribes from some of South Korea’s biggest firms. These industrial titans, conglomerates known in Korean as chaebol, have been entrenched in South Korean politics and economics since the 1960s. They actually served to create order in the early decades of South Korean post-war economic expansion; as we have written before, the “rule of law” that enables economic growth does not necessarily have to look like western liberal democracy. A modicum of stability will sometimes suffice. But now, public opinion against the chaebol is rising, as South Korea enters the ranks of developed nations and South Koreans begin to chafe under the restriction and calcification of their old industrial aristocracy.

This marks the first time that a sitting South Korean president was investigated, impeached, and punished; but every living former South Korean president has now been convicted of corruption offenses, or is in jail being investigated for such crimes. The sense this time is that the whole system of chaebol patronage and bribery is under trial, and the South Korean people are becoming unwilling to tolerate it. It is noteworthy that in South Korea, the politicians involved in the bribery scandal are getting much tougher prison sentences than the chaebol cronies who bribed them… So there’s further to go in this process, to be sure.

Not a Smooth Process

On the one hand, this global trend of “bringing to light the things that were hidden” bodes very well for economic growth and vitality in the countries where it is occurring. In Brazil, the ongoing revelations of the “Car Wash” scandal and prosecutions have been highly salutary for the economy and the stock market as the country has been emerging from a tough recession. South Korea’s scandal and its resolution have also corresponded with a period of excellent performance for South Korean equities. So far, so good — often, disruptive revelations can ultimately help build investor enthusiasm and economic vitality.

Not invariably, though — and this is where we want to introduce a note of caution as we look forward to this process continuing over the next decade or more.

To paraphrase Dr Martin Luther King, “the arc of transparency bends towards prosperity.” But there can also be episodes of reaction. Long-suppressed viewpoints and groups of people can react strongly, even violently, when they are finally given a voice. The downfall of one corrupt official may lead to the rise of another corrupt demagogue who can tell stories that angry people are eager to hear. (The Middle East in the period since the Arab Spring is a sad example of how hopes for reform can be dashed in this way.)

In Brazil, Lula’s ignominious exit from the political stage opens room for his next-closest competitor in this year’s upcoming elections, a populist conservative firebrand named Jair Bolsonaro. Bolsonaro has some views that resonate deeply with Brazil’s long-ignored fiscally and socially conservative majority (those who live primarily in the country’s vast, rural interior). He also has also called for a return to law and order in Brazil’s crime-ridden metropolises — and has raised concerns by remembering how well Brazil’s military dictatorship tackled such problems. Bolsonaro has 4.8 million Facebook followers, far outstripping his rivals, leads among 18-to-25-year-old voters, and is known for a sense of humor that some find offensive and others think is merely tasteless. Despite his controversial status, he has the supreme advantage of being completely untainted by the ongoing corruption scandal. (One social media ad reads, “Hitler? Mussolini? Well, there’s one thing they can’t call him — corrupt.”) A Bolsonaro presidency would have uncertain effects on Brazil’s economy, markets, and international standing.

As transparency and the fight against official corruption roll on, we continue to view the process as ultimately positive — even while we watch closely for the risk of nearer-term turbulence.

Investment implications: In the long term, transparency and the ouster of corrupt officials will lead to more effective government and more consistent rule of law, and will support economic growth and stable stock markets in the developing world. However, it will not be a straight-line path. When markets become enthusiastic after an event such as Lula’s conviction and imprisonment, investors must still remain alert to the possible swing of the pendulum and arrival of old corruption in a new form. Investors in Brazil cannot rest on their laurels, but should continue to monitor the political landscape carefully as this year’s elections — due in October — draw closer.

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