Presentation on theme: "Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business Joel Kurtzman Chairman, Kurtzman Group Senior Fellow, Milken Institute."— Presentation transcript:
Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business Joel Kurtzman Chairman, Kurtzman Group Senior Fellow, Milken Institute
Today’s hypercompetition changes the old view of making countries successful Old view: countries compete on labor costs and raw material endowments New view: countries compete on a range of issues including: ▪ Access to capital ▪ Social systems and costs ▪ Stability ▪ Overall levels of risk Opacity
Canada United States Australia South Africa China India Hong Kong Indonesia Japan Malaysia Argentina Brazil Chile Colombia Ecuador Mexico Venezuela Egypt Israel Kuwait Lebanon Nigeria Saudi Arabia Austria Belgium Czech Rep. Denmark Finland France Germany Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Russia Spain Sweden Switzerland Turkey United Kingdom Pakistan Philippines Singapore South Korea Taiwan Thailand
1. Large-Scale, Low-Frequency Risk Large-scale risks (earthquakes, revolutions, nationalizations) are dramatic and rare but capture attention. 2. Small-Scale, High-Frequency Risk Small-scale risks are everyday occurrences and are the real bane of business. For business, this is where the real costs lie.
While all eyes focus on the large but rare risks, businesses must watch out for the real risks that cost money and time. ▪ Corruption ▪ Legal systems with limited protections ▪ Economic policies that hinder sustained growth ▪ Accounting and governance standards that make it difficult to see inside companies ▪ Regulatory systems that fail to protect investors ▪ These five (CLEAR) factors are sand in the gear of commerce. They are the “everyday risks” of being a global business.
What exactly is opacity? ”Opacity is the opposite of transparency. It is the lack of clear, accurate, easily discernible, and widely accepted practices governing the relationships among businesses, investors, and governments. Opacity acts as a brake on commerce, and its presence hampers the smooth operation of business transactions.” Joel Kurtzman and Glenn Yago MIT Sloan Management Review October 2004
Social scientists might call opacity “negative social capital.” Social capital includes institutions and “agreements” that keep a society functioning. It includes elements as diverse as laws, markets and educational institutions. Since opacity is a form of capital, it can be measured. Since opacity is a form of capital, its transformation from negative to positive can be noted and followed. Since opacity is a form of capital, its impact on business and growth can be plainly seen – if leaders want to look!
Understand the link between opacity and growth Understand price risk Measure global portfolio risk and balance Create country-based strategies Create new types of portfolios (green, sustainable, peace etc.) Comply with pension fund “screens” Forecast challenges/opportunities Compute minimum-required rates of return
Country Category Opacity Index CLEAR Finland3112317913 United Kingdom20325331319 Denmark615213319 Sweden824212519 Hong Kong261214331520 United States281927201021 Australia191626331021 Switzerland202720252123 Austria211132331723 Belgium282530171423 Canada261737201623 Singapore151925501024 Netherlands162122382324
Country Category Opacity Index CLEAR Germany281433173225 Ireland33192938926 Japan38243122 28 Chile412430202729 Israel333044202530 Taiwan473320402834 South Africa553428331834 Spain392532502334 Malaysia553528302635 Thailand723329202135 Portugal372631503235 Hungary513126502436 France394733 3237
Country Category Opacity Index CLEAR South Korea6135223037 Brazil474832403540 Poland633547401941 Greece583036503041 Czech Republic613532443541 Ecuador646034252942 Colombia576145292143 Italy523245632443 Turkey674127443643 Mexico656035332544 Argentina656433302744 Pakistan754947332245 Saudi Arabia613432336946
Country Category Opacity Index CLEAR Russia784439403146 Egypt713739405148 India744449304648 Nigeria80654805049 China7439 564350 Philippines755652333650 Venezuela75684930 51 Lebanon836065444259 Indonesia825490224959
Every Additional Point on an Opacity Score Yields: Lower average per capita income (-$986) Lower net foreign direct investment as a percent of GDP (-1 percent) Lower Capital Access Index Score (-0.06 points) Lower bank assets as a percent of GDP (-4 percent) Lower stock market capitalization as a percent of GDP (-0.9 percent) Lower stock market traded value as a percent of GDP (-0.9 percent) Increase average borrowing interest rate (57 basis points) Increase inflation rate (0.46 percent)
1. Procedural Complexity Index Number of filings Duration Cost 2. Employment Laws Index Flexibility of Hiring Index Conditions of Employment Index Flexibility of Firing Index 3. Aggregate Complexity Index Average of Procedural Complexity and Employment Laws Index Source: World Bank, Doing Business
Source CodePublication, Source WBRSRegulation and Supervision of Banking Around the World, World Bank SSBGSalomon Smith Barney Guide to World Equity Markets ISSAInternational Security Services Association Handbook IFADInternational Forum on Accountancy Development, GAAP Convergence ICRGInternational Country Risk Guide, PRS Group TICorruption Perceptions Index, Transparency International GCRGlobal Competitive Report, World Economic Forum WBDBDoing Business, World Bank AONRisk Management Updates WBCRSWorld Bank Survey on Public Credit Registry for Central Banks
Questions (E: Effectiveness of Economic Policy) Type of Data No of Countries for which data are available Source Average days of legal procedure from filing to enforcement Raw Data48WBDB Contract Enforcement Index: How inefficient (formalism) is contract enforcement? Index48WBDB Business costs of terrorism (1-7, low is worse)Index46GCR Transparency of policy makingIndex22GCR Organized crime costs on businessIndex46GCR Efficiency and transparency of tax systemIndex46GCR Extent of bureaucratic red tapeIndex46GCR Freedom of pressIndex46GCR Enforce contracts: cost (% GNI per capita)Raw Data47WBDB
Questions (R: Regulatory Regime) Type of Data No of Countries for which data are available Source Government stabilityIndex48ICRG Capital Flows Restriction IndexIndex48 Heritage Foundation Government Involvement in Banking and Finance Index Index48 Heritage Foundation Regulatory Burden IndexIndex 48 Heritage Foundation Start Business: number of ProceduresRaw Data 48 WBDB Start Business: duration (days)Raw Data 48 WBDB Start Business: cost (% GNI per capita)Raw Data 48 WBDB Start Business: min. capital (% GNI per capita)Raw Data 48 WBDB
Questions (R: Regulatory Regime) Type of Data No of Countries for which data are available Source Close Business: actual cost (% of estate)Raw Data48WBDB Close Business: goals of insolvency IndexIndex48WBDB Can regulators engage in discretionary forbearance?Binary46WBRS Can the banking supervisor suspend a bank's directors' decision to distribute dividends, bonuses or management fees? Binary47WBRS Is there a central securities and exchange regulator?Binary39ISSA Can brokers set their own fees and commissions?Binary38ISSA Is there self-regulation of brokers?Binary23ISSA Have exchanges established listing requirements?Binary40SSBG
Questions (R: Regulatory Regime) Type of Data No of Countries for which data are available Source Does the central bank or independent agent (other than the fiscal authority) handle the issuance and settlement of public debt? Binary45 Country's regulator Is public debt distributed by auction?Binary45 Country's regulator Is there a system of primary dealers?Binary45 Country's regulator Is there a central clearinghouse for settlements?Binary44 Country's regulator Is debt held at a central depository?Binary34 Country's regulator Is there one or more consumer credit rating agency?Binary39WBCRS Regulation of securities exchanges: transparency, effectiveness, role of government, industry intervention (1-7, low is worse) Index46GCR
Source: International Financial Statistics
Surplus Deficit Source: U.S. Department of the Treasury, Bureau of the Public Debt
Source: Milken Institute
Less access More access Sources: World Economic Outlook, Milken Institute
Level of institutional development, including law and regulation (Boyd and Smith, 1996; Gurley and Shaw, 1955) Legal origin, shareholder rights and creditor rights (La Porta et al, 1998) Laws and regulations (Levine, 2002; World Bank, 2001) Demographics and human capital (Black, 2002)
Forgone GDP Growth % Forgone GDP US$ Billions (2006) Mexico2.6322.09 Russia2.5024.48 Argentina1.974.19 Pakistan1.702.19 India1.6614.72 Source: Authors’ Calculation based upon Triphon Phumiwasana, (2003)
Size of each bubble represents relative GDP Vertical (Y) location of the bubble indicates rate of growth Horizontal (X) location illustrates increasing procedural complexity Opportunity is defined here as a country’s legal and procedural complexity, relative to its overall market size and rate of growth Asia Europe North America Latin America Middle East Australia Africa GDP GROWTH RATE (%) Source: CIA World Factbook World Bank, Doing Business The Economist: World in Figures 2002
Recent empirical estimates suggest that… Doubling bank credit to the private sector as a percent of GDP in emerging markets could increase annual GDP growth by almost 3 percent. Doubling the trading volume of the stock market in an emerging market could increase annual GDP growth by almost 2 percent.