Global Edge: to Manage the Risks of Cross-Border Business. Joel Kurtzman Chairman, Kurtzman Group

Transcription

1 Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business Joel Kurtzman Chairman, Kurtzman Group Senior Fellow, Milken Institute

2 Approach 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

3 Markets and Countries Included d in the Opacity Index Canada United States Austria Belgium Czech Rep. Denmark Finland France Germany Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Russia Spain Sweden Switzerland Turkey United Kingdom Argentina Brazil Chile Colombia Ecuador Mexico Venezuela South Africa Egypt Israel Kuwait Lebanon Nigeria Saudi Arabia China India Hong Kong Indonesia Japan Malaysia Australia Pakistan Philippines Singapore South Korea Taiwan Thailand

4 Two Types of Global Risks 1. Large-Scale, Low-Frequency Risk Large-scale risks (earthquakes, revolutions, nationalizations) are dramatic and rare but capture attention. 2. Small-Scale, 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.

5 The Impact of Small-Scale Risks Is Big 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.

6 We Call These Small-Scale Risks Opacity 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

7 The Costs of Small-Scale Risks Can Be Measured 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!

8 What Can We Do With Opacity? 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

9 The Opacity Index Scores Country Category C L E A R Opacity Index Finland United Kingdom Denmark Sweden Hong Kong United States Australia Switzerland Austria Belgium Canada Singapore Netherlands

10 The Opacity Index Scores Country Category C L E A R Opacity Index Germany Ireland Japan Chile Israel Taiwan South Africa Spain Malaysia Thailand Portugal Hungary France

11 The Opacity Index Scores Country Category C L E A R Opacity Index South Korea Brazil Poland Greece Czech Republic Ecuador Colombia Italy Turkey Mexico Argentina Pakistan Saudi Arabia

12 The Opacity Index Scores Country Category C L E A R Opacity Index Russia Egypt India Nigeria China Philippines Venezuela Lebanon Indonesia

13 Behaviors Can Be Measured 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)

14 Complexity of Legal Systemss 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 Country/Region Procedural Complexity Index Employment Laws Index Aggregate Complexity Index Latin America & Caribbean Europe & Central Asia Middle East & North Africa South Asia East Asia & Pacific OECD: High income Spain Mexico Russia France Brazil Chile Italy Poland Thailand Germany Hungary Czech Republic India Korea, South China Turkey South Africa Ireland Israel Sweden Switzerland Japan Singapore United States Malaysia Australia United Kingdom Canada Source: World Bank, Doing Business

15 Sources of Data (General) Source Code WBRS SSBG ISSA IFAD ICRG TI GCR WBDB AON WBCRS Publication, Source Regulation and Supervision of Banking Around the World, World Bank Salomon Smith Barney Guide to World Equity Markets International Security Services Association Handbook International Forum on Accountancy Development, GAAP Convergence International Country Risk Guide, PRS Group Corruption Perceptions Index, Transparency International Global Competitive Report, World Economic Forum Doing Business, World Bank Risk Management Updates World Bank Survey on Public Credit Registry for Central Banks

16 Sources of Data (Economic and Regulatory) Questions (E: Effectiveness of Economic Policy) Average days of legal procedure from filing to enforcement Contract Enforcement Index: How inefficient (formalism) is contract enforcement? Type of Data No of Countries for which data are available Source Raw Data 48 WBDB Index 48 WBDB Business costs of terrorism (1-7, low is worse) Index 46 GCR Transparency of policy making Index 22 GCR Organized crime costs on business Index 46 GCR Efficiency and transparency of tax system Index 46 GCR Extent of bureaucratic red tape Index 46 GCR Freedom of press Index 46 GCR Enforce contracts: cost (% GNI per capita) Raw Data 47 WBDB

17 Sources of Data (Economic and Regulatory) Type of Questions (R: Regulatory Regime) Data No of Countries for which data are available Source Government stability Index 48 ICRG Capital Flows Restriction Index Index 48 Government Involvement in Banking and Finance Index Index 48 Regulatory Burden Index Index 48 Heritage Foundation Heritage Foundation Heritage Foundation Start tbusiness: number of fprocedures Raw 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

18 Sources of Data (Economic and Regulatory) Questions (R: Regulatory Regime) Type of Data No of Countries for which data are available Source Close Business: actual cost (% of estate) Raw Data 48 WBDB Close Business: goals of insolvency Index Index 48 WBDB Can regulators engage in discretionary forbearance? a Binary ay 46 WBRS Can the banking supervisor suspend a bank's directors' decision to distribute dividends, bonuses or management fees? Binary 47 WBRS Is there a central securities and exchange regulator? Binary 39 ISSA Can brokers set their own fees and commissions? Binary 38 ISSA Is there self-regulation of brokers? Binary 23 ISSA Have exchanges established listing requirements? Binary 40 SSBG

19 Sources of Data (Economic and Regulatory) Questions (R: Regulatory Regime) Does the central bank or independent agent (other than the fiscal authority) handle the issuance and settlement of public debt? Type of Data No of Countries for which data are available Binary 45 Is public debt distributed by auction? Binary 45 Is there a system of primary dealers? Binary 45 Is there a central clearinghouse for settlements? Binary 44 Is debt held at a central depository? Binary 34 Source Country's regulator Country's regulator Country's regulator Country's regulator Country's regulator Is there one or more consumer credit rating agency? Binary 39 WBCRS Regulation of securities exchanges: transparency, effectiveness, role of government, industry intervention (1-7, low is worse) Index 46 GCR

20 U.S. GDP Growth Percent Change, Year Ago Source: International Financial Statistics

21 A Brief Period of U.S. Budget Surplus % of GDP 4 2 Surplus Deficit Source: U.S. Department of the Treasury, Bureau of the Public Debt

22 Capital Access Index 2006 Gauging Entrepreneurial Access to Capital Max = Hong Kong United Kingdom 7.5 U.S Mexico India China Brazil 5.0 Russia Source: Milken Institute

23 Capital Access Index, ,000 60,000 GDP per Capita, US S$ 50,000 40,000 30,000 20,000 10,000 y = 6,821x - 21,731 R 2 = , Capital Access Index Less access More access Sources: World Economic Outlook, Milken Institute

24 Factors Affecting Financial Market Development 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)

25 Improved Capital Access Can Add Billions to Emerging Economies Forgone GDP Growth % Forgone GDP US$ Billions (2006) Mexico Russia Argentina Pakistan India Source: Authors Calculation based upon Triphon Phumiwasana, (2003)

26 Representative Costs of Opacity Expressed in Percent Finland: Brazil: 4.29 UK: Sweden: U.S.: 0.00 Switzerland: 0.40 Belgium: 0.42 Germany: 0.86 Ireland: 1.03 Czech Rep: 4.56 Turkey: 4.95 Mexico: 5.01 Saudi Arabia: Russia: 5.64 China: 6.49 Venezuela: 6.56 Japan: 1.51 Indonesia: 8.54

27 Opportunity ty Map Opportunity is defined here as a country s legal and procedural complexity, relative to its overall market size and rate of growth 10.0% China 8.0% India Size of each bubble represents relative GDP Vertical (Y) location of the bubble indicates rate of growth Horizontal (X) location illustrates increasing procedural complexity Russia Right side of the chart correlates with higher levels of opportunity GD DP GROWTH RAT TE (%) 6.0% Thailand UAE Malaysia Turkey Asia Saudi Arabia Kuw ait Greece Europe 4.0% United North Taiw an Poland States Korea America Australia Hong Kong Egypt European Chile Spain Latin Ireland America UK Japan Czech Rep Union Hungary 2.0% Middle East South Africa Sw eden Australia Canada Finland Israel Italy Mexico Africa Singapore Austria Belgium Denmark Norw ay France 0.0% Sw itzerland Brazil Netherlands Germany -2.0% INCREASING LEGAL COMPLEXITY Source: CIA World Factbook World Bank, Doing Business The Economist: World in Figures 2002

28 Forgone Finance, Forgone Growth 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.