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FINANCIAL REPRESSIONANDCAPITAL ACCESS

B Y G L E N N Y A G O , T H O M A S H A L L , S U S A N N E

T R I M B A T H A N D J U A N M O N T O Y A

March 20, 2001

C A P I T A L A C C E S S I N D E X

Number 26

C A P I TAL ACCESS INDEX 2001

FINANCIAL REPRESSION ANDCAPITAL ACCESS

March 20, 2001

byGlenn Yago, Thomas Hall,

Susanne Trimbath and Juan Montoya

Glenn Yago is Director of Capital Studies, Milken Institute; Thomas Hall is a Research Economist,Capital Studies Group, Milken Institute; Susanne Trimbath is a Research Economist, Capital Studies

Group, Milken Institute and Juan Montoya is a Research Assistant with theCapital Studies Group, Milken Institute

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GLOBAL ECONOMICS AND FINANCE March 20, 2001

www.milkeninstitute.org

Executive Summary

The 2001 Milken Institute Capital Access Index (CAI) shows general improvement in the ability

of entrepreneurs to finance innovation over last year. The scores of 57 out of 83 countries

improved since last year’s report, although the scores of 22 countries declined. Of the 57

components used to compute the CAI score, scores declined in nine categories, whereas 34

component scores increased on average.

We focus our companion essay to the 2001 CAI on the concept of financial repression, which

refers to direct government interference in the provision of capital from savers to borrowers. It

takes many forms, and can be measured in various ways. This policy brief defines the concept,

introduces some measurements of financial repressive policies, and presents data concerning

where financial repression is at its worst.

Third, and following last year’s release of the Capital Access Index, we explore the usefulness of

the concept of “capital access” further. We compare the CAI 2001 scores to other recently

released data sets concerning banking regulation, the regulation of new firm entry, i.e., the time

and money it takes to launch a new enterprise, entrepreneurial activity, and “green friendly”

economic growth. Capital access remains a vital element for obtaining many of these financial

reforms and social goals (Table 1).

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Table 1: Capital Access Index CAI 2001 CAI 2000*

Score** Rank Score** Rank Change in

Score United States 5.72 1 5.57 2 0.15 United Kingdom 5.63 2 5.62 1 0.02 Luxembourg 5.59 3 5.41 4 0.18 Hong Kong 5.58 4 5.49 3 0.09 Netherlands 5.49 5 5.38 6 0.11 Switzerland 5.46 6 5.40 5 0.06 Singapore 5.36 7 5.28 7 0.08 Canada 5.25 8 5.08 9 0.17 New Zealand 5.14 9 5.16 8 -0.02 Ireland 5.10 10 4.92 14 0.18 Germany 5.09 11 4.94 12 0.15 Australia 5.08 12 5.00 10 0.08 Finland 5.04 13 4.85 15 0.19 Sweden 5.02 14 4.92 13 0.09 Taiwan 5.00 15 4.95 11 0.05 Spain 4.90 16 4.81 16 0.10 Japan 4.85 17 4.63 23 0.22 France 4.81 18 4.77 17 0.04 Belgium 4.79 19 4.58 25 0.21 Denmark 4.78 20 4.75 19 0.04 Austria 4.77 21 4.73 21 0.04 Israel 4.74 22 4.58 24 0.16 Portugal 4.74 23 4.51 26 0.23 Chile 4.72 24 4.74 20 -0.02 South Korea 4.64 25 4.46 27 0.19 Malaysia 4.63 26 4.77 18 -0.14 Norway 4.62 27 4.72 22 -0.09 Iceland 4.56 28 4.43 28 0.14 Thailand 4.56 29 4.28 33 0.27 Italy 4.54 30 4.39 29 0.15 South Africa 4.47 31 4.36 30 0.11 Mauritius 4.34 32 4.34 31 0.00 Egypt 4.34 33 4.28 35 0.06 Hungary 4.34 34 4.28 33 0.06 Argentina 4.31 35 4.33 32 -0.02 Czech Republic 4.27 36 4.21 36 0.06 Slovenia 4.27 37 4.03 46 0.23 Croatia 4.24 38 4.17 39 0.07 Nicaragua 4.18 39 4.00 48 0.18 Estonia 4.18 39 4.03 47 0.15 Morocco 4.18 39 4.15 42 0.02 China 4.17 42 4.19 37 -0.02

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Table 1: Capital Access Index, Continued CAI 2001 CAI 2000*

Score** Rank Score** Rank Change in

Score Namibia 4.16 43 4.16 40 0.00 Peru 4.10 44 4.16 40 -0.06 Bolivia 4.08 45 3.86 54 0.22 Jordan 4.04 46 4.00 48 0.04 Philippines 4.04 47 4.10 43 -0.06 Tunisia 4.04 48 4.19 38 -0.15 Latvia 4.03 49 3.94 52 0.10 Botswana 4.00 50 4.08 45 -0.08 Slovak Republic 4.00 50 4.09 44 -0.09 Nigeria 3.96 52 3.96 51 0.00 El Salvador 3.89 53 4.00 48 -0.11 Greece 3.87 54 3.66 58 0.21 India 3.85 55 3.53 65 0.33 Poland 3.84 56 3.80 56 0.04 Lithuania 3.83 57 3.77 57 0.06 Brazil 3.77 58 3.60 60 0.17 Mexico 3.77 59 3.86 55 -0.09 Indonesia 3.76 60 3.88 53 -0.12 Pakistan 3.70 61 3.52 66 0.18 Jamaica 3.62 62 3.48 68 0.14 Honduras 3.59 63 3.43 70 0.16 Moldova 3.56 64 3.56 63 0.00 Ivory Coast 3.54 65 3.58 62 -0.04 Guatemala 3.52 66 3.43 71 0.09 Colombia 3.51 67 3.49 67 0.02 Romania 3.48 68 3.55 64 -0.06 Turkey 3.48 69 3.60 61 -0.12 Costa Rica 3.46 70 3.61 59 -0.14 Vietnam 3.42 71 3.26 75 0.16 Armenia 3.40 72 3.20 77 0.20 Bulgaria 3.39 73 3.19 78 0.21 Venezuela 3.33 74 3.27 74 0.07 Paraguay 3.30 75 3.38 72 -0.07 Kazakstan 3.29 76 3.12 79 0.18 Zimbabwe 3.24 77 3.22 76 0.02 Ecuador 3.24 77 3.48 69 -0.23 Kenya 3.24 79 3.28 73 -0.03 Uruguay 3.07 80 3.00 80 0.07 Ghana 2.92 81 3.00 80 -0.08 Russia 2.85 82 2.67 82 0.19 Ukraine 2.61 83 2.45 83 0.16 *Note: the 2000 scores listed here are revised versions of the scores issued last year, due to data availability and the three-year average smoothing methodology we used. See Appendix 1 and Appendix 2 for details on the variables used and the time periods covered. **Note: Some countries with different ranks may appear to have the same score due to rounding.

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I. Introduction

The year since February, 2000 when the Milken Institute last released its Capital Access Index,

has been very eventful for international capital markets and suggestive of the future ahead.

Important changes were proposed and took place at many international financial institutions

(referred to hereafter as IFI, a catch-all term encompassing the World Bank, the regional

development banks, the World Trade Organization, the International Monetary Fund, and the

Bank for International Settlements). Notable events include the Meltzer Commission report

released in March of last year arguing for a less active IMF role, major staff changes at the

World Bank (with former EBRD chief economist Nicolas Stern taking the helm and putting new

emphasis on opening industrialized country markets to emerging country exports), and the

recently announced Bank for International Settlements proposed amendments to the Capital

Accord last updated in 1988.1 In addition, a major report released by the Council on Foreign

Relations argued that middle class development, based on secure long-term capital markets in

emerging countries, represented a new developmental blueprint that can replace the export-

oriented growth model so dominant in the 1980s and 1990s.2

The intervening year has also demonstrated the magnitude of the backlash against globalization

since Seattle. Now, not only the World Trade Organization and World Bank, but the

International Monetary Fund, Davos, and even the Bank for International Settlements must take

for granted that their annual meetings are subject to street protests and disruptions. The spillover

effect of these tactics on financial reform policies could threaten the world economy with short-

or long-term protectionism, inducing a recession. Are these protests an ephemeral sign of the

times, or are they a harbinger of more significant policy backlashes to come? Countries around

the world that cater to these forces are in danger of “repressing” not simply their political

opponents but their domestic structures of financial intermediation, the focus of our companion

essay to this year’s release of the Capital Access Index. In any case, there is growing realization

1 For a commentary on the proposed amendments, see “Global Credit Update: Basle Brushed Up” Credit Suisse First Boston, January 18, 2001. 2 Walter Russell Mead and Sherle Schwenninger. A Financial Architecture for Middle-Class-Oriented Development: A Report of the Project on Development, Trade, and International Finance. New York, NY: Council on Foreign Relations. 2000. Available at: www.cfr.org.

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by market participants and governments that political and social risks are significant risks that

need to be understood.3 Just as privatization without restructuring proved insufficient to promote

economic growth in transition economies, so too has financial liberalization without transparency

proved inadequate to restoring growth to Latin American and Asian economies.4

Financial repression and the associated absence of financial transparency eliminate the ability of

the market to price assets and allocate claims.5 In one of the year’s most important books, The

Mystery of Capital, Hernando DeSoto argues that countries remain poor even if they are rich in

assets because they cannot turn them into liquid claims and thus cannot use them to create capital

to generate new wealth.6 Financial repression and associated opacity in financial systems

perpetuates the illiquidity that keeps some countries poor.

The central question answered by comparing this year’s index with last is how has capital access

changed for entrepreneurs around the globe? The changes in ratings and rankings are discussed

fully later in this paper but in brief, it has gotten better on average, although not by much and not

everywhere). For now, let us draw your attention to an important factor that transcends the

debate between IFI pundits and life-sized, street puppet-wielding protestors. We focus our

companion essay to the 2001 Capital Access Index on a little-reported aspect of the traditional

economic literature on financial market intermediation – the issue of financial repression, that is,

direct government intervention in the pricing and allocation of loanable funds and investment.

3 For example, the growing influence of political risk in the determinant of emerging market credit spreads (see, e.g. http://www.eurasiagroup.net/lehman.html), or the realization of the importance of social and political factors for national security (http://www.nssg.gov/phaseIII.pdf). 4 See Gil Mehrez and Daniel Kaufmann, “Transparency, Liberalization, and Banking Crisis,” World Bank Working Paper, No. 2286, July 2000. Also, see John M. Keynes, The General Theory of Employment, Interest, and Money. San Diego: Harcourt Brace, 1964; and Ronald McKinnon, Money and Capital in Economic Development, Washington, DC: Brookings Institution, 1973. 5 See, for example, the on-line article by Amity Shlaes in the Financial Times, available at: http://news.ft.com “The Story of O,” Financial Times, February 8, 2001. In the past year, we participated in an international survey along with the thought leadership practice of PricewaterhouseCoopers. Survey interviews were conducted with equity analysts, bankers, CFOs, and PwC consultants and accountants in numerous countries around the world. Using statistical analysis, Milken Institute and external scholars were able to use different methods in order to quantify the effect of opacity on the cost of capital facing countries around the world. See www.opacityindex.com for the full report. 6 Hernando De Soto, The Mystery of Capital (New York: Basic Books, 2000).

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II. Financial Repression and Capital Access

Few resources have been dedicated to the study of financial intermediation (the role of capital

markets and financial institutions in matching borrowers with savers). This led Karl Marx to

claim in frustration that finance often takes place behind the backs and over the heads of the

people. An under-appreciated facet of government action in financial markets around the world

is “financial repression,” referring to a variety of means whereby the state interferes with the free

flow of resources from savers to borrowers and represses the growth of capital formation in the

entrepreneurial sector relative to the state. It takes place in numerous forms, all of which

“distort” the allocation of resources in society. The purpose of this essay is to explain why,

where and how financial repression of the entrepreneurial section exists and to suggest how it is

changing.

A. Financial Repression: Who Benefits?

There are both theoretical and practical reasons for financial repression. The most important

reason governments engage in financial repression is very simple: it provides additional avenues

of financing. The answer to the question of who benefits is clear: the state gains because it is

able to channel resources either toward its own fiscal priorities (government programs) or to

sectors, firms, or individuals who have the favor of the political apparatus.

Who loses? Primarily, everyone who is prevented from lending and investing in the private

sector and obtaining the type of risk-return profile that they desire for their investments. In

addition, the forced provision of resources directed by the state denies funding to ventures that

would otherwise have received financing (those with good ideas but who do not have the favor

of the government), so entrepreneurs may be “crowded out” of capital markets as well. The

resulting lack of innovation hurts all consumers indirectly.

1. Financial Repression and Seignorage

If governments are unable to legislate or implement the desired degree of tax collection revenue,

the state is required to raise funds in another fashion. Often, this takes the form of seignorage

(James Tobin’s so-called “inflation tax”) whereby the government debases the currency via

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excessive issuance of notes or through the purchase of privately held sovereign bonds through

open market operations. When inflationary policies do not generate enough income or the costs

are perceived to outweigh the benefits, the state can engage in financial repression either through

reserve requirements or related mechanisms. Repression can reinforce other revenue-generating

activities of government, such as requiring banks to invest in sovereign debt securities.7

Repression generally serves the interests of those who hold the reigns of political power. Under

ideal conditions (freely operating capital markets), credit is channeled to firms that engage in the

production of value-adding consumption or investment goods or otherwise engage in profitable

activity. These can include either entrepreneurial start-ups or existing firms introducing

innovative product lines.8 Often, however, credit is channeled not based on competitive forces

but on personal connections, political ties or under rules and conditions known as “crony

capitalism.”9 Financial repression occurs when this mechanism of credit allocation is distorted

through direct state sponsorship of sectors, firms or individuals.

Although seignorage (the generation of revenues through the printing of money or other

inflationary policies) certainly distorts product and capital markets in important ways, it is not

included under the narrow definition of financial repression in the academic literature. It is

included in the 2001 Capital Access Index measure of Banking Repression either since the

Macroeconomic Environment category is more appropriate for inflation. The definition of

“financial repression” – and as we use it here – generally relates to the direct “interference” in

the intermediation of financial resources between borrowers and lenders, either in terms of

pricing or allocating loanable funds. Personal and corporate income taxation per se is not

included in our definition of financial repression. However, financial repression can and does

increase the effectiveness of seignorage in some theoretical models.10

7 This is related to prudential banking regulations. 8 Clearly, investors must make judgment calls concerning the ex ante profit possibilities for the firms in which they wish to invest. The point here is that, under ideal conditions, investors decide on their desired level of risk-taking, select firms in the proper combination in order to achieve that level, and then let market competition determine end outcomes. 9 Indeed, the phenomenon of “crony capitalism” whereby lending was based not on what you know, but who you know, has been discussed as an important element in the onset of the recent banking and financial crises in East Asia and in Russia. 10 Nouriel Roubini and Xavier Sala-I-Martin, “A Growth Model of Inflation, Tax Evasion, and Financial Repression.” National Bureau of Economic Research Working Paper #W4062, 1992.

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The Capital Access Index examines direct government interference in capital markets –the

phenomenon of excessive government borrowing generally characterized as “crowding out” –

when we look at the share of domestic credit channeled to the private sector. The state’s appetite

for revenues constitutes a fundamental motive for financially repressive policies in the real

world.

2. Recent Studies of Financial Repression

A growing number of cross-sectional and time-series empirical studies demonstrate that

economic growth is furthered by financial depth and imply that unfettered finance aids growth.11

Even occasional proponents of financial repression argue that its level should be regulated by

broader social goals, and that an “optimal” level of financial repression should be based on these

other priorities.12 Recent specific estimates of the cost of repression in the emerging market

context have demonstrated that they may be even higher than previously thought.13

The persistence of financial repression also appears to be associated with the increasing

frequency of financial crises. Analysis of data spanning 120 years of financial history is being

used to examine the increasing frequency of financial crises. Financial crisis frequency since

1973 is double that of the Bretton Woods and classical gold standard periods.14 The spread of

restrictive regulations and deposit insurance in weak institutional environments also appears to

protect government interference in credit flows and to increase the moral hazard problems that

lead to crisis. And, the costs of banking and financial crises may be associated with government

intervention that represses entrepreneurial access to credit and equity investment.

11 See, for example, the arguments of Levine (2000), who argues that systems characterized by capital markets that preserve an arms-length distance between borrowers and savers (as opposed to cozy, close, bank-based relationships) are superior in terms of economic growth. 12 Nouriel Roubini and Xavier Sala-I-Martin, “A Growth Model of Inflation, Tax Evasion, and Financial Repression.” National Bureau of Economic Research Working Paper #W4062, 1992. Chong-En Bai, David Li, Yingyi Qian, and Yijiang Wang, “Financial Repression and Optimal Taxation,” Economics Letters, Vol. 70, No. 2, pp. 245-251, February, 2001. 13 Panicos Demetriades and Kul Luintel, “The Direct Costs of Financial Repression: Evidence From India,” Review of Economics and Statistics, 1997, pp. 311-319. 14 Michael Bordo, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Marinez-Peria, “Ist the Crisis Problem Growing More Severe,” Economic Policy, Spring 2001; J.R. Barth, S.B. Caudill, T. Hall, and G. Yago, “Cross-Country Evidence on Banking Crisis: Do Financial Structure & Bank Regulation Matter?” Bank Fragility and Regulation: Evidence from Different Countries, Volume 12, New York: Elsevier. 200.

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The analytical evidence concerning the role of financial repression in creating credit crunches

that constrain capital formation and job creation is derived from diverse sources. As suggested

by much of our earlier research on the Asian Crisis, a downward shift in the supply of credit, i.e.,

a credit crunch, exacerbated and prolonged the macroeconomic problems those economies faced.

Excess liquid reserves suggest that bank supply behavior affected by government policies was a

major cause of the credit decline in Asia preceding and during the Crisis.15 The types of financial

repression that persist in many countries prone to crisis appear to enhance the negative effects of

capital flows resulting from government intervention and associated higher capital costs –

shorter-term bank lending and short-term trade credits from abroad. Meanwhile, financial

repression of the entrepreneurial sector discourages capital flows that have the most positive

impact on long-term growth – portfolio equity and foreign direct investment capital flows.16 The

result is increased borrowing offshore by increasingly over-leveraged financial institutions and

firms to finance increasingly less productive investments and capital outflows. Repressive

financial policies by the government encourage short-term flows by further opening the capital

account and facilitating the expansion of poorly regulated financial institutions. Under these

conditions, leverage ratios remain high as do ratios of short-term debt to total debt, generating

systemic financial fragility.17

15 Richard Agenor, Joshua Aizenman, and Alex Hoffmaister, “The Credit Crunch in East Asia: What Can Bank Excess Reserves Tell Us?” World Bank Working Paper Series 2483:www.nber.org/papers/w7951. 16 Helmut Reisen and Marcelo Soto, “Which Types of Capital Inflows Foster Developing Country Growth,” OECD Working Paper, November 2000. This study provides panel analysis of 44 countries over the 1986-97 period and concludes that the form of shorter term debt finance to finance countries’ long term asses has had considerable risks for developing countries, while equity (FDI and portfolio flows) have had great benefits for these countries. 17 Stijn Claessens, Simeon Djankov and Colin Xu, “Corporate Performance in the East Asian Financial Crisis,” World Bank Research Observer, February 2000; see also Jeffrey Wurgler, “Financial Markets and the Allocation of Capital,” Milken Institute Award for Distinguished Economic Research, Santa Monica, CA: Milken Institute, January, 2000; James Barth, Gerald Caprio & Ross Levine, “Banking Systems Around the Globe: Do Regulation and Ownership Affect Performance and Stability?” Milken Institute Policy Brief, July, 2000; Kristen Forbes, “How Are Crises Transmitted Internationally?” Milken Institute Award for Distinguished Economic Research, Santa Monica: Milken Institute, January, 2000; and Theodore Barnhill, Panagiotis Papapanagioou and Liliana Schumacher, “Measuring Integrated Market and Credit Risk in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa,” Milken Institute Award for Distinguished Economic Research, Santa Monica: Milken Institute, January, 2001.

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B. Where is Repression the Worst?

1. Financial Structure and Financial Repression

A variety of financial structures have arisen in the developing and the developed context. In

some countries, commercial banks are the dominant players in the markets that intermediate

between lenders and borrowers. In other countries, capital markets (generally, equities or shares,

but in some well-developed markets can also include corporate bond markets) play an important

role in the allocation of resources to firms that wish to borrow funds from investors.

For illustration of this point, Figures 1 - 5 show the relative size of banks, equity markets and

bond markets (as a percent of gross domestic product) in forty-one countries. The larger the

markets, the greater the access to capital for entrepreneurial efforts and the greater the potential

distribution of wealth throughout society. The scale of bank assets and equity market

capitalization (as a percent of output) in Hong Kong dwarfs the size of all markets elsewhere.

Equity markets have overtaken bank assets’ share of financial markets only recently in Singapore

and Malaysia, Greece, Canada, and Austria. Bank assets continue to dominate the financial

market landscape in all but a handful of countries.

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Figure 1: Structure of Financial Markets: Asia, 1999

HKSing

TaiwanJapan

ChinaMalay

ThaiKor

PhilIndo

India

500

400

300

200

100

0

Percent of GDP

Source: IFS, BIS, Emerging Stock Market Factbook

Domestic Debt SecuritiesEquity Market CapitalizationBank Assets

Figure 2: Structure of Financial Markets: Developed Countries, 1999

SpainAustl

ItalyCan

NorSwe

DenFinland

GreeceUSA

400

300

200

100

0

Percent of GDP



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Figure 3: Structure of Financial Markets: Developed Countries, 1999

SwitUK

IreBelg

NethAustria

GerPort

New ZeaFra

400

300

200

100

0

Percent of GDP



Figure 4: Structure of Financial Markets: Countries in Transition, 1999

Czech RepublicHungaryPolandRussia

120

100

80

60

40

20

0

Percent of GDP



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Figure 5: Structure of Financial Markets: Latin America, 1999

ChileBrazil

ArgentinaMexico

ColombiaVenezuela

120

100

80

60

40

20

0

Percent of GDP



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2. Measures of Financial Repression

Financial repression has also come under increasing scrutiny both in former communist countries

and recently industrialized countries with state-directed capitalism. Such repression takes place

mainly through the commercial banking system, and is thus likely to be a more important

problem in countries that do not present other options (e.g., issuance of securities) to firms in

need of extra funds. In addition, the Milken Institute Capital Access Index contains a category of

variables that reflect the extent of repression in the banking sector. The category “Banking

Repression” (BR) contains four measures:

Ø Share of Domestic Credit to the Private Sector [BR1]: Since financial repression often takes the form of channeling credit to government-owned enterprises, one way to measure it is to see how much credit actually goes to the private sector. In addition, this measure gets at the concept of “crowding out,” in that we are looking at whether or not domestic savings are being channeled to private and not government-owned enterprises.

Ø Reserve Requirements [BR2]: For this measure, we look at the ratio of bank reserves to total bank assets. This measurement is based on the assumption that banks make their money by the difference between the lending rate and the deposit rate. The spread between these two rates forms a large component of the profits of the bank.18 If banks are to be profitable, they need to make as many loans as possible given their risk profile. Thus, if bank reserves are very high compared to assets, ceteris paribus, these banks can be considered more repressed than their counterparts.

Ø Real Interest Rates [BR3]: A classic mechanism for repressing the financial system is to hold real interest rates below their equilibrium levels. The resulting surplus of credit can then be allocated by state authorities toward politically important sectors, firms or individuals. This type of interference in the flow of finance is a standard aspect of repression.

Ø Interest Rate Controls [BR4]: A problem with focusing exclusively on real interest rates is that it is hard to know ex ante what the equilibrium level really should be, and therefore, whether capital markets are being repressed or if other factors are involved. For this reason, we rely on survey evidence concerning controls on interest rates. Participants responded whether or not bank deposit and/or loan rates are freely determined by the market. We take these survey data into account when giving country scores on the banking repression category.

18 Other sources of income include fees and fines as well as any proceeds from activities such as securities origination, real estate investments, or insurance issuance. Different countries allow banks varying degrees of freedom to engage in these types of activities. See section IV, A, for a discussion of a new data base that examines the permissible activities of banks in over 100 countries around the world.

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In order to answer the question of where repression is worst, we rated each country on a scale of

1 to 7 for each of these factors, as shown in Table 2.

As can be seen from the table, New Zealand, Portugal, Switzerland, the United States, Canada

and Finland are among the countries with the least repressed financial systems. New Zealand’s

banking system has essentially been outsourced, and it is interesting that this country ties the

scores of other countries that have generally more developed capital markets. At the other end of

the table, Bulgaria, Russia, Indonesia, Greece, and Costa Rica have very repressed financial

systems.

Nowhere are these problems of financial repression greater than in countries with government

ownership of banks and high levels of bank concentration. Government ownership of banks is

still pervasive. It is greater in countries with low levels and growth of per-capita income,

backward financial systems, interventionist and inefficient governments, poor protection of

property rights, and lower productivity growth.19

19 R. LaPorta, F. Lopez-de-Silanes, and Andrei Schleifer, “Government Ownership of Banks,” Harvard University mimeo, August 2000.

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Table 2: Selected Banking Repression (BR) Scores from the CAI 2001

Country BR1 BR2 BR3 BR4 BR Country BR1 BR2 BR3 BR4 BR New Zealand 7 7 6 7 6.75 El Salvador 7 5 5 5 5.50 Portugal 6 7 7 7 6.75 Italy 4 7 7 4 5.50 Switzerland 6 7 7 7 6.75 Philippines 4 7 6 5 5.50 USA 6 7 7 7 6.75 Chile 7 2 6 6 5.25 Canada 5 7 7 7 6.50 Israel 5 6 6 4 5.25 Finland 5 7 7 7 6.50 Malaysia 6 6 7 2 5.25 Netherlands 5 7 7 7 6.50 Mauritius 5 7 5 4 5.25 Sweden 6 7 7 6 6.50 Mexico 3 7 6 5 5.25 Australia 6 7 6 6 6.25 Slovak Rep. 4 6 5 5 5.00 Austria 5 7 7 6 6.25 Zimbabwe 4 6 6 4 5.00 Denmark 5 6 7 7 6.25 Hungary 3 * 7 5 5.00 Iceland 7 7 6 5 6.25 China 7 4 7 1 4.75 Ireland 4 7 7 7 6.25 Colombia 5 6 4 4 4.75 Norway 5 7 7 6 6.25 Egypt 4 6 6 3 4.75 Singapore 5 7 7 6 6.25 India 3 7 6 3 4.75 UK 4 7 7 7 6.25 Peru 5 4 3 7 4.75 Argentina 4 7 6 7 6.00 Brazil 4 6 * 4 4.67 Germany 4 7 6 7 6.00 Turkey 2 6 * 6 4.67 Hong Kong 6 7 6 5 6.00 Ukraine 4 6 * 4 4.67 Japan 5 7 7 5 6.00 Ecuador 6 6 5 1 4.50 Luxembourg 3 7 7 7 6.00 Jordan 5 4 6 3 4.50 Spain 4 7 7 6 6.00 Poland 3 6 6 3 4.50 Thailand 6 7 6 5 6.00 Venezuela 5 5 4 4 4.50 France 4 7 7 5 5.75 Costa Rica 5 4 6 2 4.25 South Africa 6 7 5 5 5.75 Greece 3 5 5 4 4.25 South Korea 7 7 6 3 5.75 Indonesia 2 7 4 3 4.00 Belgium 2 7 7 6 5.50 Russia 2 6 * 3 3.67 Bolivia 7 6 2 7 5.50 Bulgaria 3 6 1 3 3.25 Czech Rep. 5 5 7 5 5.50 Note: 7 is the best possible score; 1 is the worst. For descriptions of BR1, BR2, BR3, and BR4, see accompanying text. The composite BR score is simply the average of the components with available data. * = Data unavailable. BR1 = Share of Domestic Credit to Private Sector BR2 = Reserve Requirements BR3 = Real Interest Rates BR4 = Interest Rate Controls BR = Average of BR1, BR2, BR3, and BR4

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C. What Will Help End Financial Repression?

Given the increasing quantification of the cost of financial repression, governments interested in

enacting growth-sustaining economic policies may be starting to avoid it. Non-repressive

policies reflect (1) the direct interests of entrepreneurs with good ideas that are currently being

crowded out of capital markets by repression, (2) the direct interests of those individuals in

society who benefit from the free flow of capital who will reap the appropriate returns for their

decision to save (at the expense of current consumption), and (3) the indirect interests of

consumers, who benefit from the innovative products and services made possible through

entrepreneurial finance.

Financial repression will end as countries adopt clear, transparent, credible and predictable rules

by which investment policy decisions are made. The end of financial repression, however, will

permit easier attainment of innovative ideas and methods for achieving these other goals. The

costs of opacity in financial systems (which makes financial repression possible) are becoming

increasingly clear. 20

III. The Capital Access Index 2001: Changes in Global Capital Access

In comparison to last year’s rankings, the average change in scores – using over 100 data points

per country on average – was 0.07. Countries with positive changes (57 total) moved 0.13 points

on average. Countries that dropped in score (22 total) lost 0.08 points on average. The scores of

four countries did not change. Before going into more detail concerning score and ranking

movement, we review the motivation for and the thinking behind the CAI.

20 For a discussion of the importance of this point, see Opacity Index, located at www.opacityindex.com.

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A. Description of the Capital Access Index

The Milken Institute Capital Access Index (CAI) identifies quantitative and qualitative measures

of the ability of an entrepreneur (broadly construed to include an innovator, manager, owner or

other economic agent)21 to gain access to capital. These funds might be used to start a new

enterprise, to expand a promising line of business, or to restructure a large multi-industry firm.

A fundamental assumption underlying the CAI is that access to capital will tend to enliven and

infuse a country’s real economy with the on-the-ground competition necessary for innovation,

profitability and long-run growth. Such access should permit all individuals to acquire wealth,

not just a select, ensconced elite. Countries that promote access to capital will possess more

competitive markets and will in the long run achieve superior economic performance, as research

increasingly shows.22 For this reason, it is not a coincidence that many of the measures used

here are also good indicators of long-run securities market performance (returns) as well as

economic growth in different countries.

B. General and Specific Measures of Capital Access

Vast quantities of data on international economic conditions and activity exist, many with direct

or indirect bearing on “capital access” broadly construed. To focus our index, we asked whether

the various data directly address the following issues: What sources of capital empower an

entrepreneur to start a new company or reform an existing one? How can financing ideas create

new business realities?

We grouped the relevant and available data series as follows. We established several categories

of capital access, each of which is composed of a number of specific quantitative and qualitative

components. This allows us to include the maximum number of countries in the CAI while at

the same time using as many different measures as possible. Using a system of benchmarking, 21 We have in mind here individuals with good ideas in need of financing, but also include various other harbingers of “creative destruction” such as Schumpeterian entrepreneurs, active institutional investors, or in the spirit of Jensen (1993), active investors that tend to remedy the problem of overcapacity in aging industries (Schumpeter, Joseph. The Theory of Economic Development. New Brunswick: Transaction Publishers. 1996 [1934]).

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we were able to determine which values would achieve scores from 1 to 7, with a score of 1

indicating poor conditions of capital access and a score of 7 indicating excellent conditions.

Country scores could change over time based on changes in the underlying variables that were

averaged together in order to obtain a country score.

The general economic environment creates the conditions for entrepreneurial activity.

Macroeconomic measures reflect important variables relating to inflation, interest rates, and

fiscal policy.23 Institutional measures reflect the fact that if legal contracts are not enforced, or

either private or government agents can expropriate assets or earnings with no recourse, capital

access will be constrained.24 Given the basic condition of a sound macroeconomic and

institutional setting, the next important aspect of capital access concerns the ease of securing

bank lending. In what countries are banks free to lend to projects of their choice that will be

likely to yield high returns? What countries have competitive banking markets? Where are

banks dominated by repressive policies or outright state ownership? Is the banking sector

stunted or robust?

A third set of variables is meant to capture an additional avenue of capital access: equity and

bond market development. Equity and debt are vital sources of start-up and continuing external

finance, and can even facilitate the restructuring of entire industries. More sophisticated

instruments such as securitization, are included in our measure of advanced capital market

development. In many countries, such instruments and markets are underdeveloped and do not

serve the interests of the demanders of capital. Access to international capital provides an

additional source of funds for entrepreneurs and active capital market participants. Poor national

credit ratings can be a significant barrier to capital access.

Although these ratings are based in large part on measures we have already included, we

consider them on the premise that the various rating agencies bring additional expertise and

22 For a review of this literature, see the survey in Ross Levine, “Financial Development and Economic Growth: Views and Agenda”, Journal of Economic Literature, June, vol. 35, no. 2, 688-726, 1997. 23 See Maxwell Fry, Money, Interest, and Banking in Economic Development. 2nd Ed. Johns Hopkins University Press. 1995, passim but especially chapter 16. 24 This perspective has been highly influenced by the Nobel Laureate Douglass North’s research, e.g., Structure and Change in Economic History. New York: W.W. Norton & Company. 1981.

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knowledge of these markets to bear in assessing country ratings. We use sovereign credit ratings

produced by Moody’s and S & P (as well as Institutional Investor, ICRG, and Euromoney, where

available).

C. Overview of Changes From Last Year: Overall Progress

Figure 6 and Figure 7 illustrate the changes in the scores using a histogram. The height of each

bar represents the number of countries that had scores in the range indicated at the bottom of

each bar. Thus, for the year 2000 rankings, two countries received scores between 5.5 and 7.0.

In the year 2001 rankings, however, four countries received scores in this range. The overall

increase in national scores is reflected in the fact that in the 2001 histogram, the bars to the right

of the median bar (corresponding to scores of 4.00-4.49) rose on average while the bars to the

left of the median bar fell on average.

Figure 6: Distribution of Scores for the CAI 2000

2

15 16

24

16

8

2

0

5

10

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25

30

# o

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ies

0.00 -2.99

3.00 -3.49

3.50 -3.99

4.00 -4.49

4.50 -4.99

5.00 -5.49

5.50 -7.00

CAI 2000 Score

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Figure 7: Distribution of Scores for the CAI 2001

It is important to differentiate between changes in scores (the rating of the country based on its

data) and rankings (how the countries stack up against one another). Given the general

improvement in scores, it is quite possible that a country will improve in ranking but not improve

in score. Indeed, 12 countries achieved better scores but declined in rank vis-à-vis the other

countries in the Index. Since the underlying data reveal the extent of capital access, movement in

rank is less important than the movement in score.

Because countries compete for scarce investment funds, we realize that there will be some focus

on the rank itself, i.e., how one country did vis-à-vis others in the list (addressing questions of

which country should be targeted for foreign direct or portfolio investment). We would like to

emphasize that absolute increases or decreases in score are more important than country rank

for determining changes in capital access over time. Just as everyone benefits under free trade if

a given country’s wealth increases (other countries can sell more exports there, and the wealthier

country may wish to invest abroad as well), we feel strongly that the expansion of

entrepreneurial finance will expand the global economy and encourage broad-based participation

in economic growth.

3

13

16

22

14

11

4

0

5

10

15

20

25

30

# o

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0.00 -2.99

3.00 -3.49

3.50 -3.99

4.00 -4.49

4.50 -4.99

5.00 -5.49

5.50 -7.00

CAI 2001 Score

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The 2001 Capital Access Index reflects the latest available data in the various categories. In

order to arrive at fair and accurate scores and avoid the problems inherent with volatile swings in

macroeconomic time series, we adjusted the data to reflect values over a three-year period,

contingent upon data availability. This allowed us to track medium-term changes in the

conditions that will either discourage or encourage entrepreneurial finance. In addition, the

advantage of this method is that if a country’s data availability changes from year to year, such

omissions will not greatly affect their score on the Capital Access Index. For a list of which data

is included in the 2001 and 2000 CAI scores, please see Appendix 2.25

D. Improving Scores

In last year’s CAI, we developed a methodology whereby country improvements over time could

be traced. This year’s CAI is the first that allows us to actually see changes in country scores.

Given that the CAI contains countries accounting for 98% of global output and 83% of the global

population, examination of changes in category scores provides an interesting exercise in

determining how formal capital access is getting easier for people around the world. 26, 27 We

now discuss changes in country scores and changes in component scores.

1. Progress In Country Scores

Fifty-seven countries achieved better scores on the 2001 CAI than in the 2000 CAI; 22 country

scores decreased. India’s score improved 0.33 points, more than any other country. India’s

macroeconomic environment improved (due to a decline in real interest rate volatility), entry into

the banking sector eased, the spreads between lending and deposit rates fell, and reserves

25 We have revised scores of some countries released in the 2000 Capital Access Index in order to account for this smoothing, the result of which is a methodology that will be consistently applied in the future and will enable us to track real changes in entrepreneurial finance for given countries and for given categories and variables. 26 Specifically, the 83 countries included in the 2000 and 2001 CAI comprise 97.69% of world GDP and 83.12 % of world population, using figures for 1999. Source: World Development Indicators. 27 Informal capital access, including angel financing, curb markets, and illegal provision of credit (e.g., from loan sharks) are virtually impossible to measure and hence are not reflected in the variables comprising the Capital Access Index.

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declined as a percentage of total assets. Further development of bond vis-à-vis equity markets

also helped increase the score.28

India was the only country to achieve improvement by 0.30 or better. The scores of nine other

countries improved 0.20 points or better. Thailand’s improvement of 0.27 points reflected

improvements in the banking sector, as well as increased flows of foreign direct investment and a

resulting increase in the ratio of total foreign reserves to GDP. Slovenia’s score increased by

0.23 due to an improved macroeconomic environment, notably, reductions in interest rate

volatility and changes in the corporate income tax rate. Its sovereign debt was upgraded by

Moody’s, which should enhance the availability of capital in the country. The other countries

with improvements of 0.20 or better included Portugal, Japan, Bolivia, Belgium, Greece,

Bulgaria, and Armenia. Japan’s increased score is notable in that despite continuing problems in

the banking sector, its scores for institutional environment (perceptions of corruption and of

government bureaucracy) and advanced capital markets (venture capital funding) increased.

Naturally, it is easier for countries with lower absolute scores to move up in any given year, and

the improved scores of many emerging and non-industrialized countries corroborate this

observation.

2. Progress in Component Scores29

Averaging across countries, scores for 34 variables increased, 9 decreased. The biggest changes

took place in advanced capital markets (total venture capital funding and funding as a percentage

of GDP increased by 1.13 [capital markets-advanced – KA1] and 0.73 [capital markets-advanced

– KA3] respectively); in the market adjusted debt ratio (capital markets-bonds – KB3 improved

by 0.41); in ease of entry into banking (banking-governance – BG4 increased by 0.36);

perceptions of foreign access into domestic markets (international-general – IG3 increased by

0.27); inflation (environment-macroeconomic – EM1 improved by 0.23); and direct investment

(international-FDI – IF1 increased by 0.22). Eleven other variables increased between 0.10 and

0.19 points. Sixteen variables showed marginal improvements above zero but below 0.10.

28 For more information on India’s emerging bond industry, see Suchismita Bose, Dipankir Coonoo, and Sumon Kumar Bhaumik, “The Emerging Indian Bond Market: A First Glimpse,” ICRA’s Project on Money and Finance in India Working Paper No. 1. Available at www.ssrn.com. 29 See Appendix 1 for a complete description of all components and alphanumeric codes.

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E. Declining Scores

Over 20 countries received worse scores in the 2001 CAI than in the 2000 CAI, and the average

country scores for nine variables declined from last year’s release.

1. Decreased Country Scores

Although more countries reflected improved conditions of capital access, the scores for 22

countries declined vis-à-vis last year. Ecuador’s decline was most precipitous, dropping 0.23

points due to changes in the macroeconomic environment (inflation), the banking sector and in

capital markets (equity and VC).

The countries that lost between 0.10 and 0.20 include Tunisia (0.15), Costa Rica and Malaysia

(0.14), Turkey and Indonesia (0.12) and El Salvador (0.11). Tunisia’s score suffered due to

decreased variable scores in share of credit to the private sector, portfolio flows as a portion of

GDP, and downgrading of its Moody’s sovereign bond rating. Costa Rica lost points because of

its declines in banking sector depth (bank assets as a portion of GDP) and market perceptions of

interest rate controls. Malaysia’s score worsened due to a deteriorating institutional environment

(environment-institutional – EI2 and EI5), reduced equity market capitalization as a percent of

GDP and liquidity, and reduced rate of initial public offerings. The score for Indonesia declined

due to interest rates, the perception of more burdensome government regulation, reduced share of

domestic credit to the private sector, and reductions in portfolio and direct investment. Problems

in the tradeables sector were reflected in declining portfolio and direct investment.

2. Decreased Component Scores

Of the 57 variables that are included in the CAI, only nine declined from last year. The biggest

losses were in international portfolio flows (IP3), institutional environment (EI5), general

international openness (IG7) and equity markets (KE3). Averaged across countries, these scores

declined by between 0.21 and 0.29 points. Other variables with falling average values included

international portfolio flows (IP1 by 0.16), general international openness (IG6 by 0.15),

macroeconomic environment (EM3 by 0.13; EM4 by 0.09), and banking sector repression (BR1

by 0.03).

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F. Summary: The State of Capital Access In 2001

Overall, the trend of global capital access is improving as reflected by the fact that more

countries and more CAI components achieved higher scores in the 2001 than in the 2000 Capital

Access Index. The changes are summarized in Table 3. The first column of the table lists the

various sub-categories (see Appendix 1 for an explanation of the sub-categories and lists of the

underlying variables). As the table demonstrates, the biggest positive changes from the 2000 to

the 2001 CAI are in advanced capital markets (the availability of venture capital funding) and

increased international direct investment flows. Banking sectors improved (all three banking

sub-categories – depth [BD], governance [BG], and repression [BR] – increased on average). In

addition, bond markets deepened and macroeconomic environments stabilized.

Only two components lost points. The institutional environment scores worsened in more

countries than it improved, and average international portfolio flow scores declined. On average,

sovereign bond ratings improved by 0.06 points.

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Table 3: Changes in Sub-Categories Across All Countries

2001Score

(Avg.) Change

from 2000 # Underlying

Variables Number of

Observations Environment, Macroeconomic (EM) 4.94 0.06 6 422 Environment, Institutional (EI) 4.05 -0.02 8 445 Banking, Depth (BD) 3.28 0.06 5 401 Banking, Governance (BG) 4.64 0.09 5 315 Banking, Repression (BR 5.37 0.05 4 268 Capital Markets, Equity (KE) 3.39 0.02 6 455 Capital Markets, Bonds (KB) 3.45 0.18 4 126 Capital Markets, Advanced (KA) 4.05 0.39 5 279 International, General (IG) 5.06 0.03 8 467 International, FDI Flows (IF) 4.25 0.22 1 79 International, Portfolio Flows (IP) 5.03 -0.17 3 163 Sovereign Debt Ratings (S) 5.07 0.06 2 142

IV. The Importance of Capital Access: Comparison With Other Indices

In order to clarify the importance of capital access and illustrate the usefulness of the concept, in

this section we compare our CAI 2001 ratings with other measures of capital market regulation,

entrepreneurial activity and other indices.

A. Banking Regulation and Capital Access: A New Data Set

One area of concern coming out of the recent banking sector crises in East Asia, Russia and

Turkey is the regulation of commercial banks and other deposit-taking intermediaries. Based on

a newly assembled data set, we are able to compare the composite CAI 2001 score with a

measure of the restrictiveness of allowable activities for commercial deposit-taking institutions.30

This variable is composed of five separate measures, examining whether or not banks are

allowed to own non-banks and vice-versa, and whether banks are allowed to engage in securities

issuance, insurance underwriting and real estate activities. The results are indicated in Figure 8,

with the CAI composite score on the left axis, and the measure of banking restrictiveness on the

bottom axis. High CAI scores indicate a high level of availability for entrepreneurial finance.

High RESTRICT scores indicate a high level of regulatory restrictiveness. As the figure shows,

30 James Barth, Gerard Caprio, and Ross Levine. “The Regulation and Supervision of Banks Around the World: A New Database.” Milken Institute working paper February 2000.

I-27



countries that provide a more entrepreneur-friendly environment tend to have less restrictive

bank regulatory practices (indicated by the downward slope of the line).

Figure 8: 2001 CAI vs. RESTRICT

Although the relationship between the composite CAI score and the RESTRICT variable is

interesting, it is only an examination of the general relationship between capital access and bank

regulatory restrictiveness. Several CAI variables specifically address the depth of the banking

sector. Figure 9 and Figure 10 demonstrate the univariate relationship between BD1 (claims to

non-financial firms as a portion of GDP) and BD2 (bank assets as a portion of GDP). Since high

scores for BD1 and BD2 represent a deep financial sector, and high scores of RESTRICT

indicate more restrictiveness of banking activity, the downward slope of both lines indicates that

capital access may be curtailed by bank restrictiveness, at least as measured by these two

variables. The correlation between RESTRICT and BD1 is –0.352 and the correlation between

RESTRICT and BD2 is –0.354; both correlations are statistically significant.

0

1

2

3

4

5

6

7

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

RESTRICT

2001

CA

I

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Figure 9: RESTRICT vs. Banking Depth (BD1)

Figure 10: RESTRICT vs. Banking Depth (BD2)

B. Capital Access and Entrepreneurship

One of the goals of the Capital Access Index is to measure the ease of obtaining “entrepreneurial

finance.” This concept relates to the ability of innovative companies or individuals to borrow

funds in order to implement their ideas and start new businesses. Two international data sets

0

1

2

3

4

5

6

7

8

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

RESTRICT

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re

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(only recently available) also examine entrepreneurship: one based on the regulatory hurdles that

are faced by start-up companies in different countries around the world, the other on the

percentage of the population engaged in entrepreneurship.

1. CAI and the Regulation of Entry

Recently, economists at the National Bureau for Economic Research released a new data set

articulating regulatory barriers faced by start-up firms in various countries around the world.31

The data set contains information on the number of bureaucratic procedures necessary before a

new firm could officially open for business (each procedure requiring a separate trip to a separate

agency or building), the minimum number of days required to pass from the time a new firm

begins the official registration process until it may legally open its doors for business, and the

cost of various bureaucratic fees and licenses (expressed as a percentage of per capita GDP).

The relationship between the 2001 CAI and these bureaucratic obstacles is contained in Figures

11, 12 and 13. The correlations of these three measures with the CAI are –0.486, –0.279, and

–0.304. All three correlations are statistically significant.

Figure 11: Bureaucratic Procedures vs. CAI

31 Simeon Djankov, Rafael La Porta, Floencio Lopez-de-Silanes, and Andrei Shleifer. “The Regulation of Entry,” NBER Working Paper #7892. September 2000.

0

1

2

3

4

5

6

7

0 5 10 15 20 25

Procedures Necessary to Start a New Firm

CA

I 200

1 S

core

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Figure 12: Days of Waiting vs. CAI 2001

Figure 13: Start-Up Bureaucratic Cost vs. CAI 2001

Interestingly, all three measures of bureaucratic obstacles to firm entry are negatively related to

the availability of entrepreneurial finance as measured by the CAI and indicated by the

downward slope of the line in each figure. Also interesting is the fact that several of the sub-

categories of the CAI were strongly related to different measures of bureaucratic obstacles. For

0

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5

6

7

0 50 100 150 200

Minimum Days of Bureaucratic Delay

CA

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1 S

core

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7

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Cost to Register a New Firm(as % of per capita GDP)

CA

I 200

1

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example, the correlation between our EI measure of the institutional environment for

entrepreneurial finance and the number of bureaucratic procedures was –0.59. This indicates

that our measures of the institutional environment are strongly related to the number of

procedures necessary. Second, the CAI score for advanced capital markets (mainly covering the

availability of venture capital) was negatively correlated with the other two measures of

bureaucratic obstacles. For the number of days delay before a firm can open its doors for

business, the correlation was –0.45 and for the cost of licenses and fees, the correlation also

rounds to –0.45.

2. The Global Entrepreneurship Monitor

In an ongoing international effort to collect more and better data on entrepreneurship around the

world, a consortium of researchers this year released the second Global Entrepreneurship

Monitor (GEM) report. Last year, we presented data on the relationship among the 11 countries

included in the 1999 GEM report. In this year’s GEM 2000 report, the sample of countries was

expanded to 20, and we can again compare the CAI with the level of entrepreneurial activity in

those nations.

The simple correlation between the latest GEM measure of entrepreneurial activity and the latest

CAI score is not very high and negative (–0.18) implying that entrepreneurial activity is not

related to access to capital. The negative relationship reflects the fact that two countries with

very high entrepreneurial activity (Brazil and South Korea) did not achieve high scores on the

CAI 2001. If these two outlier countries are removed, the correlation becomes a positive 0.12,

which is, however, still not very large. One explanation for the lack of correlation between

entrepreneurial activity and capital access may be that much of the sort of activity that is being

picked up in the GEM report (based on surveys responses) is informal in nature and thus not

reflected in the CAI, which only examines formal channels of intermediation. Thus, if

individuals borrow from neighbors, friends, and through unregulated credit markets, their

activities would not be registered on the CAI. In particular, there are reasons to believe that both

Brazil and South Korea have extensive informal networks of credit provision, especially given

the level of financial repression in each of these countries. (The 2001 BR score for Brazil is 4.67

and for South Korea is 5.75) Given that neither of these countries has very well-functioning

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equity or bond markets, it may not be surprising that informal credit provision has substituted for

more above-board mechanisms of financial intermediation.

C. Environmental Sustainability

The sustainability of economic growth and development is an increasing area of interest.

“Sustainability” refers to the fact that non-renewable resources are depleted each year and, where

ownership rights are not clearly defined, markets affecting the environment function

inefficiently. Known in economic theory as the “tragedy of the commons,” the essential problem

is that individuals tend not to preserve public goods such as forests, parks and natural

ecosystems. Markets efficiently allocate resources where ownership is clear, but in cases where

public goods are involved, “market failures” may result. Thus, in the absence of government

action, too few public goods may be produced.

One way to reduce the problems of market failures in this arena is to properly price and then

protect the social contribution of public goods. For example, if a nearby forest is able to absorb

10 tons of carbon emissions per year without damaging the environment, a local factory could

purchase the forest in lieu of buying emission rights and thus mitigate its own air pollution. In

the absence of private ownership of the forest, the carbon-sink value the forest holds may not be

properly priced or respected by firms, individuals or governments. Such carbon-sink forests are

more likely to be felled if ownership rights are unclear (hence, the tragedy of the commons).

The Environmental Sustainability Index represents an innovative way of thinking about what sort

of government policies will encourage sustainable development. The Index ranks countries on

22 core indicators, each of which combines two to six variables for a total of 67 underlying

variables. The ESI “permits cross-national comparisons of environmental progress” and in this

sense is analogous to the CAI.32

Interestingly, one of the factors that seems to enable environmentally sustainable growth as

measured by the ESI is the capacity of the private sector to develop green-friendly production

32 2001 Environmental Sustainability Index, p. 7 at http://www.ciesin.comumbia.edu/indicators/ESI.

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techniques. In fact, the ESI contains an indicator for “private sector responsiveness,” which uses

none of the variables employed in the CAI. Given the underlying premise of the CAI, we

speculated that there might be a relationship between entrepreneurial finance and private sector

responsiveness as measured in the ESI. Figure 14 indicates the relationship between the ESI and

the CAI 2001. The correlation is 0.58. Figure 15 shows the relationship between the indicator

for private sector responsiveness and the CAI 2001. The correlation is 0.62. Both correlations

are statistically significant.

The upward slope of the lines indicates a positive relationship between the CAI and both the ESI

and the private sector responsiveness indicators, since high numbers in all cases indicate high

levels of capital access, environmentally sustainable policies, and responsiveness of the private

sector to the needs of a stressed ecosystem. This is particularly interesting in that despite the use

of 57 variables in the CAI and 67 variables in the ESI, there is no overlap between the various

measures in the two indices. The conditions of transparency and access that sustain capital flows

are intertwined with environmentally sustainable development as well.

Figure 14: Environmental Stability Index vs. CAI

0

1

2

3

4

5

6

7

0 20 40 60 80 100

Environmental Sustainability Index

CA

I 200

1 S

core

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Figure 15: Private Sector Responsiveness vs. CAI

0

1

2

3

4

5

6

7

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Private Sector Responsiveness Indicator

CA

I 200

1 S

core

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V. Conclusion

We began this year’s CAI with a discussion of financial repression, that is, government

interference in the pricing or allocation of loanable funds and investment. Governments interfere

in credit markets at their peril. In some countries, the degree of financial repression is much

worse than in others. Four measures of banking sector repression are included in the CAI.

This year, for the first time, we were able to examine how countries and variables change over

time in terms of the accessibility of entrepreneurial finance. We found that the scores of 57

countries improved since last year’s report, although the scores of 22 countries declined. Of the

57 components used to compute the CAI score, only nine declined on average, whereas 34

component scores increased on average.

Finally, as in last year’s release of the Capital Access Index, we explored the usefulness of the

concept of “capital access” further. We compared the CAI 2001 scores to other national rankings

and recently released data concerning banking regulation, bureaucratic obstacles to new firm

entry, entrepreneurial activity, and environmentally sustained growth. These data sets

corroborated last year’s findings that capital access can help society obtain numerous social

objectives, from environmentally sustainable growth to the formal establishment of new and

innovative firms. Conversely, blocking the free flow of finance can significantly hinder these

goals.

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Appendix 1: Data Description for CAI 2001 Macroeconomic and Institutional Environment

EM – Environment, Macroeconomic

• EM1 Inflation Rate: The annual inflation rate averaged over a three-year period (1997 – 1999). Source:

International Monetary Fund, 2001. International Financial Statistics (line 64), February.

• EM2 Prime Rate Deviation from 6%: Measures the average value of the year-end prime lending rate deviation

from 6.00% over a three-year period (1997 – 1999). Source: International Monetary Fund, 2001. International

Financial Statistics (line 60p), February.

• EM3 Normalized Interest Rate Volatility: Standard deviation of monthly observations (January 1995 through

December 19998) of the annual lending rate, normalized by the mean. Source: International Monetary Fund,

2001. International Financial Statistics (line 60p), February.

• EM4 Government Expenditure % of GDP: The annual percent of GDP represented by Government

consumption averaged over a three-year period (1997 – 1999). Source: International Monetary Fund, 2001.

International Financial Statistics (lines 91f and 99b), February.

• EM5 Corporate Income Tax Rate: The maximum income tax rate assessed to corporations. Source: The Global

Competitiveness Report, 2000. World Economic Forum.

EM6 Capital Gains Tax Rate: The maximum tax rate assessed to foreigners for their capital gains. Source: The

Salomon Smith Barney Guide to World Equity Markets, 2000. Euromoney Publications PLC.

EI – Environment, Institutional

• EI1 Property Rights and Contract Enforcement: Equally weighted average of the International Country Risk

Guide’s Risk of Expropriation, Risk of Contract Violation and Rule of Law Principle scores. Source: PRS

Group.

• EI2 Corruption Perception Index: based on survey results on perceptions of corruption from local and foreign

business executives. Source: Transparency International and Goettingen University 2000.

• EI3 State Interference in Business: Scores based on response to the question: “State interference in business is

minimal.” Source: The Global Competitiveness Report, 1997. World Economic Forum.

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• EI4 Role of State-Owned Enterprises: Scores based on response to the question: “State-owned or state-

controlled enterprises do not have a dominant role in your economy.” Source: The Global Competitiveness

Report, 1997. World Economic Forum.

• EI5 Government Regulation: Scores based on response to the question: “Burdensome administrative regulations

are not pervasive.” Source: The Global Competitiveness Report, 2000. World Economic Forum.

• EI6 Creditor Rights: A variable measuring whether or not bankruptcy laws in a country give preferential

treatment to non-secured creditors (government, employees, etc.) over secured creditors. Source: Law and

Finance. La Porta, Rafael, et. al. National Bureau of Economic Research.

• EI7 Accounting Transparency: Index created by examining and rating companies’ 1990 annual reports on their

inclusion or omission of 90 items. These items fall into 7 categories (general information, income statements,

balance sheets, funds flow statement, accounting standards, stock data and special items). Source: International

Accounting and Auditing Trends, Center for International Financial Analysis and Research, Inc.

• EI8 Ofactor Survey: Composite score for corruption and various types of transparency (legal, accounting,

economic and regulatory), based on international survey responses from CFO’s, equity analysts, bankers and

consultants. Source: Milken Institute, 2000.

Banking

BD – Banking, Depth

• BD1 Claims to Non- Financial Firms / GDP: The three-year average (1997 – 1999) of the annual ratio of bank

claims to non-financial private firms as a percentage of the year’s GDP. Source: International Monetary Fund,

2001, International Financial Statistics (lines 22d and 99b), February.

• BD2 Bank Assets percent of GDP: The three-year average (1997 – 1999) of the annual ratios of bank assets as a

percentage of GDP. Bank assets are defined as the sum of reserves, foreign assets and total claims (except

claims on other financial institutions). Source: International Monetary Fund, 2001, International Financial

Statistics (lines 20, 21, 22a, 22b, 22c, 22d and 99b), February.

• BD3 Domestic Assets percent of GDP: The three-year average (1997 – 1999) of the annual ratios of bank’s

domestic assets as a percentage of GDP, and where domestic bank assets are defined as the sum of reserves and

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total claims (except claims on other financial institutions). Source: International Monetary Fund, 2001,

International Financial Statistics (lines 20, 22a, 22b, 22c, 22d and 99b), February.

• BD4 Claims of Domestic Private Sector percent of Total Domestic Claims: The three-year average (1997 –

1999) of the annual percentage of total bank claims (excluding claims to other financial institutions) represented

by bank claims to non-financial private firms. Source: International Monetary Fund, 2001, International

Financial Statistics (lines 22a, 22b, 22c and 22d), February.

• BD5 Ratio of Claims to Assets: The ratio of the claims of domestic private sector variable (BD1) to the total

bank assets variable (BD2). Source: International Monetary Fund, 2001, International Financial Statistics (lines

20, 21, 22a, 22b, 22c and 22d), February.

BG – Banking, Governance

• BG1 Moody's Bank Rating: Average financial strength rating across banks within each country. Source:

Moody’s Investors Services, 2000.

• BG2 Bank Concentration Ratio: Bank assets of top three banks to total bank assets for a country. Source: James

Barth and Gerard Caprio Jr.

• BG3 State Ownership of Banks: Percentage of total bank assets in a country owned or controlled by its

government. Source: James Barth and Gerard Caprio Jr.

• BG4 Entry to Banking Industry: Scores based on response to the question: The entry of new banks into the

domestic banking industry is easy and subject only to reasonable regulations. Source: The Global

Competitiveness Report, 2000. World Economic Forum.

• BG5 Rate Spread: Average interest rate spread (1999). Source: The Global Competitiveness Report, 2000.

World Economic Forum.

BR – Banking, Repression

• BR1 Share of Domestic credit to Private Sector: Private sector claims as a share of all claims of the

consolidated banking system. (1999). Source: The Global Competitiveness Report, 2000. World Economic

Forum.

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• BR2 Reserve Requirements: The three-year average (1997 – 1999) of the annual ratios of bank reserves to total

bank assets. Source: International Monetary Fund, 2001, International Financial Statistics (lines 20, 21, 22a,

22b, 22c and 22d), February.

• BR3 Real Interest Rate Deviation from 3%: The three-year average (1997 – 1999) of the absolute value of the

year-end real interest rate deviation from 3.00%. Source: International Monetary Fund, 2001. International

Financial Statistics (lines 60p and 64p), February.

• BR4 Interest Rate Controls: Scores based on response to the question: Interest rates on bank deposits and/or

loans are freely determined by the market. Source: The Global Competitiveness Report, 2000. World Economic

Forum.

Capital Markets

KE – Capital Markets, Equity

• KE1 Equity Market Cap / GDP: The three year average (1997 – 1999) of the annual ratio of Total market

capitalization of all firms listed in domestic stock exchanges compared to the country’s gross domestic product

(GDP). Sources: Standard & Poor’s, Emerging Stock Market Factbook, 2000 and International Monetary Fund,

2001, International Financial Statistics (line 99b), February.

• KE2 Equity Market Liquidity: The three year average (1997 – 1999) of the annual ratio of the dollar volume of

shares traded divided by the equity market capitalization. Source: Standard & Poor’s, Emerging Stock Market

Factbook, 2000.

• KE3 Average IPO Formation Rate: The three-year average (1997 – 1999) of the annual net change in the

number of stock exchange listed companies relative to the average number of companies listed during the same

year. Source: Standard & Poor’s, Emerging Stock Market Factbook, 2000.

• KE4 Relative Equity Market Volatility: Standard deviation of weekly observations (January 1, 1995 through

December 31, 1999) of the leading stock market index, normalized by the mean. Source: Datastream.

• KE5 Firm Concentration: Market capitalization of the 10 largest listed firms divided by total market

capitalization. Source: The Salomon Smith Barney Guide to World Equity Markets, 2000. Euromoney

Publications PLC.

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• KE6 Number of Companies listed per million persons: The number of companies listed in a country as of

December, 1999, divided by the country’s population (in millions). Sources: Standard & Poor’s, Emerging

Stock Market Factbook, 2000 and International Monetary Fund, 2001, International Financial Statistics (line

99z), February.

KB - Capital Markets, Bonds

• KB1 Private Sector Domestic Securities / GDP: The three-year average (1997 – 1999) of the ratio of Private

Sector Domestic Debt Securities outstanding to GDP, and where Private Sector Domestic Debt Securities are

defined as the money market instruments, bonds and notes issued by a country’s private sector. Sources: Bank

for International Settlements, 2000, Quarterly Review, November and International Monetary Fund, 2001,

International Financial Statistics (line 99b), February.

• KB2 Public Sector Domestic Securities / GDP: The three-year average (1997 – 1999) of the ratio of Public

Sector Domestic Debt Securities outstanding to GDP, and where Public Sector Domestic Debt Securities are

defined as the money market instruments, bonds and notes issued by a country’s public sector. Sources: Bank

for International Settlements, 2000, Quarterly Review, November and International Monetary Fund, 2001,

International Financial Statistics (line 99b), February.

• KB3 Market Adjusted Debt Ratio: Interpreted as Private Domestic Debt Securities / (Private Domestic Debt

Securities + Equity Market Capitalization.) Source: Bank for International Settlements.

• KB4 Private to Public Sector Domestic Securities Ratio: The ratio of the Private Sector Domestic Securities

variable (KB1) to Public Sector Domestic Debt Securities variable (KB2). Sources: Bank for International

Settlements, 2000, Quarterly Review, November and International Monetary Fund, 2001, International

Financial Statistics (lines 99b), February.

KA – Capital Markets, Advanced

• KA1 Venture Capital Funds: The three-year average (1998 – 2000) of the annual amount of venture capital

made available to firms in a country. Sources: SDC Platinum, Securities Data Corporation.

• KA2 Bond Market Development: Scores based on response to the question: Bond markets are highly developed

for public and corporate finance. Source: The Global Competitiveness Report, 1999. World Economic Forum.

• KA3 Venture Capital Funds / GDP: The three-year average (1997 – 1999) of the annual amount of venture

capital made available to firms in a country as a percentage of that country’s GDP. Sources: SDC Platinum,

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Securities Data Corporation and International Monetary Fund, 2001, International Financial Statistics (lines

99b), February.

• KA4 Availability of Venture Capital: The three-year average of the response to the question: Venture capital is

readily available for new business development. Source: The Global Competitiveness Report, 1998, 1999,

2000. World Economic Forum.

• KA5 Private Placements / GDP: The three-year average (1997 - 1999) of the ratio between the amount of

private placements of equity in a country and that country’s GDP. Sources: SDC Platinum, Securities Data

Corporation and International Monetary Fund, 2001, International Financial Statistics (line 99b), February.

International

IG – International, General

• IG1 Total Reserves / GDP: The three-year average (1997 - 1999) of the ratio between a country’s foreign

reserves (excluding gold) and its GDP. Source: International Monetary Fund, 2001, International Financial

Statistics (lines 1ld and 99b), February.

• IG2 Foreign Investment Ceiling: The maximum percentage of ownership of any given company allowed to

foreigners. Source: International Finance Corporation, Emerging Stock Market Factbook, 2000.

• IG3 Foreign Access to Domestic Markets: Scores based on response to the question: Foreigners are free to

invest in stocks and bonds. Source: The Global Competitiveness Report, 2000. World Economic Forum.

• IG4 Corporate Control by Foreign Investors: Scores based on response to the question: Foreign investors are

free to acquire control in a domestic company. Source: The Global Competitiveness Report, 1998. World

Economic Forum.

• IG5 Relative Currency Volatility: Standard deviation of weekly observations (January 1, 1995 through

December 31, 1999) of the exchange rate for the national currency, normalized by the mean. Source:

Datastream.

• IG6 International Bonds issued by Private Corps: The three-year average (1997 – 1999) of the annual issuance

of International bonds by private firms in a country as a percentage of all international bonds issued by private

corporations worldwide. Source: Capital Data, Bondware.

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• IG7 International Equities issued by Private Corps: The three-year average (1997 – 1999) of the annual issuance

of International equity securities issued by private firms in a country as a percentage of all international equity

securities issued by private corporations worldwide. Source: Capital Data, Bondware.

• IG8 Foreign Investment Protection Scores based on response to the question: Investment protection schemes are

readily available for most foreign investors. Source: The Global Competitiveness Report, 1998. World

Economic Forum.

IF – International, Foreign Direct Investment

• IF1 FDI / GDP: The three-year average (1997 – 1999) of the annual net inflows of investment to acquire a

lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other

than that of the investor, relative to the host economy’s GDP. International Monetary Fund, 2001, International

Financial Statistics (lines 78bed and 99b), February.

IP – International, Portfolio Flows

• IP1 Stock: Portfolio Flows / GDP: The three-year average (1997 – 1998) of the annual net flows of non-debt-

creating portfolio equity flows relative to the host economy’s GDP Sources: World Bank, 2000, World

Development Indicators 2000 and International Monetary Fund, 2001, International Financial Statistics (line

99b), February.

• IP2 Bonds: Portfolio Flows / GDP: The three-year average (1997 – 1998) of the annual net flows of bond issues

purchased by foreign investors relative to the host economy’s GDP. Sources: World Bank, 2000, World

Development Indicators 2000 and International Monetary Fund, 2001, International Financial Statistics (line

99b), February.

• IP3 Total Portfolio Flows / GDP: The three-year average (1997 – 1998) of the annual net flows created by

transactions in which foreigners purchase or dispose of equity securities and/or debt securities in an economy

other than its own, relative to the host economy’s GDP. Sources: World Bank, 2000, World Development

Indicators 2000 and International Monetary Fund, 2001, International Financial Statistics (line 99b), January

Sovereign

• S1 Moody's Sovereign Ratings: Moody’s indicator of the sovereign and supranational credit quality of a

country. Source: Moody’s Investor Services.

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• S2 S & P Sovereign Ratings: Standard and Poor’s indicator of the sovereign and supranational credit quality of

a country. Source: Standard and Poor’s Sovereign Rating Services.

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Appendix 2: Years and Methodology for CAI Variable Scores Variable CAI 2001 CAI 2000 Methodology

EM1 Inflation Rate 1997 - 1999 1996 - 1998 3 Year Average EM2 Prime Rate Deviation from 6% 1997 - 1999 1996 - 1998 3 Year Average EM3 Relative Interest Rate Volatility 1995 - 1999 1994 - 1998 5 Year Volatility EM4 Government Expenditure / GDP 1997 - 1999 1996 - 1998 3 Year Average EM5 Corporate Income Tax 1999 1998 Year-End EM6 Capital Gains Tax 1999 1998 Year-End EI1 Property Rights, Contract Enforcement 1997 1997 Single Observation EI2 Corruption Perception Index 2000 1999 Single Observation EI3 State Interference in Business 1996 1996 Single Observation EI4 Role of State-Owned Enterprises 1996 1996 Single Observation EI5 Government Regulation 1999 1996 Single Observation EI6 Creditor Rights 1997 1997 Single Observation EI7 Accounting Transparency 1998 1998 Single Observation EI8 O-factor Survey 2000 2000 Single Observation BD1 Claims to Non- Financial Firms / GDP 1997 - 1999 1996 - 1998 3 Year Average BD2 Bank Assets / GDP 1997 - 1999 1996 - 1998 3 Year Average BD3 Domestic Assets to GDP 1997 - 1999 1996 - 1998 3 Year Average BD4 Claims of Domestic Priv. Sect. to Total Dom. 1997 - 1999 1996 - 1998 3 Year Average BD5 Ratio of Claims to Assets 1997 - 1999 1996 - 1998 Based on 3 Year Averages BG1 Moody's Bank Rating 2000 1999 Single Observation BG2 Bank Concentration Ratio 1997 1997 Single Observation BG3 State Ownership of Banks 1997 1997 Single Observation BG4 Entry to Banking Industry 1999 1998 Single Observation BG5 Rate Spread 1999 1998 Single Observation BR1 Share of Domestic Credit to Private Sector 1999 1998 Single Observation BR2 Reserve Requirements 1997 - 1999 1996 - 1998 3 Year Average BR3 Real Interest Rate Deviation from 3% 1997 - 1999 1996 - 1998 3 Year Average BR4 Interest Rate Controls 1999 1998 Single Observation KE1 Equity Market Cap / GDP 1997 - 1999 1996 - 1998 3 Year Average KE2 Equity Market Liquidity 1997 - 1999 1996 - 1998 3 Year Average KE3 Average IPO Formation Rate 1997 - 1999 1996 - 1998 3 Year Average KE4 Relative Equity Market Volatility 1995 - 1999 1994 - 1998 5 Year Volatility KE5 Firm Concentration 1999 1998 Single Observation KE6 # of Companies listed per million persons 1999 1998 Single Observation KB1 Private Sector Domestic Securities / GDP 1997 - 1999 1996 - 1998 3 Year Average KB2 Public Sector Domestic Securities / GDP 1997 - 1999 1996 - 1998 3 Year Average KB3 Market Adjusted Debt Ratio 1999 1998 Single Observation KB4 Private to Public Sector Domestic Securities 1997 - 1999 1996 - 1998 Based on 3 Year Averages KA1 Venture Capital Funds 1998 - 2000 1997 - 1999 3 Year Average KA2 Bond Market Development 1998 1998 Single Observation KA3 Venture Capital Funds / GDP 1997 - 1999 1996 - 1998 3 Year Average KA4 Availability of Venture Capital 1997 - 1999 1996 - 1998 3 Year Average KA5 Private Placements / GDP 1997 - 1999 1996 - 1998 3 Year Average

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Variable CAI 2001 CAI 2000 Methodology IG1 Total Reserves / GDP 1997 - 1999 1996 - 1998 3 Year Average IG2 Foreign Investment Ceiling 1999 1998 Single Observation IG3 Foreign Access to Domestic Markets 1999 1998 Single Observation IG4 Corporate Control by Foreign Investors 1996 1996 Single Observation IG5 Relative Currency Volatility 1995 - 1999 1994 - 1998 5 Year Volatility IG6 International Bonds issued by Private Corps 1998 - 2000 193l 3 Year Average IG7 International Equities issued by Private Corps 1998 - 2000 1997 - 1999 3 Year Average IG8 Foreign Investment Protection 1997 1997 Single Observation IF1 FDI / GDP 1997 - 1999 1996 - 1998 3 Year Average IP1 Stock: Portfolio Flows / GDP 1996 - 1998 1995 - 1997 3 Year Average IP2 Bonds: Portfolio Flows / GDP 1996 - 1998 1995 - 1997 3 Year Average IP3 Total Portfolio Flows / GDP 1996 - 1998 1995 - 1997 3 Year Average S1 Moody's Sovereign Ratings 2000 1999 Single Observation S2 S & P Sovereign Ratings 2000 1999 Single Observation

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Appendix 3: The 2001 Capital Access Index: Sub-Category Scores

Country 2001 CAI Score Environment, Macroeconomic

Environment, Institutional

Banking, Depth

Banking, Governance

Banking, Repression

Code CAI EM EI BD BG BR

Argentina 4.31 5.33 4.00 2.20 4.80 6.00

Armenia 3.40 3.75 1.00 2.20 6.00 3.00

Australia 5.08 4.50 5.14 5.00 5.80 6.25

Austria 4.77 5.20 4.86 5.20 5.60 6.25

Belgium 4.79 5.00 4.43 3.80 6.00 5.50

Bolivia 4.08 4.60 3.00 4.20 4.40 5.50

Botswana 4.00 5.20 5.00 2.40 4.00 6.50

Brazil 3.77 5.75 2.75 2.20 3.75 4.67

Bulgaria 3.39 3.50 2.67 1.20 3.33 3.25

Canada 5.25 5.17 5.29 4.20 5.50 6.50

Chile 4.72 4.17 4.75 4.40 4.80 5.25

China 4.17 4.83 3.00 5.20 3.67 4.75

Colombia 3.51 3.83 2.63 2.80 4.40 4.75

Costa Rica 3.46 4.67 3.33 1.80 3.75 4.25

Croatia 4.24 5.50 2.00 2.50 4.00 6.50

Czech Republic 4.27 4.83 3.83 3.20 5.25 5.50

Denmark 4.78 5.00 5.43 2.40 5.60 6.25

Ecuador 3.24 4.33 2.60 3.60 3.00 4.50

Egypt 4.34 5.50 4.13 2.40 3.80 4.75

El Salvador 3.89 6.00 3.33 3.00 3.50 5.50

Estonia 4.18 3.60 4.50 2.60 6.00 5.50

Finland 5.04 5.20 5.86 3.80 4.80 6.50

France 4.81 4.80 4.00 3.80 5.60 5.75

Germany 5.09 5.33 5.29 5.00 5.20 6.00

Ghana 2.92 5.33 2.50 1.00 2.00 6.00

Greece 3.87 5.17 2.75 2.00 4.20 4.25

Guatemala 3.52 5.75 1.50 2.60 4.67 5.50

Honduras 3.59 4.50 1.00 3.20 3.50 5.00

Hong Kong 5.58 6.50 6.13 5.80 5.20 6.00

Hungary 4.34 5.00 5.00 1.60 5.75 5.00

Iceland 4.56 5.20 4.60 4.40 3.75 6.25

India 3.85 5.17 3.38 2.00 5.00 4.75

Indonesia 3.76 4.50 3.57 3.00 4.20 4.00

Ireland 5.10 6.00 4.67 4.60 5.80 6.25

Israel 4.74 4.50 4.50 4.40 3.80 5.25

Italy 4.54 5.00 3.88 3.60 5.40 5.50

Ivory Coast 3.54 6.33 1.50 2.20 1.00 7.00

Jamaica 3.62 4.80 3.00 1.80 3.67 4.00

Japan 4.85 4.67 4.13 5.20 6.20 6.00

Jordan 4.04 4.83 3.40 3.40 3.80 4.50

Kazakstan 3.29 4.00 2.00 2.50 3.00 5.00

Kenya 3.24 4.80 2.75 2.40 2.00 5.00

Latvia 4.03 4.80 3.50 1.60 5.00 6.00

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Country Capital

Markets, Equity

Capital Markets,

Bonds

Capital Markets, Advanced

International, General

International, FDI Flows

International, Portfolio

Flows

Sovereign Debt

Ratings Code KE KB KA IG IF IP S

Argentina 2.67 1.00 3.60 5.63 5.00 6.00 3.50

Armenia 3.50 4.00 6.00 5.00

Australia 4.50 4.00 5.40 4.86 3.00 6.00 7.00

Austria 3.33 2.75 3.80 5.29 3.00 5.00 7.00

Belgium 3.50 4.25 5.00 5.14 7.00 2.00 7.00

Bolivia 2.25 1.00 5.00 7.00 5.00 3.00

Botswana 2.20 5.67 3.00 5.00

Brazil 2.83 3.00 3.80 4.88 5.00 5.33 3.50

Bulgaria 3.75 3.00 4.75 5.00 5.67 3.00

Canada 5.00 4.00 6.00 5.29 4.00 5.00 7.00

Chile 4.33 3.40 5.50 7.00 5.00 5.50

China 4.50 2.50 3.00 4.50 5.00 5.00 5.00

Colombia 2.00 2.60 4.67 4.00 5.00 4.00

Costa Rica 1.25 2.50 4.67 5.00 4.67 4.00

Croatia 2.50 4.33 5.00 4.00 5.33 4.50

Czech Republic 3.17 2.25 3.40 5.67 6.00 5.00 5.50

Denmark 4.00 3.50 4.80 5.14 4.00 5.00 7.00

Ecuador 1.50 1.00 4.00 4.00 4.50 2.00

Egypt 4.00 2.33 5.75 3.00 6.00 4.50

El Salvador 1.50 2.25 5.33 5.00 5.00 4.00

Estonia 3.00 3.67 5.67 7.00 5.33 5.00

Finland 4.33 3.75 4.60 5.43 5.00 5.00 7.00

France 4.17 3.75 5.60 5.43 4.00 4.00 7.00

Germany 4.17 3.00 5.20 5.86 3.00 5.00 7.00

Ghana 1.83 2.00 4.00 3.00 6.00

Greece 3.83 2.67 3.00 5.57 3.00 4.00 6.00

Guatemala 1.00 2.00 4.00 3.00 5.00 4.00

Honduras 1.67 5.00 4.00 5.00 3.00

Hong Kong 4.83 3.25 4.80 6.43 7.00 5.50

Hungary 3.83 3.00 3.20 5.00 5.00 5.67 5.50

Iceland 4.60 4.67 3.33 3.00 4.00 6.00

India 3.50 3.25 4.25 3.29 3.00 5.00 4.00

Indonesia 2.50 4.20 4.29 2.00 5.00 2.50

Ireland 4.17 3.25 5.20 5.14 7.00 4.00 7.00

Israel 3.83 5.20 6.00 3.00 6.00 6.00

Italy 3.33 4.00 4.00 5.57 3.00 6.00 6.50

Ivory Coast 2.67 2.00 5.00 4.00 4.67

Jamaica 2.50 5.33 5.00 5.50 3.00

Japan 3.83 4.25 4.60 5.14 2.00 5.00 7.00

Jordan 3.67 3.00 5.00 4.00 5.00 3.50

Kazakstan 1.00 3.50 5.00 5.00 3.50

Kenya 2.17 3.67 2.00 4.50

Latvia 3.00 5.25 6.00 4.00 5.00 Blank space = Data not available

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Appendix 3: The 2001 Capital Access Index: Sub-Category Scores

Country 2001 CAI Score Environment, Macroeconomic

Environment, Institutional

Banking, Depth

Banking, Governance

Banking, Repression

Code CAI EM EI BD BG BR

Lithuania 3.83 4.60 3.67 1.60 4.00 6.00

Luxembourg 5.59 5.40 6.20 5.40 6.80 6.00

Malaysia 4.63 5.83 4.57 5.00 4.20 5.25

Mauritius 4.34 5.17 4.00 3.60 3.50 5.25

Mexico 3.77 4.17 3.38 1.80 3.60 5.25

Moldova 3.56 3.25 1.00 1.20 4.50 4.50

Morocco 4.18 6.00 4.50 3.00 3.33 6.50

Namibia 4.16 4.60 5.00 3.80 7.00 4.00

Netherlands 5.49 5.33 5.71 5.40 6.20 6.50

New Zealand 5.14 5.67 6.00 5.40 5.60 6.75

Nicaragua 4.18 5.00 3.00 3.00 2.00 5.00

Nigeria 3.96 5.25 3.75 2.50 3.50 5.50

Norway 4.62 4.83 5.00 4.20 4.60 6.25

Pakistan 3.70 6.00 4.33 2.00 2.00 7.00

Paraguay 3.30 5.25 3.00 2.40 3.50 4.50

Peru 4.10 5.33 3.25 2.60 4.40 4.75

Philippines 4.04 5.17 3.57 3.20 4.80 5.50

Poland 3.84 3.67 3.67 1.40 4.25 4.50

Portugal 4.74 4.60 4.00 5.00 6.00 6.75

Romania 3.48 4.00 2.67 1.20 2.00 6.00

Russia 2.85 3.40 2.67 1.20 2.50 3.67

Singapore 5.36 6.33 6.00 4.80 4.75 6.25

Slovak Republic 4.00 4.33 4.00 2.40 4.75 5.00

Slovenia 4.27 4.40 4.50 2.40 4.50 6.50

South Africa 4.47 4.83 3.75 4.20 4.80 5.75

South Korea 4.64 5.67 3.75 4.60 5.50 5.75

Spain 4.90 4.80 4.86 4.40 5.80 6.00

Sweden 5.02 5.17 5.43 3.20 5.40 6.50

Switzerland 5.46 6.00 5.14 6.20 5.20 6.75

Taiwan 5.00 6.25 4.13 6.00 5.50 5.00

Thailand 4.56 5.33 4.00 5.60 4.40 6.00

Tunisia 4.04 6.00 5.00 3.80 4.00 7.00

Turkey 3.48 4.75 3.00 1.60 3.75 4.67

Ukraine 2.61 4.20 1.80 1.00 2.00 4.67

United Kingdom 5.63 5.60 6.13 5.20 6.40 6.25

United States 5.72 5.83 5.13 4.00 6.80 6.75

Uruguay 3.07 3.50 2.75 2.60 2.67 3.00

Venezuela 3.33 4.00 2.00 2.00 3.80 4.50

Vietnam 3.42 6.00 2.50 3.33 2.50

Zimbabwe 3.24 3.33 3.33 2.60 3.50 5.00

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Country

Capital Markets, Equity

Capital Markets,

Bonds

Capital Markets, Advanced

International, General

International, FDI Flows

International, Portfolio

Flows

Sovereign Debt

Ratings Code KE KB KA IG IF IP S

Lithuania 2.50 3.67 5.00 6.00 4.67 4.50

Luxembourg 4.00 5.60 5.29 7.00

Malaysia 4.00 4.50 3.60 4.38 4.00 5.33 5.00

Mauritius 3.33 3.50 5.25 3.00 5.67 5.00

Mexico 2.67 3.00 3.60 5.13 4.00 5.33 4.00

Moldova 5.00 3.50 4.50 5.00 6.50 2.00

Morocco 2.83 2.00 5.25 2.00 5.00 4.00

Namibia 2.80 4.67 4.00 5.00

Netherlands 4.83 3.50 5.80 5.71 6.00 3.00 7.00

New Zealand 3.83 2.00 3.40 5.00 4.00 4.00 7.00

Nicaragua 5.00 7.00 5.50 3.00

Nigeria 2.20 6.00 4.00 4.50

Norway 4.83 2.75 3.80 4.57 4.00 3.00 7.00

Pakistan 3.50 4.33 3.00 5.00 2.50

Paraguay 1.75 3.50 4.00 3.00

Peru 3.00 2.33 5.71 4.00 5.67 3.50

Philippines 2.50 3.40 4.00 3.00 5.67 4.00

Poland 3.67 1.00 4.00 4.50 5.00 5.33 5.00

Portugal 3.17 3.50 4.00 5.38 3.00 5.00 7.00

Romania 4.00 4.33 3.67 5.00 5.33 2.50

Russia 3.17 1.00 2.00 3.14 3.00 5.67 2.50

Singapore 4.83 3.25 4.80 6.00 7.00 1.00 7.00

Slovak Republic 3.17 3.40 4.86 3.00 4.67 4.00

Slovenia 3.17 5.67 3.00 6.00 6.00

South Africa 4.17 3.60 4.88 3.00 5.33 4.50

South Korea 3.83 4.00 4.80 4.50 3.00 5.33 5.00

Spain 4.67 3.25 4.40 5.43 3.00 4.00 7.00

Sweden 4.00 3.75 5.40 5.43 7.00 3.00 7.00

Switzerland 4.83 4.25 5.60 5.43 4.00 4.00 7.00

Taiwan 5.00 4.20 4.50 6.50

Thailand 2.50 4.00 4.86 5.00 5.33 4.50

Tunisia 2.50 4.00 4.00 3.67 5.00

Turkey 3.00 1.33 2.67 5.00 3.00 5.00 3.00

Ukraine 2.00 1.50 3.33 3.00 3.00 2.00

United Kingdom 4.33 3.75 6.40 5.83 5.00 6.00 7.00

United States 5.00 5.75 6.60 5.86 4.00 7.00 7.00

Uruguay 1.50 3.50 3.00 5.00 4.50

Venezuela 2.17 2.00 4.83 5.00 5.33 3.00

Vietnam 7.00 2.50 3.50 5.00 3.00

Zimbabwe 2.33 3.50 2.67 4.50 Blank space = Data not available

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