Global Edge:Using the Opacity Index to Manage the Risks of Cross-Border Business
Joel Kurtzman
Chairman, Kurtzman Group
Senior Fellow, Milken Institute
Today’s hypercompetition changes the old view of making countries successful
• Old view: countries compete on labor costs and raw material endowments
• New view: countries compete on a range of issues including:▪ Access to capital
▪ Social systems and costs
▪ Stability
▪ Overall levels of risk
• Opacity
Canada United States
Australia
South Africa
China IndiaHong KongIndonesiaJapanMalaysia
ArgentinaBrazil ChileColombiaEcuadorMexicoVenezuela
EgyptIsraelKuwaitLebanonNigeriaSaudi Arabia
AustriaBelgiumCzech Rep.Denmark FinlandFranceGermanyGreece
HungaryIrelandItaly NetherlandsNorway PolandPortugal
RussiaSpainSwedenSwitzerlandTurkeyUnited Kingdom
PakistanPhilippinesSingaporeSouth Korea TaiwanThailand
1. Large-Scale, Low-Frequency Risk
Large-scale risks (earthquakes, revolutions, nationalizations) are dramatic and rare but capture attention.
2. Small-Scale, High-Frequency Risk
Small-scale risks are everyday occurrences and are the real bane of business. For business, this is where the real costs lie.
While all eyes focus on the large but rare risks, businesses must watch out for the real risks that cost money and time.▪ Corruption
▪ Legal systems with limited protections
▪ Economic policies that hinder sustained growth
▪ Accounting and governance standards that make it difficult to see inside companies
▪ Regulatory systems that fail to protect investors
▪ These five (CLEAR) factors are sand in the gear of commerce. They are the “everyday risks” of being a global business.
What exactly is opacity?
”Opacity is the opposite of transparency. It is the lack of clear, accurate, easily discernible, and widely accepted practices governing the relationships among businesses, investors, and governments. Opacity acts as a brake on commerce, and its presence hampers the smooth operation of business transactions.”
Joel Kurtzman and Glenn Yago
MIT Sloan Management Review
October 2004
Social scientists might call opacity “negative social capital.” Social capital includes institutions and “agreements” that keep a society functioning. It includes elements as diverse as laws, markets and educational institutions.
Since opacity is a form of capital, it can be measured.
Since opacity is a form of capital, its transformation from negative to positive can be noted and followed.
Since opacity is a form of capital, its impact on business and growth can be plainly seen – if leaders want to look!
Understand the link between opacity and growth
Understand price risk Measure global portfolio risk and balance Create country-based strategies Create new types of portfolios (green,
sustainable, peace etc.) Comply with pension fund “screens” Forecast challenges/opportunities Compute minimum-required rates of return
Country
CategoryOpacity Index
C L E A R
Finland 3 11 23 17 9 13
United Kingdom 20 3 25 33 13 19
Denmark 6 15 21 33 19 19
Sweden 8 24 21 25 19 19
Hong Kong 26 12 14 33 15 20
United States 28 19 27 20 10 21
Australia 19 16 26 33 10 21
Switzerland 20 27 20 25 21 23
Austria 21 11 32 33 17 23
Belgium 28 25 30 17 14 23
Canada 26 17 37 20 16 23
Singapore 15 19 25 50 10 24
Netherlands 16 21 22 38 23 24
Country
Category
Opacity IndexC L E A R
Germany 28 14 33 17 32 25
Ireland 33 19 29 38 9 26
Japan 38 24 31 22 22 28
Chile 41 24 30 20 27 29
Israel 33 30 44 20 25 30
Taiwan 47 33 20 40 28 34
South Africa 55 34 28 33 18 34
Spain 39 25 32 50 23 34
Malaysia 55 35 28 30 26 35
Thailand 72 33 29 20 21 35
Portugal 37 26 31 50 32 35
Hungary 51 31 26 50 24 36
France 39 47 33 33 32 37
Country
Category
Opacity IndexC L E A R
South Korea 61 35 22 30 37 37
Brazil 47 48 32 40 35 40
Poland 63 35 47 40 19 41
Greece 58 30 36 50 30 41
Czech Republic 61 35 32 44 35 41
Ecuador 64 60 34 25 29 42
Colombia 57 61 45 29 21 43
Italy 52 32 45 63 24 43
Turkey 67 41 27 44 36 43
Mexico 65 60 35 33 25 44
Argentina 65 64 33 30 27 44
Pakistan 75 49 47 33 22 45
Saudi Arabia 61 34 32 33 69 46
Country
Category
Opacity IndexC L E A R
Russia 78 44 39 40 31 46
Egypt 71 37 39 40 51 48
India 74 44 49 30 46 48
Nigeria 80 65 48 0 50 49
China 74 39 39 56 43 50
Philippines 75 56 52 33 36 50
Venezuela 75 68 49 30 30 51
Lebanon 83 60 65 44 42 59
Indonesia 82 54 90 22 49 59
Every Additional Point on an Opacity Score Yields:• Lower average per capita income (-$986)• Lower net foreign direct investment as a
percent of GDP (-1 percent)• Lower Capital Access Index Score (-0.06
points)• Lower bank assets as a percent of GDP (-4
percent)• Lower stock market capitalization as a
percent of GDP (-0.9 percent)• Lower stock market traded value as a
percent of GDP (-0.9 percent)• Increase average borrowing interest rate (57
basis points)• Increase inflation rate (0.46 percent)
1. Procedural Complexity Index Number of filings Duration Cost
2. Employment Laws Index Flexibility of Hiring Index Conditions of Employment
Index Flexibility of Firing Index
3. Aggregate Complexity Index Average of Procedural
Complexity and Employment Laws Index
Country/ Region
Procedural Complexity
I ndexEmployment Laws I ndex
Aggregate Complexity
I ndexLatin America & Caribbean 70 61 66Europe & Central Asia 57 57 57Middle East & North Africa 59 48 54South Asia 55 49 52East Asia & Pacific 55 45 50OECD: High income 49 45 47
Spain 83 70 77Mexico 62 77 70Russia 54 79 67France 79 50 65Brazil 48 78 63Chile 73 50 62I taly 64 59 62Poland 65 55 60Thailand 53 61 57Germany 61 51 56Hungary 57 54 56Czech Republic 65 36 51India 50 51 51Korea, South 50 51 51China 52 47 50Turkey 38 55 47South Africa 56 36 46I reland 42 49 46I srael 51 38 45Sweden 44 42 43Switzerland 44 36 40J apan 39 37 38Singapore 49 20 35United States 46 22 34Malaysia 41 25 33Australia 29 36 33United Kingdom 36 28 32Canada 29 34 32
Source: World Bank, Doing Business
Source Code Publication, Source
WBRS Regulation and Supervision of Banking Around the World, World Bank
SSBG Salomon Smith Barney Guide to World Equity Markets
ISSA International Security Services Association Handbook
IFAD International Forum on Accountancy Development, GAAP Convergence
ICRG International Country Risk Guide, PRS Group
TI Corruption Perceptions Index, Transparency International
GCR Global Competitive Report, World Economic Forum
WBDB Doing Business, World Bank
AON Risk Management Updates
WBCRS World Bank Survey on Public Credit Registry for Central Banks
Questions (E: Effectiveness of Economic Policy)Type of
Data
No of Countries for which data are available
Source
Average days of legal procedure from filing to enforcement
Raw Data 48 WBDB
Contract Enforcement Index: How inefficient (formalism) is contract enforcement?
Index 48 WBDB
Business costs of terrorism (1-7, low is worse) Index 46 GCR
Transparency of policy making Index 22 GCR
Organized crime costs on business Index 46 GCR
Efficiency and transparency of tax system Index 46 GCR
Extent of bureaucratic red tape Index 46 GCR
Freedom of press Index 46 GCR
Enforce contracts: cost (% GNI per capita) Raw Data 47 WBDB
Questions (R: Regulatory Regime)Type of
Data
No of Countries for which data are available
Source
Government stability Index 48 ICRG
Capital Flows Restriction Index Index 48Heritage
Foundation
Government Involvement in Banking and Finance Index
Index 48Heritage
Foundation
Regulatory Burden Index Index48
Heritage Foundation
Start Business: number of Procedures Raw Data 48 WBDB
Start Business: duration (days) Raw Data 48 WBDB
Start Business: cost (% GNI per capita) Raw Data 48 WBDB
Start Business: min. capital (% GNI per capita) Raw Data 48 WBDB
Questions (R: Regulatory Regime)Type of
Data
No of Countries for
which data are available
Source
Close Business: actual cost (% of estate) Raw Data 48 WBDB
Close Business: goals of insolvency Index Index 48 WBDB
Can regulators engage in discretionary forbearance? Binary 46 WBRS
Can the banking supervisor suspend a bank's directors' decision to distribute dividends, bonuses or management fees?
Binary 47 WBRS
Is there a central securities and exchange regulator? Binary 39 ISSA
Can brokers set their own fees and commissions? Binary 38 ISSA
Is there self-regulation of brokers? Binary 23 ISSA
Have exchanges established listing requirements? Binary 40 SSBG
Questions (R: Regulatory Regime)Type of
Data
No of Countries for which data are available
Source
Does the central bank or independent agent (other than the fiscal authority) handle the issuance and settlement of public debt?
Binary 45Country's regulator
Is public debt distributed by auction? Binary 45Country's regulator
Is there a system of primary dealers? Binary 45Country's regulator
Is there a central clearinghouse for settlements? Binary 44Country'sregulator
Is debt held at a central depository? Binary 34Country'sregulator
Is there one or more consumer credit rating agency?
Binary 39 WBCRS
Regulation of securities exchanges: transparency, effectiveness, role of government, industry intervention (1-7, low is worse)
Index 46 GCR
0
1
2
3
4
5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Percent Change, Year Ago
Source: International Financial Statistics
200620011996199119861981
4
2
0
-2
-4
-6
-8
% of GDP
Surplus
Deficit
Source: U.S. Department of the Treasury, Bureau of the Public Debt
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0Max = 10
U.S.
Hong Kong
China
Russia
Brazil
India
United Kingdom
Mexico
Source: Milken Institute
y = 6,821x - 21,731
R2 = 0.6308
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0 1 2 3 4 5 6 7 8 9
Capital Access Index
GD
P p
er
Ca
pit
a,
US
$
Less access More accessSources: World Economic Outlook, Milken Institute
• Level of institutional development, including
law and regulation (Boyd and Smith, 1996;
Gurley and Shaw, 1955)
• Legal origin, shareholder rights and creditor
rights (La Porta et al, 1998)
• Laws and regulations (Levine, 2002; World Bank,
2001)
• Demographics and human capital (Black, 2002)
Forgone GDP
Growth %
Forgone GDP
US$ Billions (2006)
Mexico 2.63 22.09
Russia 2.50 24.48
Argentina 1.97 4.19
Pakistan 1.70 2.19
India 1.66 14.72
Source: Authors’ Calculation based upon Triphon Phumiwasana, (2003)
Finland: -1.83
UK: -0.44
Sweden: -0.31
U.S.: 0.00
Switzerland: 0.40
Belgium: 0.42
Germany: 0.86
Ireland: 1.03
Japan: 1.51
Brazil: 4.29
Czech Rep: 4.56
Turkey: 4.95
Mexico: 5.01
Saudi Arabia: 5.52
Russia: 5.64
China: 6.49
Venezuela: 6.56
Indonesia: 8.54
Denmark
Malaysia
Sw itzerland
Turkey
China
Netherlands
India
Thailand
Kuw ait
Poland
Russia
Sw edenSouth Africa
France
Brazil
Italy
Germany
Mexico
Spain
Greece
UAE
United States
UK Japan
Australia
CanadaSingapore
Taiw an
Finland
Saudi Arabia
Ireland
Israel
Norw ayAustria Belgium
Korea
HungaryCzech Rep
European Union
Egypt ChileHong Kong
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Size of each bubble represents relative GDPVertical (Y) location of the bubble indicates rate of
growthHorizontal (X) location illustrates increasing
procedural complexity
Opportunity is defined here as a country’s legal and procedural complexity, relative to its overall market size and rate of growth
AsiaEuropeNorth AmericaLatin AmericaMiddle EastAustraliaAfrica
GD
P G
RO
WT
H R
AT
E (
%)
Source: CIA World FactbookWorld Bank, Doing Business
The Economist: World in Figures 2002
Recent empirical estimates suggest
that… Doubling bank credit to the private sector as a
percent of GDP in emerging markets could
increase annual GDP growth by almost 3 percent.
Doubling the trading volume of the stock market in
an emerging market could increase annual GDP
growth by almost 2 percent.
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