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Joel Kurtzman
Chairman, Kurtzman Group
Senior Fellow, Milken Institute
Global Edge:
Using the Opacity Index to Manage the
Risks of Cross-Border Business
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
Austria
Belgium
Czech
Rep.
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Russia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Canada
United States
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Venezuela
Egypt
Israel
Kuwait
Lebanon
Nigeria
Saudi Arabia
China
India
Hong Kong
Indonesia
Japan
Malaysia
South Africa
Australia
Pakistan
Philippines
Singapore
South Korea
Taiwan
Thailand
1.
Large-Scale, Low-Frequency Risk
Large-scale risks (earthquakes, revolutions,
nationalizations) are dramatic and rare but capture
attention.
2.
Small-Scale, High-Frequency Risk
Small-scale risks are everyday occurrences and are the
real bane of business. For business, this is where the real
costs lie.
While all eyes focus on the large but rare risks,
businesses must watch out for the real risks that cost
money and time.
▪
Corruption
▪
Legal systems with limited protections
▪
Economic policies that hinder sustained growth
▪
Accounting and governance standards that make it difficult to see inside
companies
▪
Regulatory systems that fail to protect investors
▪
These five (CLEAR) factors are sand in the gear of commerce. They are the
“everyday risks” of being a global business.
What exactly is opacity?
”Opacity is the opposite of transparency. It is
the lack of clear, accurate, easily discernible,
and widely accepted practices governing the
relationships among businesses, investors, and
governments. Opacity acts as a brake on
commerce, and its presence hampers the
smooth operation of business transactions.”
Joel Kurtzman and Glenn Yago
MIT Sloan Management Review
October 2004
Social scientists might call opacity “negative social
capital.” Social capital includes institutions and
“agreements” that keep a society functioning. It
includes elements as diverse as laws, markets and
educational institutions.
 Since opacity is a form of capital, it can be
measured.
 Since opacity is a form of capital, its transformation
from negative to positive can be noted and
followed.
 Since opacity is a form of capital, its impact on
business and growth can be plainly seen – if leaders
want to look!









Understand the link between opacity and growth
Understand price risk
Measure global portfolio risk and balance
Create country-based strategies
Create new types of portfolios (green, sustainable,
peace etc.)
Comply with pension fund “screens”
Forecast challenges/opportunities
Compute minimum-required rates of return
Category
C
L
E
A
R
Opacity
Index
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
C
L
E
A
R
Opacity
Index
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
C
L
E
A
R
Opacity
Index
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
C
L
E
A
R
Opacity
Index
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
Country
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



2.
Employment Laws Index



3.
Number of filings
Duration
Cost
Flexibility of Hiring Index
Conditions of Employment Index
Flexibility of Firing Index
Aggregate Complexity Index

Average of Procedural
Complexity and Employment
Laws Index
Country/Region
Latin America & Caribbean
Europe & Central Asia
Middle East & North Africa
South Asia
East Asia & Pacific
OECD: High income
Procedural
Complexity
Index
70
57
59
55
55
49
Employment
Laws Index
61
57
48
49
45
45
Aggregate
Complexity
Index
66
57
54
52
50
47
83
62
54
79
48
73
64
65
53
61
57
65
50
50
52
38
56
42
51
44
44
39
49
46
41
29
36
29
70
77
79
50
78
50
59
55
61
51
54
36
51
51
47
55
36
49
38
42
36
37
20
22
25
36
28
34
77
70
67
65
63
62
62
60
57
56
56
51
51
51
50
47
46
46
45
43
40
38
35
34
33
33
32
32
Spain
Mexico
Russia
France
Brazil
Chile
Italy
Poland
Thailand
Germany
Hungary
Czech Republic
India
Korea, South
China
Turkey
South Africa
Ireland
Israel
Sweden
Switzerland
Japan
Singapore
United States
Malaysia
Australia
United Kingdom
Canada
Source: World Bank, Doing Business
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
Type of
Data
No of
Countries
for which
data are
available
Source
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
Raw Data
47
WBDB
Questions (E: Effectiveness of Economic Policy)
Average days of legal procedure from filing to
enforcement
Enforce contracts: cost (% GNI per capita)
Type of
Data
No of
Countries
for which
data are
available
Source
Government stability
Index
48
ICRG
Capital Flows Restriction Index
Index
48
Heritage
Foundation
Government Involvement in Banking and Finance
Index
Index
48
Heritage
Foundation
Regulatory Burden Index
Index
Questions (R: Regulatory Regime)
48
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
Type of
Data
No of
Countries for
which data
are available
Source
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)
Close Business: actual cost (% of estate)
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
45
Country's
regulator
Is public debt distributed by auction?
Binary
45
Country's
regulator
Is there a system of primary dealers?
Binary
45
Country's
regulator
Is there a central clearinghouse for settlements?
Binary
44
Country's
regulator
Is debt held at a central depository?
Binary
34
Country's
regulator
Is there one or more consumer credit rating agency?
Binary
39
WBCRS
Regulation of securities exchanges: transparency,
effectiveness, role of government, industry
intervention (1-7, low is worse)
Index
46
GCR
Questions (R: Regulatory Regime)
Percent Change, Year Ago
5
4
3
2
1
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: International Financial Statistics
% of GDP
4
Surplus
2
0
-2
-4
-6
-8
Deficit
1981
1986
1991
Source: U.S. Department of the Treasury, Bureau of the Public Debt
1996
2001
2006
Max = 10
9.0
8.5
Hong Kong
8.0
7.5
7.0
United Kingdom
U.S.
Mexico
India
China
6.5
6.0
Brazil
5.5
5.0
4.5
4.0
Source: Milken Institute
Russia
70,000
GDP per Capita, US$
60,000
50,000
y = 6,821x - 21,731
R2 = 0.6308
40,000
30,000
20,000
10,000
0
-10,000
0
1
2
Less access
Sources: World Economic Outlook, Milken Institute
3
4
5
6
Capital Access Index
7
8
More access
9
• 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

Brazil: 4.29

UK: -0.44

Czech Rep: 4.56

Sweden: -0.31

Turkey: 4.95

U.S.: 0.00

Mexico: 5.01

Switzerland: 0.40

Saudi Arabia: 5.52

Belgium: 0.42

Russia: 5.64

Germany: 0.86

China: 6.49

Ireland: 1.03

Venezuela: 6.56

Japan: 1.51

Indonesia: 8.54
Size of each bubble represents relative GDP
Vertical (Y) location of the bubble indicates rate of growth
 Horizontal (X) location illustrates increasing procedural
complexity


Opportunity is defined here as a country’s legal
and procedural complexity, relative to its overall
market size and rate of growth
10.0%
China
8.0%
GDP GROWTH RATE (%)
India
Russia
Thailand
6.0%
4.0%
United
States
UK
Korea
Hong Kong
Japan
Canada
0.0%
Saudi Arabia
Kuw ait
Taiw an
Australia
2.0%
UAE
Turkey
Malaysia
Singapore
Denmark
Ireland
Czech Rep
South Africa
Sw eden
Israel
Austria
Norw ay
European
Union
Greece
Poland
Chile
Egypt
Spain
Hungary
Finland
Belgium
Mexico
Italy
France
Sw itzerland
Brazil
Netherlands
Asia
Europe
North
America
Latin
America
Middle East
Australia
Africa
Germany
-2.0%
Source: CIA World Factbook
World Bank, Doing Business
The Economist: World in Figures 2002
Recent empirical estimates suggest that…

Doubling bank credit to the private sector as a percent of GDP
in emerging markets could increase annual GDP growth by
almost 3 percent.

Doubling the trading volume of the stock market in an
emerging market could increase annual GDP growth by almost
2 percent.