Title: Financial Innovations Reduce Volatility Selected Macroeconomic Volatility Before and After FI Period
1Joel Kurtzman Chairman, Kurtzman Group Senior
Fellow, Milken Institute
Global Edge Risk and the world economy
2Global Edge Risk and the World Economy
3Overall, the global economy appears to be holding
up
GDP
Source IMF, Eurostat, The Conference Board
4Financial depth increasing
5All regions show resilience
- LEI Leading Economic Indicators
- Note Shaded areas represent U.S. recessions
- Source The Conference Board
6Capital outflows continue to be strong
7US consumers are wary but optimistic
Unemployment rate Actual Bureau of Labor
Statistics Consumer confidence Conference
Board Monthly survey of consumer confidence self
stated by household
- Sources The Conference Board, TNS NFO, BLS
8Manufactured goods still dominate trade
Source World Trade Organization
9Three continental exportersWestern Europe a
dominant player (US billions)
Source World Trade Organization
10Global exports 1999-2005US trillions
Source World Trade Organization
11Manufactured goods as percent of total exports
Source World Trade Organization
12Asian logistics costlier than Europes
13Logistics and Outsourcing
14Logistical operations
15Growth in logistics
16Capital is plentiful
- There may be a credit crunch,
- but there is no capital crunch
17Large pools of capital seeking opportunities
18Wealth funds contribute to global growth
19Petro dollars will continue to increase
20SWFs Largest and smallest(In Billions)
Source Sovereign Wealth Funds Institute
21SWFs 95 of Middle East Foreign Assets
Sovereign Wealth Funds 96 of Middle East
Countries Foreign Assets
22Growth is strong, orientation is long
23Greatest concentration in Middle East
24Sovereign wealth fund market by country
Source Sovereign Wealth Fund Institute
25Mr. Mrs. Asia
- Asian region integrates globally,
- and prepares for the future
26Mr. Mrs. Asia
After-School Educational Activities
27China is spending big on education
- In China, parents spend an average of 15 on
their childrens education and only 10 on
housing. - 55 of parents in China send their children for
extra lessons in English.
28Spending on early-childhood andpost-secondary
education
Early Childhood Post-Secondary Education Educati
on
U.S. 3,900 14,200 China 6,000 -
10,000 1,200 - 1,500
60
Source Knowledge Universe Education
29The flat world is getting flatter
English texts are now the fastest-growing sector
of education books in China. Xin
GuangweiPublishing in China
61
Source The Financial Times 4/13/05
30Education remains a high priority
After-School Educational Activities
31India leads in educational aspirations
In India
- Extracurricular activities consisted of academic
coaching in 95 of the households. - 43 of parents want their children to get a
Masters degree 29 want them to get a PhD.
32South Korea sees US as a second home
South Korea
- Spend more on education (22) than housing (13)
- 70 of Korean parents expect their children to
work overseas, of which more than half expect
their children to work in the US.
33Long-term trend, a less populous Asia
Fertility Rates
34Mr. Mrs. America
- A few stumbles along
- an otherwise upbeat trail
35Despite problems, US economy remains vibrant
Source International Monetary Fund
36A US recession is not a certainty
Sources Economy.com, Milken Institute, 2005
37US high tech and VC investment remains strong
38Existing home sales are down and falling
Sources National Association of Realtors,
Moodys Economy.com
39New home sales are down and falling
Sources US Census, Moodys Economy.com
40Dont write off securitization -- US home
ownership rates
Sources US Census, Moodys Economy.com
41Subprime and prime mortgages outstanding
Subprime
Prime
Source Mortgage Banker Assocation
42Subprime write offs total 185 billion, in line
with Feds predictions
43Subprime Share of Securitized Purchase Mortgage
Originations
Sources Loan Performance, Credit Suisse
44Subprime loan originations are down
Sources Inside Mortgage Finance Statistic
Annual, Credit Suisse
45Impact of 10 Percent Decline in Housing
Sales Impact over Next Four Quarters
46Current Path Credit Crunch Impact over Next Four
Quarters
47Current Path 100 Oil Impact over Next Four
Quarters
48Current Path Housing, Oil, and Credit Crunch
Impact over Next Four Quarters
49Global Edge global risk
- The opacity index and
- global risk management
50Business risks
51Labor risk
52Supply chain risks
53Risk management
54Most companies manage risks informally
55Management of supply chain risks lags
56No common risk standards
57Opacity Risk A new approach
- Todays hypercompetition changes the old view of
what makes 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/transparency
58Markets and countriesincluded in the Opacity
Index
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
Pakistan Philippines Singapore South Korea
Taiwan Thailand
China India Hong Kong Indonesia Japan Malaysia
Egypt Israel Kuwait Lebanon Nigeria Saudi Arabia
Argentina Brazil Chile Colombia Ecuador Mexico V
enezuela
South Africa
Australia
59Two types of global risks
- Large-Scale, Low-Frequency Risk
- Large-scale risks (earthquakes, revolutions,
nationalizations) are dramatic and rare but
capture attention. - 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.
60The impact of small-scale risks is big
- While all eyes focus on the large but rare risks,
businesses must - watch out for the real risks that cost money and
time. - Corruption
- Legal systems with limited protections
- Economic policies that hinder sustained growth
- Accounting and governance standards that make it
difficult to see inside companies - Regulatory systems that fail to protect investors
- These five (CLEAR) factors are sand in the gear
of commerce. They are the everyday risks of
being a global business. -
61We call these small-scale risks Opacity
- What exactly is opacity?
- Opacity is the opposite of transparency. It is
the lack of clear, accurate, easily discernible,
and widely accepted practices governing the
relationships among businesses, investors, and
governments. Opacity acts as a brake on commerce,
and its presence hampers the smooth operation of
business transactions. - Joel Kurtzman and Glenn Yago
- MIT Sloan Management Review
- October 2004
62The costs of small-scale risks can be measured
- Social scientists might call opacity negative
social capital. Social capital includes
institutions and agreements that keep a society
functioning. It includes elements as diverse as
laws, markets and educational institutions. - Since opacity is a form of capital, it can be
measured. - Since opacity is a form of capital, its
transformation from negative to positive can be
noted and followed. - Since opacity is a form of capital, its impact on
business and growth can be plainly seen if
leaders want to look!
63What can we do with Opacity?
- Understand the link between opacity and growth
- Understand price risk
- Measure global portfolio risk and balance
- Create country-based strategies
- Create new types of portfolios (green,
sustainable, peace etc.) - Comply with pension fund screens
- Forecast challenges/opportunities
- Compute minimum-required rates of return
-
64The Opacity Index scores
65The Opacity Index scores
66The Opacity Index scores
67The Opacity Index scores
68Behaviors have costs
- 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)
69Complexity of legal systems
- Procedural Complexity Index
- Number of filings
- Duration
- Cost
- Employment Laws Index
- Flexibility of Hiring Index
- Conditions of Employment Index
- Flexibility of Firing Index
- Aggregate Complexity Index
- Average of Procedural Complexity and Employment
Laws Index
Source World Bank, Doing Business
70Sources of data (general)
71Sources of data (economic and regulatory)
72Sources of data (economic and regulatory)
73Sources of data (economic and regulatory)
74Sources of data (economic and regulatory)
75U.S. GDP growth
Source International Financial Statistics
76A brief period of U.S. budget surplus
Surplus
Deficit
Source U.S. Department of the Treasury, Bureau
of the Public Debt
77Capital Access Index 2006 Gauging
entrepreneurial access to capital
Source Milken Institute
78Capital Access Index, 2006
Less access
More access
Sources World Economic Outlook, Milken Institute
79Factors affecting financial market development
- Level of institutional development, including law
and regulation (Boyd and Smith, 1996 Gurley and
Shaw, 1955) - Legal origin, shareholder rights and creditor
rights (La Porta et al, 1998) - Laws and regulations (Levine, 2002 World Bank,
2001) - Demographics and human capital (Black, 2002)
80Improved capital access can add billions to
emerging economies
Source Authors Calculation based upon Triphon
Phumiwasana, (2003)
81Representative costs of Opacity expressed in
percent
- 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
82Opportunity map
- 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 countrys legal
and procedural complexity, relative to its
overall market size and rate of growth
- Right side of the chart correlateswith higher
levels of opportunity
GDP GROWTH RATE ()
Source CIA World Factbook World Bank, Doing
Business The Economist World in Figures 2002
INCREASING LEGAL COMPLEXITY
83Forgone finance, forgone growth
- Recent empirical estimates suggest that
- Doubling bank credit to the private sector as a
percent of GDP in emerging markets could increase
annual GDP growth by almost 3 percent. - Doubling the trading volume of the stock market
in an emerging market could increase annual GDP
growth by almost 2 percent.
84Thank you