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UNITED NATIONS ECLAC TRAINING CONFERENCE COMPETITIVENESS AND CORPORATE GOVERNANCE
Anil Kapur Tobago, May 2004
Thomas L. Friedman, The New York Times, dated March 21, 2004 The Software of Democracy “While India has the hardware of democracy-free elections—it lacks a lot of the software – decent, responsive, transparent local government. While China has none of the hardware of democracy, its institutions have been better at building infrastructure and services”.
1
COMPETITIVENESS AND CORPORATE GOVERNANCE OUTLINE OF PRESENTATION COMPETITIVENESS – FACTORS AND RESULTS THE CARIBBEAN ECONOMY – A BROAD ASSESSMENT LINAKAGE OF COMPETITIVENESS AND CORPORATE GOVERNANCE OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE
FACTORS OF COMPETITIVENESS GLOBAL COMPETITIVENESS INDEX Government Efficiency
Business Efficiency
Domestic Economy
Public Finance
Productivity
Basic Infra.
International Trade
Fiscal Policy
Labor Markets
Technological Infra.
International Investment
Institutional Framework
Finance
Scientific Infra.
Employment
Business Legislation
Management Practices
Health & Environment
Prices
Societal Framework
Attitudes and Values
Education
Economic Performance
Infrastructure
2
GROWTH COMPETITIVENESS RANKINGS TOP THIRD
MIDDLE THIRD
Taiwan
5
6
Korea
18
Estonia
BOTTOM THIRD
South Africa 42
34 JAMAICA
67
25
China
44
38 Ghana
71 n/a
22
27
Poland
45
50 ARGENTINA 78 64
Hong Kong 24
22
MEXICO
47
53 VENEZUELA 82 68
CHILE
28
24
EL SAL.
48
60 ECUADOR
Malaysia
29
30
TRINIDAD & TOBAGO 49
86 73
HONDURAS
94 78 95 76
42
Thailand
32
37 COSTA RICA 51 49 PARAGUAY
Hungary
33
29 DOMINICAN HAITI REPUBLIC 62 56
Source: Global Competitiveness Report, 2003-2004
57
2003 Rankings
102 80
2002 Rankings
BUSINESS COMPETITIVENESS RANKINGS TOP THIRD
MIDDLE THIRD
BOTTOM THIRD
Taiwan
16
South Africa
27
EL SAL.
64
Korea
23
COSTA RICA
45
Ghana
63
Estonia
28
China
46
ARGENTINA
69
Hong Kong
19
Poland
47
VENEZUELA
85
CHILE
32
MEXICO
48
ECUADOR
89
Malaysia
26
TRINIDAD & TOBAGO
HONDURAS
95
53 PARAGUAY
97
Thailand
31
JAMAICA
56
Hungary
38
DOMINICAN REPUBLIC
61
Source: Global Competitiveness Report, 2003-2004
HAITI
100
2003 Rankings
3
GDP GROWTH AMONG EMERGING REGIONS Africa Middle East South Asia Europe & C.A. LAC East Asia All Emerg. Econ.
-2
0
2
4
6
2001-2002
8
2003-2005
Source: The World Bank Development Prospects Group
STRUCTURE AND COMPOSITION OF OUTPUT SELECTED CARIBBEAN COUNTRIES -- 2002 Trinidad and Tobago
2
35
6
Jamaica
7
21
Dominican Republic
12
Costa Rica
8
16
17 7
0
63
16
55
22
62
25 Agricluture
56
50 Industry
Manufacturing
75
100 Sevices
4
EXPORT GROWTH – regional markets (2002-2005) 18 16 14 12 10 8 6 4 2 0 -2
2002
2003
2004
2005
-4 WORLD
EMERGING
EAST ASIA
SOUTH ASIA
CENTRAL EUROPE
LAC
Source: World Bank Data and Projections
SELECTED CARIBBEAN COUNTRIES EXPORTS COMPOSITION 1999 EXPORTS PERCENT
Honduras Trinidad and Tobago Costa Rica 0 Agr.- Raw
25 Agr. - Foods
50 Fuels
Ore & Metals
75
100
Manufacturing
5
SELECTED CARIBBEAN COUNTRIES STRUCTURE OF SERVICE EXPORTS -- 2002 100 75 50 25 0 Trinidad & Tobago Transport
Costa Rica Travel
Dominican Republic Fin. & Ins.
Jamaica Info. & Comp.
CAPITAL FLOWS TO EMERGING MARKETS (US$ billions) 150 125 100 75 50 25 0 -25
2000
2001 FDI
2002 Portfolio
2003 Banks
6
CAPITAL INFLOWS BY REGION 2000-2003
US$ Billions
125 100 75 50 25 0 2000 Asia
2001
2002
Europe
LAC
2003
Africa and M.E.
Source: Institute of International Finance
FDI as a % of GDP 19911991-2001
5 4 Top 10 Percent
3 2
All developing countries
1
Top 10 recipients
0 1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: World Bank, Global Development Finance: Country Tables and sources cited therein, various years; World Bank, World Development Indicators, various years; World Bank staff estimates for 2001.
7
THE CARIBBEAN ECONOMY AN OVERALL ASSESSMENT Economic performance in the Caribbean has been modest as compared with other selected emerging economies ⌦
Reforms have been slow without commitment, in many cases uninitiated and results uneven
⌦
Product and Market diversification coupled with actions on competitiveness have been limited
⌦
Issues of governance have not been addressed systematically
THE CARIBBEAN ECONOMY FACTORS IMPACTING COMPETITIVENESS
Selected key factors impacting the region: ⌦
Weak public institutions, unclear rules and policies, and disproportionate complex barriers have collectively permitted poor governance
⌦
Outdated infrastructure, especially in transportation, information and telecom
⌦
Weak educational structure has resulted in inadequate number of skilled workers and a recipient of innovation
8
FACTORS OF COMPETITIVENESS SOME INSTITUTIONAL FACTORS SELECTED FACTORS
TRINIDAD & TOBAGO
JAMAICA
DOMINICAN REPUBLIC
COSTA RICA
CRIME & THEFT
17% -- 1st
23% -- 1st
2% -- 13th
4% -- 9th
INEFFICIENT BUREAUCRACY
17% -- 1st
12% -- 2nd
10% -- 6th
17% -- 1st
CORRUPTION
10% -- 5th
8% -- 4th
7% -- 7th
7% -- 7th
LABOR REGULATIONS
7% -- 8th
2% -- 13th
4% -- 13%
3% -- 8th
Source: World Economic Forum, Executive Opinion Survey, 2003
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS Infrastructure, underpinning the core of the Caribbean industry, is generally uncompetitive ⌦
the transportation system is under invested and highly bureaucratic. The focus has been on hardware and not on facilitation of trade services and efficiency
⌦
communications--though generally “privatized”--are yet to achieve global price, service and technical levels
9
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS
Avg. Days for Custom Clearances South Asia Africa LAC East Asia Developed
0
2
Developed
4 East Asia
6
8
LAC
Africa
10
12
South Asia
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS
Impact of Trade Facilitation Measures 15
10
5
0 OECD Ports
LAC Customs
South Asia Regulations
East Asia Services
Source: Wilson, Mann, and Choi, Trade Facilitation: A Development Perspective in the Asia Pacific Region, Singapore, 2002
10
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS AVG. REV./ YEARS
3 MIN. TELE. COST
PAX MILE
N.Y. TO LONDON
1930 1940 1950 1960 1970 1980 1990
0.68 0.48 0.30 0.24 0.16 0.10 0.11
244.65 188.51 53.20 45.86 31.56 4.80 3.32
2000
0.13
0.30
SOURCE: Richard J. Herring and Robert E. Litan, Financial Regulation in the Global Economy, Brookings Institute, Washington, D.C.
LABOR PRODUCTIVITY INDIAN AUTOMOTIVE INDUSTRY (Index 1992/93=100)
400 300 200 100 0
Productivity 1992-93
Output
Employment 1999-2000
Source: Indian Automobile Industry
11
GOVERNANCE AND COMPETITIVENESS Governance includes: ⌦
⌦
⌦ ⌦
Economy Issues: National competitiveness, wealth creation through markets and not personal gains, development of capital markets and sustainable growth Corporate issues: Increasing firm value, lowering cost of capital, enhancing capital efficiency, protecting shareholder interests Social Issues: Corruption Political Issues: Democracy and Market Economy
Governance awareness is rising worldwide ⌦ ⌦ ⌦
generally, in response to corporate failures increased private sector activity globalization of capital markets
GOVERNANCE IN THE CARIBBEAN
At the first Corporate Governance Forum held in September 2003, the Caribbean Technical Working Group, recommended the following: ⌦ ⌦ ⌦
Development of Codes Training Initiatives and accreditation/certification Public Information
Like many other countries, governance in the Caribbean is being redefined
12
GOVERNANCE CODES BY REGION GOVERNANCE CODES BY REGION (%)
50 Countries have their own governance codes
6
Codes vary in scope and detail but tackle 4 fundamental issues – fairness, accountability, transparency and responsibility
6
10 48 28
Ultimately, codes and laws must support each other
Europe South America North America
Asia-Pacific Africa Middle East
Source: European Corporate Governance Institute
VARYING GOVERNANCE CODES Ind. Directors
Separation of Chair /CEO
Rotation of External Auditors
Frequency of financial reporting
Comply or Explain Req.
Specific Country Issues
BRAZIL
Many
Split
Not Covered
Quarterly
No
Adoption of IAS/US GAAP
SINGAPORE
At least 1/3 of Board
Recommen ded
Not Covered
Quarterly
Yes
Disclosure of pay for family
RUSSIA
At least ¼ of Board
Split Required
Not Covered
Quarterly
No
Managerial Boards
UNITED STATES
Substantial Majority
Acceptable Option
Recommen ded for audit firm
Quarterly
No
FRANCE
At least ½ of Board
None suggested
Regularly, for lead auditor
None suggested
No
Dual statutory auditors
13
CORPORATE GOVERNANCE RATINGS SELECTED ASIAN ECONOMIES
Singapore Hong Kong Malaysia
Rankings
Thailand China Indonesia South Korea Best
0
2
4
6
8
10
Worst
Source: Political and Economic Risk Consultancy
CORPORATE GOVERNANCE INVESTOR RANKINGS IN LAC 100 75 50 25 0 Shareholders Rights
Disclosure
Foreign Investors
Board of Directors Local Investors
14
GOVERNANCE IN THE CARIBBEAN
Varied ownership structures results asymmetries in information, imperfect monitoring and opportunistic behavior – making governance reform more complex Less competitive markets and weaker institutions makes the solutions more difficult
TRADITIONAL ANALYSIS FACTORS OF COMPETITIVENESS STEEL -- US$ COST PER TON OF SLAB 400
$305 $250
C O S T S
300
$190
$225
$180
200
100
0
China
Brazil Fixed
Japan
Variable
Europe Capital
U.S.
Logistics
15
CHANGING COMPETITIVE ANALYSIS A SIMPLISTIC FRAMEWORK Fixed – Productivity and Labor Regulations, not just staff Variable and Logistics – Cost of doing business and quality of infrastructure, not just access
Fixed Varibale and Logistics Capital
Capital – Cost of doing business, regulations, governance, global flows, not just domestic interest rates
OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE Establish an autonomous identity and undertake policy and research within the context of the Caribbean, not submerged in LA C Reform agenda undertaken at a regional level with a strong commitment Policy makers, the private sector and labor need to collaborate closely on policy priorities that foster competitiveness and governance
16
OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE Some priority areas that need to be considered: ⌦
⌦
⌦
⌦
identify key industries, e.g. tourism, agriculture, financial, energy, etc. where distorted policies have thwarted competition undertake a study that would identify new products for export diversification and entry or expansion into service sector activities, a focus on “employment generation” review the regulatory structures, especially labor and competitive policy that have discouraged local and foreign investment review the structure and size of the market for both entry and geographic diversification
17
Anil Kapur Tobago, May 2004
Thomas L. Friedman, The New York Times, dated March 21, 2004 The Software of Democracy “While India has the hardware of democracy-free elections—it lacks a lot of the software – decent, responsive, transparent local government. While China has none of the hardware of democracy, its institutions have been better at building infrastructure and services”.
1
COMPETITIVENESS AND CORPORATE GOVERNANCE OUTLINE OF PRESENTATION COMPETITIVENESS – FACTORS AND RESULTS THE CARIBBEAN ECONOMY – A BROAD ASSESSMENT LINAKAGE OF COMPETITIVENESS AND CORPORATE GOVERNANCE OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE
FACTORS OF COMPETITIVENESS GLOBAL COMPETITIVENESS INDEX Government Efficiency
Business Efficiency
Domestic Economy
Public Finance
Productivity
Basic Infra.
International Trade
Fiscal Policy
Labor Markets
Technological Infra.
International Investment
Institutional Framework
Finance
Scientific Infra.
Employment
Business Legislation
Management Practices
Health & Environment
Prices
Societal Framework
Attitudes and Values
Education
Economic Performance
Infrastructure
2
GROWTH COMPETITIVENESS RANKINGS TOP THIRD
MIDDLE THIRD
Taiwan
5
6
Korea
18
Estonia
BOTTOM THIRD
South Africa 42
34 JAMAICA
67
25
China
44
38 Ghana
71 n/a
22
27
Poland
45
50 ARGENTINA 78 64
Hong Kong 24
22
MEXICO
47
53 VENEZUELA 82 68
CHILE
28
24
EL SAL.
48
60 ECUADOR
Malaysia
29
30
TRINIDAD & TOBAGO 49
86 73
HONDURAS
94 78 95 76
42
Thailand
32
37 COSTA RICA 51 49 PARAGUAY
Hungary
33
29 DOMINICAN HAITI REPUBLIC 62 56
Source: Global Competitiveness Report, 2003-2004
57
2003 Rankings
102 80
2002 Rankings
BUSINESS COMPETITIVENESS RANKINGS TOP THIRD
MIDDLE THIRD
BOTTOM THIRD
Taiwan
16
South Africa
27
EL SAL.
64
Korea
23
COSTA RICA
45
Ghana
63
Estonia
28
China
46
ARGENTINA
69
Hong Kong
19
Poland
47
VENEZUELA
85
CHILE
32
MEXICO
48
ECUADOR
89
Malaysia
26
TRINIDAD & TOBAGO
HONDURAS
95
53 PARAGUAY
97
Thailand
31
JAMAICA
56
Hungary
38
DOMINICAN REPUBLIC
61
Source: Global Competitiveness Report, 2003-2004
HAITI
100
2003 Rankings
3
GDP GROWTH AMONG EMERGING REGIONS Africa Middle East South Asia Europe & C.A. LAC East Asia All Emerg. Econ.
-2
0
2
4
6
2001-2002
8
2003-2005
Source: The World Bank Development Prospects Group
STRUCTURE AND COMPOSITION OF OUTPUT SELECTED CARIBBEAN COUNTRIES -- 2002 Trinidad and Tobago
2
35
6
Jamaica
7
21
Dominican Republic
12
Costa Rica
8
16
17 7
0
63
16
55
22
62
25 Agricluture
56
50 Industry
Manufacturing
75
100 Sevices
4
EXPORT GROWTH – regional markets (2002-2005) 18 16 14 12 10 8 6 4 2 0 -2
2002
2003
2004
2005
-4 WORLD
EMERGING
EAST ASIA
SOUTH ASIA
CENTRAL EUROPE
LAC
Source: World Bank Data and Projections
SELECTED CARIBBEAN COUNTRIES EXPORTS COMPOSITION 1999 EXPORTS PERCENT
Honduras Trinidad and Tobago Costa Rica 0 Agr.- Raw
25 Agr. - Foods
50 Fuels
Ore & Metals
75
100
Manufacturing
5
SELECTED CARIBBEAN COUNTRIES STRUCTURE OF SERVICE EXPORTS -- 2002 100 75 50 25 0 Trinidad & Tobago Transport
Costa Rica Travel
Dominican Republic Fin. & Ins.
Jamaica Info. & Comp.
CAPITAL FLOWS TO EMERGING MARKETS (US$ billions) 150 125 100 75 50 25 0 -25
2000
2001 FDI
2002 Portfolio
2003 Banks
6
CAPITAL INFLOWS BY REGION 2000-2003
US$ Billions
125 100 75 50 25 0 2000 Asia
2001
2002
Europe
LAC
2003
Africa and M.E.
Source: Institute of International Finance
FDI as a % of GDP 19911991-2001
5 4 Top 10 Percent
3 2
All developing countries
1
Top 10 recipients
0 1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: World Bank, Global Development Finance: Country Tables and sources cited therein, various years; World Bank, World Development Indicators, various years; World Bank staff estimates for 2001.
7
THE CARIBBEAN ECONOMY AN OVERALL ASSESSMENT Economic performance in the Caribbean has been modest as compared with other selected emerging economies ⌦
Reforms have been slow without commitment, in many cases uninitiated and results uneven
⌦
Product and Market diversification coupled with actions on competitiveness have been limited
⌦
Issues of governance have not been addressed systematically
THE CARIBBEAN ECONOMY FACTORS IMPACTING COMPETITIVENESS
Selected key factors impacting the region: ⌦
Weak public institutions, unclear rules and policies, and disproportionate complex barriers have collectively permitted poor governance
⌦
Outdated infrastructure, especially in transportation, information and telecom
⌦
Weak educational structure has resulted in inadequate number of skilled workers and a recipient of innovation
8
FACTORS OF COMPETITIVENESS SOME INSTITUTIONAL FACTORS SELECTED FACTORS
TRINIDAD & TOBAGO
JAMAICA
DOMINICAN REPUBLIC
COSTA RICA
CRIME & THEFT
17% -- 1st
23% -- 1st
2% -- 13th
4% -- 9th
INEFFICIENT BUREAUCRACY
17% -- 1st
12% -- 2nd
10% -- 6th
17% -- 1st
CORRUPTION
10% -- 5th
8% -- 4th
7% -- 7th
7% -- 7th
LABOR REGULATIONS
7% -- 8th
2% -- 13th
4% -- 13%
3% -- 8th
Source: World Economic Forum, Executive Opinion Survey, 2003
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS Infrastructure, underpinning the core of the Caribbean industry, is generally uncompetitive ⌦
the transportation system is under invested and highly bureaucratic. The focus has been on hardware and not on facilitation of trade services and efficiency
⌦
communications--though generally “privatized”--are yet to achieve global price, service and technical levels
9
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS
Avg. Days for Custom Clearances South Asia Africa LAC East Asia Developed
0
2
Developed
4 East Asia
6
8
LAC
Africa
10
12
South Asia
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS
Impact of Trade Facilitation Measures 15
10
5
0 OECD Ports
LAC Customs
South Asia Regulations
East Asia Services
Source: Wilson, Mann, and Choi, Trade Facilitation: A Development Perspective in the Asia Pacific Region, Singapore, 2002
10
FACTORS OF COMPETITIVENESS SOME INFRASTRUCTURE FACTORS AVG. REV./ YEARS
3 MIN. TELE. COST
PAX MILE
N.Y. TO LONDON
1930 1940 1950 1960 1970 1980 1990
0.68 0.48 0.30 0.24 0.16 0.10 0.11
244.65 188.51 53.20 45.86 31.56 4.80 3.32
2000
0.13
0.30
SOURCE: Richard J. Herring and Robert E. Litan, Financial Regulation in the Global Economy, Brookings Institute, Washington, D.C.
LABOR PRODUCTIVITY INDIAN AUTOMOTIVE INDUSTRY (Index 1992/93=100)
400 300 200 100 0
Productivity 1992-93
Output
Employment 1999-2000
Source: Indian Automobile Industry
11
GOVERNANCE AND COMPETITIVENESS Governance includes: ⌦
⌦
⌦ ⌦
Economy Issues: National competitiveness, wealth creation through markets and not personal gains, development of capital markets and sustainable growth Corporate issues: Increasing firm value, lowering cost of capital, enhancing capital efficiency, protecting shareholder interests Social Issues: Corruption Political Issues: Democracy and Market Economy
Governance awareness is rising worldwide ⌦ ⌦ ⌦
generally, in response to corporate failures increased private sector activity globalization of capital markets
GOVERNANCE IN THE CARIBBEAN
At the first Corporate Governance Forum held in September 2003, the Caribbean Technical Working Group, recommended the following: ⌦ ⌦ ⌦
Development of Codes Training Initiatives and accreditation/certification Public Information
Like many other countries, governance in the Caribbean is being redefined
12
GOVERNANCE CODES BY REGION GOVERNANCE CODES BY REGION (%)
50 Countries have their own governance codes
6
Codes vary in scope and detail but tackle 4 fundamental issues – fairness, accountability, transparency and responsibility
6
10 48 28
Ultimately, codes and laws must support each other
Europe South America North America
Asia-Pacific Africa Middle East
Source: European Corporate Governance Institute
VARYING GOVERNANCE CODES Ind. Directors
Separation of Chair /CEO
Rotation of External Auditors
Frequency of financial reporting
Comply or Explain Req.
Specific Country Issues
BRAZIL
Many
Split
Not Covered
Quarterly
No
Adoption of IAS/US GAAP
SINGAPORE
At least 1/3 of Board
Recommen ded
Not Covered
Quarterly
Yes
Disclosure of pay for family
RUSSIA
At least ¼ of Board
Split Required
Not Covered
Quarterly
No
Managerial Boards
UNITED STATES
Substantial Majority
Acceptable Option
Recommen ded for audit firm
Quarterly
No
FRANCE
At least ½ of Board
None suggested
Regularly, for lead auditor
None suggested
No
Dual statutory auditors
13
CORPORATE GOVERNANCE RATINGS SELECTED ASIAN ECONOMIES
Singapore Hong Kong Malaysia
Rankings
Thailand China Indonesia South Korea Best
0
2
4
6
8
10
Worst
Source: Political and Economic Risk Consultancy
CORPORATE GOVERNANCE INVESTOR RANKINGS IN LAC 100 75 50 25 0 Shareholders Rights
Disclosure
Foreign Investors
Board of Directors Local Investors
14
GOVERNANCE IN THE CARIBBEAN
Varied ownership structures results asymmetries in information, imperfect monitoring and opportunistic behavior – making governance reform more complex Less competitive markets and weaker institutions makes the solutions more difficult
TRADITIONAL ANALYSIS FACTORS OF COMPETITIVENESS STEEL -- US$ COST PER TON OF SLAB 400
$305 $250
C O S T S
300
$190
$225
$180
200
100
0
China
Brazil Fixed
Japan
Variable
Europe Capital
U.S.
Logistics
15
CHANGING COMPETITIVE ANALYSIS A SIMPLISTIC FRAMEWORK Fixed – Productivity and Labor Regulations, not just staff Variable and Logistics – Cost of doing business and quality of infrastructure, not just access
Fixed Varibale and Logistics Capital
Capital – Cost of doing business, regulations, governance, global flows, not just domestic interest rates
OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE Establish an autonomous identity and undertake policy and research within the context of the Caribbean, not submerged in LA C Reform agenda undertaken at a regional level with a strong commitment Policy makers, the private sector and labor need to collaborate closely on policy priorities that foster competitiveness and governance
16
OBSERVATIONS ON IMPROVING COMPETITIVENESS AND GOVERNANCE Some priority areas that need to be considered: ⌦
⌦
⌦
⌦
identify key industries, e.g. tourism, agriculture, financial, energy, etc. where distorted policies have thwarted competition undertake a study that would identify new products for export diversification and entry or expansion into service sector activities, a focus on “employment generation” review the regulatory structures, especially labor and competitive policy that have discouraged local and foreign investment review the structure and size of the market for both entry and geographic diversification
17
