For the first time since the rankings began, the United Kingdom tops this year′s Milken Institute Capital Access Index. The index measures which nations have the best markets for entrepreneurs.
The U.K., which was third on last year′s index, rose to the number-one ranking thanks to its growing and vibrant equity market. Hong Kong, last year′s number one, dropped to second this year, followed by Singapore and the United States.
Several countries moved up considerably in this year′s index, including Argentina (up 10 positions, from 76th to 66th), Mexico (eight positions, from 51st to 43rd) and Bulgaria (up eight, from 61st to 53rd). Others dropped significantly, including the Philippines (nine positions, from 49th to 58th), Brazil (seven positions, from 33rd to 40th) and Thailand (six places, from 24th to 30th).
Reasons for the changes vary. The U.S. moved up four positions this year thanks to its improved economic environment, particularly with interest rates more stable in 2004 than in 2003. Thailand′s position fell in large part because of a higher inflation rate caused by its heavy dependence of imported oil.
Started in 1998, the Capital Access Index is a comprehensive analysis of the breadth, depth and vitality of capital markets around the world. It is based on the simple premise, but complex measurements, showing that efficient financial markets — making capital accessible to the entrepreneurs who can use it to grow and sustain companies and generate jobs — are the key for long-term growth and reducing poverty and income polarization.
"As the Index makes clear, the top-ranked countries all have open, efficient capital markets, well-functioning financial institutions, and few impediments to the competitive trading of goods and services," said Glenn Yago, Director of Capital Studies. "Those countries that lack these elements harm the ability of entrepreneurs to build and grow their companies, which puts the brakes on job creation and economic growth."
The Top 10 markets (with 2004 ranking):
1. United Kingdom (3)
2. Hong Kong (1)
3. Singapore (2)
4. United States (6)
5. Sweden (4)
6. Denmark (9)
7. Australia (7)
8. Norway (13)
9. Finland (5)
10. (tie) Canada (10)
10. (tie) Ireland (11)
This year′s index expands coverage from 88 to 121 countries representing 92 percent of global GDP, ranking them on more than 50 measurements, from the strength of their banking systems and the diversity and efficiency of financial markets to general economic conditions. [Because new methodology was used, scores were recalculated for 2003 and 2004.] The top score possible is 10, with this year′s median being 4.34.
Other highlights from this year′s report:
- Among the countries in the top half of the index, New Zealand has the largest improvement in score (from 6.60 in 2004 to 7.04 in 2005).
- Malaysia (16th) and Chile (18th), the only two nations in the top 20 that are not developed countries, showed strength in their banking sectors and capital markets.
- Despite having strong equity markets, Asian countries in general continue to lag in bond- market development, which resulted in lower scores than most developed countries.
- Ongoing weaknesses remain in Africa: 17 of the bottom 20 countries on the index are in Africa.
- Four of the top 10 countries on this year′s index are in Scandinavia.
- Europe′s economic powerhouses remained in the upper tier of the index: Germany is 15th, France 20th and Italy 31st.
In addition to the Capital Access Index, each year the Institute focuses its report on one aspect of entrepreneurial finance. This year′s focus is securitization — the process of issuing securities backed by the cash flows from a pool of underlying assets, such as home mortgages.
Securitization has become a pervasive financing mechanism, with total worldwide issuance of $4.7 trillion in 2004. The U.S. and Western Europe accounted for 90 percent of that.
To illustrate the value of securitization, Institute research found that a country issuing securitized financial instruments has a 2.39-point higher capital access score than a country with no such issuance.
"By diversifying risk and increasing liquidity, a broader securitization of home and commercial mortgages, receivables and business loans could substantially increase overall capital access and economic growth," the report states.
View 2005 Capital Access Index report (pdf).
View the rankings (pdf).