LOS ANGELES — The gap between "have" and "have not" countries widened dramatically last year, creating a dangerous vulnerability for global economic recovery, according to the 2004 Milken Institute Capital Access Index.
Of the 85 countries surveyed by the Index, which measures the openness of capital markets, 33 of the 51 "mature" capital markets improved scores and attracted increased portfolio and direct investment flows. By comparison, only 15 of the 34 "frontier" markets — primarily low-income and developing countries with restricted, non-competitive and less-transparent financial systems — improved their position on the Index. Nineteen of these markets declined.
"The relative improvement in mature markets and the deterioration of frontier markets creates greater geopolitical risk for the engines of growth in the U.S. and Asia," said Glenn Yago, director of the Institute′s capital markets research. "Unless that gap is bridged, the current prospects for global recovery are threatened."
Topping the "mature" markets index were Hong Kong, the Netherlands and the United Kingdom. Finland and Germany moved up the most on the Index. The United States fell three spots from last year, landing at number six, mainly because of corporate governance issues. Canada and South Korea fell the most.
Among "frontier" capital markets, Bahrain, Kuwait, Slovenia and Latvia ranked high and improved. The Ukraine, Romania, Pakistan, Croatia and most of Africa fell further behind.
The Top 10 "mature" markets (with 2003 ranking):
1. Hong Kong (1st)
2. Netherlands (5th)
3. United Kingdom (2nd)
4. Tie - Singapore (4th)
4. Tie — Switzerland (6th)
6. United States (3rd)
7. Australia (9th)
8. Finland (tie — 12th)
9. Germany (tie — 12th)
10. Denmark (9th)
Regionally, most Latin American countries other than Brazil declined significantly from last year because of a combination of weak financial institutions and laws and an increasingly fragile banking system. Argentina, Venezuela, Peru, Nicaragua and Bolivia all continue to suffer from their inability to generate and transform savings into effective investment and attract sufficient new foreign investors.
In Asia, the broadening of access to capital has greatly aided the Asian recovery, the Index shows. All of the countries involved in the "Asian Crisis" of 1997-98 (South Korea, Malaysia, the Philippines, Indonesia and Thailand) have nearly returned to or surpassed their pre-crisis levels of production and profitability. According to the Capital Access Index report, a common policy followed by all these countries was to strengthen their domestic financial markets by developing deep and liquid bond markets to complement existing equity markets and commercial banking.
"This is a case where financial diplomacy worked and countries devastated by financial crisis in the late ′90s learned important lessons about overdependence on short-term credit and currency devaluation," said Yago. "Global growth would improve rapidly if Latin American and Middle Eastern countries would study Asian financial reforms."
Diversifying risk through use of more financial innovations improved in almost all Asian countries, allowing entrepreneurs to access a broader range of capital resources. For example, domestic bond markets continue to grow and have a positive effect in non-crisis Asian countries, particularly in the emerging engines of growth in Asia — China and India, where domestic bond markets grew 22 percent and 13 percent respectively.
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, complexly measured, 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. It ranks 85 countries on more than 50 measurements, from the strength of their banking systems and the diversity and efficiency of financial markets to general economic conditions.
"Prosperity requires wide and deep access to capital markets at home and abroad," said Yago. "With fewer and more restrictive channels of capital flowing to the have-not countries, the prospects for economic development worsened in precisely those regions that need it the most. They must open up their markets if they′re going to turn things around."