Friday, January 9, 2009

The Opacity Factor-A Country's Lack of Transparency Hinders Its Economic Growth

Satyam Computer's 7% plunge in stock price Wenesday, January 7, can teach us some lessons. Satyam, one of India's leading outsourcers, and a company whose stock is easy to buy in the U.S. (as an A.D.R.), it turns out, has been falsifying its financial data for years. Just because a foreign company is a U.S.-listed ADR doesn't guarantee investment safety-U.S regulatory agencies can barely police companies in their own back yard.
We don't have to go all the way to to India -the same thing has been going on in the U.S., with companies like Enron, WorldCom, and Tyco which also "cooked' their books. The lack-of-transparency issue has been ignored at our peril the past decade. Tamar Frankel, a law Professor at Boston University, as well as an author, writes that "The global business culture downplays honesty...People talk a lot about efficiency and innovation, but being very trustworthy and honest is not high on the list."
The Milliken Institute, a capital formation and economic growth think tank, ranks sixty countries of the world by "Opacity Risk," which it defines as a lack of transparency. That risk is guaged by 1) a nation's corruption, 2) its legal systems, 3) its enforcement policies, 4) its accounting and disclosure standards, and 5) its regulatory quality. The lack of transparency is a major impediment to capital formation, and thus economic growth.
It turns out that India is not a very safe counry in which to invest-ranking 40th out of 60 countries. Probably not just coincidentally, two other mega-sized countries, China and Brazil, by comparison, only rank 41st and 42nd respectively.
U.S. citizens can not take much comfort either. The United States, as could almost be predicted from its dramatic stock markets' drop the past year, has plunged from 4th to 13th in transparency ranking in the past decade. Only 13th of 60 countries.
Which countries are the best-at least according to this measuring stick? The five best are: Finland, Hong Kong, Singapore, Sweden, and Australia.
The Milliken Institute's Joel Kurtzman sums it up thus: "I see the [transparency] issue as something that has been ignored over the last decade, and the issue of Satyam is perhaps one of many to come. If you operate in a lax system, you're likely to have more wrongdoing."
Which company will make tomorrow's headlines for lack of transparency? And, the bottom line- isn't this really a matter of ethics? "Who said, "It's the economy stupid?" Ultimately it's not the economy but ethics-or, worse yet, just "old-fashion" sin.

For Further Reading:

Frankel, Tamar, Trust and Honesty: America's Business Culture at the Crossroad.

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