The Rule of Law and Business Expanding the Global Business Rule of Law Dashboard Dr David Torstensson Pugatch Consilium AACCLA’s Outlook on the Americas Conference 2015 February Los Angeles, CA

2 Outline Project background – what is the rule of law and why is it important to business? Building the Global Business Rule of Law Dashboard – overview and methodology Dashboard results Zoom-in on the Americas Conclusions and next steps

3 Project background

4 Why measure the Rule of Law? “The rule of law is better than that of any individual.“ - Aristotle Growing importance of Rule of Law (RoL) to business community 2010 US Chamber Coalition for the Rule of Law in Global Markets Measuring RoL provides stakeholders and policymakers a greater and deeper understanding of RoL environment – evidence-based decision-making A number of international indices and surveys measure rule of law:  World Justice Project: Rule of Law Index  World Economic Forum: The Global Competitiveness Report  Heritage Foundation: Index of Economic Freedom But what about RoL issues relating to business and the business community?

5 Project Overview and Basic Rationale Pugatch Consilium asked by U.S. Chamber in 2013 to map existing surveys and indices of RoL and build a Global Business Rule of Law Dashboard The goal was threefold:  Identify what RoL and business indicators are currently being measured  Establish what the gaps are  Develop a Dashboard of indicators comparing countries and regions Dashboard seeks to incorporate all existing relevant RoL indicators relating to the business community into one single overall meta-measure We have mapped a total of 12 indices and surveys – Indicators from 7 indices/surveys extracted and included in Dashboard First Dashboard built in 2013 – covered 10 countries in Americas Second Dashboard finalized 2015 – covers 60 countries from across the world

6 Methodology

7 Measuring the RoL for Business RoL definitions vary in scope and focus “Thick” versus “thin” conceptions – no internationally accepted RoL definition as pertains to business U.S. Chamber has put forth 5 factors defining the RoL – mapping and extraction of indicators has been based on these definitions 1.Transparency. Laws and regulations applied to business must be readily accessible and easily understood. 2.Predictability. Laws and regulations must be applied in a logical and consistent manner regardless of time, place, or parties concerned. 3.Stability. The state’s rationale for the regulation of business—for example, promotion of negotiation and implementation of trade agreements and other vehicles that strengthen rule of law, sanctity of contracts, and compliance with international law—must be consistent and coherent over time, establishing an institutional consistency across administrations, and free from arbitrary or retrospective amendment. 4.Accountability. Investors must be confident that the laws will be upheld and applied equally to government as well as the private sector and civil society: for example, anti-bribery and corruption issues. 5.Due Process. When disputes inevitably arise, they must be resolved not by ad hoc arrangements or special interventions, but in a fair, transparent, and predetermined process.

8 Indices/Surveys Sampled and Mapped 12 indices/surveys included in initial sample World Economic Forum: The Global Competitiveness Report The World Justice Project: Rule of Law Index 2014 Transparency International: Global Corruption Barometer 2013 Transparency International: Bribe Payers Index Transparency International: Corruption Perceptions Index Transparency International: Putting Corruption Out of Business Survey Freedom House: Freedom in the World Heritage Foundation: Index of Economic Freedom 2014 Global Integrity: Global Integrity Index World Bank: Worldwide Governance Indicators The World Bank and the International Finance Corporation: Doing Business 2015 Millennium Challenge Corporation: Selection Criteria and Methodology Due to methodological challenges out of the above 12 indices and surveys 7 were used for the Dashboard

9 Mapping, Extracting and Combining Indicators: a 3 Step Process Mapping What is the purpose of the index or survey? What does it measure? How does it measure it – what is the methodology used? Scoring system – are scores/indicators weighed? If so how? What is the country coverage? Extracting Identify RoL indicators Identify the relevant RoL business indicators Extract indicators from index/survey with any internal weighting system intact Combining Prior to combination all scores from existing indices/surveys must be standardized into a percentage Group indicators from separate indices/surveys together into 1 metric/overall measure

10 Expanding the Dashboard to 60 countries First Dashboard limited to 1 region and 10 countries Phase II has expanded Dashboard to 60 countries in total with 4 new regions AsiaAmericasEuropeAfricaMiddle East AustraliaArgentinaBelgiumGhanaEgypt BangladeshBoliviaFranceIvory CoastIran ChinaBrazilGermanyKenyaIsrael IndiaCanadaGreeceMozambiqueJordan IndonesiaChileHungarySouth AfricaQatar JapanColombiaItalySaudi Arabia MalaysiaCosta RicaSlovakiaSyria Myanmar/BurmaDom. Rep.SpainTurkey New ZealandEcuadorUAE PakistanEl Salvador PhilippinesGuatemala RussiaHaiti S KoreaHonduras SingaporeJamaica ThailandMexico VietnamNicaragua Panama Paraguay Peru U.S. Uruguay Venezuela

11 Overall Results

12 No. rule of law business indicators, % of available indicators

13 Overall Dashboard Results – Initial Impressions Countries in top-10 as expected – all developed high income countries  NZ, Singapore, Australia, Germany and Canada are top-5 – US outside at 6 th  Quite a steep 20% drop from top (NZ and Singapore) to countries outside top-10 Bottom 10 as expected, headlined by:  Haiti and Myanmar at the bottom with 19-22%  Venezuela, Paraguay and Syria clumped together just after at 30-33%  Honduras, Ivory Coast, Ecuador, Iran, Bangladesh and Mozambique next group – separated by less than 1.5% between % A few surprises  Qatar at 10  Dom Rep 47 th worst environment – 38% in total  South Africa strongest environment of BRICS – 20th best environment (China 27th, India 29th, Brazil 33rd, Russia 43rd)

14 Overall results, top-30 countries, % available score Success story: Chile and Uruguay ranked in top 15 – ahead of Spain and Italy

15 Overall results, lower-30 countries, % available score Challenges abound: Venezuela, Paraguay and Haiti in bottom.

16 Individual Measure Results – Some Impressions By and large extraction results for each individual measure echoes broader results – still, some important differences GCB and GII somewhat of outlier indices/measures – developed OECD countries tend to do worse here than on the other measures:  GCB:  China has 8 th lowest corruption rate in the sample  US (19 th ), France (14 th ), Japan (23 rd ) all outside top-10  Mexico, Indonesia and Russia (85-86%) highest perception of business related corruption in sample  GII:  Top-10 dominated by emerging/developing countries: SA, Turkey, Argentina, China, Bangladesh, Colombia, Peru and Ghana  US and Germany only developed countries in top-10 – Canada in bottom half!  Quirky results consequence of GII methodology - heavy focus on legislative/de jure RoL environment as opposed to enforcement/application of laws and regulations GCR, Doing Business, WGI and Index of Economic Freedom broadly similar in country placement

17 Zoom-in: The Americas

18 Headline Results Country sample for Americas increased significantly – from 10 to 22 Top quartet of Canada, US, Chile and Uruguay far ahead of rest – Only 6 countries out of 22 get a score of over 50% Haiti, Venezuela and Paraguay score the lowest in sample Particular challenges include:  Corruption: high levels of perceived corruption across number of underlying measures (e.g. GCB, GCR, and Index of Econ Freedom) for many countries  Property rights: Challenging environment for sanctity and protection of property rights e.g. Venezuela, Argentina, Nicaragua, Paraguay etc. Some bright spots:  Colombia’s business environment, protection of minority investors strong across many underlying measures  Chile and Uruguay in top 15 of Overall results for all countries – ahead of Israel, Spain and Italy

19 Overall Results, The Americas, % available score Most countries under 50%

20 Conclusions and Next Steps

21 Conclusions Dashboard is a new, innovative empirical tool – measure a critical policy area for socio-economic development and growth Clear that Dashboard fills a void in the existing research Amount of data from Dashboard opens up wealth of follow-on research:  Policy deep-dive: Dashboard can be used as springboard for detailed policy analysis on a regional or country by country level  Economic impact analysis: Modelling of economic impact of RoL and business environment – e.g. how does the RoL and business environment in a country correlate with levels of Foreign Direct Investment? But there is a need to complement existing work – Dashboard reveals gaps relating to practical on-the-ground rule of law needs of business

22 What’s missing? Next Steps for Further Research U.S. Chamber has identified seven critical areas of rule of law and business 1.Corruption and bribery, specifically as they apply to government procurement and other business activities 2.Regulatory and policy trade barriers, such as the adoption of protectionist measures 3.Existence and enforcement of real property and intellectual property protection laws 4.Adherence to trade, investment, and tax treaties or agreements 5.Resolution of business disputes and outcomes 6.Transparent government policymaking 7.Adherence to litigation and international arbitration rulings regarding sanctity of contracts and agreements and the expropriation of land, facilities, or businesses Current measures only cover parts of above categories – No index or survey mapped includes indicators directly relevant to areas 4 and 7 Similarly, areas 2, 5 and 6 are only partially covered – less than half of indices and surveys mapped include indicators relating to these areas Inclusion of new and more detailed of rule of law business indicators in existing measures would strengthen overall body of research

23 Take Home Messages There is a real need to measure and understand the RoL as it relates to business: ‘Good business demands good governance’ Dashboard fills a role and void in the existing research and opens up wealth of follow-on uses: e.g. policy deep-dive, economic impact analysis, surveys etc. Key gap that of specific rule of law and business indicators Developing new and more detailed rule of law business indicators in existing measures is an inclusive process We welcome feedback from all stakeholders on what more work and specific indicators are needed

24 Thank you!