Thoughts from a Renaissance man Economics & Strategy 31 March 2015 Charles Robertson +44 (207) 367-8235 [email protected] Mobile +44 7747 118 756 @RenCapMan Thoughts from a Renaissance man Are you constrained by the law? Legal reform seems to us to be the hardest reform of all. Until now, we don’t think there has been a way to ‘price’ a legal system. The more expensive equity markets tend to be in countries with poor legal systems We have covered democratisation, business reforms and education in our previous thematic work. Prompted by meetings in Cairo, Athens and Washington DC, and after reading why some women may favour sharia law in Pakistan, we felt impelled to focus on legal systems. We suspect that no one has done this before, because what we found is that equity investors are currently paying higher prices for emerging market (EM) and frontier market (FM) countries with relatively worse legal systems, such as India, Bangladesh or Mexico. We also discovered that while legal systems generally don’t tend to change a great deal – World Bank data show that EM legal systems are changing more than most. Renaissance Capital’s legal scoreboard We have a created a legal scoreboard for around 75 countries, with South Korea scoring the best in EM followed closely by Estonia in FM. Once we adjusted for per capita GDP, Poland was the biggest EM outperformer, followed by South Africa (SA) and South Korea. We find that EU soft power is very effective in providing legal systems that are better than wealth alone can provide. At the bottom of the EM pile is India, with Bangladesh taking the worst spot in FM. When we adjusted for per capita GDP, the big underperformance is among oil exporters, along with former Ottoman countries such as Greece, Turkey, Egypt and Lebanon (some suggest this is connected to French legal influences, but Tunisia and Ivory Coast outperform). Beyond frontier success stories include Botswana and Georgia, which also outperform vs per capita GDP, with Zimbabwe and Myanmar having very poor scores and underperformance. Among the big three EEMEA markets, SA comes out considerably better than Turkey or Russia. You can trade ‘the law’ If you believe institutions will deliver better returns, there are easy trades to be done. At similar P/E ratios, we think you can ‘buy’ far better legal systems by investing in Poland or the Czech Republic while selling Peru, the United Arab Emirates (UAE) or Colombia. Other such trades would include buying Hungary and selling China, or in frontier buying Tunisia and selling Bangladesh. Or where legal systems are similar, but P/E ratios are vastly different, this suggests to us selling Bangladesh and buying Pakistan at half the price. According to our analysis, China is half the price of Mexico (Russia is even cheaper and has a similar legal score too, but it may be a stretch too far for some). In MENA, we think buy Jordan and sell Morocco. In Sub-Sahara Africa (SSA), unadjusted figures say we should buy Nigeria and sell Kenya, but once we adjust for Nigeria’s rebased per capita GDP, that is hard to justify, unless you suspect Nigeria’s per capita GDP is overstated. Some of these recommendations will change in 2015 given lower per capita GDP in commodity exporters. But don’t expect the law to change We were surprised to discover that only a quarter of the countries we studied have improved the speed of key legal processes at all in the past 10 years. We also found research showing countries where presidents have legal immunity tend to have worse legal environments and more corruption. The implication is that SA should have a better legal score than Russia or Turkey, which is indeed the case in our legal score. Figure 1: Renaissance Capital's legal scores for a sample of countries Poland Romania SA Georgia Greece Brazil 81 68 67 60 56 52 China 46 Russia 45 Turkey 42 Pakistan 21 Egypt 21 Kenya 19 Nigeria 17 India 16 Source: EODB, World Justice Project, Renaissance Capital © 2015 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04). Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer. Renaissance Capital 31 March 2015 Thoughts from a Renaissance man During his travels to London in 1698 Peter the Great encountered some English barristers wearing their wigs and gowns. “Who are those men?” Peter inquired of his escort. “Lawyers,” was the reply. “Lawyers!” exclaimed Peter, “What is the use of so many? I 1 have only two in my whole empire and I mean to hang one of them as soon as I return”. 0F Post-Yukos, Bill Browder might argue that Russia’s legal system has not progressed very far in the past 300 years. Certainly, the UK’s current account exports benefit from the legal services offered to Russian companies and individuals that choose to fight their cases in London. Yet Russia ranks 14th in the world for how easy it is to enforce contracts in Russia, according to the latest Ease of Doing Business (EODB) report from the World Bank. And at a roundtable at one of our Moscow conferences, two foreign companies explained how they had successfully sued in Russian courts and won (only one of them needed the intervention of their head of state). Last summer in Athens, an economist told me that the really big reform Greece needed was legal reform. He said a large Greek company had hired one of Greece’s top legal officials, with the single task to make sure that it paid its taxes according to the law. After signing his employment contract, the lawyer gave an embarrassed smile, and admitted the task was impossible. With 2mn pages of the Greek commercial code built up since 1920, the law is now so contradictory that a company is more likely than not to get something wrong. So bureaucrats can force a bribe from a Greek company – by threatening to embroil it in a tax dispute, which at best would take years and at worst would see large fines levied against it. It ends up being easier to pay a EUR10,000 bribe to the corrupt official, and the consequence is a government that struggles to collect tax revenues and ends up relying on EU loans. In Cairo last autumn, I was told that one of Egypt’s biggest weaknesses is its “medieval” courts and a commercial code with many of the problems mentioned in Greece. In researching this piece, we discovered that both Greece and Egypt imported their legal systems from a French model, somewhat modified by Byzantine law, within a generation of each other in the early 19th century. And for all our bullishness on Egypt, in our piece Egypt: After the ‘what?’, now we address the ‘why?’, we did note that even under Mubarak’s reforms of the mid-2000s, the one area in which no progress was made was legal system reform. It is a flaw that President Abdul Fattah el-Sisi began to address when he approved new legislation ahead of the investor conference in March 2015. Also, nearly as an aside, it has been interesting for us to read how sharia law is perceived more favourably by some women, relatively speaking (and we’re all used to ‘relatively’ in EM and FM). According to journalist Anatol Lieven, Pakistan’s judicial system is so flawed that local traditional law, pashtunwali, often governs disputes. When Lieven asked students at Peshawar University in 2007 to “state a preference between the Sharia and the pashtunwali, twelve chose the pashtunwali and fourteen the Sharia, with the rest not voting. The striking thing was that most of the men chose the pashtunwali and all the girls chose the Sharia. They did not state their reasons, but they seem obvious enough. Restrictive though they appear to Westerners, the provisions of the Sharia prescribe the most savage provisions of the pashtunwali as far as women are concerned – like the odious practice of giving girls as part of the settlement of feuds between families – just as the Koran was intended to reform the savage tribal traditions of seventh-century Arabia. The Sharia also guarantees a share of inheritance to girls, while the pashtunwali gives it 2 only to boys; and furthermore it guarantees rights to wives in the case of divorce.” Sharia law is not just relevant to Pakistan, of course. That General Muhammadu Buhari once suggested sharia law could be imposed across Nigeria has become an election issue. 1F 1 http://www.cambridge.org/gb/academic/subjects/politics-international-relations/russian-and-easteuropean-government-politics-and-policy/reforming-russian-legal-system 2 Pakistan: A hard country, by Anatol Lieven 2 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Curiously, sharia courts were used in imperial Russia, and were recommended by the British rulers in Pakistan itself. Obviously all this legal stuff is important, so we try to look at a few issues below. How good is a country’s legal system and is that partly reflected in equity prices? Is it improving or worsening? Does the judiciary act as a constraint on corruption, and if not, why? And most fundamentally, are good institutions a precondition for economic success or a consequence of it? How good is the legal system? The trigger for this piece was the discovery of a new database, created by the World Justice Project (WJP), which in its 2014 report gives cross-country comparisons using 45 questions given to 100,000 people in 99 countries. It offers a different view to the only existing cross-country comparison we know of, which is the World Bank’s EODB surveys. The WJP looks at eight broad areas: constraints on government powers, the absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, and criminal justice. It does not directly look at political questions such as property rights, or foreign exchange issues such as capital controls. Within each component, a sub-component of three to eight data points range from ’government officials in the legislative branch do not use public office for private gain’ to ’crime is effectively controlled’. So to take those two examples, we can see that on a scale of 0-1, Nigeria’s parliamentarians have a score of 0.09, while Botswana manages 0.74, and controlling crime ranges from Nigeria’s 0.34 to 0.99 in Georgia. Nigeria is not alone in having a few challenges to confront. Figure 2: Questions 2.4 and 5.1 of the World Justice Project – answers for some emerging, frontier and beyond frontier countries 2.4 Government officials in the legislative branch do not use public office for private gain 5.1 Crime is effectively controlled 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Nigeria Ukraine Kenya Mongolia Pakistan Zimbabwe Colombia Peru India Indonesia Brazil Lebanon Uganda Bangladesh Romania Bulgaria Argentina Greece Jordan Serbia Czech Republic Ghana Mexico Cote d'Ivoire Russia SA Tanzania Sri Lanka Morocco Thailand Turkey Zambia Kazakhstan Egypt Poland Iran Croatia Tunisia Philippines Myanmar Hungary China Cambodia Slovenia Ethiopia Chile Vietnam Estonia Malaysia Sth Korea Georgia Botswana UAE 0.0 Source: World Justice Project The overall scores are in the chart below, and we focus on about 75 countries that are MSCIDM, EM, FM or what we call beyond frontier (BF) markets. There are a few unfortunate omissions: three in DM (Ireland, Israel, Switzerland), two in EM (Taiwan and Qatar), five in FM (Bahrain, Kuwait, Oman, Mauritius, Lithuania), and three in BF (Saudi Arabia, Rwanda and Iraq). 3 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 3: Total score in the World Justice Project 2014 report DM Overall Score EM FM BF 0.9 0.8 0.7 0.6 0.5 0.4 Denmark Norway Sweden Finland Netherlands New Zealand Austria Australia Germany Singapore Canada Japan UK Korea Estonia HK Belgium France US Chile Poland Czech Rep Spain Botswana Portugal UAE Slovenia Italy Hungary Georgia Greece Romania Malaysia Croatia Ghana Jordan South Africa Tunisia Brazil Bulgaria Jamaica Indonesia Thailand Sri Lanka Lebanon Mongolia Morocco Serbia Argentina Turkey Philippines Colombia Peru Vietnam India Ukraine Tanzania Zambia Kazakhstan Cote d'Ivoire Egypt China Mexico Russia Iran Kenya Ethiopia Myanmar Uganda Cambodia Bangladesh Nigeria Pakistan Zimbabwe Venezuela 0.3 Source: World Justice Project According to the WJP, the best overall legal system in EM is that of Korea, followed in order by Chile, Poland and the Czech Republic. The worst are Egypt, China and Mexico, with Russia in last place. Russia’s score is likely to surprise no one, and Mexico’s score will not surprise Americans. According to our research, there were probably more violent deaths in Mexico in 2014 than in Ukraine. China’s score is more interesting to us. We heard in Washington recently that foreign direct investment into China is now being deterred by corruption cases that are perceived to penalise foreign firms more than local firms. We find it notable that President Sisi in Egypt announced new legislation to protect investors, the night before he opened Egypt’s high-profile investment conference in Sharm el Sheikh. The largest EMEA equity market, SA, ranks roughly mid-way in EM, just marginally behind Brazil, in yet another similarity between these two countries. SA has a score about 10% above Turkey’s. Greece manages to lag all three of the main central European countries, which we find unimpressive given that it joined the EU in 1981, over a generation before central Europe. Within FM, our favourite market of the day Pakistan ranks worst. Within Africa, Tunisia and Morocco rank far higher than SSA; and within SSA, Kenya ranks well above Nigeria. In the BF space, Georgia may not be advancing reform anymore (it may be slipping backwards) but it ranks very well, just behind Italy and ahead of Romania. Iran is interestingly similar to Russia – which is a comparison we made in our Iran: A new hope piece. We believe post-sanctions Iran will be a similarly complex country to Russia since the 1990s. We think the poor scores for Myanmar and Cambodia are a warning to investors that may hope this golden triangle includes Asia’s next tiger or dragon economies. 4 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man How do the WJP rankings compare with those of the World Bank? The scoring of legal systems by the WJP report is different from the World Bank’s EODB report that we analysed extensively in 2012, and in which Russia does so well. Within the latter’s sub-categories, we think two are most relevant for legal comparisons. These are the ‘resolving insolvency’ rank and ‘enforcing contracts’, with sub-components ranging from how many days it takes to achieve either, to the legal costs involved. In the graph below, we compare the WJP score with a combined rank of these two latest EODB scores from the 2015 report. A low EODB combined rank is positive for the country, as is a high WJP score. The best corner according to our metrics is cluttered with DM countries, and the most negative corner is well exemplified by Zimbabwe, Bangladesh and Myanmar. Figure 4: Comparing the World Justice Project 2014 report scoring (lhs) against an average rank (horizontal scale) in two components of the World Bank's Ease of Doing Business Report from 2015 WJP score vs average EODB rank for Resolving insolvency and enforcing contracts 0.9 Denmark Norway Sweden Finland Netherlands Austria New Zealand Australia Germany Singapore UK Canada 0.8 Estonia Japan Korea HK France Belgium 0.7 Portugal Strong legal system R² = 0.6064 US Czech Rep Poland Botswana WJP score Spain Business Friendly 0.6 0.5 0.4 Chile UAE Slovenia Italy Hungary Georgia Greece Romania Malaysia Croatia South Africa Tunisia Brazil Bulgaria Thailand Jamaica Mongolia Serbia Morocco Sri Lanka Argentina Philippines Turkey Peru Colombia Kazakhstan Vietnam Ukraine China Zambia Tanzania Russia Mexico Iran Ethiopia Cote d'Ivoire Uganda Weak legal system Unfriendly to business Ghana Jordan Indonesia India Lebanon Egypt Kenya Myanmar Bangladesh Cambodia Nigeria Pakistan Zimbabwe Venezuela 0.3 0 20 40 60 80 100 120 Average rank in two chapters of WB EODB 2015 report 140 160 180 Source: World Justice Project, World Bank, Renaissance Capital While most countries run along the line, we think there are some interesting exceptions. Russia, China and Mexico have poor scores from the WJP, but good scores for enforcing contracts and resolving insolvency; Thailand fares better than all three. SA beats Turkey handsomely on both scores. Pakistan beats Bangladesh in the EODB table, while Sri Lanka beats both on the WJP score. Poland and the Czech Republic have better legal systems, are more business friendly and have lower wages than Spain or (especially) Greece. 5 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man There is little to choose between Kenya and Nigeria. The business-unfriendly countries with a good WJP score include Ghana, Jordan, Slovenia, Italy and surprisingly to us the UAE (which in other regards does well on the World Bank measure). Renaissance Capital’s legal score We have created a merged legal score that reflects the legal system focus of the WJP and the EODB rankings noted above. We think the EODB rankings fail to account for Yukos-style risks. We think the WJP report is too weighted to civil liberties and that for financial investors, the importance of the legal system working efficiently on business issues matters a great deal. Arguably, we should have stripped out some of the WJP categories – such as absence of corruption (already covered by transparency international), fundamental rights (already covered in our report Frontier and emerging markets: The revolutionary nature of growth, 22 June 2011), to make an even more business-focused scoreboard. We may do this in the future, if our readers deem it to be helpful. Figure 5: Renaissance Capital legal scoreboard, 2015 96 100 90 80 70 60 50 40 95 96 94 94 94 93 95 94 94 93 9392 90 89 85 84 91 89 81 85 84 82 DM EM 71 74 70 68 68 6867 64 61 59 65 62 60 58 FM BF 56 51 50 46 52 51 45 42 42 41 40 47 46 39 37 36 34 44 42 42 41 39 37 37 36 30 20 10 33 26 21 28 17 16 21 19 16 16 12 7 6 Norway Finland Denmark Netherlands Germany Austria Sweden Singapore Australia New Zealand Japan Sth Korea Canada UK Belgium HK US Estonia France Czech Republic Portugal Spain Poland Botswana Chile Hungary Italy Slovenia Romania SA Malaysia Croatia Bulgaria Thailand Georgia Tunisia UAE Greece Brazil Jamaica Mongolia Serbia Mexico Argentina China Russia Philippines Jordan Colombia Turkey Ghana Kazakhstan Morocco Vietnam Peru Tanzania Lebanon Ethiopia Indonesia Sri Lanka Cote d'Ivoire Zambia Ukraine Iran Uganda Pakistan Egypt Kenya Nigeria Cambodia Venezuela India Zimbabwe Myanmar Bangladesh 0 Source: World Justice Project, World Bank, Renaissance Capital The headline scores do not change too much – Korea, central Europe and Chile lead in the EM space. SA, Malaysia and Thailand score well, too. In the FM space, it is notable that all five top scorers are in the EU. China, Russia and Turkey are grouped considerably above Egypt, while India sits in last place – pulled down by the extreme sluggishness of its legal system, which highlights one of the key reforms that we believe India’s PM Narendra Modi must make. FM investors seeking relatively liquid markets need to look at Romania, followed by Argentina. We think they will find relatively little to be excited about in the legal systems of the poorest FM markets in south Asia and SSA. There are a few SSA surprises that stand out to us – Ethiopia, Tanzania and Uganda – which also happen to be some of the fastest growing economies of the past 15 years. 6 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Does the quality of the legal system just reflect per capita GDP? As any regular reader knows, we believe that countries improve in many ways while per capita GDP rises. While there is a stream of academic literature that argues good 3 institutions are a pre-condition for growth (see for example Why Nations Fail ), we controversially side with research that shows the opposite. Higher per capita GDP improves institutions, and in researching this paper, we found a lot of confirmation in the academic literature. We think we have proven this with our own democratisation work and demonstrated it in our work on corruption. Some academic research that is quantitative suggests to us this is true for legal systems, too. It means the priority of overseas development should be to accelerate growth, and that by helping fund economic growth, financial investors may be playing a key role in creating the conditions needed for better institutions. 2F We do not think research is very useful if it merely tells you that countries with low per capita GDP have a poor corruption score, are often less democratic and have a poor legal system. That has been true of every country at some point in its history. What does interest us is how a country scores relative to its per capita GDP peers. Which countries stand out as either having a legal system that is weaker than we would expect, or a legal system that is surprisingly good, given the low per capita GDP in a country? Because maybe we are wrong, and better-than-expected legal systems produce better economic outcomes than worse legal systems. We’d like to be wrong. In the chart below, we take our legal score and compare it with per capita GDP on a log scale. Figure 6: Renaissance Capital legal score vs per capita GDP (log scale) Finland Norway Austria Netherlands Germany Sweden Denmark New Zealand Singapore Australia Japan Sth Korea Canada US HK UK Estonia Belgium Portugal Czech Republic Spain France Poland 1.0 Good legal system 0.9 0.8 Botswana 0.7 SA Rencap legal score The outperformers 0.6 Poor Thailand Georgia Tunisia Mongolia 0.5 0.4 Ethiopia Tanzania Serbia Ukraine Pakistan Kenya India 0.2 Jamaica Slovenia Greece Italy UAE Brazil Philippines China Mexico Argentina Ghana Morocco Russia Vietnam Jordan Colombia Turkey Kazakhstan Cote d'Ivoire Indonesia Peru Zambia Lebanon Sri Lanka Uganda 0.3 Hungary Chile Romania Malaysia Croatia Bulgaria Cambodia Many oil exporters Iran Egypt Nigeria Rich Venezuela Weak legal system Zimbabwe 0.1 Bangladesh Myanmar 0.0 500 5,000 50,000 $ per capita GDP, 2014 current prices Source: IMF, World Justice Project, World Bank, Renaissance Capital 3 by Daron Acemoglu and James Robinson 7 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man From this perspective, the weak legal system scores of Pakistan or Kenya become explicable. It is what we would expect. As these countries get richer, their legal systems should improve as they have for Malaysia or Chile. As we find so often, many of the countries with ‘surprisingly’ weak legal systems are oil exporters, from Russia to Venezuela and, to a lesser extent (as they export less oil per capita), Colombia and Iran. It is worth noting that when we update this with 2015 per capita GDP figures, we expect the oil countries will have probably converged a little towards the average due to currency depreciation since the oil price crash. Currency depreciation in Turkey and Argentina may also cause them to converge towards the norm. China interests us. Its legal system appears to be struggling to keep up with its economic growth. Its legal system should be as good as Greece, to be on the line of best fit, and it greatly lags Botswana. We suspect its legal system will be a factor in what we believe is China’s inevitable democratisation. As the judiciary strengthens, it should limit the powers of the government and the Communist Party itself (see the last section of this report for more detail). The big outperformers are BF countries from Ethiopia to Georgia, and then Poland and SA (in EM). For investors looking for frontier alternatives to existing EM trades, Sri Lanka becomes an easy frontier market proxy for EM Indonesia. Pakistan outperforms India and Bangladesh, being cheaper and with a legal system that is not as relatively poor given per capita GDP differentials. The outperformance of poor EU countries shows up again, from Poland, to Romania, suggesting to us that EU membership does indeed bestow positive underlying benefits to an economy beyond the transfer of EU budget resources. This may still be relevant to Turkey, which continues to negotiate on EU entry and where legislative alignment might help improve its legal system. Figure 7: Renaissance Capital legal score – outperformance and underperformance relative to per capita GDP DM 0.3 0.2 EM FM BF Legal scores better than per capita GDP would imply 0.1 0.0 -0.1 -0.2 -0.3 Legal scores worse than per capita GDP would imply Ethiopia Tanzania Botswana Georgia Ghana Poland SA Sth Korea Estonia Czech Republic Tunisia Uganda Thailand Cote d'Ivoire Portugal Japan Romania Finland Germany Vietnam New Zealand Mongolia Bulgaria Netherlands Austria Hungary Philippines HK UK Chile Singapore Zambia Sweden Canada Denmark Jamaica Belgium Malaysia Spain Australia Morocco US Serbia Croatia France Pakistan Norway Indonesia Sri Lanka Ukraine Cambodia Slovenia Jordan Kenya Zimbabwe China Brazil India Peru Italy Mexico Colombia Bangladesh Myanmar Argentina Greece Turkey Egypt Iran Russia Kazakhstan Nigeria Lebanon UAE Venezuela -0.4 Source: World Justice Project, World Bank, IMF, Renaissance Capital 8 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Oil underperformers include UAE, Russia, Colombia and Mexico, but we also see poorer-than-expected scores from Greece, Turkey and Egypt. There is literature which compares the source of legal systems and attributes its relative success to whether it has English, French of German roots. But while Egypt and Greece may have French legal roots, so (we assume) do Tunisia and Ivory Coast which outperform. For a group of other countries including India, as well as Nigeria, Kenya and Egypt, we find in this comparison that per capita GDP does not justify the weakness in their legal systems. Argentina, Iran and Italy score poorly too. If we add the scores in Figure 7 to the RenCap legal scoreboard, we produce a different ranking which aims to incorporate that per-capita GDP function into our legal score. So oil exporters look relatively worse, from Nigeria to Iran – although both beat Venezuela. South Korea, the Czech Republic and Poland rank best in EM, Estonia (again) ranks best in FM. The criticism of Egypt’s legal system that we heard in Cairo is validated by this score. Figure 8: RenCap legal score, adjusted by per capita GDP 91.2 100 92.3 90.2 89.4 88.3 88.1 87.6 86.8 86.4 90.5 89.7 89.3 88.1 88.0 87.1 86.6 86.085.6 84.7 82.0 85.2 90 84.1 77.7 80 70 60 50 40 DM EM FM BF 73.1 78.6 76.6 71.1 67.1 71.5 70.2 64.0 57.6 66.9 62.4 55.7 57.9 56.7 51.3 52.0 48.1 48.2 41.9 38.9 41.9 39.8 32.7 29.6 28.3 33.4 30.5 29.5 25.6 23.9 21.4 27.2 24.2 22.8 20.1 17.9 20.9 19.3 13.8 17.0 10.0 13.8 10.5 7.8 6.5 3.7 9.4 3.0 6.8 5.7 3.1 1.3 30 20 10 Sth Korea Finland Japan Germany Netherlands Austria New Zealand Denmark Singapore Estonia Sweden Czech Republic Poland Australia Canada UK HK Portugal Belgium Norway Botswana US Spain France SA Georgia Romania Hungary Chile Thailand Tunisia Bulgaria Malaysia Ethiopia Croatia Tanzania Slovenia Mongolia Ghana Italy Jamaica Serbia Philippines Vietnam Cote d'Ivoire Brazil Morocco Uganda Zambia Greece China Jordan Mexico Indonesia Sri Lanka UAE Argentina Ukraine Colombia Peru Russia Turkey Kazakhstan Pakistan Lebanon Kenya Cambodia Iran Zimbabwe India Egypt Nigeria Myanmar Bangladesh Venezuela 0 Source: World Justice Project, World Bank, IMF, Renaissance Capital Is the quality of the legal system in the price? If good institutions matter to investors, then we would expect to see investors reward countries that have better institutions with higher prices for their assets. For equity investors, we believe that a relatively good corruption score and a relatively good legal system score will generally be favoured, while debt investors care much less about either as long as they can sue a defaulting government or corporate in a US or UK court, as we argued in 2012. In the graph below, we show the absolute Renaissance Capital legal system score relative to 12-month forward P/E ratios. Not only does this fail to show that investors pay for legal systems, in fact the trendline tells us that countries have a better P/E ratio if they have a worse legal system. It suggests to us that if Poland and the Czech Republic halved their spending on justice and worsened the system, their stock market could go up 25%. 9 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 9: Renaissance Capital legal score (unadjusted) vs 12-month forward P/E (x) 1.0 Sth Korea Estonia 0.9 0.8 Cheap, good legal score Romania Czech Republic Poland Hungary Slovenia Croatia 0.7 0.6 Greece Brazil Argentina Jordan Kazakhstan Russia 0.5 China 0.3 Pakistan 0.2 0.1 UAE SA Malaysia Bulgaria Thailand Tunisia Mexico Philippines Colombia PeruVietnam Morocco Indonesia Sri Lanka Turkey Lebanon 0.4 Expensive, good legal score Chile Egypt Nigeria Kenya India Expensive, poor legal score Bangladesh Cheap, poor legal score 0.0 2 4 6 8 10 12 14 16 18 20 Source: World Justice Project, Renaissance Capital However, once we adjust for per capita GDP, we see a different picture. It appears that investors do actually pay a little more for countries where the legal systems are better than you would expect for the level of per capita GDP. The implication is that investors do have some faith in the view that better legal systems will create better investment outcomes in the future. Adjusting for per capita GDP partly takes into account the view that lower income countries will grow faster than higher income countries. Figure 10: The relative performance of Renaissance Capital’s legal score - adjusted by per capita GDP - vs the 12-month forward P/E ratio RenCap legal score adjusted by per capita GDP 20 Poland Czech Republic Thailand Sth Korea Estonia 15 Cheap, better than expected adjusted legal score 10 Romania Hungary Vietnam Bulgaria Chile Malaysia 5 Slovenia Jordan -5 China Brazil Indonesia Sri Lanka Peru Argentina Egypt Russia Kazakhstan -20 -25 Nigeria Turkey 2 4 6 India Colombia Greece Mexico Bangladesh Lebanon UAE Cheap, worse than expected adjusted legal score -30 Philippines Kenya -10 -15 Tunisia Expensive, better than expected adjusted legal score Morocco Croatia Pakistan 0 SA Expensive, worse than expected ajusted legal score 8 10 12 12-month forward P/E 14 16 18 20 Source: Bloomberg, World Justice Project, IMF, World Bank, Renaissance Capital Clearly there is huge variation in the price paid for equities. So for the same P/E ratio, we think investors would be better off investing in Hungary than China, get better legal protection in Malaysia than in Indonesia, and get better results in Romania than Nigeria. Alternatively, we can look at the range of P/E ratios in countries with very similar legal systems. Investors today are prepared to pay a great deal for equities in the Philippines, 10 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man which does have a legal system that is better than you would expect, but so does Hungary at half the price. India and Turkey both underperform by relatively similar scores, but Turkey is half the price. The P/E ratio of Bangladesh (admittedly a hard figure to calculate accurately) is more than double that of Pakistan, despite having a worse Renaissance Capital legal score, and even though it underperforms its per capita GDP peers, while Pakistan slightly beats the line of best fit. .Romania and Vietnam both outperform their per capita GDP peers, but Romania is cheaper and has a score that is absolutely better. To make a relative call on the legal systems would therefore suggest, for example, being short Bangladesh/long Pakistan. If a decent legal system is important for delivering growth or equity returns in general, then we expect investors are more likely to be disappointed by the legal environment in Bangladesh than by Pakistan. In the EM world, we think investors may do better to trim India and increase exposure to Egypt. While both legal systems underperform their per capita GDP peers, Egypt’s score is absolutely higher and both countries are promising reform. In the countries that rank mid-way on our legal score, investors might want to consider cutting exposure to Mexico, and buying exposure to China. Before the Crimea/sanctions, Russia would have been another obvious alternative. In frontier, an additional ‘legal system’ trade might include being short Sri Lanka and long Jordan. Among the best legal systems, our graph suggests selling SA to buy Korea or Romania. Now for our caveats First, while we suggest that investors should reward countries with relatively good legal systems, we completely understand that when it comes to getting money back via a local court, investors might prefer the UAE over Vietnam, as its absolute score is better even if its relative score is worse. The absolute score will provide a good indication of whether you might actually win a court case. In addition, we don’t think equity markets fully take institutions into account, because they have not been able to measure them, or because investor horizons may be too short to take the law into account and other equity drivers are far more significant. Our second caveat is that we don’t have a long-term history of WJP scores that would enable us to back-test whether the trade ideas noted above have validity. The only database that helps us compare legal systems over time is the EODB scores that have been collected by the World Bank, which we examine in more detail below. 11 Getting into the details Renaissance Capital 31 March 2015 Thoughts from a Renaissance man We look at how legal systems change over time, via the World Bank Ease of Doing Business studies. Legal systems in EM Within EM, the WJP scores show Chile and Poland are best among the high-income space, in both absolute terms and when taking per capita GDP into account. The Czech Republic and Hungary are also relatively good. The UAE has a decent legal score, but should arguably be quite a lot higher – which is often what we find with oil producers when compared with per capita GDP on our corruption score. Mexico has a poor legal score and Russia scores badly, as does Greece, which does not have the excuse of being an oil exporter. Turkey, China and Colombia (another oil exporter) also fare more poorly than we think they should. Among middle- or low-income countries, SA, Indonesia, the Philippines, Thailand and India all score better than China, despite lower per capita GDP. China’s legal system is not improving quickly enough to match its GDP. Figure 11: WJP legal score vs per capita GDP (current dollars) in 2014 Per capital GDP 0.80 Overall Score 30,000 0.75 Legal score 20,000 0.65 Above the red line is bad, below the red line is good 0.60 15,000 0.55 10,000 0.50 5,000 0.45 Russia Mexico China Egypt India Peru Colombia Philippines Turkey Thailand Indonesia Brazil SA Malaysia Greece Hungary UAE Czech Republic Poland Chile Sth Korea 0.40 Per capita GDP, $ (2014) 25,000 0.70 Source: World Justice Project, IMF The World Justice Report has little history for 99 countries, so to try to examine direction of legal reform, we looked at two data sets from the World Bank. Within ‘resolving insolvency’ and ‘enforcing contracts,’ we looked at a measurable score in each. We looked at how many days it took to enforce a contract in the 2015 report and compared it with the 2005 report (or more recently, if 2005 data were unavailable). We did the same for resolving insolvency. Most striking to us is the lack of legal reform. Among 188 countries, over a period of a decade, 96 showed no change at all. Just 57 shortened the time to enforce a contract, and 35 countries actually saw enforcement take longer. Even among those that did shorten the time to enforce a contract, over half saw just one improvement in up to a decade’s worth of data. Few countries have done multi-year reforms of their legal systems. For resolving insolvency, the reformers are even more limited. Among 168 countries, just 29 showed improvement and four worsened. EM outperforms the global average on legal reform as we measure it here. Perhaps this is because countries such as Russia decided to target improvements on the EODB scale to attract investors. Within 23 EM countries, for enforcing contracts, nine showed no change, 12 improved and just two got worse. The most positive advances were in Poland (315 days quicker than in 2005) and Malaysia (175 days quicker) and Peru. On the negative 12 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man side, in Greece, the time to enforce has risen 93% from 819 days in 2008, to 1,580 days in 2015. It would appear the legal system is overwhelmed by the economic crisis. India scores very poorly on this metric, while Egypt is the next worse in EMEA after Greece. Figure 12: Days to enforce a contract and percentage change in that since 2005 (or later, if 2005 data are not available) Days to enforce a contract % ch in days to enforce a contract 100 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 80 60 40 20 0 -20 Greece India Mumbai Colombia Egypt Philippines Brazil São Paulo Poland Czech Rep South Africa Qatar United Arab Emirates Taiwan, China Chile Indonesia Thailand Peru Malaysia Turkey China Shanghai Mexico City Hungary Russia Moscow Korea -40 Source: World Bank Also striking to us is that Russia is the second-most-efficient jurisdiction in EM on this measure (more on this below), and has been getting marginally faster over the past decade. Turkey comes out well, too, along with Hungary. If we look at resolving insolvency, EM countries again outperform the global average in terms of reform, with nine reformers out of 23, and only Greece (again) getting worse. Malaysia is not just the fastest, but is also making it quicker. In EEMEA, Russia, Hungary and SA all take a reasonably decent (in our view) two years. Egypt made the process 40% quicker in 2012, while Greece has gotten 75% longer, showing deterioration over 2012-2014. India Mumbai Brazil São Paulo Greece 100 80 60 40 20 0 -20 -40 -60 -80 -100 Turkey UAE Chile Peru Poland Qatar Philippines Thailand Egypt Czech Rep South Africa Indonesia Hungary Russia Moscow Taiwan, China Mexico City Colombia China Shanghai Korea Malaysia Figure 13: Resolving insolvency - years (lhs) and percentage change (rhs) since 2005 (or later, if 2005 data are not available) Years % ch 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: World Bank 13 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Legal systems in FM As shown in the following chart, there is a broader range of legal scores in FM than in EM. Kazakhstan (an oil exporter) underperforms, but a range of countries from Vietnam to Kenya, Ukraine, Sri Lanka, Morocco, Jordan and Tunisia have surprisingly effective legal systems given their low per capita GDP. Neither Nigeria’s nor Pakistan’s legal scores are so surprising to us once per capita GDP is taken into account. Figure 14: Legal score (lhs) compared with per capita GDP ($, 2014) in FM (rhs) Per capita GDP 0.80 Score 25,000 0.75 0.70 20,000 Above the line is bad, below the line is good 0.65 0.60 15,000 0.55 0.50 10,000 0.45 0.40 5,000 0.35 Pakistan Nigeria Banglades h Kenya Kazakhsta n Ukraine Vietnam Argentina Serbia Morocco Lebanon Sri Lanka Bulgaria Tunisia Jordan Croatia Slovenia Romania 0 Estonia 0.30 Source: World Justice Project, IMF In the World Bank data, only seven of 24 FM countries have an improving score, with Nigeria (largely in 2006, but also by 10 days in 2014), Mauritius and Serbia leading the way. Note that Nigeria’s legal process is far longer (720 days) in Kano in the north, where we hope the new Emir will make a positive difference. FM countries do not seem to have embraced the competition that others felt when the World Bank started producing these tables. Lithuania has seen the biggest reverse, but as it remains the quickest place to enforce a contract, we don’t think this is important. Sadly, Pakistan has experienced a 10% longer time to enforce a contact, although this remains quicker than its South Asian peers. 1,600 1,400 1,200 1,000 800 600 400 200 Bangladesh - Dhaka Sri Lanka Slovenia Pakistan - Karachi 0 Lebanon Jordan Bahrain Serbia Oman Argentina Croatia Kuwait Tunisia Bulgaria Mauritius Romania Morocco Kenya Nigeria - Lagos Estonia Vietnam Ukraine Kazakhstan Lithuania Figure 15: Resolving insolvency in FM, by days (rhs) and % change (lhs) since 2005 (or later, if 2005 data are not available) 50 Days to enforce a contract % ch in days to enforce a contract 40 30 20 10 0 -10 -20 -30 -40 -50 Source: World Bank 14 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Reform is even rarer in the bankruptcy arena (see below) – with only Serbia and Romania showing improvement over the past decade. Morocco is heading backwards fast. The negative view many investors have of Kuwait might be partly explained by this poor rank (22nd out of 24). Communist Vietnam may not want to make bankruptcy easier, but if it is indeed following China with a 10-to-20-year lag, as we suspect, then cutting the years to resolve a bankruptcy from five towards China’s two is likely in the coming decade. Figure 16: Year to resolve a bankruptcy (rhs), and % chance (lhs) since 2005 (or later, if 2005 data is not available) Years % ch 120 6 100 5 80 4 60 40 3 20 2 0 1 -20 Vietnam Kenya Kuwait Bangladesh - Dhaka Oman Morocco Bulgaria Romania Croatia Lebanon Jordan Estonia Ukraine Pakistan - Karachi Argentina Bahrain Lithuania Slovenia Serbia Nigeria - Lagos Sri Lanka Mauritius Kazakhstan 0 Tunisia -40 Source: World Bank First conclusions So the key message we see here is that most of the world is undertaking no legal reform. (We find this point echoed in constitutional arrangements on political immunity, which we outline below.) EM is doing more than most, outperforming the world, with roughly half the EM markets improving the efficiency of their legal system. Greece’s legal system has been overwhelmed by the economic disaster since 2008. The GEM top pick, India, badly needs to support its reform effort by improving its legal system. China’s growth is outpacing its legal reforms. This may well end up being a factor in what we believe is China’s inevitable democratic transition. Oil exporters tend to have legal systems that are less good than per capita GDP comparisons would suggest. What the above fails to answer is why Russia (for example) has a poor score from the WJP, while it looks so good on the EODB measures. We answer that next, in part by looking at the link between political and legal systems. 15 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Does the judiciary act as a constraint on the executive/judiciary? Does it limit corruption? Below we take the WJP scores and delve a little deeper. We compare EMEA countries with Mexico (because of its similarity to Russia) and India (because everyone is long) and the EM average. Figure 17: World Justice Programme component scores for EM (EMEA, Mexico, India, EM average) EM avg Czech Rep Egypt Greece Hungary India Mexico Poland 0.9 Russia SA Turkey UAE 0.8 0.7 0.6 0.5 0.4 0.3 0.2 Constraints on Government Powers Absence of Corruption Open Government Fundamental Rights Order and Security Regulatory Enforcement Civil Justice Criminal Justice Source: World Justice Project, Chile and South Korea (not shown) as well as Poland and the Czech Republic, score best on the ‘constraints on government powers’ relative to the EM average. Russia scores worst, with Turkey and Egypt also with below-average scores. Russia’s worst score relative to the EM average is on ‘constraints on government powers’, with 0.36 against an EM average of 0.59. Within the sub-components it gets a score of just 0.30 on ‘government powers are effectively limited by the judiciary’. The next worst score in EM is China on 0.40, with Turkey and Egypt next up at 0.44. Contrast that with a 0.60 score for SA on the same sub-component. Russia is also well below the EM average of 0.64 with a score of 0.40 on ‘government powers are effectively limited by the legislature’. Russia has a good score (0.81) on ‘crime is effectively controlled’ similar to China on (0.78) and way above Mexico (0.42). But Russia has a poor score on criminal justice, pulled down by a very low subcomponent score of 0.22 on ‘criminal system is free of improper government influence’. The only sub-component out of 45 where Russia scores strongly above the EM average is ‘civil justice is not subject to unreasonable delays’ – which fits with the World Bank scores above which reward speed of the judicial process. Russia was always like this What’s interesting is that Russia was always like this. Below we source heavily from a panel discussion in New York in 2008 involving legal and history academics focused on research which is available here: forum. Professor Jane Burbank (New York University, History Department) said a few years ago that “justice at the township courts in rural Russia in the early twentieth century was accessible, cheap, fast, and effective. Starting a case meant simply filing a petition with the local authority. There was no charge for this. Cases were heard promptly: the average time from registering a case until the court hearing was eight weeks. In Moscow Province, for example, for the entire period between 1905 and 1914: between 90-94% of all cases registered at the 168 township courts were decided within the same calendar year in which they were registered. 16 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Enforcement was rapid, too. Verdicts were supposed to be fulfilled within six months, but in most cases the rule of courts worked much faster. Accessibility, speed, and effectiveness — these qualities of Russian law in action”. She added “the most common kind of case to come before a township court was a suit, and that meant collecting a debt” but she added that “rule of law, Russian style, still means that the emperor issues laws and is responsible for institutions that make legal decisions. Separation of powers would be a violation of the sovereign's power and responsibility, from this perspective”. Professor Richard Wortman (New York University, Law School) emphasised the difference between countries that have a system of law and the rule of law. He differentiates between a system of law – which all Russian leaders wanted – and the rule of law, where everyone is subject to the law. He noted that, “In Russia there is also a tradition of the ruler standing above ordinary mortals, standing above the state, a superordinate figure inhabiting a sacral realm, a kind of demigod not subject to limitation. My point is that you cannot have a rule of law when the sovereign not only does not accept limitation, but when being without limitation is a sign of his authority. Peter the Great, Catherine the Great, Alexander I, Nicholas I, Alexander II all believed in a legal system. It made Russia like Europe. With Putin it's the same thing: he wants a legal system so that investment will take place”. Professor Katherina Pistor (Columbia University, Law School) is also interesting with regard to the Yukos case. “When you look at the Yukos case, and you trace the case back to the mid 1990s, what is interesting is that the way in which Yukos was acquired by Khordorkovsky or Menatep and his other affiliates — in the infamous loans-for-shares program of the 1990s — in style and process does not differ at all from the way it has been re-nationalized by Putin. In both ways, in both cases, the law has been instrumentalized by those in power. The Yeltsin administration also demonstrated a lot of not ignorance, but contempt for legal constraints on the ends they were trying to achieve. Law was an instrument in trying to push through something; they thought the ends justified the means. The major failure in my view was that there was no attempt to try to build legal constraints that would be valid for anybody and that would have given some kind of hope to build the rule of law in Russia at the time.” The conclusion based on the above is that Russia’s courts may be quick and efficient at dealing with normal commercial cases, but the legal system is constrained by its subordination to the political leaders of the time. Similar was seen in central European legal systems during the 1950s when then were subverted into conducting show trails of political enemies. So might political subordination of the legal system change? PM Dmitry Medvedev has long promised reforms to the judicial system. One research paper we read on this is discouraging and we explain why below. Legal immunity for politicians is a bad thing Only as recently as 2012 did anyone bother to research this in a cross-country comparison. This research only looked at democracies, and the extent to which politicians are immune from the law, while in office and sometimes after leaving office. It showed that, “Immunity provisions are highly persistent over time…in an analysis of American democracies founded before 1900, we find that the average and median ages of immunity regimes to be 148 years and 126 years, respectively. There were only 4 substantial changes to immunity regimes in the Western Hemisphere since 1900”. 17 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man The research noted that, “Latin American countries generally have the highest levels of immunity protection, followed by Southern and Eastern European countries. Many Latin American countries were early adopters of the relatively strong legislative immunity provisions in the French tradition. These countries were further influenced by presidential democracy developed in the United States and adopted that country’s approach to presidential immunity. The combination of both systems resulted in strong immunity regimes throughout South and Central America. By contrast, countries that were influenced by the English parliamentary tradition in general have the weakest levels of immunity protection. Southern and Eastern European countries tend to have more generous immunity provisions than their Northern and Western European neighbours.” It concluded that, “Our empirical investigation demonstrates that immunity provisions are strongly associated with poorer governance; stronger immunity is associated with greater corruption, bribery, and the diversion of public funds after controlling for a number of economic, political, historical, and demographic determinants and correlates of corruption. Our theoretical model illustrates how legally unaccountable politicians may attempt to enhance their chances of re-election through illegal means by supporting interest groups through lax law enforcement, non-collection of taxes, and other forms of favouritism. Interest groups return the favour through favourable propaganda, generous campaign financing, or even outright vote-buying”. So as we showed above – legal systems tend to remain the same. If a presidency has political immunity today, it is likely to have it 100 years from now. If bankruptcy took over 1,000 days 10 years ago, it probably takes over 1,000 days today as well. It is notable that while Turkey’s president has immunity, SA’s does not. It may be no coincidence that SA’s legal system scores highest of the three largest markets in EEMEA in both the WJP and our legal scoreboard. A quick glance at debt markets We argue above that debt investors, at least in the eurobond market, might not care too much about legal systems as they (often) rely on English law to sue defaulting governments, in international courts. However, when we made the comparison of our legal score, unadjusted for per capita GDP, against the five-year credit default spread level on 24 March 2015, there was some broad similarity. This may prove helpful to debt investors or credit rating agencies too. 0 50 100 150 200 250 300 350 400 450 500 Norway Finland Denmark Netherlands Germany Austria Sweden Australia New Zealand Japan Sth Korea UK Belgium US France Czech Republic Portugal Spain Poland Chile Hungary Italy Romania SA Malaysia Croatia Bulgaria Thailand UAE Greece Brazil Mexico China Russia Philippines Colombia Turkey Kazakhstan Vietnam Peru Lebanon Indonesia Ukraine Egypt Venezuela Figure 18: Renaissance Capital (unadjusted) legal score compared with five-year CDS levels on 24 March 2015 _ Rencap Legal Score 5-year CDS 24 March 2015 100 90 80 70 60 50 40 30 20 10 0 Source: Bloomberg, World Justice Project, World Bank, Renaissance Capital 18 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Conclusions It continues to surprise us that so little empirical work has been done on cross-country comparisons across so many spheres. It also surprises us that legal systems tend to change so slowly. We were always told that joining the EU was beneficial for securing democracy and improving the rule of law, and we are now more impressed by claims about the latter given the data we have shown here. While not everyone will agree, the data suggest that if Ukraine were to join the EU, it could make a dramatic difference to that country’s woeful legal system. But Georgia or Botswana demonstrate that even without EU membership, very good legal systems can develop if leaders are determined to push through change. What should investors look for in terms of improving legal systems? The removal of legal protection from political leaders. By removing political immunity, it is possible that the credibility of legal systems will improve. Investors should also watch for rising per capita GDP. This is likely to be associated with improved legal systems. Watch the EODB data, to see evidence of further improvement in legal reform, and future WJP publications. 19 Appendix: Country analysis Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Below we highlight key points relative to EM average scores in the CJP report, with the country name and the score relative to the EM average. Brazil (+1 vs EM average) – scores best on fundamental rights (democracy) such as freedom of expression of beliefs and the right to assembly. It is particularly weak on criminal justice; particularly on sub-component scores on the investigation system and the penal system. Chile (+14) – is strongly above average on constraints on government powers and absence of corruption, and fundamental rights and civil justice. It is particularly democratic and should score well on transparency international scores too. China (-8) – scores badly on constraints on government powers and fundamental rights and also regulatory enforcement, such as expropriation and ‘due process is respected in administrative proceedings’. China’s CJP score should improve when it democratises which we expect to occur anytime within the next decade. Colombia (-4) – scores poorly on order and security and criminal justice, similar to Brazil. Czech Republic (+14) – is strongly above average for all components except open government where it is line with the average. Egypt (-8) – is well below average, except in three sectors where it is modestly below average. The better three are the absence of corruption (it is pulled down on the measure ‘government officials in the police and military do not use public office for private gain’), open government (pulled down by the score on ‘the laws are stable’) and criminal justice (pulled down by ‘due process of law and rights of the accused’). Greece (+6) – is in line with the EM average (but well below the DM average) except for fundamental rights and civil justice where it does well. Hungary (+7) – is pulled up by good scores on absence of corruption, fundamental rights, and order and security. We are a little surprised by the first point. The only weaknesses are in a few sub-components: ‘government powers are effectively limited by the legislature’ or ‘limited by independent auditing and review’ and ‘civil justice is effectively enforced’. It would appear that EU constraints on the Orban government may help explain a strongly positive score on ‘government powers are subject to non-governmental checks’. India (-6) – has particularly poor scores on absence of corruption, order and security (with one of the worst scores in EM on ‘civil conflict is effectively limited’), regulatory enforcement, and civil justice. India outperforms on a few sub-components including ‘freedom of belief and religion’ and interestingly on ‘government powers are effectively limited by the judiciary’. A Supreme Court ruling in March 2015 allowing freedom of speech and overturning a government law may be a case in point. Indonesia (-1) – scores very poorly on the absence of corruption and criminal justice and a few sub-components regarding freedom of religion. Malaysia (+4) – does well on absence of corruption and order and security but does poorly on fundamental rights. The latter should improve when the ruling party loses power. Mexico (-9) – is well below average on absence of corruption, order and security, civil justice and criminal justice. An end to the drug war could make a big difference. 20 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Peru (-5) – like many Latin American countries does poorly on absence of corruption and criminal justice. It also has a below-average civil justice score. Philippines (-3) – is similar to most in EM, except for poor scores on civil justice and criminal justice. It only has one above-average score, ‘people do not resort to violence to redress personal grievances’ – a score similar to that seen in China and Malaysia too. Poland (+14) - well above average on all scores except open government and regulatory enforcement where it is line with the average. Poland is not significantly below average on any sub-component. South Korea (+23) – is above average in every category. Korea is not below average on any sub-component. Russia (-9) – is not South Korea. It is below average on every component. It is relatively weakest on constraints on government powers, and is also significantly below average on absence of corruption, fundamental rights and criminal justice (which includes its weakest sub-component score on ‘criminal system is free of improper government influence’). SA (+2) – is average on every component except order and security and specifically the sub-component ‘crime is effectively controlled’ where it’s score is lower than every EM country except Mexico. It’s most above-average sub-component score is on freedom of religion, one of three such scores in the fundamental rights section. Thailand (-1) – is average like SA, except for a below average civil justice rank, pulled down by ‘civil justice is effectively enforced’ and ‘ADR is accessible, impartial and effective’. Turkey (-3) – scores poorly on constraints on government powers and fundamental rights. It is second only to Russia in how poorly it scores on ‘government powers are effectively limited by the legislature’ and is below average on every constraints on government powers sub-component except for ‘government officials are sanctioned for misconduct’. It does poorly on freedom of opinion and freedom from arbitrary interference. Like Russia, Turkey outperforms on only one sub-component. In Turkey’s case it is ‘ADR is accessible, impartial and effective’. UAE (+12) – gets either average scores or well above average scores. The best categories include absence of corruption, order and security, regulatory enforcement, and criminal justice. We do the same for a few frontier countries below, and compare the country scores with an average of frontier markets only. The scores for the other FM countries, and particularly those that are above average, are in the tables below. Argentina (-3 vs FM average) – scores above average on fundamental rights, but is weak on order and security (only Nigeria and Pakistan get worse, much worse, scores on this). Some of its weakest sub-components involve constraints on government. Bangladesh (-14) – is way below average for everything except open government and regulatory enforcement where it is below average. It’s only positive score is on the subcomponent ‘civil conflict is effectively limited’ – but lots of FM countries do well on this when they are compared to an average which includes Nigeria and Pakistan. Jordan (+3) – scores well above average on absence of corruption, and order and security (despite IS in next door Iraq), Civil Justice and Criminal Justice. It is weakest – but in line with the average overall – on Fundamental Rights. 21 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Kazakhstan (-7) – is a very mixed bag on the sub-components, outperforming on six and underperforming on 14. It only scores well below average on constraints on government powers and open government. Kenya (-11) – is weakest on absence of corruption (the ‘police and military’ get a very low score), fundamental rights (very low on ‘the right to life and security of the person is effectively guaranteed) and criminal justice. Kenya only strongly outperforms on one measure ‘civil conflict is effectively limited’ with this despite the terrorism afflicting the country. Morocco (-3) – is only well below the FM average on fundamental rights. It does nonetheless outperform on ‘the right to petition government’ and ‘transition of power is subject to the law’. We believe Morocco is one of the African countries most likely to democratise in the coming decade – see our book, The Fastest Billion: The Story Behind Africa’s Economic Revolution. Nigeria (-14) – underperforms the average most on order and security, which is no surprise given Boko Haram. It is also well below average on absence of corruption, fundamental rights and criminal justice. It (along with Pakistan) does not significantly outperform the FM average on any sub-component. It is just above average on ‘government powers are effectively limited by the judiciary’. Pakistan (-18) – significantly underperforms the FM average on every measure except constraints on government powers and criminal justice. It is 0.81 below the FM average for the sub-component ‘civil conflict is effectively limited’ (Nigeria is only 0.59 below). Curiously one of the very sub-components that are not below average is the +6 score for ‘government powers are effectively limited by the judiciary’. Sri Lanka (-2) – is average Vietnam (-6) – is only significantly below average on one category constraints on government powers. 22 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 19: Scores for MSCI EM countries in the WJP report Country 2014 $ per capita GDP, current dollars (IMF, RenCap for Pakistan) Overall Score Factor 1: Constraints on Government Powers 1.1 Government powers are effectively limited by the legislature 1.2 Government powers are effectively limited by the judiciary 1.3 Government powers are effectively limited by independent auditing and review 1.4 Government officials are sanctioned for misconduct 1.5 Government powers are subject to non-governmental checks 1.6 Transition of power is subject to the law Factor 2: Absence of Corruption 2.1 Government officials in the executive branch do not use public office for private gain 2.2 Government officials in the judicial branch do not use public office for private gain 2.3 Government officials in the police and the military do not use public office for private gain 2.4 Government officials in the legislative branch do not use public office for private gain Factor 3: Open Government 3.1. The laws are publicized and accessible 3.2 The laws are stable 3.3 Right to petition the government and public participation 3.4 Official information is available on request Factor 4: Fundamental Rights 4.1 Equal treatment and absence of discrimination 4.2 The right to life and security of the person is effectively guaranteed 4.3 Due process of law and rights of the accused 4.4 Freedom of opinion and expression is effectively guaranteed 4.5 Freedom of belief and religion is effectively guaranteed 4.6 Freedom from arbitrary interference with privacy is effectively guaranteed 4.7 Freedom of assembly and association is effectively guaranteed 4.8 Fundamental labour rights are effectively guaranteed Brazil Chile China Colombia 11,067 14,911 7,572 Czech Egypt Greece Hungary India Republic 8,394 18,985 3,337 22,318 Indonesia Malaysia Mexico Peru Philippines Poland 13,154 1,626 3,404 11,062 10,837 6,625 2,913 Sth Russia Korea SA 14,330 28,739 14,317 6,354 Thailand Turkey UAE 5,550 10,518 44,771 0.54 0.68 0.45 0.49 0.67 0.45 0.59 0.61 0.48 0.52 0.58 0.45 0.49 0.50 0.67 0.77 0.45 0.55 0.52 0.50 0.65 0.63 0.76 0.35 0.55 0.72 0.45 0.66 0.61 0.61 0.64 0.55 0.55 0.60 0.59 0.73 0.76 0.36 0.61 0.50 0.46 0.58 0.72 0.77 0.58 0.59 0.78 0.51 0.63 0.52 0.69 0.76 0.70 0.70 0.63 0.72 0.79 0.77 0.40 0.66 0.62 0.47 0.52 0.62 0.65 0.40 0.52 0.65 0.44 0.56 0.61 0.67 0.59 0.58 0.50 0.45 0.60 0.74 0.78 0.30 0.60 0.53 0.44 0.63 0.49 0.79 0.37 0.48 0.70 0.44 0.58 0.40 0.52 0.51 0.52 0.47 0.62 0.56 0.69 0.72 0.35 0.50 0.36 0.42 0.75 0.40 0.65 0.45 0.46 0.59 0.50 0.52 0.58 0.39 0.57 0.56 0.32 0.42 0.47 0.59 0.70 0.35 0.47 0.44 0.47 0.74 0.74 0.76 0.08 0.59 0.76 0.43 0.75 0.72 0.68 0.74 0.37 0.65 0.69 0.66 0.68 0.75 0.38 0.72 0.60 0.40 0.33 0.83 0.50 0.91 0.73 0.23 0.48 0.68 0.43 0.84 0.60 0.39 0.46 0.90 0.56 0.83 0.64 0.74 0.39 0.68 0.36 0.57 0.64 0.68 0.37 0.78 0.36 0.54 0.50 0.89 0.66 0.86 0.79 0.37 0.42 0.71 0.49 0.48 0.51 0.56 0.55 0.50 0.79 0.49 0.76 0.46 0.50 0.58 0.48 0.53 0.61 0.39 0.49 0.59 0.47 0.51 0.52 0.63 0.78 0.44 0.47 0.49 0.54 0.83 0.64 0.75 0.34 0.49 0.71 0.50 0.64 0.69 0.46 0.34 0.66 0.36 0.35 0.41 0.78 0.80 0.41 0.61 0.61 0.62 0.79 0.64 0.86 0.62 0.56 0.80 0.48 0.77 0.78 0.48 0.37 0.69 0.31 0.38 0.58 0.81 0.91 0.50 0.54 0.56 0.65 0.78 0.22 0.55 0.49 0.18 0.32 0.39 0.31 0.48 0.21 0.22 0.64 0.33 0.19 0.47 0.41 0.68 0.35 0.36 0.38 0.39 0.77 0.50 0.46 0.48 0.45 0.59 0.66 0.66 0.65 0.52 0.84 0.48 0.76 0.74 0.60 0.41 0.69 0.48 0.24 0.23 0.31 0.53 0.49 0.42 0.45 0.52 0.57 0.55 0.54 0.52 0.53 0.55 0.46 0.52 0.80 0.77 0.44 0.52 0.43 0.51 0.28 0.39 0.54 0.50 0.39 0.49 0.41 0.73 0.69 0.64 0.50 0.63 0.49 0.48 0.40 0.68 0.58 0.53 0.59 0.50 0.58 0.45 0.54 0.56 0.54 0.60 0.53 0.63 0.38 0.54 0.51 0.48 0.65 0.60 0.46 0.21 0.45 0.70 0.52 0.49 0.61 0.45 0.53 0.55 0.43 0.44 0.32 0.47 0.44 0.53 0.66 0.55 0.45 0.59 0.44 0.44 0.35 0.52 0.56 0.56 0.55 0.53 0.53 0.62 0.72 0.71 0.74 0.85 0.75 0.65 0.71 0.73 0.70 0.43 0.52 0.52 0.28 0.40 0.46 0.59 0.58 0.61 0.60 0.61 0.51 0.62 0.52 0.47 0.58 0.40 0.54 0.35 0.58 0.59 0.42 0.46 0.55 0.35 0.34 0.47 0.58 0.46 0.61 0.66 0.41 0.17 0.49 0.58 0.61 0.83 0.39 0.54 0.92 0.33 0.74 0.83 0.34 0.49 0.42 0.40 0.77 0.32 0.84 0.86 0.45 0.60 0.55 0.56 0.68 0.37 0.61 0.46 0.43 0.78 0.28 0.52 0.49 0.38 0.35 0.50 0.30 0.53 0.38 0.64 0.77 0.37 0.45 0.42 0.50 0.66 0.74 0.77 0.08 0.59 0.76 0.43 0.76 0.73 0.68 0.74 0.38 0.65 0.70 0.66 0.68 0.75 0.39 0.72 0.60 0.40 0.33 0.81 0.83 0.20 0.67 0.80 0.23 0.73 0.62 0.72 0.45 0.23 0.68 0.78 0.64 0.66 0.63 0.54 0.76 0.69 0.51 0.35 0.66 0.84 0.36 0.55 0.87 0.32 0.74 0.73 0.50 0.48 0.45 0.55 0.72 0.39 0.75 0.70 0.38 0.56 0.57 0.30 0.63 0.76 0.80 0.17 0.63 0.82 0.60 0.80 0.75 0.67 0.71 0.34 0.73 0.73 0.68 0.76 0.73 0.44 0.77 0.64 0.44 0.24 0.65 0.61 0.32 0.41 0.68 0.40 0.56 0.70 0.47 0.56 0.55 0.62 0.49 0.49 0.68 0.66 0.55 0.56 0.55 0.45 0.45 Source: World Justice Project, IMF Oct 2014 WEO 23 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 19: Scores for MSCI EM countries in the WJP report (continued) Country Factor 5: Order and Security 5.1 Crime is effectively controlled 5.2 Civil conflict is effectively limited 5.3 People do not resort to violence to redress personal grievances Factor 6: Regulatory Enforcement 6.1 Government regulations are effectively enforced 6.2 Government regulations are applied and enforced without improper influence 6.3 Administrative proceedings are conducted without unreasonable delay 6.4 Due process is respected in administrative proceedings 6.5 The Government does not expropriate without adequate compensation Factor 7: Civil Justice 7.1 People can access and afford civil justice 7.2 Civil justice is free of discrimination 7.3 Civil justice is free of corruption 7.4 Civil justice is free of improper government influence 7.5 Civil justice is not subject to unreasonable delays 7.6. Civil justice is effectively enforced 7.7 ADR is accessible, impartial, and effective Factor 8: Criminal Justice 8.1 Criminal investigation system is effective 8.2 Criminal adjudication system is timely and effective 8.3 Correctional system is effective in reducing criminal behavior 8.4 Criminal system is impartial 8.5 Criminal system is free of corruption 8.6 Criminal system is free of improper government influence 8.7. Due process of law and rights of the accused 0.66 0.58 1.00 0.71 0.81 1.00 0.81 0.78 1.00 0.58 0.51 0.94 Czech Republic 0.82 0.83 1.00 0.41 0.32 0.65 0.31 0.53 0.59 0.68 0.61 0.41 0.46 0.70 0.79 0.29 0.53 Brazil Chile China Colombia Egypt Greece Hungary India Indonesia Malaysia Mexico Peru Philippines Poland Sth Russia SA Thailand Turkey UAE Korea 0.89 0.64 0.60 0.75 0.67 0.89 0.89 0.81 0.48 0.86 0.86 0.96 1.00 0.68 1.00 0.81 0.73 1.00 0.67 0.84 0.92 0.74 0.82 1.00 0.84 0.88 1.00 0.51 0.71 0.51 0.77 0.95 1.00 0.87 0.85 1.00 0.47 0.42 0.75 0.63 0.54 1.00 0.73 0.72 0.88 0.83 0.92 1.00 0.61 0.26 0.40 0.66 0.33 0.35 0.75 0.24 0.35 0.58 0.56 0.78 0.44 0.33 0.57 0.43 0.69 0.50 0.44 0.63 0.68 0.42 0.47 0.54 0.53 0.57 0.72 0.40 0.34 0.52 0.47 0.51 0.49 0.50 0.45 0.46 0.40 0.46 0.46 0.59 0.60 0.74 0.66 0.44 0.55 0.53 0.53 0.46 0.43 0.54 0.57 0.66 0.78 0.54 0.60 0.77 0.46 0.46 0.75 0.38 0.50 0.61 0.50 0.51 0.59 0.62 0.78 0.47 0.58 0.54 0.55 0.88 0.70 0.51 0.33 0.48 0.20 0.50 0.35 0.24 0.51 0.52 0.45 0.35 0.36 0.45 0.84 0.46 0.33 0.38 0.52 0.58 0.53 0.26 0.45 0.54 0.42 0.52 0.53 0.47 0.50 0.57 0.52 0.46 0.44 0.64 0.72 0.37 0.55 0.51 0.43 0.51 0.57 0.76 0.29 0.68 0.66 0.56 0.67 0.51 0.58 0.61 0.37 0.57 0.58 0.47 0.67 0.68 0.37 0.68 0.44 0.61 0.54 0.51 0.53 0.69 0.67 0.60 0.30 0.25 0.52 0.37 0.22 0.32 0.61 0.59 0.65 0.68 0.75 0.44 0.51 0.66 0.57 0.42 0.62 0.41 0.49 0.49 0.33 0.17 0.67 0.33 0.39 0.43 0.46 0.45 0.49 0.53 0.59 0.53 0.55 0.23 0.37 0.66 0.35 0.20 0.35 0.65 0.64 0.78 0.68 0.70 0.34 0.67 0.72 0.67 0.49 0.61 0.39 0.45 0.39 0.56 0.48 0.35 0.13 0.39 0.41 0.41 0.43 0.61 0.62 0.84 0.66 0.59 0.30 0.48 0.81 0.46 0.32 0.45 0.49 0.50 0.46 0.82 0.45 0.40 0.22 0.60 0.53 0.45 0.54 0.39 0.29 0.48 0.48 0.60 0.25 0.21 0.40 0.44 0.43 0.36 0.47 0.51 0.51 0.36 0.58 0.56 0.29 0.45 0.37 0.31 0.46 0.57 0.39 0.61 0.73 0.42 0.64 0.51 0.68 0.53 0.53 0.63 0.39 0.36 0.36 0.39 0.48 0.40 0.30 0.45 0.25 0.15 0.24 0.39 0.40 0.45 0.35 0.47 0.28 0.28 0.52 0.37 0.29 0.21 0.40 0.48 0.42 0.48 0.42 0.25 0.26 0.45 0.36 0.40 0.32 0.62 0.51 0.77 0.79 0.73 0.41 0.47 0.66 0.69 0.69 0.62 0.74 0.52 0.68 0.83 0.67 0.67 0.84 0.93 0.76 0.62 0.82 0.46 0.49 0.52 0.46 0.30 0.54 0.35 0.53 0.36 0.30 0.44 0.53 0.43 0.47 0.61 0.57 0.48 0.53 0.65 0.45 0.34 0.46 0.39 0.47 0.38 0.62 0.35 0.47 0.13 0.29 0.51 0.46 0.61 0.52 0.54 0.60 0.60 0.43 0.41 0.40 0.67 0.39 0.41 0.27 0.59 0.42 0.39 0.77 0.59 0.71 0.64 0.60 0.78 0.84 0.80 0.15 0.32 0.50 0.13 0.56 0.28 0.23 0.46 0.40 0.20 0.44 0.16 0.25 0.18 0.56 0.75 0.34 0.25 0.54 0.37 0.86 0.28 0.57 0.67 0.37 0.55 0.73 0.75 0.61 0.44 0.53 0.19 0.46 0.40 0.45 0.50 0.43 0.79 0.68 0.82 0.78 0.41 0.53 0.54 0.28 0.33 0.63 0.72 0.52 0.43 0.76 0.62 0.49 0.40 0.52 0.63 0.38 0.35 0.38 0.52 0.35 0.51 0.69 0.42 0.50 0.19 0.29 0.39 0.30 0.48 0.32 0.54 0.53 0.28 0.56 0.42 0.38 0.76 0.72 0.87 0.64 0.68 0.88 0.82 0.77 0.44 0.40 0.22 0.37 0.49 0.54 0.61 0.45 0.39 0.65 0.52 0.42 0.36 0.60 0.25 0.50 0.75 0.78 0.77 0.66 Source: World Justice Project, 24 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 20: MSCI Frontier countries WJP scores Country 2014 $ per capita GDP, current dollars (IMF, Rencap for Pakistan) Overall Score Factor 1: Constraints on Government Powers 1.1 Government powers are effectively limited by the legislature 1.2 Government powers are effectively limited by the judiciary 1.3 Government powers are effectively limited by independent auditing and review 1.4 Government officials are sanctioned for misconduct 1.5 Government powers are subject to non-governmental checks 1.6 Transition of power is subject to the law Factor 2: Absence of Corruption 2.1 Government officials in the executive branch do not use public office for private gain 2.2 Government officials in the judicial branch do not use public office for private gain 2.3 Government officials in the police and the military do not use public office for private gain 2.4 Government officials in the legislative branch do not use public office for private gain Factor 3: Open Government 3.1. The laws are publicized and accessible 3.2 The laws are stable 3.3 Right to petition the government and public participation 3.4 Official information is available on request Factor 4: Fundamental Rights 4.1 Equal treatment and absence of discrimination 4.2 The right to life and security of the person is effectively guaranteed 4.3 Due process of law and rights of the accused 4.4 Freedom of opinion and expression is effectively guaranteed 4.5 Freedom of belief and religion is effectively guaranteed 4.6 Freedom from arbitrary interference with privacy is effectively guaranteed 4.7 Freedom of assembly and association is effectively guaranteed Argentina Bangladesh Bulgaria Croatia Estonia Jordan Kazakhstan Kenya Lebanon Morocco Nigeria Pakistan Romania Serbia Slovenia Sri Tunisia Ukraine Vietnam Lanka 12,778 1,179 7,648 13,624 19,777 5,460 12,950 1,461 10,531 3,392 3,416 1,324 10,161 5,924 24,211 3,414 4,467 2,979 2,073 0.50 0.47 0.39 0.41 0.53 0.53 0.57 0.58 0.76 0.80 0.57 0.50 0.47 0.35 0.43 0.51 0.51 0.57 0.51 0.56 0.39 0.47 0.36 0.46 0.59 0.58 0.51 0.49 0.65 0.65 0.52 0.53 0.55 0.58 0.47 0.41 0.48 0.40 0.41 0.55 0.65 0.59 0.76 0.38 0.31 0.65 0.72 0.61 0.63 0.53 0.62 0.56 0.69 0.52 0.66 0.59 0.30 0.35 0.45 0.41 0.45 0.81 0.48 0.26 0.52 0.46 0.55 0.49 0.53 0.56 0.33 0.54 0.53 0.55 0.25 0.26 0.44 0.41 0.49 0.50 0.76 0.69 0.37 0.41 0.49 0.37 0.28 0.28 0.45 0.39 0.66 0.55 0.54 0.29 0.43 0.30 0.27 0.34 0.56 0.81 0.59 0.45 0.42 0.47 0.54 0.39 0.28 0.48 0.34 0.52 0.47 0.48 0.32 0.55 0.63 0.40 0.66 0.61 0.79 0.46 0.34 0.58 0.76 0.55 0.55 0.65 0.67 0.60 0.69 0.62 0.62 0.51 0.35 0.67 0.49 0.41 0.27 0.62 0.43 0.77 0.54 0.88 0.78 0.39 0.57 0.36 0.43 0.48 0.28 0.54 0.40 0.71 0.43 0.49 0.26 0.50 0.29 0.69 0.50 0.74 0.41 0.80 0.60 0.51 0.53 0.63 0.50 0.49 0.28 0.48 0.44 0.49 0.35 0.39 0.52 0.76 0.59 0.44 0.36 0.39 0.49 0.28 0.35 0.49 0.40 0.55 0.50 0.52 0.25 0.44 0.56 0.29 0.46 0.56 0.90 0.69 0.40 0.39 0.46 0.37 0.46 0.41 0.59 0.41 0.69 0.56 0.52 0.41 0.29 0.61 0.19 0.56 0.67 0.90 0.69 0.49 0.23 0.50 0.49 0.22 0.25 0.66 0.53 0.63 0.68 0.50 0.34 0.46 0.31 0.27 0.30 0.42 0.58 0.31 0.39 0.13 0.24 0.38 0.09 0.16 0.29 0.32 0.53 0.37 0.47 0.11 0.57 0.45 0.50 0.49 0.36 0.48 0.29 0.46 0.46 0.44 0.49 0.51 0.54 0.71 0.66 0.77 0.43 0.55 0.45 0.35 0.52 0.37 0.38 0.38 0.37 0.44 0.44 0.55 0.48 0.54 0.40 0.40 0.41 0.46 0.32 0.31 0.30 0.47 0.48 0.50 0.47 0.51 0.51 0.60 0.66 0.56 0.48 0.54 0.57 0.47 0.51 0.61 0.46 0.51 0.53 0.39 0.56 0.45 0.45 0.41 0.48 0.38 0.66 0.39 0.25 0.40 0.37 0.53 0.45 0.37 0.43 0.42 0.50 0.51 0.41 0.36 0.40 0.37 0.67 0.66 0.27 0.43 0.55 0.47 0.65 0.70 0.55 0.64 0.68 0.73 0.80 0.85 0.34 0.47 0.66 0.27 0.48 0.58 0.35 0.46 0.48 0.40 0.62 0.51 0.43 0.45 0.61 0.29 0.42 0.53 0.30 0.38 0.39 0.49 0.71 0.73 0.46 0.62 0.66 0.69 0.79 0.69 0.31 0.56 0.62 0.36 0.54 0.63 0.44 0.56 0.62 0.17 0.50 0.62 0.82 0.22 0.75 0.65 0.93 0.46 0.60 0.28 0.68 0.32 0.24 0.21 0.85 0.63 0.93 0.39 0.51 0.56 0.66 0.47 0.30 0.47 0.59 0.77 0.50 0.45 0.33 0.44 0.30 0.22 0.27 0.62 0.57 0.77 0.45 0.41 0.38 0.48 0.64 0.41 0.67 0.62 0.79 0.47 0.35 0.59 0.77 0.55 0.56 0.66 0.68 0.61 0.70 0.62 0.62 0.52 0.35 0.80 0.56 0.80 0.72 0.81 0.46 0.58 0.68 0.55 0.48 0.49 0.43 0.78 0.75 0.81 0.74 0.53 0.63 0.39 0.70 0.26 0.54 0.40 0.77 0.33 0.40 0.26 0.71 0.19 0.34 0.25 0.66 0.40 0.82 0.38 0.44 0.52 0.72 0.67 0.55 0.74 0.75 0.80 0.49 0.42 0.69 0.82 0.58 0.62 0.63 0.78 0.75 0.81 0.68 0.62 0.69 0.30 Source: World Justice Project, IMF Oct 2014 WEO 25 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 20: MSCI Frontier countries WJP scores (continued) Country 4.8 Fundamental labour rights are effectively guaranteed Factor 5: Order and Security 5.1 Crime is effectively controlled 5.2 Civil conflict is effectively limited 5.3 People do not resort to violence to redress personal grievances Factor 6: Regulatory Enforcement 6.1 Government regulations are effectively enforced 6.2 Government regulations are applied and enforced without improper influence 6.3 Administrative proceedings are conducted without unreasonable delay 6.4 Due process is respected in administrative proceedings 6.5 The Government does not expropriate without adequate compensation Factor 7: Civil Justice 7.1 People can access and afford civil justice 7.2 Civil justice is free of discrimination 7.3 Civil justice is free of corruption 7.4 Civil justice is free of improper government influence 7.5 Civil justice is not subject to unreasonable delays 7.6. Civil justice is effectively enforced 7.7 ADR is accessible, impartial, and effective Factor 8: Criminal Justice 8.1 Criminal investigation system is effective 8.2 Criminal adjudication system is timely and effective 8.3 Correctional system is effective in reducing criminal behaviour 8.4 Criminal system is impartial 8.5 Criminal system is free of corruption 8.6 Criminal system is free of improper government influence 8.7. Due process of law and rights of the accused Argentina Bangladesh Bulgaria Croatia Estonia Jordan Kazakhstan Kenya Lebanon Morocco Nigeria Pakistan Romania Serbia Slovenia Sri Tunisia Ukraine Vietnam Lanka 0.59 0.54 0.59 0.52 0.72 0.77 0.82 0.80 0.90 0.84 0.90 0.92 0.87 1.00 1.00 0.93 0.56 0.61 0.53 1.00 0.57 0.64 0.73 1.00 0.57 0.79 0.86 1.00 0.74 0.77 0.94 1.00 0.65 0.84 0.85 1.00 0.42 0.85 0.92 1.00 0.48 0.79 0.83 1.00 0.38 0.63 0.72 1.00 0.44 0.76 0.87 1.00 0.58 0.76 0.83 0.92 0.40 0.36 0.34 0.31 0.24 0.30 0.53 0.09 0.59 0.81 0.86 1.00 0.59 0.74 0.87 1.00 0.80 0.78 0.88 1.00 0.29 0.19 0.50 0.38 0.67 0.63 0.55 0.17 0.42 0.54 0.42 0.27 0.56 0.35 0.45 0.38 0.47 0.55 0.55 0.43 0.41 0.37 0.37 0.47 0.57 0.49 0.58 0.75 0.83 0.54 0.49 0.46 0.60 0.41 0.51 0.44 0.46 0.54 0.55 0.40 0.38 0.35 0.27 0.52 0.53 0.45 0.39 0.59 0.50 0.44 0.55 0.52 0.58 0.40 0.41 0.39 0.54 0.57 0.25 0.44 0.53 0.89 0.56 0.47 0.44 0.38 0.58 0.37 0.34 0.50 0.46 0.59 0.50 0.53 0.34 0.28 0.36 0.37 0.43 0.28 0.67 0.37 0.47 0.24 0.43 0.41 0.29 0.30 0.50 0.45 0.61 0.34 0.33 0.44 0.38 0.39 0.40 0.42 0.49 0.62 0.60 0.28 0.33 0.45 0.48 0.44 0.40 0.47 0.39 0.56 0.30 0.48 0.45 0.41 0.43 0.47 0.49 0.55 0.74 0.67 0.47 0.52 0.49 0.66 0.53 0.44 0.60 0.56 0.68 0.49 0.66 0.36 0.33 0.54 0.59 0.75 0.59 0.37 0.33 0.53 0.63 0.37 0.18 0.32 0.36 0.36 0.35 0.30 0.37 0.39 0.36 0.41 0.29 0.24 0.33 0.53 0.50 0.69 0.49 0.48 0.39 0.47 0.68 0.41 0.32 0.44 0.52 0.60 0.66 0.54 0.52 0.17 0.42 0.75 0.55 0.75 0.51 0.72 0.57 0.87 0.89 0.83 0.54 0.65 0.69 0.72 0.57 0.61 0.62 0.50 0.78 0.79 0.63 0.43 0.62 0.62 0.56 0.46 0.56 0.47 0.39 0.38 0.42 0.27 0.71 0.58 0.53 0.40 0.38 0.56 0.44 0.37 0.41 0.40 0.49 0.42 0.46 0.54 0.33 0.36 0.31 0.45 0.51 0.48 0.45 0.39 0.31 0.48 0.52 0.42 0.29 0.45 0.50 0.42 0.60 0.47 0.46 0.58 0.46 0.52 0.35 0.50 0.47 0.50 0.47 0.66 0.49 0.48 0.37 0.45 0.59 0.31 0.34 0.34 0.36 0.40 0.28 0.41 0.47 0.31 0.19 0.47 0.37 0.39 0.40 0.59 0.57 0.74 0.62 0.54 0.44 0.52 0.68 0.56 0.60 0.54 0.45 0.48 0.74 0.40 0.37 0.37 0.31 0.46 0.41 0.51 0.37 0.61 0.61 0.74 0.64 0.70 0.39 0.38 0.79 0.58 0.60 0.54 0.41 0.31 0.39 0.59 0.44 0.29 0.35 0.47 0.49 0.25 0.40 0.54 0.48 0.71 0.49 0.52 0.56 0.44 0.56 0.45 0.44 0.52 0.52 0.51 0.74 0.40 0.28 0.62 0.43 0.64 0.33 0.37 0.43 0.42 0.38 0.60 0.34 0.20 0.56 0.34 0.55 0.47 0.37 0.54 0.27 0.25 0.34 0.36 0.68 0.53 0.43 0.25 0.14 0.18 0.20 0.27 0.39 0.31 0.43 0.39 0.33 0.28 0.54 0.44 0.46 0.39 0.26 0.43 0.38 0.47 0.57 0.68 0.83 0.59 0.62 0.24 0.45 0.31 0.28 0.52 0.54 0.29 0.50 0.39 0.27 0.36 0.35 0.63 0.57 0.41 0.41 0.52 0.58 0.71 0.68 0.44 0.52 0.46 0.26 0.60 0.53 0.43 0.27 0.52 0.58 0.91 0.66 0.29 0.49 0.52 0.21 0.41 0.54 0.58 0.29 0.63 0.55 0.49 0.15 0.26 0.47 0.30 0.47 0.59 0.77 0.50 0.45 0.33 0.44 0.30 0.22 0.27 0.62 0.57 0.77 0.45 0.41 0.38 0.48 Source: World Justice Project, IMF Oct 2014 WEO 26 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 21: Beyond Frontier countries scores in WJP 2014 report Country 2014 $ per capita GDP, current dollars (IMF, Rencap for Pakistan) Overall Score Factor 1: Constraints on Government Powers 1.1 Government powers are effectively limited by the legislature 1.2 Government powers are effectively limited by the judiciary 1.3 Government powers are effectively limited by independent auditing and review 1.4 Government officials are sanctioned for misconduct 1.5 Government powers are subject to non-governmental checks 1.6 Transition of power is subject to the law Factor 2: Absence of Corruption 2.1 Government officials in the executive branch do not use public office for private gain 2.2 Government officials in the judicial branch do not use public office for private gain 2.3 Government officials in the police and the military do not use public office for private gain 2.4 Government officials in the legislative branch do not use public office for private gain Factor 3: Open Government 3.1. The laws are publicized and accessible 3.2 The laws are stable 3.3 Right to petition the government and public participation 3.4 Official information is available on request Factor 4: Fundamental Rights 4.1 Equal treatment and absence of discrimination 4.2 The right to life and security of the person is effectively guaranteed 4.3 Due process of law and rights of the accused 4.4 Freedom of opinion and expression is effectively guaranteed 4.5 Freedom of belief and religion is effectively guaranteed 4.6 Freedom from arbitrary interference with privacy is effectively guaranteed 4.7 Freedom of assembly and association is effectively guaranteed 4.8 Fundamental labour rights are effectively guaranteed Factor 5: Order and Security 5.1 Crime is effectively controlled 5.2 Civil conflict is effectively limited 5.3 People do not resort to violence to redress personal grievances Factor 6: Regulatory Enforcement 6.1 Government regulations are effectively enforced 6.2 Government regulations are applied and enforced without improper influence 6.3 Administrative proceedings are conducted without unreasonable delay 6.4 Due process is respected in administrative proceedings 6.5 The Government does not expropriate without adequate compensation Botswana Cambodia Cote d'Ivoire Ethiopia Georgia Ghana 7,750 1,104 1,370 548 3,607 1,353 0.67 0.40 0.46 0.42 0.60 0.57 0.69 0.34 0.44 0.35 0.53 0.68 0.72 0.43 0.44 0.39 0.50 0.79 0.74 0.26 0.37 0.35 0.42 0.65 0.46 0.23 0.44 0.38 0.50 0.51 0.69 0.38 0.45 0.47 0.58 0.55 0.76 0.40 0.44 0.26 0.64 0.80 0.77 0.37 0.49 0.28 0.55 0.80 0.73 0.33 0.41 0.45 0.71 0.44 0.73 0.38 0.41 0.43 0.70 0.48 0.75 0.22 0.36 0.35 0.59 0.56 0.68 0.19 0.52 0.48 0.86 0.41 0.75 0.51 0.34 0.54 0.71 0.32 0.61 0.38 0.34 0.32 0.48 0.50 0.66 0.46 0.24 0.54 0.51 0.42 0.60 0.43 0.39 0.18 0.44 0.58 0.80 0.40 0.42 0.35 0.46 0.57 0.40 0.21 0.32 0.22 0.51 0.42 0.57 0.46 0.50 0.36 0.58 0.66 0.51 0.55 0.66 0.51 0.76 0.65 0.53 0.46 0.26 0.30 0.58 0.69 0.58 0.38 0.33 0.39 0.55 0.41 0.76 0.40 0.46 0.26 0.64 0.81 0.60 0.52 0.86 0.61 0.60 0.75 0.29 0.36 0.32 0.21 0.35 0.66 0.72 0.47 0.60 0.31 0.66 0.81 0.55 0.51 0.48 0.31 0.50 0.50 0.82 0.73 0.60 0.66 0.85 0.72 0.79 0.85 0.65 0.65 0.99 0.78 1.00 1.00 0.75 0.94 1.00 1.00 0.67 0.35 0.41 0.38 0.57 0.39 0.68 0.36 0.47 0.38 0.57 0.53 0.74 0.38 0.38 0.41 0.62 0.53 0.79 0.37 0.48 0.56 0.84 0.56 0.51 0.47 0.43 0.28 0.50 0.42 0.58 0.25 0.41 0.18 0.34 0.47 0.78 0.31 0.62 0.46 0.53 0.66 Iran Mongolia Myanmar Uganda Zambia Zimbabwe Tanzania 5,165 4,008 1,270 686 1,705 1,036 768 0.44 0.51 0.41 0.41 0.47 0.34 0.47 0.36 0.53 0.41 0.41 0.53 0.25 0.54 0.48 0.61 0.58 0.43 0.51 0.34 0.65 0.47 0.44 0.38 0.38 0.38 0.26 0.51 0.24 0.46 0.30 0.43 0.62 0.27 0.43 0.32 0.45 0.53 0.48 0.62 0.35 0.48 0.23 0.63 0.30 0.35 0.43 0.16 0.58 0.40 0.60 0.39 0.42 0.62 0.15 0.57 0.50 0.39 0.43 0.30 0.41 0.28 0.38 0.48 0.39 0.53 0.27 0.38 0.28 0.40 0.51 0.47 0.17 0.42 0.49 0.42 0.38 0.60 0.55 0.54 0.25 0.39 0.25 0.38 0.42 0.15 0.48 0.25 0.39 0.17 0.37 0.34 0.33 0.31 0.33 0.43 0.24 0.41 0.42 0.39 0.48 0.25 0.46 0.26 0.41 0.44 0.35 0.24 0.31 0.37 0.28 0.30 0.28 0.26 0.24 0.42 0.49 0.20 0.58 0.22 0.30 0.27 0.34 0.40 0.20 0.36 0.23 0.61 0.30 0.37 0.43 0.29 0.51 0.46 0.62 0.41 0.45 0.49 0.34 0.59 0.14 0.67 0.22 0.22 0.37 0.26 0.42 0.34 0.43 0.27 0.31 0.33 0.25 0.37 0.23 0.64 0.30 0.35 0.43 0.16 0.59 0.13 0.68 0.37 0.63 0.54 0.60 0.61 0.08 0.56 0.15 0.17 0.48 0.14 0.47 0.21 0.73 0.33 0.45 0.42 0.19 0.60 0.28 0.56 0.31 0.40 0.41 0.37 0.40 0.63 0.78 0.72 0.61 0.70 0.62 0.57 0.54 0.76 0.89 0.71 0.71 0.49 0.50 0.92 1.00 0.69 0.92 1.00 1.00 1.00 0.44 0.56 0.57 0.19 0.37 0.35 0.22 0.53 0.43 0.37 0.37 0.43 0.32 0.43 0.57 0.49 0.27 0.33 0.47 0.38 0.40 0.55 0.38 0.49 0.22 0.41 0.31 0.34 0.51 0.44 0.41 0.25 0.36 0.32 0.33 0.49 0.43 0.36 0.54 0.57 0.39 0.53 0.55 0.42 0.34 0.52 0.34 0.18 0.56 Source: World Justice Project, IMF 27 Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Figure 21: Beyond Frontier countries scores in WJP 2014 report (continued) Country Factor 7: Civil Justice 7.1 People can access and afford civil justice 7.2 Civil justice is free of discrimination 7.3 Civil justice is free of corruption 7.4 Civil justice is free of improper government influence 7.5 Civil justice is not subject to unreasonable delays 7.6. Civil justice is effectively enforced 7.7 ADR is accessible, impartial, and effective Factor 8: Criminal Justice 8.1 Criminal investigation system is effective 8.2 Criminal adjudication system is timely and effective 8.3 Correctional system is effective in reducing criminal behaviour 8.4 Criminal system is impartial 8.5 Criminal system is free of corruption 8.6 Criminal system is free of improper government influence 8.7. Due process of law and rights of the accused Botswana 0.61 0.53 0.47 0.79 0.60 0.58 0.64 0.64 0.63 0.62 0.62 0.53 0.67 0.83 0.60 0.58 Cambodia 0.34 0.33 0.32 0.24 0.17 0.41 0.30 0.60 0.29 0.23 0.41 0.27 0.42 0.21 0.10 0.38 Cote d'Ivoire 0.48 0.39 0.55 0.40 0.37 0.57 0.48 0.62 0.40 0.29 0.54 0.28 0.51 0.42 0.45 0.33 Ethiopia 0.39 0.32 0.39 0.37 0.26 0.46 0.37 0.58 0.45 0.55 0.47 0.42 0.51 0.47 0.33 0.39 Georgia 0.59 0.60 0.64 0.58 0.42 0.69 0.57 0.67 0.51 0.48 0.57 0.35 0.58 0.72 0.32 0.55 Ghana 0.59 0.48 0.68 0.56 0.69 0.51 0.49 0.70 0.44 0.40 0.32 0.35 0.40 0.43 0.75 0.41 Iran 0.56 0.50 0.52 0.54 0.40 0.63 0.65 0.70 0.38 0.39 0.45 0.42 0.32 0.53 0.22 0.34 Mongolia 0.52 0.46 0.62 0.50 0.45 0.68 0.41 0.51 0.48 0.36 0.55 0.50 0.58 0.45 0.52 0.43 Myanmar 0.39 0.40 0.38 0.24 0.24 0.48 0.46 0.55 0.32 0.33 0.37 0.24 0.27 0.43 0.33 0.27 Uganda 0.48 0.46 0.53 0.37 0.49 0.37 0.50 0.63 0.37 0.32 0.33 0.43 0.42 0.28 0.46 0.31 Zambia 0.47 0.41 0.53 0.45 0.44 0.46 0.49 0.50 0.36 0.41 0.40 0.15 0.41 0.38 0.40 0.33 Zimbabwe 0.40 0.42 0.43 0.43 0.21 0.49 0.50 0.34 0.36 0.52 0.52 0.32 0.42 0.32 0.20 0.25 Tanzania 0.48 0.40 0.62 0.36 0.48 0.41 0.50 0.57 0.46 0.50 0.49 0.33 0.38 0.42 0.69 0.37 Source: World Justice Project, IMF 28 Disclosures appendix Renaissance Capital 31 March 2015 Thoughts from a Renaissance man Analysts certification This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about the issuer or issuers (collectively, the “Issuer”) and the securities and markets that are the subject matter of this report. 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