A summertime look at the global economic dashboard surveys the debris of GDP growth statistics from 2009 and looks forward to an uplift for this year. There are few surprises in these dismal figures – for the developed world. The USA registered -2.4% GDP “growth”; EU Zone, -4.1% and Japan, -5.2%. These figures contrast starkly with those of China, 8.7%; India, 6.6%; Brazil, o.2% and Russia bucking the developing trend with -7.9%. So, where are we now? Well, out of this debris has come the momentum that creates the G20 agenda and this is endorsed by the 2010 figures as follows. The USA 2010 GDP growth figure is looking like 3.2% and, the EU Zone, 1.2%. Meanwhile, over in the emerging markets stormy weather seems to be clearing much faster and growth is strong with Brazil, 6.5%; Russia, 5.5%; India, 6.6% and, China, 11.1%.

Trawl some more through the mass of global economic statistics and it is worth a glance at the world according to the Standard & Poor Index. S&P is one of three Internationally renowned agencies with a monopoly of the global Ratings Industry. The others are Fitch and Moodys. All three emerged in the 19th and early 20th century to become part of the global financial furniture – both Moodys and S&P have a 40 per cent market share of the ratings industry. In fact, Moody’s book on railway investments back in 1909 started using letter grades to assess their risk which remains in use today. For example, take a look at the S&P map of the world and you will note the AAA (top grade rating) features in North America, the European Zone and Australia. The main Gulf States merit a more subdued AA+ to AA-. Meanwhile – and take a glance back at the growth figures for the BRIC economies as you do so – Brazil, Russia, India and China come in at a rather subdued BBB+ to a BBB- rating. This follows 1. AAA (maximum security rating); 2. AA+ to AA- (top to good quality risk) and, 3. A+ to A- (medium quality risk). This fourth layer of risk is categorised as BBB+ to BBB- (middling to inferior rating) and is then followed by the purely speculative BB+ to BB-. Then, there are the African countries and the Stans of the former Soviet Bloc with no rating whatsoever.

Without going into the voluminous journalistic comment on the risks attached to three such agencies having a monopoly of wisdom on the global risk business there does seem to be a mounting case to look anew at investment and global risks. The US Securities Exchange Commission Report of July 2008 is a useful place to start. With a blistering attack on how the profit motive within these Agencies undermined integrity and gave, at best, mixed signals on Sub Prime mortgages in the run up to the global financial crash, the SEC points the finger at conflicts of interest that led to questionable judgements. How could risks that were judged AAA soon be qualified as risky and then, add a new word to the financial lexicon: toxic? McGlatchy Publishing were not alone in their furious attack on how Moody´s (et al) were selling ratings and selling out investors at the same time. They say that when you are in a hole – stop digging; but, what do you do when the best available advice is saying that the hole is in fact a very acceptable mine of opportunity?

The point is that our world is being transformed and the pace and scope of this change is picking up pace – beyond the developed world. It is as if we are back with a flat world (pre Tom Friedman) and the shock of the new more rounded context has yet to sink in. Take the emerging world first. It is well known that the impact of infrastructure on growth is considerable and, even more dramatic if investment in human capital can follow other asset classes at a parallel pace. However, this investment is slowed down in no small way by the cost of finance that is triggered – yes, we are back where we started – by the ratings given by three powerful agencies. The lower the rating the higher the interest rate (and cost of money) and so on.

Then, there are the developing economies and those that are in a significant mess – like Haiti is right now. Clearly, this is where there is considerable risk and we are not suggesting an AAA rating or anything close. However, Haiti brings home the need to shift the emphasis to instruments that can build confidence and sustainability into tough markets. For example, Hernando de Soto’s work on Peru and elsewhere highlights the lack of legal title for land is a lost opportunity that consigns the Majority World – who live in self built shanty towns or slums – into the financial margins. These homes have no legal status and this – chicken and the egg – has an impact on what is owned and with this a whole lexicon of legal options such as opening a bank account and having access to small loans. A failure to sort this out is holding back many economies and, having an indirect impact upon their ability to trade out of their plight. Haiti is an extreme example but as the Humanitarian Aid bubble starts to lose its scale the need for a sensible and practical solution to land ownership will come home to roost yet again. It is difficult to move from tents to affordable housing if the means to own such property does not exist. After all,  as de Soto makes plain in an interview with Alexis La Croix * – the poor are not the problem but the solution to capitalism current crisis. As C K Prahlahad illustrates in his book The market at the bottom of the pyramid; emerging and developing economies can no longer be ignored by the developed world. Especially so as the low growth prospects start to stoke the fire of shareholder activism. This is a risk class that merits more insight than a blank category on the risk assessment map.

Relegating all but the developed World to the upper echelons of the global risk ratings game is losing its logic. This is especially worrying at a time when dependency – and competition – for scarce raw materials, commodities and and energy “hots” up. Let´s face it, another map of the world highlighting these factors would show an inverse relationship with the developed world far from rich in such resources. More fundamentally, these Rating Agencies started out as no more than market researchers selling assessments of debt to people considering taking such a risk. It is only recently that they morphed into companies hired by those who designed the risk instruments – sub prime mortgages – to give their products a seal of approval. The SEC Report highlights a number of e mails that sum things up. In one, a S&P employee requests a meeting to “discuss adjusting criteria for assessing housing backed securities because of the ongoing threat of losing deals.” In another, a manager highlights the need to use resources “to massage sub prime and alt-A numbers to preserve market share.” Risk assessment merits a fresh pair of eyes.This culture of spinning the story around the figures may well have contributed to overloading the market with high risk debt masquerading as low risk investment. However, identifying the culprits in this bonfire of the vanities is wide of the mark. We are looking at systemic failure and something more fundamental about how global markets deal with risk profiles.

Then, as we consider country risk, we need to factor in the role of large Corporations. Of the 100 largest economies in the world; 51 are Corporations generating close to 30 per cent of global economic activity. In fact, the combined sales of the world´s Top 200 Corporates are bigger than ALL countries in the world minus the top 10. We live in a world where International businesses can have a major impact on local economies – witness what has been happening with the small businesses on the coastline because of the BP oil spill. Or Bhopal. On the other hand, look closely at the performance of ports when managed by a local Government and the benefits of a specialist operator in raising the bar of performance is massive. For example, Sao Paulo port cranes were moving 6 containers per hour before privatisation and this climbed to over 25 after private investment came in. On balance, there is a strong argument to factor in the real impact of International players on the competitive performance of countries being assessed for investment risk. There is one cautionary note – whilst they have such a dominant role in the balance sheet the top 51 employ no more than 0.78 per cent of the global workforce. Maybe we should factor in the contribution to and impact on localisation and sustainability of each of these countries. In this way, the presence of some Corporations in the affairs of a country would have a positive (or negative) impact upon a specific risk profile. Some would say that this is in the calculation. We are arguing that this should be taken out of the black box and subject to clear transparency.

Nonetheless, for many, these areas of risk remain unacceptable. Perhaps it would be instructive to return to the days when these Agencies were no more than Research Bureaux. For example, Henry Varnum Poor came to prominence after the publication of the History of US Railroads and Canals in 1860.  So too Moodys with their work on Railroad Investments in 1909. This type of objective – on but not of the market – analysis became a fundamental platform for the investment community to make decisions at a time when railroad investment worldwide was just as risky a business as, well, all of the trillions of  dollars investment on infrastructure worldwide right now – most of which is in the Emerging (maybe time to re-rate them as fast growth) and Developing markets. It was the case back then that the Old World had a lot to learn from New frontier markets and it is time to revisit risk assumptions yet again – or, the developed world may suffer the risk of its own long term decline. And the fact is that many of these investments are starting to seek funding from sovereign wealth funds that have no need of data from agencies that see markets beyond the developed world with such pessimism. We seem to be in need of some more of that pioneering spirit and a failure to adapt is slowing down the speed of a much needed global transformation.

Maybe it is time to review global risk metrics in much the same way as GDP figures expressed in terms of earnings per capita were questioned by Nobel Laureate Amartya Sen. What about literacy, public health etc? And, these days, what about the full range of demographic insights and their impact upon future economic viability and risk? For example, whilst the countries of the developed world move into higher dependency ratios – those who are of an employable age versus those that are in retirement – others, like the young republic of India, are experiencing a demographic dividend. Are we factoring in the full impact of climate change and scarce resources? For example, why do we not explore full cost accounting of the production and distribution of all goods worldwide? What impact does this have on the risk equation? The list goes on and ends with a fundamental question. Why is such a powerful global investment risk assessment in the hands of so few and, if this is to continue, what steps are being taken to ensure that the dashboard has enough instruments to deal with increasingly complex and challenging global circumstances?

Let´s be clear. A failure to deal with this risk rating status quo questions the validity of developed world judgement in much the same way as the G-7 failed to reflect an emerging world. Can the developed world risk being consigned to the margins of an investment into global futures because of a lack of credibility in judgement or, is the risk assessment aparatus only there to shore up a better yesterday?

* Les pauvres sont l’avenir du capitalisme, L’Histoire (2009)

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