Corporate Governance

The BRIC Project: Emerging Economies and Policy-Driven Growth (Part 3)

By Daniel O?Connell

The BRIC economies are projected to account for approximately 50% of global GDP by 2050.  The growth will not happen, however, without institutional development.  Goldman Sachs' report, Dreaming with the BRICs: The path to 2050, noted that '[t]he key assumption underlying our projections is that the BRICs maintain policies and develop institutions that are supportive of growth.' 

In the same report, Goldman outlined four 'Conditions for Growth': macro-economic stability supported by price stability via fiscal deficit reduction, institutions, openness to trade and foreign direct investment, and education.  The report further notes that '[t]hese core policies are linked: institutional capacity is required to implement stable macroeconomic policies, macro stability is crucial to trade, and without price stability a country rarely has much success in liberalizing and expanding trade.'

For the purposes of this blog, what Goldman describes as 'Institutions' are of primary concern (Report, p. 13): 

"Institutions.  Institutions affect the ‘efficiency' of an economy much in the same way as technology does: more efficient institutions allow an economy to produce the same output with fewer inputs: Bad institutions lower incentives to invest, to work and to save. ‘Institutions' in this broad sense include the legal system, functioning markets, health and education systems, financial institutions and the government bureaucracy. Recent research argues that poor political and economic policies are only symptoms of longer-run institutional factors—a line of reasoning that could help explain the disappointing results of developing countries‘ adoption of macroeconomic policy reforms in the 1990s."

More specifically, the legal system, functioning markets, and government bureaucracy are of importance to this blog and the focus of this mini-series on the prevailing elements of each BRIC nation's regulatory environment. 

Corporate governance reform will also be necessary.  In 2008, Standard and Poor's reported that 'corporate governance remains one of the most important factors constraining the BRICs' attractiveness to foreign capital providers and, in particular, potential long-term shareholders.'  Addressing this problem, the report notes that:

• '[a]mong BRIC countries, minority shareholders and financial markets have, in general, limited influence on the governance practices of public companies.  This is partially because of the presence of less active minority shareholders, but also because of large share concentrations, which prevent market-driven changes in control.' 

Accordingly, over the course of this series, this blog will present the most significant elements of the four BRIC nation's regulatory schemes and the attempts of each nation to confront the challenges presented by concentrated ownership and the lack of transparency and accountability that often plague corporate governance in emerging economies.  

Full post as published by The Race to the Bottom on April 01, 2010 (boomark / email).