Country Corruption Rankings
Countries vary widely in the degree to which corruption is a way of life. Corruption impacts how business gets done, whether it gets done, when it gets done and how much it costs. It may also impact the general level of risk of investing in a country.
It seems logical that a country with a more corrupt culture would tend to have less reliable financial reporting, more executive fraud and embezzlement, lower market transparency, less effective securities regulation and less equitable courts. Those things are not good for investors, although other growth factors could be so strong as to make the cost of corruption “affordable”. That is an equation that each investor must make individually.
This article is not making any recommendation for or against any country, nor does it suggest that you should invest in more corrupt or less corrupt countries. Corruption is only one of many different factors that go into a decision to invest in a country. However, if you want to take general levels of corruption into consideration, the following chart may be helpful. You should do no more than take the chart as the starting point of a more in-depth and multi-dimensional approach to the question of corruption (or integrity) in countries of interest to you. No simple chart such as this appropriate for us in isolation as an investment decision tool.
It is also likely that the nature of corruption in countries is different, with differing impact on businesses of various sizes in various industries.
The only specific recommendation that we make in this article, is that the more corrupt a country seems to be, the more diversified you need to be in your stock holdings. You might want to assume country risk, but not individual company risk. That would suggest a country fund or a signficicant number of well selected individual companies from the country.
The chart shows the corruption score and ranking as generated and published by Transparency International for 2006 for 145 countries. It also identifies one country investment fund for many of the countries listed in the chart and indicates which countries are represented in the EEM and VWO, two emerging market equity ETFs.
click image to enlarge
Richard Shaw
QVM Group LLC
[Securities mentioned in this article (including in images):
EWS EWD EWL EWA EWN EWO EWU EWC EWH EWG EWJ EWQ IRL EWK CH IWV EWP ISL EWT EWY EWM EZA TKF TTF EWZ FXI TRF IF ]
Disclosure: author owns VWO and several country funds on the country chart, including some with high and low corruption rankings.