As we start constructing our ranking of public sector productivity gains, existing analyses of the relative importance of countries are useful. An important resource available is the Global Competitiveness Report of 2011-2012 produced by the World Economic Forum (WEF). We will be adding the efficiency enhancer ratings from this report to our computations.
Global Competitiveness Index
For more than 30 years, the WEF’s annual report has studied and benchmarked the many factors underpinning national competitiveness in order to highlight the best strategies and policies to promote improvement. Since 2005, its analysis has been based on the Global Competitiveness Index (GCI), a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness. In 2011-2012, the GCI covers 142 economies from all the world’s regions.
The WEF defines competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country. This sets the level of prosperity that can be earned by an economy and also determines the rates of return obtained by investment in it, which are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to grow faster.
There are many determinants driving competitiveness. In addition to investment in physical capital and infrastructure, mechanisms such as education and training, technological progress, macroeconomic stability, good governance, and market efficiency are all important. This open-endedness is captured within the GCI by including a weighted average of many different components, grouped into twelve ‘Pillars of Competitiveness’.
- First Pillar: Institutions
The quality of institutions influences investment decisions, how production is organised, and how the benefits and the costs of development are distributed. It goes beyond the legal framework. Government attitudes toward excessive bureaucracy and over-regulation, corruption over public contracts, lack of transparency and trustworthiness, and a politicised judicial system all impose economic costs to businesses and slow the process of economic development. With regard to private institutions, the global financial crisis and corporate scandals have highlighted the importance of accounting standards and transparency in order to prevent fraud and mismanagement, to ensure good governance, and to maintain investor and consumer confidence.
- Second Pillar: Infrastructure
Efficient infrastructure significantly impacts on economic growth and serves to reduce income inequalities and poverty. Economies depend on effective modes of transport, uninterrupted power supplies, and on extensive telecommunications networks that enable businesses to access information in making decisions.
- Third Pillar: Macroeconomic environment
An economy cannot grow in a sustainable manner unless the macroeconomic environment is stable. A government cannot provide services efficiently if it has to make high-interest payments on past debt, and running fiscal deficits limits its future ability to react to business cycles. Firms cannot operate efficiently when inflation is out of hand.
- Fourth Pillar: Health and Primary Education
A healthy workforce is vital to a country’s competitiveness and productivity. In addition, workers who have received little formal education can carry out only simple manual tasks and this can be a constraint on business development. Despite the need for many governments to cut budgets to reduce debt, the WEF considers it essential for the longer term to avoid significant cut-backs in these critical areas.
- Fifth Pillar: Higher Education and Training
Quality higher education and training is crucial for economies to move up the value chain beyond simple production processes and products. This pillar measures secondary and tertiary enrolment rates, the quality of education as evaluated by the business community, and the extent of vocational and on-the-job training for staff.
- Sixth Pillar: Goods Market Efficiency
Countries with efficient goods markets are well positioned to produce the right mix of products and services and to ensure they can be most effectively traded in the economy. A minimum of government intervention is required. Competitiveness is hindered by high taxes and restrictive rules on foreign direct investment and on international trade. Market efficiency also depends on demand conditions. Buyer sophistication, for example, can force companies to be more innovative and customer oriented, thereby giving them a competitive advantage in other markets.
- Seventh Pillar: Labour Market Efficiency
Labour markets need the flexibility to enable workers to shift from one economic activity to another rapidly and at low-cost, and to allow for wage fluctuations without social disruption. Efficient labour markets must also provide fairness between women and men. Factors such as this help a country to attract talent, an increasingly important consideration, the WEF believes, as talent shortages loom on the horizon.
- Eighth Pillar: Financial Market Development
A well-functioning financial sector has a central role for economic activities. It channels the resources saved by a country’s citizens, as well as those entering the economy from abroad, to their most productive uses giving the highest expected rates of return. Economies require sophisticated financial markets, but banking sectors need to be trustworthy and financial markets need appropriate regulation to protect investors.
- Ninth Pillar: Technological Readiness
This pillar measures the agility with which an economy adapts existing technologies to improve productivity, with specific emphasis on its capacity to utilise information and communication technologies in daily activities and production processes.
- Tenth Pillar: Market Size
The size of markets affects productivity since large markets allow firms to exploit economies of scale. With globalisation, trade openness is positively associated with growth, especially for countries with small domestic markets. Both foreign and domestic markets are therefore included in the WEF’s measure of market size, which gives credit to export driven economies and to geographic areas such as the European Union that, while comprising many countries, have a single common market.
- Eleventh Pillar: Business Sophistication
Business sophistication involves both the quality of a country’s overall business networks and the quality of individual firms’ operations and strategies. With regard to business networks, when companies and suppliers are clustered in geographically proximate groups, efficiency is increased, greater opportunities for innovation are created, and barriers to entry are reduced. With regard to individual firms, operations and strategies (production processes, unique products, branding, marketing and distribution) spill over into the economies and lead to sophisticated and modern processes across a country’s business sectors.
- Twelfth Pillar: Innovation
All the drivers of competitiveness previously outlined seem eventually to run into diminishing returns. For advanced economies, in the long run standards of living can be enhanced only by technological innovation. This requires investment in research and development especially by the private sector; high quality research institutions; extensive research collaborations between universities and industry; and the protection of intellectual property. Despite fiscal pressures, the WEF says it is important to resist cut-backs to R&D spending, which is critical for sustainable growth in the future.
The Interrelation of the Twelve Pillars
While the results of the twelve competitiveness pillars are reported separately they are not independent. For example, a strong innovation capacity (Twelfth Pillar) would be difficult to achieve without a healthy, well-educated and trained workforce (Fourth and Fifth Pillars) that is adept at absorbing new technologies (Ninth Pillar) and without sufficient financing (Eighth Pillar) or an efficient goods market enabling innovations to be brought to market (Sixth Pillar)
As in previous years, this year’s top ten are dominated by European countries, with Sweden, Finland, Denmark, and the Netherlands confirming their place among the most competitive economies. Singapore continues its upward trend to become the second most competitive economy in the world, overtaking Sweden, while the UK returns to the top ten as it recovers from the crisis.