Following the launch of
The Global Competitiveness Report
2005-2006,
Xavier
Sala-i-Martin, Professor of Economics, Colombia University,
shares his insight into competitiveness, and how the Growth
Competitiveness Index has been modified to more accurately
assess competitiveness
Competitiveness
explained Competitiveness is
productivity, competitiveness is what the World Economic Forum
defines as the set of institutions and policies that determine
the level of productivity.
Productivity then is two different things. One is
the level of welfare, the level of income that an economy or a
country can sustain and two, productivity determines the rate
of return on investment. More productive economies tend to
deliver a larger return for a particular investment. Which
means that more productive economies, more competitive
economies, tend to have a higher growth potential because the
ability to return is the ability to grow.
Therefore, competitiveness - in the extent to which
it reflects productivity – reflects both the possible level of
welfare that an economy can get and the potential growth that
an economy can achieve.
Capturing the complexity of
competitiveness There’s no
single determinant of competitiveness, there’s no single
determinant of productivity. And this is one of the main ideas
that we at the World Economic Forum try to convey.
Competitiveness is not a simple thing, if there is one thing
that we have learned over dozens of years of economic research
is that it is a complex problem and there are different things
that matter. And another thing that we have learned is that
different things matter for different
countries.
Things that matter
for example are the macro-economic stability of a country, the
soundness of institutions whether the judiciary for example is
independent or favours particular sectors or businesses,
whether the government acts in efficient ways or in sectarian
ways, other determinants of competitiveness involve market
efficiency, labour market flexibility, goods market
flexibility, financial market flexibility, other determinants
of competitiveness involve innovation and the ability to adopt
technologies that are invented somewhere else. So there are
many many factors that determine competitiveness. And one of
the beauties of the work that we are doing now at the World
Economic Forum is that we try to capture these complexities by
using many different pillars or concepts or aspects of
competitiveness.
The second
important thing is that different pillars or aspects matter
differently for different countries. What it takes to make the
US competitive is not what it takes for Zimbabwe to be
competitive. The US is at a stage of development where
producing things cheaper is not what is important. Zimbabwe or
Malawi are countries which should worry at this point about
producing things in the cheapest possibly way. The US should
be involved in increasing competitiveness through innovation
through creating different things.
Poor countries tend to be competitive by producing
cheaper things, intermediate tend to be competitive by
producing better things, and advanced countries tend to be
competitive by producing new and different things by
innovating. Therefore what matters for one country is not what
matters for another country. What determines competitiveness
for Finland is not what determines competitiveness for
Argentina.
Pillars of
competitiveness Macro-economic
stability is certainly one interesting factor but it is not
the only one and certainly not the most important one [when it
comes to measuring competitiveness]. The true determinants of
competitiveness are many. For example institutions: private
institutions, public institutions, corruption, corruption of
the government, corruption of the judiciary, corruption of the
corporate sector, are important factors.
Another important factor is education. Education at
the low level of development, primary education, is more
important, at advanced levels of development, advanced
education – tertiary education, universities - is more
important.
Health is a very
important determinant of competitiveness. We have learned this
with the recent experience of Africa. Unhealthy economies
cannot compete because you need a healthy labour force to be
able to produce things in efficient and productive
ways.
Again efficiency of
various markets from the labour market to the financial
sector. The labour market for example is very important in
Europe. Many people and scholars argue that the main
competitiveness problem of Europe today is the lack of
flexibility of the labour market. The lack of a link between
how productive a worker is and much he gets in his wage, as
well as by discrimination against half of its labour force,
that is women. All of these things matter for competitiveness.
A country cannot be competitive, it cannot be productive, if
it discriminates against half of its labour
force.
Innovation is very
important for advanced countries. The sophistication of the
business-customer relationship, all these things are
determinants of economic competitiveness and that is why the
World Economic Forum has constructed an index that tries to
capture all of these concepts and not just focuses on the
simple concept of competitiveness that is usually related to
exchange rates or macro-economic stability or inflation. But
it tries to capture the more complex and sophisticated
economic environment that determines
competitiveness.
New
tools to determine competitiveness The whole Growth Competitiveness Index that is the
index that has been used over the least five or six years by
the World Economic Forum captures three big concepts: macro
economic stability, government institutions and innovation.
This is an important first step but clearly it misses a lot of
the complications that exist in the world of competitiveness.
It misses education and health for example. You cannot talk
about competitiveness in Africa if you don’t talk about the
health crises of AIDS and malaria for example and this is now
incorporated in the new Global Competitiveness Index. We
include the efficiency of various markets. Again you cannot
talk about competitiveness in Europe unless you talk about the
efficiency of the European labour market. The financial
under-development of Africa is also
crucial.
One way in which the
new index is going to be more sophisticated, more advanced and
more reliable, is that it is going to be closer to capturing
the true meaning of competitiveness which is complex. It’s not
just three things, it’s many things.
Another way in which the new index improves on the
previous index is that it really tries to measure the concept
of stages of development. What matters for rich countries is
not what matters for poor countries. And therefore, we get
closer to capturing the true meaning of competitiveness by
giving a bigger weight to the technological sub-indexes we
created for countries like the US, Finland or European
countries and to countries in Africa we give more weight to
other factors that we think are more important to developing
countries such as health, basic education, basic factors that
are needed for an economy to start growing. So we take
seriously the stages of development that the previous index
did not.
Therefore the new
index, I think, is an improvement on the previous index and it
captures a much more sophisticated concept of competitiveness
and it does so in a much more realistic way by distinguishing
between the competitiveness of the poor and the
competitiveness of the rich.
Accounting for different stages of
development Different countries
face different challenges. At lower levels of development,
people compete in prices, this is what we call factor-driven
economies, you need to produce things cheaper. Factor-driven
means that either you produce natural resources or things that
are heavily labour intensive. Therefore trying to be efficient
at producing things more cheaply is important. And to do this
well, you need not only a cheap labour force, you need good
institutions, you need an educated labour force, a healthy
labour force, you need a good macro-economic environment, and
you need to protect property rights. For poor countries this
is what matters the most and so we give a bigger weight to
these factors.
The second stage
of development is the efficiency-driven stage. When you cannot
produce the same things cheaper, you need to produce them with
better quality. And to do that you need other kinds of factors
to improve for example the efficiency of the labour market,
the efficiency of the goods market, the efficiency of the
financial sector, these are things that matter most in the
second stage of development.
In
the third stage of development when you cannot compete by
producing things cheaper and you cannot compete by producing
things better, you need to compete by producing different, new
things and that’s when you start innovating because you have
to start producing things that nobody has thought about
before.
Now what matters in
this third stage of development is the ability to innovate
which not only reflects the amount of research and
development, but the efficiency of the research and
development effort, and the environment in which the research
and development effort is made. It’s not enough for the
government to spend more money on R&D, you need good
relationships between universities and the private sector, you
need a goods market that promotes innovation and provides
incentives for people to innovate. These are the things that
matter for more advanced economies.
So, again different factors matter differently and
are given different weights for different countries at
different stages of development, that’s how we capture this
phenomenon. |