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Global Competitiveness Report 2005-2006: Interview with Xavier Sala-i-Martin

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

Xavier Sala-i-Martin, Professor of Economics, Colombia UniversityCompetitiveness 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.

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Last updated: 28 September 2005
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