Appendix E: The Future of Competitiveness Benchmarking: A Proposal
Three years ago, the World Economic Forum embarked on a major review of its flagship Global Competitiveness Index (GCI), originally launched in 2004. The review was prompted by the new economic reality, the advent of the Fourth Industrial Revolution (4IR), new empirical evidence, and new data. Its goal is to ensure that the index remains relevant and continues to inform multi-stakeholder dialogue and find its way into the toolkits of policymakers in the years to come. The new methodology—working title: GCI 4.0—builds on the success of the current methodology and retains some of its key features. It places more emphasis on future orientation, adaptability, and agility than the current GCI—all important features in the context of the 4IR—and is less prescriptive about the path of development.
The review was conducted under the auspices of Professor Klaus Schwab, Chairman of the Forum, and the guidance of Professor Xavier Sala-i-Martin of Columbia University, the long-standing academic advisor of The Global Competitiveness Report series. The team leveraged the Forum’s extensive network of experts and partner organizations and held numerous consultations and events on key conceptual and technical aspects of the methodology. At various stages of the process, it also consulted with and solicited feedback from many practitioners, including governments from around the world (see Acknowledgments at the end of this appendix).
The 2015–2016 edition of the GCR presented the first reflections on this process, providing a thorough literature review of competitiveness drivers and a first draft of the structure for an updated index. The 2016–2017 edition featured preliminary rankings for selected pillars related to innovation and human capital. This edition presents the key conceptual and technical features of the new index, its detailed structure (Appendix E1), and notional results for 2017 for the overall index and its 12 pillars (Appendix E2 below).
Publishing the methodology under development offers users the opportunity to familiarize themselves with it and the ways in which the results differ. However, given the many and significant differences, any comparison of the results of the GCI 4.0 with those of the current GCI would be misguided and spurious, and is therefore discouraged (see Box 1 below).1 The team will hold further consultations and collect feedback before finalizing the methodology.
Key features and conceptual innovations
Following initial consultations, it was decided to keep the key objective of the original GCI: to measure the determinants of competitiveness, defined as the set of institutions, policies, and factors that determine an economy’s level of productivity. Despite the difficulties associated with measuring it, productivity remains a key driver of prosperity and ultimately of economic progress. Prosperity can increase only if inputs of production are used in smarter and more efficient ways to fulfill constantly evolving human demands. Once this definition was confirmed, the process was guided by the following objectives:
- Embracing the Fourth Industrial Revolution. The 4IR is disrupting economies and societies. It redefines the way we work, live, and interact with each other. It is very quickly reshaping the business landscape, often in unexpected ways. In this context, the primary feature of successful economies will be their capacity to be agile, adapt to changes, and respond to shocks relatively smoothly and speedily.
- Rethinking innovation. Innovation represents a critical driver of productivity growth and value creation; this is even more essential in the age of the 4IR. Three postulates guided the re-design of the entire innovation pillar, and several concepts across other pillars. First, a country’s capacity to innovate depends on the quality of a vast and complex ecosystem made up of a myriad of factors: beyond traditional factors such as R&D investment, technology, and financing, intangibles such as flexibility, openness to ideas, willingness to collaborate, and risk taking play critical roles. Second, innovation is a process through which ideas become successful products. Third, innovation happens everywhere, not just in a laboratory, and its outcomes take many forms, from products—goods and services—to business models and organizational models.
- Integrating the lessons from the global financial crisis and latest empirical evidence. The historical proportions of the crisis led to rethinking how financial development, financial stability, and debt sustainability are assessed. The Macroeconomic context pillar and the Financial market development pillar of the GCI 4.0 were completely redesigned to reflect this evolution.
- Leveraging new data sources. Over the past decade, governments and international and nongovernmental organizations have greatly increased their capacity to collect reliable data, aided by new technology and partnerships and pressed by the growing need for data and information to guide decision-making. This has resulted in a proliferation of data and new indicators.
- Integrating feedback from practitioners. Since 2004, users of the GCI have been sharing their comments and suggestions about the methodology; this feedback was taken into account when developing the GCI 4.0.
The GCI 4.0 is the result of the natural evolution of its predecessor rather than a completely new approach. The overall structure of 12 pillars remains relevant because it captures general concepts that are important for any type of market-based economy to thrive. Yet some reshuffling, regrouping, and re-labeling at the pillar level result in a more streamlined framework (see Figure 1). The pillars are organized into four components: Enabling environment, Human capital, Markets, and Innovation ecosystem. These four components are used only for presentation and analysis purposes; they do not enter the calculation of the index, where the 12 pillar scores are averaged to produce the overall GCI score, with each pillar weighted equally.
The GCI 4.0 comprises 106 indicators (compared with 114 in the current methodology). The extent of the changes is significant: 67 percent of the indicators are new. The number of indicators derived from the Executive Opinion Survey (EOS) was reduced from 80 to 45, and their combined weight accounts for 30 percent of the overall score, down from between 69 percent (for advanced economies) and 57 percent (for least-developed economies) in the current methodology.2 The global coverage of the current GCI is one of its defining features and a main reason for its success, and it was decided from the outset that the GCI 4.0 would maintain similar coverage: this iteration includes 137 economies, accounting for 95 percent of the world’s population and 99 percent of global GDP.
The GCI 4.0 discontinues the concept of stages of development that is used in the current methodology to determine the weight assigned to the different pillars based on a country’s level of income. In the GCI 4.0, the overall GCI score is simply the average of the 12 pillar scores. The 4IR makes it reasonable to take this more agnostic approach to income level, recognizing that all competitiveness factors matter for all countries and policy prioritization is more complex than has previously been believed. For example, robotics is making light manufacturing less labor-intensive, which reduces the feasibility of lower-income countries developing by leveraging unskilled labor; however, because information and communication technologies (ICTs) enable the rapid transfer of ideas and technologies, they also make innovation less capital-intensive, offering those countries new ways to develop. The GCI 4.0 is less prescriptive about the path to prosperity, rewarding countries that leapfrog while penalizing those that neglect aspects of their competitiveness, regardless of their stage of development.
Each pillar of the current GCI was thoroughly reviewed, taking into account the latest empirical evidence. A significant part of the review process consisted in identifying, validating, and securing access to new indicators, making it possible to cover concepts previously left out because of lack of data and to improve the measurement of existing ones. In the process, many data providers granted privileged access to their data. For some organizations, the prospect of having an indicator included in the GCI 4.0 provided the incentive to commit resources to create or refine an indicator. In addition, several indicators were developed in-house (e.g., the road quality index, an indicator of debt dynamics). Finally, empirical evidence and statistical analysis also prompted the exclusion of a number of indicators and concepts. Box 2 presents some of the most significant conceptual innovations.
Like its predecessor, the GCI 4.0 is a composite indicator: its computation is based on successive aggregations of scores from the indicator level (i.e., the most disaggregated level) all the way up to the overall GCI score. Yet the GCI 4.0 introduces a number of innovations.
The normalization of the individual indicators remains based on a min-max approach, which converts values for all indicators into unit-less scores ranging from 0 to 100. These normalized scores can then be combined to produce aggregated scores. Formally we have:
where valuei,c is the value of country c in indicator i; lowi is the the threshold value, which usually—but not always—corresponds to the lowest value in the sample of countries covered; and highi,c, which usually corresponds to the highest value in the sample.
In the case of “flipped” indicators where a higher value corresponds to a worse outcome (e.g., terrorism incidence, power losses), the normalized score becomes 100 – a so that 100 always corresponds to the ideal outcome. For each indicator, the high value (or the low value in the case of a flipped indicator) corresponds to widely accepted policy targets or aspirations, the maximum (or minimum) theoretical value, or was derived from research, consultations, and trend and statistical analysis of the distribution. Therefore the ideal value does not always correspond to the actual maximum (or minimum) values in the country sample. In this case, scorei,c is capped to 100 (or 0). The high and low values will be kept constant in future iterations of the model.
A distance-to-frontier approach is used for computation of the pillar scores. Normalized scores of individual indicators (or concepts) are averaged to produce pillar averages. Using the same min-max approach as described above, these pillar averages are transformed onto a 0-to-100 scale to produce the pillar scores used in the computation of the overall GCI 4.0 and reported in Table 2 of Appendix E2. The economy with the highest average is assigned a pillar score of 100 and is considered to be the “frontier,” whereas the pillar score of the economy with the lowest pillar score is 0, to signal that it is the one the furthest away from the frontier.3 With this approach, the score has a straightforward interpretation: it informs how close a country is to the set frontier (the higher the score, the closer the country is to the frontier) and, over time, it shows whether it is moving away from or closer to this goal post or has even exceeded it, in which case its pillar score exceeds 100. Conversely, it is possible that in the future a pillar score could be negative (e.g., if a newly covered country performs worse than the worst performer did in 2017).
The structure of the index has been greatly simplified to make it more transparent and easier to communicate, understand, and use. In particular, the number of aggregation levels has been drastically reduced. Indicators enter only once into the index, unlike in the current GCI, where some indicators appear in two pillars and are given half-weight in each case. Special weights assigned to certain pillars and concepts have also been abandoned. And, as noted above, the decision to discard the stages and to be more agnostic about the path of development translates into a much simpler weighting scheme, common to all economies covered: the overall GCI 4.0 score is an average (arithmetic mean) of the 12 pillar scores.
Finally, missing data points are now imputed, using econometric methods that rely on the performance of the country on similar indicators and/or the performance of peer countries on the indicator for which the value is missing. A carefully estimated value is greatly preferable to a missing value, which effectively amounts to assigning the average score of the other indicators in the category that contains the missing value.
Box 1: Main causes of differences in performance across the two methodologies
The GCI 4.0 introduces significant changes to the methodology, so the re-stated ranking is therefore not comparable with that of the current methodology. Here is a description of the main types of changes, along with illustrative examples.
- Changes in weights. The discontinuation of stages of development significantly alters the weighting scheme used to compute the overall GCI score. The 12 pillars in the GCI 4.0 are weighted equally, each contributing 8.3 percent. With the current methodology, the weight varies by pillar and country, from 5 to 15 percent, according to (1) the subindex to which the pillar belongs and (2) the country’s stage of development. In the current methodology, the basic requirements (i.e., institutions, infrastructure, macroeconomic environment, and health and primary education) account for 65 percent of the overall GCI score in the case of low-income countries (i.e., those with GDP per capita of less than US$2,000) and commodity-dependent economies (i.e., those whose share of minerals in exports exceeds 70 percent), while innovation and sophistication factors obtain a weight of 5 percent. In the proposed methodology, each of the pillars will receive equal weight. The new scheme will therefore benefit those low-income and commodity-dependent countries that perform better in the innovation ecosystem; but it will penalize countries that have been neglecting some key enablers of competitiveness. This change reflects the latest thinking that many paths to growth are possible and better reflects the aspirations of low-income and commodity-exporting countries.
- Changes within pillars. Within each pillar, changes in the form of the addition, deletion, modification, and reshuffling of concepts and/or individual indicators can significantly impact the performance of a country (a concept is a well-defined driver of competitiveness that is assessed through one or more individual indicators). The direction and magnitude of this impact is a function of (1) the country’s performance in the concept/indicator that has been added/deleted/modified, and (2) the change in the implicit weight of the various components of the pillar. Four types of changes are distinguished:
- Reorganization within pillars. In some pillars, a number of concepts were regrouped, while in others concepts were split into several categories. For instance, the health and primary education pillar of the current methodology has been broken into two: the health component is a pillar of its own in the new methodology, while primary education is part of an enlarged Education and skills pillar.
- Change in concept definition. In several pillars, the scope of certain concepts has been either expanded or reduced. For instance, transport infrastructure includes a connectivity dimension, beyond mere availability and quality, while in the Labor market functioning pillar, the female-to-male labor participation ratio is replaced with a more restrictive measure that takes into account only salaried workers.
- Change in concept measurement. A majority of concepts have been retained in the new methodology, but the ways in which they are assessed has changed or been refined. For instance, the Health pillar is composed of a single indicator, namely health-adjusted life expectancy, which replaces eight health-related indicators in the current GCI. In several cases, indicators derived from the Executive Opinion Survey (EOS) have been replaced by statistical indicators. For example, the perceived impact of terrorism is replaced with a measure of actual terrorism incidence. In the Innovation capacity pillar, the current methodology includes an EOS indicator assessing the propensity of companies to spend on research and development (R&D), which has been replaced with R&D expenditures as a share of GDP.
- Introduction/deletion of concepts/indicators. In the new methodology, recent empirical evidence has led to the introduction of new concepts; other concepts have been dropped, notably to avoid conceptual overlaps or because their link to productivity is less certain. For example, the Institutions pillar now features two new concepts—checks and balances and social capital—both assessed through new indicators and existing ones that were moved to these categories. In another example, the education and skills pillars, which in the current methodology look only at the education of the future workforce, now includes an assessment of the skills and education attainment of the current workforce. This concept is composed of new indicators exclusively.
Each of the changes to the current methodology has an impact—positive or negative—on how a country fares in a concept, pillar, or the overall GCI. However, the overall impact is difficult to isolate and therefore quantify because of the many overlapping and interconnected changes.
Box 2: Conceptual innovations in the GCI 4.0 framework
Some of the most significant conceptual innovations introduced in the GCI 4.0 include:
- The Institutions pillar has been entirely re-designed. Two new categories, Social capital and Checks and balances, capture elements that constitute the bedrock of society and of all economic activity. The pillar also now features a set of indicators that assess the agility and adaptability of the government.
- By making the Technological readiness pillar one of the “Enablers” (see Figure 1 of the main text), the status of digital infrastructure as a general purpose technology is reasserted: for any type of economic activity, information and communication technologies (ICTs) have become as important as electricity and transport infrastructure—for which they can, in some cases, be a substitute.
- Achieving economic progress requires a human-centric approach to policymaking. The GCI 4.0 assigns more weight to human capital–related factors. The Education and skills pillar assesses the capacity to educate, train, and attract talent, drawing a distinction between current and future workforces, while the Labor market functioning pillar measures the capacity of an economy to allocate the available labor to its most productive use. The Health pillar now relies on a single, intuitive indicator—the number of years a newborn can expect to live in good health—which captures with unprecedented accuracy the health status of a population.
- The GCI’s Macroeconomic environment pillar has been completely redesigned and renamed Macroeconomic context. Brand new indicators now capture the sustainability of government finances rather than mere levels of deficits or indebtedness. Similarly, the Financial market development pillar has been entirely rethought. As part of the depth assessment, the main sources of financing are now taken into account separately, while financial stability is now assessed through a set of macro-prudential indicators.
- The Innovation capacity pillar and the Business dynamism pillar capture core elements of the innovation ecosystem. Innovation is seen as a complex process that spans the generation of ideas, their translation into products, and the commercialization of these products. The success of this process depends on a myriad of factors that these pillars capture to the extent possible: entrepreneurship, intrapreneurship, diversity, collaboration, and research and development. Beyond these two pillars, the GCI 4.0 includes a number of factors that contribute to shaping the innovation ecosystem, including human capital (Pillar 6), competition and efficiency of the product market (Pillar 7), availability of venture capital (Pillar 8), and, of course, technological readiness (Pillar 3), assessed through the adoption of ICTs.
The authors would like to thank the numerous experts who provided valuable suggestions and feedback during the process of updating the Global Competitiveness Index. The information and views set out in this appendix lie entirely with the authors and do not necessarily reflect the opinion of the experts and entities listed below.
Sessions and workshops
We are very grateful to the participants and panelists of the following events held since 2014:
- “Revision of the Global Competitiveness Index,” Expert Session, Annual Meeting of World Economic Forum 2014, January 24, 2014, Davos-Klosters, Switzerland
- “The Evolving Nature of Innovation in Enhancing Competitiveness,” Workshop, June 19, 2014, Geneva, Switzerland
- “Mineral Resources and National Competitiveness in the Context of the Global Competitiveness Index,” Workshop, November 12, 2014, Dubai, United Arab Emirates
- “Macroeconomics under the Microscope: The Link between Macroeconomic Stability, Financial Development and Productivity Growth,” Expert Session, Annual Meeting of the World Economic Forum 2015, January 23, 2015, Davos-Klosters, Switzerland
- Workshop on the Global Competitiveness Index, October 28, 2015, Abu Dhabi,United Arab Emirates
- “Productivity Growth Slowdown in the Age of the Fourth Industrial Revolution,” Expert Session, Annual Meeting of the World Economic Forum 2016, January 21 , 2016, Davos-Klosters, Switzerland
- “The Future of Competitiveness,” Seminar, World Bank, April 20, 2016, Washington DC, USA
- “The Global Competitiveness Index: A New Index and Methodology,” Seminar, World Bank, April 20, 2017, Washington DC, USA
- “A New Framework for Competitiveness,” Hub Session, World Economic Forum on Latin America, April 6, 2017, Buenos Aires, Argentina
- “Competitiveness in the Era of the Fourth Industrial Revolution,” Hub Session, World Economic Forum on ASEAN, May 11, 2017, Phnom Penh, Cambodia
- “Introducing the Updated Global Competitiveness Index: Briefing for the Geneva-Based Diplomatic Community,” Presentation and Q&As, June 9, 2017, Geneva, Switzerland
We are particularly grateful to the following individuals who provided substantive feedback and guidance and/or contributed to the events above, always in their personal capacity: Carolina Arriagada, Richard Baldwin, Beñat Bilbao Osorio, Mario I. Blejer, David Bloom, Erik Brynjolfsson, Federico Burone, Martin Burt, Mauricio Cardenas, Ian Goldin, Anabel Gonzalez, Arancha Gonzalez, Mary Hallward-Driemeier, Daniel Isenberg, Yoko Ishikura, Sung-Mo Kang, Danny Leipziger, Jaime Malet, Anandi Mani, Angel Melguizo, Christopher Murray, Jonathan D. Ostry, Christopher Pissarides, Laura Ripani, Nouriel Roubini, Sergio Schmukler, Michael Spence, Sarvesh Suri, Jan Svejnar, and Amiradi Tantraporn.
We are very grateful to the various organizations for their tremendous efforts in collecting data of great value to the development community and without which this work would not be possible. In particular, we thank the staff of the following organizations for providing privileged access to datasets, and for their invaluable help, guidance, and feedback throughout the review process:
- Institute for Health Metrics and Evaluation
- International Air Transport Association
- International Energy Agency
- International Monetary Fund
- International Telecommunications Union
- International Trade Centre
- International Trade Union Confederation
- Organisation for Economic Co-operation and Development
- The World Bank Group
- United Nations Educational, Scientific and Cultural Organization
- World Intellectual Property Organization
Governments and agencies
We would also like to thank the following governments and agencies:
- Permanent Mission of Canada
- Ministry of Foreign Trade of Costa Rica
- Ministry of Economy, Industry and Digital Affairs of France
- Government of the Hong Kong Special Administrative Region
- Ministry of National Economy of Kazakhstan
- Permanent Mission of the Republic of Korea
- Secretariat of Economy of Mexico
- Public Authority for Investment Promotion and Export of Oman
- Ministry of Economy of Portugal
- Rwanda Development Board
- Federal Department of Foreign Affairs of Switzerland
Appendix E1: Preliminary Structure and Composition of the Global Competitiveness Index 4.0
The following table provides the preliminary structure and composition of the Global Competitiveness Index 4.0 to date. It informs on the hierarchy of the index, showing each level of aggregation. At each level, starting from the lowest level (i.e., the individual indicator), values are aggregated using an arithmetic mean (unless noted otherwise) in order to produce the score of their respective parent categories, which in turn are combined to produce the score of their respective categories. At the highest level of aggregation, the scores of the 12 pillars are averaged out to yield the overall GCI score, as described in this appendix.
For each individual indicator, the table provides a short description; the name of the organization from which all, or the majority of data points was collected; and the reference period—that is, the most frequent measurement period. For more details about the indicators derived from the Executive Opinion Survey, refer to Appendix C of this Report. For additional information on the methodology, specific indicators, and/or data points, contact [email protected].