Chapter 2: Key Findings of the Global Competitiveness Index 2017–2018
The Global Competitiveness Report has been measuring competitiveness for over four decades. This year also marks the 10th anniversary of the global financial crisis and comes at a time of increased uncertainty and rapid transformations for the global economy. With slow and uncertain growth recoveries, the end of the commodity boom, shifting geopolitics, global imbalances, and increasing inequality in some economies, understanding the factors that determine growth continues to be a pressing global issue.
In this chapter we present the methodology, the rankings, and the three main findings of the Global Competitiveness Index 2017–2018.
We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the economy can achieve.
Building on Klaus Schwab’s original work of 1979, the World Economic Forum has used the Global Competitiveness Index (GCI) developed by Xavier Sala-i-Martín in collaboration with the Forum since 2005. The GCI combines 114 indicators that capture concepts that matter for productivity and long-term prosperity (described in greater detail in Appendix A).
These indicators are grouped into 12 pillars (Figure 1): institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. These pillars are in turn organized into three subindexes: basic requirements, efficiency enhancers, and innovation and sophistication factors. The three subindexes are given different weights in the calculation of the overall Index, depending on each economy’s stage of development, as proxied by its GDP per capita and the share of exports represented by raw materials. Appendix A presents a description of each pillar, a classification of economies by stage of development, the detailed structure of the GCI, and a description of the various steps of its computation, including normalization and aggregation.
The GCI includes statistical data from internationally recognized organizations, notably the International Monetary Fund (IMF); the World Bank; and various United Nations’ specialized agencies, including the International Telecommunication Union, UNESCO, and the World Health Organization. The Index also includes indicators derived from the World Economic Forum’s Executive Opinion Survey that reflect qualitative aspects of competitiveness, or for which comprehensive and comparable statistical data are not available for a sufficiently large number of economies (see Appendix C).
The Report this year covers 137 economies, based on data availability. Countries excluded because of insufficient data this year are Barbados, Bolivia, Côte d’Ivoire, Gabon, and FYR Macedonia. Reinstated countries are Guinea, Haiti, Seychelles, and Swaziland. Altogether, the combined output of the economies covered in the GCI accounts for 98 percent of world GDP.1
Table 1 presents the rankings of the GCI 2017–2018.2
Results Overview and Main Findings
Ten years after the financial crisis, what are the most pressing issues related to the health of the global economy and its ability to provide sustained economic growth and well-being? Analysis of the Global Competitiveness Index (GCI) points to three main challenges and lessons that are relevant for economic progress, public-private collaboration, and policy action.
First, 10 years after the crisis, the financial sector remains vulnerable. GCI indicators of bank soundness have not recovered to pre-crisis levels, new sources of vulnerability have emerged—such as increasing private debt in emerging economies and the growth of non-regulated capital markets—and governments have less bandwidth than they did 10 years ago to cope with another crisis. Maintaining a sound financial sector is not only important to prevent recessions with deep and long-lasting effects on productivity and growth, but also to sustain innovation. In fact, providing adequate funds and instruments to support the most productive and innovative ideas is essential to take advantage of the Fourth Industrial Revolution (4IR).
Second, more countries are able to innovate, but they must do more to spread the benefits. Major emerging markets such as China, India, and Indonesia are becoming centers for innovation, catching up with advanced economies. However, they would benefit from accelerating progress in increasing the readiness of their people and firms to adopt new technology, which is necessary to widely spread innovation’s potential economic and societal benefits.
Third, both labor market flexibility and worker protection are needed to ensure shared prosperity in the 4IR era.
As globalization and rapid technological progress continue to test the ability of labor markets to reallocate workers between tasks and occupations, the GCI shows three parallel trends. First, measures of labor market flexibility are converging between advanced and emerging economies; second, more openness and economic integration has been accompanied by increased labor market flexibility; and third, contrary to widespread perception, greater labor market flexibility can coexist with protecting workers’ rights and reducing inequality.
Together, these issues underscore the overall challenge for both advanced and emerging economies: to reallocate factors of production to be flexible and responsive to technological trends while protecting people’s well-being during adjustment periods.
1: Ten years after the crisis, the financial sector is still vulnerable
Financial stability matters for economic progress. As demonstrated by the prolonged slowdown in advanced economies since the 2007 crisis, it takes a long time to restore productivity and growth after a financial meltdown. Ten years ago, strained banking sectors affected the real economy first in countries where the crisis originated, and later in others. Access to credit was limited, which restrained productivity-enhancing investments and dampened appetite for high-risk, high-return ventures such as innovative companies and start-ups.
Today although progress has been made to make the financial sector sturdier, some concerns remain. First, despite the actions taken in the aftermath of the crisis—restructuring and regulation or macro-prudential policies to increase capital requirements and clean up balance sheets—the banking sector has still not fully recovered. Second, new sources of potential risk are coming from emerging economies. Third, growing segments of the financial system not subject to regulation are a potential source of vulnerabilities. Fourth, the scope for public sector intervention has narrowed.
Analysis of the GCI shows that, despite sounder asset-to-equity ratios, the banking sector remains weaker than it was before the crisis. In general, there is still too much debt in parts of the private sector, and top global banks are still “too big to fail.” The largest 30 banks hold almost US$43 trillion in assets, compared to less than US$30 trillion in 2006, and concentration is continuing to increase in the United States, China, and some European countries.3 The GCI’s soundness of banks indicator has not yet returned to its average pre-crisis level in any region (Figure 2a), though the picture in individual countries and subregions varies considerably (Figure 2b).
In the United States, where the crisis originated, a new wave of deregulation appears to be underway: the government is considering reducing provisions of the Dodd-Frank Act and reviewing rules on financial advisers’ conflicts of interest.4 This may lead to the re-emergence of fragilities that post-crisis regulation aimed to tackle. In Europe, banks are still grappling with the consequences of 10 years of low growth and the enduring non-performance of loans in many countries.
Asian economies were less exposed to the global financial crisis, but they are facing new problems of their own. Amid a private-sector credit boom in India, the proportion of loans classed as non-performing went from 4 percent to 9 percent in two years; in China, business credit is building up similarly to the United States pre-crisis, and could be a new source of vulnerability. African banks, although not hit severely 10 years ago, have recently been affected by the weaker global financial system and lower commodity prices5—a factor also impacting the solidity of banks in Latin America.
Potential new sources of vulnerability also derive from the way in which post-crisis regulation of the banking sector has moved some activities to the non-bank sector, where supervisory and regulatory standards are less stringent.6 Liquidity could become a problem for non-bank systems with overleveraged positions if market sentiment suddenly changes. The possible implications of emerging and relatively less-regulated financial technologies, such as blockchain, are also not yet fully understood.
Compounding these reasons for concern, public authorities have less flexibility to respond to crises than they did 10 years ago. The space for intervention in case of another recession is somewhat reduced due to higher public debts and deficits in almost all countries (Figure 3), while non-conventional monetary policies may also reach a limit if another crisis hits. In this event, it may be harder today for governments to intervene than it was 10 years ago.
Maintaining stability in the financial sector is important not only for firm-level productivity,7 but also to stimulate investment in innovation. The financial crisis impacted both traditional loans and venture capital availability (Figure 4), leading to a decade-long stagnation in total investments in non-financial assets (Figure 5). Further development of Fourth Industrial Revolution technologies depends on sound foundations in the banking sector.
2: More countries are able to innovate, but they must do more to spread the benefits
The last decade has seen some important emerging markets move closer to the technology frontier—although a clear gap remains with the leading advanced countries, which continue to benefit from their historically strong innovation ecosystems.
Figure 6 shows how selected countries have performed over the last decade on the innovation environment pillar of the GCI, which comprises indicators on the capacity for innovation, the quality of scientific research institutions, company spending on R&D, university-industry collaboration, government procurement of advanced technology, the availability of scientists and engineers, and patent applications. Japan and the Republic of Korea, while still in this top group, appear to have lost ground. Among the emerging markets seen as having great potential in the early 2000s, Brazil and Turkey have now lost much of the ground they gained before 2013, but China, India, and Indonesia continue to improve.
Other sources confirm the growing importance of China and India as centers of innovation. In a recent study on which geographical clusters are generating the most patents,8 Shenzen–Hong Kong comes in at 2nd place—between Tokyo-Yokohama and San Jose–San Francisco—while Beijing comes in 7th. In both cases activity is concentrated in the field of digital communications. Three Indian locations appear in the top 100 of the cluster study: Bengaluru at 43rd (with patent activity focused on computer technology), Mumbai at 95th, and Pune at 96th (both registering among the most patents in organic fine chemistry).
During the last decade, the nature of innovation has shifted: from being driven by individuals working within the well-defined boundaries of corporate or university labs, innovation increasingly emerges from the distributed intelligence of a global crowd.9 McAfee and Brynjolfsson (2017) identify this as one of three major trends, along with the move from product to platform and from brain to machine. High-profile successes in artificial intelligence (AI), such as AlphaGo’s improvement past the best human Go players, point to the expanding ability of machine intelligence to learn from ever-expanding datasets and improve themselves by running their own simulations.10
The economic impact of the current wave of innovation remains difficult to measure. Innovation should ultimately affect competitiveness and raise productivity, but does not yet appear to be doing so. There are two plausible reasons for this. One is that it will take time for systems to adapt to a new order so they can take full advantage of the advances: analogously, it took decades to realize productivity gains from electrification through complementary innovations such as the re-organization of production lines. The other reason is that many of the benefits of digital services—including the ability to use search engines, email, digital maps, and social media—do not have a market price, so they are not captured in GDP or reflected in productivity estimates, even though alternative measures confirm they are providing significant value to individuals.11
One clear requirement for innovations to translate into broad-based economic and societal benefits is that a country’s people and firms must be capable of adopting them. The GCI’s technological readiness pillar captures this ability through indicators on the availability of latest technologies, firm-level technology absorption, foreign direct investment (FDI) and tech transfer, individuals using the Internet, fixed broadband Internet subscriptions, international Internet bandwidth, and mobile broadband subscriptions. Technological readiness also feeds back into innovation capacity, because it reflects the extent to which a core of professional researchers can tap into the crowd.
Although technological readiness is generally trending upward globally, Figure 7 shows that some of the large emerging markets that are doing well on innovation are leaving sections of their populations behind. The level of technological readiness of individuals and firms in China, India, and Indonesia remains relatively low, suggesting that the benefits of these innovative activities are not widely shared. Societal gains from innovation breakthroughs do not happen automatically: they need complementary efforts to ensure that more people and firms have the means to access and use new technologies.
3: There need be no trade-off between labor market flexibility and workers’ rights
In the 1990s, governments in many high-income countries—especially in Western Europe—began to discuss reforms intended to make labor markets less rigid. The financial crisis and restructuring imposed by technological change triggered a second round of reforms. Figure 8 shows how labor market flexibility (measured by business executives’ perceptions of union-employer cooperation, flexible hiring and firing practices, and the alignment between wages and productivity) accelerated after 2013 in many advanced economies, with average flexibility in Europe and North America converging with East Asia and the Middle East and North Africa. In contrast, other regions tightened labor regulations, in particular Eurasia and Latin America and the Caribbean. Data collected by the International Labour Organization confirm these results.12
Although causal links are difficult to establish, the positive correlation between international openness and labor market flexibility suggests that economic integration increases competitive pressure in labor markets. In the European Union (EU), over the past decade, flexibility in older EU members increased significantly to converge with the new members that joined between 2004 and 2007 (Figure 8b). This contributed not only to lower levels of unemployment in many countries, especially in Southern Europe, but also to a backlash against economic integration: it exacerbated some groups’ perception that the EU project did not sufficiently prioritize labor protection.
However, GCI and labor protection data show that there need be no trade-off between flexible labor markets and the protection of workers’ rights. Figure 9 on page 19 plots countries’ labor market flexibility against the International Trade Union Confederation (ITUC) Global Workers’ Rights Index, which proxies more inclusive decision making on labor markets. It overlays these indicators with data on inequality, as measured by the Gini coefficient and the share of the population who are employed. Two-thirds of countries with high levels of inequality have below-median protection of workers’ rights, while two-thirds with lower levels of inequality protect rights more strongly.
Most importantly, 60 percent of countries in the top-right quadrant of Figure 9—that is, with high levels of both rights protection and flexibility—achieve both high employment and low inequality. These include Denmark, Norway, Sweden, Switzerland, the Netherlands and Germany. This pattern supports the finding that workers’ rights can be well protected in flexible labor markets, and governments that pursue both these objectives can achieve efficient labor markets as well as low levels of inequality. Most of the countries that achieve both have strong active labor market policies in place. Governments should therefore not pull back from labor market reforms or economic integration, when faced with worsening social conditions. Rather they should introduce complementary active labor market policies that help workers who are between jobs to acquire new skills and competences.
The role of the GCI in turning key Findings into action
Countries can use the GCI to reflect on the key findings that emerge from this year’s analysis and determine how best they can advance the goal of implementing policies that help progress in competitiveness benefit their entire populations (Box 1). Taken together, the insights from the data can allow governments to design policies that support growth and encourage the reallocation of factors of production to take advantage of technological trends for the benefit of their populations.
Box 1: How to use the GCI to accelerate competitiveness agendas
The Global Competitiveness Index (GCI) tracks over 100 indicators for close to 140 economies. By establishing a common framework and comparable data, and allowing decision makers to monitor their annual progress, the Report draws attention to the long-term determinants of productivity, growth, income levels, and well-being. How should policymakers and businesses use the GCI to accelerate competitiveness agendas and make progress?
- Scores not only ranks. The GCI measures all indicators on a 1–7 scale and aggregates the scores to find a final overall GCI score. This score leads to the ranking that is so widely reported. Although the ranking is useful to gauge relative performance, the score itself is more informative for policymakers as a guide to action: is the economy improving? Are we making progress on the subindexes, pillars, concepts, and individual indicators? The score is a better indication of the direction of change than the rank: because all countries could become more or less competitive simultaneously, countries can fall in the rankings even while improving their score or rise in the rankings despite a deteriorating score.
- Aggregates rather than indicators. The GCI seeks to promote improvements in the fundamental determinants of productivity and growth. While individual indicators reflect important levers for boosting competitiveness, it is critical not to lose sight of the bigger picture as captured in the concepts that are defined in the index pillars and subpillars. To make real progress, programs and action should target aggregates: concepts, subpillars, pillars, and subindexes.
- Identifying priorities. Because factors of competitiveness are complementary, an economy cannot make sustained progress without advancing simultaneously on all pillars—but governments and the private sector have limited resources, so they have to define priorities. The GCI is a good starting point to identify the most binding constraints, but only the first step of the analysis.
- One method is to identify trends. Which pillar score is deteriorating? Which pillar is falling behind others? Another is to identify a reference economy or group for comparison. For example, policymakers could consider that the Organisation for Economic Co-operation and Development (OECD) is the appropriate benchmark representing best practices and decide to invest the most on those factors where their economy lags furthest behind the OECD average. Other possible references could be the regional leader, or the regional average, or the performance of economies with similar income levels.
- More sophisticated methods are possible. For example, recent work by the OECD Development Centre, outlined in The Global Competitiveness Report 2016–2017, uses statistical techniques to identify the factors that set apart economies that have made it out of the middle-income trap from those that have not. Those economies could choose to prioritize the factors that seem to explain escape from the trap. We invite researchers and policymakers to further investigate how best to guide their prioritization efforts.
- Understanding the drivers of competitiveness. Policymakers and the private sector need to understand the policies, actions, inactions, and external shocks that explain an economy’s performance on the GCI. They should map these factors onto the GCI to get clues into the drivers of pillar score changes and evaluate, adjust, eliminate, or start programs and policies accordingly.
- Solving market failures. The GCI can help to identify areas that need improvement, but then the question is whether there is a role for government to enable the private sector to achieve an efficient outcome. Once the rationale for government action is identified—whether based on externalities, incomplete markets, information asymmetries, or coordination problems—the GCI can be used to allocate scarce government resources toward the resolution of the market failure.
- Public-private collaboration. Governments can resolve market failures more effectively if solutions emerge from an understanding between the public and the private sectors. The GCI can serve as a catalyst for collaboration. It can help to set the agenda, lead discussions, bring together actors around common objectives, and facilitate structured dialogue. It can change the nature of the interactions between the private and public sectors by focusing them on long-term objectives, rather than lobbying for short-term and sector-specific gains. The long-term focus tends to draw attention to elements of the economic policy space where everyone wins, not those where some gain but others lose (such as tariff protection).
- The GCI can also be used independently by the private sector to keep government accountable, evaluate performance, and incentivize needed reforms. Some pillars in the GCI have a natural owner or leader within government—for example, the Minister of Infrastructure on road and port construction and maintenance—so the GCI can be used to catalyze action and help those leaders to identify areas of emphasis.
- Coordination. While some areas have natural leaders within government, most areas require coordinated efforts between several government agencies as well as timely information and efforts on the part of the private sector. By helping to identify issues and bring together decision makers, the GCI can be used to improve coordination and achieve faster progress.
- Institutional arrangements. Finally, the GCI can be the starting point for a permanent institutional arrangement for policy prioritization, coordination, and action. In many countries, “national competitiveness systems” with public and private participation have proved to be effective mechanisms to lead the design and implementation of competitiveness agendas. They have even used the GCI methodology to produce subnational competitiveness indexes and to identify local-level agendas for action.
The GCI is a starting point—a tool for policymakers and the private sector, providing information based on our best knowledge of what is needed to increase growth and drive poverty reduction. How exactly each economy uses it depends on the idiosyncrasies of its institutions, history, and culture. The principles apply to all countries; the specific implementation and policies must come from policy analysis and discussions within countries using the GCI as a point of departure.
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