The Updated Global Competitiveness Index
Attilio Di Battista
Daniel Gómez Gaviria
World Economic Forum
The authors invite feedback on this chapter. Please send feedback and comments to [email protected].
Economies and people worldwide are starting to feel the first effects of the dawning Fourth Industrial Revolution, a convergence of technologies that is blurring the lines between the physical, digital, and biological in ways that promise to disrupt almost every industry in every country.1
Breakthroughs are happening and proliferating at an unprecedented pace—from sensors to blockchain to human-brain interfaces. Technology-enabled platforms in the “sharing” or “on-demand” economies are upending business models and forcing countries to rethink how they formulate economic policies. The number of industrial robots in the world is roughly doubling every five years (from 69,000 in 2002 to 229,000 in 2014, as shown in Figure 1, and is projected to reach 400,000 by 2018),2 driven especially by demand from automotive parts suppliers and the electrical/electronics industry. As the Internet of Things becomes mainstream, the number of connected devices will almost triple by 2020, from 13.4 billion to 38.5 billion,3 and the proportion of products sold via e-commerce will more than double, from 6 percent in 2014 to 12.8 percent by 2019.4
The combination of automation and digitalization is revolutionizing manufacturing and services alike, as well as blurring the lines between them. This process is increasing efficiency, optimizing logistics, and making prices more transparent and competition starker. At the same time, it is reinforcing the need of firms to remain ahead of the innovation curve. More and more, technological forces are pushing companies to either innovate or disappear: 88 percent of firms in the 1955 Fortune 500 were not on the 2014 list, and the rate of turnover is accelerating, while the duration of product lifecycles declined, across all industries, by 24 percent between 1997 and 2012.5
Such dramatic changes in the dynamics of the economy need to be reflected in how we measure economic progress and its drivers. These changes make it necessary to better understand how the Fourth Industrial Revolution is altering how we understand competitiveness, growth, and—fundamentally—the prosperity of countries (see Box 1 for further discussion). For purposes of the present report, an important question is how it impacts the drivers of competitiveness captured by the Global Competitiveness Index.
The increased complexity of today’s economy is arguably making our current statistical tools outdated, both conceptually and methodologically. Calculation methods built for tracking physical sales of goods and services are incapable of accurately measuring transactions that take place on virtual platforms or through non-monetary exchanges of services. Increased measurement challenges in calculating GDP have lessened its value as an indicator of economic progress (see Box 2), and also calls into question the accuracy of productivity estimates, which require precise evaluation of output, capital, and labor.
Measuring the drivers of prosperity likewise requires a conceptual and methodological rethink. When the Global Competitiveness Index (GCI) was introduced in 2006, the effects of the Fourth Industrial Revolution had not yet started to arise. Today, although the main drivers of competitiveness identified at that time remain generally valid, they may affect the development process in a different way than they did a decade ago.
This chapter lays out the Forum’s latest thinking on the concept of competitiveness and its implications for the GCI in light of the new forces that are starting to be unleashed by the Fourth Industrial Revolution and other trends. The goal of the chapter is to provide a basis for discussion and feedback ahead of the launch of the new methodology.
The GCI in the time of the Fourth Industrial Revolution
The need to produce measurements that better capture this emerging new economic reality translates into an evolved measurement of competitiveness and its drivers to give more relevant guidance to policymakers and public-private dialogues. The World Economic Forum has been working on modernizing the GCI over the past two years. In the 2015–2016 edition of The Global Competitiveness Report (GCR), the first reflections from this process were published, providing a thorough literature review of competitiveness drivers,6 as well as a preliminary methodology for the new Index. Since last year’s Report the Forum’s thinking has advanced further to identify five clear directions for measuring competitiveness during the rise of the Fourth Industrial Revolution.
First, productivity remains a key driver of prosperity. Although measuring productivity has become more complex, economists have little doubt of its central role in economic progress. Prosperity can increase only if inputs of production are used in smarter and more efficient ways to fulfill constantly evolving human demands. Therefore we still define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn determines the level of prosperity a country can achieve.
Second, future orientation is central. Because technology disrupts the business landscape in unexpected ways and does this more quickly than it used to, the primary feature of successful economies will be their capacity to be agile, adapt to changes, and respond to shocks relatively smoothly and speedily. These aspects are meant to be captured by the education and skills, labor market, and goods market pillars that measure the extent to which a country’s regulations and human capital support structural change and industrial revamp.
Third, the meaning of innovation is being updated. The capacity of a country to be innovative has to be thought of as an ecosystem that not only produces scientific knowledge but also enables all industries—including in the service sector—and society at large to be more flexible, interconnected, and open to new ideas and business models. This way of understanding innovation focuses on a country’s ability to bring new products and services to market, and it attributes equal importance to non-technical and technical inventions. To be truly innovative, a country should not only file patents and support research and development in science and technology, but should also provide a networked, connected environment that promotes creativity and entrepreneurship, fosters collaboration, and rewards individuals who are open-minded and embrace new ways to perform tasks. In such an ecosystem the modernization of the educational framework also plays a pivotal role: it must offer life-long learning opportunities and teach students to think critically, collaborate with individuals of different backgrounds, and expose them to different points of view and ideas. Similarly, the financial sector needs to offer venture capital and new financing solutions suitable for smaller or riskier projects, as well as leverage information and communication technologies (ICT) platforms, such as what today is known as FinTech.
Fourth, ICT infrastructure is an imperative. As ICT-based business models become more prevalent, countries that fail to transition to a digital economy will be at a substantial competitive disadvantage, not only commercially but also in terms of innovation. Hence the technology adoption, business agility, and innovation capacity pillars have been reformed, considering them to be all part of the innovation ecosystem. ICT infrastructure measures have also been added to the infrastructure pillar as they now play a prerequisite role for development as much as transport infrastructure.
Fifth, the world is leveled more than it used
to be. The current GCI model assumes that a country’s priorities evolve as it develops, with infrastructure, institutions, macroeconomic stability, and basic health and education more important for lower-income countries and innovation and business sophistication more important for higher-income countries. The Fourth Industrial Revolution makes it reasonable to take a more agnostic approach and recognize that all competitiveness factors matter for countries at all income levels and the exercise of policy prioritization is more complex than we have so far 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 ICTs enable the rapid transfer of ideas and technologies, they also make innovation less capital-intensive, offering those countries new ways to develop. The updated GCI will reflect this conceptual change and weight all 12 pillars equally for all countries. We assume that a country’s development priorities are country-specific rather than determined by their income level. Defining policy priorities is a country-specific exercise that will be better informed by the updated GCI (see Box 3).
In addition to these new conceptual underpinnings, the methodology needs to keep up with new indicators that have become available, notably for health and financial development. On health, the disability-adjusted life year summarizes all available information on the extent of mortality and disability due to communicable and non-communicable diseases and is, therefore, a more accurate measure of the health component of human capital than life expectancy or the prevalence of malaria, tuberculosis, and HIV. On finance, new metrics on depth, liquidity, soundness, and access to the banking sector have started to become more available for a larger set of countries since the global financial crisis.
These changes in the GCI methodology are a natural evolution of the current framework 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 society: good governance, infrastructure, education, and functioning markets will continue to determine how successfully economic systems can cope with technological and societal revolutions, but they will do so in different ways. For example, institutions will not only have to protect property rights, security, and rule of law, but they also have to become more forward looking, updating regulations to prevent potential misuse of new technologies while nurturing a dynamic business environment; countries will need to build “data highways” as well as roads and ports; and financial sectors will need to support industrial restructuring and innovation.
Figure 2 summarizes the main changes to the GCI framework. These include centering the health pillar on disability-adjusted life years, rethinking market size as market potential, and reflecting the richer data now available in the financial pillar. The appendix fully describes all the indicators that are part of the updated methodology.
Selected issues: Discussion and preliminary results
This section presents preliminary results on two subindexes that are particularly relevant in the context of the Fourth Industrial Revolution and that have been extensively reviewed—the human capital subindex and the innovation ecosystem subindex—as well as a new approximation to the weights given to pillars due to implications for policy prioritization.
Moving away from the idea that countries move through sequential, defined stages of development implies that the methodology needs to be updated accordingly. The planned index will weight all 12 pillars equally for all countries and the pillars will be grouped into four subindexes:7
The enabling environment subindex measures whether countries have in place sound institutions, well-developed infrastructure, and strong macroeconomic conditions, which together determine the environment in which companies operate.
The human capital subindex measures how the health and skills of the labor force contribute to a country’s competitiveness.
The markets subindex measures how firms can rely on product, labor, and financial markets to find the production inputs they need and how quickly and easily they can reorganize when the industry landscape changes.
The innovation ecosystem subindex measures how technology adoption, business dynamism, and innovation capacity all influence the innovation process. Using existing technology can give rise to new products and business models; countries where businesses are more open to new ideas are more likely to adopt the latest technologies faster and create new ones; and larger markets foster innovation because they enable economies of scale for new products and services.
Education and skills
At every level of schooling, the education system needs to teach competences that are relevant to the modern economy. Even lower-skilled jobs increasingly require talent and knowledge, so vocational training and secondary education need to equip people with the ability to work in a complex, digital environment. Because change occurs so quickly, there is a high level of uncertainty regarding the skills needed for the future.8 However, at all skill levels, individuals will be rewarded for the capacity to think critically, solve problems, and take advantage of new technologies. Schools will therefore need to teach flexible thinking rather than emphasizing memorization; they will need to show students how to cooperate and work with individuals with different backgrounds as well as to compete, and will need to nurture the ability to challenge, confront, and critically appraise differing ideas.
To capture these developments, the suggested education and skills pillar measures both the quantity and quality of skills and the training that today’s workers possess, as well as the level of education and skills of tomorrow’s workforce, with particular emphasis on the use of ICTs in school and the style of teaching. Measuring the skills of the current and future workforce together captures the dynamics of the workforce’s skillset in each country, tracking whether the level of human capital is increasing or declining. Even the most advanced countries today could quickly lose their human capital advantage if their education systems fail to increase the quantity and quality of skills of their future professionals and entrepreneurs. Similarly, developing countries could see their investments in education generate decreasing returns if they do not manage to update curricula and teaching styles. Table 1 shows the structure of the education and skills pillar.
Table 2 presents the preliminary results for this pillar. Denmark has the most sustainable system, with the skills of the current and future workforce both ranking in the top five. Denmark is one of the first countries to include computer science in its primary-school curriculum, together with the United Kingdom, Israel, New Zealand, and Australia. Finland and Iceland are among the advanced countries where the future workforce is expected to be better equipped than current workers, whereas Switzerland, Israel, and Japan are among those that may see their currently high level of human capital diminish going forward. Among emerging and developing economies, Brazil, China, Colombia, Rwanda, and Kenya are examples of countries improving the future skillset of their workforce, while countries with education systems that may see reductions in their future human capital include the Philippines, Panama, South Africa, and Nigeria, which already ranks as low as 123rd.
According to the latest thinking, innovation occurs in an ecosystem where businesses, regulations, and social norms promote connectivity, creativity, entrepreneurship, collaboration, and the adoption of the latest technologies to generate new ideas and bring new products and business models to market. These concepts are measured by four pillars: technological adoption, market size, business dynamism, and innovation capacity.
The concepts measured by the latter two pillars, in particular, need to go hand in hand for a country to be considered an innovation powerhouse (Table 3). As long as new ideas cannot find a practical implementation they might contribute to knowledge accumulation but they do not immediately translate into advances in human welfare. In some cases finding a practical application for a new idea is just a matter of time, because technological progress in other fields has to occur before these ideas can be put into practical use. It is, however, crucial for a country to develop the skills and the conditions that can ignite the process of transforming abstract innovation into new products and processes. Therefore the business dynamism pillar measures the extent to which regulations promote entrepreneurial mindset and business agility—for example, the ease of opening and closing a business and attitudes toward entrepreneurial risk.
Innovation capacity, in addition to measuring the accumulation of knowledge produced by formal research and patenting activity, also captures a country’s capacity to encourage creativity, interaction, and collaboration between individuals and institutions; and the aptitude of its companies to commercialize new products. This way of thinking about innovation emphasizes how breakthrough ideas emerge from contrasting and applying concepts across diverse industries, cultures, departments, and disciplines.9 A similar process was observed during the Renaissance when the cultural environment provided the conditions for painters, sculptors, scientists, philosophers, financiers, and architects to influence each other’s’ work and produce remarkable progress in both arts and science.
Table 4 shows the preliminary country rankings on these two pillars. Switzerland, Sweden, the Netherlands, Germany, Denmark, and the United States are in the top 10 on both pillars. Others fall short in one or other dimension: for example, Italy and China rank above 40th for innovation capacity but below 60th for business agility. Japan and the Republic of Korea rank around 20th in both dimensions: although both countries score highly for patenting and research and development investment, their innovation ecosystem is limited by burdensome regulations and conservative social norms around entrepreneurial risk. Conversely, New Zealand ranks better for business dynamism than it does for innovation capacity. Because countries can be truly innovative only if all components of the ecosystem are in place, this analysis should help policymakers, businesses, and civil society to identify bottlenecks and prioritize interventions.
This chapter has explained the current status of the World Economic Forum’s work to modernize the Global Competitiveness Index in light of the new reality brought about by the Fourth Industrial Revolution. We have presented preliminary results on the three most renovated pillars (education and skills, business dynamism, and innovation capacity).
The analysis of the preliminary results suggests that the competitiveness of advanced and emerging economies alike will rest on a country’s future orientation and its ability to update skills, and on the regulations and social norms that promote entrepreneurship and welcome change, collaboration, and creativity.
As we continue to work to improve the Index, we invite users, policymakers, business executives, and the academic community to provide feedback on the components discussed above and the preliminary Index results presented in this chapter.10
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