Asia and the Pacific
The competitiveness landscape in the Asia and the Pacific region remains one of stark contrasts. The region is home to three of the 10 most competitive economies in the world: Singapore, Japan, and Hong Kong SAR. A further three economies are featured in the top 20: Taiwan (China), New Zealand, and Malaysia (20th), which is the best ranked of Emerging and Developing Asian nations. At 28th, China stands some 40 places ahead of India, the other regional economic giant. At the other end of the regional spectrum, five countries rank below the 100th mark, although encouragingly they are all progressing to different degrees: Nepal (102nd, up 15 places), Bhutan (103rd, up six), Bangladesh (109th, up one), Myanmar (134th, up five), and Timor-Leste (136th, up two). The competitiveness gap between South Asian and Southeast Asian nations runs deeper than before. The five largest Southeast Asian economies (ASEAN-5) all feature in the top half of the rankings, and all of them have made strides in this edition: Malaysia gains four places, Thailand is up six, Indonesia four, the Philippines seven, and Vietnam advances two places. Since 2009, they have improved their group performance in every edition. In South Asia, among the region’s six countries covered by the GCI, only India features in the top half of the rankings. Since 2009, the average GCI score of the South Asian Association for Regional Cooperation (SAARC) countries has stagnated.
Because of the region’s diversity, the challenges vary enormously, but a few common priorities can be identified. For the most advanced economies, such as Japan, the Republic of Korea, and Taiwan (China), one common challenge is the rigidity of their labor markets. They must also set up an ecosystem that is better at creating truly disruptive innovations. For countries such as Malaysia, the goal is to transform the economy to become more knowledge-driven in order to avoid the middle-income trap. In China, more reforms and liberalization are needed to improve market efficiency, increase competition, and encourage a more optimal allocation of financial resources. In most emerging Asian economies, common challenges include addressing the huge infrastructure deficit and improving regional connectivity; reducing red tape, which will promote economic formality and entrepreneurship and reduce pervasive and deep-rooted corruption; and improving market efficiency by phasing out distortionary measures. As the region’s poorest economies—such as India and Myanmar—are transitioning away from agriculture and developing a manufacturing base, they will need to create a sound and stable institutional framework for local and foreign investors and improve connectivity.
Taiwan (China) ranks 14th, dropping two places despite maintaining its score. The third of the Asian Tigers, behind Singapore and Hong Kong SAR, its performance has been very stable over the past six years. Notable strengths include its capacity to innovate (10th, down two), its highly efficient goods markets (11th), its world-class infrastructure (11th), and strong higher education (12th). In order to enhance its competitiveness, Taiwan will need to further strengthen its institutional framework (27th), whose quality is undermined by some inefficiency within the government (29th) and various forms of corruption (31st), and will also need to address some inefficiencies and rigidities in its labor market (32nd). As elsewhere in Asia, encouraging and facilitating the participation of women in the workforce (89th) would contribute to enhancing competitiveness.
New Zealand advances one rank to 17th place—its best rank since the introduction of the current GCI methodology. Among the highlights, the country is ranked 1st in the institutions pillar and features in the top 10 of five more pillars. In particular, New Zealand ranks third in the financial market development pillar. It boasts an excellent education system (9th), while the efficiency of its goods (6th) and labor (6th) markets is among the highest in the world.
Australia (22nd) follows an opposite trend. Since reaching its best rank—15th—in 2009, Australia has been dropping continuously in the rankings. However, although not outstanding, the country’s performance is remarkably consistent across the board. It ranks no lower than 30th in 11 of the 12 pillars of the GCI. It achieves its best rank in the financial market development pillar, advancing one position to 6th place. In particular, the soundness of its banking sector is especially strong (3rd, behind Canada and New Zealand). The country also posts gains in higher education and training, climbing to 11th position. Australia’s macroeconomic situation has deteriorated slightly (30th, down five places), owing mainly to the small increase of the budget deficit. Australia’s public debt-to-GDP ratio, though rising, is the fourth lowest among OECD countries. Overall, the quality of Australia’s public institutions is excellent (22nd) but tarnished by the 124th position it obtains for the extent of red tape. The main area of concern remains the labor market. Australia ranks 136th for the rigidity of its hiring and firing practices and 132nd for the rigidity of its wage setting. Indeed, as part of our Executive Opinion Survey, Australian businesses, year after year, have named the restrictive labor regulations the most problematic factor for doing business in their country by a wide margin.
Continuing its upward trend, Malaysia makes its way into the top 20 for the first time since the current GCI methodology was introduced in 2006. The country remains the highest ranked among the developing Asian economies. Malaysia advances nine positions in the institutions pillar, which largely drives this year’s progress. It ranks no lower than 60th in any of the 12 pillars of the GCI. It ranks an outstanding 4th in the financial market development pillar, which reflects its efforts to position itself as the leading center of global Islamic finance. And it ranks 7th in the efficiency of its goods and services markets and a business-friendly institutional framework (29th). In a region plagued by corruption and red tape, Malaysia stands out as one of the very few countries that have been relatively successful at tackling these two issues, as part of its economic and government transformation programs. The country, for instance, ranks an impressive 4th for the burden of government regulation, although its score differential with the leader in this area, Singapore, remains large. Malaysia ranks a satisfactory 26th in the ethics and corruption component of the Index, but room for improvement remains. Furthermore, Malaysia ranks 11th for the quality of its transport infrastructure, a remarkable feat in this part of the world, where insufficient infrastructure and poor connectivity are major obstacles to development for many countries. Finally, Malaysia’s private sector is highly sophisticated (15th) and already innovative (21st). All this bodes well for a country that aims to become a high-income, knowledge-based economy by the end of the decade. Amid this largely positive assessment, the government budget deficit, which represented 4.6 percent of GDP in 2013 (102nd); the low level of female participation in the workforce (119th); and the still comparatively low technological readiness (60th) stand out as some of Malaysia’s major competitive challenges.
After exiting the top 20 last year, the Republic of Korea (26th) drops one more position. Its performance remains uneven across the different dimensions of the Index. The country loses further ground in two of the three areas in which historically it has performed poorly. It now ranks 82nd (down eight places) in the institutions pillar and 86th (also down eight) in the labor market efficiency category. Although stable, the financial market development pillar remains a sore point (80th, up one), preventing Korea from closing the competitiveness gap with the three other Asian Tigers. On a brighter note, Korea possesses a remarkably sound macroeconomic environment (7th, second only to Norway among OECD countries). The country also boasts excellent infrastructure (14th), and enrollment rates at all levels of education are among the highest in the world. These factors, combined with the country’s high degree of technological adoption (25th) and relatively strong business sophistication (27th), contribute to explaining its remarkable capacity for innovation (17th).
Up one position, China ranks 28th. The country continues to lead the BRICS economies by a wide margin—well ahead of Russia (53rd), South Africa (56th), Brazil (57th), and India (71st). Small gains in most pillars of the GCI contribute to creating a more conducive ecosystem for entrepreneurship and innovation: higher education and training (65th, up five); business sophistication (43rd, up two); and the technological readiness pillar, which constitutes China’s weakest showing in the GCI, (83rd, up two). Problems endure in the critically important financial sector (54th), the assessment of which is weakened by the relative fragility of the banking industry. Access to loans remains very difficult for a large number of SMEs. The functioning of the market (56th, up five) is also improving, but various limiting measures and barriers to entry, along with investment rules, greatly limit competition. China is becoming more innovative (32nd), but it is not yet an innovation powerhouse. There is very little change in the assessment of the country’s governance structures (47th). Government efficiency is improving (now 31st), but corruption (66th), security concerns (68th, up seven), and low levels of accountability (80th, up two) and lack of transparency (43rd) continue to weaken the institutional framework. The macroeconomic situation remains favorable (10th): inflation is below 3 percent; budget deficit has been reduced; and public debt-to-GDP ratio, at 22.4 percent, is among the lowest in the world. The gross savings rate amounts to a staggering 50 percent of GDP. This rate is probably too high in light of the need for China to rebalance its economy away from investment and toward more consumption. Despite the persistence of bottlenecks, the country also boasts good transport infrastructure and connectivity (21st), thanks to decades of massive investments. Trends are largely positive, but now is not the time for China to be complacent. The country is no longer an inexpensive location for labor-intensive activities and is losing manufacturing jobs to less-developed countries and even to some more advanced economies. China must now create the high-value jobs that will sustain the increasing standards of living.
Despite its prolonged political crisis, Thailand advances six places to 31st position. The country moves up 12 places in the macroeconomic environment pillar and now ranks 19th, its best showing among the 12 pillars. In 2013, Thailand almost balanced its budget and reduced inflation to 2 percent. Public debt remained stable and the savings rate was high. Thailand continues to do well in the financial development (34th) and improves its already strong showing in the market efficiency pillar (30th, up four). However, market competition remains limited by a number of barriers to entry, especially those affecting foreign investments. Considerable challenges remain in other areas: first and foremost these relate to governance. Political and policy instability, excessive red tape, pervasive corruption, security concerns, and high uncertainty around property rights protection seriously undermine the institutional framework (93rd in the public institutions subpillar, down eight). In most of these areas, Thailand ranks below the 100th mark. In particular, the level of trust in politicians is among the lowest in the world (129th). Another concern is the mediocre quality of education at all levels (87th, down nine) and the still low level of technological readiness pillar (65th), although Thailand shows marked improvement in this area (up 13). It must be noted that all the data used in our assessment were collected before the most recent developments—including the military coup of May 2014—took place.
Up four notches to 34th place, Indonesia, Southeast Asia’s largest country, continues its progression in the overall rankings. This improvement in competitiveness will probably contribute to sustaining the country’s impressive momentum—its GDP grew by 5.8 percent annually since 2004—under the new leadership. That said, Indonesia’s overall performance remains uneven. Infrastructure and connectivity continue to improve: up five places from last year and 20 places since 2011, Indonesia now ranks 56th in the related GCI pillar. The quality of public and private governance is strengthening: Indonesia is up 14 places to 53rd as a result of improvement in 18 of the 21 indicators composing this pillar. In particular, Indonesia ranks a remarkable 36th place for government efficiency. Corruption remains prevalent (87th) but has been receding for several years. The macroeconomic situation deteriorated between 2012 and 2013 on the back of a higher deficit, but remains satisfactory (34th, down eight). The situation of its labor market (110th, down seven) remains by far the weakest aspect, owing to rigidities in terms of wage setting and hiring and firing procedures—for instance, the World Bank estimates that, on average, the cost associated with making a worker redundant is equivalent to 58 weeks of salary (139th). Furthermore, the participation of women in the workforce remains low (112th). Another area of concern is public health (99th). The incidence of communicable diseases and the infant mortality rate are among the highest outside sub-Saharan Africa. Turning to the more sophisticated drivers of competitiveness, Indonesia’s technological readiness is lagging (77th). In particular, the use of ICTs by the population at large remains comparatively low (94th, down 10).
Up seven places, the Philippines (52nd) continues its upward trend. The country’s gain of 33 places since 2010 is the largest over that period among all countries studied. The results suggest that the reforms of the past four years have bolstered the country’s economic fundamentals. The trends across most of the 12 pillars are positive, and in some cases truly remarkable. In the institutions pillar (67th), the Philippines has leapfrogged some 50 places since 2010. In particular, there are signs that the efforts made against corruption have started bearing fruit: in terms of ethics and corruption, the country has moved from 135th in 2010 to 81st this year. The recent success of the government in tackling some of the most pressing structural issues provides evidence that bold reforms can yield positive results relatively quickly. A similar pattern is observed in terms of government efficiency (69th) and the protection of property rights (63rd). Finally, the Philippines has made significant strides in terms of technological adoption (69th, up eight). The country is one of the best digitally connected developing Asian nations, close behind Malaysia (60th) and Thailand (65th). The same cannot be said of infrastructure, however, which remains poor (91st), especially with respect to airport (108th) and seaport (101st) infrastructure. The situation is just as worrisome in the labor market, which suffers from rigidities and inefficiencies: the Philippines ranks a mediocre 91st in this dimension and almost no progress has been made since 2010. Finally, security remains an issue (89th), in particular in terms of costs that the threat of terrorism imposes on businesses (110th).
Continuing on its downward trend and losing 11 places, India ranks 71st. The country’s new government faces the challenge of improving competitiveness and reviving the economy, which is growing at half the rate of 2010. Box 2 details India’s performance.
Up two positions, Vietnam ranks 68th, with a performance almost unchanged from last year. Following an episode of double-digit inflation in 2011, its macroeconomic situation continues to improve (75th, up 12 positions), as inflation declined to 6.6 percent. Public institutions also receive a better assessment (85th, up five), on the basis of better property rights protection (104th, up nine), improved efficiency (91st, up 13), and a lower level of perceived corruption (109th, up seven). Progress in this area occurs from a low base, however. The quality of transport and energy infrastructures also improves slightly (81st). In a region where many countries have poorly functioning labor markets, Vietnam ranks a satisfactory 49th, its best showing among the 12 pillars with the exception of the market size pillar (34th). Vietnam’s financial sector and its banks remain vulnerable. Technological readiness remains low (99th, up three). The country’s businesses are especially slow in adopting the latest technologies (118th), thus forfeiting significant productivity gains through technological transfer. The degree of business sophistication is low (106th, down eight), with companies typically operating toward the bottom of the value chain.
After two consecutive years of steep decline, Pakistan (129th) remains essentially stable since last year. The country obtains low marks in the most critical and basic areas of competitiveness. Its public institutions (125th) are constrained by red tape, corruption, patronage, and lack of property rights protection. Its security situation remains alarming (142nd). Pakistan is the third least safe of all countries covered, behind only Yemen and Libya. Thanks to a lower inflation rate and a smaller budget deficit, the country’s macroeconomic situation improves slightly but nevertheless remains dismal (137th). Pakistan’s infrastructure (119th)—particularly for electricity (133rd)—is underdeveloped. Moreover, the country’s performance in terms of health and education is among the worst of all the countries covered. Infant mortality (137th) is the highest outside sub-Saharan Africa, and, with one of the lowest enrollment rates in the world (132nd), it is estimated that almost a quarter of children do not go to primary school. Pakistan’s competitiveness is further penalized by the many rigidities and inefficiencies of its labor market (132nd, up six). Female participation in the labor force is the world’s fifth lowest (140th). Finally, the potential of ICTs is not sufficiently leveraged, and access to ICTs remains low (114th). On a slightly more positive note, Pakistan does comparatively better in the more advanced areas captured by the GCI, ranking 72nd in the financial development pillar and 81st on the business sophistication pillar.
Covered for the first time last year, Myanmar advances five places and ranks 134th. After decades of political and economic isolation, the country is going through profound changes. Its government has embarked on an ambitious process of reforms to improve the country’s economic landscape and prospects, notably by leveraging Myanmar’s extraordinary assets. These include an abundance of natural resources, very favorable demographics, and a strategic location in the heart of Asia. Competitiveness is at the core of this strategy. However, Myanmar’s challenges are many and the road to prosperity will be a challenging one. The country ranks beyond the 100th rank in 10 out of the 12 pillars of the GCI, but has improved in 11 of them over the past year.