Chapter 1: Global Findings
Share
How to sustain growth is a question that preoccupies every government. By drawing a detailed map of the competitiveness landscape of 140 economies, the new GCI 4.0 can point towards lessons learned from global analyses. It can also help respond to critical emerging questions about competitiveness in today’s economic, political, technological and social context.
This chapter distils global findings from the inaugural edition of the Global Competitiveness Index (GCI) 4.0, featured below. It also includes four In Depth sections on what the GCI 4.0 tells us are critical questions arising around innovation, institutions, economic progress, and openness.
Competitiveness is not a zero-sum game between countries—it is achievable for all countries
When competitiveness is equated to productivity, it becomes clear that it is neither a competition nor a zero-sum game. All countries can become more productive at the same time. Improving education standards in Country A does not lower standards in Country B; tackling corruption in Country A does not make Country B more corrupt. Hence, the pursuit of national competitiveness does not undermine global cooperation—indeed, openness contributes to competitiveness (see the third In Depth section later in this chapter). This finding is important to reassert at a time when globalization and the global governance system are being put to the test.
While competitiveness is not a zero-sum game between countries, cross-country comparisons can be instructive by pointing to benchmarks and best practices. The GCI 4.0 therefore presents a ranking of countries, as in previous years, but aims to focus the debate instead on three fundamental questions: Which areas should a country prioritize?; Is a country making progress over time?; and ‘What can a country learn from the highest performing countries?’
This index does this through a ‘distance to frontier’ approach, in which performance on each component is evaluated against the ‘frontier’, or ideal state. Stakeholders are encouraged to ask whether their country is moving closer to the frontier in a given area, where its distance to the frontier is the largest, and what it can learn from those who are performing best in selected areas.
There are deep divides between countries when it comes to current competitiveness—and the risk of further divergence
The United States is the closest economy to the frontier, the ideal state, as described by the concepts included in the index, where a country would obtain the perfect score on every indicator. With a competitiveness score of 85.6, it is 14 points away from the frontier mark of 100, slightly closer than Singapore and Germany (see the full rankings). This implies that, even though the United States is the top-ranked economy among the 140, there is still room for improvement.
Globally, the median score is 60. Twenty-one countries, including 18 in sub-Saharan Africa, score lower than 50. With a score of 35.5—fully 50 points behind the United States—Chad is the furthest from the frontier and therefore ranked last.
The competitiveness gap runs deep across regions (Figure 1). Europe and North America (the two are grouped together for the purpose of the analysis) are home to seven of the 10 most competitive economies. The three others in the top 10—Singapore, Japan and Hong Kong SAR—are in the East Asia and the Pacific region. Other regions lag significantly behind; in particular Sub-Saharan Africa, where eight of the 10 least competitive economies are found. Additionally, regional averages conceal vast disparities within them. In Europe, there are four distinct groups of countries with very different competitiveness levels. In Latin America, Chile’s score (70.3, 33rd) is almost twice that of Haiti (36.5, 138th). The existence of pockets of over- or under-performance within each region suggests that there is little determinism in competitiveness; it is instead the result of proactive policies and leadership (see Chapter 2 for a longer discussion). The 4IR is likely to compound these differences in competitiveness for countries that are unprepared to leverage new opportunities. It may result in a further segregated world, in which highly competitive countries adapt and thrive, and the least competitive countries stagnate or decline.1 Similarly, within countries the 4IR could increasingly segregate workforces into “low-skill/low-pay” and “high-skill/high-pay” groups, which could exacerbate inequalities and increase social tensions.2
In the age of the Fourth Industrial Revolution all economies have the opportunity to carve a path to competitiveness
For most of the 20th century, the pathway to development seemed relatively clear: lower-income countries would be expected to develop through progressive industrialization by leveraging unskilled labour. Today, the sequence has become less clear. For example, robotics are making light manufacturing less labour-intensive. However, the 4IR is also making it more feasible for lower-income countries to leapfrog in certain areas. ICTs, for instance, have been shown to facilitate access to basic services and enable new business models. ICTs and globalization enable the rapid transfer of ideas and technologies and lower the barriers to innovation, offering new ways to develop.
The GCI 4.0 reflects this growing complexity of policy prioritization by no longer weighting the pillars according to a country’s stage of development. Instead, the overall score is simply the average of the 12 pillar scores. All competitiveness factors matter for all countries, regardless of their stage of development, and any pillar can be considered a potential priority. The 4IR makes it reasonable to take this more agnostic approach to income level and calls for a more encompassing approach to policy prioritization. This is supported by the GCI’s results: a country’s overall competitiveness depends to a very large extent on that country’s performance on the relatively basic drivers of competitiveness (see Chapter 2).
The promise of leveraging technology for economic leapfrogging remains largely unfulfilled
Analysis of the GCI pillars makes clear that in many countries, the root causes of slow growth and inability to leverage new opportunities offered by technology continue to be the ‘old’ developmental issues—institutions, infrastructure and skills. Notably, the disappointing economic performance of most Sub-Saharan African countries is more attributable to weaknesses in these areas than in any others, and the much-vaunted economic leapfrogging will not happen unless these issues are addressed decisively.
While there is much hype around the potential of information and communications technologies (ICTs), and while ICTs can clearly be enablers of productivity on some GCI pillars, such as innovation and business dynamism, it would be misguided to rely on technology to solve all problems.3 For example, evidence of significant impact technology in areas such as education, health and governance remains anecdotal.4 Additionally, an enabler is not the same as a substitute. There is full complementarity among the drivers of productivity, but little compensability. ICTs cannot, for instance, replace transport infrastructure.
Moreover, ubiquitous ICTs and universal internet access remain aspirational: there are, at most, 4.5 billion smartphones in use in the world and more than half of humanity has never gone online.5 ICT adoption—which often serves as a proxy for a country’s general level of technological adoption—is either the weakest or second weakest of the 12 pillars for 57 out of the 140 countries. The second In Depth section later in this chapter examines how institutions remain a fundamental building block of competitiveness and therefore a prerequisite to fulfilling the promise of leapfrogging.
Fostering innovation requires holistic strategies that most economies have yet to master
Innovation is especially critical as a driver of productivity growth and value creation in the 4IR. It is already at the core of the growth agenda of most advanced economies and a growing number of emerging economies. But governments are struggling to understand what makes a country innovative.
The new GCI adopts a broad approach guided by three principles: first, a country’s capacity to innovate depends on the quality of a vast and complex ecosystem; 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 businesses and organizational models. Since the GCI 4.0 aims to capture the complexity of the innovation process and the breadth of the ecosystem supporting it, the index includes softer drivers of innovation—such as creativity and entrepreneurship—that are difficult for stakeholders and leaders to grasp, let alone to influence.
The results of the GCI 4.0 reveal there are only a handful of innovation hubs in the world, for reasons we unpack in the first In Depth section later in this chapter. The global median score on the Innovation capability pillar (pillar 12) is 36 out of 100, the lowest score across the 12 pillars. For 77 of the 140 economies studied, Innovation capability is the weakest pillar. Only four ‘super innovators’ score above 80: Germany, the United States, Switzerland and Taiwan (China).
Enhancing the fundamentals of competitiveness improves resilience to shocks
The results reveal that countries that optimize their performance on the factors included in the GCI 4.0 are on a higher long-term growth trajectory (see Chapter 3, Box 3) and achieve higher levels of income (see Figure 2). More competitive economies are also more resilient to various shocks. As shown in previous editions, the more competitive advanced economies rebounded from the Great Recession much more quickly, returning to pre-crisis levels of employment and growth by 2015, while less competitive economies experienced protracted stagnation or even long episodes of recession.6 Building economic resilience through competitiveness is more important than ever in today’s volatile context, with a wide range of vulnerabilities, geopolitical tensions and potential flash points around the world.
Likewise, more competitive countries are also better equipped to address the challenges of the Fourth Industrial Revolution (4IR)– and to seize the opportunities it presents. In particular, competitive economies that prioritize agile and innovative businesses and a skilled workforce, combined with visionary governments, are better able to handle the negative impacts of new technologies while also being better prepared for the benefits (see Chapter 3, Box 1 for a longer discussion).
The global economy is growing and the short-term outlook looks favourable—but medium-term risks are mounting. Tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions that could derail the recovery and deter investment. Financial market conditions remain accommodating to advanced economies, but this could change rapidly as levels of public, corporate and/or private debt are very high in many advanced and emerging economies. Should a shock occur, government capacity will be limited and credit markets might seize up again. Now is the time to make structural reforms and investment to improve productivity. Given the volatile context, the window might not be open for much longer.
Achieving equality, sustainability and growth together needs proactive, far-sighted leadership
There is a worldwide consensus on the need for a more holistic model of economic progress that promotes higher living standards for all, respects planetary boundaries, and does not disadvantage future generations. Competitiveness is necessary but not sufficient to meet these objectives.
In the third In Depth section, we show that more competitive economies tend to do better on selected socio-economic outcomes. Competitiveness, for instance, has a close and positive relationship with measures of poverty and life satisfaction. The relationship with equality is looser: more competitiveness seems neither to systematically reduce or increase inequality. This implies there is no inherent trade-off between equality and growth: it is possible to be both pro-growth and ‘pro-equity’, as shown by the strong performance of several northern European countries both in terms of competitiveness and inclusion (Figure 3). The relationship between competitiveness and the environment, however, is less conclusive. The most competitive economies have the largest ecological footprints, but they are the most efficient (footprint per unit of GDP is the lowest). It is therefore incumbent upon leaders to set longer-term priorities to create virtuous cycles between equality, sustainability and growth.
In Depth Sections
The In Depth sections following sift through the results of the Global Competitiveness Index 4.0 to tackle four important questions—and to debunk the assumptions and myths surrounding them.
- Is there a formula for innovation? A critical driver of productivity, innovation is bound to assume increased significance in the 4IR. In this section, we show the myriad factors that make for a fertile innovation ecosystem. The difficulty of having all these elements in place explains why there are so few innovation hubs around the world.
- Are institutions still important? We show how weak institutions continue to act as a drag on competitiveness, and urge governments to not lose sight of this long-standing governance issue.
- Are prosperity, people and the planet compatible? We stress the importance of competitiveness for overall economic progress. We show that more competitive economies are on a higher long-term growth trajectory (when accounting for their level of development) and achieve better socioeconomic outcomes than less competitiveness economies.
- Should countries pursue openness? We examine how openness is linked to competitiveness and inclusion. We argue that being open is almost always good for competitiveness, and not necessarily bad for inclusion.
References
- Acemoglu, Daron, Introduction to Modern Economic Growth, Princeton University Press, 2009.
- Autor, David and Anna Salomons, Is Automation Labor-Displacing? Productivity Growth, Employment, and the Labor Share, NBER Working Paper No. 24871, National Bureau of Economic Research, 2018.
- Autor, David H., David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States” American Economic Review, vol. 103, no. 6, 2013, pp. 212–2168.
- Bannister, Geoffrey J. and Alex Mourmouras, Welfare vs. Income Convergence and Environmental Externalities, IMF working paper: WP/17/271, International Monetary Fund, 2017.
- Brinded, Liana, The 9 Countries with the Most Entrepreneurs, World Economic Forum, 2015, https://www.weforum.org/agenda/2015/06/the-9-countries-with-the-most-entrepreneurs/.
- CB Insights, Research Briefs: Unicorns Abroad: The Creation Of Billion-Dollar Startups Is Shifting Out Of The US, 2017.
- Cirera, Xavier and Leonard Sabetti, The Effects of Innovation on Employment in Developing Countries: Evidence from Enterprise Surveys, Policy Research Working Paper No. 7775, World Bank, 2016.
- Department for International Development (DfID), Growth – Building Jobs and Prosperity in Developing Countries, DfiD working paper, 2008.
- Feenstra, Robert C., Robert Inklaar and Marcel Timmer, “The Next Generation of the Penn World Table”, American Economic Review, vol. 105, no. 10, 2015, pp. 3150-3182, dataset available for download at www.ggdc.net/pwt.
- Frankel, Jeffrey A. and David Romer, “Does trade cause growth?”, American Economic Review, vol. 89, no. 3, 1999, pp. 379–399.
- Global Footprint Network (GFN), National Footprint Accounts 2018, 2018.
- Goos, Maarten, Alan Manning, and Anna Salomons, “Explaining job polarization: Routine-biased technological change and offshoring”, American Economic Review vol. 104, no. 8, 2014, pp. 2509–2526.
- Helliwell, John F., Richard Layard, and Jeffrey D. Sachs, World Happiness Report 2018, Sustainable Development Solutions Network, 2018.
- International Monetary Fund (IMF), World Economic Outlook Database (April 2018 edition), 2018.
- International Telecommunications Union (ITU), World Telecommunications/ICT Indicators Database 2018 (22nd, June 2018 edition), 2018.
- Juma, Calestous, “Leapfrogging Progress: The Misplaced Promise of Africa’s Mobile Revolution”, The Breakthrough Journal, summer/issue 7, 2017.
- Karabarbounis, Loukas and Brent Naiman, The Global Decline of the Labor Share, NBER Working paper #19136, National Bureau of Economic Research, 2013.
- Lustig, Nora, Fiscal Policy, Inequality and the Poor in the Developing World, Tulane University Economics Working Paper 1612, 2016.
- McKinsey Global Institute, Jobs Lost, Jobs Gained: Workforce Transitions in a Time of Automation, 2017.
- North, Douglass C., “Economic Performance Through Time”, American Economic Review, vol. 84, no. 3, 1994, pp. 359–68.
- OECD, Society at a Glance 2009, 2009.
- ———, Towards Green Growth, 2011.
- Parizat, Roy and Heinz-Wilhelm Strubenhoff, Future Development: Using Big Data to Link Poor Farmers to Finance, Brookings, 2018.
- Raftery, Adrian E., Alec Zimmer, Dargan M.W. Frierson, Richard Startz, and Peiran Liu, “Less than 2 °C warming by 2100 unlikely”, Nature Climate Change, vol. 7, 2017, pp. 637–641.
- Ravallion, Martin, “Inequality and Globalization: A Review Essay”, Journal of Economic Literature, vol. 56, no. 2, 2018, pp. 620–642.
- Rodrik, Dani, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth, Princeton University Press, 2008.
- ———, “Global Poverty Amid Global Plenty: Getting Globalization Right”, Americas Quarterly, Spring, 2012.
- Schwab, Klaus, “The Fourth Industrial Revolution”, Foreign Affairs, December, 2015.
- Sen, Amartya, Development as Freedom, Oxford, Oxford University Press,1999.
- Solt, Frederick, The Standardized World Income Inequality Database, 2009, https://hdl.handle.net/1902.1/11992, Harvard Dataverse, V20.
- United Nations Conference on Trade and Development, Regional trade agreements, integration and development, UNCTAD Research Paper no. 1, 207.
- World Bank, World Development Indicators Database, retrieved July–September 2018.
- World Economic Forum, The Global Competitiveness Report 2015–2016, 2015.
- ———, The Future of Jobs Report 2018, 2018.
- ———, The Inclusive Growth and Development Report 2017, 2017.
- ———, Inclusive Development Index 2018: Summary and Data Highlights, 2018.
- World Inequality Lab, Paris School of Economics, World Inequality Report 2018, 2018.
- WWF, Living Planet Report 2016 – Risk and resilience in a new era, 2016.
- Wu, Yimian, 2017 In Review: China Leads World After Minting 22 New Unicorns Worth $37.3B, China Money Network, 6 December 2017.
- Yale Center for Environmental Law & Policy, Yale University and Center for International Earth Science Information Network, Columbia University, 2018 Environmental Performance Index, 2018.