East Asia and Pacific
Among the 17 East Asia and Pacific economies covered by the GCI, 13 have increased their score—albeit marginally—with Indonesia and Brunei Darussalam making the largest strides. Only Singapore, the Philippines, Cambodia, and Lao People’s Democratic Republic have seen their scores decrease (Figure 3). Even with China’s gradual slowdown, economic growth has continued to be robust in the region as a result of sustained domestic demand and increased exports from emerging economies.
Singapore falls behind the United States to rank 3rd globally, but remains the most competitive economy in the region. Hong Kong SAR is closing the gap, rising from 9th to 6th, while Japan slips back one place for the second year in a row and now ranks 9th. The lowest-ranked performer among the region’s advanced economies continues to be the Republic of Korea, which remains 26th for a fourth consecutive year, placing it behind Malaysia (23rd), the region’s top emerging economy, and just ahead of China (27th).
Many of the region’s advanced economies—including Korea, Hong Kong SAR, and Taiwan (China), but not Japan—and a few emerging economies have benefited from a favorable macroeconomic context. This could be partly explained by a regional financial market stabilizing after the volatility of late 2016, although the recent escalation of tensions in the Korean peninsula has again raised uncertainty. High levels of household debt in many advanced economies may also eventually threaten the region’s economic and financial stability.5
There have been signs of a productivity slowdown among the region’s advanced economies and in China,6 suggesting the need for greater focus on advancing technological readiness and promoting innovation. For instance, greater access to mobile technology in China has fostered the expansion of the “sharing economy,” which is expected to reach 10 percent of GDP by 2020. Hong Kong SAR is the region’s only economy among the top 10 globally in technological readiness, a category dominated by European economies—but all the others, except Singapore, have made tremendous progress since last year.
On innovation, Taiwan (China) rebounds this year after several years of decline, Hong Kong SAR and New Zealand continue to make steady progress, and Korea’s score improves slightly. Both Japan and Singapore maintain their places among the top 10 innovators, despite their scores falling this year—Japan’s for the third consecutive year. Innovation and sophistication are not the only priorities, however: Vietnam, Cambodia, the Philippines, Lao PDR, and Mongolia could all make large gains in competitiveness at a relatively lower cost by improving their performance on infrastructure, health, and education.
Singapore (3rd, down one) posts an excellent performance across the board. It continues to lead the Higher education and training pillar and the Goods market efficiency pillar, and features in the top 10 of six others. In particular, Singapore ranks first worldwide for public sector performance, one of the categories of the Institutions pillar, where it also excels (2nd). The country also possesses superior transport infrastructure (2nd), its labor market is extremely efficient (2nd), and its financial sector is well developed, stable and trustworthy (3rd). Singapore’s macroeconomic environment (18th) has slightly deteriorated as a result of a persisting deflationary spell. There exists room for improvement among innovation (9th) and business sophistication factors (18th). Singapore continues to lag behind the world’s most prolific innovation powerhouses in these areas.
Hong Kong SAR (6th) has made the largest leap among the top 10 economies this year, moving ahead of Sweden (7th), the United Kingdom (8th), and Japan (9th). Hong Kong is still endowed with the world’s best physical infrastructure and its healthy level of competition and openness ensure extremely efficient markets (2nd), which in turn are supported by strong and stable financial markets (5th). Hong Kong’s labor market is highly flexible and efficient, though it could do better in terms of harnessing talent from its workforce (17th). Hong Kong has also advanced its macroeconomic environment by slightly bringing down its inflation rate in 2016. Its most significant improvement can be observed across the business sophistication (11th) and innovation (26th) pillars, which is a step in the right direction given that the business community consistently cites their insufficient capacity to innovate as one of the most problematic factors for doing business.
Japan (9th), with a minor improvement in score, loses one place as a result of Hong Kong SAR’s larger improvement. The country’s overall performance is largely driven by high-quality physical and digital infrastructure (4th), a healthy and educated workforce, and a fertile innovation ecosystem. Despite these attributes, Japan’s performance is dragged down by its poor macroeconomic environment (93rd), caused mostly by a period of deflation in 2016 and persistently troubled public finances. The situation has improved slightly since last year as a result of better government budget balance and higher gross national savings. Japan also made strides in the technological readiness pillar (15th, up four) as a result of higher levels of ICT usage. A drop in the rankings in the labor market efficiency pillar, however, points to certain difficulties among firms in retaining talent.
Australia (21st) moves up one place in the rankings with a stable score. When considering Australia’s performance by pillar, its results are rather less static. The country posts a noticeable drop in the infrastructure pillar, more specifically its communications’ infrastructure, while several other pillars increase only marginally. Australia’s overall performance is not remarkable: in most pillars it does not rank among the top 25 countries. Similar to last year, Australia performs comparatively better in the higher education and training pillar (9th), which reflects its capacity to produce a large pool of qualified workers. It also performs well in the financial market development (6th) pillar, which is driven mostly by a stable and well-regulated banking sector.
The Republic of Korea’s (26th) overall performance has improved slightly since last year, with all 12 pillars obtaining a higher score. For an advanced economy, however, the country still presents large disparities between pillars. Its performance is largely driven by its remarkable infrastructure (8th) and a highly favorable macroeconomic environment (2nd). This year’s political turmoil and corruption scandals highlighted the challenges in the country’s institutional environment, yet the score of the institutions pillar advanced marginally. Another area in which Korea consistently underperforms is labor market efficiency, in which it ranks 73rd, hiding deeper challenges with regard to labor market flexibility—in which it ranks 106th—caused notably by conflictual labor-employer relations and high redundancy costs. Looking back at Korea’s performance over the last decade, it is one of the few advanced economies that have experienced a general decline in performance for a majority of its pillars of competitiveness. It is hoped that this year’s rebound signals a shift toward a more positive trend overall.
China (27th) has gained one place as a result of steady, albeit incremental, improvements to its overall competitiveness score. Since last year, China has made progress in all pillars except its macroeconomic environment and infrastructure. A decline in the former is explained by a worsening of the government budget deficit, which has been slightly higher than the expected target for 2016.7 The score for the infrastructure pillar decreases for the second year in a row, the result in part of a decline in the quality of port infrastructure and the reliability of electricity supply as perceived by the business community. The largest gains are observed in technological readiness, owing to higher ICT penetration and the extent to which foreign direct investments have been bringing new technologies to China. Despite the remarkable progress already made, further improvement on this front would foster the growth of emerging digital industries and create the conditions necessary to kick-start new ones. Other significant advances have been made in the goods market efficiency pillar as a result of a slight reduction in the number of procedures for starting a business compared to last year.
Indonesia (36th) is inching its way up the competitiveness ladder, moving ahead five places since last year. Similar to Korea, Indonesia has improved its performance across all of its pillars. Its position in the rankings is driven mainly by its large market size (9th) and a relatively robust macroeconomic environment (26th). Ranking 31st and 32nd in innovation and business sophistication respectively, Indonesia is one of the top innovators among the emerging economies. In contrast, the country is lagging quite far behind in terms of technological readiness (80th) despite having made steady progress on that front over the last decade. Significant advances are also needed in the labor market efficiency pillar (96th), which is dragged down by excessive redundancy costs, limited flexibility of wage determination, and a limited representation of women in the labor force.
With a relatively modest increase in its overall score, Vietnam (55th) moves up five places to narrowly surpass the Philippines (56th). Vietnam’s competitiveness is significantly driven by its market size (31st). Although the withdrawal of the United States from the Trans-Pacific Partnership (TPP) earlier in 2017 eliminated significant trade opportunities, the country’s growth is nonetheless projected to remain robust from strong exports.8 Significant improvements are necessary across all pillars, notably among the basic requirement factors (75th) and higher education (84th), as firms perceive that the lack of an educated workforce constitute a significant hurdle for doing business. Vietnam could also boost its competitiveness by closing gaps in innovation and sophistication factors with countries at a similar stage of development, such as the Philippines (see Box 2 for a description of how the latter is working with the GCI to advance its competitiveness agenda).
Box 2: The Philippines: Building City Competitiveness
The Philippines created the Task Force on Competitiveness in 2006, which it upgraded to create the National Competitiveness Council (NCC) in 2011 through an Executive Order issued by the President. The NCC is a public-private partnership body, with government represented by the Secretary of Trade and Industry, the Secretary of Finance, the Director-General of the National Economic Development Authority (the country’s planning agency), the Secretary of Education, the Secretary of Tourism, and the Secretary of Energy, while the private sector is represented by five business executives appointed by the President.
The Council closely monitors the global competitiveness ranking of the Philippines across a number of major reports, including the World Economic Forum’s Global Competitiveness Report, Travel & Tourism Competitiveness Report, and Global Information and Technology Report. Over a dozen global indices are tracked so data can be used for benchmarking the country’s progress in the competitiveness rankings across indicators as diverse as governance, infrastructure, education, science and technology, and the ease of doing business.
Working groups, task forces, and special projects have been created to focus on specific issues or problems that need special attention. These groups have also been created as public-private partnership committees, with co-chairs from government and the private sector and membership drawn almost equally from both sides.
One of the projects launched by the Council was the Cities/Municipalities Competitiveness Index, in the belief that local competitiveness is a key building block for overall national competitiveness. The Council also believes that, in a country the size of the Philippines—with over 100 million people spread out over 7,000 islands—it is important to create more economic engines built around cities or clusters of cities to drive long-term economic growth and development. Building these economic engines would disperse investment and job opportunities and spur inclusive growth. It would also spread risk for companies looking for new business locations and create a better investment environment for the country as a whole because there would now be more options available.
The problem was that the identification of which cities were likely to be good candidates for their own region’s growth engines was not easy. Moreover, cities themselves could not tell how they compared against others or whether their competitive positions were improving or not over time. So, in 2012, the Council conceptualized the Cities/Municipalities Competitiveness Index and started organizing Regional Competitiveness Committees across the nation to oversee a review. Although there were earlier attempts to measure subnational competitiveness, those projects covered only a few cities (the conventional choices) and could be carried out only once every three years. These early projects eventually faded away.
The goal was to measure all cities and municipalities (the Philippines has 1,634) annually and to eventually institutionalize and embed this data-gathering and analysis activity in cities so they could use their own data to plan their futures. Following an initial set of discussions with industry and experts, the Council worked jointly with Regional Competitiveness Committees to draw up a list of indicators that would measure the competitiveness of cities and municipalities. These were categorized in three broad pillars—Economic Dynamism, Government Efficiency, and Infrastructure—for a total of 30 indicators. At first, not all data were readily available because records were not well maintained. Thus, many cities had difficulty submitting data for measurement. Nonetheless, the work continued and a total of 285 cities and municipalities entered the Index; an announcement of the first ranking report was made in 2013. Since then some adjustments have been made to the indicators to focus on readily available data. A fourth pillar—Resiliency—was also added because this issue has become increasingly important for cities in the age of climate change.
This year, the Council is running the fifth annual Cities/Municipalities Competitiveness Index awards, with 1,487 cities and municipalities—over 90 percent of the country—now covered. The award ceremony has become a much-anticipated event by mayors and city administrators and almost 2,000 people were expected to attend the ceremony in August 2017. More importantly, the data and results generated by the award have become a benchmark for both government agencies and investors to more closely monitor cities and make decisions, whether for budgeting or investing.
The old adage that “what gets measured, gets managed” rings true for more and more cities in the Philippines. Local competitiveness will lead to better delivery of services and economic development in cities—the building blocks of nations.
Contributed by Guillermo M. Luz, Private Sector Co-Chairman, National Competitiveness Council of the Philippines.