What competitiveness is and why it matters
Our conceptual definition of competitiveness remains unchanged. We continue to define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. We focus on productivity because growth models suggest that, in the long run, productivity is the most fundamental factor explaining the level of prosperity of a country and hence its citizens.
Since Adam Smith’s work (1776), economists have identified, theoretically and empirically, dozens of possible factors—both within and outside firms—affecting the level and growth rates of productivity and prosperity across countries. These range from the institutional framework discussed by Smith, which allows for division of labor and exchange, to the most recent studies on connectivity as a source of business innovation. They include factors such as macroeconomic stability, corruption (or the absence of it), security, education (both basic and advanced), the health of the labor force, regulation, financial development, the efficient use of talent, the right incentives for firms to invest in research and development (R&D), market size, the participation of women in the workforce, and the use of modern production and distribution techniques.
Each proposed factor rests on solid theoretical grounds and is backed by empirical evidence. Because the development process is complex and economic theories are open ended, any effort to identify one single factor that matters above all others is misguided. Indeed, all of these factors could be in place at the same time.
Academic research since the 1950s has formalized several of these ideas in mathematical terms.3 It has provided empirical evidence that capital accumulation is not sufficient to explain differences in countries’ prosperity, and total factor productivity (TFP) is the main long-run engine of growth, living standards, and prosperity. The term productivity is widely used as shorthand for TFP.
To reflect the complexity of the economic development process, the GCI embraces a wide array of determinants of a country’s productivity at both the macro- and microeconomic levels. Most of the suggested drivers of productivity are linked to one another, which makes any attempt to measure competitiveness more challenging. For the sake of clarity, simplicity, and intellectual organization, we divide the potential factors affecting competitiveness that we have identified into 12 categories that will translate into the 12 pillars of the updated GCI. This categorization is intended to provide guidance for policymakers in the form of a tool that gives information on the competitive strengths and weaknesses of their respective economies.
The 12 sections below offer a conceptual discussion to restate or update the relevance of each productivity factor in light of the current state of academic research. At the time of publication of this Report, the update of the GCI is still a work in progress, so what we present here is our current thinking on those factors that drive competitiveness; we expect to refine our approach in the coming year through a series of consultations with academics, practitioners, and policymakers. Despite improvements in measurements, some areas still suffer from a scarcity of reliable data that cover the large sample size of the GCI, so that the elements presented in each section may not necessarily be implemented in the final, updated GCI. In an attempt to stimulate discussion on relevant indicators to capture the concepts outlined above, we present potential indicators for each of the drivers of competitiveness that we have identified to date in Appendix A to this chapter.