Economics for everyone: The crux of competitiveness

by Vijay Birajdar on Sunday 8 May 2011, 9:23 PM | Category: Business Environment| View: 1703 views
 
 
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Economics for everyone: The crux of competitiveness

 
 

India has dropped in its global competitiveness ranking to the 50th place; while neighboring China has improved it's ranking to the 30th spot in the latest list compiled by the World Economic Forum

 
Prof.M.Guruprasad / 17:44, Nov 05, 2008
 

 

India has dropped in its global competitiveness ranking to the 50th place; while neighboring China has improved it's ranking to the 30th spot in the latest list compiled by the World Economic Forum. In the annual Global Competitiveness 2008-09 Report, India has dropped two places from last year's 48th spot.

 

The main factor behind this slip is its instable macroeconomics, and according to the forum, "India's overall deficit is weakened with the government running one of the highest deficits in the world."

 

Even as the financial turmoil is ravaging the economy, the US has topped the league of 134 countries. In last year's list, China was at the 34th place, whileIndia was ranked at the 48th position.

 

The rankings are calculated from both publicly available data and the Executive Opinion Survey a comprehensive annual survey conducted by the World Economic Forum together with its network of Partner Institutes in the countries covered by the report. This year, over 12,000business leaders were polled in a record 134 global economies. The survey is designed to capture a broad range of factors affecting an economy's business climate, WEF said in a statement.

 

Other countries in the top 10 are Singapore (5th), Finland (6th), Germany (7th), Netherlands (8th), Japan (9th) and Canada (10th). According to the WEF report,India derives substantial advantages not only from its market size but also from its strong business sophistication. The country is endowed with strong business clusters and a large number of local suppliers, in addition to availability of scientists,

engineers and the quality of its research institutions, it added.

 

Among the BRIC economies, China has the highest rank, followed by India, Russia (51st) and Brazil (64th). Further, only India has dropped in the ranking, while Russia and Brazil have jumped from last year's 58th and 72ndpositions, respectively. The top four countries in the index-US, Switzerland,

Denmark and Sweden-have retained their respective positions from last year.

 

This year's Global Competitiveness Report is being released at a time of multiple shocks to the global economy. The sub prime mortgage crisis and the ensuing credit crunch, combined with rising inflation worldwide and the consequent slowdown in demand in many advanced economies, has engendered significant uncertainty about the short-term outlook for the world economy.Global growth is slowing, and it is not yet clear when the effects of the present crisis will subside The financial market crisis that began in early 2007 is almost unprecedented in its impact, having resulted not only in losses in markets and forfinancial institutions, but also in an erosion of public confidence in the financial sector and among the institutions themselves across the industrialized world. In the meantime, rising energy and commodity prices are having a dual effect on emerging and developing economies: on the one hand, boosting growth; on the other hand creating inflationary pressures that raise the basic cost of living, thus increasing poverty levels. More generally, although the present slowdown was originally expected to be confined mainly to the United States, it is now spreading to other industrialized economies and it is not yet clear what the future will bring for emerging markets.

 

The concept of competitiveness:

 

The report, define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens. The productivity level also determines the rates of return obtained by investments in an economy. Because the rates of return are the fundamental drivers of the growth rates of the economy, a more competitive economy is one that is likely to grow faster over the medium to long run. The concept ofcompetitiveness thus involves static and dynamic components: although the productivity of a country clearly determines its ability to sustain a high level of income, it is also one of the central determinants of the returns to investment, which is one of the key factors explaining an economy's growth potential.

 

Analysis:

 

The Report is a contribution to enhancing our understanding of the key factors determining economic growth, and explaining why some countries are much more successful than others in raising income levels and opportunities for their respective populations, offering policymakers andbusiness leaders an important tool in the formulation of improved economic policies and institutional reforms. This year's Report is characterized by the continued expansion of country coverage. Currently featuring a total of 134 economies, it remains the most comprehensive assessment of its kind. The Report contains a detailed profile for each of the economies featured in the study as well as an extensive section of data tables withglobal rankings covering over 100 indicators.

 

 

After several years of rapid and almost unhampered growth, the global economic landscape is changing. Rising food and energy prices, a major international financial crisis, and the related slowdown in the world's leading economies are confronting policymakers with new economic management challenges. Today's volatility underscores the importance of acompetitiveness supporting economic environment that can help national economies to weather these types of shocks in order to ensure solid economic performance going into the future. A nation's level ofcompetitiveness reflects the extent to which it is able to provide rising prosperity to its citizens. Since 1979, the World Economic Forum's annualGlobal Competitiveness Reports have examined the many factors enabling national economies to achieve sustained economic growth and long-term prosperity. Our goal over the years has been to provide benchmarking tools forbusiness leaders and policymakers to identify obstacles to improved competitiveness, stimulating discussion on strategies to overcome them. For the past several years, the World Economic Forum has based its competitiveness analysis on the Global Competitiveness Index (GCI), a highly comprehensive index for measuring national competitiveness, which captures the microeconomic and macroeconomic foundations of national competitiveness.

 

Measurement

 

The 12 pillars of competitiveness

 

The determinants of competitiveness are many and complex. For hundreds of years, economists have tried to understand what determines the wealth of nations. This attempt has ranged from Adam Smith's focus on specialization and the division of labor to neoclassical economists' emphasis on investment in physical capital and infrastructure, and, more recently, to interest in other mechanisms such as education and training, technological progress (whether created within the country or adopted from abroad), macroeconomic stability, good governance, the rule of law, transparent and well-functioning institutions, firm sophistication, demand conditions, market size, and many others. Each of these conjectures rests on solid theoretical foundations and makes common sense. The central point, however, is that they are not mutually exclusive-so that two or more of them could be true at the same time. Hundreds of econometric studies show that many of these conjectures are, in fact, simultaneously true. This also can partly explain why, despite the presentglobal financial crisis, we do not necessarily see large swings in competitiveness ratings, for example in the United States. Financial markets are only one of several important components of national competitiveness . The GCI captures this open-ended dimension by providing a weighted average of many different components, each of which reflects one aspect of the complex reality that we callcompetitiveness. The report groups all these components into 12 pillars of economic competitiveness.

 

Basic Requirements

 

1st pillar: Institutions

 

A. Public institutions

  1. Property rights
  2. Property rights
  3. Intellectual property protection1/2
  4. Ethics and corruption
  5. Diversion of public funds
  6. Public trust of politicians
  7. Undue influence
  8. Judicial independence
  9. Favoritism in decisions of government officials
  10. Government inefficiency
  11. Wastefulness of government spending
  12. Burden of government regulation
  13. 1.09 Efficiency of legal framework
  14. Transparency of government policymaking
  15. Security
  16. Business costs of terrorism
  17. Business costs of crime and violence
  18. Organized crime
  19. Reliability of police services

B. Private institutions

  1. Corporate ethics
  2. Ethical behavior of firms
  3. Accountability
  4. Strength of auditing and reporting standards
  5. Efficacy of corporate boards
  6. Protection of minority shareholders' interests

2nd pillar: Infrastructure

 

A. General infrastructure

  1. Quality of overall infrastructure

B. Specific infrastructure

  1. Quality of roads
  2. Quality of railroad infrastructure
  3. Quality of port infrastructure
  4. Quality of air transport infrastructure
  5. Available seat kilometers (hard data)
  6. Quality of electricity supply
  7. Telephone lines (hard data)

3rd pillar: Macroeconomic stability

  1. Government surplus/deficit (hard data)
  2. National savings rate (hard data)
  3. Inflation (hard data)
  4. Interest rate spread (hard data)
  5. Government debt (hard data)

4th pillar: Health and primary education

 

A. Health

  1. Business impact of malaria
  2. Malaria incidence (hard data)
  3. Business impact of tuberculosis
  4. Tuberculosis incidence (hard data)
  5. Business impact of HIV/AIDS
  6. HIV prevalence (hard data)
  7. Infant mortality (hard data)
  8. Life expectancy (hard data)

B. Primary education

  1. Quality of primary education
  2. Primary enrollment (hard data)
  3. Education expenditure (hard data)

Efficiency Enhancers

 

5th pillar: Higher education and training

 

A. Quantity of education

  1. Secondary enrollment (hard data)
  2. Tertiary enrollment (hard data)
  3. Education expenditure (hard data)

B. Quality of education

  1. Quality of the educational system
  2. Quality of math and science education
  3. Quality of management schools
  4. Internet access in schools

C. On-the-job training

  1. Local availability of specialized research and training
  2. Services
  3. Extent of staff training

6th pillar: Goods market efficiency

 

A. Competition

  1. Domestic competition
  2. Intensity of local competition
  3. Extent of market dominance
  4. Effectiveness of anti-monopoly policy
  5. Extent and effect of taxation
  6. Total tax rate (hard data)
  7. Number of procedures required to start a business (hard data)
  8. Time required to start a business (hard data)
  9. Agricultural policy costs
  10. Foreign competition variable
  11. Prevalence of trade barriers
  12. Trade-weighted tariff rate (hard data)
  13. Prevalence of foreign ownership
  14. Business impact of rules on FDI
  15. Burden of customs procedures
  16. Imports as a percentage of GDP (hard data)

B. Quality of demand conditions

  1. Degree of customer orientation
  2. Buyer sophistication

7th pillar: Labor market efficiency

 

A. Flexibility

  1. Cooperation in labor-employer relations
  2. Flexibility of wage determination
  3. Non-wage labor costs (hard data)
  4. Rigidity of employment (hard data)
  5. Hiring and firing practices
  6. Extent and effect of taxation
  7. Total tax rate (hard data)
  8. Firing costs (hard data)

B. Efficient use of talent

  1. Pay and productivity
  2. Reliance on professional management
  3. Brain drain
  4. Female participation in labor force (hard data)

8th pillar: Financial market sophistication

 

A. Efficiency

  1. Financial market sophistication
  2. Financing through local equity market
  3. Ease of access to loans
  4. Venture capital availability
  5. Restriction on capital flows
  6. Strength of investor protection (hard data)

B. Trustworthiness and confidence

  1. Soundness of banks
  2. Regulation of securities exchanges
  3. Legal rights index (hard data)

9th pillar: Technological readiness

  1. Availability of latest technologies
  2. Firm-level technology absorption
  3. Laws relating to ICT
  4. FDI and technology transfer
  5. Mobile telephone subscribers (hard data)
  6. Internet users (hard data)
  7. Personal computers (hard data)
  8. Broadband Internet subscribers (hard data)

10th pillar: Market size

 

A. Domestic market size

  i.  Domestic market size index (hard data)

 

B. Foreign market size

  i.  Foreign market size index (hard data)

 

Innovation and Sophistication Factors

 

11th pillar: Business sophistication

 

A. Networks and supporting industries

  1. Local supplier quantity
  2. Local supplier quality
  3. State of cluster development

B. Sophistication of firms' operations and strategy 50%

  1. Nature of competitive advantage
  2. Value chain breadth
  3. Control of international distribution
  4. Production process sophistication
  5. Extent of marketing
  6. Willingness to delegate authority
  7. Reliance on professional management1/2

12th pillar: Innovation

  1. Capacity for innovation
  2. Quality of scientific research institutions
  3. Company spending on R&D
  4. University-industry research collaboration
  5. Government procurement of advanced technology

Products

  1. Availability of scientists and engineers
  2. Utility patents (hard data)
  3. Intellectual property protection1/2

Indian Competitiveness:

 

India, at 50th place, derives substantial advantages not only from its market size (ranked 4th for its domestic market size and 5th for its foreign market size) but also from its strong business sophistication (ranked 27th) and innovation (ranked 32nd). The country is endowed with strong business clusters and many local suppliers, and ranks an impressive 3rd for the availability of scientists and engineers and 27th for the quality of its research institutions.

 

However, India's overall competitive position is weakened by its macroeconomic instability (109th) with the government running one of the highest deficits in the world (ranked 127th), unsustainable levels of government debt (ranked 113th), and fairly high inflation.

 

Health and primary education is another area of concern, with poor health indicators (ranked 105th for both infant mortality and life expectancy), related to the high prevalence of diseases such as tuberculosis and malaria. Educational enrollment rates also remain low at all levels, with the primary educational system in particular getting poor marks for quality. Certain labor market efficiency indicators are also poor, including female participation in the labor force (ranked 122nd) and the facility with which firms can hire and fire employees (ranked 104th).

 

The interrelation of the 12 pillars

 

 

Although the 12 pillars of competitiveness are described separately, this should not obscure the fact that they are not independent: not only they are related to each other, but also they tend to reinforce each other. For example, innovation (12th pillar) is not possible in a world without institutions (1st pillar) that guarantee intellectual property rights, cannot be performed in countries with poorly educated and poorly trained labor force (5th pillar), and will never take place in economies with inefficient markets (6th, 7th, and 8th pillars) or without extensive and efficient infrastructure (2nd pillar). Although the actual construction of the Index will involve the aggregation of the 12 pillars into a single index, measures are reported for the 12 pillars separately because offering a more disaggregated analysis can be more useful to countries and practitioners: such an analysis gets closer to the actual areas in which a particular country needs to improve. 

 

 

The 12 pillars of competitiveness 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(Source: The Global Competitiveness Report 2008-2009 - World Economic Forum) 

 

 

Prof.M.Guruprasad

AICAR Business School

[email protected]

9850981448

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