The Global Competitiveness Report 2016-2017 assesses the competitiveness landscape of 138 economies, providing insight into the drivers of their productivity and prosperity.
Since 2004, the report ranks the world's nations according to the Global Competitiveness Index. It is based on the latest theoretical and empirical research. It is made up of over 110 variables, of which 2/3rd comes from the Executive Opinion Survey, and one third comes from publicly available sources such as the United Nations. The variables are organized into twelve pillars, with each pillar representing an area considered as an important determinant of competitiveness.
One part of the report is the Executive Opinion Survey which is a survey of a representative sample of business leaders in their respective countries. Respondent numbers have increased every year.
What are the parameters (pillars) involved in computing the Index?
1st pillar: Institutions-The institutional environment of a country depends on the efficiency and the behavior of both public and private stakeholders.
2nd pillar: Infrastructure- Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy.
3rd pillar: Macroeconomic environment- The stability of the macroeconomic environment is important for business and, therefore, is significant for the overall competitiveness of a country.
4th pillar: Health and primary education -A healthy workforce is vital to a country’s competitiveness and productivity.
5th pillar: Higher education and training- Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. In particular, today’s globalizing economy requires countries to nurture pools of well-educated workers who are able to perform complex tasks and adapt rapidly to their changing environment and the evolving needs of the production system. Secondary and tertiary enrollment rates, quality of education, staff training-vocational and continuous on-the-job training etc. are included in it.
6th pillar: Goods market efficiency- Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy.
7th pillar: Labor market efficiency- The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most effective use in the economy and provided with incentives to give their best effort in their jobs.
8th pillar: Financial market development -An efficient financial sector allocates the resources saved by a nation’s population, as well as those entering the economy from abroad, to the entrepreneurial or investment projects with the highest expected rates of return rather than to the politically connected. The banking sector needs to be trustworthy and transparent.
9th pillar: Technological readiness -The technological readiness pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries, with specific emphasis on its capacity to fully leverage information and communication technologies (ICTs) in daily activities and production processes for increased efficiency and enabling innovation for competitiveness.
10th pillar: Market size- The size of the market affects productivity since large markets allow firms to exploit economies of scale.
11th pillar: Business sophistication- Business sophistication concerns two elements that are intricately linked: the quality of a country’s overall business networks and the quality of individual firms’ operations and strategies.
12th pillar: Innovation- The last pillar focuses on innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge, and the possibility of generating more value by merely integrating and adapting exogenous technologies tends to disappear.
The interrelation of the 12 pillars is important to keep in mind that they are not independent: they tend to reinforce each other, and a weakness in one area often has a negative impact in others.
The top 30 of the 2016–2017 report
Current Global Scenario
According to the Report, many of the competitiveness challenges stem from the aftermath of the financial crisis. Today, productivity and growth are not picking up in advanced economies, and the consequences of low and even negative productivity growth in many emerging economies are now evident. The great recession led many advanced economies to implement very loose monetary policy, which in turn fueled a global commodities boom that masked many of the competitiveness challenges of commodity-exporting emerging markets. Vulnerability to commodity price fluctuations in emerging economies and the promises of the Fourth Industrial Revolution underscore the importance of innovation as a source of competitiveness and economic diversification to reignite growth.
Future growth prospects are constrained by longer-term trends. Many economies around the world struggle with the double challenges of slowing productivity growth and rising income inequality, often exacerbated by rapidly aging societies. Stagnating and unequally distributed income growth in turn has opened the door to more inward-looking policies, mounting protectionist pressures, and a general questioning of the premises underlying globalization in many economies.
At the same time, in emerging markets, the end of the commodity super cycle has led to an abrupt economic slowdown that has exposed the slow pace or lack of competitiveness enhancing reforms in recent years, which could increase polarization and threaten social cohesion.
Against this background, it is clear that (1) monetary stimulus is not enough to reignite growth if economies are not competitive, (2) an increasingly important element of competitiveness is creating an enabling environment for innovation, and (3) innovation in turn goes hand in hand with openness and economic integration.
On the bright side, tremendous promise for higher economic growth and societal progress dawns with the Fourth Industrial Revolution. Based on digital platforms, the Fourth Industrial Revolution is characterized by a convergence of technologies that is blurring the lines between the physical, digital, and biological spheres.
Findings of the Report
The report notes that as a nation develops, wages tend to increase, and that in order to sustain this higher income, labor productivity must improve for the nation to be competitive. Thus, the GCI separates countries into three specific stages: factor-driven, efficiency-driven, and innovation-driven, each implying a growing degree of complexity in the operation of the economy.
In the factor-driven stage countries compete based on their factor endowments, primarily unskilled labor and natural resources. Thus, the impact of each pillar on competitiveness varies across countries, in function of their stages of economic development. Therefore, in the calculation of the GCI, pillars are given different weights depending on the per capita income of the nation. The weights used are the values that best explain growth in recent years. For example, the sophistication and innovation factors contribute 10% to the final score in factor and efficiency-driven economies, but 30% in innovation-driven economies. Intermediate values are used for economies in transition between stages.
How the India enhancing its ranking?
India’s GDP per capita in PPP terms almost doubled between 2007 and 2016, from US$3,587 to US$6,599. Growth slowed after the 2008 crisis, hitting a decade’s low in 2012–13. This experience triggered India to rethink its policies and engage more firmly in the reforms necessary to improve its competitiveness. Growth rebounded in 2014 and last year surpassed that of China, making it the fastest-growing large emerging market in that year.
India’s competitiveness score stagnated between 2007 and 2014, and the economy slipped down the GCI rankings. Since the new government took office in 2014, India climbed back up the rankings to 39th in this edition of the Report, from 48th in 2007–2008. What has made India so successful in recent years?
The overall trend masked some diversity over the years on the different pillars, for example, health and basic education improved throughout the decade. Improvement in infrastructure, by contrast, was small and faltering during most of the period, but picked up after 2014 when the government increased public investment and sped up approval procedures to attract private resources. The institutional environment deteriorated until 2014, as mounting governance scandals and seemingly unmanageable inefficiencies saw businesses lose trust in government and public administration, but this trend was also reversed after 2014.
Macroeconomic conditions followed a similar path, as India managed only in recent years to the drop in commodity prices to keep inflation below the target of 5 percent while rebalancing its current account and decreasing public deficit. Financial market development has also improved since 2014, but unlike the case of institutions and the microeconomics environment not enough to recover to 2007 level.
The 2015 and 2016 rebound, India’s overall competitiveness scores in this period increased by 0.19 points. The two most significant improvements are in infrastructure and in health and primary education.
India’s competitiveness score stagnated between 2007 and 2014, and the economy slipped down the GCI rankings. Since the new government took office in 2014, India climbed back up the rankings to 39th in this edition of the Report, from 48th in 2007–2008.
“Declining openness in the global economy is harming competitiveness and making it harder for leaders to drive sustainable, inclusive growth.” Leveraging the opportunities of the Fourth Industrial Revolution will require not only businesses willing and able to innovate, but also sound institutions, both public and private; basic infrastructure, health, and education; macroeconomic stability; and well-functioning labor, financial, and human capital markets.
This year’s edition highlights that declining openness is threatening growth and prosperity. It also highlights that monetary stimulus measures such as quantitative easing are not enough to sustain growth and must be accompanied by competitiveness reforms. Final key finding points to the fact that updated business practices and investment in innovation are now as important as infrastructure, skills and efficient markets.