Global Competitiveness Report 2004-2005 v126q

Excerpt from / Fragmento del

GLOBAL COMPETITIVENESS REPORT 2004/2005

By / Por World Economic Forum in collaboration with / con la colaboración de IESE Business School and the of / y el apoyo de Nissan Chair of Corporate Strategy and International Business Anselmo Rubiralta Center for Globalization and Business Strategy

Including/Incluye: - Executive Summary - Chapter 1.2: Building the Microeconomic Foundations of Prosperity - Competitiveness Spain

You can search for the full text at / Puede buscar el texto completo en: http://www.weforum.org/site/homepublic.nsf/Content/Global+Competitiveness+Programme%5CGlobal +Competitiveness+Report

AUGUSTO LOPEZ-CLAROS, World Economic Forum

For well over two decades the World Economic Forum has been trying to shed light on the question of why some countries are able to grow on a sustained basis for prolonged periods of time, in the process pulling large segments of the population out of poverty, while others remain stagnant or, worse, actually see an erosion of living standards.Through its flagship publication, The Global Competitiveness Report, the World Economic Forum has led the way in assessing the competitiveness of nations. The Forum may be in a singularly advantageous position, for at least two reasons, to contribute meaningfully to the debate on the key building blocks of successful economic development and improved competitiveness. First, it brings key representatives from the private sector and the corporate world together with a broad spectrum of senior policymakers in government, creating opportunities for the thoughtful exchange of ideas and experiences on best practices.This exchange may be an important catalyst in identifying the most critical factors in the development process.The role of corruption in delaying the development process, the central importance of women’s education for boosting per capita incomes, the interplay between political and civil rights and the willingness of the public to engage in economic activity, the role of a free press, and the type of safety net arrangements that governments put in place to enhance the ability of economic agents to participate in the life of the nation, are but some of the topics that have been at the centre of the agenda in many of the summits and other interactions organized by the World Economic Forum. Second, the Forum has developed a vehicle, the Executive Opinion Survey (EOS), which annually conveys a wealth of information about the obstacles to growth in more than 100 countries, ing for the lion’s share of global GNP.Through the Survey, business executives in these countries assess the importance of a broad range of factors central to creating a healthy business environment in of successful and productive economic activity. The tax and regulatory environment, labor market legislation, the overall macroeconomic environment, the prevalence of corruption and other irregular practices in the economy at large, the quality of the country’s infrastructure and education are but a few of the areas covered by the EOS. Over the years, the Survey has continued to deliver a treasure trove of information about both country-specific strengths and weaknesses, and the challenges faced by the business community. On the basis of the information provided by the EOS, the Country Profiles prepared by the Forum offer extremely valuable information for policymakers, aid agencies and others, working to improve economic performance and the quality of people’s lives.

Executive Summary

Executive Summary

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Executive Summary xii

The methodology used by the Forum to assess national competitiveness has evolved over time, taking into the latest thinking on the factors driving competitiveness and growth.The Forum first introduced the Growth Competitiveness Index (GCI) three years ago, in collaboration with Professors Jeffrey Sachs and John McArthur, in the Global Competitiveness Report 2001–2002.The GCI aims specifically to gauge the ability of the world’s economies to achieve sustained economic growth over the medium to long term. It primarily assesses the impact of those factors that economic theory and the accumulated experience of policymakers in a broad range of countries have shown to be critical for growth, whether narrowly focused on elements of the macroeconomic environment or, reflecting the latest insights in the economics literature, institutional and other factors. Professor Michael Porter’s Business Competitiveness Index, presented in Chapter 1.2 in this volume, is an especially useful complement to the GCI, with its special emphasis on a range of company-specific factors conducive to improved efficiency and productivity at the micro level.

The Growth Competitiveness Index The GCI is composed of three “pillars,” all of which are widely accepted as being critical to economic growth: the quality of the macroeconomic environment, the state of a country’s public institutions, and, given the increasing importance of technology in the development process, a country’s technological readiness. Using a combination of publicly available hard data, and information provided in the Forum’s Executive Opinion Survey—which provides more textured qualitative information on difficult-tomeasure concepts—these three pillars are brought together in the three indexes of the GCI: the macroeconomic environment index, the public institutions index, and the technology index. Sachs and McArthur strongly emphasized that the role of technology in the growth process differs for countries, depending on their particular stage of development. It is widely understood that technological innovation is relatively more important for growth in countries close to the technological frontier. Innovation will be key in Sweden, but the adoption of foreign technologies, or the kind of technology transfer frequently associated with foreign direct investment will be relatively more important in a country such as the Czech Republic. For this reason, in estimating the GCI, economies are separated into two groups: the core economies, i.e. those for which technological innovation is critical for growth, and non-core economies, i.e. those which can still grow by adopting technologies developed abroad.

The critical importance of technological innovation for core economies is taken into in the technology index. Specifically, more weight is given to innovation, by means of the innovation subindex, for the core economies, than for the non-core.To make a further distinction, an additional measure is used of the ability of non-core economies to adopt technology from abroad: the technology transfer subindex. Finally, since the determinants of economic competitiveness vary for core and non-core economies, the weighting of the three indexes in the overall GCI differs between the two groups. For the non-core economies, more weight is given to the quality of institutions and the macroeconomic environment, since these countries can still make progress in achieving higher growth by getting their fundamentals in order. On the other hand, for the core economies that are closer to the technological frontier, more weight is placed on technology. It is, of course, important for these countries to have a sound macroeconomic environment and strong institutions, but these economies will typically have long ago entered a period characterized by “institutional stability.” For these countries to continue to grow they must innovate.This is why more weight is placed, for the core innovators, on technology, than on the other two pillars. Chapter 1.1, by Jennifer Blanke and Augusto LopezClaros provides specific details on the composition and construction of the GCI, which this year covers a total of 104 countries.

The Competitiveness Rankings for 2004 Table 1 presents the rankings from this year’s GCI. For the third time during the last four years Finland tops the rankings.The country is extremely well managed at the macroeconomic level, and scores very high in those measures which assess the quality of its public institutions. Moreover, Finland has very low levels of corruption and its firms operate in a legal environment in which there is widespread respect for contracts and the rule of law. Finland’s private sector shows a proclivity for adopting new technologies, and nurtures a culture of innovation. Especially noteworthy is the fact that, for several years, Finland has been running budget surpluses, in anticipation of future claims on the budget associated with the aging of its population.The United States is ranked second, with overall technological supremacy, and especially high scores for such indicators as companies’ spending on R&D, the creativity of its scientific community, personal computer and internet penetration rates. However, these are partly offset by a weaker performance in those areas which capture the quality of the macroeconomic environment and its public institutions. As compared to the results of 2003, nine out of ten of the top performers remain in this category. Among these

Country

Finland United States Sweden Taiwan Denmark Norway Singapore Switzerland Japan Iceland United Kingdom Netherlands Australia Canada United Arab Emirates Austria New Zealand Israel Estonia Hong Kong SAR Chile Spain Portugal Belgium Luxembourg Bahrain Korea Ireland Malaysia Malta Slovenia Thailand Jordan Lithuania Greece Cyprus Hungary Czech Republic South Africa Tunisia Slovak Republic Latvia Botswana China Italy Mexico Mauritius Costa Rica Trinidad and Tobago Namibia El Salvador Uruguay India Morocco Brazil Panama Bulgaria Poland Croatia Egypt

GCI 2004 rank

GCI 2004 score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62

5.95 5.82 5.72 5.69 5.66 5.56 5.56 5.49 5.48 5.44 5.30 5.30 5.28 5.25 5.23 5.21 5.20 5.18 5.09 5.08 5.06 5.01 5.00 4.96 4.95 4.95 4.92 4.91 4.90 4.90 4.88 4.79 4.75 4.58 4.58 4.57 4.56 4.56 4.56 4.55 4.53 4.51 4.43 4.43 4.30 4.29 4.27 4.17 4.14 4.12 4.12 4.11 4.10 4.08 4.07 4.06 4.05 4.01 3.98 3.98 3.94 3.88

GCI 2003 rank*

1 2 3 5 4 9 6 7 11 8 15 12 13 10 16 — 17 14 20 22 24 28 23 25 27 21 26 — 18 30 29 19 31 32 34 40 35 — 33 39 42 38 43 37 36 44 41 47 46 51 49 52 48 50 56 61 54 59 64 45 53 58

Country

Romania Colombia Jamaica Turkey Peru Ghana Indonesia Russian Federation Algeria Dominican Republic Sri Lanka Argentina Gambia Philippines Vietnam Kenya Uganda Guatemala Bosnia and Hercegovina Tanzania Zambia Macedonia, FYR Venezuela Ukraine Malawi Mali Serbia and Montenegro Ecuador Pakistan Mozambique Nigeria Georgia Nicaragua Madagascar Honduras Bolivia Zimbabwe Paraguay Ethiopia Bangladesh Angola Chad

GCI 2004 rank

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

GCI 2004 score

3.86 3.84 3.82 3.82 3.78 3.78 3.72 3.68 3.67 3.63 3.57 3.54 3.52 3.51 3.47 3.45 3.41 3.38 3.38 3.38 3.36 3.34 3.30 3.27 3.24 3.24 3.23 3.18 3.17 3.17 3.16 3.14 3.12 3.11 3.10 3.09 3.03 2.99 2.93 2.84 2.72 2.50

GCI 2003 rank*

75 63 67 65 57 71 72 70 74 62 68 78 55 66 60 83 80 89 — 69 88 81 82 84 76 99 77 86 73 93 87 — 90 96 94 85 97 95 92 98 100 101

* Note that these are the published rankings from 2003. The three countries not covered this year (Cameroon, Haiti, and Senegal) are not shown.

(cont’d.)

Executive Summary

Table 1: Growth Competitiveness Index rankings and 2003 comparisons

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Executive Summary xiv

leaders, the largest improvement has been ed by Norway, which has moved up from ninth to sixth place since 2003. Norway improved in all three areas of the Index, most particularly with regard to its public institutions, driven by a much better score in the area of contracts and law. Indeed, the Nordic countries all occupy privileged positions in the GCI ranking. The GCI does a reasonably good job not only of ranking countries vis-à-vis each other, but also of tracking shifts in rank over time.This is perhaps not surprising in the case of the macroeconomic environment index, which is made up overwhelmingly of hard data variables— Norway, Estonia, and New Zealand get credit for running budget surpluses, while Turkey, India, and Japan are penalized for running large deficits—but applies to other components of the GCI as well. Those countries showing the largest drops in rankings in 2004—Bolivia, the Dominican Republic, Pakistan, Peru, Philippines, Poland,Vietnam, to name some—are all countries that have witnessed significant deteriorations in one or more areas tracked by the Index. Others, such as Venezuela and Zimbabwe, already low last year, have dropped even further. Indeed, all of these countries have been prominent in the pages of the international press. Highly visible instances of official corruption, a crackdown on press freedoms and other civil liberties which contribute to capital outflows and harden the mood of the business community, political instability linked to domestic infighting in some cases leading to civil unrest, a weakening in the rule of law have, to a greater or lesser degree, been prominent in some of the above cases. The reverse is also true: countries may move up in the rankings, when they show not only improvements in the macroeconomic environment—e.g. Argentina in 2003, following the country’s harrowing experiences the previous year—but some other factors, directly or indirectly reflected in those variables tracked by the index.We are not puzzled by the significant improvement in the rankings of Bulgaria and Romania, for instance.These countries have an appointment to keep with the EU in 2007, and are gradually gearing up to meet EU accession criteria. In Latin America, we note that Chile improved its performance significantly, moving up from 28th to 22nd place in the overall rankings. Chile not only has the highest ranking in Latin America, but the gap with respect to its nearest rival (Mexico) is a full 26 places; there is no other continent in the world where we can observe this symbolic “migration” from the region, in of performance. Chile’s case is featured separately in Chapter 2.3 of this Report. In Asia, the rankings are quite stable, with some small improvements—notably Indonesia and, more significantly, Japan, the latter by two places—and some small drops in the rankings, as with Malaysia and Thailand.There are

two countries in the region, which stand out for their significant drop in the rankings: Korea and Vietnam, the latter noted above. Korea’s drop is linked to a significant decline in the macroeconomic environment subindex, falling from 23rd last year to 35th this year; moreover, Korea also experienced declines in the other two areas measured by the GCI.Vietnam’s decline is linked to significant drops in all three areas, particularly with regard to public institutions and technology. Countries in sub-Saharan Africa continue to hold places primarily at the bottom of the rankings, with a few bright exceptions. South Africa improved its performance somewhat, continuing to lead the region in competitiveness, with an overall rank of 41, incidentally, well ahead of all countries in Latin America, except Chile. Likewise, while it did slip somewhat in the rankings, Botswana continues to outperform most of the other sub-Saharan African countries, with a relatively strong performance, particularly in its public institutions, and a relatively healthy macroeconomic environment. Still, three of the five bottom-ranked countries are from this region, including Angola and Chad, which take the last two places in the ranking. It is clear that much work remains to be done to improve competitiveness in Africa.Table 2 provides more detailed information on the components of each of the three subindexes of the GCI for all 104 countries in 2004.

The Business Competitiveness Index The Business Competitiveness Index (BCI) is a complement to the medium-term, macroeconomic approach of the Growth Competitiveness Index. It evaluates the underlying microeconomic conditions defining the current sustainable level of productivity in each of the countries covered, the underlying concept being that, while macroeconomic and institutional factors are critical for national competitiveness, these are necessary but not sufficient factors for creating wealth.Wealth is actually created at the microeconomic level by the companies operating in each economy.The BCI evaluates two specific areas, critical to the business environment in each country: the sophistication of the operating practices and strategies of companies, and the quality of the microeconomic business environment in which a nation’s companies compete.The idea is that, without these microeconomic capabilities, macroeconomic and institutional reforms will not bear full fruit. This year’s BCI rankings are shown in Table 3.The first column shows the overall rankings, while the second and third columns show the two interrelated subindexes: company operations and strategy, and the quality of the national business environment. The table shows that the United States has taken over the leading position from Finland, after dropping to

As explained above, the GCI and the BCI measure complementary dimensions of competitiveness. Figure 1 compares the two rankings for 2004, revealing their high correlation.

A look ahead—the new Global Competitiveness Index Over the last several years the Growth Competitiveness Index has been a useful tool in thinking about key macroeconomic and institutional elements, critical to the growth process.The present rankings continue to provide policymakers, businesses and organizations of civil society with valuable insights into areas where further progress is called for, in order to improve the environment for private sector economic activity, and generate sustainable growth. The considerable utility of the GCI notwithstanding, the vertiginous pace of change of the global economy has brought into sharper focus the increasing role played by a number of other factors in enhancing the ability of countries to grow.The swift pace of innovation in information and communications technology, and the concomitant fall in the costs of communication is leading to an acceleration in the pace of integration of the world economy.The increasingly global perspective of businesses in formulating their strategies and decision making—already manifesting a global reach in the search for new markets and sources of supply—has now extended to the location of production, and resulted in the increasing internationalization of the labor force of the typical multinational corporation. Innovations in transportation, which have reduced the cost of freight, mean that location is less of a factor than in the past, and businesses are now looking for the right combination of labor costs—coupled, ideally, with flexible labor markets—skills, infrastructure, and the provided by a good macroeconomic and institutional environment to reduce production costs. Against the backdrop of these changes, countries are being forced to be increasingly creative, in order to maintain their competitive edge.The role of multi-country alliances in bringing together better combinations of capital, labor, skills and regulatory frameworks for particular projects is becoming more important. Countries with the nimbleness demanded for such cross-border arrangements are reaping the benefits of higher economic growth rates and improvements in living standards. Countries which are not allocating sufficient resources to improve the quality of their educational systems or to address major public health concerns, or which are otherwise engulfed in internal conflicts and instability, are rapidly falling behind.The net effect of these trends is the growing complexity in the economic, social and political underpinnings of the environment faced by policymakers and business leaders everywhere.This is not only putting enormous stress on the institutions that sustain and the global economy,

Executive Summary

second place last year.The United States benefited from improvements in the sophistication of marketing, the availability of venture capital, the intensity of local competition, local supplier quality, and local supplier quantity. Other advanced economies improving their rankings include Hong Kong, by reflecting more sophisticated financial markets and improvements in management practices, Japan, by improving financial market sophistication and improving quality of istrative services, and Portugal, by improving cluster strength. Japan ed the highest absolute improvement of its BCI score, followed by Hong Kong and Norway. Advanced countries, which dropped in the rankings include Italy, Malta, and Iceland. Italy dropped by a disappointing nine ranks, almost entirely driven by a deteriorating business environment, now evaluated on a par with that of Portugal and the Czech Republic. Italy deteriorated especially in areas related to innovative capacity, such as university-industry research collaboration, foreign technology licensing, government procurement of advanced technology, company R&D spending, and venture capital availability. Middle-income nations improving their business competitiveness rankings this year include Romania, Lithuania, the Slovak Republic, Russia, Namibia, and the Ukraine. Romania jumped by a remarkable 22 ranks, driven by strong across-the-board improvements, especially in the area of company sophistication. Romania’s improvement comes after repeated slippage in the ranking since the country became part of The Global Competitiveness Report in 2001. Middle-income countries which have experienced a fall in ranking include Latvia, the Dominican Republic, Poland, and Mauritius. Other countries with significant absolute drops in BCI scores include Thailand and Mexico. Latvia has moved back to a level consistent with its longer-term trajectory; last year’s strong improvement proved to be unsustainable optimism.The Dominican Republic, down 13 places, continues the trend set by a large drop last year, driven particularly by a decline in openness to imports, and in the sophistication of its financial market. Among low-income countries, Indonesia made the greatest improvement, jumping a remarkable 18 ranks. After years of turmoil, the country is now back to its 2000 business competitiveness level.While improvements were ed in areas across the board, they were strongest in measures of company sophistication. Another low-income country with large improvements is India, up 8 ranks, showing the benefits of increased company sophistication and strengthened clusters.Vietnam slipped significantly, down 23 places, after a number of years of steady improvement. Conditions worsened most in areas related to technology and government istration.

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Executive Summary xvi

Table 2: Growth Competitiveness Index components Growth Competitiveness Index (GCI)

Country

Finland United States Sweden Taiwan Denmark Norway Singapore Switzerland Japan Iceland United Kingdom Netherlands Australia Canada United Arab Emirates Austria New Zealand Israel Estonia Hong Kong SAR Chile Spain Portugal Belgium Luxembourg Bahrain Korea Ireland Malaysia Malta Slovenia Thailand Jordan Lithuania Greece Cyprus Hungary Czech Republic South Africa Tunisia Slovak Republic Latvia Botswana China Italy Mexico Mauritius Costa Rica Trinidad and Tobago Namibia El Salvador Uruguay India Morocco Brazil Panama

GCI GCI 2004 2004 rank score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

5.95 5.82 5.72 5.69 5.66 5.56 5.56 5.49 5.48 5.44 5.30 5.30 5.28 5.25 5.23 5.21 5.20 5.18 5.09 5.08 5.06 5.01 5.00 4.96 4.95 4.95 4.92 4.91 4.90 4.90 4.88 4.79 4.75 4.58 4.58 4.57 4.56 4.56 4.56 4.55 4.53 4.51 4.43 4.43 4.30 4.29 4.27 4.17 4.14 4.12 4.12 4.11 4.10 4.08 4.07 4.06 4.05 4.01

(cont’d.)

Source: World Economic Forum

Technology Index

Country

GCI GCI 2004 2004 rank score

Bulgaria Poland Croatia Egypt Romania Colombia Jamaica Turkey Peru Ghana Indonesia Russian Federation Algeria Dominican Republic Sri Lanka Argentina Gambia Philippines Vietnam Kenya Uganda Guatemala Bosnia and Hercegovina Tanzania Zambia Macedonia, FYR Venezuela Ukraine Malawi Mali Serbia and Montenegro Ecuador Pakistan Mozambique Nigeria Georgia Nicaragua Madagascar Honduras Bolivia Zimbabwe Paraguay Ethiopia Bangladesh Angola Chad

59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

3.98 3.98 3.94 3.88 3.86 3.84 3.82 3.82 3.78 3.78 3.72 3.68 3.67 3.63 3.57 3.54 3.52 3.51 3.47 3.45 3.41 3.38 3.38 3.38 3.36 3.34 3.30 3.27 3.24 3.24 3.23 3.18 3.17 3.17 3.16 3.14 3.12 3.11 3.10 3.09 3.03 2.99 2.93 2.84 2.72 2.50

Country

United States Taiwan Finland Sweden Japan Denmark Switzerland Israel Korea Norway Singapore Canada Iceland Estonia Netherlands Australia United Kingdom Czech Republic Spain Malta Austria Portugal New Zealand United Arab Emirates Slovenia Malaysia Slovak Republic Hungary Belgium Chile Lithuania Hong Kong SAR Bahrain Latvia Ireland Greece Cyprus South Africa Luxembourg Brazil Thailand Mauritius Poland Croatia Romania Mexico Jamaica Italy Jordan Turkey Panama Trinidad and Tobago Costa Rica Uruguay Argentina Tunisia

Rank Score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

6.24 6.04 5.92 5.80 5.68 5.34 5.25 5.25 5.18 5.17 5.11 5.08 5.05 5.05 5.01 4.98 4.93 4.92 4.88 4.86 4.85 4.85 4.78 4.76 4.71 4.71 4.67 4.67 4.66 4.65 4.59 4.55 4.51 4.49 4.47 4.46 4.43 4.42 4.36 4.33 4.28 4.24 4.24 4.19 4.19 4.15 4.13 4.13 4.12 4.08 4.02 4.01 4.00 3.98 3.97 3.92 3.87 3.87

(cont’d.)

Country

Rank Score

Bulgaria Dominican Republic Philippines China India Botswana Egypt Namibia Russian Federation Colombia El Salvador Venezuela Peru Kenya Indonesia Morocco Serbia and Montenegro Macedonia, FYR Uganda Ghana Guatemala Georgia Sri Lanka Bosnia and Hercegovina Ukraine Tanzania Gambia Zimbabwe Pakistan Ecuador Nigeria Zambia Paraguay Vietnam Honduras Mozambique Bolivia Nicaragua Malawi Algeria Madagascar Bangladesh Mali Angola Ethiopia Chad

59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

3.82 3.80 3.72 3.72 3.72 3.70 3.68 3.66 3.65 3.60 3.60 3.60 3.45 3.31 3.31 3.30 3.30 3.26 3.22 3.21 3.18 3.18 3.17 3.15 3.15 3.12 3.12 3.04 3.02 3.01 2.99 2.98 2.94 2.92 2.89 2.89 2.81 2.78 2.74 2.67 2.64 2.62 2.52 2.30 2.17 1.81

Public Institutions Index

Country

Denmark Iceland Finland New Zealand Norway Sweden United Kingdom Switzerland Hong Kong SAR Singapore Australia Netherlands Luxembourg Austria Japan Ireland Canada United Arab Emirates Chile United States Belgium Portugal Israel Estonia Taiwan Bahrain Jordan Malta Slovenia Uruguay Cyprus Spain South Africa Tunisia Hungary Malaysia Botswana Namibia Korea Morocco Lithuania Greece Thailand El Salvador Costa Rica Italy Slovak Republic Brazil Czech Republic Latvia India Ghana China Bulgaria Gambia Peru

Macroeconomic Environment Index

Rank Score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

6.59 6.58 6.48 6.41 6.35 6.31 6.23 6.22 6.22 6.21 6.21 6.10 6.08 5.99 5.99 5.88 5.87 5.84 5.82 5.77 5.74 5.71 5.69 5.64 5.62 5.59 5.56 5.56 5.43 5.39 5.28 5.23 5.18 5.16 5.15 5.14 5.07 5.06 4.98 4.92 4.81 4.75 4.75 4.74 4.71 4.71 4.69 4.64 4.64 4.62 4.56 4.55 4.45 4.44 4.39 4.36 4.30 4.28

(cont’d.)

Country

Rank Score

Country

Mexico Panama Colombia Turkey Malawi Trinidad and Tobago Mauritius Zambia Algeria Indonesia Jamaica Egypt Dominican Republic Sri Lanka Zimbabwe Romania Kenya Croatia Ethiopia Bosnia and Hercegovina Argentina Poland Nicaragua Vietnam Mali Guatemala Serbia andMontenegro Uganda Bolivia Tanzania Russian Federation Ecuador Venezuela Macedonia, FYR Angola Mozambique Madagascar Nigeria Ukraine Paraguay Philippines Honduras Georgia Pakistan Chad Bangladesh

59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

Singapore Norway Finland Denmark Switzerland Luxembourg Netherlands United Kingdom Taiwan Austria United Arab Emirates Iceland Hong Kong SAR Australia United States Spain Sweden Canada Belgium Malaysia Ireland New Zealand Thailand China Chile Bahrain Japan Estonia Greece Tunisia Lithuania Portugal Korea Jordan Latvia Italy Slovenia Algeria Czech Republic Botswana Israel Trinidad and Tobago Cyprus Morocco Malta South Africa Mexico Mauritius Poland India El Salvador Slovak Republic Hungary Russian Federation Egypt Vietnam

4.28 4.26 4.25 4.22 4.20 4.18 4.16 4.16 4.13 4.12 4.11 4.10 4.08 4.08 3.99 3.94 3.87 3.86 3.80 3.80 3.77 3.70 3.68 3.66 3.66 3.61 3.61 3.61 3.55 3.54 3.54 3.42 3.41 3.41 3.38 3.36 3.32 3.31 3.29 3.24 3.21 3.19 3.17 2.87 2.61 2.47

Rank Score

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

5.79 5.54 5.47 5.36 5.24 5.23 5.13 5.11 5.11 5.11 5.09 5.09 5.05 5.04 5.04 4.99 4.99 4.97 4.92 4.91 4.85 4.80 4.79 4.78 4.78 4.77 4.71 4.70 4.67 4.65 4.52 4.52 4.46 4.42 4.41 4.29 4.27 4.27 4.26 4.23 4.22 4.21 4.20 4.20 4.14 4.13 4.11 4.11 4.09 4.08 4.05 4.05 3.99 3.98 3.95 3.87 3.86 3.82

(cont’d.)

Country

Rank Score

Croatia Bulgaria Panama Namibia Indonesia Costa Rica Ghana Colombia Pakistan Peru Philippines Mali Romania Tanzania Sri Lanka Bangladesh Uganda Ukraine Macedonia, FYR Madagascar Guatemala Brazil Mozambique Honduras Jamaica Turkey Bosnia and Hercegovina Kenya Nigeria Gambia Ecuador Uruguay Chad Georgia Dominican Republic Argentina Zambia Bolivia Nicaragua Venezuela Ethiopia Malawi Paraguay Serbia and Montenegro Angola Zimbabwe

59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

3.81 3.77 3.76 3.76 3.74 3.72 3.68 3.67 3.63 3.60 3.59 3.55 3.50 3.47 3.46 3.42 3.41 3.39 3.37 3.36 3.36 3.28 3.26 3.23 3.23 3.22 3.19 3.18 3.17 3.13 3.10 3.10 3.08 3.07 3.00 2.96 2.96 2.90 2.90 2.89 2.81 2.79 2.77 2.77 2.46 2.07

Executive Summary

Table 2: Growth Competitiveness Index components (cont’d.)

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Executive Summary xviii

Table 3: The Business Competitiveness Index

Country United States Finland Sweden Switzerland United Kingdom Denmark Japan Netherlands Singapore Hong Kong SAR Australia Belgium Canada Austria Taiwan New Zealand Iceland Norway Israel Ireland Malaysia Korea South Africa Spain Estonia United Arab Emirates* Chile India Slovenia Tunisia Portugal Italy Czech Republic Lithuania Thailand Brazil Slovak Republic Bahrain* Greece Hungary Jordan Indonesia Cyprus Morocco China Costa Rica Latvia Malta Namibia Turkey Mauritius Jamaica Mexico Romania Poland Colombia Trinidad and Tobago Panama Russian Federation Botswana Kenya Ghana El Salvador Egypt* Gambia* Sri Lanka

BCI ranking

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68

Company operations and strategy ranking

Quality of the national business environment ranking

2 7 1 5 4 8 9 3 6 13 15 10 19 11 16 14 12 20 17 23 18 22 28 21 24 25 34 32 33 30 27 43 42 26 31 37 36 29 41 53 40 48 54 38 59 45 39 35 51 60 63 44 49 52 46 61 47 58 55 66 62 73 56 71 65 57 70 69

2 1 5 6 7 4 3 11 9 8 10 16 12 19 13 17 20 15 18 14 21 22 23 28 25 27 24 26 29 32 33 30 31 43 37 35 36 44 39 34 42 38 40 46 41 45 47 50 48 49 51 55 54 53 56 57 64 61 62 58 60 52 63 59 65 68 66 67

Country Ukraine Philippines Uganda* Croatia Pakistan Argentina Bulgaria Peru Uruguay Zambia* Vietnam Dominican Republic Nigeria* Zimbabwe Macedonia, FYR Malawi Serbia and Montenegro Guatemala Madagascar Venezuela Algeria Tanzania Mali* Georgia Bosnia and Hercegovina Ecuador Bangladesh Mozambique Honduras Paraguay Ethiopia Nicaragua Bolivia Chad* Angola*

BCI ranking

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103



64 50 75 72 67 68 86 77 80 85 81 74 76 79 84 83 87 78 88 82 93 92 95 89 96 90 97 94 91 98 101 100 99 103 102

71 77 69 70 75 78 72 74 76 73 79 83 80 84 82 85 81 90 88 91 86 87 89 93 92 95 94 98 100 96 97 99 101 102 103

*Survey data for these countries have high within-country variance. Until the reliability of survey responses improves, with future educational efforts and improved sampling in these countries, their rankings should be interpreted with caution.

(cont’d.)

Executive Summary

Figure 1: Growth and Business Competitiveness rankings

100 Bosnia and Herzegovina

Business Competitiveness ranking

90

Algeria Zimbabwe

80

Uruguay

Bulgaria Pakistan

70

Ukraine Kenya

Botswana

60 50

Malta Indonesia

40

Brazil

Portugal United Arab Emirates

30

Norway

20

India South Africa

Iceland Belgium

Taiwan

Hong Kong SAR

10 Finland

0 0 United States

Switzerland Sweden

20

40

60

80

100

Growth Competitiveness ranking

but is also changing our understanding of what are emerging as the key factors determining a country’s growth performance. To address some of these challenges, we have been working with Xavier Sala-i-Martin and Elsa Artadi to develop a more comprehensive competitiveness index. Reflecting the need to broaden our scope and look at a larger set of factors, the new index will bring into focus a much richer set of pillars: human capital, labor and financial markets efficiency, openness and market size, quality of infrastructure, to name a few of the new ones being incorporated; in this spirit, it will be called the Global Competitiveness Index. Chapter 1.3 of this Report is an excellent presentation of the work that has been done to date. 2004 therefore constitutes a transition year between the presentation of two indexes, the GCI and the BCI, and the subsequent consolidation of the World Economic Forum’s competitiveness work into a single index—the Global Competitiveness Index.

Selected issues of competitiveness and special topics This year’s Report contains a number of studies which address different aspects of competitiveness and, more generally, themes which emanate from the World Economic Forum’s deep concern with growth and development and the state of the world. Some of these studies draw directly from the Executive Opinion Survey for their analysis and

insight. Others are concerned with a broader set of issues at the heart of the development agenda. All are business relevant, and highlight a range of issues which are variously shaping the global economic and business environment. Selected issues of competitiveness

Daniel Kaufmann’s “Corruption, Governance and Security: Challenges for the Rich Countries and the World” is an important addition to the literature in an increasingly important field.Traditionally, governance and corruption challenges have been seen as especially daunting in poorer countries, with the richer ones viewed as good examples, with their relative law and order, and well developed institutions. Others might view them as public sector problems, divorced from global governance or security issues. Using an empirical approach, based on this year’s EOS, Kaufmann challenges these notions, and shows us a more complex reality, revealing more subtle, yet costly manifestations of misgovernance, afflicting not only poor, but rich countries as well.The traditional definition of corruption as the commission of an illegal act, such as outright bribery, is here broadened to include new measures of “legal corruption,” seen as the collusion of at least two parties, typically from the public and private sectors, and where the rules of the game, laws and institutions are used, via influence peddling and even capture, to benefit vested interests.

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By analyzing the interaction between rich country transnationals and the public sectors in emerging countries, Kaufmann finds that ethics and corruption pose a serious challenge for many rich countries, and that they represent key determinants of a country’s competitiveness, shaping its investment climate. Kaufmann ends his chapter with an insightful analysis of the governance data from the EOS, separating the issues of national governance and global and domestic security, and challenging the notion that security issues—common crime, organized crime, money laundering, and the threat of terrorism—are not subject to measurement.The evidence suggests that some rich countries are faced not only with domestic challenges of undue influence, as regards many key public policies, laws and regulations, but with a new set of security threats as well; even with their well-developed institutions, the G-7 and other rich countries must face the challenge of guaranteeing level playing fields and mitigating the cost of terrorist threats. In his paper “The Competitive Edge in Environmental Responsibility,” Arthur Dahl argues that the environment has for too long been seen as an impediment to business, since environmental regulations have increased costs. A review of global environmental problems reveals not only challenges and risks for the private sector that cannot be ignored, but also opportunities for businesses that can work to their competitive advantage. Dahl highlights the significant potential for business leadership in the field of environment and sustainable development at each stage of the development process. By taking a positive, proactive view, the private sector can ensure supplies of raw materials, increase efficiency, and generate new technologies to respond to these problems, thus opening up new markets, reducing costs, and allowing more time for adaptation, with phased investments and reduced write-offs or special charges. The 2004 Executive Opinion Survey evaluates the views of business leaders on environmental and social responsibility issues, and demonstrates both the importance of governmental leadership in providing an effective regulatory climate, and the key role of business leadership in addressing environmental and social issues proactively. In Dahl’s analysis, countries are rated not on their present environmental status, but on the efforts of both business and government to improve that status, and to anticipate and address emerging problems. Nine countries received high ratings, another 34 were positive on balance, while 24 showed progress in some areas, and 38 were making little or no effort to be environmentally responsible. Some emerging economies and developing countries scored well, driven perhaps by dynamic business sectors and enlightened governments, while some industrialized countries were ranked far below their peers, suggesting a need for greater efforts to remain competitive.The results

strongly suggest that combined efforts by business and government to facilitate corporate social and environmental responsibility do, indeed, generate a competitive edge. In “Chile:The Next Stage of Development,” Augusto Lopez-Claros notes that Chile has managed to grow faster than many other countries in the developing world, boosting per capita incomes, and making further progress to reduce poverty levels. It has done so against a backdrop of fiscal discipline and rapidly declining public debt levels, while maintaining an irably open trade and foreign investment regime, and improving to a remarkable degree the quality of its public institutions, which have played a stabilizing and pivotal role in the country’s recent evolution. By a wide margin, Chile is the most competitive economy in Latin America. The author identifies a number of areas where challenges remain, however, if Chile is to make a successful transition to the next stage of its development.This phase will require a combination of comparative advantages and the adoption of new technologies to facilitate the emergence of clusters, centered mainly on the natural resource sectors and the upstream development of ing industries with higher value added. Critical to this process of development will also be a substantial upgrading in the quality of Chile’s educational system, which remains surprisingly inefficient, given the country’s income levels. Lopez-Claros also raises the question of whether the country—and in particular its political leadership—have reached the right balance, as regards the role of the state in the economy.Without doubt, the country has benefited from a system that has built in a number of safeguards to protect the public interest from the short-term interests of ing politicians, and from various forms of abuse. But this approach may need to make room for a more active role for the state, as has been done in Finland, with regard to the for new ventures, aimed at enhancing the country’s potential for innovation. Chile aside, in “The Future of CompetitivenessEnhancing Reforms in Latin America,” Mario Blejer argues that despite a recent pickup in growth, the region continues to confront important challenges and faces serious struggles ahead.The difficulties concern the uncertainty regarding the sustainability of macroeconomic recovery and, more importantly, the capacity of the region to address long-term structural weaknesses. A significant problem in Latin America is the incomplete nature of the reforms, evidenced by deficiencies in institutional development, and reflected in the loss of competitiveness. Indeed, Latin America is falling behind, not only with respect to the economies of East Asia but, more significantly, with respect to the transition economies of central and eastern Europe. In answer to the question what explains this worrisome trend, Blejer suggests that in most cases, reforms

perception of labor practices and business regulations as barriers to productivity does not appear to be directly related to income level, lack of skilled labor appears to be a hindrance in high-income countries, while the lack of infrastructure is typically, but not surprisingly, perceived as a productivity barrier in most low-income countries.

Executive Summary

have remained incomplete and their economic benefits have not been fully realized. Some of the successes in creating a more stable macroeconomic environment have not been complemented by more broad-based “second generation” reforms. He points out that any assessment of the current political and social realities in the region suggests that the short term prospects for further implementation of market-oriented reforms would seem bleak. Reforms have not had the anticipated effects on growth and employment and, against a groundswell of the antiglobalization movement, the entire concept of structural reform—with the exception of Chile—has been systematically maligned and discredited across Latin America. In such an environment, it is clear that there is a widespread lack of enthusiasm for further reforms. In practice, the design and introduction of a realistic reform agenda would require two key elements: compensation for those who are bound to be negatively affected from the process, and a better set of international incentives for governments and countries willing to swim against the current of public opinion, and take the necessary steps to improve their economy. In “International Productivity Comparisons: the Importance of Hours of Work,” Andrew Warner challenges the traditional measures of productivity, by highlighting the importance of hours worked. He demonstrates that while growth of GDP or GDP per capita puts the United States clearly ahead of most industrial countries during the boom years of the new economy (1995–2000), this supremacy is not quite so obvious when data on growth of GDP per hour is used to quantify productivity growth. Warner also questions the common notion that productivity has suffered a serious decline in Europe over the last decade. Using GDP per hour calculations, he shows the clear lead of some European countries over the United States, and implies that the European “productivity slowdown” may be more myth than reality, when we focus on per hour data. Given uncertainties about the reliability and comparability of existing data on hours worked, as well as lack of coverage of poorer countries, questions were introduced into the 2004 Executive Opinion Survey on the extent of hours worked.Warner uses this unique dataset to reveal interesting differences between the trends observed in industrial countries and those in developing nations.Wage labor in low-income countries work particularly long hours, whereas in rich countries as a whole, there is a trend for executive workers to put in more hours than hourly labor. Warner also uses the Survey data to highlight differences in productivity barriers and to show how these vary across countries and income levels. Four barriers to productivity are examined: labor practices, business regulations, labor skills, and poor infrastructure.While the

Special topics

By analyzing trends in population growth, per capita income, and the effects of the IT revolution, Richard Cooper, in “A Glimpse of 2020,” offers an insightful perspective on what the world will look like two decades from now. Cooper paints contrasting demographic scenarios for 2020: low-income countries will see rapid population increase, placing heavy pressures on energy demand and urban infrastructure; rich countries will experience population decline, and a much higher ratio of elderly to working age, severely taxing governments’ abilities to maintain the high social benefits to which their citizens have grown accustomed. Dramatically decreased costs of communication will increase mobility, reduce economic and cultural differences between the regions of the world, but increase international cooperation, not only in areas such as financial regulation, tax and law enforcement and technology exchange, but also in the willingness of nations to intervene where national governments have failed. Despite the natural attraction of familiar languages and social environments, businesses are becoming “footloose,” increasingly driven by competition to outsource offshore, with headquarters and production centers often situated at great distances from each other. NGOs as well as criminal business and terrorism will become increasingly international in scope, and repressive governments will find it more difficult to insulate their populations from access to information. Cooper points out that by 2020, while there is bound to be uncertainty following the inevitable demise of current dictators, more “South Koreas” will arise, i.e. developing countries which grow rapidly, democratize and the ranks of the rich, forming new market opportunities. Particular attention is paid to China, whose GDP by 2020 could make it the world’s third largest economy, and where, although still poor, the high ratio of wage earners to dependents will enable the country to become a major world player. Forecasting the future is hazardous business, but Cooper presents a cogent, business-relevant, vision of 2020. A number of challenges to the well-being of our societies—demographic, technological, climatological, and geopolitical—are visible on the long-term horizon. In “Confronting Long-Term Fiscal Challenges:Why it Matters for the Global Economy,” Peter Heller takes up an issue raised by Cooper in his own article, and perceptively explains why some of these challenges are predictable,

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while others are vague and uncertain. Even when clearly anticipated, uncertainty still surrounds developments whose horizon may be measured in decades. Some, such as aging populations, pose a threat to the financial solvency of national governments, raising the prospect of vastly increased future public outlays, whether for pensions, health care, long-term chronic care, infrastructure, or security. Accentuating these fiscal risks is the fact that the future resources of governments are already precommitted to an unprecedented extent. Not surprisingly, political economy factors work against efforts to address these challenges. Heller contends that governments must do much more, now, to prepare for the fiscal consequences of the developments that their countries face over the next several decades.The agenda for action will depend on the country, on the preferences and capacities of its people and institutions, on the extent of its existing policy commitments, and on the specific challenges it faces. Uncertainty does not absolve fiscal policymakers from the burden of addressing long-term issues.What they do, or fail to do, will critically influence both the welfare of current and future generations, and the role and capacity of the state itself. Delay in addressing these changes will only increase their costs, some of which will be borne by those living today.What to do? Heller suggests that no single policy reform will suffice to meet long-term challenges. Reform must proceed on many fronts, utilizing additional analytic techniques, strengthening institutions to clarify and monitor evolving budget trends, introducing detailed policy reforms, the sustained strengthening of the aggregate fiscal position, and working with other countries on areas where collective action is required. In a compelling contribution to this year’s Report, entitled “Agricultural Policies in OECD Countries: an Agenda for Reform,” Stefan Tangermann makes a number of fundamental points, which cast refreshing light on a complex and politically charged subject.To begin with, there is an apparent inconsistency between the rapidly declining importance of agriculture among the 30 Member countries of the OECD—whether measured in of the sector’s contribution to total GDP or total employment—and the considerable attention devoted to it in the public debate.The resources transferred to farmers—an impressive US$257 billion in 2003, a full three quarters of which taking the form of production-linked transfers—seriously distort markets and competition in international trade.Tangermann shows that, despite longstanding discussions about the need for reforms, the level of during 2001–2003 is only marginally lower than during the period 1986–1988. However, within the OECD as a whole, there is considerable diversity across countries, with New Zealand and Australia having essentially eliminated farm as a result of comprehensive

reforms, and others, such as Norway and Switzerland, still providing levels of producer more than twice the average in the EU, and hardly changed during the past 15 years. Tangermann examines the reasons for these massive transfers to farmers.Their motivation stems from a desire to address equity concerns in societies at large, and deal with market failures associated with the interaction between agriculture and the environment. However, he provides compelling data to show that, in fact, incomes of farm households in OECD countries are in line with, if not higher than, household incomes in the overall economy.Thus, broad-based measures such as price and output are unnecessary.Worse still, only 25 cents out of every dollar of provided to farmers actually ends up in farmers’ pockets, with a large share of the rest going to large landowners. As regards the environment, the harsh effects of overproduction on the quality of farmland and wildlife are well known. Finally, the extra output generated by farm policies in OECD countries depresses prices for farm products in international trade, and has been a contributing factor in the difficulties encountered in promoting further multilateral trade liberalization.The author concludes this important paper with some specific suggestions for reform. In his paper “Can Foreign Aid Make Poor Countries Competitive?”William Easterly offers insightful answers to the question why foreign aid has not been more successful at promoting competitiveness. In his review of the evidence on foreign aid and economic growth, the effectiveness of aid conditionality, and the bureaucratic nature of aid agencies, Easterly questions and then examines the results of the regression analysis published in 2000 by Craig Burnside and David Dollar, which investigated the relationship between foreign aid, economic policy and the growth of per capita GDP. Because of its conclusion, viz. that aid only works in a good policy environment, this study was widely cited by media, governments and aid agencies, as a basis for increasing foreign aid. By expanding the dataset, extending the time line and using alternative definitions of “aid,” “policy,” and “growth,” Easterly comes to some different and thought-provoking conclusions, to the effect that the interaction term of aid and good policy is no longer statistically significant. Easterly also critically examines the “financing gap” approach to aid, by which it is assumed that aid increases investment and investment increases economic growth, finding it both theoretically questionable and empirically deficient, leading him to question why the international community has not held agencies responsible for the failure of large flows of aid to generate growth. After discussing the detailed findings, Easterly analyzes how aid agencies actually function, citing the excessive, dysfunctional bureaucracy of agencies, the fact that they

Executive Summary

are answerable to the rich donors, rather than their voiceless recipients, the assumption of capital projects without maintaining them, and the pernicious tendency to overmeet, overextend and overstate. He saves particularly trenchant criticism for the failure of aid agencies, despite the presence of obviously well-intentioned and capable minds, to understand the deeper implications of and truly practice “grassroots” development.The result of this failure, he concludes, has been not only the continued presence of unalleviated misery, but the loss of for aid on the part of the rich countries most able to provide it. He ends in a positive tone, pointing to a successful project in Ethiopia, by making a number of serious and realistic proposals for aid agencies, governments and development practitioners, to assist them in revising expectations, methods, and, hopefully, outcomes. The Report ends with a section containing detailed country profiles for each of the 104 economies covered in our competitiveness indexes, as well as data tables for the variables that are used as inputs in their construction. A brief Annex, explaining how best to interpret the information contained in the country profiles and the data tables, is an essential companion to this section, as are technical notes clarifying the meaning of many variables, and listing relevant data sources.

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Building the Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index1 MICHAEL E. PORTER, Harvard University

Competitiveness has become a central preoccupation of both advanced and developing countries in an increasingly open and integrated world economy. Despite its acknowledged importance, the concept of competitiveness is often misunderstood. Here, we define competitiveness concretely, show its relationship to a nation’s standard of living, and outline a conceptual framework for understanding its causes. The Business Competitiveness Index (BCI), based on this conceptual framework, provides a data-rich approach to measuring and analyzing the fundamental competitiveness of a large number of countries in a comparative context.This year’s BCI includes 103 countries, up one from last year. Our aim is to rank country competitiveness across countries, identify individual countries’ competitive strengths and weaknesses, reveal the trends in competitiveness in the global economy, and extend our basic knowledge about the sources of competitiveness and the process of economic development. Most discussion of competitiveness and economic development is still focused on the macroeconomic, political, legal, and social circumstances that underpin a successful economy. It is well understood that sound fiscal and monetary policies, a trusted and efficient legal system, a stable set of democratic institutions, and progress on social conditions contribute greatly to a healthy economy. However, these broader conditions are necessary but not sufficient.They provide the opportunity to create wealth but do not themselves create wealth.Wealth is actually created in the microeconomic level of the economy, rooted in the sophistication of the operating practices and strategies of companies as well as in the quality of the microeconomic business environment in which a nation’s companies compete. Unless these microeconomic capabilities improve, macroeconomic, political, legal, and social reforms will not bear full fruit. Beginning in 1998, we began an effort to examine statistically the microeconomic foundations of competitiveness and prosperity across a wide array of countries. This is a daunting task, given the need to measure and compare the complex array of national circumstances that a high and sustainable level of productivity.The effort aims to move beyond the examination of broad, aggregate variables typical of most economic growth analyses to provide a framework for countries and companies to understand their detailed competitive strengths and weaknesses. It also aims to be as rigorous as possible, ing the importance of each measure statistically and using statistical techniques to weight the contribution of individual variables. Finally, we know that improvement in competitiveness is not a simple linear process but one where nations at different levels of development face different challenges and priorities.This effort aims to highlight these differences.

1.2: Building the Microeconomic Foundations of Prosperity

CHAPTER 1.2

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1.2: Building the Microeconomic Foundations of Prosperity 20

The Business Competitiveness Index seeks to explore the underpinnings of a nation’s prosperity, measured by its level of GDP per capita.The focus is on whether current prosperity is sustainable, and on the specific areas that must be addressed if GDP per capita is to achieve higher levels in the future. A separate Growth Competitiveness Index (GCI), discussed in the previous chapter of this Report, examines the sources of GDP per capita growth, which is more dependent on investment rates and other macroeconomic policies.The sustainable level of current GDP per capita and its rate of growth will be related in the long term, but each area requires its own distinctive policy agenda.The conceptual framework and statistical approach follow that of the previous reports and the findings are fully comparable with previous Microeconomic Competitiveness Index results. The analysis here is pragmatic, making use of the best available data and econometric methods even though both are far from perfect.We also confront the challenge of establishing the direction of causality given limited timeseries data. However, even if definitive tests of causality are not possible, understanding the microeconomic correlates of prosperity remains crucial.There may be a natural tendency for some microeconomic conditions to improve as GDP per capita increases.Yet the large observed differences across countries, even those at similar income levels, reveal that this improvement is far from automatic. Despite the statistical challenges, the statistical findings overall are remarkably stable and robust compared with the Global Competitiveness Report 2003–2004 (GCR) and earlier Reports.We expand this year’s analysis to include an analysis of natural resource endowments and their role in competitiveness, a crucial issue especially for developing countries.The results again provide strong for the importance of microeconomic competitiveness for economic development and prosperity. Our findings also the striking and regular pattern of microeconomic changes that accompany economic development. The Business Competitiveness Index (BCI) s for 81 percent of the variation across countries in the level GDP per capita.2 This level is remarkably high given the presence of so many low- income countries and the inherent imperfections of national income data.These findings highlight the pressing need to better incorporate microeconomic competitiveness agenda into efforts to stimulate economic growth. In advanced countries, which have largely gotten their macro policies right, it is micro reform that holds the key to reversing unemployment problems, to growing exports, and to translating economic growth into a rising standard of living. In developing countries, microeconomic failures nullify macroeconomic and social programs again and again. By accessing global capital markets, countries can engineer spurts of growth through macroeconomic stabilization and

financial reforms that bring in floods of capital and create the illusion of progress as construction cranes dot the skyline.Without microeconomic reforms, however, growth will be snuffed out as exports and jobs fail to materialize, wages stagnate, and the return on investments proves disappointing.This disappointment, and the austerity that results from such cycles, is at the heart of the backlash against globalization. Successful economic development requires progress on multiple fronts simultaneously. Reform efforts need to be tightly connected to the country’s current stage of development. As an economy progresses, the constraints to its continued advancement shift. At strategic points in the development process, the whole basis of national competitiveness must be transformed. Many aspects of company strategy must be shifted and new requirements in the national business environment must be met. Our analysis provides the conceptual framework and comparative data to define such national agendas, and to measure progress.

Competitiveness and its causes Measuring and ranking competitiveness requires a clear conceptual framework, drawing on the accumulated knowledge about competitiveness and its sources.We summarize the framework here, drawing on previous years’ chapters while extending it to incorporate recent learning. What is competitiveness?

Competitiveness remains a concept that is not well understood, despite widespread acceptance of its importance. The most intuitive definition of competitiveness is a country’s share of world markets for its products.This makes competitiveness a zero-sum game, because one country’s gain comes at the expense of others.This view of competitiveness is used to justify intervention to skew market outcomes in a nation’s favor (so-called industrial policy). It also underpins policies intended to provide subsidies, hold down local wages, and devalue the nation’s currency, all aimed at expanding exports. In fact, it is still often said that lower wages or devaluation “make a nation more competitive.” Business leaders are drawn to the marketshare view because these policies seem to address their immediate competitive concerns. Unfortunately, the most intuitive view of competitiveness is deeply flawed, and acting on it works against national economic progress.The need for low wages reveals a lack of competitiveness and holds down prosperity. Subsidies drain national income and bias choices away from the most productive use of the nation’s resources. Devaluation results in a collective national pay cut by discounting the products and services sold in world markets while raising the cost of the goods and services purchased

Microeconomic foundations of productivity

Stable political, legal, and social institutions and sound macroeconomic policies create the potential for improving national prosperity. But wealth is actually created at the microeconomic level—in the ability of firms to create valuable goods and services using efficient methods. Only in this way can a nation high wages and the attractive returns to capital necessary to sustained investment (see Figure 1). The microeconomic foundations of productivity rest on two interrelated areas: (1) the sophistication with which domestic companies or foreign subsidiaries compete in the country, and (2) the quality of the microeconomic business environment in which they operate.

Figure 1: Determinants of productivity and productivity growth

Macroeconomic, Political, Legal, and Social Context for Development

Sophistication of Company Operations and Strategy

Quality of the Microeconomic Business Environment

Microeconomic Foundations of Development

The productivity of a country is ultimately set by the productivity of its companies. An economy cannot be competitive unless companies operating there are competitive, whether they are domestic firms or subsidiaries of foreign companies. However, the sophistication and productivity of companies is inextricably intertwined with the quality of the national business environment. More productive company operating practices and strategies require more highly skilled people, better information, more efficient government processes, improved infrastructure, better suppliers, more advanced research institutions, and more intense competitive pressure, among other things. Companies in a nation must upgrade their ways of competing if successful economic development is to occur. Broadly, companies must shift from competing on inherited endowments (comparative advantages such as low-cost labor or natural resources) to competing on competitive advantages arising from efficient and distinctive products and processes. Companies must move from tapping foreign distribution channels to building their own channels.These and other transitions in corporate strategies and operating practices required for successful economic development are shown in Figure 2.

Figure 2: Company sophistication and economic development Low-Income Countries • Competitive advantages beyond cheap inputs • Production process sophistication

Middle-Income Countries

High-Income Countries

• Extent of regional sales

• Capacity for innovation

• Control of international distribution

• Breadth of international markets

• Extent of branding

• Extent of incentive compensation

• Broad value chain presence

• Company spending on R&D

• Reliance on professional management

• Prevalence of foreign technology licensing • Extent of staff training

• Willingness to delegate authority


abroad. Exports based on low wages or a cheap currency, then, do not an attractive standard of living. To understand competitiveness, the starting point must be the underlying sources of prosperity. A nation’s standard of living is determined by the productivity of its economy, which is measured by the value of goods and services produced per unit of the nation’s human, capital, and natural resources. Productivity depends both on the value of a nation’s products and services, measured by the prices they can command in open markets and the efficiency with which they can be produced. Productivity also depends on the ability of an economy to mobilize the available human resources. Some European economies report high levels of productivity per hour worked, but high unemployment, sick leave, and limited working hours depress national income per capita.3 Much of this is not voluntary but reflects a lack of employment alternatives.4 True competitiveness, then, is measured by productivity. Productivity allows a nation to high wages, a strong currency, and attractive returns to capital—and with them a high standard of living. Productivity is the goal, not exports per se. Only if a nation increases exports of products or services that it can produce more productively than the average industry will national productivity rise. Also, productivity is the goal, not whether firms operating in the country are domestic or foreign owned.What matters most is not ownership, but the nature and productivity of the business activities taking place in a particular country. Finally, purely local industries also matter for competitiveness because their productivity not only sets the wages in these industries but also has a major influence on the cost of living and the cost of doing business in the country. The productivity of the entire economy matters for the standard of living, not just the traded sector. The world economy is not a zero-sum game. Many nations can improve their prosperity if they can improve productivity.The central challenge in economic development, then, is how to create the conditions for rapid and sustained productivity growth.

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Figure 3: The microeconomic business environment

Context for Firm Strategy and Rivalry • A local context and rules that encourage investment and sustained upgrading (e.g., Intellectual property protection)

Factor (Input) Conditions Presence of high quality, specialized inputs available to firms

• Meritocratic incentive systems across institutions • Open and vigorous competition among locally based rivals

• • • • • •

Human resources Capital resources Physical infrastructure istrative infrastructure Information infrastructure Scientific and technological infrastructure • Natural resources

Demand Conditions • Sophisticated and demanding local customer(s) • Local customer needs that anticipate those elsewhere • Unusual local demand in specialized segments that can be served nationally and globally

Related and ing Industries • Access to capable, locally based suppliers and firms in related fields • Presence of clusters instead of isolated industries

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What were strengths in competing at earlier stages of development become weaknesses at more advanced levels of development. Extensive technology licensing works for lower- and middle-income countries, but must give way to indigenous technology development. Necessary changes are often resisted by the corporate sector because past approaches were profitable and because old habits are deeply ingrained. Moving to more sophisticated ways of competing depends on parallel changes in the microeconomic business environment.The business environment can be understood in of four interrelated areas: the quality of factor (input) conditions, the context for firm strategy and rivalry, the quality of local demand conditions, and the presence of the related and ing industries. Because of their graphical representation (see Figure 3), the four areas have collectively become referred to as the diamond. As the diamond framework reveals, almost everything matters for competitiveness.The schools matter, the roads matter, the financial markets matter, and customer sophistication matters, among many other aspects of a nation’s circumstances, many of which are deeply rooted in a nation’s institutions, people, and culture.This makes improving competitiveness a special challenge, because there is no single policy or grand step that can create competitiveness, only many improvements in individual areas that inevitably take time to accomplish. Improving

competitiveness is a marathon, not a sprint. How to sustain momentum in competitiveness improvements over time is among the greatest challenges facing countries. There are distinct influences on competitiveness at multiple geographic levels: national, state, and local.5 In many countries, we observe striking differences in economic performance among subnational regions. In countries such as China, India, and the United States, the benefits of decentralization of economic policy and strong initiative in individual regions is evident.The crucial need for economic strategies for sub-national units such as states or regions is among the most important new directions in competitiveness thinking and practice. National productivity can also be enhanced through coordinating policies among neighboring countries. A concerted effort to improve the business environment is needed both within countries and across countries. Government plays an inevitable role in economic development because it affects many aspects of the business environment. Government shapes factor conditions, for example, through its training and infrastructure policies.The sophistication of home demand derives in part from regulatory standards, consumer protection laws, government purchasing practices, and openness to imports. Similar policy influences are present in all four parts of the diamond. Many government departments and agencies impinge on competitiveness, as do government entities at

Clusters and economic development

An improving business environment gives rise to the formation of clusters. Clusters are geographically proximate groups of interconnected companies, suppliers, service

providers, and associated institutions in a particular field, linked by commonalities and complementarities. Clusters such as software in India or high-performance cars in are often concentrated in a particular region within a larger nation, and sometimes in a single town. Clusters affect competitiveness in three broad ways: first, by increasing the productivity of constituent firms or industries. Firms with a cluster have more efficient access to specialized suppliers, employees, information, and training than isolated firms.The presence of a wide range of available inputs, machinery, skills, and knowledge promotes greater efficiency and flexibility than vertical integration or relationships with distant suppliers. Second, clusters increase the capacity for innovation and productivity growth. Opportunities for innovation are often perceived more easily within clusters, and the assets, skills, and capital are more available to pursue them.Third, clusters stimulate and enable new business formation that s innovation and expands the cluster.The local presence of experienced workers and access to all the needed inputs and specialized services, for example, reduces the barriers to entry. The benefits of clusters apply to virtually all parts of an economy, not only to knowledge-intensive industries such as life sciences or information technology as is sometimes assumed. A good example is tourism: in the Cairns tourism cluster of northwestern Australia, natural attractions such as proximity to the Great Barrier Reef and a tropical rainforest alone would provide little advantage for the location versus competing tourism destinations.6 Only the combination of high-quality transportation services,

Figure 4: The Cairns Tourism Cluster

Travel Agents

Public Relations and Market Research Services Food Suppliers

Restaurants

Tour Operators

Local retail, health care, and other services

Attractions and Activities

Local Transportation

e.g., James Cook University, Cairns College of TAFE

Souvenirs, Duty Free

Property Services Maintenance Services

Government Agencies Harvard University, MIT, e.g., Australian Tourism Commission, Great Barrier Reef Authority

Source: Research by HBS Student Team, 2003

Hotels

Airlines, Cruise Ships

Educational Institutions e.g., James Cook University, Cairns College of TAFE

Banks, Foreign Exchange

Industry Groups e.g., Queensland Tourism Industry Council


the provincial, state, and city levels.The question is not whether government has a role, but what that role should be and how to coordinate policies across parts of government. Many countries have sought to limit the inappropriate roles of government while ignoring its positive roles. Government must set the right rules and incentives and make the public investments needed for a productive economy. National endowments such as natural resources play a declining role in competitiveness as the resource intensity of the economy falls and as technology substitutes for resources or opens up new resource locations.The real prices of most resources or resource-intensive goods have been falling over the decades. It is the productivity with which natural resources can be utilized, not the resources themselves, that normally have the strongest influence on prosperity. Abundant natural resources also carry a risk. In countries where natural resources are abundant or dominate economic activity, forces are set in motion that limit the development of policies, skills, and attitudes that enhance competitiveness. Exploiting and redistributing resource spoils can become the dominant orientation not enhancing productivities.We explore the relationship between natural resource endowments and competitiveness in a later section.

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accommodation, restaurants, travel guides, and the many ing activities required to operate them creates the high level of value which tourists are looking for. Even the best hotel and the most unique tourist attraction would loose greatly in value if local transportation services were weak. National economies tend to specialize in particular clusters, which for a disproportionate share of their output and exports.This specialization is even more evident in sub-national regions.The nature and depth of clusters varies with the state of development of the economy. In developing countries, clusters are normally shallow or underdeveloped. Firms compete based on cheap labor or local natural resources, and they depend heavily on imported components, machinery, and technology. Specialized local infrastructure and institutions are absent or inefficient, which limits local processing of products and limits quality. As economies advance, clusters develop and deepen to include suppliers of specialized inputs, components, machinery, and services; specialized infrastructure; and institutions providing specialized training, education, information, research, and technical . It is rare for there to be only a single cluster in the world in a given field; usually there is an array of clusters in different locations with different levels of sophistication and specialization. In a given field, only a small number of clusters tend to be true innovation centers, such as Silicon Valley and Japan in semiconductors.These innovation centers sometimes specialize in particular market segments— the Silicon Valley cluster is unusually strong in microprocessors. Other locations may be manufacturing centers. Still other clusters can be regional assembly and service clusters. Firms based in the most advanced clusters often seed or enhance clusters in other locations as they disperse some activities to reduce risk, access lower cost inputs, or better serve particular regional markets. Intel, for example, has moved some assembly and testing and some wafer fabrication to a number of non-US locations that have become regional clusters.The same development can be seen in a number of other areas: for example, the offshoring of business services and manufacturing activities to locations with lower labor costs. Instead of spreading these activities across geography in less-advanced economies, companies have found it advantageous to colocate in newly emerging clusters.This can be seen in outsourced business services in Bangalore, India and in textile production in Timisoara, Romania.7 The challenge for an economy is to move from isolated firms to an array of clusters, and to upgrade the sophistication of clusters to more advanced activities.

Stages of competitive development

Successful economic development is a process of successive upgrading, in which a nation’s business environment evolves to and encourage increasingly sophisticated and productive ways of competing by firms based there. Nations at different levels of development face distinctly different challenges.

Figure 5: Stages of competitive development

Factor-Driven Economy

Investment-Driven Economy

Innovation-Driven Economy

Input Cost

Efficiency

Unique Value

Source: Porter (1990)

As nations develop, they progress in of their competitive advantages and modes of competing.8 In the Factor-Driven stage, basic factor conditions such as lowcost labor and unprocessed natural resources are the dominant sources of competitive advantage and exports. Firms produce commodities or relatively simple products designed in other, more-advanced countries.Technology is assimilated through imports, supply agreements, foreign direct investment, and imitation. In this stage, companies compete on price and lack direct access to consumers. They have limited roles in the value chain, focusing on assembly, labor-intensive manufacturing, and resource extraction. A Factor-Driven economy is highly sensitive to world economic cycles, commodity prices, and exchange rate fluctuations. In the Investment-Driven stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. Heavy investment in efficient infrastructure, business-friendly government istration, strong investment incentives, and better access to capital allow major improvements in productivity.The products and services produced become more sophisticated, but technology and designs still largely come from abroad.Technology is accessed through licensing, t ventures, foreign direct investment, and imitation. However, nations at this stage not only assimilate foreign technology but also begin to develop the capacity to improve on it. Companies serve a mix of OEM customers and end s. Firms extend capabilities more widely in the value chain. An Investment-Driven economy is concentrated on manufacturing and on outsourced service exports. It is susceptible to financial crises and external, sector-specific demand shocks.

Institutions and roles in economic development While government is important to competitiveness, government alone is less and less able to build a competitive economy. Many other national and local institutions have a role in competitiveness and economic development.The influence of universities and schools is growing as knowledge and technology become more and more central to competition. Universities and schools must not only improve the educational and research capabilities, but must also become better connected to the private sector. The private sector has also become a crucial actor in improving competitiveness and in setting economic policy. The private sector is not only a consumer of the business environment, but it also can and must play a role in shaping it. Individual firms, through steps such as establishing educational programs, attracting suppliers, or defining standards, not only benefit themselves but also improve the overall environment for competing. Collective industry bodies, such as trade associations and chambers of commerce, also have important roles to play in improving infrastructure, providing training, and developing export markets that are often overlooked. Collective efforts to enhance the capabilities of individual companies, such as quality certification programs and manufacturing assistance

centers, are becoming more prominent. Engagement of the private sector in competitiveness is also important to provide the continuity of attention necessary to sustain progress through changes of government and to counteract the relatively short attention span of political leaders. Finally, a whole class of institutions, which we term Institutions for Collaboration (IFCs), play an important role in competitiveness though they have been largely ignored in economic development thinking.9 Neither government agencies, educational institutions, nor firms, these organizations—trade associations, entrepreneur networks, standard-setting agencies, quality centers, technology networks, and many others—are common.They are especially prevalent in the most advanced economies, but also have crucial roles in developing countries. IFCs play an essential role in connecting the parts of the diamond and fostering efficient collective activities in both advanced and developing countries.10 The importance of institutions for economic development has been widely recognized in recent years.While institutions are important, they are only one of the factors that determine competitiveness and, maybe even more importantly, the ability of a country to sustain and upgrade competitiveness over time. Institutions are neither a strictly necessary nor a sufficient factor for competitiveness.This view, consistent with the conceptual framework outlined here, has recently been ed by new empirical analyses.11 Institutions are often used in a very wide sense, incorporating a broad set of organizations, rules, and behavioral patterns in many different parts of the economy and society.This way the term becomes too wide to be a useful guide for policy. It has encouraged a focus on large public institutions, while the role of private and public-private institutions such as IFCs is much less well understood. The relationship between macroeconomic and microeconomic policy

Our analysis makes it clear why the traditional focus on macroeconomic stabilization and market opening is insufficient. Macroeconomic policies fostering high rates of capital investment, for example, will not translate into rising productivity unless the forms of investment are appropriate, the company skills and ing industries are present to make the investments efficient, and strong competitive pressures and adequate corporate governance provide the needed market discipline. Sound monetary and fiscal policies and the removal of distortions in exchange rates and other prices will eliminate impediments to productivity, but microeconomic foundations must be in place if productivity is actually to increase. Appropriate levels of foreign debt depend on microeconomic circumstances.The prudence of foreign debt levels depends on exactly where the foreign capital is


In the Innovation-Driven stage, the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage.The national business environment is characterized by strengths in all areas together with the presence of deep clusters. Institutions and incentives ing innovation are well developed. Companies compete with unique strategies that are often global in scope. An Innovation-Driven economy has a high share of services in the economy and is resilient to external shocks. Seeing economic development as a sequential process of building interdependent microeconomic capabilities, shifting company strategies, improving incentives, and increasing rivalry exposes important pitfalls in economic policy.The influence of one part of the microeconomic business environment depends on the state of others. Lack of improvement in any important area can lead to a plateau in productivity growth and stalled development. Worse yet, it can undermine the whole economic reform process.When well-trained college graduates cannot find appropriate jobs because companies are still competing based on cheap labor, for example, a backlash against business is created. This analysis also begins to reveal why countries find the transition to a new stage of development so difficult. Such inflection points require wholesale transformation of many interdependent aspects of competition.

25


invested, together with the microeconomic fundamentals surrounding its deployment and governance. Regulating overall debt levels is less important, in many ways, than improving the microeconomic foundations. High rates of public investment in human capital will not pay off unless a nation’s microeconomic circumstances create the demand for skills in companies. Privatization will not boost prosperity unless companies can improve efficiency and are pressured by local competition. For sound policies at the macroeconomic level to translate into an increasingly productive economy, then, parallel microeconomic improvements must take place. The effects of trade agreements and other market opening measures, a major focus in today’s international economic policymaking, also depends on microeconomic policies. Market opening is good, but its benefits in of prosperity depend on microeconomic progress. If the local business environment does not become more efficient and local companies do not improve their productivity and sophistication, market opening will boost imports but growth in exports and the attraction of foreign investment will be painfully slow. Improvement in the microeconomic business environment begins before market opening measures are complete. A greater focus on microeconomic reforms will pay another essential dividend.While macro reforms almost inevitability inflict hardship in the short and medium run through raising interest rates and prices while cutting public expenditures, micro reforms can produce tangible and visible benefits for citizens. Breaking up local cartels and monopolies, for example, lowers the cost of food, housing, electricity, telephone service, and other costs of living. Regulatory reform can rapidly begin to ease inefficiencies, reduce pollution, improve product quality, and end unsafe practices. Bold steps to improve the quality of education and training are particularly important, because they offer the hope of a better life for children. If citizens see businesses reforming themselves and having to confront tough competitive challenges, they themselves will be more willing to live with personal sacrifices and less likely to side with anti-reform interest groups.The political will and public to make real economic change is elevated.

Ranking competitiveness Measures of competitiveness

The Business Competitiveness Index (BCI) is constructed from measures drawn primarily from the survey of 8,695 senior business leaders in 103 countries.12 Compared with last year five countries were added (Bahrain, BosniaHercegovina, Cyprus, Georgia, and the United Arab Emirates) but three countries (Cameroon, Haiti, Senegal)

had to be dropped.We are working with our partners in these countries to reenter them next year. Measuring competitiveness is challenging because of the sheer number and variety of influences that shape national productivity. Only through a detailed survey can textured measures of the competitive environment and company practices be assembled across many countries. The Survey questions aim to capture the circumstances in a nation, but they do so in way that is meaningful for Survey respondents. For example, we get at the stock of basic human capital with a question on the quality of public schools because this is something that respondents can compare more readily across countries.The quality of schools, a flow measure, will be highly correlated with the stock of basic skills. The World Bank has recently started a new effort to systematically collect comparable data on regulatory conditions, an important element of the microeconomic foundations for competitiveness, across a wide number of countries.13 In three of the areas covered by the World Bank effort—the istrative procedures of starting a business, the availability of effective credit s to enable loans to businesses, and the organization of bankruptcy procedures—our Survey contains questions that cover related aspects.The analysis reveals low levels of correlation between our data (assessments of the overall effectiveness of procedures made by business leaders) and the World Bank data (quantifications of specific aspects of procedures made by technical specialists).These differences could indicate that the technical dimensions measured in the World Bank effort (e.g., number of steps needed to a new business) give a skewed description of the real impact these regulations have on business.They could also be a sign of weaknesses in the Survey data, related to misinformed respondents or other reasons. More research will be necessary to evaluate the relative advantages of both types of data. Quantitative measures are utilized for patenting rates, Internet penetration, and cellular phone penetration. For all of the other dimensions we measure, however, quantitative data are simply unavailable, especially for so many countries.The Survey not only offers many unique measures, but also captures the informed judgments of thousands of actual participants in the economies examined. The Survey responses are important in their own right, because they reflect the attitudes of the decision makers that ultimately determine economic activity. As with last year, we examined the consistency of the Survey data to ensure that the sample used for statistical estimation is as valid as possible and to identify particular countries whose rankings may be less reliable. For each Survey question we compared the standard deviation of answers within a country with the standard deviation of

movements in particular export industries.The proportion of the variation in GDP per capita across all countries that can be explained by microeconomic fundamentals is interesting in its own right. To explore differences in the sources of competitiveness across countries at different levels of development, we divided countries into three groups based on income. There is no accepted division among low-, middle-, and high-income countries, and efforts to define income cutoffs statistically face data limitations. Instead, we proceed pragmatically, dividing countries based on two criteria. First, we use income cutoffs that yield logical divisions of countries in of aspirations and competitive position. Second, we ensure that there are enough countries in each group to allow meaningful statistical tests. Ideally, the cutoffs are also stable. Applying these criteria, we maintained the cutoff points at US$4,000 GDP per capita (PPP) for low to middle income and US$17,000 GDP per capita (PPP) for middle to high income. There were 20 low-income countries with a purchasing power-adjusted US-dollar GDP per capita in 2003 below $4,000; 43 middle-income countries with GDP per capita between $4,000 and $17,000; and 30 high-income countries with a GDP per capita above $17,000. As will be reported, these groups exhibited quite different patterns of influence among variables as we would expect.


answers across all countries.This is a weak statistical test that the vast majority of countries easily meet. In those countries with high within-country variance of responses on many survey questions, however, it is hard to interpret the country averages, independently of the possible reasons for the variances.14 In addition to examining all responses for each country, we further analyzed within-country consensus in the subset of responses from executives from foreign companies operating in the country.We expect these respondents to have the best perspective on how the country compared to others. Of the 103 countries surveyed this year, the 93 countries shown in Table 1 ed our data consistency test,15 of at least 50 Survey questions out of the 67 with a lower within-country variance than cross-country variance. Countries that have more heterogeneous responses in the sample include some low-income countries only added to the survey process last year (for example Gambia, Ghana, and Uganda), but also some Arab countries included this year for the first time (Bahrain, UAE). We calculated Index rankings for all 103 countries shown in Table 2, with those marked with an asterisk subject to concerns about the Survey data.16 Until the reliability of Survey responses improves with future educational efforts and improved sampling in these countries, their rankings should be interpreted with caution. For the 93-country sample used in the regressions and for computing the Index model, there is an average of more than 80 respondents per country.The degree of within-country consensus is striking. For all measures, the proportion of variation due to country differences is statistically significant. For most measures, between one-third and one-half of the overall variation in the responses is driven by country-specific differences for that measure. As expected, the within-country consensus is higher for cross-cutting business environment indicators, such as overall infrastructure quality, and lower for measures where there would be variation within the country across companies and clusters, such as state of cluster development. The country averages, then, capture meaningful differences across countries in competitive circumstances while limiting idiosyncratic biases that would result if there were only a handful of responses per country. The dependent variable used to develop the BCI is the level of GDP per capita in 2003, adjusted for purchasing power parity (PPP). GDP per capita is the broadest measure of national productivity and is strongly linked over time to a nation’s standard of living.17 It is the best single, summary measure of microeconomic competitiveness available across all countries.18 GDP per capita will reflect a country’s structural fundamentals over the medium and long term. However, it is also influenced by a wide array of short-term and idiosyncratic factors such as natural disasters, macroeconomic shocks, and price

27

Sources of competitiveness To construct an overall index of competitiveness, we first validated the statistical relationship of each of a wide array of measures of microeconomic competitiveness that are suggested by our conceptual framework with GDP per capita.Variables are drawn from Survey responses and available quantitative measures, and are broadly grouped into those measuring the sophistication of company operations and strategy and those measuring the quality of the national business environment. A full list of Survey questions and available quantitative measures is given in Appendix A. Table 3 gives bivariate regressions on GDP per capita that include those variables that proved to be the most statistically significant. Included in the table is the mean response across all countries or groups of countries, the slope of the regression relationship, a measure of the statistical significance of the relationship, and the adjusted R2 (or proportion of variation in GDP per capita explained by the variable, adjusted for statistical degrees of freedom).19 While the bivariate regressions are not meant to represent a fully specified model, they provide a basic test of whether the variables have a meaningful relationship with the level of GDP per capita across countries. All the reported variables are highly statistically significant in the full sample of countries. A wide range of company


Table 1: The Business Competitiveness Index, sample of 93 countries

Country

United States Finland Sweden Switzerland United Kingdom Denmark Japan Netherlands Singapore Hong Kong SAR Australia Belgium Canada Austria Taiwan New Zealand Iceland Norway Israel Ireland Malaysia Korea South Africa Spain Estonia Chile India Slovenia Tunisia Portugal Italy Czech Republic Lithuania Thailand Brazil Slovak Republic Greece Hungary Jordan Indonesia Cyprus Morocco China Costa Rica Latvia Malta Namibia Turkey Mauritius Jamaica Mexico Romania Poland Colombia Trinidad and Tobago Panama Russian Federation Botswana Kenya Ghana El Salvador Sri Lanka Ukraine Philippines Croatia Pakistan Argentina Bulgaria

2004 2003 2002 2001 2000 1999 1998

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

2 1 5 3 7 6 4 13 9 8 19 10 11 15 12 17 16 18 14 22 20 21 26 23 27 25 28 32 37 30 33 36 24 35 40 31 34 43 39 38 41 60 — 49 46 45 29 42 55 52 44 56 48 76 47 51 53 59 66 54 67 63 64 57 73 65 62 75 69 77

1 2 4 6 5 3 8 11 7 9 19 15 14 13 10 12 16 22 17 21 18 20 26 23 29 25 30 31 37 27 32 36 24 34 40 35 33 42 43 28 53 64 — 48 38 39 45 — 51 54 49 59 55 67 46 56 44 50 58 57 — — 63 47 69 61 52 — 65 68

2 1 4 6 5 7 8 10 3 9 18 13 14 15 12 11 21 20 16 19 17 22 37 26 25 24 28 29 36 32 — 33 23 34 50 38 30 40 46 27 47 55 — — 43 48 41 — — 35 51 39 52 61 42 57 31 49 56 — — — 64 58 59 53 — — 54 68

2 1 3 7 5 8 6 14 4 9 16 15 10 12 11 13 21 19 17 20 18 22 30 27 25 23 — 26 37 — — 28 24 34 — 40 31 36 33 32 35 47 — — 44 43 — — — 29 38 — 42 — 41 48 — — 52 — — — 51 — 56 46 — — 45 55



BCI ranking

1 2 6 4 5 10 7 14 3 12 21 9 13 15 8 11 19 16 22 18 20 17 27 28 26 23 — 24 42 — — 29 25 41 — 39 35 48 36 33 32 53 — — 49 38 — — — 31 30 — 34 — 37 52 — — 55 — — — 47 — 56 44 — — 40 54

1 2 4 7 9 5 8 18 3 10 12 11 15 19 6 16 20 17 24 14 21 13 27 28 25 22 — 23 44 — — 33 26 30 — 37 35 36 38 31 32 51 — — 42 — — — — 29 — — 39 — 41 49 — — 46 — — — — — 52 45 — — 34 —

2004 2003 2002 2001 2000 1999 1998

2 7 1 5 4 8 9 3 6 13 15 10 19 11 16 14 12 20 17 23 18 22 28 21 24 25 33 32 30 27 42 41 26 31 36 35 29 40 39 47 52 37 56 44 38 34 50 57 60 43 48 51 45 58 46 55 53 63 59 69 54 67 62 66 61 49 68 64 65 79

2 4 1 3 5 8 7 6 10 12 22 9 18 11 14 13 16 23 15 21 20 17 26 19 28 25 36 34 40 27 38 46 24 33 41 31 30 44 39 45 59 62 — 49 42 32 29 47 64 51 35 56 37 84 43 50 54 60 69 67 61 66 58 52 72 48 65 81 63 85

1 4 2 6 5 3 9 7 8 14 24 10 19 11 13 12 16 25 17 23 20 15 27 21 31 22 36 35 40 26 37 41 18 34 39 33 28 43 47 29 59 55 — 50 38 32 48 — 58 56 42 60 45 69 46 51 44 54 62 64 — — 61 52 66 49 53 — 57 72

1 2 4 6 5 7 9 8 3 15 21 10 24 12 14 11 20 19 16 23 18 17 37 26 25 22 32 30 43 28 — 38 13 41 47 42 29 57 51 33 56 50 — — 39 34 35 — — 44 49 31 46 63 55 52 27 40 54 — — — 66 58 62 45 — — 53 70

2 3 1 6 5 11 8 4 7 15 23 9 20 10 16 12 18 22 14 21 13 19 30 25 26 24 — 27 40 — — 35 17 41 — 47 29 31 32 34 46 51 — — 38 39 — — — 28 37 — 42 — 36 48 — — 33 — — — 57 — 52 43 — — 45 54

1 7 5 3 2 13 9 4 8 14 24 6 19 11 12 10 17 16 21 23 18 20 25 27 28 22 — 26 48 — — 37 15 55 — 43 32 51 45 36 44 47 — — 31 35 — — — 33 29 — 30 — 38 40 — — 42 — — — 46 — 50 34 — — 39 52

2 8 1 4 3 9 10 7 5 12 17 6 22 13 15 11 16 19 28 14 21 18 34 24 33 23 — 25 50 — — 48 20 31 — 37 27 40 32 39 42 52 — — 35 — — — — 26 — — 29 — 38 43 — — 45 — — — — — 51 41 — — 30 —

2004 2003 2002 2001 2000 1999 1998

2 1 5 6 7 4 3 11 9 8 10 16 12 19 13 17 20 15 18 14 21 22 23 27 25 26 24 28 31 32 29 30 41 35 33 34 42 37 40 36 38 44 39 43 45 48 46 47 49 53 52 51 54 55 62 59 60 56 58 50 61 57 63 64 66 71 65 69 72 67

2 1 9 5 8 6 3 20 11 4 15 14 7 17 10 18 16 13 12 21 19 22 24 25 28 26 27 30 36 34 29 33 23 38 41 32 39 43 40 37 35 61 — 49 44 47 31 42 52 55 46 56 51 71 45 54 53 60 64 50 72 57 65 59 77 74 58 70 73 75

1 2 4 8 6 3 9 17 10 5 16 21 11 15 7 12 13 20 14 19 18 22 26 23 33 25 28 31 37 27 30 32 24 34 39 35 36 40 41 29 48 65 — 46 38 47 42 — 49 55 50 59 60 64 45 57 44 52 56 51 — — 62 43 69 67 54 — 68 63

2 1 4 6 5 8 10 16 3 9 17 13 7 14 11 12 21 20 15 19 18 22 37 29 27 23 26 30 34 35 — 28 24 31 47 39 32 36 43 25 41 58 — — 46 51 42 — — 33 50 44 52 60 40 59 38 49 55 — — — 64 56 57 54 — — 53 65

2 1 6 11 10 9 4 19 3 5 14 15 7 13 8 12 21 17 16 18 20 22 30 28 25 23 — 24 37 — — 27 26 34 — 40 32 36 33 31 35 47 — — 45 42 — — — 29 38 — 43 — 41 48 — — 53 — — — 50 — 56 46 — — 44 54

1 1 2 2 5 8 7 9 9 10 8 5 6 7 19 19 3 4 12 6 18 11 11 13 10 12 15 18 4 3 13 17 22 21 14 16 21 23 16 15 20 20 17 14 31 26 30 28 25 25 23 22 — — 24 24 43 42 — — — — 26 30 27 27 36 33 — — 39 36 37 39 47 37 34 38 33 31 28 32 52 51 — — — — 50 44 41 — — — — — — — 32 29 29 — — — 35 41 — — 38 40 53 49 — — — — 55 47 — — — — — — 48 —— — — 56 52 46 45 — — — — 40 34 54 —

2003 GDP per capita (PPP-adjusted)*

37,352 27,252 27,609 26,656 30,186 27,106 30,588 28,162 29,412 24,480 28,027 27,327 29,143 28,396 30,463 29,972 24,560 21,177 30,658 37,063 19,678 29,907 9,696 17,908 10,492 22,264 13,348 10,206 2,909 19,300 7,083 18,444 27,050 16,448 11,250 7,580 7,767 13,469 19,973 14,572 4,319 3,364 19,155 4,012 4,995 9,490 9,981 18,203 6,375 6,749 11,258 4,184 9,136 7,222 11,623 6,784 9,975 6,475 9,195 8,359 1,035 2,234 4,994 3,776 5,472 4,321 11,139 1,971 11,586 7,807

(cont’d)

Country

2004 2003 2002 2001 2000 1999 1998

Peru Uruguay Vietnam Dominican Republic Zimbabwe Macedonia, FYR Malawi Serbia and Montenegro Guatemala Madagascar Venezuela Algeria Tanzania Georgia Bosnia and Hercegovina Ecuador Bangladesh Mozambique Honduras Paraguay Ethiopia Nicaragua Bolivia

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93

81 71 50 61 78 82 72 79 86 90 85 88 68 — — 89 91 93 95 97 96 94 98

66 62 60 41 70 — — — 73 — 72 — — — — 77 74 — 78 76 — 75 79

63 45 62 60 65 — — — 69 — 67 — — — — 72 73 — 74 70 — 71 75

49 — 53 — 50 — — — — — 54 — — — — 57 — — — — — — 58



BCI ranking

46 — 50 — 45 — — — — — 51 — — — — 57 — — — — — — 58

47 — 43 — 48 — — — — — 50 — — — — — — — — — — — —

2004 2003 2002 2001 2000 1999 1998

71 74 75 70 73 78 77 80 72 81 76 86 85 82 88 83 89 87 84 90 93 92 91

83 77 53 57 70 79 71 75 76 88 74 93 68 — — 87 91 90 89 95 96 92 97

65 63 67 30 68 — — — 70 — 73 — — — — 74 76 — 78 77 — 75 79

65 48 64 59 60 — — — 69 — 67 — — — — 71 72 — 74 68 — 73 75

53 — 50 — 56 — — — — — 49 — — — — 55 — — — — — — 58

56 — 41 — 54 — — — — — 53 — — — — 57 — — — — — — 58

49 — 36 — 46 — — — — — 44 — — — — — — — — — — — —

2004 2003 2002 2001 2000 1999 1998

68 70 73 76 77 75 78 74 82 81 83 79 80 85 84 87 86 90 92 88 89 91 93

78 68 48 63 81 83 76 79 88 90 87 86 67 — — 92 91 95 96 98 94 93 97

66 61 58 53 70 — — — 73 — 72 — — — — 77 74 — 79 75 — 76 78

63 45 62 61 67 — — — 69 — 66 — — — — 72 73 — 75 71 — 70 74

51 — 52 — 49 — — — — — 55 — — — — 58 — — — — — — 57

44 — 49 — 45 — — — — — 51 — — — — 57 — — — — — — 58

46 — 43 — 48 — — — — — 50 — — — — — — — — — — — —

2003 GDP per capita (PPP-adjusted)*

5,267 8,280 2,490 6,703 1,892 6,762 618 3,970 4,122 808 4,909 6,248 611 2,569 6,029 3,684 1,786 1,133 2,658 4,724 716 2,523 2,546


Table 1: The Business Competitiveness Index, sample of 93 countries (cont’d.)

Note: GNI per capita is used for Ireland

29


Table 2: The Business Competitiveness Index, full sample of 103 countries

Country United States Finland Sweden Switzerland United Kingdom Denmark Japan Netherlands Singapore Hong Kong SAR Australia Belgium Canada Austria Taiwan New Zealand Iceland Norway Israel Ireland Malaysia Korea South Africa Spain Estonia United Arab Emirates* Chile India Slovenia Tunisia Portugal Italy Czech Republic Lithuania Thailand Brazil Slovak Republic Bahrain* Greece Hungary Jordan Indonesia Cyprus Morocco China Costa Rica Latvia Malta Namibia Turkey Mauritius Jamaica Mexico Romania Poland Colombia Trinidad and Tobago Panama Russian Federation Botswana Kenya Ghana El Salvador Egypt*

BCI ranking, 2004

Company operations and strategy ranking, 2004

Quality of the national business environment ranking, 2004

2003 GDP per capita (PPP adjusted)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

2 7 1 5 4 8 9 3 6 13 15 10 19 11 16 14 12 20 17 23 18 22 28 21 24 25 34 32 33 30 27 43 42 26 31 37 36 29 41 53 40 48 54 38 59 45 39 35 51 60 63 44 49 52 46 61 47 58 55 66 62 73 56 71 65 57

2 1 5 6 7 4 3 11 9 8 10 16 12 19 13 17 20 15 18 14 21 22 23 28 25 27 24 26 29 32 33 30 31 43 37 35 36 44 39 34 42 38 40 46 41 45 47 50 48 49 51 55 54 53 56 57 64 61 62 58 60 52 63 59 65 68

37,352 27,252 27,609 26,656 30,186 27,106 30,588 28,162 29,412 24,480 28,027 27,327 29,143 28,396 30,463 29,972 24,560 21,177 30,658 37,063 19,678 29,907 9,696 17,908 10,492 22,264 13,348 17,520 10,206 2,909 19,300 7,083 18,444 27,050 16,448 11,250 7,580 7,767 13,469 17,789 19,973 14,572 4,319 3,364 19,155 4,012 4,995 9,490 9,981 18,203 6,375 6,749 11,258 4,184 9,136 7,222 11,623 6,784 9,975 6,475 9,195 8,359 1,035 2,234 4,994 3,950

Country Gambia* Sri Lanka Ukraine Philippines Uganda* Croatia Pakistan Argentina Bulgaria Peru Uruguay Zambia* Vietnam Dominican Republic Nigeria* Zimbabwe Macedonia, FYR Malawi Serbia and Montenegro Guatemala Madagascar Venezuela Algeria Tanzania Mali* Georgia Bosnia and Hercegovina Ecuador Bangladesh Mozambique Honduras Paraguay Ethiopia Nicaragua Bolivia Chad* Angola*

BCI ranking, 2004

Company operations and strategy ranking, 2004

67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103

70 69 64 50 75 72 67 68 86 77 80 85 81 74 76 79 84 83 87 78 88 82 93 92 95 89 96 90 97 94 91 98 101 100 99 103 102

Quality of the national business environment ranking, 2004

66 67 71 77 69 70 75 78 72 74 76 73 79 83 80 84 82 85 81 90 88 91 86 87 89 93 92 95 94 98 100 96 97 99 101 102 103

Note: GNI per capita is used for Ireland

(cont’d.) * Survey data for these countries have high within-country variance. Until the reliability of Survey responses improves with future educational efforts and improved sampling in these countries, their rankings should be interpreted with caution.

2003 GDP per capita (PPP adjusted)

1,714 3,776 5,472 4,321 1,471 11,139 1,971 11,586 7,807 5,267 8,280 883 2,490 6,703 1,024 1,892 6,762 618 3,970 4,122 808 4,909 6,248 611 994 2,569 6,029 3,684 1,786 1,133 2,658 4,724 716 2,523 2,546 1,206 2,319

All countries (N = 93)

Low-income countries GDP per capita < $4,000 (N = 20)

Middle-income countries GDP per capita > $4,000 and < $17,000 (N = 43)

Mean

Slope

Adj. R 2

Mean

Slope

Adj. R 2

Mean

Mean

Slope

Adj. R 2

3.95 3.68 3.93 4.48 3.78 3.59

7964.0** 7590.5** 8652.0** 8647.8** 8851.1** 7820.3**

0.805 0.699 0.687 0.659 0.667 0.685

2.79 2.83 3.02 3.46 3.06 2.74

657.8* 311.4 321.3 659.4 365.1 630.9

0.119 –0.032 –0.017 0.089 –0.019 0.080

3.54 3.13 3.61 4.26 3.41 3.14

3137.5** 0.216 531.8 –0.019 1796.8** 0.078 1437.3* 0.060 2041.1** 0.079 3070.5** 0.192

5.33 5.03 5.00 5.47 4.78 4.80

4762.4** 2786.7** 4664.3** 5526.2** 4168.4** 2725.7**

0.417 0.219 0.392 0.425 0.482 0.229

3.42 3.95 3.93 4.62 4.00 3.70 4.64 4.20 4.68 4.48

8330.5** 6678.5** 6469.1** 11011.8** 11595.8** 7136.5** 8086.5** 8594.5** 6752.6** 8134.0**

0.584 0.627 0.615 0.672 0.600 0.689 0.506 0.521 0.488 0.380

2.78 2.90 2.89 3.85 3.37 2.66 4.06 3.49 3.74 3.71

310.1 591.9 605.3* 58.7 117.6 902.0* –104.3 567.9 388.7 –111.3

–0.028 0.069 0.097 –0.055 –0.052 0.150 –0.050 0.075 0.018 –0.049

3.05 3.49 3.52 4.40 3.78 3.24 4.36 3.97 4.47 4.41

2445.9** 0.104 1542.3** 0.086 1533.3** 0.152 1750.8* 0.048 285.1 –0.023 1778.0** 0.076 2241.5** 0.170 1902.6** 0.144 1481.4** 0.145 1604.3** 0.091

4.38 5.29 5.22 5.46 4.73 5.05 5.44 4.99 5.59 5.09

2716.8** 1414.1 2380.9** 6530.2** 4647.3** 2290.6** 3936.1** 3748.6** 2843.0** 3510.3

0.222 0.037 0.175 0.314 0.195 0.173 0.415 0.183 0.191 0.049

4.07 3.23 3.99 4.70 4.85 5.55 42.91 2006

6155.9** 4507.1** 5659.2** 6655.0** 6011.6** 5777.8** 269.4** 4.9**

0.687 0.487 0.585 0.532 0.668 0.445 0.749 0.805

2.64 2.15 2.71 3.69 2.96 4.07 6.51 215

417.1 –0.008 262.2 –0.004 599.8* 0.152 67.5 –0.054 924.1** 0.256 264.4 0.027 85.6** 0.378 3.7** 0.448

3.69 2.75 3.58 4.39 4.76 5.53 32.49 1264

1130.4** 0.086 1174.4** 0.186 496.3 0.001 343.5 –0.014 1497.3** 0.162 547.8 –0.001 111.3** 0.520 2.0** 0.422

5.55 4.65 5.45 5.82 6.24 6.57 82.10 4262

4.31 4.08 3.95 3.99 5.55

6360.0** 5434.5** 5972.3** 6682.3** 15689.0**

0.528 0.553 0.559 0.348 0.260

3.45 2.96 3.04 3.49 5.34

508.3 0.077 –137.0 –0.038 –172.6 –0.037 335.5 –0.014 1723.7** 0.158

3.86 3.61 3.47 3.71 5.50

–291.1 –0.017 949.8** 0.096 767.2 0.035 861.9 0.024 1894.2 0.025

5.52 5.50 5.25 4.72 5.76

4053.0** 3158.9** 3336.7** 2121.1* 10469.4**

0.326 0.210 0.341 0.085 0.163

4.33 3.97 3.66 4.19

7756.5** 6306.1** 7158.8** 5902.0**

0.554 0.702 0.595 0.387

3.39 2.54 2.71 3.36

330.4 0.001 821.5** 0.242 197.2 –0.035 466.4* 0.099

4.14 3.63 3.33 3.98

1255.8* 1892.1** 1788.9** 1405.6**

0.059 0.377 0.196 0.208

5.23 5.41 4.76 5.03

4869.8** 4299.2** 3441.8** 1906.4

0.466 0.300 0.248 0.026

29.59 4.73 4.01 3.37

116.0** 7334.0** 8145.8** 8507.5**

0.486 0.396 0.563 0.626

0.07 4.20 3.38 2.58

5108.2** 0.179 382.4 0.055 –102.3 –0.051 344.2 –0.027

0.92 4.47 3.67 3.04

1620.5** 1555.8** 2721.2** 1768.9**

0.481 0.129 0.300 0.086

90.35 5.45 4.92 4.37

25.8** 4599.3** 3554.0** 3409.6**

0.133 0.209 0.297 0.266

4.16 3.33 3.38 4.82

6677.0** 8830.8** 8013.9** 4830.9**

0.613 0.599 0.505 0.302

3.06 2.68 2.68 4.28

518.7 757.6* 278.6 33.6

0.065 0.101 –0.024 –0.054

3.80 2.98 3.13 4.43

779.1 2220.4** 1921.6** 510.0

0.023 0.145 0.141 0.005

5.39 4.26 4.22 5.74

3770.4** 3172.6** 2799.7** 3478.9**

0.356 0.191 0.151 0.154

4.02

8122.2**

0.699

3.06

348.3

0.009

3.62

1281.7

0.032

5.22

5352.7**

0.384

4.55

9298.3**

0.631

3.74

73.6

–0.053

4.26

1456.8*

0.042

5.50

5329.1**

0.240

3.70 4.37 3.85 4.12

10233.6** 8430.4** 8500.3** 7218.7**

0.360 0.783 0.604 0.719

3.30 3.21 2.91 3.07

–271.0 482.6 350.7 348.0

–0.041 –0.005 –0.009 –0.022

3.55 4.07 3.63 3.70

1010.2 3064.7** 1842.5** 2481.1**

0.006 0.385 0.135 0.331

4.20 5.58 4.79 5.41

3826.5** 5440.5** 4201.1** 3444.9**

0.100 0.450 0.190 0.396

Slope

Adj. R 2

High-income countries GDP per capita > $17,000 except Norway (N = 30)

I. COMPANY OPERATIONS & STRATEGY Production process sophistication Nature of competitive advantage Extent of staff training Extent of marketing Willingness to delegate authority Capacity for innovation Company spending on research and development Value chain presence Breadth of international markets Degree of customer orientation Control of international distribution Extent of branding Reliance on professional management Extent of incentive compensation Extent of regional sales Prevalence of foreign technology licensing


Table 3: Bivariate regression results, dependent variable: 2003 GDP per capita (PPP-adjusted)

II. NATIONAL BUSINESS ENVIRONMENT A. FACTOR (INPUT) CONDITIONS 1. Physical Infrastructure Overall infrastructure quality Railroad infrastructure development Port infrastructure quality Air transport infrastructure quality Quality of electricity supply Telephone/fax infrastructure quality Cell phones per 100 people (2003) Internet s per 10,000 people (2003) 2. istrative Infrastructure Reliability of police services Judicial independence Efficiency of legal framework istrative burden for startups Extent of bureaucratic red tape 3. Human Resources Quality of management schools Quality of public schools Quality of the educational system Quality of math and science education 4. Technology Infrastructure Patents per million population (2003) Availability of scientists and engineers Quality of scientific research institutions University/industry research collaboration 5. Capital Markets Financial market sophistication Venture capital availability Ease of access to loans Local equity market access B. DEMAND CONDITIONS Buyer sophistication Sophistication of local buyers’ products and processes Government procurement of advanced technology products Presence of demanding regulatory standards Laws relating to ICT Stringency of environmental regulations

3168.4** 0.314 1449.9** 0.152 2240.0** 0.125 3936.1** 0.230 4806.2** 0.355 4839.8 0.060 –34.9 –0.026 1.9** 0.186

(cont’d.)

31


Table 3: Bivariate regression results, dependent variable: 2003 GDP per capita (PPP-adjusted) (cont’d.)

All countries (N = 93)

Low-income countries GDP per capita < $4,000 (N = 20)

Middle-income countries GDP per capita > $4,000 and < $17,000 (N = 43)

Mean

Slope

Adj. R 2

Mean

Slope

Adj. R 2

Mean

Mean

Slope

Adj. R 2

4.47 3.43 3.03

9622.4** 7644.9** 6409.1**

0.736 0.406 0.447

3.46 3.07 2.17

622.8 46.9 395.3

0.057 –0.054 0.039

4.25 3.05 2.81

3086.2** 0.213 68.3 –0.024 1005.3* 0.049

5.47 4.22 3.93

5848.8** 3143.5** 2804.3**

0.414 0.199 0.233

4.19 3.76 4.74 3.34

8933.7** 8660.7** 10773.7** 6495.8**

0.696 0.549 0.590 0.443

3.29 3.14 4.00 2.43

631.4 35.9 410.9 411.8

0.042 –0.055 0.003 0.061

3.90 3.44 4.60 3.15

2428.4** 1276.4 2463.0** 1256.0**

0.169 0.038 0.109 0.089

5.20 4.63 5.45 4.21

4385.1** 3652.2** 6160.6** 2603.1**

0.399 0.259 0.337 0.150

3.40 4.51 4.56 3.93 4.51 4.90 4.52

7483.1** 7898.2** 11290.8** 6980.6** 7361.0** 7812.6** 7467.1**

0.468 0.315 0.412 0.731 0.412 0.447 0.632

2.84 3.99 4.19 2.79 4.06 4.26 3.58

–324.1 –133.8 –530.8 –72.9 –538.7 132.3 –452.1

–0.019 –0.053 0.011 –0.054 0.060 –0.047 0.022

3.04 4.42 4.40 3.45 4.14 4.64 4.15

512.5 1074.7 2258.3* 1105.4* 332.4 799.7 977.8

–0.010 0.010 0.066 0.051 –0.018 0.012 0.030

4.30 5.00 5.03 5.37 5.34 5.69 5.66

3157.9** 2813.9** 5137.8** 4691.1** 3323.9** 4396.4** 4406.5**

0.213 0.198 0.302 0.505 0.186 0.213 0.456

4.57 4.82 4.31 4.05 3.92 4.79 5.95 3.00 3.98 5.03

8493.7** 10911.6** 8307.5** 8375.0** 8276.9** 7899.0** 13230.5** 6481.9** 9701.4** 6966.5**

0.609 0.466 0.326 0.651 0.558 0.632 0.603 0.279 0.515 0.220

3.85 4.24 3.72 3.18 3.28 3.98 5.38 2.66 3.35 4.65

475.4 230.0 639.0* –108.8 156.3 –94.1 1455.0** 350.8 285.0 –456.7

0.007 –0.038 0.120 –0.052 –0.045 –0.054 0.305 –0.008 –0.043 0.025

4.20 4.68 4.23 3.68 3.58 4.35 5.78 2.79 3.80 4.93

2007.7** 1636.6 1025.6 969.4 1318.7 916.2 2734.2** 2038.3** 1577.2* 1847.0**

0.179 0.039 0.018 0.017 0.035 0.021 0.154 0.167 0.048 0.121

5.60 5.41 4.80 5.16 4.85 5.95 6.59 3.53 4.66 5.43

2368.8 3948.2 4058.3** 4514.9** 3615.9** 3618.9** 5426.7 2354.4** 3785.1** 2463.0*

0.034 0.055 0.137 0.238 0.288 0.179 0.003 0.169 0.266 0.069

Slope

Adj. R 2

High-income countries GDP per capita > $17,000 except Norway (N = 30)

II. NATIONAL BUSINESS ENVIRONMENT (cont’d.) C. RELATED AND ING INDUSTRIES Local supplier quality State of cluster development Local availability of process machinery Local availability of specialized research and training services Extent of collaboration among clusters Local supplier quantity Local availability of components and parts D. CONTEXT FOR FIRM STRATEGY AND RIVALRY 1. Incentives Favoritism in decisions of government officials Cooperation in labor–employer relations Efficacy of corporate boards Intellectual property protection Protection of minority shareholders’ interests Regulation of securities exchanges Effectiveness of bankruptcy law 2. Competition Hidden trade barrier liberalization Intensity of local competition Extent of locally based competitors Effectiveness of anti–trust policy Decentralization of corporate activity Business costs of corruption Tariff liberalization Centralization of economic policy–making Prevalence of mergers and acquisitions Foreign ownership restrictions

Note: * denotes p < 0.10, ** denotes p < 0.05

practices and multiple dimensions of the business environment prove strongly related to competitiveness.These findings are highly consistent with results from earlier Global Competitiveness Reports.While a bilateral statistical correlation to GDP per capita does not necessarily imply causation, it does refute the hypothesis that microeconomic variables have no important relation to prosperity. Interestingly, prominent macroeconomic variables such as the national savings rate and the level of investment as a percentage of GDP are either not significantly related to the level of GDP per capita in bilateral regressions or associated with only a minor share of its variation across countries.20 Among the company variables, production process sophistication, the nature of competitive advantage, the extent of staff training, the extent of branding, the capacity for innovation, and the degree of customer orientation have the strongest bilateral association with per capita GDP. By itself, the nature of companies’ competitive advantage—whether competitive advantage is based on

cheap inputs versus unique products and processes— explains a remarkable 71 percent of the variance in GDP per capita. All four parts of the business environment prove important, with the influences of individual variables quite stable from previous years. Among factor conditions, telecommunication access (cell phone and Internet use), the quality of public schools, overall infrastructure quality, the quality of public schools, the quality of electricity supply, university-industry research collaboration, financial market sophistication, and the efficiency of the legal framework have the strongest bilateral association with GDP per capita. Many of the most important influences on GDP per capita relate to policies and institutions rather than fact stocks. Measures of local demand conditions perform particularly strongly.The presence of demanding regulatory standards, stringent environmental regulations, and buyer sophistication, among other measures, are strongly associated with the variation in GDP per capita.These results run

Competitiveness and economic development

As has been discussed, the appropriate company strategies and operating practices, as well as the influence of particular elements of the business environment, will differ for countries at different levels of development. As noted earlier, the transition to entirely different stages of competitive development is particularly challenging. To examine these issues, we explored the impact of measures of microeconomic competitiveness in the three country groups based on per capita GDP. Although the reported variables are statistically significant across the entire sample and strongly distinguish countries across groups, individual variables, as expected, differ in their influence within groups. Some variables will not yet be important for low-income countries. Others may act via a threshold that a country must reach, but no longer explain income beyond this level. The right-hand side of Table 3 presents income subgroups’ regressions.We explore the differences across income groups in the mean Survey response and the

differences in slope as well as the pattern of statistical significance of each variable with the caveat that limitations on subgroup sample size and the more limited variation of the dependent variable within versus across subgroups reduce statistical power. It is notable that, for all variables, the mean Survey response increases as we compare low- and high-income countries.This confirms the fact that economic development is associated with improvement across many aspects of the business environment and company behavior. However, we find distinctive differences across income groups in the relative importance and trajectory of improvements of particular aspects of the process of development. Low-income countries For low-income countries at the Factor-Driven stage of development, the ability to move beyond competing solely on cheap labor/natural resources is the essential challenge emerging from the regressions. It is revealing that for lowincome countries none of the variables describing the sophistication of companies is significantly related to GDP per capita.With huge challenges in their surrounding business environment, companies find it hard to reap the benefits of more advanced operating practices. Low-income countries score low on most measures of the business environment, but especially on infrastructure, educational quality, cluster development, capital access, and measures related to technology and innovation. Priorities for improving the business environment in lowincome countries revealed in the regressions begin with upgrading the quality of infrastructure (including electricity, communications, and transportation networks) and schools. Another priority is the opening of competition (reducing trade barriers and increasing the number of local competitors).These steps create a foundation of efficiency and competitive pressure that s more productive Factor-Driven competition. Other aspects of the business environment, such as expanding the availability of scientists and engineers and updating regulatory standards, are not yet priorities at this stage of development. Middle-income countries Moving into middle income, the task is to move beyond Factor-Driven competition to the Investment-Driven stage.Their biggest challenge remains the nature of their local competitive advantages, often still based solely on low-cost production inputs. Other reported weaknesses consistent with this underlying challenge are a lack of branding, a narrow position in the value chain, low production process sophistication, and limited innovative activities.


counter to the perceived wisdom that local demand and local market conditions are not important in a global economy. Cluster linkages, especially the quality of local suppliers and the presence of specialized local research and training providers, also prove significant and highlight the role of clusters in competitiveness. Finally, the incentives and rules governing local competition show a strong relationship to national productivity. Intellectual property protection, the effectiveness of antitrust policy, the prevalence of illegal or unfair activities (corruption), the effectiveness of bankruptcy laws, and the openness to trade tariff and non-tariff barriers are particularly potent variables.The intensity of local competition is strongly and positively related to GDP per capita, alone explaining 47 percent of variations across countries in GDP per capita.The strong influence of local competition, ed in other recent studies,21 is contrary to arguments made about the need to curb local competition in favor of creating national champions.This failed policy has recently resurfaced in . It is important to acknowledge that causality can be argued in both directions for some of the variables, though the Survey questions were worded to avoid spurious reverse causality.The quality of scientists and engineers or the sophistication of buyers, for example, could be partly the result of high per capita GDP and not the cause. Note that the same causality issue applies to macroeconomic and economic growth analyses.We provide some evidence of causality from microeconomic conditions to GDP per capita later in this chapter, but more years of surveying will be required to establish definitive cause and effect relationships.

33


The regressions suggest the following patterns: improving production process sophistication is the single most important corporate priority. But companies must also begin to increase the professionalism of management, create the capacity for technology absorption and introduction, and overcome their dependence on exports to a few, often distant, advanced foreign markets. Middle-income countries score low on many aspects of the business environment, but especially on infrastructure, the legal and regulatory efficiency and transparency (including corruption), educational quality, cluster development, and measures related to technology and innovation.The regressions reveal that there is a high payoff to continued progress in a number of areas, especially public schools, telecommunication quality, and Internet usage. Success as a middle-income country also raises new challenges in the business environment. Improving universityindustry research collaboration and the quality of research institutions becomes an important differentiator of success, as does the quality of the judicial system. Improving local demand conditions, for example through more stringent environmental and consumer protection laws, is needed to pressure improvements in producer quality. All aspects of cluster development become significant in differentiating more successful from less successful countries, especially widening the supplier base and improving the availability of specialized research and training institutions. Finally, moving to higher levels of competition and rivalry is important across many dimensions, including liberalizing tariff and non-tariff barriers, improving antitrust policy, and opening the market for corporate control. High-income countries High-income countries report more advanced company practices across the board.The difference is highest in of the nature of firm competitive advantage.The gap in of management professionalism and customer orientation is smaller. To succeed in a high-income economy, assimilating improvements in quality and efficiency are no longer enough.The hurdle is to move to the Innovation-Driven stage.The regressions suggest that overcoming this hurdle is not only a matter of more R&D spending. It is also tightly connected to the ability to transform technological advances into attractive new products and services, using flexible work organizations and the delegation of authority combined with marketing and advanced production processes. High-income countries have all achieved strength in many aspects of the business environment. Continuing to improve infrastructure, simplicity and fairness of regulation, and schools remain important in distinguishing the more successful high-income countries. Other distinguishing factors include deep cluster development, especially

the improvement of local supplier quality and the access to local providers of specialized research services.The regulatory environment, including the protection of intellectual property rights and effective bankruptcy laws, is also important. Other distinguishing factors include the quality of management education, the sophistication of demand conditions (e.g., demanding regulatory standards, local buyer sophistication), the extent of decentralization of corporate activity away from large business groups, and the sophistication of the local financial market.

Trends in competitiveness in the global economy With several years of consistent Survey data, we can examine trends in the variables that offset competitiveness between 1998 and 2004.22 Table 4 identifies those variables where substantial changes in company practices and the quality of the business environment, defined as changes greater than 10 percent positive or negative in the mean Survey responses between 1998 and 2004, were ed in eight more countries, or 15 percent of the sample of 51 countries for which we have seven years of data. Other metrics (fixed absolute changes or different percentage cutoffs) produce virtually identical results. Overall, there is clear upgrading in national business environments in the global economy.The bar is rising, and improvement in the business environment is needed just to maintain position vis-à-vis other countries. In company operations and strategy, the average company is, in many countries, progressing its sophistication along some dimensions, but there are also signs that the growing intensity of competition is making it hard to keep up and that greatest international specialization of activity is occurring. As shown in Table 4, professionalism of management is rising in increasingly competitive markets, the single most widespread global development among companies. Also widespread are improvements in marketing and customer orientation plus moves to regionalize sales as regional trade opening continues. Companies from middle-income economies have made strides in raising the sophistication of their competitive advantage. Companies from high-income economies are becoming more global through increasing the breath of international markets they serve. Although companies are improving in some respects, however, they are struggling to cope with tough international competition. Especially in middle-income countries, companies report less presence in the value chain, accompanied most likely by greater international specialization of activities. Companies in middle-income countries also are having difficulty defending brands and maintaining global market presence. Even in a significant minority of advanced economies, companies find it hard to keep control of international distribution. Overall, these

Worsening international competitive conditions

Improving international competitive conditions

No. of countries Total L M H 51 4 20 27

No. of countries Total L M H 51 4 20 27


Reliance on professional management...................39 3 15 Extent of marketing .....................................................28 2 10 Degree of customer orientation................................24 2 10 Extent of regional sales..............................................21 2 10 Nature of competitive advantage.............................13 2 8 Extent of staff training ................................................13 2 3 Prevalence of foreign technology licensing.............8 — 4 Breadth of international markets................................8 — —

21 16 12 9 3 8 4 8

Value chain presence.................................................26 Extent of branding .......................................................24 Breadth of international markets..............................23 Capacity for innovation ..............................................13 Prevalence of foreign technology licensing...........12 Production process sophistication ..........................11 Control of international distribution .........................11

3 2 2 2 2 2 1

17 15 15 7 6 8 2

6 7 6 4 4 1 8

Quality of the Business Environment

Extent of bureaucratic red tape................................48 Tariff liberalization.......................................................38 Efficacy of corporate boards.....................................36 Financial market sophistication ................................34 Overall infrastructure quality ....................................30 Railroad infrastructure development .......................25 Extent of locally based competitors.........................23 Quality of management schools ...............................22 Quality of scientific research institutions ...............21 Favoritism in decisions of government officials ....21 Air transport infrastructure quality ..........................21 Port infrastructure quality..........................................19 Local supplier quality..................................................18 Reliability of police services......................................16 Quality of public schools............................................16 Local equity market access.......................................15 Presence of demanding regulatory standards ......15 Venture capital availability ........................................14 Telephone/fax infrastructure quality........................12 Hidden trade barrier liberalization ...........................11 Effectiveness of anti-trust policy..............................10

24 17 18 15 18 14 14 12 5 13 6 11 4 4 13 8 4 6 1 5 5

Efficiency of legal framework ...................................22 2 Quality of public schools............................................19 3 Venture capital availability ........................................19 2 Judicial independence ...............................................18 2 istrative burden for startups ..........................18 1 Buyer sophistication ...................................................15 1 University/industry research collaboration ............14 2 Intellectual property protection ................................14 2 Favoritism in decisions of government officials ....12 1 Hidden trade barrier liberalization .............................8 —

12 12 12 8 12 8 6 10 8 6

8 4 5 8 5 6 6 2 3 2

4 4 4 4 2 2 2 1 3 2 2 2 3 1 1 3 3 2 1 2 2

20 17 14 15 10 9 7 9 13 6 13 6 11 11 2 4 8 6 10 4 3

Notes: L, M, and H refer to low-, middle-, and high-income countries, respectively. Significant change is defined as 10 percent or more change in country average score over the six- year period from the score of year 1998.

observations are consistent with a global marketplace that has, in many ways, become more sophisticated and more demanding, especially for companies that are trying to move away from dependence on cheap inputs. In the business environment,Table 4 shows that governments around the world are continuing to reduce bureaucratic red tape, lower tariffs, improve corporate governance, upgrade financial markets, and improve infrastructure. Progress in these areas is increasingly becoming a given if a country is to participate fully in the world economy. For middle-income countries, improvements in their scientific research institutions, air transport and telecommunication infrastructure, the quality of local suppliers, and effective police services are notable. Many high-income countries have put renewed emphasis on their public schools and diminishing favoritism in providing public services. While there is much progress, however, many countries, especially middle-income countries, are also struggling to sustain the quality of their business environments.

The quality of the legal institutions and of the educational system seems especially hard to defend. Overall, we find that the gap between country groups seems to be increasing; an observation we made in previous years.While many countries have improved many elements of their business environments, high-income countries have been able to improve more than middle-income countries and more than low-income countries, based on the mean responses across all Survey questions (see Table 5).This pattern raises concerns about the ability of developing economies to catch up to more prosperous nations.

Ranking competitiveness To derive an overall Business Competitiveness Index (BCI), we compute subindexes measuring the sophistication of company operations and strategy and the quality of the national business environment. Because many of the dimensions of company sophistication and the quality of the business environment tend to move together, and because the sample of countries is relatively small and the


Table 4: Significant changes in competitive conditions in eight or more countries, 1998–2004

35


number of relevant variables is high, the impact of individual variables is difficult to distinguish statistically. The weighted average of the two subindexes is defined as the BCI.The weights are determined from the coefficients of a multiple regression of the subindexes on GDP per capita, using pooled data from 2002 to 2004 to smooth year-to-year variations.This procedure results in a weight of 0.7 for national business environment and 0.3 for company operations and strategy, similar to last year. When we include an interaction term in the regression on GDP per capita of the two subindexes, it proves to be positive and significant.This means that the benefits of a better business environment for prosperity are increasing with the sophistication of company operations and strategy, and vice versa. Countries that improve both the business environment and company sophistication in tandem reap disproportionate benefits, while countries where there is an imbalance bear disproportionate costs. Figure 6 plots BCI against 2003 GDP per capita adjusted for purchasing power parity for each country in the sample of 93 countries used in building the model. The regression line is shown, together with bands above and below the regression line that delineate the 95 percent confidence forecast region.23 Only three countries, Norway, India, and Italy fall outside the forecast region. Differences in BCI for a remarkable 80 percent of the variation in GDP per capita across a widely disparate group of countries. In the regression we allow for a non-linear relationship between the BCI and GDP per capita.The best fit is the polynomial form, indicating a higher impact on GDP per capita of improvements in BCI for higher-income versus lower-income countries.This finding has a number of possible interpretations: First, we would expect improvements in microeconomic conditions to have positive spill-overs, that is, an improvement in one part of the business environment has more impact if other parts of the business environment are stronger.This interpretation is consistent with the positive interaction between company sophistication and the business environment previously reported. Second, lower-income countries may reap fewer productivity benefits from microeconomic improvements due to weaknesses in macroeconomic, political, legal, and social conditions. We use the model along with data for each country to calculate a BCI for each country.The overall BCI rankings for 2004 for the 93 countries that were used for the statistical analysis are shown in Table 1, along with the rankings for the previous four years where available. Also included are the separate subindex rankings.The rankings for all 103 surveyed countries are shown in Table 2.24 Because changes in the ranking can result from very small differences in the absolute value of the BCI score, we also graph the relation between rank and BCI score in Figure

7. BCI scores change smoothly with ranks for most parts of the ranking. However, in some ranges—such as those between rank 25 and 20 at the transition between middleand high-income countries—the gaps in BCI score become larger.We also include a new Table 5 that gives more detailed information on the changes of BCI score by country. Please refer to the Country Profiles section of the Report for detailed descriptions of the competitive advantages and disadvantages of each country. As noted earlier, competitiveness is not a zero-sum game. Many countries can improve productivity and prosperity. BCI tracks both the absolute and relative progress of countries in building a productive economy. The United States has retaken the leading position from Finland, after dropping to second place last year.The United States benefited from improvements in the sophistication of marketing, the availability of venture capital, the intensity of local competition, local supplier quality, and local supplier quantity; in these areas the United States was seen to have improved while its peers either improved much less (local supplier quantity) or ed worsening conditions. Other advanced nations improving their rankings include Hong Kong SAR (reflecting more sophisticated financial markets and improvements in management practices), Japan (improving financial market sophistication; improving quality of istrative services), and Portugal (improving cluster strength). Japan ed the highest absolute improvement of its BCI score, followed by Hong Kong and Norway. Advanced countries dropping in the rankings include Italy, Malta, and Iceland. Italy dropped by a disappointing nine ranks,25 almost entirely driven by a deteriorating business environment that is now evaluated on par with Portugal and the Czech Republic, with 32 percent and 39 percent lower GDP per capitas. Italy deteriorated especially in areas related to innovative capacity, such as university-industry research collaboration, foreign technology licensing, government procurement of advanced technology, company R&D spending, and venture capital availability. Advanced countries that ed large absolute reductions in their BCI score despite relatively stable ranks include Spain, Korea, Singapore, and Finland. Middle-income nations improving their competitiveness ranking this year include Romania, Peru, Lithuania, the Slovak Republic, Russia, Namibia, and the Ukraine. Romania jumped by a remarkable 22 ranks, driven by strong across-the-board improvements, especially in the area of company sophistication.Whether this large jump is a temporary event reflecting positive near-term sentiment or a sustainable improvement will become evident in subsequent years. Romania’s improvement comes after repeated slippage in the ranking since the country became part of the GCR in 2001.

2003 GDP per capita (adjusted for purchasing power parity)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

–2.0

Croatia

Poland Mauritius

Malta

Slovenia Portugal

Lithuania

Slovak Republic

Hungary

–1.5

–1.0

–0.5

Korea

Ireland

Malaysia

South Africa

Estonia

Spain

Business Competitiveness Index

0.0

0.5

Czech Republic

Greece Cyprus

Italy

Trinidad and Tobago Chile Latvia Russian Federation Mexico Costa Rica Uruguay Botswana Brazil Thailand Macedonia, FYR Bulgaria Colombia Romania Tunisia Turkey Dominican Republic Algeria Bosnia and Hercegovina Panama Namibia Ukraine Peru El Salvador China Venezuela Paraguay Jordan Guatemala Philippines Jamaica Morocco Serbia and Honduras Ecuador Sri Lanka Montenegro Indonesia India Bolivia Vietnam Georgia Ghana Nicaragua Pakistan Bangladesh Zimbabwe Mozambique Madagascar Kenya Ethiopia Malawi Tanzania

Argentina

y = 1549.9x2 + 8603.4x + 11188 R 2 = 0.8064

Figure 6: The relationship between business competitiveness and GDP per capita

37

1.0

Canada

Israel

Taiwan

Singapore

2.0

Finland

2.5


1.5

New Zealand

United States

Denmark Switzerland Netherlands

Australia Belgium Japan Hong Kong SAR United Kingdom Sweden

Iceland Austria

Norway

High

Low

High income

• Middle income

• Low income

Estonia

Georgia

Ecuador

93

Paraguay Mozambique Nicaragua Ethiopia Bolivia

Bangladesh Honduras

BCI rank

Israel

Korea Spain

Malaysia South Africa

Denmark

United States

1

United Kingdom

Sweden

Finland Switzerland


Japan Netherlands Hong Kong SAR Singapore Canada Australia Taiwan Iceland Belgium Austria Norway New Zealand

Ireland

India Portugal Chile Czech Republic Slovenia Thailand Tunisia Slovak Republic Italy Lithuania Indonesia Hungary Brazil Morocco Jordan Greece Costa Rica Cyprus Namibia Latvia China Mauritius Romania Malta Columbia Mexico Botswana Panama Turkey Kenya Jamaica Poland El Salvador Trinidad and Tobago Ghana Ukraine Russian Federation Sri Lanka Croatia Philippines Argentina Pakistan Dominican Republic Uruguay Bulgaria Macedonia, FYR Peru Serbia and Montenegro Vietnam Zimbabwe Madagascar Malawi Algeria Guatemala Tanzania Venezuela Bosnia and Hercegovina

•

Figure 7: BCI rank and score by country

BCI score

38

Change of Country

BCI rank

BCI score

Number of indicators*

BCI score change of

Change of

advancing

declining

Top 5

Bottom 5

COS score

NBE score

Income group

High income Middle income Low income

na na na

–0.016 –0.070 –0.081

20 8 11

51 63 60

0.010 0.003 0.007

–0.008 –0.012 –0.021

–0.003 –0.015 –0.026

–0.013 –0.055 –0.054

3 2 1

Indonesia Japan Romania Hong Kong SAR Norway Madagascar Morocco India Netherlands Kenya Austria Switzerland Russian Federation Ukraine Belgium Paraguay United Kingdom Algeria Taiwan Lithuania Slovak Republic South Africa New Zealand Estonia Namibia Portugal Peru United States Turkey Jamaica Bolivia Pakistan Mozambique Malaysia Chile Bulgaria Ethiopia Guatemala China Panama Honduras Ireland Canada Denmark Czech Republic Sweden Iceland Australia Slovenia Greece El Salvador Costa Rica Israel Brazil Bangladesh Tunisia Hungary Ecuador Finland Philippines Venezuela Colombia

16 5 20 8 2 3 3 7 2 0 4 1 2 5 4 1 –1 0 –1 –1 4 4 2 0 1 4 3 5 1 0 2 –3 2 –3 3 3 –2 2 –3 0 –1 –1 –2 –1 –3 –3 0 –1 –5 –2 –1 –2 –1 –3 –1 –4 –4 1 –4 –5 –1 –5 –3 –7

0.403 0.338 0.307 0.264 0.231 0.216 0.145 0.133 0.131 0.128 0.112 0.111 0.098 0.096 0.096 0.083 0.076 0.074 0.068 0.068 0.066 0.063 0.047 0.044 0.041 0.036 0.028 0.013 0.006 0.006 0.004 0.001 –0.001 –0.005 –0.006 –0.013 –0.014 –0.015 –0.017 –0.022 –0.023 –0.029 –0.030 –0.034 –0.040 –0.042 –0.043 –0.046 –0.047 –0.059 –0.062 –0.062 –0.063 –0.066 –0.066 –0.085 –0.093 –0.099 –0.100 –0.103 –0.105 –0.106 –0.113 –0.114

66 59 51 58 50 49 45 42 50 51 38 47 36 41 42 40 37 44 39 40 43 42 40 40 41 37 39 34 37 32 34 33 30 36 35 33 33 31 32 30 31 34 32 37 27 34 36 32 32 27 29 29 30 30 31 29 24 28 22 16 21 24 29 19

5 12 20 13 21 22 26 29 21 20 33 24 35 30 29 31 34 27 32 31 28 29 31 31 30 34 32 37 34 39 37 38 41 35 36 38 38 40 39 41 40 37 39 34 44 37 35 39 39 44 42 42 41 41 40 42 47 43 49 55 50 47 42 52

0.077 0.067 0.086 0.075 0.075 0.069 0.058 0.054 0.050 0.029 0.067 0.051 0.059 0.050 0.064 0.060 0.058 0.045 0.061 0.043 0.037 0.053 0.043 0.040 0.042 0.073 0.042 0.046 0.043 0.061 0.052 0.038 0.140 0.049 0.068 0.043 0.035 0.036 0.043 0.067 0.036 0.029 0.034 0.037 0.045 0.034 0.040 0.041 0.037 0.053 0.034 0.024 0.031 0.039 0.057 0.036 0.027 0.031 0.025 0.032 0.026 0.024 0.055 0.034

–0.013 –0.020 –0.034 –0.023 –0.065 –0.023 –0.050 –0.025 –0.030 –0.016 –0.029 –0.031 –0.018 –0.041 –0.057 –0.031 –0.035 –0.028 –0.040 –0.019 –0.029 –0.042 –0.030 –0.026 –0.039 –0.064 –0.050 –0.043 –0.030 –0.042 –0.041 –0.031 –0.115 –0.045 –0.067 –0.055 –0.026 –0.034 –0.054 –0.047 –0.041 –0.048 –0.043 –0.056 –0.040 –0.053 –0.052 –0.054 –0.054 –0.046 –0.033 –0.036 –0.056 –0.062 –0.060 –0.052 –0.037 –0.054 –0.036 –0.028 –0.041 –0.044 –0.068 –0.044

0.133 0.054 0.142 0.093 –0.025 0.051 0.028 0.077 0.042 0.047 0.008 0.021 0.047 0.054 0.061 0.023 0.000 –0.002 0.032 0.048 0.031 0.017 0.043 0.025 0.026 –0.005 0.015 0.027 0.006 0.026 0.005 0.025 0.101 –0.014 –0.042 0.001 –0.008 –0.006 –0.032 –0.002 0.007 –0.040 0.004 –0.038 –0.010 –0.043 0.017 –0.012 –0.018 0.006 –0.006 –0.022 –0.044 –0.029 0.039 –0.007 –0.039 –0.040 –0.034 –0.034 –0.052 –0.014 –0.031 –0.040

0.271 0.284 0.164 0.170 0.256 0.165 0.117 0.056 0.089 0.080 0.104 0.089 0.050 0.041 0.035 0.060 0.076 0.075 0.036 0.020 0.035 0.045 0.004 0.019 0.015 0.041 0.013 –0.015 0.000 –0.021 –0.001 –0.025 –0.102 0.008 0.037 –0.015 –0.007 –0.009 0.015 –0.020 –0.030 0.011 –0.034 0.004 –0.030 0.001 –0.060 –0.034 –0.029 –0.065 –0.055 –0.040 –0.019 –0.037 –0.106 –0.078 –0.054 –0.059 –0.066 –0.069 –0.053 –0.091 –0.082 –0.074

1 3 2 3 3 1 2 1 3 3 1 3 3 2 2 3 2 3 2 3 2 2 2 3 2 2 3 2 3 2 2 1 1 1 2 2 3 2 1 2 2 2 1 3 3 3 2 3 3 3 3 3 2 2 3 2 1 2 2 1 3 2 2 2

*The count of advancing/declining is based on the normalized values for 2003 and 2004 data.

(cont’d.)


Table 5: Decomposition of rank changes

39


Table 5: Decomposition of rank changes (cont’d.) Change of Country

Nicaragua Trinidad and Tobago Jordan Uruguay Argentina Botswana Singapore Zimbabwe Sri Lanka Serbia and Montenegro Korea Mexico Spain Croatia Thailand Malawi Malta Mauritius Poland Dominican Republic Tanzania Latvia Vietnam Italy

BCI rank

–6 –6 –2 –6 –5 –8 –2 –4 –11 –6 –1 –7 –1 –10 –6 –12 –8 –9 –10 –19 –22 –20 –29 –10

BCI score

–0.120 –0.123 –0.125 –0.132 –0.135 –0.144 –0.149 –0.152 –0.175 –0.179 –0.192 –0.203 –0.223 –0.235 –0.245 –0.257 –0.288 –0.292 –0.380 –0.444 –0.555 –0.597 –0.633 –0.649

Number of indicators*

BCI score change of

Change of

advancing

declining

Top 5

Bottom 5

COS score

NBE score

27 21 22 17 25 28 13 23 20 25 19 13 16 16 9 23 9 13 9 10 10 8 5 5

44 50 49 54 46 43 58 48 51 46 52 58 55 55 62 48 62 58 62 61 61 63 66 66

0.024 0.026 0.019 0.036 0.059 0.044 0.013 0.040 0.044 0.056 0.044 0.032 0.022 0.017 0.021 0.025 0.031 0.030 0.031 0.017 0.046 0.039 0.027 0.015

–0.061 –0.037 –0.045 –0.054 –0.051 –0.071 –0.041 –0.069 –0.069 –0.070 –0.088 –0.053 –0.065 –0.057 –0.046 –0.070 –0.058 –0.077 –0.070 –0.099 –0.093 –0.114 –0.118 –0.078

–0.080 –0.011 0.006 –0.016 –0.031 –0.051 –0.039 –0.056 –0.092 –0.084 –0.005 –0.077 –0.074 –0.074 –0.066 –0.073 –0.085 –0.117 –0.057 –0.124 –0.201 –0.197 –0.169 –0.129

–0.040 –0.112 –0.132 –0.117 –0.104 –0.093 –0.110 –0.096 –0.082 –0.095 –0.186 –0.126 –0.150 –0.161 –0.179 –0.184 –0.204 –0.175 –0.323 –0.320 –0.354 –0.400 –0.464 –0.520

Income group

1 2 2 2 2 2 3 1 1 1 3 2 3 2 2 1 3 2 2 2 1 2 1 3

*The count of advancing/declining is based on the normalized values for 2003 and 2004 data.

40

Middle-income countries losing rank in competitiveness include Latvia, the Dominican Republic, Poland, and Mauritius. Other countries with significant absolute drops in BCI score include Thailand and Mexico. Latvia has moved back to a level consistent with its longer-term trajectory; last year’s strong improvement proved to be unsustainable optimism. Dominican Republic (down 13 places) continues the trend set by a large drop last year. Dominican Republic was hurt by declining openness to imports and regressing financial market sophistication. Among low-income countries, Indonesia made the largest improvement, jumping a remarkable 18 ranks.The country ed the highest increase in absolute BCI score of all the countries included in our sample. After years of turmoil the country is now back to its 2000 competitiveness level.While improvements were ed areas across the board, they were strongest in measures of company sophistication. Another low-income country with large improvements is India (up 8 ranks; profiting from increasing company sophistication and strengthening clusters).Vietnam slipped significantly (down 23 places) after a number of years with steady improvements. Conditions worsened most in areas related to technology and government istration. It remains to be seen whether Vietnam’s drop reflects short-term sentiments or signals more fundamental problems. For low-income countries, we also calculated the BCI incorporating only those variables with a significant relationship to GDP per capita for this income group in order to recognize the more limited set of variables that prove

significant early in development.26 The rankings using this alternative approach are highly correlated (70 percent) with the reported rankings. Company competitiveness versus the quality of the business environment

To gain deeper insight into the competitive position of countries, normalized subindexes of company sophistication and the quality of the microeconomic business environment are plotted against each other in Figure 8. Countries near the 45-degree line enjoy the positive interaction of the two subindexes, as noted previously. Countries lying above line are those whose companies are more advanced than the state of their business environment.Those below the line are countries whose business environment is more advanced than their companies. Countries whose company development is ahead of the business environment include Japan, the Philippines, , Korea, Italy, Switzerland, , Sweden, and the Netherlands.With the exception of the Philippines, all these countries have reported a relative weakness in the business environment relative to company development for some years. Significant changes in public policy are necessary in these countries to improve the platform for productivity. Unless the business environment improves, companies will be prone to move operations or make new investments outside the country. Japan remains the advanced economy with the most glaring weaknesses in the business environment relative to the sophistication of its companies. The consequences of this weakness for Japan’s economic

Index of the sophistication of company operations and strategy

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

–2.0

–1.5

Paraguay Bolivia Nicaragua Ethiopia

Honduras Mozambique

Costa Rica

Brazil Czech Republic

Italy India

Spain Slovenia

–1.0

0.0

0.5

1.0

Malaysia

Ireland

Israel

Index of the quality of the national business environment

–0.5

Estonia

South Africa

Korea

Chile Thailand Lithuania Indonesia China Greece Slovak Republic Turkey Tunisia Mauritius Portugal Mexico Morocco Jamaica Poland Hungary Philippines Latvia Jordan Kenya Trinidad and Tobago Colombia El Salvador Pakistan Ukraine Cyprus Romania Malta Namibia Argentina Russian Federation Sri Lanka Dominican Republic Panama Ghana Croatia Zimbabwe Botswana Guatemala Peru Venezuela Uruguay Malawi Vietnam Bulgaria Macedonia, FYR Serbia and Montenegro Madagascar Georgia Tanzania Ecuador Algeria Bosnia and Hercegovina Bangladesh

y = 0.9685x + 8E-17 R 2 = 0.938

Figure 8: The relative development of companies and the microeconomic business environment

41

Iceland

Taiwan

Belgium

2.0

2.5


1.5

Norway

United States

Finland United Kingdom Denmark

Sweden

Singapore Austria Hong Kong SAR Canada Australia New Zealand

Netherlands

Japan

Switzerland


growth have been severe, as Japanese corporate investment has fled the country.27 Countries whose business environment ranks ahead of current company sophistication include Tunisia, Estonia, Cyprus, Norway, and Portugal. In these countries many leading companies still rely on natural resource extraction (e.g., Norway), depend heavily on OEM production, or have a high incidence of local subsidiaries of foreign multinationals competing heavily on the basis of low labor costs (e.g.,Tunisia, Cyprus, and Portugal). In some countries, such as Estonia, part of the gap results from rapid improvements in the business environment that have not yet been harnessed by companies who remain focused on traditional ways of competing. Efforts to improve entrepreneurship, strategic thinking, managerial practice, and business education are high priorities in these countries.

Table 6: GDP per capita relative to competitiveness

Advanced countries

Middle-income countries

Developing countries

UPSIDE POTENTIAL Competitiveness (measured by BCI) would higher per capita income

Finland Sweden United Kingdom New Zealand

Malaysia Jordan Morocco Tunisia South Africa China Thailand Brazil Jamaica Chile Estonia Namibia El Salvador Turkey Philippines

Singapore Israel Japan Switzerland Taiwan Denmark Netherlands Korea Hong Kong SAR Belgium

Lithuania Panama Ukraine Colombia Costa Rica Romania Peru Guatemala Latvia Mexico Botswana Venezuela Russian Federation

India Indonesia Kenya Ghana Pakistan Malawi Sri Lanka Madagascar Tanzania Zimbabwe Vietnam Ethiopia Mozambique

Country overperformance and underperformance

42

We can gain insights into the sustainability of a country’s prosperity by looking at its level of microeconomic (business) competitiveness relative to its current per capita income.Table 6 lists countries in order of the divergence between actual GDP per capita and the expected GDP given microeconomic competitiveness. A level of actual GDP per capita above the expected level is termed “overperformance,” below the expected level “underperformance.” Reasons for sustained over- or underperformance can reflect a variety of circumstances.The political, governmental, and social situation is one of them, as our model suggests.The data set on governance generated by Kaufman et al. (2003) allows a better explanation of these relationships. Many of these indicators are highly correlated with GDP per capita.This is to be expected, with causality is likely to run both ways.28 We find that Kaufmann’s measures for “voice and ability” and “government effectiveness” are significant in explaining the gap between actual and predicted GDP per capita in our model. “Voice and ability” is especially important for middle-income countries, with “government effectiveness” important for high-income countries. “Political stability” is also important but less significant. Countries that, in of absolute GDP per capita, benefit most from good governance are Switzerland, the Netherlands, Finland, Denmark, New Zealand, the United Kingdom, Sweden, and Norway. Countries that suffer the most from bad governance in of absolute GDP per capita reduction are Zimbabwe, Ethiopia, Paraguay, Venezuela, Pakistan, and Algeria. Another important factor is a country’s geographic location.We examine two aspects of location: the neighborhood a country is part of, and its proximity to ocean transportation.We find that the average income of neighboring countries is positive and significant in explaining

NEUTRAL Competitiveness (measured by BCI) and per capita income are balanced

Bangladesh Serbia and Montenegro Georgia Honduras

CURRENT OVERACHIEVERS Per capita income is high relative to competitiveness (measured by BCI)

Australia United States Portugal Austria Canada Slovenia Spain Iceland Greece Cyprus Malta Ireland Norway Italy

Trinidad and Tobago Macedonia, FYR Bulgaria Algeria Mauritius Paraguay Uruguay Hungary Bosnia and Hercegovina Czech Republic Poland Croatia Argentina

Nicaragua Bolivia Ecuador

depresses GDP per capita levels below what could be expected given their BCI position. Countries lying below the regression line in Figure 6 are those whose microeconomic competitiveness is stronger than current GDP per capita. Underperformance bodes well for the future, because the platform is in place to higher GDP per capita if macro, political, or other constraints can be eased. Finland, , Sweden, the United Kingdom, New Zealand, and Singapore lead the advanced countries with upside potential. Malaysia, Jordan, Morocco,Tunisia, South Africa, China, and Thailand are among the middleincome countries that should be able to a higher GDP per capita given microeconomic fundamentals. India, followed by Indonesia, Kenya, Pakistan, Malawi, and Sri Lanka, continues to head the list of low-income countries with upside potential alongside. Sustained underperformance can result from political or geographic challenges, as discussed earlier. More transitory underperformance can also occur in the aftermath of a macroeconomic crisis that did not lead to a deterioration of the microeconomic fundamentals, as in Thailand, Malaysia, and Singapore. Underperformance may also reflect a lag prosperity adjusting upward to improving microeconomic conditions.This seems to be the case in Finland and the United Kingdom. India and China are two particularly interesting cases. The underperformance measured for both on a per capita basis may well result from the sheer number of people living at the subsistence level outside the mainstream economy. In these and other countries, the Survey confirms large regional differences in business environment quality, while Surveys tend to come from executives in the more advanced regions.The average prosperity of such countries will remain below measured microeconomic potential until progress is spread throughout the country. For both countries, however, it is likely that even correcting for this bias, the economies would remain to a business environment that should be able to sustain higher prosperity, including higher wages and more economic activity.This imbalance makes the countries particularly attractive for foreign investors that can tap into huge markets where costs have not yet caught up with the level of productivity that can be reached. Regional disparities As with last year, we included a question on regional differences in a country’s business environment. Not surprisingly, countries such as Italy, Russia, Brazil, China, and India high regional heterogeneity. For countries such as China and India, this high degree of regional heterogeneity could help explain the low level of GDP per capita relative to the reported BCI since Survey respondents will tend to come from companies in more


the gap between predicted and actual GDP per capita. This finding suggests the benefits of collaboration with neighboring countries to improve competitiveness. Second, we find that the share of a country’s population within 100 km of an ocean or rivers accessible from an ocean is also positive and significant in explaining the gap between actual and predicted GDP per capita.29 Countries that in of GDP per capita benefit most from their geographic location are the Dominican Republic, Canada, New Zealand, Denmark, and the United Kingdom. Countries that are most negatively affected are Malawi, Ethiopia, Kenya,Tanzania, Pakistan, and Bolivia. Overall, we find that locational factors, the size of natural resource exports, and political conditions (voice and ability, government effectiveness) explain more than 25 percent of the variation in the gap between expected and actual GDP per capita across countries. Countries lying above the regression line in Figure 6 are those whose current GDP per capita exceeds that predicted by their microeconomic competitiveness, as measured by the BCI index.This is a danger sign, because it means that a country’s per capita income may be unsustainable. Among high-income countries, Malta, Greece, Cyprus, Ireland, and especially Norway and, after its massive drop in the BCI, Italy all enjoy a level of prosperity that exceeds their microeconomic fundamentals. Argentina, Croatia, Poland, and the Czech Republic are among a group of middle-income countries whose levels of income appear unsustainable without substantial microeconomic reform. Ecuador, Bolivia, Nicaragua, and Honduras are the low-income countries in this precarious position. Reasons for country overperformance seem to vary, with some enduring and others more transitory. Overperformance can persist for many years if it is based on stable political and social conditions or a favorable geographic location as discussed above. It can also be sustained by ample natural resource endowments, as in the case of Norway, as long as the natural resources are not exhausted and commodity price levels are maintained at high enough levels. Large, consistent foreign aid inflows can otherwise unsustainable prosperity levels, too, which may explain the overperformance of countries such as Nicaragua. Overperformance can be more transitory if it is based on a boom in foreign investment, as in Poland and the Czech Republic, or European Structural Fund inflows, as in Ireland, Greece, and Portugal. Overperformance can also reflect a lag in the affect on income of deteriorating microeconomic conditions, as in Italy and Argentina.We find that relatively few lowincome countries are overperformers.This is consistent with the higher incidence of macroeconomic, political, and social challenges among low-income countries that

43


prosperous regions and not reflect average conditions in the economy. There are also many other smaller, often less developed, countries that equal or even higher rates of regional disparity. Peru, Mozambique, Georgia, Guatemala, Argentina, and Bolivia top the list of such countries, followed by Italy, the Slovak Republic, Latvia, and Mexico. These data indicate that regional disparity in both economic prosperity and competitiveness is a prominent feature of developing economies. Policies in these countries sometimes accentuate the problem by biasing investment flows toward a few regions, notably the capital city. Reducing regional disparities, especially the overconcentration of economic activity in a few huge metropolitan areas, is one of the critical agendas in the development process that less advanced economies need to address. More-advanced economies tend to have policies aimed at fostering the development of less prosperous regions.30 A good example is the system of Regional Development Agencies in the United Kingdom, a deliberate attempt to balance the dominance of the Greater London region in the UK economy.31 But in all countries, the challenge of moving from policies focused on providing social transfers to ones ing the upgrading of local competitiveness is daunting.The challenge is to mobilize the economic potential of all regions, especially when the demographic development will increase the scarcity of labor, and overcome the tendency the use of market interventions such as subsidies and trade barriers to shelter less prosperous regions from competition. Natural resources and development

Natural resources have played a prominent role in thinking about economic development. Historically, abundant resources were seen as the source of national prosperity. In the last decade, however, the importance of natural resources has been called into question as the knowledge and skill intensity of competition has risen. As was the case in last year’s Report, we explore the relationship between resource abundance and competitiveness. For 88 countries we were able to assemble data on the size of minimally processed natural resources relative to overall exports.32 The largest absolute natural resource exporting countries remain the United States, Canada, Russia, Australia, and Norway.The countries with the highest share of natural resources exports to total exports are Venezuela, Jamaica, Ecuador, Malawi, and Paraguay, all with a natural resource share of greater than 50 percent. Natural resource exports per capita as a proportion of GDP per capita are plotted on Figure 9. Natural resources result from endowments, not economic competitiveness. A country’s world market share of natural resource exports proves to be more closely related to its geographic size than to its share of world GDP,

while non-natural resource exports are closely correlated to a country’s share of world GDP. Natural resource exports per capita are, controlling for country size (we use population density, the inverse of land area per capita), much less related to underlying competitiveness measured by BCI than non-natural resource exports.We find that the natural resource share of a country’s exports (and GDP) is decreasing in GDP per capita, again controlling for country size, as we might expect. Countries with lower levels of productivity are more dependent on natural resource exports. Theory suggests another effect of natural resources that would counteract the positive direct effect on prosperity: abundant natural resources might bias policies toward rent seeking and redistribution and work against overall competitiveness. A crude analysis of changes in BCI s this view: both high 1997 (initial) natural resource exports (share of GDP) and a dummy variable for countries with high current natural resource exports (more than 1 percent of GDP) are negatively and significantly correlated with changes in the BCI rank between 1998 and 2003.33 Changing microeconomic competitiveness and prosperity growth

We also examined whether countries that are improving or worsening their competitiveness ranking corresponding trends in growth of GDP per capita. Changes in BCI rank should affect growth in GDP per capita as per capita income responds to a new sustainable level. Although macroeconomic adjustments and other shocks may also affect per capita income growth, the relationship between shifts in BCI ranking and prosperity growth provides a tentative indication of causality in the relationship between BCI and prosperity. Regressing GDP per capita growth between 1998 and 2003 on BCI rank changes between 1999 and 2004 yields a statistically significant relationship that explains about 18 percent of the total variation in the growth in GDP per capita across countries.The relationship is highly significant.The coefficient of the relationship implies that an improvement of 10 BCI ranks over the five-year time period is associated with a 1.9 percent higher growth rate in GDP per capita, and vice versa.Two countries, Venezuela and Zimbabwe, fall outside the 95 percent significance interval in their relationship.Their GDP per capita has dropped even more than predicted due to falling BCI, not surprising given the political turmoil in both countries.34

Conclusions National prosperity is strongly affected by competitiveness, which is defined by the productivity with which a nation

Natural resource exports share of GDP, 2002

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

Bangladesh

Ghana

Bolivia

Uruguay

Colombia

Namibia Ukraine

Paraguay

Indonesia Nicaragua

Honduras

Zimbabwe

Jamaica

Vietnam

Ecuador

Chile

5,000

El Salvador

Argentina

10,000

Mauritius

Poland

Lithuania

Estonia

15,000

20,000

Greece Slovenia Israel Portugal Cyprus Korea Malta

Czech Republic

Singapore

Spain

New Zealand

GDP per capita, PPP adjusted, 2003

Slovak Republic

Hungary

Costa Rica Trinidad and Tobago Malaysia South Africa

Latvia

Russian Federation

Macedonia, FYR Tunisia Brazil Peru Ethiopia Mexico Guatemala Bulgaria Kenya Georgia Botswana Jordan Panama Thailand Serbia and Montenegro Romania Sri Lanka Morocco Turkey Croatia Philippines China Pakistan India

Tanzania

Malawi

Algeria

Venezuela

Figure 9: Natural resource exports share of GDP versus GDP per capita, PPP adjusted

45

25,000

35,000

40,000

United States


30,000

Ireland Finland United Kingdom Austria Italy Iceland Switzerland Hong Kong SAR Japan Sweden

Belgium

Canada Denmark Netherlands

Australia

Norway


utilizes its human, capital, and natural resources. Competitiveness is rooted in a nation’s microeconomic fundamentals, manifested in the sophistication of its companies and the quality of its microeconomic business environment. Stable institutions, sound macroeconomic policies, market opening, and privatization have long been considered the cornerstones for economic development. Our results here, and in previous years, suggest that these factors are necessary but far from sufficient. More than 80 percent of the variation of GDP per capita across countries is ed for by microeconomic fundamentals. In this Report we have shown how other factors, including political governance, geography, and natural resources, explain why a country’s prosperity can deviate, sometimes for long time periods, from the level ed by its microeconomic fundamentals.We find, however, that the absolute impact of these factors is significantly smaller than that of the microeconomic fundamentals. Without micro reforms, growth in GDP induced by sound macro policies, market opening, and privatization will be unsustainable or will not translate into improvements in GDP per capita. Appropriate micro reforms, which boost productivity and productivity growth, can greatly ease the challenge of meeting government’s fiscal obligations and reducing macroeconomic distortions. Microeconomic reforms can also reduce the political pressure on governments trying to defend macroeconomic stabilization and market opening against vested interests. Citizens who see monopolies loosing their grip, businesses reforming themselves, and opportunities for employment and entrepreneurship increasing are much less likely to be seduced by the false promises of redistribution and government intervention. Over time, more countries are realizing that sustained prosperity growth can be achieved only through continuous improvement of the microeconomic foundations of competitiveness.The experience with the 2000 Lisbon Agenda of the European Union, however, is an indication of how hard it is to move from realization to meaningful action.The current economic climate in Europe has raised the danger that politicians will fall back on tried and failed models of industrial policy. More broadly, our results illustrate the challenges countries face, especially low- and middle-income countries, in sustaining and continuously improving their business environments when the bar is rising in the global economy. Our findings confirm the view that it is unwise to view micro reforms narrowly in of reducing the role of government and abolishing market distortions. Such steps remain a critical challenge that many countries still have to master.Yet government has a range of positive roles that are fundamental to prosperity, such as investing in human resources, stimulating sophisticated demand via

setting appropriate regulatory standards, and building innovative capacity. Many nations need to move beyond first-stage reforms and address these agendas. The private sector has a crucial role in improving a nation’s competitive platform through dialogue with government, collective private activities, and cluster development. Second-stage micro reforms require a new perspective on the role of the private sector. Private sector leaders are still not engaged enough in driving national competitiveness programs and initiatives, especially in developing countries. The important role of clusters in competitiveness is again validated by our results. Realizing that clusters are important, however, is not the same as developing policies and process that are effective in ing cluster development and growth.There is a pressing need to professionalize the way cluster development efforts are conducted, including the application of tools to track their impact.35 Our analysis, however, also makes it clear that microeconomic reform is much more than cluster development.While numerous efforts to enhance clusters around the world are highly encouraging, countries also need to pursue improvements throughout the business environment. Otherwise cluster development initiatives will ultimately be stymied. Our results once again highlight the need to align a nation’s economic priorities with its level of development. There is strong evidence that microeconomic upgrading is a sequential process in which countries at different levels of development face distinctly different challenges. Attempting to apply one policy model across disparate countries is often not appropriate; a problem the European Union is now facing after the accession of ten mainly central and eastern European countries.This Report clarifies the differing policy priorities and challenges for low-, middle-, and high-income countries, and the difficult transitions between broad developmental stages. Countries that have been very successful in one mode of competing need to recognize the multifaceted adjustments necessary for managing the transition to the next one. This year’s Report also sheds light on the experience of individual countries.The strong underlying competitiveness of the United States, confirmed by its reclaiming the top rank in the BCI, bodes well for the medium-term prospects of the US economy, despite the turbulences in the international environment. India, after an erratic history, has now for a number of years ed a stable trend of improvements in competitiveness. Indonesia, a crucial country given its large Muslim population and role in the region, has made heartening improvements in competitiveness. Italy has seen an alarming deterioration of its competitiveness position; part of it might be temporary, related to the sentiment of the country’s business elite in the wake of the Parmalat ing scandal, but our

Notes 1 I would like to thank Christian Ketels and Weifeng Weng for their major role in the analyses reported here. Lyn Pohl provided able supervision of the final production of the chapter. 2 The proportion has grown modestly over the last several years as the model has been improved. 3 See, for example, O’Mahony and van Ark (2003). 4 Accordingly, the European Union has made increasing labor participation one of the core goals of its Lisbon Agenda to improve competitiveness. See Lisbon European Council: Presidency Conclusions, Lisbon (23/24 March 2000) 5 See the Clusters of Innovation report (Porter, Council on Competitiveness, and Monitor Group, 2001); further reports on five US regions are available at www.compete.org. 6 See the report by Harvard students Jean Hayden, Chai McConnell, Peter Tynan, and Alexandra West 7 See the report by Harvard students Mattia Adani, Adrien Couton, Marisa Joelson, and Verena Kugi.

12 One surveyed economy, Luxembourg, was not included in the calculations because, given its small size, functional concentration on a few sectors, and almost complete integration into the neighboring economies, it is better understood as a region within these economies. 13 See World Bank (2004) and the web site http://rru.worldbank.org/doingbusiness/ 14 These reasons could include larger actual heterogeneity within the country as well as greater uncertainty by respondents about appropriate international benchmarks. 15 Eighty-nine countries were included with all their responses; four countries (Ghana, Macedonia, Namibia, and Tanzania) were included with only the responses from their foreign-owned businesses. 16 These countries are Angola, Bahrain, Chad, Egypt, Gambia, Mali, Nigeria, Uganda, the United Arab Emirates, and Zambia. 17 GDP per worker is employed as a productivity measure in some studies. We used the broader measure here because GDP per worker can be increased by high unemployment or low workforce participation, which do not increase wealth. Also, holders of capital, not only workers, contribute to national productivity. In comparing the United States and , for example, the United States has absorbed a huge influx of new workers (higher workforce participation) over the last decade, while has maintained high GDP per worker through suffering high unemployment and maintaining a large student population not counted as part of the potential workforce. 18 In the case of Ireland, we used GNP instead of GDP because of the size of dividend outflows to foreign investors. Ireland’s GDP is about 20 percent higher than its GNP. 19 Statistical significance at ** = 5 percent and * = 10 percent (all twotailed tests) is noted in the table. 20 We conducted additional bivariate regressions (not reported here) using macroeconomic indicators collected for the Global Competitiveness Report. These regressions show no statistical relationship between GDP per capita and individual macroeconomic indicators. See also Easterly (2001), who finds similar results. 21 See Lewis (2004) and Porter and Sakakibara (2004) 22 This analysis covers the Survey questions that have been common over five years, which comprise the great majority of questions. 23 The forecast region has wider bands than a 95 percent mean confidence region. The mean confidence region provides a confidence interval for a given level of competitiveness over repeated observations. The forecast region method, in contrast, reflects a higher degree of inherent uncertainty in predicting a single observation. As a result, interpretation of the proximity of data points to the regression line should be undertaken with appropriate caveats. Note that the forecast region widens slightly as it moves away from the “center” of the graph. The center is the point located at the intersection of the mean GDP per capita level and mean factor score. 24 Our ranking has an interesting correlation with the FDI potential index calculated by UNCTAD (2004). The FDI potential index includes natural resource deposits and a large domestic market as elements, both factors that motivate inward foreign direct investment but not themselves indicators of competitiveness. The index contains fewer elements of business environment quality than the BCI but includes GDP per capita, an indicator highly correlated with the BCI and many of its constituent elements.

8 The stages were first introduced in Porter (1990).

25 All changes refer to the sample of 93 countries included in the statistical analysis.

9 The notion of institutions for collaboration has been developed further in t work with Willis Emmons, Georgetown University. Porter and Emmons (2003)

26 For middle- and high-income countries, most of the individual variables included in the BCI are significant.

10 For a survey of cluster initiatives, a specific type of IFC with the explicit purpose to mobilize and upgrade a cluster, see Sölvell, Lindqvist, and Ketels (2003) 11 Glaeser, La Porta, Lopez-de-Silanes, and Shleifer (2004).


results indicate that the country has underlying challenges that have become much more apparent in an environment of slow growth and t European currency.The data in this Report provide detailed assessments of the strengths and weaknesses in these and other countries. China and India stand out as enjoying the fruits of improvements in competitiveness that have run ahead of wages.Their position as underperformers—countries with current prosperity and productivity levels below the potential of their microeconomic fundamentals—helps explain the robust investment inflows into these countries: They are attractive not because their wages are low in an absolute sense but because their level of wages is low relative to the quality of business environment in which foreign companies can operate.We are already observing an adjustment process that will, over time, tend to close this gap and investment flows will reflect this. Microeconomic competitiveness is arguably the central item on the economic policy agenda of every nation. Progress in improving the sophistication of companies and the quality of the business environment is the only way to produce real improvements in efficiency, product quality, and new business and job growth that a rising standard of living for citizens. In future years, we and the Forum are committed to work toward improved data and more advanced tools to enable leaders in government and business to guide economic development.

27 For a more detailed examination of Japan’s competitive situation, see Porter, Takeuchi, and Sakakibara (2000). 28 This implies also a high correlation between these indicators and the BCI, providing a statistical challenge for distinguishing their independent effects.

47


29 See Gallup and Sachs (1999) for a discussion of the data on geographic location.

Hirschman, A. O. 1958. The Strategy of Economic Development New Haven, CT: Yale University Press.

30 A good example is the discussion about policies for rural regions. For an assessment of the current situation in the United States see Porter, Ketels, Miller, and Bryden (2004)

Kaufmann, D., A. Kraay, and M. Mastruzzi. 2003. “Governance Matters III: Governance Indicators for 1996–2002, Washington, DC: World Bank Policy Research Working Paper 3106

31 For a discussion in the context of a broader assessment of UK competitiveness, see Porter and Ketels (2003).

Lewis, W. W. 2004. The Power of Productivity Chicago, IL: The University of Chicago Press.

32 Data were drawn from “Trade Analysis System on Personal Computer, 1997–2001, SITC Rev.3.” A list of SITC industries included can be obtained from the author.

Lucas, R. E., Jr. 1988. “On the Mechanics of Economic Development,” Journal of Monetary Economics 22 (July 1988): 3–42.

33 The time-series data available for this analysis unfortunately still include few low-income countries with high natural resource export share. The analysis will be expanded as more country data become available over time. 34 When Venezuela and Zimbabwe are dropped from the regression, the explanatory power of the equation falls to 13.6 percent and the coefficient falls to an increase of 1.2 percent annual GDP per capita growth for an increase of ten ranks in the BCI over five years. 35 See, for example, the tools provided by the Foundation Cluster and Competitiveness (www.clustercompetitiveness.org), an institution launched on the initiative of the Catalan government.

Mankiw, N. G. 1995. “The Growth of Nations,” Brookings Papers on Economic Activity 1 (1): 275–310. Mankiw, N. G., D. Romer, and D. N. Weil. 1992. “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics 107(2): 407–437. Nickell, S. 1996. “Competition and Corporate Performance,” Journal of Political Economy 104 (1996): 724-746. Nordhaus, W. D. 1994. “Climate and Economic Development.” In Proceedings of the World Bank Annual Conference on Development Economics 1993. Washington, DC: The International Bank for Reconstruction and Development/The World Bank. North, D. C. 1990. Institutions, Institutional Change and Economic Performance: Political Economy of Institutions and Decisions. Cambridge: Cambridge University Press.

Selected References Adani, M., A. Couton, M. Joelson, and V. Kugi. 2003. The Romanian Textile & Apparel Cluster, Paper prepared for the Harvard University course “Microeconomics of Competitiveness,” Boston, MA: June 2003. Barro, R. J. 1991. “Economic Growth in a Cross Section of Countries,” Quarterly Journal of Economics 106 (2): 407–443.

48

Baumol, W. J. 2002. The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. Princeton, NJ: Princeton University Press. Department of Trade and Industry. 2003. UK Productivity and Competitiveness Indicators 2003, London: Department of Trade and Industry. Easterly, W. 2001.The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Cambridge, MA: MIT Press. Easterly, W. and R. Levine. 2002. “Tropics, Germs, and Crops: How Endowments Influence Economic Development,” NBER Working Paper No. 9106. Cambridge, MA: National Bureau of Economic Research.

O’Mahony, M., B. van Ark (eds.). 2003. EU productivity and competitiveness: an industry perspective. Brussels: European Commission. Porter, M. E. 2003. “The Economic Performance of Regions,” Regional Studies 37(6&7): 549–678. ———. 2000. “Attitudes, Values, Beliefs, and the Microeconomic of Prosperity,” in L. E. Harrison, S. P. Huntington (eds.), Culture Matters, New York: Basic Books, 2000: 14–28. ———. 2000. “Locations, Clusters, and Company Strategy,” in G. L. Clark, M. P. Feldman, and M. S. Gertler (eds.), The Oxford Handbook of Economic Geography, New York: Oxford University Press, 2000: 253–274. ———. 1998a. “Introduction.” In The Competitive Advantage of Nations: With a New Introduction. New York: The Free Press. ———. 1998b. “Clusters and Competition: New Agendas for Companies, Governments, and Institutions.” In On Competition. Boston: Harvard Business School Press. ———. 1996. “What Is Strategy?” Harvard Business Review 74 (6): 61–78.

European Council. 2000. Presidency Conclusions of the Lisbon European Council. March 23/34, 2000.

———. 1995. “Comment on ‘Interaction Between Regional and Industrial Policies: Evidence From Four Countries,’ by J. Markusen. ”In Proceedings of The World Bank Annual Conference on Development Economics 1994. Washington, DC: The International Bank for Reconstruction and Development/The World Bank.

Enright, M. J., A. Francés, and E. S. Saavadra. 1994. Venezuela: El Reto de la Competitividad. Caracas, Venezuela: Ediciones IESA.

———. 1990. The Competitive Advantage of Nations. New York: The Free Press.

Fairbanks, M. and S. Lindsay. 1997. Plowing the Sea: The Challenge of Competitiveness in the Developing World Boston: Harvard Business School Press.

Porter, M. E., Council on Competitiveness, and Monitor Group. 2001. Clusters of Innovation Initiative: Regional Foundations of U.S. Competitiveness. Washington, DC: Council on Competitiveness.

Gallup, J. L. and J. D. Sachs. 1999. Geography and Economic Development. Center for International Development (CID) Working Paper no. 1, Cambridge, MA: March 1999.

Porter, M.E., and W. Emmons. 2003. “Institutions for Collaboration: Overview.” Harvard Business School case 9-703-436.

European Commission. 2003. European Competitiveness Report 2003. Brussels: European Commission.

Glaeser, E., R. La Porta, F. Lopez-de-Silanes, and A Shleifer. 2004. “Do Institutions Cause Growth?” NBER Working Paper No. 10568, Cambridge, MA: National Bureau of Economic Research. Hall, R. E. and C. I. Jones. 1999. “Why Do Some Countries Produce So Much More Output per Worker than Others?” Quarterly Journal of Economics 114 (1): 83 –116. Hayden, J., C. McConnell, P. Tynan, and A. West. 2003. The Cairns Tourism Clusterl, Paper prepared for the Harvard University course “Microeconomics of Competitiveness,” Boston, MA: June 2003.

Porter, M. E. and C. Ketels. 2003. UK Competitiveness: Moving to the Next Stage, DTI Economics Paper No.3. Porter, M.E., C. Ketels, K. Miller, and R. Bryden. 2004. Competitiveness in Rural U.S. Regions: Learning and Research Agenda, Washington, DC: US Economic Development istration (EDA). Porter, M. E. and M. Sakakibara. 2004. Competition in Japan, Journal of Economic Perspectives, Winter Issue, forthcoming 2004.

Porter, M. E. and C. van der Linde. 1995. “Toward a New Conception of the Environment-Competitiveness Relationship,” Journal of Economic Perspectives 9(4): 97–118. Romer, P. M. 1990. “Endogenous Technological Change,” Journal of Political Economy 98(5): S71–S102. Sachs, J. D. and A. Warner. 1995. “Economic Reform and the Process of Global Integration,” Brookings Papers on Economic Activity 1(1): 1–118. Sakakibara, M. and M. E. Porter. 1998. “Competing at Home to Win Abroad: Evidence from Japanese Industry,” Harvard Business School Working Paper No. 99-036. Cambridge, MA: Harvard Business School Press. Solow, R. M. 1956. “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70(1): 65–94. Sölvell, Ö., G. Lindqvist, and C. Ketels. 2003. “The Cluster Initiative Greenbook,” Stockholm: November 2003.


Porter, M. E. and H. Takeuchi with M. Sakakibara. 2000. Can Japan Compete? Basingstoke, England, and New York: Macmillan and Basic Books.

UNCTAD. 2004. World Investment Report 2004 Geneva: UNCTAD.

49


Appendix A: ANOVA Analysis for Survey Responses I. COMPANY OPERATIONS & STRATEGY

Production process sophistication. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.422 Nature of competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.358 Extent of staff training. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.342 Extent of marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.339 Willingness to delegate authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.278 Capacity for innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.382 Company spending on research and development . . . . . . . . . . . . . . . 0.322 Value chain presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.392 Breadth of international markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.412 Degree of customer orientation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.227 Control of international distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.178 Extent of branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.396 Reliance on professional management . . . . . . . . . . . . . . . . . . . . . . . . . 0.297 Extent of incentive compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.263 Extent of regional sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.366 Prevalence of foreign technology licensing . . . . . . . . . . . . . . . . . . . . . 0.221 II. NATIONAL BUSINESS ENVIRONMENT

50

R2

R2

A. FACTOR (INPUT) CONDITIONS 1. Physical Infrastructure Overall infrastructure quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.553 Railroad infrastructure development . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.608 Port infrastructure quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.500 Air transport infrastructure quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.408 Quality of electricity supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.487 Telephone/fax infrastructure quality . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.438 2. istrative Infrastructure Reliability of police services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.355 Judicial independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.426 Efficiency of legal framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.408 istrative burden for startups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.222 Extent of bureaucratic red tape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.081 3. Human Resources Quality of management schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.352 Quality of public schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.480 Quality of the educational system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.347 Quality of math and science education . . . . . . . . . . . . . . . . . . . . . . . . . 0.387 4. Technology Infrastructure Availability of scientists and engineers . . . . . . . . . . . . . . . . . . . . . . . . . 0.274 Quality of scientific research institutions . . . . . . . . . . . . . . . . . . . . . . . 0.327 University/industry research collaboration. . . . . . . . . . . . . . . . . . . . . . 0.299 5. Capital Markets Financial market sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.432 Ease of access to loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.226 Local equity market access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.343

II. NATIONAL BUSINESS ENVIRONMENT (Cont’d.)

R2

B. DEMAND CONDITIONS Buyer sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.334 Sophistication of local buyers' products and processes . . . . . . . . . . 0.269 Government procurement of advanced technology products. . . . . . 0.170 Presence of demanding regulatory standards . . . . . . . . . . . . . . . . . . . 0.426 Laws relating to ICT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.305 Stringency of environmental regulations . . . . . . . . . . . . . . . . . . . . . . . 0.411 C. RELATED AND ING INDUSTRIES Local supplier quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.314 State of cluster development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.220 Local availability of process machinery . . . . . . . . . . . . . . . . . . . . . . . . 0.341 Local availability of specialized research and training services . . . 0.278 Extent of collaboration among clusters . . . . . . . . . . . . . . . . . . . . . . . . . 0.263 Local supplier quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.216 Local availability of components and parts . . . . . . . . . . . . . . . . . . . . . 0.323 D. CONTEXT FOR FIRM STRATEGY AND RIVALRY 1. Incentives Favoritism in decisions of government officials. . . . . . . . . . . . . . . . . . 0.272 Cooperation in labor-employer relations . . . . . . . . . . . . . . . . . . . . . . . . 0.218 Efficacy of corporate boards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.148 Intellectual property protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.418 Protection of minority shareholders’ interests . . . . . . . . . . . . . . . . . . . 0.259 Regulation of securities exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.338 Effectiveness of bankruptcy law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.359 2. Competition Hidden trade barrier liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.267 Intensity of local competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.163 Extent of locally based competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.174 Effectiveness of anti-trust policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.315 Decentralization of corporate activity . . . . . . . . . . . . . . . . . . . . . . . . . . 0.261 Business costs of corruption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.254 Tariff liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.225 Centralization of economic policy-making . . . . . . . . . . . . . . . . . . . . . . 0.207 Prevalence of mergers and acquisitions. . . . . . . . . . . . . . . . . . . . . . . . 0.181 Foreign ownership restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.216

Spain

4.2: Country Profiles

Competitiveness Rankings Growth Competitiveness Index Rank

23

Macroeconomic Environment Index Rank .....................16 Macroeconomic Stability Subindex Rank .............34 Government Waste Rank .....................................17 Country Credit Rating Rank ..................................16

Business Competitiveness Index Rank

26

Sophistication of Company Operations and Strategy Rank ............................................................25 Quality of the National Business Environment Rank ............................................................26

Public Institutions Index Rank..........................................34 Contracts and Law Subindex Rank ......................42 Corruption Subindex Rank....................................32

Technology Index Rank ......................................................20 Innovation Subindex Rank ....................................24 ICT Subindex Rank ...............................................30 Technology Transfer Subindex Rank (out of 79 non-core innovators)........................11

The Most Problematic Factors for Doing Business 382

FACTOR

Restrictive labor regulations .............................. Access to financing ............................................. Inefficient bureaucracy....................................... Tax regulations...................................................... Tax rates................................................................. Inadequate infrastructure................................... Inadequately educated workforce.................... Policy instability.................................................... Inflation .................................................................. Poor work ethic .................................................... Crime and theft ..................................................... Corruption .............................................................. Government instability/coups ............................ Foreign currency regulations............................. 0

5

10

15

20

25

30

Percent of responses

Note: From a list of 14 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings. Source: World Economic Forum, Executive Opinion Survey (2004)

NOTABLE COMPETITIVE ADVANTAGES

Growth Competitiveness Index

NOTABLE COMPETITIVE DISADVANTAGES

Rank/104

Growth Competitiveness Index

Macroeconomic Environment 2.26 2.30 2.22 6.06

Interest rate spread, 2003.................................................2 Country credit rating, 2004 .............................................16 Government surplus/deficit, 2003...................................17 Wastefulness of government spending ..........................17

Technology 3.18 4.22

Rank/104

Macroeconomic Environment

Cellular telephones, 2003..................................................8 Tertiary enrollment ..........................................................14

2.24 2.07 2.25 2.01 2.23

4.2: Country Profiles

National competitiveness balance sheet

Real effective exchange rate, 2003 ................................88 Access to credit ..............................................................50 Inflation, 2003 .................................................................50 Recession expectations ..................................................49 National savings rate, 2003 .............................................39

Public Institutions 6.01 6.22 6.03 6.18 6.10 6.23 6.21

Judicial independence.....................................................50 Irregular payments in public utilities ...............................39 Property rights.................................................................38 Organized crime ..............................................................38 Favoritism in decisions of government officials..............36 Irregular payments in tax collection ................................34 Irregular payments in exports and imports .....................31

Technology 3.15 3.14 3.02 3.13 3.06 3.16 3.12 3.19 3.01 3.08 3.21 3.03 3.04 5.08 3.17 3.20


Rank/93


Sophistication of Company Operations and Strategy 9.14 9.09 9.02

Extent of incentive compensation ..................................18 Control of international distribution .................................18 Value chain presence ......................................................21

9.10 9.13 3.06

Extent of regional sales...................................................43 Willingness to delegate authority....................................40 Company spending on research and development ........39

Quality of the National Business Environment

Centralization of economic policymaking ..........................4 Cellular telephones, 2003..................................................7 Quality of management schools .......................................8

Other Indicators 4.07 2.04 9.05 4.04

Rank/93


Quality of the National Business Environment 6.15 3.18 9.16

Government success in ICT promotion ..........................69 Government prioritization of ICT .....................................52 Firm-level technology absorption ....................................52 Quality of competition in the ISP sector .........................46 Company spending on research and development ........41 Laws relating to ICT ........................................................39 Internet access in schools ..............................................38 Internet s, 2003........................................................36 Technological readiness ..................................................33 University/industry research collaboration ......................33 Personal computers, 2003 ..............................................31 Prevalence of foreign technology licensing ....................29 FDI and technology transfer............................................29 Telephone lines, 2003 .....................................................29 Utility patents, 2003 ........................................................28 Internet hosts, 2003........................................................27

6.16 7.05 9.20

Rank/104

Present business impact of HIV/AIDS ..............................7 Soundness of banks........................................................14 Ethical behavior of firms .................................................21 Disparity in healthcare quality .........................................22

Reliability of police services ............................................77 istrative burden for startups .................................61 Cooperation in labor-employer relations..........................52

Other Indicators 4.13 9.18 7.08 7.09 2.14 9.26 2.17 9.19 7.10 2.13 4.14 10.07 2.02 9.25 10.06

Rank/104

Maternity laws’ impact on hiring women .......................95 Hiring and firing practices ...............................................89 Private-sector employment of women ..........................83 Wage equality of women in the workplace ....................83 Business impact of foreign trade barriers .......................80 Company promotion of volunteerism .............................78 Tax burden.......................................................................76 Flexibility of wage determination ....................................76 Regional disparities in quality of business environment .74 Business impact of domestic trade barriers ...................73 Childcare availability ........................................................72 Subsidies for energy or materials ...................................70 Business costs of terrorism ............................................69 Charitable causes involvement .......................................68 Political context of environmental gains .........................60

Note: The Business Competitiveness Index applies different criteria for selecting a country’s competitive advantages and disadvantages. Please refer to the section “How Country Profiles Work” for further details.

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