Competitiveness. A Step Forward, Two Backward
By Sergey Gakhov and Yelena Zabortseva
The World Economic Forum published the Annual Global Competitiveness Report 2007-2008 in November 2007. The main intrigue for Kazakhstan was that we occupied not 56th place in 2006 but 50th place, which means that we actually were a member of the world’s top 50 most competitive countries! The matter is that an index approach used by the World Economic Forum in its studies is being constantly improved, so the new report also had innovations. In order to enable countries to follow their competitiveness in dynamics, their ratings in the previous reports were revised. Although this revision produced a pleasant surprise for Kazakhstan, the current results are appalling – the country dropped to 61st place in the competitiveness rating…
The list of countries studied in the latest report included 131 countries (this figure stood at 125 in 2006), which accounted for over 98% of the world’s GDP. The USA tops the rating (Table 1). The co-editor of the report, Columbia University Prof Xavier Sala-i-Martin, believes the USA’s leadership is backed up by the efficiency of national markets, the high competitiveness of its companies and impressive ability to produce technological innovations, based on the first-class network of universities and research centres. At the same time, the report pointed to some negative features of the US economy relating to macroeconomic imbalances which still pose risks of not only to the country’s general competitiveness potential, but the whole global economy too. For example, a number of dangerous trends emerged when the US subprime mortgage crisis led to serious consequences on the global financial market.
Switzerland occupied second place, followed by Denmark, Sweden, Germany, Finland, Singapore, Japan and the United Kingdom. The Netherlands closed the top 10, pushing Hong Kong from this position (12th place). South Korea approached leaders very closely, jumping from 23rd to 11th place. Chile has the highest ranking among Latin American countries (26th place). China (36th) and India (48th) are still ahead of all other major developing countries. Some Middle Eastern and North African countries ended up in the first half of the rating: Israel (17th), Kuwait (30th), Qatar (31st), Tunisia (32nd), Saudi Arabia (35th) and the United Arab Emirates (37th). Among countries from the lower part of Africa only South Africa (44th) and Mauritius (60th) hit the upper part of the list. Clear outsiders were Zimbabwe, Burundi and Chad.
Kazakhstan only occupied 61st place this year, lagging behind Russia (58th). The new entry to the ranking – Uzbekistan (62nd) – is just behind Kazakhstan. It is followed by Azerbaijan (66th), Ukraine (73rd), Georgia (90th), Armenia (93rd) and Moldova (97th). Tajikistan (117th) and Kyrgyzstan (119th) faired quite badly and had their ratings worsened compared with the previous year (96th and 109th respectively).
We cannot ignore the excellent results of Estonia (27th), Lithuania (38th) and Latvia (45th), which outperformed other post-Soviet countries and firmly settled down in the club of the top 50.
Mechanics of Competitiveness
Before we discuss our country’s competitiveness in greater detail, let us consider the latest changes in the very methodology of assessing it. As the main instrument of ranking, World Economic Forum experts use the Global Competitiveness Index (GCI) which is based on the assessment of several tens of key indicators that are the most critical for a country’s productivity and competitiveness. We have already discussed the GCI and its structure in Kazakhstan magazine’s No 4 issue published in 2006.
Basing on testing and consulting with leading economists this year’s GCI was significantly improved. It included 110 indicators (previously 90), which were grouped into 12 pillars: (1) institutions, (2) infrastructure, (3) macroeconomic stability, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labour market efficiency, (8) financial market sophistication, (9) technological readiness, (10) market size, (11) business sophistication and (12) innovation. It should be noted that the 6, 7, 8 and 10 pillars were previously united into one pillar that characterised the market environment in general. The new methodology has made it possible to consider each of these markets in detail, which makes the analysis itself more precise and clear.
As in the past, pillars are grouped into three subindixes: basic requirements, efficiency enhancers and innovation and sophistication factors. Moreover, each of these subindexes’ contribution to the final GCI index for a specific country depends on the development level of it. Earlier, in order to define the level of development, the World Economic Forum used only GDP per capita. According to the new methodology, in addition to this indicator, the economy’s raw material depends is also taken into account. For example, if 70% of a country’s exports are raw materials, its competitiveness is believed to be more dependent on a group of factors included in the basic requirements subindex. It is worth noting that this approach had an immediate effect on Kazakhstan’s standing. Despite the fact that in terms of GDP per capita our country should be among countries that are at the second stage of their development, World Economic Forum experts placed the country into a transitional group between the first and second stages of development.
In addition to the GCI, the report separately offers the Business Competitiveness Index (BCI), which assesses microeconomic indicators that define the current level of the national economy’s productivity. In the BCI rating, our country occupied 72nd place among 127 countries.
We should also note that ratings are based on a combination of open-source statistical data and opinion polls carried out among heads of companies by the World Economic Forum and its partner organisations. A total of 11,000 business leaders were polled this year in a record number of countries. The questionnaire has been composed in a way that it covers a wide range of factors that influence business climate.
Elements of Success and Failures
The report shows that our country dropped by 11 rankings. It is fair to say that seven new countries were included in the report this year. Nevertheless, only two of them faired better than our countries, which means that we still had lost nine places in competition with “old” rivals.
Table 2 shows that the worst results for Kazakhstan, as in the previous year, were in the innovation subindex – here we fell from 73rd to 84th place. Nine rankings we lost on basic requirements (from 57th to 66th place). The best results were achieved in the efficiency enhancers subindex – 58th place. As a result, we can see an obvious lagging in the innovation sphere.
Based on the results of the ratings, the World Economic Forum composes a separate list of strengths and weaknesses of competitiveness of a specific country, which makes it possible for it to define priority spheres for formulating its policy on economic development and conducting key reforms. Harvard Business School Professor and Co-director of the report Michael Porter believes: “Economic policy, especially at the microeconomic level, needs to set priorities that reflect the most important constraints to competitiveness in each country. The GCR enables countries to move beyond abstract theoretical policy debates and identify the specific tasks ahead of them.”
We should admit that the balance of advantages and shortcomings of Kazakhstan is very much shifted towards negative components of the rating (Tables 3 and 4). In general, out of 110 factors used in the GCI, our country occupies positions higher than 50th place only on 25.
It should be noted that assessing each country’s competitiveness on one indicator or another, the World Economic forum uses a mathematical approach when first they calculate a score on a seven-point scale and only after that they arrange countries by them. If we compare the number of indicators Kazakhstan has managed to improve this year with that of indicators the country has failed without taking into account the results achieved by rivals and based only on its scores, we will establish that these numbers are equal.
Nevertheless, there are clear advantageous factors in our rating of competitiveness, despite numerous negative factors. For example, Kazakhstan’s main advantages, as in the previous year, were thanks to good macroeconomic indicators (25th place, a combined score of 5.6 on the seven-point scale), including budget surplus (15th place), spread on interest rates (fifth) and public debt (sixth place). Another significant advantage is a combined indicator of labour market efficiency, on which Kazakhstan came 15th (five points).
Other advantages are the high quality of secondary education (30th), the number of procedures to register a business (27th), salary flexibility (20th) and schools’ access to the Internet (50th).
Most factors that had a negative impact on Kazakhstan’s rating were technological readiness (77th place, three points), innovation (75th and 3.1 respectively) and institutions (80th and 3.7) and financial market sophistication (80th and 4.0).
The worst three factors that are very critical for our competitiveness are trade barriers (114th) and stock exchange regulations (113th). We believe that here it should be also noted that the indicator which concerns all Kazakhs directly – life expectancy on which we occupy 107th place; this is the place we also occupy in terms of infant mortality.
Aspects of government regulation and the quality of institutions.This is the only pillar in which practically fully negative factors prevail. As in the previous year, business ethics (102nd place) and judiciary independence (100th) gave rise to the greatest concern. The population’s trust in the law-enforcement bodies (91st) and the quality of auditing (85th) remained very low. In terms of organised crime, Kazakhstan came 87th.
Innovation and technological readiness.In these pillars, there is also the need to improve the strategic development programme. In a year, the country’s innovation rating fell from 65th place to the 75th. The shortage of engineering and scientific specialists (98th) and a weak level of cooperation between research and industry (71st) have a significant impact on the development of innovation. Kazakhstan’s technological readiness also lags behind advanced countries – in this we fell from 70th to 77th place. For example, in terms of Internet users our country occupies 112th place, technology transfer in 101st place and access to new technology in 90th place.
Financial market sophistication.As was mentioned above, this is a new pillar, which is, by the way, very important for Kazakhstan in light of the latest events in the banking sphere. Our achievements in this sphere are the high level of foreign investment protection (35th) and access to venture capital (49th). It seems that the National Innovation Fund’s efforts to create joint venture funds have produced some results.
World Economic Forum experts specified the poor level of securities market regulation (113th), restrictions in capital flow (105th) and the poor development of the local capital market (89th) as negative factors. Unfortunately, compared with the previous year the general rating of the Kazakh financial market’s competitiveness lost 20 positions and the fall from 60th to 80th place was largely due to a sharp fall in stability on, and trust in the financial sphere (from 69th to 97th place). One of the reasons for this is a revision of stability in the banking system (86th place against the 72nd in 2006).
Higher education and training.The ranking in this pillar fell from 51st to 57th place. Business schools (95th place against the 80th), continuity in training (93rd against 79th) and access to research and training (82nd against 66th) received poor assessment. In terms of qualified specialists and supplying them to local research centres Kazakhstan fell 16 rankings, and in terms of the education system it is in 64th place.
We asked the authors of the report to comment on Kazakhstan’s standing in the Global Competitiveness Report. The senior economist from the World Economic Forum’s global competitiveness network, Jennifer Blanke, said that thanks to our natural resources, the macroeconomic environment in our country was very positive. For example, indicators such as budget surplus, the public debt to GDP ratio, high levels of savings and low interest rates received good assessments. Nevertheless, the “growing inflation offers grounds for certain concern”. Ms Blanke said that Kazakhstan needed to do a lot to improve institutions. In particular, “it is necessary to pay special attention to priority issues such as improvements in the work of government structures and institutions, property rights protection, the efficiency of the government, public trust in political figures and the law-enforcement bodies.” She also said: “Placing priority on healthcare and education and improving technological development will be crucial in improving the country’s competitiveness.”
The following are the most important moments.
Firstly, our country’s high level of dependence on natural resources when the economy is poorly diversified is becoming a constraining factor for Kazakhstan’s competitiveness. For example, Russia, which also exports natural resources and has similar GDP per capita, remained, in contrast to Kazakhstan, in the group of countries that are at the second stage of their development.
Secondly, it seems that World Economic Forum experts did not have fully taken into account the recent crisis on the domestic financial and construction sectors. This means that in the next report our main hot shot – macroeconomic indicators – may not produce very impressive results, and we have to be ready for this. In considerable extend, the adequacy of measures from macroeconomic perspective, that are fulfilled by the government to resolve the situation in baking and construction spears, would be decisive.
Thirdly, the rating in the innovation pillar (which also takes account of development strategies) continues to be low. In this respect, the case of Uzbekistan, which is already catching up with us, is very exemplary. Without sizeable natural resources, this country came 51st in terms of innovation, which played a key part in its high general competitiveness. Compare it with our 84th place – comments are excessive here.
In conclusion, to be fair we should note one nuance. Of course, a fall in the country’s global competitiveness does not necessarily mean a recession or even a crisis in certain economic sectors. This means that our rivals are not complacent and are always improving their indicators, which is why the main task here is the continuity of the process, because there is no gain without pain.
The authors express sincere gratitude to the World Economic Forum’s public relations department and the senior economist of the global competitiveness network, Ms Jennifer Blanke, who kindly agreed to answer our questions.
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