Competitiveness: Our Place 66
In October 2008, the World Economic Forum published its Global Competitiveness Report for 2008–2009. Kazakhstan's position in the ranking has dropped again, with the country falling from 61st to 66th place. Therefore, one should acknowledge that the strategic plan to join the 50 most competitive states is no cinch at all. However, just two years ago, we did join this group of states, having fulfilled the objective set by the president.*
* According to the Global Competitiveness Report 2007-2008 Kazakhstan was placed at the 50th place in the GCI ranking. For further details see Kazakhstan magazine No. 4, 2007
The USA topped the rankings as the most competitive economy for the second year running. Given that the United States are a source of the global financial crisis, this outcome could not help but raise certain doubts within the international expert community.
Answering questions from our magazine, Margareta Drzeniek Hanouz, Director of the Global Competitiveness Network, has outlined the WEF position on this issue. She emphasised that competitiveness is more contingent on fundamental economy indicators rather than the concrete economic cycles. Recessions and slumps, while adversely affecting the competitiveness still have a rather limited impact. According to the expert, the US ranking is mainly attributable to two aspects. Firstly, the financial crisis has caused a decline of only one out of 12 pillars determining the country's position in terms of global competitiveness (development of financial institutions). Secondly, the data WEF used for 2008-2009 rankings were collected before the crisis reached its peak and therefore did not take account of all its aftermaths. Nonetheless, the WEF experts believe the US economy has much strength, which is not likely to be affected by any negative global trends in the future. Such strengths include high-end quality of universities and research institutions, flexibility of labour and goods markets, favourable business environment, high competitiveness of US companies, and extraordinary innovation developments. All these factors will enable the US economy to recover much quicker after the crisis than the countries with lower levels of competitiveness.
As seen from Table 1, Switzerland is in second position followed by Denmark, Sweden, Singapore and Finland. Among the top 50 are the countries maintaining close business links with Kazakhstan, viz.: Germany (7th place), Netherlands (8th), Japan (9th), Canada (10th), Korea (13th), China (30th), and India (50th). It is noteworthy that another strong partner of Kazakhstan in foreign trade – UK – has slipped from 9th to 12th position. It looks like a weakening of financial markets has impacted heavily is competitiveness – much unlike the USA.
Among the energy rich countries, Norway (15th) and Australia (18th) figure in the top of the ranking. Thanks to the high oil prices period, the Gulf States have also measurably improved their competitiveness rankings, led by Qatar (26th), Saudi Arabia (27th), United Arab Emirates (31st), Kuwait (35th), and Oman (38th).
Burundi, Zimbabwe and Chad bring up the rear of the WEF ranking, just as it was last year. It should be noted that in 2008, the WEF experts assessed a total of 134 economies accounting for over 98% of the global GDP while two years ago the report was featuring only 125 countries.
Kazakhstan is naturally most interested in the outcomes of the countries that are confronted with the need to transform their economies, just as we are, following the collapse of the Soviet Union. The most illustrative comparison should be with Russia and Azerbaijan, who also rely on their oil resources. The Russian economy has significantly improved its standing this year and is ranked 51st, up seven places from last year. While two years ago we were eight places ahead of Russia, now we are 15 points down, occupying the 66th rank. Azerbaijan has slipped from 66th to 69th position, leaving a 3-point gap between our states.
The Baltic States rank the highest among the other former Soviet countries with Estonia and Lithuania ranking 32nd and 44th respectively. Latvia, at 54th place, has moved down, giving way to Russia for the first time.
The standings are worse than ours for Ukraine (72nd), Georgia (90th), Moldova (95th), and Armenia (97th). Tajikistan (116th) and Kyrgyzstan (122nd) stand as obvious outsiders. It is noteworthy that the latter was the first to join the World Trade Organisation. The WTO accession negotiations are ongoing with Russia and Kazakhstan, while the expediency of this step is still under debate in our country.
Finally, Belarus and Turkmenistan do not figure in the global competitiveness ranking at all. As is known, their economic transparency is quite low and the political regime stands far from democracy. The state of affairs on Uzbekistan is similar to that though it was included in last year’s WEF report and even showed quite decent results. This year it has been de-listed again, due to a lack of international survey data.
The Global Competitiveness Index (GCI), developed for the World Economic Forum by Columbia University Professor Xavier Sala-i-Martin is the main tool used by the WEF ranking experts. First, each country is assessed against 110 key indicators of productivity and competitiveness on the basis of statistics and feedback from business structures. The findings are aggregated under 12 groups – the so-called 'pillars of competitiveness'. These are then grouped into three sub-indexes: basic requirements, efficiency enhancers, and innovation and sophistication factors. Each sub-index contributes to the final index dependent on a country's stage of economic development.1
1. WEF classifies the countries into four groups according to the level of their economic development. The first group includes factor driven countries, i.e. those oriented at primary resources, market size, etc. The economies based on efficient development fall in the second group while the third one envisages innovation development. Besides this, there are two transition stages between group 1 and 2 and between group 2 and 3.
For Kazakhstan, whose stage of development is assessed as Transition 1-2 according to WEF methodology, it is crucial to show up well in the Basic Requirements sub-index. And it is here that our country has demonstrated the worst dynamics, with a drop of eight places since last year – from 66th to 74th position (see Table 2). Based on four pillars, this index has seen some positive changes for only one pillar, health and primary education (81st vs. 94th place last year). However, against a catastrophic fall of macroeconomic stability (from 25th to 74th place), the decrease in the quality of institutions (from 80th to 81st) and infrastructure (from 71st to 76th) sub-pillars no longer look so discouraging.
In terms of efficiency enhancers, Kazakhstan has fallen six places (from 58th to 64th) showing poor results in the two pillars, goods market efficiency and financial market sophistication (both down 17 places). Some positive dynamics was seen for labour market efficiency (up from 15th to 12th), market size (from 56th to 55th) and technological readiness (from 77th to 75th). In terms of the last indicator, the increase in the number of Internet users has been remarkable to enable us to move 22 places up to reach the 90th position. Kazakhtelecom has apparently played its role in the development of broadband Internet in the country.
Innovation and sophistication factors, at 77th place, remain the weakest pillar of our competitiveness. However, the positive changes are quite notable given the 84th position in the last-year report, with both pillars of this sub-index tending to improve: business sophistication (up from 87th to 86th) and innovation (from 75th to 62nd). Despite the share of this sub-index currently accounting for only 5-10% of the final GCI, this field is particularly essential for Kazakhstan in securing economic diversification and gradually overcoming the country's dependency upon primary production.
In terms of general dynamics, nine indicators out of 110 have remained unchanged for Kazakhstan, 62 indicators have fallen and 37 have improved. The statistics was unavailable for two more indicators – number of personal computers and interest rate spread.
Our advantages and disadvantages
Based on the ranking results, WEF elaborates a separate list of strengths and weaknesses of each country's competitiveness. This makes the WEF report an excellent tool for governmental officials and business leaders to determine the priority fields that require key institutional reforms or correction of economic policy.
According to WEF methodology, those indicators form the competitive advantages of a national economy, which are ranked above 50. All the other indicators are seen as disadvantages. What is remarkable is that the government of Kazakhstan has never proclaimed the GCI ranking as the official indicator for the realisation of its strategy to join the list of the world’s top 50 competitive countries. But the simple fact the WEF experts view the 50th place as the 'moment of truth', make the forum reports most suitable for evaluating Kazakhstan's progress in pursuing its aim.
Out of 12 pillars, only the labour market efficiency (ranked 12th) may be regarded as a clear competitive advantage of our economy. Close to the target level are market size (55th) and innovation (62nd). The selected lists of Kazakhstan's advantages and disadvantages are shown in Tables 3 and 4.
One must acknowledge that for the time being we can pride ourselves on good competitiveness only in 19 out of 110 sub-pillars (this figure was 25 only a year ago). In terms of basic requirements, the country shows the most notable results for such indicators as government debt (13th), quality of railroad infrastructure (34th), and business impact of HIV/AIDS (23rd). The country is ranked first worldwide for the malaria incidence, which is indeed quite an exotic disease for our country.
Among the efficiency enhancers are such indicators as tertiary enrolment (36th), hiring and firing practices (4th), and total tax rate (43rd). The programmes, jointly implemented by the government of Kazakhstan and international agencies such as USAID and which are aimed at the development of entrepreneurship, have contributed to the country, gaining another competitive advantage: number of procedures required to start a business (44th). The only positive indicator within the eighth pillar, financial market sophistication, is strength of investor protection (39th).
As noted above, the indicators under the innovation factors sub-index have seen dramatic improvements, with the capacity for innovation being ranked 50th for the first time ever.
As for our weaknesses, the lowest ranked pillars are as follows: financial market sophistication (97th), business sophistication (86th), health and primary education (81st), and institutional development (81st).
Among internal components of Kazakhstan's basic competitiveness indicators are the two weakest indicators – prevalence of trade barriers (down from 114th to 123rd) and inflation (down from 104th to 121st). In addition, the country's drawbacks (where it is ranked below 100th place) include quality of roads and the quality of air and port transport infrastructure (ranked 108th, 101st and 102nd respectively). Most of the negative indicators remain in the institutional development: judicial independence (102nd), protection of minority shareholders’ interests (111th), and ethical behaviour of firms (103rd). A source of great concern is the disturbing ranking of such fundamental indicators as organised crime (95th) and reliability of police services (97th).
One of the key issues for us is the financial sector stability. Over the last 5 years, the IMF mission experts annually pointed out the need for strengthening measures for prudential regulation of the banking sector in order to prevent a possible failure of the second-tier banks to stand up to their obligations. This year, the IMF has acknowledged some progress in the efforts by the Kazakh Agency for the Regulation and Supervision of the Financial Market in this field. But the regulatory measures were taken only after the 'thunder crashed'. The result is a fall of 38 places (to 124th) for soundness of banks. Despite a number of state initiatives to develop the local equity market, the regulation of securities exchanges and financing through local equity market are still ranked rather low (113th and 96th respectively).
In terms of business sophistication, the evident challenges are the low level of FDI and technology transfer (114th), small value chain breadth (104th), and local supplier quantity and quality (103rd and 98th).
It remains to add that Kazakhstan has unfortunately been ranked below the 100th mark in the life expectancy, for several years on end.
When analysing the WEF report's findings, one has to state that the financial crisis has had a considerable impact upon our competitiveness ranking. And that is understandable. Unlike America, with its innovation-based economy, Kazakhstan must rely heavily on the basic factors of development and, particularly, on macroeconomic indicators, which have measurably (and quite naturally) decreased, given the global turbulence.
In this context, we asked the WEF experts about the main reasons that prevent our country from coming to the second stage of development. Looking back, we see that in terms of GDP per capita (PPP) indicator ($6,867.8 in 2007) Kazakhstan has long ago achieved the required threshold coefficient.
As follows from the WEF reply, to enter the list of economies whose competitiveness is based on efficiency enhancers, apart from increasing the GDP level as such, some fundamental measures must be taken, such as the diversification of the economy structure. The crucial component of the competitiveness is an intensive institutional development. Thus, particular attention should be focused on addressing weaknesses related to the quality of its institutions, notably judicial independence, the protection of property rights, government inefficiency, public trust of politicians, and security. A focus on improving the health of the workforce and the quality of the educational system, and placing a greater focus on technological adoption and innovation, will also be important in the country's efforts to improve its competitiveness.
Next year, WEF will present the updated Global Competitiveness Index. Its main distinguishing feature will be the increased role of so-called macroeconomic competitiveness, which is based on macroeconomic (fiscal and monetary) policy as well as the quality of institutional development and social infrastructure (political institutions, human development index, and rule of law). Furthermore, the share of these factors in the total competitiveness index from the developing countries will increase dramatically from 38% to 83%.
It appears that this new approach will give rise to reflection about the possible ranking of Kazakhstan in 2009 and what steps are to be taken by our government and all Kazakh citizens. Otherwise this slow slipping down will threaten to turn into a downfall.
Special for Kazakhstan
Today, the international experts acknowledge the WEF reports as the etalon in assessing competitiveness. The forum rankings are based not only on the official statistics data and indices of such influential international structures as the World Bank Group, IMF, UNDP, but also on the results of polling of business leaders conducted by partner organisations in the participant countries. According to the experts, the WEF rankings are publicly available and distributed through media, which gives an impulse for public promotion of reforms.
Alongside this, there are also other scientific centres apart from WEF, who are dealing with global competitiveness ranking. One of them is the Lausanne-based International Institute for Management Development, which has been developing its own rating since 1989. The report now covers 55 countries worldwide.
In late October, the Ministry of Economy and Budget Planning of Kazakhstan distributed a press release stating that our country was among the countries ranked by IMD. Moreover, our country was said to be in the list of the 40 most competitive countries worldwide, occupying the 39th place. According to the ministry, out of six countries whose economy is largely contingent on oil production and oil revenues, Kazakhstan has been ranked second, after Norway, in terms of competitiveness.
Alongside this, as the IMD informed our magazine, Kazakhstan was not considered in the last report of this institute and its competitiveness was ranked within another special research study, performed on the order of the Institute of Economic Research under the Ministry of Economy and Budget Planning of Kazakhstan. Meanwhile the IMD representatives do not rule out the possibility that our country will be included in the overall overview next year.
The different method undoubtedly affects the position of the country according to various research structures. However, as was justly noted in the press release of the ministry, "the activities for strengthening the competitiveness must not be confined to achieving a formal rank on this or that ranking, but rather in the targeted and consistent progress towards the world standards in the whole range of spheres of the Kazakh society."
By Sergey Gakhov and Elena Zabortseva
Table of contents
Competitiveness: Our Place 66 Sergey Gakhov, Elena Zabortseva
Experts recommend. How to increase the rating Margareta Drzeniek Hanouz
Business Forum. In Quest of a Panacea Editorial
Investors and the State: Kazakh Content Editorial
Oil Chronicles: a New Deal Editorial
PetroKazakhstan: Policy of Stability Wang Zhongcai
KIOGE 2008: Autumn Revelations Editorial
Mining in Kazakhstan: Russians Coming Vasily Lukyanchikov