global compettiveness report 2003

8/7/2019 global compettiveness report 2003

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Excerpt from / Fragmento del

GLOBAL COMPETITIVENESS REPORT2003/2004

By / PorWorld Economic Forum

in collaboration with / con la colaboracin de

IESE Business School

and the support of / y el apoyo deNissan Chair of Corporate Strategy and International Business

Anselmo Rubiralta Center for Globalization and Business Strategy

Including/Incluye:

Execut ive SummaryCompetitiveness RankingsCompetitiveness Spain

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Executive SummaryXAVIER SALA-I-MARTIN,Columbia University and Universitat

Pompeu Fabra

The fundamental objective of the Global CompetitivenessReport (GCR ) is to evaluate the economic competitivenessof a large sample of countries.Traditionally, the GC R hasfocused on two complementary approaches to analyzingcompetitiveness.The first, called the Growth CompetitivenessIndex (GCI), was developed by Jeffrey D. Sachs of Columbia University and John W. McArthur of The Earth

Institute and was presented in The Global CompetitivenessReport 20012002 .The second index, now labeled theBusiness Competitiveness Index(BCI), was developed byMichael Porter of Harvard University and was first intro-duced in The Global Competitiveness Report 2000 .

The two indexes combine available hard data and datafrom the Executive Opinion Survey (Survey) conductedannually by the World Economic Forum (see Chapter 3.1for additional analysis of Survey results and methodology).The Survey is conducted in the first half of every year.Input is contributed exclusively by leading business execu-tives and entrepreneurs whose current perceptions of the

business environment in which they work are captured intheir responses to a comprehensive and scientifically con-structed questionnaire. By participating, respondents arealso provided with the opportunity to identify key obsta-cles to economic growth in their own countries and thuscontribute to assessing the quality of the business environ-ment in the countries where their companies operate.This, in turn, may help precipitate an internal debatewithin the country between government officials, businessleaders, organizations of civil society and the academiccommunity on key problem areas and how best toaddress them.

The Survey was carried out this year in collaborationwith 104 Partner Institutes of the World EconomicForums Global Competitiveness Programme. PartnerInstitutes are typically leading national research or aca-demic institutes committed to contributing to the growthpotential of their respective economies. Under the direc-tion of the World Economic Forum, their collaborationinvolves conducting the Survey according to commonguidelines in order to ensure that the sample of respon-dents is representative of the economies in question andthat the Survey method used remains consistent across allcountries.

The number of countries surveyed this year increasedsignificantly, from 80 to 102.The countries added aremainly from the developing world, especially Africa.Thecoverage in that region of the world has increased from 8to 25, and now also includes Algeria, Angola, Cameroon,Chad, Egypt, Ethiopia, Gambia, Ghana, Kenya,Madagascar, Malawi, Mali, Mozambique, Senegal,Tanzania,Uganda, and Zambia. Newly added countries alsoembrace non-African nations, including Luxembourg,Macedonia, Malta, Pakistan, and Serbia.The countriesincluded in this years Report account for 97.8 percent of


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worlds GDP. The Global Competitiveness Report 20032004 , therefore, provides comprehensive coverage of the global economy.

The Growth Competitiveness IndexThe GCIs main goal is to analyze the potential for theworlds economies to attain sustained economic growthover the medium and long term.The index is based oneconomists current understanding of the determinants of the complex process of economic growth and develop-ment. It summarizes the set of institutions, policies, andstructures driving the growth process of 102 heteroge-neous countries.

The GCI is founded on three central ideas.The firstone is that the process of economic growth can be ana-lyzed within three important broad categories: the macro-economic environment, the quality of public institutions,and technology.

Although it is certainly not true that macroeconomicstability alone can increase the growth rate of a nation, itis no less true that macroeconomic disarray kills its growthprospects. Informed decisions cannot be made in environ-ments where the inflation rate is in the hundreds.Thebanking system cannot function if the government runsgigantic deficits.The government cannot provide servicesefficiently if it has to pay enormous interest rates on itspast debts. And wasted taxation hurts the business sectorunnecessarily. In sum, sustained growth is hard to achievein nonfavorable macro environments.

The second pillar underlying the GCI relates to pub-

lic institutions. In a market economy, wealth is ultimatelycreated by private businesses. However, these businesseshave to operate within a country and have to deal with itsinstitutions. It is important, for example, that propertyrights are guaranteed by a legal and judicial system. It ishard for private companies to operate efficiently in coun-tries where the rule of law is nonexistent or where con-tracts cannot be enforced. Firms may find it too expensiveto do business where corruption is rampant.Thus, theGCI measures the soundness of the public institutions andit introduces this soundness as the second of the three pil-lars of economic growth and development.

The third channel is technological progress. Perhapsthe main lesson of neoclassical growth theory is that theultimate source of long-run economic growth is techno-logical progress.The reason for this is that the otherpotential determinants of growth must run into diminish-ing returns. For example, institutions and the macroeco-nomic policy can have important effects on growth incountries with terr ible environments. But once institu-tions are more or less right, and once the macroeconomyis more or less stable, additional improvements along theselines will probably have little or no effect on economic

growth.This is not true for technological progress: theredo not seem to be good reasons that would suggest thatthere are diminishing returns to ideas. In fact, the contrarymight be true, given that humanity seems to generate newideas at accelerating rates.

The GCI uses both hard (publicly available) data anddata from the World Economic Forums Survey to esti-

mate three component indexes that capture the threepillars of growth mentioned above.The three componentsare called the technology index, the public institutionsindex, and the macroeconomic environment index. Thethree components are then combined to calculate theoverall GCI.

The second idea underlying the GCI is that, althoughtechnological advance is the ultimate source of growth, itsorigin may be different across countries. In particular, foreconomies that are already close to the technological fron-tier, innovation is the main source of technologicalimprovements. For those that are far away from the fron-

tier, technological improvements can be achieved partlythrough innovation and partly by copying or adopting theknowledge previously developed in one of the leadingeconomies.

To capture this second idea, the GCI separates thesample of countries into two groups: the core and thenon-core innovators. Core innovators are thoseeconomies whose growth is largely driven by their capaci-ty to innovate because they are close to the technologicalfrontier.N on-core innovators are those that dependmore on technological adoption from abroad.The thresh-old of 15 patents per million population was chosen toseparate the countries into these two groups. Countriesabove this threshold are defined as the core group, and allothers as non-core.

To reflect the fact that innovation is more importantthan adoption for core innovators, the technology indexof the GCI puts a larger weight on innovation for thecore innovators than for the non-core innovators.Technological adoption, on the other hand, receives a pos-itive weight for non-core countries and zero weight forcore innovators.Technological adoption is captured by thetechnology transfer subindex.

The third central idea underlying the GCI is that theimportance of the determinants of economic competitive-ness varies for core and non-core innovators. Getting thefundamentals right in terms of the macroeconomic envi-ronment and institutions is still extremely critical for thenon-core innovators, whereas core innovators will havethese fundamentals largely in place, and for them techno-logical innovation has become the deciding factor forgrowth. Along these lines, the GC I assigns a larger weightto the technology index for core innovators than it doesto the public institutions index and the macroeconomic

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Executive Summary


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environment index. On the other hand, equal weights areassigned to these three indexes for non-core innovators.

Although we have maintained the basic structure andoverall logic of the GCI as developed by Sachs andMcArthur, this year we have made one significant changeto the methodology. In the macroeconomic environmentindex, we have replaced a previously used variable, the

government expenditure as a percentage of GDP, with acomposite subindex aimed at capturing governmentspending waste.We decided to consider governmentspending as a percentage of GDP because, implicitly, itsinclusion assumed that economic growth would be maxi-mized at zero government expenditures.We do not think that this is a good assumption, since many public expendi-tures are productive and contribute positively to the com-petitiveness of a nation.The index should capture publicwaste rather than public spending. After testing a numberof candidate variables, three were selected:

Extent of distortive government subsidies Diversion of public funds Public trust in the financial honesty of politicians

We think that this composite waste subindex cap-tures waste through government favoritism and corrup-tion.This should account for a large part of overall gov-ernment wasteful spending. Statistical analysis of thesevariables indeed showed that they have strong explanatorypower with regards to medium- to long-term growth.This solution was thus retained.The second change, lessimportant in its implications, affects the innovation com-ponent of the technology index the details are presentedin chapter 1.1.

Last years rankingsOf course, altering the model as described in the sectionabove necessarily has an impact on the rankings of theindex.Table 1 compares last years published rankings(Column 4) with those that would have been obtainedusing the current formula (Column 3).We see that therewould have been a number of differences in last yearsrankings if we had made the two substitutions describedin the section above. A first notable point is that Finland,rather than the United States, would have topped therankings.This can be traced to the fact that the US gov-ernment spends a relatively low percentage of GDP com-pared to Finland.And although US spending is not seen asparticularly wasteful, Finlands is seen as even less so.Thecombined effect of these two forces is that Finland isranked ahead of the US once government expenditure isreplaced by government waste.

Finlands relative improvement is indicative of a moregeneral trend we see in the data: many western European

countries would have been higher in the rankings last yearusing the new formula.These countries have governmentsthat spend a high proportion of GDP (which was penal-ized by last years formula), but that, as captured by thewaste composite, are not seen as spending wastefully. Infact, all western European countries have either the sameor higher rankings following the introduction of govern-

ment waste to the index: not one of them is lower follow-ing this change.The other side of the same coin is that many coun-

tries in Asia and Latin America would have had lowerranks last year if we had been using the waste variablerather than government expenditure.These are countriesthat have relatively low overall government spending,which pushed them higher in the rankings last year.However, once the wastefulness of the spending they dohave is taken into account, many of these countries do lesswell, therefore coming in lower in the rankings.

Competitiveness Rankings 20032004Column 1 of Table 1 reports the results of this years 2003Growth Competitiveness Index rankings using the fullsample of 102 countries. In order to establish comparabili-ty between last years rankings (Column 3) and this years,we also report this years rankings when only the countriesthat participated in last years study are included.This isdone in Column 2.

A quick comparison of Columns 2 and 3 revealsstriking similarities with last years top ten rankings.Thefirst four ranks are identical, with Finland in first place,

followed by the United States, Sweden, and Denmark,respectively.Taiwan and Singapore maintain their rankingsrelative to each other, but both moved higher by one posi-tion, to 5th and 6th positions respectively, slidingSwitzerland from 5th position to 7th position.Norway declined by one rank to 9th place, making wayfor Iceland at 8th place. Canada, previously at 9thplace, falls off the top 10 list while Australia remains in10th position.

The top two newcomers are Malta (19th) andLuxembourg (21st).The new countries from the develop-ing world lie all at the bottom half of the table. Gambia(55th) is the highest rank newcomer, whereas Chad(101st) is the lowest. Egypt (58th) comes back to the rank-ings after being eliminated last year because of problems inthe data collection process.Tanzania (69th), Ghana (71st),Pakistan (73rd) and Algeria (74th) are the next highestrank newcomers, followed by Malawi (76th), Serbia(77th), Senegal (79th), Uganda (80th), Macedonia (81st),Kenya (83rd), Zambia (88th), Cameroon (91st), Ethiopia(92nd), Mozambique (93rd), Madagascar (96th), Mali(99th), and Angola (100th).


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4

Executive Summary

GCI 2003 Rank GCI 2002 Rank(among 2003 (among 2002

Country countries) countries) (revised*) (original)

Tanzania 69 Russian Federation 70 65 66 64Ghana 71 Indonesia 72 66 69 67Pakistan 73 Algeria 74 Romania 75 67 67 66Malawi 76 Serbia 77 Argentina 78 68 64 63Senegal 79 Uganda 80 Macedonia 81 Venezuela 82 69 68 68Kenya 83 Ukraine 84 70 74 77Bolivia 85 71 71 78Ecuador 86 72 73 73Nigeria 87 73 72 71Zambia 88 Guatemala 89 74 75 70

Nicaragua 90 75 70 75Cameroon 91 Ethiopia 92 Mozambique 93 Honduras 94 76 78 76Paraguay 95 77 76 72Madagascar 96 Zimbabwe 97 78 79 79Bangladesh 98 79 77 74Mali 99 Angola 100 Chad 101 Haiti 102 80 80 80

*Applying the 2003 FormulaSource: World Economic Forum

Table 1: Growth Competitiveness Index rankings and 2002 comparisons

GCI 2003 Rank GCI 2002 Rank(among 2003 (among 2002

Country countries) countries) (revised*) (original)

Finland 1 1 1 2United States 2 2 2 1Sweden 3 3 3 5Denmark 4 4 4 10Taiwan 5 5 6 3Singapore 6 6 7 4Switzerland 7 7 5 6Iceland 8 8 12 12Norway 9 9 8 9Australia 10 10 10 7Japan 11 11 16 13Netherlands 12 12 13 15Germany 13 13 14 14New Zealand 14 14 15 16United Kingdom 15 15 11 11Canada 16 16 9 8Austria 17 17 18 18Korea 18 18 25 21Malta 19 Israel 20 19 17 19Luxembourg 21

Estonia 22 20 27 26Spain 23 21 20 22Hong Kong 24 22 22 17Portugal 25 23 19 23France 26 24 28 30Belgium 27 25 21 25Chile 28 26 24 20Malaysia 29 27 30 27Ireland 30 28 23 24Slovenia 31 29 26 28Thailand 32 30 37 31Hungary 33 31 29 29Jordan 34 32 44 47Greece 35 33 31 38Botswana 36 34 35 41Latvia 37 35 43 44Tunisia 38 36 32 34

Czech Republic 39 37 36 40Lithuania 40 38 39 36Italy 41 39 33 39South Africa 42 40 34 32Slovak Republic 43 41 46 49China 44 42 38 33Poland 45 43 50 51Mauritius 46 44 41 35Mexico 47 45 53 45El Salvador 48 46 60 57Trinidad and Tobago 49 47 42 37Uruguay 50 48 40 42Costa Rica 51 49 49 43Namibia 52 50 47 53Croatia 53 51 48 58Brazil 54 52 45 46Gambia 55

India 56 53 54 48Peru 57 54 55 54Egypt 58 Panama 59 55 51 50Vietnam 60 56 62 65Morocco 61 57 52 55Dominican Republic 62 58 56 52Colombia 63 59 61 56Bulgaria 64 60 58 62Turkey 65 61 65 69Philippines 66 62 63 61Jamaica 67 63 57 60Sri Lanka 68 64 59 59

(contd.)


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Table 2 breaks down the GCI into its three main sub-components: the macroeconomic environment index, thepublic institutions index, and the technology index. InTable 2 we see, for instance, that Finland is ranked firstoverall because it scored well in all areas. Unlike Finland,the United States maintained its position in secondplace of the GCI amid varying levels of achievement in

the different components. For instance, the countrys over-all performance is weakened by the quality of its publicinstitutions. And although the U nited States still leads inthe technology index, its overall score dropped, reflecting areduction in the tertiary enrolment rate and a decline inthe number of patents granted.

In Europe, France, at 26th place, received a boost inits rankings due to higher scores in public institutions andtechnology, which offset a decline in the macroeconomicenvironment. Unlike France, Ireland fell to 30th posi-tion due to widespread declines in the different compo-nents of the index. Similarly, Italy, at 41st position, also

plummeted in the rankings, reflecting across-the-boarddeclines in the major components of the index, particular-ly its macroeconomic environment.

Among central and eastern European countries,Estonia maintains its leadership at 22nd place in the over-all rankings, enjoying the highest technology, public insti-tutions, and macroeconomic environment scores in theregion. Latvia is most notable for posting one of the mostimproved performances across the various components.Although Ukraine, at 84th place, has the lowest rank inEurope, the country has posted improvements incertain areas.

In Asia, Korea posted one of the most notable ascentsin the GCI rankings, moving from 25th to 18thposition. Koreas rise in the rankings was driven byimprovements in its macroeconomic environment,increased public trust in politicians, a better score in thearea of diversion of public funds, and a remarkableimprovement in its technology performance with one of the highest increases in patent activity. Like Korea,Thailand and Vietnam registered notable improvementsin overall rankings. Although Indonesia declines in theoverall rankings, the country posts one of the most signifi-cant increases in its actual score. Its macroeconomicenvironment score is the 5th most improved, marked bydramatically better scores in the area of government waste.Malaysia and India both derived gains from improvementsin the area of technology. Among the most notable down-ward shifts in the rankings was experienced by China.The countrys plunge in the rankings was marked by aremarkable deterioration in the perceived quality of publicinstitutions.

In Latin America, Chile continues to have the highestrank in the region, followed, at a considerable distance, byMexico. Although Chile has the highest scores in the

region in all three index components, the country hasexperienced notable deterioration in the area of govern-ment waste, exhibiting the worst decline in the indicatormeasuring public trust of politicians.The lowest ranking inthe region is held by Haiti, which also occupies 102ndposition in the GCI. Brazil and Argentina both posted sig-nificant declines in the macroeconomic environment.

Technology offers a bright spot for both countries: tertiaryenrollment increased significantly and diffusion of ICTcontinues at a very fast pace in Brazil, while governmentprioritization of ICT and success of government ICT pro-motion both received higher ratings in Argentina. Amongthe countries in the region, the biggest declines in therankings were experienced by Uruguay and Jamaica.Uruguay fell due to drastic deterioration of its macroeco-nomic environment as evident in the regions largestdecline in credit rating. Lower scores in the macroeco-nomic environment also pushed Jamaica lower in therankings. On the opposite extreme, Mexico and El

Salvador experienced the most notable improvements inperformance.

In the Middle East, Jordan and Turkey both post dra-matic improvements in the quality of public institutions.Jordan, in particular, showed the largest score and rank increase in this area, driven by gains in control of corrup-tion and greater independence of the judiciary.The coun-try also posted better ratings relating to public trust inpoliticians, diversion of public funds, and the extent of dis-tortive subsidies. Likewise, but to a lesser extent,Turkeyexhibited significant improvements in the control of cor-ruption and the independence of the judiciary.

In Africa, Botswana enjoys the highest ranking in theGCI. It has the highest public institutions andmacroeconomic environment rankings in the region.Botswanas ranking in technology is lower than its rankingin other components; despite increases in ICT diffusion,significant drawbacks in technology remain. South Africaleads the region in the area of technology. However, SouthAfricas overall growth competitiveness ranking is muchlower than last years because of deterioration in the quali-ty of public institutions.

The Business Competitiveness IndexStable political, legal, and social institutions and soundmacroeconomic policies create the potential for improvingnational prosperity. But wealth is actually created at themicroeconomic level in the ability of firms to createvaluable goods and services using efficient methods. Onlyin this way can a nation support high wages and theattractive returns to capital necessary to support sustainedinvestment.The Business Competitiveness Index ( (BCI) pre-sented in this volume is based on a conceptual framework and statistical approach which follows that of the previous


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Executive Summary

Table 2: Growth Competitiveness Index components

Country Rank

Finland 1United States 2Sweden 3Denmark 4Taiwan 5

Singapore 6Switzerland 7Iceland 8Norway 9Australia 10Japan 11Netherlands 12Germany 13New Zealand 14United Kingdom 15Canada 16Austria 17Korea 18Malta 19Israel 20Luxembourg 21Estonia 22

Spain 23Hong Kong 24Portugal 25France 26Belgium 27Chile 28Malaysia 29Ireland 30Slovenia 31Thailand 32Hungary 33Jordan 34Greece 35Botswana 36Latvia 37Tunisia 38Czech Republic 39

Lithuania 40Italy 41South Africa 42Slovak Republic 43China 44Poland 45Mauritius 46Mexico 47El Salvador 48Trinidad and Tobago 49Uruguay 50Costa Rica 51Namibia 52Croatia 53Brazil 54Gambia 55India 56

Peru 57Egypt 58Panama 59Vietnam 60Morocco 61Dominican Republic 62Colombia 63

(contd.)

Country Rank

Bulgaria 64Turkey 65Philippines 66Jamaica 67Sri Lanka 68

Tanzania 69Russian Federat ion 70Ghana 71Indonesia 72Pakistan 73Algeria 74Romania 75Malawi 76Serbia 77Argentina 78Senegal 79Uganda 80Macedonia 81Venezuela 82Kenya 83Ukraine 84Bolivia 85

Ecuador 86Nigeria 87Zambia 88Guatemala 89Nicaragua 90Cameroon 91Ethiopia 92Mozambique 93Honduras 94Paraguay 95Madagascar 96Zimbabwe 97Bangladesh 98Mali 99Angola 100Chad 101Haiti 102

Country Rank

Singapore 1Finland 2Luxembourg 3Norway 4Denmark 5

Switzerland 6Australia 7Sweden 8Netherlands 9Austria 10Canada 11United Kingdom 12New Zealand 13United States 14Hong Kong 15Iceland 16Spain 17Taiwan 18Belgium 19France 20Germany 21Ireland 22

Korea 23Japan 24China 25Thailand 26Malaysia 27Italy 28Malta 29Botswana 30Portugal 31Tunisia 32Greece 33Estonia 34Chile 35Latvia 36Slovenia 37Hungary 38Czech Republic 39

South Africa 40Lithuania 41Jordan 42Morocco 43Israel 44Vietnam 45Gambia 46Trinidad and Tobago 47El Salvador 48Poland 49Slovak Republic 50Algeria 51India 52Namibia 53Mexico 54Croatia 55Egypt 56

Mauritius 57Peru 58Panama 59Philippines 60Russian Federat ion 61Pakistan 62Costa Rica 63

(contd.)

Country Rank

Indonesia 64Sri Lanka 65Colombia 66Senegal 67Ghana 68

Dominican Republic 69Ukraine 70Uganda 71Bangladesh 72Bulgaria 73Nigeria 74Brazil 75Tanzania 76Kenya 77Cameroon 78Madagascar 79Macedonia 80Romania 81Turkey 82Bolivia 83Ethiopia 84Guatemala 85

Jamaica 86Serbia 87Honduras 88Uruguay 89Ecuador 90Mali 91Paraguay 92Argentina 93Venezuela 94Mozambique 95Chad 96Zambia 97Malawi 98Haiti 99Nicaragua 100Angola 101Zimbabwe 102

Growth Competitiveness Index (GCI) Macroeconomic Environment Index

Source: World Economic Forum


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Country Rank

Denmark 1Finland 2Iceland 3Australia 4New Zealand 5

Singapore 6Sweden 7Switzerland 8Germany 9Hong Kong 10Netherlands 11United Kingdom 12Luxembourg 13Austria 14Israel 15Norway 16United States 17Malta 18Chile 19Jordan 20Taiwan 21Portugal 22

France 23Canada 24Ireland 25Botswana 26Belgium 27Estonia 28Uruguay 29Japan 30Spain 31Tunisia 32Hungary 33Malaysia 34Slovenia 35Korea 36Thailand 37Malawi 38Gambia 39

El Salvador 40Lithuania 41Greece 42South Africa 43Mauritius 44Latvia 45Italy 46Czech Republic 47Namibia 48Costa Rica 49Mexico 50Slovak Republic 51China 52Brazil 53Peru 54India 55Trinidad and Tobago 56

Egypt 57Poland 58Tanzania 59Colombia 60Vietnam 61Bulgaria 62Turkey 63

(contd.)

Country Rank

Dominican Republic 64Ghana 65Algeria 66Croatia 67Morocco 68

Zambia 69Jamaica 70Panama 71Sri Lanka 72Ethiopia 73Pakistan 74Senegal 75Indonesia 76Serbia 77Nicaragua 78Bolivia 79Ecuador 80Russian Federation 81Mozambique 82Mali 83Uganda 84Philippines 85

Romania 86Guatemala 87Argentina 88Venezuela 89Zimbabwe 90Angola 91Kenya 92Macedonia 93Ukraine 94Cameroon 95Madagascar 96Paraguay 97Nigeria 98Honduras 99Bangladesh 100Chad 101Haiti 102

Country Rank

United States 1Finland 2Taiwan 3Sweden 4Japan 5

Korea 6Switzerland 7Denmark 8Israel 9Estonia 10Canada 11Singapore 12Norway 13Germany 14Iceland 15United Kingdom 16Malta 17Netherlands 18Australia 19Malaysia 20Czech Republic 21Portugal 22

New Zealand 23Slovenia 24Spain 25Latvia 26Austria 27France 28Belgium 29Greece 30Chile 31Hungary 32Slovak Republic 33Poland 34Brazil 35Lithuania 36Hong Kong 37Ireland 38Thailand 39

South Africa 40Croatia 41Luxembourg 42Mexico 43Italy 44Argentina 45Costa Rica 46Trinidad and Tobago 47Jordan 48Mauritius 49Panama 50Uruguay 51Dominican Republic 52Jamaica 53Turkey 54Romania 55Philippines 56

Tunisia 57Venezuela 58Botswana 59Colombia 60Peru 61Namibia 62Bulgaria 63

(contd.)

Country Rank

India 64China 65Serbia 66El Salvador 67Egypt 68

Russian Federation 69Macedonia 70Morocco 71Sri Lanka 72Vietnam 73Kenya 74Zimbabwe 75Ecuador 76Uganda 77Indonesia 78Guatemala 79Gambia 80Tanzania 81Nigeria 82Pakistan 83Ukraine 84Nicaragua 85

Ghana 86Honduras 87Bolivia 88Senegal 89Zambia 90Paraguay 91Mozambique 92Cameroon 93Malawi 94Bangladesh 95Algeria 96Madagascar 97Angola 98Mali 99Ethiopia 100Haiti 101Chad 102

Table 2: Growth Competitiveness Index components (contd.)

Public Institutions Index Technology Index


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reports and the findings are fully comparable with previ-ous Microeconomic Competitiveness Index results.

The microeconomic foundations of productivity reston two interrelated areas: (1) the sophistication withwhich domestic companies or foreign subsidiaries operat-ing in the country compete, and (2) the quality of themicroeconomic business environment in which they oper-

ate.The productivity of a country is ultimately set by theproductivity of its companies.An economy cannot becompetitive unless companies operating there are compet-itive, whether they are domestic firms or subsidiaries of foreign companies. However, the sophistication and pro-ductivity of companies is inextricably intertwined withthe quality of the national business environment. Moreproductive company strategies require more highly skilledpeople, better information, more efficient governmentprocesses, improved infrastructure, better suppliers, moreadvanced research institutions, and more intense competi-tive pressure, among other things.This is what the BCI

tries to capture.The BCI is constructed from measures drawn prima-

rily from the Executive Opinion Survey. Quantitativemeasures are utilized for patenting rates and Internet andcellular telephone penetration. For all of the other dimen-sions measured, quantitative data for many countries areunavailable.Thus, the Survey offers many unique measuresand captures the informed judgments of thousands of business leaders and decision makers in the economiesexamined.

To derive the overall BCI, two subindexes are com-puted.The subindexes measure the (1) sophistication of com-pany operations and strategyand (2) the quality of the national business environment , respectively. Many of the dimensionsof company sophistication and the quality of the businessenvironment tend to move together. Moreover, the sampleof countries is relatively small and the number of relevantvariables is high.Thus, the impact of individual variables isdifficult to distinguish statistically. Hence common factoranalysis is used to compute the subindexes.The twosubindexes are then averaged to estimate the overall BCI.The weights are determined from the coefficients of amultiple regression of the subindexes on GDP per capita.

The BCI rankings for 2003 are shown in Table 3.Column 1 shows the overall rankings. Columns 2 and 3display the two subindexes: the company operations andstrategy subindex and the quality of the national businessenvironment subindex, respectively.

In the overall BCI, Finland retakes the leading posi-tion, after dropping to second place behind the UnitedStates last year. Finland remains one of the worlds mostremarkable success cases over the last decade.The UnitedStates was pulled down by concerns about rising tradeprotection, tightening capital availability, and weakeningcluster vitality. Other advanced nations improving their

rankings include France, Denmark, Sweden, Australia, andNew Zealand. France gained five positions, mainly due toan improving business environment, regaining its pre-2000ranking. Heartening for France are improvements in localcompetition, governance, and reductions in governmentdistortions. Denmark and New Zealand gained four ranks;mainly based on improvements in the business environ-

ment. Australia continued its upward trend, while Swedenreached the third position based on company and businessenvironment improvements.

Advanced countries slipping in the rankings includeAustria, based on a deteriorating business environment.The United Kingdom also slipped several places afterstrong gains last year. Other advanced nations that are slip-ping are Switzerland, Canada, and Japan. Japan, while stillsliding, registered strong improvements in corporate gov-ernance and cluster collaboration. Germanys rank fallsonly one place, but the quality of its business environmentdropped precipitously. Labor-management relations are a

growing concern in Germany, along with creeping subsi-dies and a hollowing of clusters.

Middle-income nations improving their competitive-ness rankings this year include Latvia, Jordan,Vietnam,Mexico, Colombia, Indonesia, Mauritius, Greece, andThailand. One new country, Malta, entered the middle-income group, ranked at 42. Egypt reentered to theranking at 58, showing a significant decline comparedwith its ranking in the 19982001 period. Latvia jumpedby a remarkable 16 ranks, driven by strong perceivedacross-the-board improvements in the business environ-ment and company sophistication.Whether this largejump is a temporary event reflecting positive near-termsentiment or a sustainable trend will become more evidentin subsequent years.

Middle-income countries losing rank in competitive-ness include the Dominican R epublic, Hungary, SriLanka,Trinidad and Tobago, Croatia, and C hina.T heDominican R epublic (down 18 places) and Sri Lanka(down 9 places) fall back after strong jumps last year, sig-naling that last years rankings might have been anomalies.The Dominican R epublics ranking was led down by con-cerns about the state of local companies. Hungary (down10) and Croatia (down 8) appear to be suffering fromincreasing competition from other transition countries.Finally,Trinidad and Tobago has experienced decliningcompetitiveness since its entry into the ranking in 2001.China, which showed a strong gain last year, has revertedback to its ranking of previous years. A surge in confi-dence about Chinas prospects proves not to have beensustainable. China was pulled down by concerns about redtape, corruption, judicial independence, and trade barriers,among other factors, though Chinese companies werejudged to be making positive progress. Russia continues a

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Executive Summary


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Country

Finland 1 4 1United States 2 2 2Sweden 3 3 5Denmark 4 7 3Germany 5 1 9United Kingdom 6 8 6Switzerland 7 5 8Singapore 8 12 4Netherlands 9 10 11France 10 9 14Australia 11 18 7Canada 12 14 10Japan 13 6 20Iceland 14 15 12Belgium 15 11 17Taiwan 16 16 16Austria 17 13 18New Zealand 18 23 13Hong Kong SAR 19 22 15Israel 20 20 19Ireland 21 17 22

Norway 22 21 21Korea 23 19 25Italy 24 24 23Spain 25 25 26Malaysia 26 26 24South Africa 27 28 28Estonia 28 36 27Latvia 29 29 31Slovenia 30 27 34Thailand 31 31 32Chile 32 34 30Tunisia 33 38 29Brazil 34 30 39Czech Republic 35 33 38Portugal 36 46 33India 37 40 36Hungary 38 45 37

Greece 39 39 40Lithuania 40 41 41Jordan 41 59 35Malta 42 47 42Slovak Republic 43 44 43Mauritius 44 35 46Costa Rica 45 32 47China 46 42 44Poland 47 43 45Mexico 48 37 51Morocco 49 49 49Vietnam 50 53 48Colombia 51 50 54Turkey 52 51 55Trinidad and Tobago 53 54 53Botswana 54 67 50Namibia 55 64 52

Jamaica 56 56 56Sri Lanka 57 52 59Egypt 58 55 62Panama 59 60 60Indonesia 60 62 61Dominican Republic 61 57 63Croatia 62 65 58Ghana* 63 66 57El Salvador 64 58 65Philippines 65 48 74Russian Federation 66 69 64Kenya 67 61 72

(contd. )

Table 3: The Business Competitiveness Index

BCIranking

Companyoperations and

strategy ranking

Quality of thenational business

environment ranking Country

Tanzania 68 68 67Argentina 69 63 73Gambia* 70 80 66Uruguay 71 77 68Malawi 72 71 76Ukraine 73 72 77Uganda* 74 78 69Pakistan 75 81 70Romania 76 84 71Bulgaria 77 85 75Zimbabwe 78 70 81Serbia 79 75 79Nigeria 80 73 80Peru 81 83 78Macedonia* 82 79 83Cameroon* 83 86 82Zambia 84 82 85Venezuela 85 74 87Guatemala 86 76 88Senegal 87 94 84Algeria 88 93 86

Ecuador 89 87 92Madagascar 90 88 90Bangladesh 91 91 91Mali* 92 98 89Mozambique 93 90 95Nicaragua 94 92 93Honduras 95 89 96Ethiopia 96 96 94Paraguay 97 95 98Bolivia 98 97 97Chad 99 99 99Haiti 100 101 100Angola 101 100 101

BCIranking

Companyoperations and

strategy ranking

Quality of thenational business

environment ranking

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


11/19

slow downward trend, while Argentinas position seems tohave stabilized.

Among low-income countries, rankings comparedwith last years were quite stable. Peru slipped significantly(down 5 places), continuing a negative trend. Ecuadormoved up 3 places. Of the low-income countries rankedfor the first time, Ghana entered at 63, Kenya at 67, and

Tanzania at 68. Pakistan entered at 75 and Serbia at 79.Angola became the lowest ranked country at 101.The GCI and the BCI measure different dimensions

of competitiveness. Figure 1 compares the two rankingsfor this year. Despite the different methodologies used intheir construction, and although the two indexes aremeant to capture different (although complementary)aspects of competitiveness, they are highly correlated.Finland ranks first on both indexes.The two indexesalso coincide in the ranks of second, third, and fourth: theUnited States, Sweden, and Denmark, respectively.Moreover, the two indexes agree that the three lowest-

ranked countries are Haiti, Chad, and Angola. Of course,the two rankings are not perfectly correlated, whichmeans that some countries are ranked higher by one indexthan they are by the other. At the top Taiwan is ranked 5thby the GCI and 16th by the BCI. Other countries that areranked higher by the GCI than the BCI include Norway,Malta, Portugal, Botswana, El Salvador, Uruguay, Gambia,Per, Bulgaria, Algeria, and Bolivia. Countries that areranked lower by the GCI than the BCI include France,Germany, the United Kingdom, Italy, South Africa, India,Kenya, and Zimbabwe.

Structure of the Report The first part of the Report includes two chapters.The firstone, by Jennifer Blanke and Fiona Paua (of the WorldEconomic Forum) and Xavier Sala-i-Martin (of ColumbiaUniversity and Universitat Pompeu Fabra), describes themethodology and analyzes the various rankings behind theGrowth Competitiveness Index. In the second chapter,Michael Porter (of Harvard University) presents the detailsof the construction and analyzes the results of the BusinessCompetitiveness Index.

The second part of the Report includes five chaptersdescribing various issues related to competitiveness andeconomic performance. In his chapter The Year inR eview, Martin Baily (of the Institute for InternationalEconomics in Washington, DC) reviews and evaluates themost important economic events of the year worldwideand the most crucial challenges for the near future. Bailyargues that, today, the global economic outlook looksmuch better than it did a year ago, except perhaps inEurope. Some of the uncertainties hanging over the worldeconomy have dissipated: the war in Iraq is over and someof the worst fears about oil prices jumping to US$100 a

barrel have not been realized.There has not been anotherterrorist attack on the scale of the attack of September 11,2001. On the economic side, the excess capacity that builtup in the 1990s has been greatly reduced in many indus-tries and stock markets have made a partial recovery fromtheir slump.

On the down side, the task of stabilizing and rebuild-

ing Iraq looks daunting.The US and coalition forces arestruggling against terrorist groups in Iraq.There have beena series of smaller but still deadly terrorist attacks aroundthe world; oil prices remain high; and consumer, business,and equity market confidence remain fragile.

The US economy grew at around 2 percent in thefirst half of 2003 and appears poised for faster growth inthe second half of the year or in early 2004. Short-termmacroeconomic forecasters in the United States havebecome very much more optimistic as new data havebeen released in the summer of 2003. Employmentgrowth still lags behind the recovery, although that is

because of the continuing rapid increases in productivity.In Japan, GDP grew a little faster than 2 percent in thefirst half of 2003 and there are clear signs of better eco-nomic performance than a year ago. However, after 10years or more of relative economic stagnation, doubtsremain about Japans ability to sustain an economic recov-ery. Among the developed economies, Europe seems to be theregion that is having the most difficulty in recoveringfrom the downturn, especially Germany.The euro areaeconomy was basically flat in the first half of 2003, and isexpected to grow by only 0.6 percent for 2003 overall.

In the developing world, Chinas impressive economicgrowth performance has continued, apparently only mod-estly affected by the global slowdown and the outbreak of SAR S.The Chinese central bank is now worr ied aboutthe economy overheating. Although less dynamic thanChina, other countries in Asia, including India, are alsodoing pretty well. Latin America is gradually healing itswounds after a wave of crises for example, the risk pre-mium on sovereign debt in Brazil has dropped substantial-ly. South Africa is growing, but it is also battling the AIDScrisis and its worsening economic effects, a topic that isdiscussed in the chapter.

In this review Baily looks at some of the importantissues and challenges facing the world economy that haveemerged or been at center stage this past year. First, thereis a look at the impact of the war in Iraq and whether ornot this will sour international relations.The war was thecentral political and military event of the past year, and ithas indeed soured international relations. But, surprisingly,so far its economic consequences do not seem to havebeen all that large.

Next he turns to the issue of exchange rate adjust-ment and the rebalancing of global trade patterns.TheUnited States has been running a massive trade deficit that

10

Executive Summary


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continues to grow. Many policymakers have judged that atsome point there would have to be a downward adjust-ment in the value of the dollar and in the current account

deficit.This past year that adjustment seems to have start-ed, with a substantial swing in the euro/dollar exchangerate.A particular concern now is to figure out how theworld economy can return to sustainable growth whileadjusting to a still lower dollar and lower US deficit, whenthese occur.The adjustment process must be seen in aglobal context, not just in a US context.

The review then looks at the steps being takentoward economic reform in Europe, where considerablemomentum for a reform agenda has emerged this pastyear.The 2000 Lisbon EU council meeting was an impor-tant landmark. Implementation seems to be taking place,

although with some resistance.The fourth topic is anexamination of deflation, an issue that has been around for a while as part of Japans economic difficulties, but hasassumed increased importance over the past year, withconcerns that deflation could spread to the United States,Germany, and possibly other countries.

The implications of rapid growth in China have beena hot topic for a while, but have become a much hotter topic in the past year.As the rest of the world economyturned sluggish, the Chinese surged ahead, increasing their exports at a very rapid pace. From Tokyo to Milan, from

Mexico City to Chicago, everyone is wondering whether China can continue to grow so fast and how their ownjobs and businesses will be affected if it does.The discus-

sion of China is followed by a short review of the eco-nomic effects of SARS outbreak of the past year. FinallyBaily turns to Africa where there have been importantdevelopments, both in the evaluation of the dangers of AIDS to the economy of the region and in the local andinternational response to the disease.

In Varieties of Economic Experience in theDeveloping World,Augusto Lopez-Claros (of the WorldEconomic Forum) outlines some of the key challengesfacing policymakers in the developing world. He focuseshis attention on two sets of countries, a small but repre-sentative sample of those ranked by the Global

Competitiveness Report .The first set is made up of Argentina, Russia, and Turkey countries that have hadserious financial crises in the recent past and offer a treas-ure trove of insights in terms of the causes of such crises,their consequences, and the policy responses to them, tosay nothing of the effectiveness of existing internationalinstitutional mechanisms to cope with them. Lopez-Clarosexplains that, although the causes behind the crises inthese three countries have been many, there is a threadcommon to all three countries: the lack of fiscal disciplinecombined with poor public debt management. In Russia,

Figure 1: Growth and Business Competitiveness rankings

00 20 40 60 80 100

20

40

60

80

100

Kenya

Zimbabwe

HaitiAngola

Bolivia

Algeria

BulgariaPeru

GambiaUruguay

El Salvador

Botswana

Malta

Portugal

Norway

Taiwan

Chad

Finland

United States

GermanyUnited Kingdom France

ItalySouth Africa

India

Denmark

Sweden

Business Competitiveness Ranking

Growth Competitiveness Ranking


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the problem was essentially on the revenue side. A persist-ent output drop during much of the 1990s contributed tothe erosion of the tax base and this process was madeworse by tax exemptions granted by the authorities toinfluential lobby groups. In Turkey, the problems werelargely on the expenditure side:a combination of enor-mous claims on the budget associated with an overly gen-

erous pension system, an extensive network of agriculturalsubsidy schemes and other quasi-fiscal operations, and thefiscal burden of a public debt overhang. Argentinas crisisreflected the authorities ultimate failure to maintain ade-quate control over the public finances. During the period199398 in particular, when the Argentine economy wasreceiving substantial nonrecurring revenues from privatiza-tion, the public-sector debt-to-GDP ratio rose by 12 per-centage points. By end-2000 the debt-to-GDP ratio hadrisen to 50 percent of GDP, not unusually high by inter-national standards, but extremely high for an economywith a very low revenue ratio, an external debt to exports

ratio in excess of 400 percent, and a contracting economy.Another common aspect of these three economies is

that the currencies had been pegged in some fashion.Lopez-Claros argues that the authorities in all three coun-tries failed to recognize that successful pegs are usuallyunderpinned by suitably tight fiscal policies. Moreover,lack of fiscal discipline over a number of consecutive yearsmakes the country a captive to its creditors, includingbondholders.The pattern is well known: persistent fiscaldeficits result in their financing at increasingly higherinterest rates, which inevitably worsen the deficit.The fis-cal problem then leads to an external crisis when nonresi-dent debt holders refuse to rollover the outstanding debt.R ussia and Argentina defaulted on their external obliga-tions;Turkey did not, but only due to massive IMF finan-cial assistance. Lopez-Claros then analyzes the role of theIMF in its various principal roles of financier, advisor, andoverall crisis manager. He argues that although the Fundplayed with varying degrees of success each one of these roles in all three countries, the crisis in Argentina hasforced the organization to recognize that there has to be abetter way of dealing with unsustainable debt burdensthan the present ad-hoc arrangements, involving a broadrange of economic, social, and political dislocations. Hethen looks at several aspects of the ongoing debate on theneed to develop formal mechanisms for sovereign debtrestructuring.

The second set of countries analyzed in this paperconsists of the transition economies of central and easternEurope, eight of whose members are scheduled to join theEuropean Union (EU) in May of 2004: the CzechR epublic, Estonia, Hungary, Latvia, Lithuania, Poland,Slovakia and Slovenia.These countries have had a goodgrowth performance during the past decade and some of its members have the potential to join in the medium-

term the upper ranks of the most competitive economiesin the world. Quite aside from having benefited from rea-sonably competent macroeconomic management, as agroup they have moved farther along than virtually anyother set of economies in the world in implementingbroad ranging structural reforms. Lopez-Claros arguesthat, the impressive achievements notwithstanding, policy-

makers in these countries will continue to face a numberof challenges. Countries expected to grow more rapidlyand to experience real appreciation of their currenciesmay continue to attract substantial capital inflows whichcould put further upward pressures on currencies, generatehigher current account deficits and foreign debt accumu-lation by the private sectors.The question which policy-makers will want to ask is whether the above set of factorsimply any particular risks as the countries join the EUand, subsequently, cope with the challenges of a muchmore competitive environment. One possible scenario tothis policy environment sees the authorities managing the

pressures identified above through a combination of cau-tious fiscal policies and structural reforms.

The chapter on R anking National InnovativeCapacity: Findings from the N ational Innovative CapacityIndex by Michael Porter and Scott Stern (of Northwestern University) analyzes the conditions thatallow countries to innovate. In this chapter, the authorsuse the 2003 Executive O pinion Survey to assess theinnovative capacity of 78 countries for which the requireddata are available.They examine a wide range of nationalcharacteristics suggested by the national innovative capaci-ty framework and available from the Survey data to con-struct a National Innovative Capacity Index (NICI).Theythen rank countries on the NICI as well as five subindexesmeasuring important components of innovative vitality.The statistical findings reveal the striking degree to whichmeasures of the national environment for innovation affectinnovative output.They also find that the bar for innova-tion is rising; even countries with an absolute increase ininnovative capacity over 2001 sometimes register a relative decline because of their inability to improve local condi-tions as fast as other nations.They find that some coun-tries have aggressively invested in innovative capacityahead of that expected given current income in an effortto enhance competitiveness and prosperity. Conversely, inother nations, innovative capacity lags overall productivityand income rankings, raising concerns about the sustain-ability of their competitiveness.

In Five Puzzles in the Behavior of Productivity,Investment, and Innovation, R obert Gordon of Northwestern University analyzes the recent behavior of productivity growth.The behavior of productivity growthin the U nited States has surprised experts: instead of fad-ing after the economys peak in mid-2000, US nonfarmbusiness productivity growth has actually accelerated from

12

Executive Summary


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a 2.45 percent annual rate during 19952000 to a stun-ning 3.34 percent annual growth rate in the three yearsbetween 2000:Q2 and 2003:Q2. As US productivity per-formance has become even stronger over the past threeyears, some puzzles have emerged regarding the revival, itscauses, and the performance of the United States relativeto the rest of the world. Gordons paper analyzes five of

these puzzles.The first puzzle is: Whatever happened to the cyclical effect?Using data through mid-2003, it is clear that therewas only a negligible cyclical effect for 199599 but atemporary bubble in 2002.The author argues that thispattern repeats similar temporary blips in three previousbusiness cycles.

The second puzzle is: Why did productivity growth accel-erate after 2000 when the ICT investment boom was collapsing?Gordon analyzes a number of arguments proposed in theacademic literature. He then concludes that the most per-suasive argument points to hidden intangible invest-

ments in the late 1990s that required labor input but werenot counted in measured output; after 2000, the delayedbenefits of intangible investments boosted output, whilemuch of the labor input that created them was laid off. Inshort, productivity growth was understated in the late1990s but has been overstated since then.

The third puzzle reads: What aspects of innovation caused productivity growth to take off?To deal with this puzzle,Gordon draws an analogy between computers and elec-tricity. In the case of electricity, miniaturization was thekey step in making small electric motors practical, andcomplementary investments, especially roads, were neces-sary to reap benefits. For computers the key steps wereminiaturization in the form of the PC, followed in the1990s by the marriage of computer hardware with soft-ware and communication technology.

The fourth puzzle is: How can ICT investment revive if innovations are second-rate?First-rate inventions in the1990s, notably the web and user-friendly business produc-tivity software, are being followed by second-rate inven-tions in the current decade, such as web-enabled mobilephones, wi-fi enabled laptops, and a host of innovationsproviding incremental improvements in consumer enter-tainment but not fundamental changes in business produc-tivity. Gordon argues that innovation is the fundamentaldriver of the demand for investment (rather than the otherway around). Given that, the question is: what does therise and fall of ICT investment since 1995 tell us aboutthe pace of innovation for the near future? The authorspeculates about the future path of innovation in theentertainment and medical industries.

The last puzzle is: Why has Europe failed to experience aproductivity growth revival?Gordon argues that US institu-tions foster creative destruction and financial markets thatwelcome innovation, while Europe remains under the

control of corporatist institutions that dampen competi-tion and inhibit new entry. He also argues that Europelacks a youth culture like that of the United States, whichfosters independence: US teenagers work after school andUS college students must work to pay for much of theireducational expense.There is a chasm of values across theAtlantic, as Americans facilitate the development of high-

productivity big-box retail formats while Europeans aredisdainful of overly dispersed American metropolitan areaswith their traffic congestion, waste of energy, and starva-tion of public transit.

In his chapter Governance R edux:The EmpiricalChallenge, Daniel Kaufmann of the World Bank Instituteargues that governance is still at a crossroads, its underper-formance evident in most regions and across a vast num-ber of countries within such regions.This contrasts withthe significant strides that have been made in many coun-tries in improving the content of macroeconomic policiesfor well over a decade. In this sense, Kaufmann argues,

there is a growing governance gap, since improvementsin governance are far from keeping pace with the progressattained in economic policy and some other areas. Such agap implies that public governance is nowadays a centralbinding constraint to growth and development.

Indeed, the enterprises from developing and transitioneconomies included in this years Survey single out cor-ruption and excessive bureaucracy among the top con-straints to their business operations, while the respondentfirms from the OECD single out excessive bureaucracyand the tax regime. Relative to these and other institu-tional weaknesses, high inflation and distortions in theexchange rate regime are not ranked as important con-straints by the firms.

More generally, with a recently constructed world-wide governance indicators dataset, the author shows theextent to which national governance matters: a countrythat significantly improves key governance dimensionssuch as the rule of law, corruption, the regulatory regime,and voice and democratic accountability can expect in thelong run a dramatic increase on its per capita incomes andin other social dimensions. Specifically, if for instance thequality of rule of law were to improve by one standarddeviation, from, say the current relatively low level of Ukraine to the middling level of South Africa, a fourfoldincrease in per capita incomes can be expected in the longrun. A larger increase in the quality of rule of law (by twostandard deviations) in Ukraine (or in other countries inthe former Soviet Union), to the much higher level inSlovenia or Spain, would further multiply such incomeper capita increase. Similar results emerge from other gov-ernance dimensions:a mere one standard deviationimprovement in voice and accountability from the lowlevel of Venezuela to that of South Korea, or in control of corruption from the low level of Indonesia to the mid-


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dling level of Mexico, or from the level of Mexico to thatof Costa Rica, would also be associated with an estimatedfourfold increase in per capita incomes, as well as similarimprovements in literacy and in reducing child mortality.

In contrast to the major impact that improved gover-nance can have on incomes and development, the findingsshow no reverse causality or feedback mechanism: higher

incomes in themselves do not get automatically translatedinto improved governance.The fact that there is no auto-matic virtuous circle means that continuous politicalresolve and interventions are required to attain good gov-ernance. It also implies that a country exhibiting higherincomes than would be predicted by its current levels of governance can expect downward pressure on the sustain-ability of such incomes given their governance level.Such shortfall in the countrys actual quality of gover-nance as compared with the governance level required tosupport, the countrys income level is described as thegovernance deficit. The extent of the governance deficit

may constitute a warning regarding the income andgrowth prospects of a country. For instance, the evidencesuggests that by the late 1990s most countries in LatinAmerica had a substantial governance deficit in that theiractual per capita incomes were higher than would havebeen predicted by the prevailing levels of governance.

The author also reviews briefly recent work anchoredin the new comparative economics, which compares dif-ferent capitalist systems. In particular, he discusses some of the deeper historical determinants of current governanceperformance, and finds that the origins of a countrys legalsystem particularly whether it adopted common or civillaw systems may not be a central determinant of gover-nance outcomes nowadays, especially for lower-incomecountries. Further inquiry into the deeper determinants of governance, including understanding the relevance of his-torical patterns of settlement and of geography, seems tohold promise, however.

The empirical evidence also points to the fact thatpolitics matter substantially in understanding good gover-nance, and, within it, the corporate sector plays an activerole in shaping such political (and thus policy) outcomes.Powerful firms are not mere passive takers of the overallinvestment climate (imposed by the public sector); insteadsuch enterprises play a key role in shaping it.The databaseprovided by the Survey also permits the empirical evalua-tion of political dimensions of governance traditionallyregarded as non-measurable, such as the extent of cap-ture and of undue influence by some politically connect-ed powerful firms in shaping the regulations, laws, andpolicies of a country. Unequal distribution of influence onpolicy and regulatory outcomes (or crony bias) arefound to be closely associated with poor public and finan-cial governance performance.

Finally, the empirical richness of the Survey data setprovides a key input for the construction of an initialgovernance database at the city level.This database andresearch-in-progress is to be expanded over the comingyear, yet the early results support the observation thatgovernance performance at the city level is aided by theextent of the countrys globalization and urbanization path

(controlling for income levels). Further, the citys relativesize and its status as a capital or a port do not appear tohave a deleterious effect on the quality of city-levelgovernance.

The findings emphasize the need to revisit conven-tional advice on strategies to improve public governance.Such advice has focused excessively on attempts to reformthe internal functioning of public institutions, often draw-ing from standard templates from industrialized countries.Instead, further focus is needed on aspects that do containa political dimension. In particular, addressing the nexusbetween corporate strategies and public governance

(mediated by the institution of influence) is of particularinterest.And specifically, the findings on undue influenceand state capture point to the limits of traditional public-sector measures (such as incessant legal drafting and codesof ethics manuals, creating new Anti-Corruption agencies,or launching another anticorruption campaign). By con-trast, this chapters findings underscore the need for farmore focus on external accountability, on transparencymechanisms, and on prevention. It is emphasized that suchenhanced focus on governance matters is also warranted atthe subnational level.

The Report ends with a comprehensive section thatcontains country profiles for each of the individualeconomies covered.This part also includes data tables forthe variables that are used as inputs into the calculations of the competitiveness indexes, as well as a primer on howbest to glean the information contained in the countryprofiles and the data tables, including some of the underly-ing assumptions. In addition, technical notes elucidate onindividual variables and on the results of the WorldEconomic Forums Executive Opinion Survey.

14

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2

Table 1: Overall competitiveness rankings

GROWTH COMPETITIVENESS INDEX RANKINGS

Country

Finland 1 1 1United States 2 2 2

Sweden 3 3 3Denmark 4 4 4Taiwan 5 5 6Singapore 6 6 7Switzerland 7 7 5Iceland 8 8 12Norway 9 9 8Australia 10 10 10Japan 11 11 16Netherlands 12 12 13Germany 13 13 14New Zealand 14 14 15United Kingdom 15 15 11Canada 16 16 9Austria 17 17 18Korea 18 18 25

Malta 19 Israel 20 19 17Luxembourg 21 Estonia 22 20 27Spain 23 21 20Hong Kong SAR 24 22 22Portugal 25 23 19France 26 24 28Belgium 27 25 21Chile 28 26 24Malaysia 29 27 30Ireland 30 28 23Slovenia 31 29 26Thailand 32 30 37Hungary 33 31 29Jordan 34 32 44Greece 35 33 31Botswana 36 34 35Latvia 37 35 43Tunisia 38 36 32Czech Republic 39 37 36Lithuania 40 38 39Italy 41 39 33South Africa 42 40 34Slovak Republic 43 41 46China 44 42 38Poland 45 43 50Mauritius 46 44 41Mexico 47 45 53El Salvador 48 46 60Trinidad and Tobago 49 47 42Uruguay 50 48 40Costa Rica 51 49 49Namibia 52 50 47Croatia 53 51 48Brazil 54 52 45Gambia 55 India 56 53 54Peru 57 54 55Egypt 58 Panama 59 55 51Vietnam 60 56 62Morocco 61 57 52Dominican Republic 62 58 56Colombia 63 59 61Bulgaria 64 60 58Turkey 65 61 65

GrowthCompetitiveness

ranking 2003


ranking 2002*


ranking 2003 amongGCR 2002 countries

BUSINESS COMPETITIVENESS INDEX RANKINGS

Country

Finland 1 1 2United States 2 2 1

Sweden 3 3 6Denmark 4 4 8Germany 5 5 4United Kingdom 6 6 3Switzerland 7 7 5Singapore 8 8 9Netherlands 9 9 7France 10 10 15Australia 11 11 14Canada 12 12 10Japan 13 13 11Iceland 14 14 17Belgium 15 15 13Taiwan 16 16 16Austria 17 17 12New Zealand 18 18 22

Hong Kong SAR 19 19 19Israel 20 20 18Ireland 21 21 20Norway 22 22 21Korea 23 23 23Italy 24 24 24Spain 25 25 25Malaysia 26 26 26South Africa 27 27 29Estonia 28 28 30Latvia 29 29 45Slovenia 30 30 27Thailand 31 31 35Chile 32 32 31Tunisia 33 33 32Brazil 34 34 33Czech Republic 35 35 34Portugal 36 36 36India 37 37 37Hungary 38 38 28Greece 39 39 43Lithuania 40 40 40Jordan 41 41 53Malta 42 Slovak Republic 43 42 42Mauritius 44 43 49Costa Rica 45 44 39China 46 45 38Poland 47 46 46Mexico 48 47 55Morocco 49 48 48Vietnam 50 49 60Colombia 51 50 56Turkey 52 51 54Trinidad and Tobago 53 52 44Botswana 54 53 57Namibia 55 54 51Jamaica 56 55 59Sri Lanka 57 56 47Egypt 58 Panama 59 57 50Indonesia 60 58 64Dominican Republic 61 59 41Croatia 62 60 52El Salvador 63 61 63Philippines 64 62 61Russian Federation 65 63 58

BusinessCompetitiveness

ranking 2003


ranking 2002*



*Applying 2003 formula


17/19

GROWTH COMPETITIVENESS INDEX RANKINGS

Country

Philippines 66 62 63Jamaica 67 63 57

Sri Lanka 68 64 59Tanzania 69 Russian Federation 70 65 66Ghana 71 Indonesia 72 66 69Pakistan 73 Algeria 74 Romania 75 67 67Malawi 76 Serbia 77 Argentina 78 68 64Senegal 79 Uganda 80 Macedonia, FYR 81 Venezuela 82 69 68Kenya 83

Ukraine 84 70 74Bolivia 85 71 71Ecuador 86 72 73Nigeria 87 73 72Zambia 88 Guatemala 89 74 75Nicaragua 90 75 70Cameroon 91 Ethiopia 92 Mozambique 93 Honduras 94 76 78Paraguay 95 77 76Madagascar 96 Zimbabwe 97 78 79Bangladesh 98 79 77Mali 99 Angola 100 Chad 101 Haiti 102 80 80


ranking 2003


ranking 2002*



Table 1: Overall competitiveness rankings (contd.)

BUSINESS COMPETITIVENESS INDEX RANKINGS

Country

Kenya 66 Tanzania 67

Argentina 68 64 65Uruguay 69 65 62Malawi 70 Ukraine 71 66 69Pakistan 72 Romania 73 67 67Bulgaria 74 68 68Zimbabwe 75 69 70Serbia 76 Nigeria 77 70 71Peru 78 71 66Zambia 79 Venezuela 80 72 72Guatemala 81 73 73Senegal 82 Algeria 83

Ecuador 84 74 77Madagascar 85 Bangladesh 86 75 74Mozambique 87 Nicaragua 88 76 75Honduras 89 77 78Ethiopia 90 Paraguay 91 78 76Bolivia 92 79 79Chad 93 Haiti 94 80 80Angola 95


ranking 2003


ranking 2002*



*Applying 2003 formula


18/19

Sp

ain

168

4.2: Country Profiles

Competitiveness Rankings

Growth Competi tiveness Index Rank 23

Macroeconomic Environment Index Rank... ..................17Macroeconomic Stability Subindex Rank .............35Government Waste Subindex Rank .....................22Country Credit Rating Rank..................................16

Public Institutions Index Rank..........................................31Contracts and Law Subindex Rank ......................41Corruption Subindex Rank....................................17

Technology Index Rank ......................................................25Innovation Subindex Rank ....................................25ICT Subindex Rank ...............................................31Technology Transfer Subindex Rank

(out of 77 non-core innovators)........................35

Business Competitiveness Index Rank 25

Sophistication of Company Operationsand Strategy Rank............................................................25

Quality of the National BusinessEnvironment Rank ............................................................26

The Most Problematic Factors for Doing Business

FACTOR

Restrictive labor regulations ..............................

Access to nancing .............................................Inefcient bureaucracy .......................................

Tax rates.................................................................

Tax regulations......................................................

Ination ..................................................................

Inadequately educated workforce....................

Inadequate infrastructure...................................

Policy instability....................................................Poor work ethic ....................................................

Corruption ..............................................................

Crime and theft .....................................................

Foreign currency regulations .............................

Government instability/coups ............................

0 5 10 15 20 25 30

Percent of responses

Note: From a list of 14 factors, respondents were asked to select the ve most problematic for doing business in their coun-try and to rank them between 1 (most problematic) and 5. The bars in the gure show the responses weighted according totheir rankings.

Source: World Economic Forum, Executive Opinion Survey (2003)


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National competitiveness balance sheetNOTABLE COMPETITIVE ADVANTAGES

Growth Competitiveness Index Rank/102

Macroeconomic Environment2.22 Interest rate spread, 2002.................................................72.17 Country credit rating, 2003 .............................................162.18 Government surplus/decit, 2002...................................177.08 Diversion of public funds ................................................20

Public Institutions7.01 Irregular payments in exports and imports .....................157.03 Irregular payments in tax collection ................................19

Technology3.18 Tertiary enrollment ..........................................................143.19 Cellular telephones, 2002................................................15

Business Compet itiveness Index Rank/95

Sophistication of Company Operations and Strategy

10.14 Extent of incentive compensation ..................................1310.03 Extent of branding...........................................................1810.02 Value chain presence ......................................................18

Quality of the National Business Environment6.12 Centralization of economic policymaking..........................28.02 Extent of locally based competitors..................................26.09 Extent of bureaucratic red tape.........................................6

Other Indicators Rank/1024.09 Brain drain .........................................................................44.06 Business impact of tuberculosis.....................................122.06 Soundness of banks........................................................134.05 Business impact of malaria .............................................136.16 Government effectiveness in reducing income

inequality .......................................................................166.15 Government effectiveness in reducing poverty..............172.04 Extent of distortive government intervention .................18

10.05 Ethical behavior of rms .................................................194.04 Disparity in healthcare quality .........................................207.05 Irregular payments in loan applications...........................214.07 Business impact of HIV/AIDS .........................................216.10 Effectiveness of law-making bodies ...............................222.10 Government intervention in corporate investment.........22

NOTABLE COMPETITIVE DISADVANTAGES

Growth Competitiveness Index Rank/102

Macroeconomic Environment2.01 Recession expectations ..................................................552.20 Ination, 2002 .................................................................512.21 Real exchange rate, 2002 ...............................................412.03 Extent of distortive government subsidies .....................392.09 Access to credit ..............................................................362.19 National savings rate, 2002.............................................337.10 Public trust of politicians .................................................23

Public Institutions6.01 Judicial independence.....................................................556.08 Favoritism in decisions of government ofcials..............416.17 Organized crime ..............................................................436.03 Property rights.................................................................307.02 Irregular payments in public utilities ...............................23

Technology3.13 Quality of competition in the ISP sector.........................483.15 Government success in ICT promotion ..........................463.03 FDI and technology transfer............................................373.08 University/industry research collaboration ......................37

3.14 Government prioritization of ICT .....................................373.21 Internet hosts, 2002........................................................373.02 Firm-level technology absorption ....................................363.04 Prevalence of foreign technology licensing ....................363.16 Laws relating to ICT ........................................................333.20 Internet users, 2002........................................................333.06 Company spending on research and development ........323.12 Internet access in schools ..............................................323.23 Personal computers, 2002 ..............................................323.01 Technological sophistication............................................283.17 Utility patents, 2002 ........................................................273.22 Telephone lines, 2002 .....................................................27

Business Compet itiveness Index Rank/95

Sophistication of Company Operations and Strategy

10.10 Extent of regional sales...................................................393.06 Company spending on research and development ........3110.12 Extent of staff training ....................................................31

Quality of the National Business Environment2.11 Local equity market access.............................................586.01 Judicial independence.....................................................52

10.20 Cooperation in labor-employer relations..........................51

Other Indicators Rank/10210.18 Hiring and ring practices ...............................................95

4.10 Maternity leave legislation ..............................................868.09 Wage equality of women in the workplace ....................724.11 Maternity laws impact on hiring women .......................69

10.19 Flexibility of wage determination....................................6810.22 Charitable causes involvement .......................................64

6.06 Burden of regulation........................................................616.14 Business costs of crime and violence ............................55

11.11 Effects of compliance on business.................................552.15 Agricultural policy costs ..................................................548.08 Private sector employment of women ...........................53

10.21 Pay and productivity........................................................502.02 Business costs of terrorism............................................477.11 Prevalence of illegal political donations...........................46

11.12 Political context of environmental gains .........................44

global compettiveness report 2003

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