Global Competitiveness:part 5

Eighth pillar: Financial market development

                  The recent financial crisis has highlighted the central

role of a sound and well-functioning financial sector for

economic activities.

 An efficient financial sector allocates

the resources saved by a nation’s citizens, as well as those

entering the economy from abroad, to their most productive

uses.

 It channels resources to those entrepreneurial

or investment projects with the highest expected rates

of return rather than to the politically connected.

 A thorough and proper assessment of risk is therefore a

key ingredient.

 Business investment is critical to productivity.

Therefore economies require sophisticated financial

markets that can make capital available for private-sector

investment from such sources as loans from a sound

banking sector,

 properly regulated securities exchanges,

venture capital, and other financial products.

 The importance of such access to capital was recently underscored

by the liquidity crunch experienced by businesses and

the public sector in both developing and developed

countries.

 In order to fulfill all those functions, the

banking sector needs to be trustworthy and transparent,

and—as has been made so clear recently—financial

markets need appropriate regulation to protect investors

and other actors in the economy at large.

Ninth pillar: Technological readiness

             In today’s globalized world, technology has increasingly

become an important element for firms to compete

and prosper.

 The technological readiness pillar measures

the agility with which an economy adopts existing technologies

to enhance the productivity of its industries,

with specific emphasis on its capacity to fully leverage

information and communication technologies (ICT) in

daily activities and production processes for increased

efficiency and competitiveness.ICT has evolved into

the “general purpose technology” of our time,

given the critical spillovers to the other economic sectors and

their role as industry-wide enabling infrastructure.

Therefore ICT access and usage are key enablers of

countries’ overall technological readiness.

Whether the technology used has or has not been

developed within national borders is irrelevant for its ability

to enhance productivity.

 The central point is that the

firms operating in the country have access to advanced

products and blueprints and the ability to use them.

Among the main sources of foreign technology, FDI often

plays a key role.

 It is important to note that, in this context,

the level of technology available to firms in a country

needs to be distinguished from the country’s ability to

innovate and expand the frontiers of knowledge.

 That is why we separate technological readiness from innovation,

which is captured in the 12th pillar below.

Tenth pillar: Market size

             The size of the market affects productivity since large

markets allow firms to exploit economies of scale.

Traditionally, the markets available to firms have been

constrained by national borders.

 In the era of globalization,

international markets have become a substitute for

domestic markets, especially for small countries.

 There is vast empirical evidence showing that trade openness is

positively associated with growth.

 Even if some recent research casts doubts on the robustness of this relationship,

the general sense is that trade has a positive effect

on growth, especially for countries with small domestic

markets.

Thus exports can be thought of as a substitute for

domestic demand in determining the size of the market

for the firms of a country.

By including both domestic and foreign markets in our measure of market size, 

we give credit to export-driven economies and geographic

areas (such as the European Union) that are broken into

many countries but have a single common market

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Global Competitiveness:part 4

Fifth pillar: Higher education and training

        Quality higher education and training is crucial for

economies that want to move up the value chain

beyond simple production processes and products.

In particular, today’s globalizing economy requires countries

to nurture pools of well-educated workers who are able

to adapt rapidly to their changing environment and the

evolving needs of the production system. 

This pillar measures secondary and tertiary enrollment rates as well

as the quality of education as evaluated by the business

community.

 The extent of staff training is also taken into

consideration because of the importance of vocational

and continuous on-the-job training—which is neglected

in many economies—for ensuring a constant upgrading

of workers’ skills.

Sixth pillar: Goods market efficiency

Countries with efficient goods markets are well positioned

to produce the right mix of products and services given

their particular supply-and-demand conditions, as well

as to ensure that these goods can be most effectively

traded in the economy.

 Healthy market competition,

both domestic and foreign, is important in driving market

efficiency and thus business productivity, by ensuring

that the most efficient firms, 

producing goods demanded by the market, are those that thrive.

 The best possible environment for the exchange of goods requires a minimum

of impediments to business activity through government

intervention.

 For example, competitiveness is

hindered by distortionary or burdensome taxes and by

restrictive and discriminatory rules on foreign direct

investment (FDI)—limiting foreign ownership—as well

as on international trade.

 The recent economic crisis has

highlighted the degree of interdependence of economies

worldwide and the degree to which growth depends on

open markets.

 Protectionist measures are counterproductive

as they reduce aggregate economic activity.

Market efficiency also depends on demand conditions

such as customer orientation and buyer sophistication

For cultural or historical reasons, customers may be 7

more demanding in some countries than in others. 

This can create an important competitive advantage, as it

forces companies to be more innovative and customer

oriented and thus imposes the discipline necessary for

efficiency to be achieved in the market.

Seventh pillar: Labor market efficiency

The efficiency and flexibility of the labor market are critical

for ensuring that workers are allocated to their most

efficient use in the economy and provided with incentives

to give their best effort in their jobs.

 Labor markets must

therefore have the flexibility to shift workers from one

economic activity to another rapidly and at low cost, and

to allow for wage fluctuations without much social disruption.

The importance of the latter has been dramatically

highlighted by the difficulties countries with particularly

rigid labor markets—such as Spain—have encountered

in recovering from the recent major economic

downturn.

Efficient labor markets must also ensure a clear relationship

between worker incentives and their efforts, as

well as equity in the business environment between

women and men.

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Global Competitiveness:part 2

communities to core economic activities and services.
Effective modes of transport, including quality roads,
railroads, ports, and air transport, enable entrepreneurs
to get their goods and services to market in a secure and
timely manner and facilitate the movement of workers
to the most suitable jobs.
Economies also depend on
electricity supplies that are free of interruptions and
shortages so that businesses and factories can work
unimpeded.
Finally, a solid and extensive telecommunications
network allows for a rapid and free flow of information,
which increases overall economic efficiency by
helping to ensure that businesses can communicate and
decisions are made by economic actors taking into
account all available relevant information.
This is an area where the crisis may prove to have positive longer-term
effects, given the significant resources earmarked for
infrastructure development by many national stimulus
packages, including those of the United States and China.

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Global Competitiveness

The 12 pillars of competitiveness

There are many determinants driving productivity and

competitiveness. 

Understanding the factors behind this

process has occupied the minds of economists for hundreds

of years, ranging from Adam Smith’s focus on

specialization and the division of labor to neoclassical

economists’ emphasis on investment in physical capital

and infrastructure,3 and, more recently, to interest in

other mechanisms such as education and training, technological

progress, macroeconomic stability, good governance,

firm sophistication, and market efficiency, among

others.

 While all of these ideas are likely to be important,

they are not mutually exclusive—two or more of

them can be true at the same time,

This open-endedness is captured within the GCI

by including a weighted average of many different components,

each measuring a different aspect of competitiveness.

These components are grouped into 12 pillars

of economic competitiveness:

First pillar: Institutions

The institutional environment is determined by the

legal and administrative framework within which individuals,

firms, and governments interact to generate

income and wealth in the economy. 

The importance of a sound and fair institutional environment has become

even more apparent during the economic crisis, given

the increasingly direct role played by the state in the

economy of many countries.

The quality of institutions has a strong bearing on 

competitiveness and growth.5 It influences investment

decisions and the organization of production and plays

a key role in the ways in which societies distribute the

benefits and bear the costs of development strategies

and policies. 

For example, owners of land, corporate

shares, or intellectual property are unwilling to invest in

the improvement and upkeep of their property if their

rights as owners are not protected.6

The role of institutions goes beyond the legal

framework.

Government attitudes toward markets and

freedoms and the efficiency of its operations are also very

important: excessive bureaucracy and red tape,7 overregulation,

corruption, dishonesty in dealing with public

contracts, lack of transparency and trustworthiness, and

the political dependence of the judicial system impose

significant economic costs to businesses and slow the

process of economic development.

In addition, proper management of public finances

is also critical to ensuring trust in the national business

environment.

Indicators capturing the quality of government

management of public finances are included here

to complement the measures of macroeconomic stability

captured in pillar 3 below.

Although the economic literature has focused

mainly on public institutions, private institutions are

also an important element in the process of creation

of wealth.

The recent global financial crisis, along with

numerous corporate scandals, has highlighted the relevance

of accounting and reporting standards and transparency

for preventing fraud and mismanagement,

ensuring good governance, and maintaining investor

and consumer confidence

 An economy is well served by businesses that are run honestly, where managers

abide by strong ethical practices in their dealings with

the government, other firms, and the public at large.8

Private-sector transparency is indispensable to business,

and can be brought about through the use of standards

as well as auditing and accounting practices that ensure

access to information in a timely manner.9

Second pillar: Infrastructure

Extensive and efficient infrastructure is critical for

ensuring the effective functioning of the economy, as it

is an important factor determining the location of economic

activity and the kinds of activities or sectors that

can develop in a particular economy.

 Well-developed infrastructure

reduces the effect of distance between regions,

integrating the national market and connecting it at low

cost to markets in other countries and regions.

In addition,

the quality and extensiveness of infrastructure networks

significantly impact economic growth and affect income

inequalities and poverty in a variety of ways.10 A welldeveloped

transport and communications infrastructure

network is a prerequisite for the access of less-developed

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The Global Competitiveness

    competitiveness is defined as the set of institutions, 

policies, and factors that determine the level of productivity of a country. 

The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.

In other words, more competitive economies or countries tend to be able to yield higher levels of income.

The rates of return obtained by investments (physical, human, and technological) in an economy is also determined by the productivity level. 

Because the rates of return are the fundamental drivers of the growth rates of the economy, a more competitive economy is one that is likely to grow faster in the medium to long run.

The concept of competitiveness thus involves static and dynamic components: 

although the productivity of a country clearly determines its ability to sustain a high level of income, it is also one of the central determinants of the returns to investment, which is one of the key factors explaining an economy’s growth potential

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