Lecture 2 Rankings of National Economy Competitiveness. There are many competitiveness indexes, done by different private and international organizations. The advantage of indexes is that they are summary measures, capturing more than one aspect of economic and social prosperity. Two rankings of the national Competitiveness are taken from the World Economic Forum and the prestigious Swiss business school International Institute for Management Development. We’re going to consider each of them. Global Competitive Index [GCI]) by The World Economic Forum (WEF) As we discussed….. The World Economic Forum (WEF) defines national economy Competitiveness as “the set of factors, policies, institutions that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. WEF has published its Global Competitiveness Reports since 1979 and the Global Competitive Index (GCI) was introduced in 2005. The Report series remains the most comprehensive assessment of national Competitiveness worldwide. The 2012-2013 edition ranks 144 economies that are separated into three stages: factor-driven economies (stage 1), efficiency-driven economies (stage 2) and innovation-driven economies (stage 3). The Global Competitive Index is based on 12 “pillars of Competitiveness,” divided into three subindexes that emphasize different aspects of market efficiency. As an economy moves….. from one stage of development to the next, different subindexes of “pillars” become more important: • 1. Basic Requirements subindex «Базовые требования» (includes factor institutions 25%, factor infrastructure-25%, macroeconomic stability-25%, health and primary education-25%) • 2. Efficiency Enhancers subindex «Развитие эффективности» (higher education and training -17%, goods market efficiency-17%, labor market efficiency-17%, financial market development -17%, technological readiness -17%, market size-17%) • 3. Innovation and sophistication Factors subindex (business sophistication 50%, innovation-50%). 12 pillars of Competitiveness. The first one is Institutions The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth. The quality of institutions has a strong bearing on Competitiveness and growth. For example, owners of land, corporate shares, or intellectual property are unwilling to invest in the improvement of their property if their rights as owners are not protected. Excessive bureaucracy and red tape, overregulation, corruption dishonesty in dealing with public contracts, inability to provide services for the business, and political dependence of the judicial system …..all of these factors impose significant costs to business and slow the process of economic development. Although the economic literature has focused mainly on public institutions, private institutions are also an important element in the process of creating wealth. Second pillar: Infrastructure Well-developed infrastructure reduces the distance between regions and countries. In addition, the quality and extensiveness of infrastructure networks significantly impact on economic growth and reduce income inequalities and poverty. Third pillar: Macroeconomic environment The stability of the macroeconomic environment is important for business and, therefore, is important for the overall Competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is also recognized that macroeconomic instability harms the economy, as we have seen over the past years, notably in Europe. Running fiscal deficits limits the government’s future ability to react to business cycle. Firms cannot operate efficiently when inflation rates get out of hand. In sum, the economy cannot grow in a sustainable manner unless the macro environment is stable. Were you worried during the last crisis? What has happened to us resembles a tragedy(in three acts. Act One: a financial crisis in which 50 trillion US dollarsworth of assets are destroyed overnight. Act Two: an economic crisis in which 5 percent of the world's gross domestic product is destroyed. Then in 2010 we had Act Three: a social crisis, with 50 million jobs destroyed worldwide. Fourth pillar: Health and primary education A healthy workforce is vital to the country’s Competitiveness and productivity. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Basic education increases the efficiency of each individual worker. Lack of basic education can become a constraint on business development. The firms will find it difficult to move up by producing more sophisticated or innovative products with existing human resources. Access to education has been growing rapidly in the high growth markets, as has demand for skilled workers. However, issues exist around the quality of education in certain areas and skill shortages in certain fields as demand for educated workers has outstripped the growth of the education systems. Look at a table characterizing skills gap, education attainment and education expenditure in mature countries and high growth countries such as BRIC countries and Mexico. The first column is called Employer difficulty in filling skilled jobs-. As you can clearly see that problem with the talent shortage is especially acute in Japan and India, where 80 and 67 % of employers, respectively, report problems filling skilled job vacancies due to a lack of qualified candidates. More than half of surveyed employers in Australia, Brazil and the United States also report the same problem. Universal literacy was reached in the mature countries, and also in Russia. While India has emerged as a global IT -center, nearly 40 percent of its population is still illiterate. India has only 62.8 % of literacy rate. Literacy rate is % of all population aged 15 and over who is literate. Secondary School Attainment is % of all population aged 25 and over with at least secondary education. France and Italy lag the other mature countries in terms of high school completion. The United States ranks first among the countries in terms of education expenditures and second in terms of high school completion, but has weaker results for education outcomes. Canada and Japan generally rank well on both of these measures. (One should note here that results for education outcomes are based on The Programme for International Student Assessment. PISA scores for high school science skills. PISA repeats every three years. It is done with view to improving educational policies and outcomes. High-school students from Shanghai outperformed all other countries’ national results in the 2009 PISA test science skills. Score for China reflects the results for students from Shanghai only). Fifth pillar: Higher education and training Forty years ago, high school diplomas were considered enough to succeed in life, to get a good well-paid job. High school completion was a ticket (pass) to better life or high society, but not anymore. Nowadays, the situation has changed drastically. Advanced economies, innovative industries and firms require more educated workers with the ability to respond flexibly to complex problems, communicate effectively, manage information, work in teams and produce new knowledge. The shift towards a knowledge economy requires a well-educated labor force that is able to work with advanced technologies and adapt to innovative business processes. As a result, completion of some tertiary education has become the norm in the mature countries. Tertiary education attainment is measured among 25-64 population with tertiary education. As you can clearly see, that Russia and Canada are the leaders in higher education attainment, with at least 50 percent of their labor forces being educated at the tertiary level. In Mexico, the proportion of workers with tertiary qualifications is similar to Italy, while only a small proportion of workers in each of Brazil, China, and India currently hold tertiary degrees. All countries except the United Kingdom have seen an increase in the proportion of university/college students over the past decade. The number of new graduates per year in Italy and Australia more than doubled over than 10-year period. In comparison, Brazil more than tripled and China more than quadrupled their annual numbers of new graduates between 1999 and 2009. China is now granting nearly 8 million new degrees each year, a figure that far exceeds any other country. Sixth pillar: Goods market efficiency Countries with efficient goods markets are well positioned to produce those goods which can be most effectively traded in the economy. Market efficiency depends on trade openness. Protectionist measures are counterproductive as they reduce economic activity. Market efficiency also depends on demand conditions such as customer orientation and buyer sophistication. We define a customeroriented organization as one that makes every effort to sense, serve and satisfy the needs of its clients. A Japanese businessman once said, “Our aim goes beyond satisfying the customer. Our aim is delight (восторг) the customer.’ Seventh pillar: Labor market efficiency The efficiency of the labor market is clearly important. Labor markets must have the flexibility to shift workers from one economic activity to another rapidly and at low cost. Rigid (inflexible) labor markets might cause to high unemployment, social unrest (анрэст-беспорядки), to negative effect on worker performance. The indicators of labor market flexibility are the following: union density rates степень охвата профсоюзами collective bargaining coverage охват коллективным договором employment protection legislation -Законодательство о защите труде. Employment protection legislation has an impact on the processes and costs involved in hiring and firing workers. Legislation protecting regular employees is considerably stronger in Brazil than in the other high growth countries. It reduces flexibility of labor market. Among the mature economies, the United States generally ranks as having the most flexible labor market. On the other hand, the European countries tend to have relatively low levels of labor market flexibility. Eighth pillar: Financial market development The recent economic crisis has highlighted the central role of a financial sector for economic activities. Economies require sophisticated financial markets that can make capital available for private-sector investment. The banking sector needs to be trustworthy. Ninth pillar: Technological readiness Technology is the key element for firms to compete and prosper. Technological readiness is based on the following important contributors: Availability of latest technologies Наличие новейших технологий; Firm-level technology absorption освоения; FDI and technology transfer прямые иностранные инвестиций и передача технологий; Internet users; Fixed broadband Internet subscriptions; Internet bandwidth (kb/s) per Internet user; Mobile broadband subscriptions. Tenth pillar: Market size The size of the market affects productivity since large markets allow firms to exploit economies of scale. Traditionally, the markets have been constrained by national borders. In the era of globalization, international markets can substitute for domestic markets, especially for small countries. Trade openness is positively associated with growth. As we discussed that international trade performance has traditionally been used as the key measure for national Competitiveness. Eleventh pillar: Business sophistication Business sophistication concerns two elements: the quality of a country’s business networks and the quality of individual firms’ operations and strategies. These factors are particularly important for countries at an advanced stage of development. A country’s business networks are called clusters (in a dictionary cluster means a grouping of a number of similar things). Clusters represent an efficient organizational form compared to global outsourcing and vertical integration. The advantages of clusters: • Clusters increase productivity and operational efficiency • Clusters stimulate and enable innovations • Clusters facilitate commercialization and new business formation -Cluster participation is an important contributor to company success. Strong clusters drive regional performance. Clusters cause job growth, higher wages, higher patenting rates, greater new business formation, growth and survival. Twelfth pillar: Innovation Understanding the role of innovation in competitiveness and economic development has become increasingly important. Capacity for innovation is one of the most important factors that determine the level of third subindex Sophistication Factors. In your country, how do companies obtain technology? [1 = exclusively from licensing or imitating foreign companies; 7 = by conducting formal research and pioneering their own new products and processes]. Let me give you an example. At first Japan used foreign patents and licenses. It took them half a century to start to develop their own technologies. Now we know that this country conducts its own research, it creates new products and processes. This happened 60 years after the Japanese admitted that they had lost the war, because they did not have their own science. Japan leads the world in term of capacity for innovation. China is already moving in this direction very rapidly. It ranks number 23rd in term of capacity for innovation in the world. In an international survey of business executive opinions, China is rated ahead of mature countries such as Canada, Italy, and Australia for the capacity of its companies to innovate. In comparison, Russia ranks only number 56th in term of capacity for innovation in the world. OK, let’s consider which countries lead in the world competitiveness according to the Global Competitive Index 2012-2013 by The World Economic Forum. This year’s top 10 remain dominated by a number of European countries, with Switzerland, Finland, Sweden, the Netherlands, Germany, and the United Kingdom confirming their place among the most competitive economies. Along with the United States, three Asian economies also figure in top 10, with Singapore remaining the second-most competitive economy in the world, and Hong Kong SAR and Japan placing 9th and 10th. The map shows that the hotspots of Competitiveness concentrated in Europe, North America, and a handful of advanced economies in Asia and the Pacific. In Latin America we see the profound competitiveness gap comparing with more advanced economies. Africa continues to face the biggest competitiveness challenges of all regions. As shown on the map, six of the ten best-performing countries, in Northern and Western Europe are competitiveness hotspots. The map also shows that within the European Union the traditional distinction is made between the 15 original members and the 12 countries that joined after 2004. Those countries are not considered from a competitiveness point of view. The map draws a mixed picture of Asia, too. The Asian Tigers and Japan can be considered competitiveness hotspots. Within this group of five advanced economies, Singapore, Hong Kong, and Japan enter the top 10. Taiwan (China), and the Republic of Korea rank only a few points behind. The developing nations of Southeast Asia are not yet competitiveness champions, but their group performance is quite remarkable. Led by Malaysia, all these economies achieve average level of the GCI, and none of them falls into the lowest, dark-blue category. Finally, the map also reveals that the BRICS do not form a uniform group in terms of competitiveness, as seen on the map where China is the only member appearing in a relatively strong yellow. China (It ranks number 29th according to the Global competitiveness index). The country loses some ground in this year. After five years of progression, it has now returned to its 2009 level. China suffers from Total tax rate (125th), procedures to start a business (134th place), trade tariffs (122nd). The country has the weak level of Imports as a percentage of GDP (126th) and Int’l Internet bandwidth (119th). On a more positive note, China’s Agricultural policy costs remains very favorable (13th). Buyer sophistication is also in a higher position (11th). China receives relatively high marks in indicators of Gov’t procurement of advanced tech products (16th) and Capacity for innovation (23rd). Enrollment figures for higher education are also on the rise (4th). The country continues to lead the BRICS economies. The Russian Federation, at 67th place, drops one position since last year. The country improve in the macroeconomic environment—up from 44th to 22nd position because of low government debt and a government budget has moved into surplus. Russia has poor assessment of its already weak public institutions (133rd) and the innovation capacity (85th). The country suffers from inefficiencies in the goods (134th), labor (84th), and financial (130th) markets. Russia has the weak level of competition (136th)—caused by inefficient anti monopoly policies (124th) and lack of trust in the financial system (134 th). Its lack of business sophistication (119th) and low rates of technological adoption (137th) will become increasingly important challenges for Russian progress. On the other hand, its high level of education enrollment, especially at the tertiary level; its fairly good infrastructure; and its large domestic market (7th) represent areas that can be leveraged to improve Russia’s competitiveness. World Competitiveness Yearbook by The International Institute for Management Development (IMD) Competitiveness is like a race. It’s not just about you running faster today than you did yesterday; it’s about you running faster today than all the others in the race. Benchmarking – compares a company’s or a nation’s performance. Unfortunately, many economists prefer to compare their present performance with their past performance. While it might be interesting, it is most often irrelevant from the point of view of competitiveness. The IMD World Competitiveness Yearbook (WCY) provides objective (цель) benchmarking. The International Institute for Management Development (IMD) defines national economic competitiveness as “the ability of a nation to create and maintain an environment that contributes to more value creation for its enterprises and more prosperity for its people.” According to IMD, “some nations support competitiveness more than others by creating an environment that facilitates the competitiveness of enterprises and encourages long-term sustainability.” The IMD ranks and analyzes these environments. The IMD World Competitiveness Center’s approach to world competitiveness is to analyze how nations and enterprises manage the totality of their competencies to achieve increased prosperity. The IMD has published its reports since 1989. The 2012 edition analyzes 59 countries based on 329 criteria. IMD’s methodology for its World Competitiveness Yearbook divides the national environment into four main factors, each with five sub-factors: • Economic Performance (domestic economy, international trade, international investment, employment, prices) • Government Efficiency (public finance, fiscal policy, institutional framework, business legislation, societal framework) • Business Efficiency (productivity, labor market, finance, management practices, attitudes and values) • Infrastructure (basic infrastructure, technological infrastructure, scientific infrastructure, health and environment, education) The 20 sub-factors include more than 300 criteria that are used to compute the overall competitiveness ranking. The four competitiveness factors I'd like to consider just 2 of them: Economic Performance and Government Efficiency, as we have already discussed the similar pillars during our previous lecture. Economic Performance (78 criteria)-• Macro-economic evaluation (assessment?) (эвэльюэшэнс) of the domestic economy. This first factor regroups all of the traditional macroeconomic evaluations of the performance of a nation, such as GDP growth, international trade, international investment, employment, and prices. GDP -The Gross Domestic Product is a good indicator of the size of domestic economy. Gross Domestic Product in short defines all the final goods and services produced in an economy in one year, measured at market prices. Thus nominal GDP refers (относится) to money indicators which can change because of inflation or exchange rate misalignment. Therefore, GDP depends on whether it is calculated at nominal prices, or adjusted to purchasing power parity PPP. GDP includes: personal consumption; government expenditure; private investment; trade balance. • Is GDP an input (инпут) for, or a result of, competitiveness? The truth is probably that GDP is both a cause and a consequence of Competitiveness. A high growth provides a dynamic framework for a competitiveness policy. It gives a country an ability to conduct infrastructure investments, or to enforce research and social policy, without increasing taxes. In contrast, a slow growth country can only undertake such investments through additional taxes or increased debt. Excluding GDP and its components from the analysis of competitiveness means excluding growth, exports, and foreign direct investment. Look at what happened with GDP growth in 2012 in the world. The Euro area is currently growing at 1.4 percent, whereas the United Kingdom is doing worse at 0.8. Austria's performance is even more encouraging, currently reaching 2.8 percent. German’s GDP growth equals 2.5 percent. It is a boom by recent German standards, and a phenomenon that nobody expected. Look! Sweden is growing at 4.8 percent! Absolutely remarkable! Still, some developing nations have rebounded even higher. Russia is growing at 4.8 percent, although the rest of Central and Eastern Europe is not looking very good, with the exception of Turkey. Turkey is growing at 9.2 percent. It’s too well, I mean there's a risk of inflation now. Latin America is experiencing a boom, led by Argentina with 8.3 percent and Colombia with 7.7. However, the real miracle is in Asia, with the exception of Japan. Malaysia is growing at 5.8 percent, India at 6.9, China at 8.9. The US is 1.7 percent. That's not enough, it's a bit disappointed because I think the economy should be growing a lot faster than that. As we can see there’s a geographic imbalance in the recovery from the crisis. Government Efficiency (70 criteria) • Degree to which government policies are good to competitiveness. This second factor groups together public finance, fiscal policy, the institutional framework, and business legislation. The key issues in this factor are as follows: Should public finance be balanced? The politically correct answer is, obviously, yes. We are in a world where almost everybody is running a budget deficit. Year after year, this produces an impacton debt. Consider the G20, the largest economies in the world. In 2007, they had a debt of 70 percent of GDP. At the moment they are at 106 percent. This has a huge effect on everybody. Yet, these numbers do not tell the whole story. The government is spending, spending like crazy. In nineteen sixty the advance economy governments were spending twenty eight percent of the GDP on average. We are now at forty seven percent and they're really sure the easiest money spent in the real nice and efficient way and that's really the question we have. Therefore we are going to go into a different type of economy. A paradigm is changing about capitalism. After the crisis it was enterprise capitalism named of the game shareholders value. Since the crisis we are in the world of State capitalism on the name of the game is economy nationalist. The world of capitalism is being redefined because of the government's greater participation in the economy. Question is how do we work with the government better? The answer was found by our Indian friends, who know something about state capitalism, say that their economy grows at night, when the government is sleeping. I do not know if we can make our governments sleep, but that is another story. The first impact that we observe is the budget deficit in the largest economy of the world, the United States. When Clinton left the White House, he left a surplus of 260 billion dollars. When Obama took over the White House, he was faced with a deficit of 1,299 bn. Obviously there must have been somebody in between. When Obama was elected, he was smiling. He is not smiling anymore because he realizes the magnitude of the issue. The budget deficit is 4 billion dollars a day. The largest economy in the world is running a budget deficit of 11 percent of GDP (in 2010) and 8.8% of GDP in 2011, and every other nation has felt obliged to imitate it, with great success. The absolute winner is Ireland, with a budget deficit of 32 percent this year. It is closely followed by the United Kingdom, then by everybody else. Fortunately, Russian Federation is not doing too badly in this respect. +5.6% in 2008, -4.2% in 2010, -1.9% in 2011 and Cash surplus in 2012. China doesn’t have budget deficit for long time period. IS THE US ECONOMY MELTING? The national debt of the United States is estimated at 13.6 trillion dollars. But this is just the federal debt. One level down, some states are bankrupt. Another level down, some cities are bankrupt. The total debt of the United States amounts to over 50 trillion dollars. As for Medicare and the pension system, they are indebted to the tune of 111 trillion. This means that the real debt of the developed countries is two to three times their official national debt. We used to want everything. We wanted it immediately, and we wanted it paid with other people’s money. A system of this kind is bound to collapse. In a situation like this, governments must find money somewhere. To do that, they have to work on something called credit-worthiness. They have to be credit-worthy, meaning that they should be trusted; otherwise nobody will be willing to lend to them. How do you establish trust? Surprisingly, the best definition of creditworthiness that I have found was not proposed by an economist, but by Charles Dickens. He defined the concept thus: Credit is a system whereby a person who cannot pay gets another person who cannot pay to guarantee that he can pay. This is a beauty; a real Christmas Carol. A bank that cannot pay gets a government that cannot pay to guarantee that it can pay. We live in a world where bankrupt people are guaranteeing that other bankrupt people can pay. This cannot work. In this situation, you have to hope. You do not get anywhere without hope. What should you hope for? First, that the austerity measures will work. Yet, as you know, austerity measures are not a good way to re-launch an economy. One way to find money is to create inflation. In the past, percent of the world's debt was repaid by means of inflation. This is going to happen again. Most central banks and governments will resort to inflation because it is such an easy way to find money. For the first time in my life, I have heard the government of the United States complain that inflation in that country is too low. This is an innovation. The truly easiest way for a government to find money is to print it. But the problem at the moment is that we are running out of ink. There are limits to this approach. Another way to get money is to borrow it. But you need somebody who is willing to lend it to you and that is not easy at the moment. There is yet another option that governments have: they can raise taxes. And that is exactly what is going to happen. We can look forward to higher personal taxes. If you go in that direction, you have to decide whom you will tax more: the rich or the poor. If you focus on the rich, remember that they have the nasty tendency to evade taxes. You must first of all close all tax havens. Remember what one American president said: "If the government is big enough to give you everything that you need, it is also strong enough to take everything that you have." You do not have to be a genius to figure out that recessions tend to repeat themselves every 9-10 years. If this is so, the next one will strike before the end of this decade. Will we have enough money to confront it? Should public finance be balanced? The answer is: In the long term, most countries are in debt and run budgetary deficits. These deficits can be the result of applying anticyclical policies in periods of economic difficulty (Keynesian approach), or being confronted with increased public demand for infrastructure (health, education, security, etc.) The real issue, therefore, is not to balance public finances, but to find the means to afford the cost of such deficits. Competitiveness theory is concerned with the two possible ways to pay for such regular imbalances: taxation and economic growth. Are high taxes and competitiveness compatible? Intuitively, the answer would be no; but more correctly, it depends on what you tax and how you tax it. First, within a nation, it is possible to have differing levels of personal taxation compared to corporate taxation. Some countries, such as Sweden and Denmark, have high levels of personal taxes (34 % of a revenue equal to the average GDP per capita), but are very competitive on corporate taxation. In comparison, there is little personal income taxation in Hong Kong and Taiwan. In the future, strong competition for “attractiveness” will force nations to reduce corporate taxation disparities further, or to increase the allocation of tax incentives. A nation will find it hard to remain competitive with high corporate taxes. So right now let’s jump straight in 2012 world competitiveness Yearbook. Who the winners? So we are going to see the results. Hong Kong is number one. What was Hong Kong doing well? I think that very good government efficiency in Hong Kong is benefiting from the proximity to China. It is closely followed by the USA who is number two. Number three for the first time on the podium is Switzerland. This country has done many good things. First of them is fiscal discipline, second is export. Switzerland is not only finance and chocolate. It is also watches, food and so on. These are three on the top. Let us go on the further. We should see number four of course Singapore. I think very few would be surprised to find Singapore so close to the top. Then we have number five Sweden which shows an extremely good performance. Sweden is really the northern star in terms of competitiveness doing extremely well as a smaller nation. And then follow Canada. Then we have of course Taiwan coming in. It is very good news because Taiwan has been struggling with competitiveness for sometimes and it's improving very well. And then we have Norway coming here. It has been very successful because of its commodities–oil, gas and everything. So I think it was very much in support of the commodity producing nation. Germany. Nobody would be surprised of Germany in 9th position. It’s very export-oriented, very strong medium size companies but Germany is the success story in Europe and maybe everybody's going to look at Germany for the recovery. The number 10 is Qatar. It’s very interesting and a success story in the Arab world. Is the US going to be driving for moving forward for economic growth and economic recovery? We are looking at the results in the emerging nations. Everybody's going down almost except on Hong Kong, Mexico which are doing very well. I think everybody's looking back the USA to be back again the locomotive of the world economy. It's not only because of the size of the US, of the technology. It's not only because the US has very powerful enterprises no doubt, but it's also because of the fact that the US economy is very much integrated with the other world economies. This high level of integration means that when the US sees going up and then the rest of the world is following.