Download Cyprus Competitiveness Ranking

CYPRUS RANKS LOW IN INTERNATIONAL COMPETITIVENESS
The first ever global competitiveness ranking for Cyprus, carried out by
Harvard University using the methodology of the Global Competitiveness
Report, places Cyprus 35th out of 60 countries. Cyprus ranks below all
European countries except Greece, Russia and Turkey. It has a relatively
good score on infrastructure, low scores on openness of the economy,
government and efficiency of the public sector, finance, management and
technological innovation.
The Cyprus Development Bank (CDB) in collaboration with the Planning Bureau
and the Cyprus International Institute of Management (CIIM) has begun an
initiative which aims at creating a national competitiveness strategy for the
Cyprus economy. The contributors comprise of a team of experts of international
repute as well as CDB, Planning Bureau and other Cypriot specialists. It was
considered important as an initial input into this initiative to ascertain the present
state of competitiveness of the Cyprus economy.
This report describes a pilot project to perform a competitiveness ranking for
Cyprus using the methodology of the Global Competitiveness Report, 19991.
The Global Competitiveness Reports are the result of a collaboration between
the World Economic Forum and the Center for International Development at
Harvard University. The rankings are designed to be linked to economic growth
potential. Countries that have high rankings also tend to score highly on
economic indicators that have been shown empirically to be related to economic
growth. The ranking for Cyprus was based on data for the year 2000 hence the
data for Cyprus are slightly more recent than those for the other countries. This
does not seriously detract, however, from the comparability of the results.
Below is a summary in more detail of the relative strengths and weaknesses of
Cyprus. The strengths and weaknesses are not absolute but are assessed
relative to Cyprus’ overall ranking.
Openness of the Economy: (51 out of 60)
The openness ranking has three major components, openness to international
trade, openness of financial markets and exchange rate policy. Cyprus ranks in
the mid-30s on trade barriers. The exchange rate is perceived to be somewhat
overvalued (rank 38th). But what brings Cyprus down on this score is the
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perception of very tight restrictions on capital outflows (rank 59 th) and difficulty in
obtaining foreign exchange (rank 43rd).
Government and the Efficiency of the Public Sector: (37 out of 60)
Cyprus obtains relatively high marks for the (low) level of marginal tax rates (VAT
tax rate, corporate tax rate, payroll tax rate, median marginal income tax rate),
which place Cyprus between 7th and 14th of the 60 countries. Cyprus tends to be
ranked in the mid-40's in terms of the quality of public spending (rank 48 th),
infrastructure spending (rank 46th ) and competence of government officials (rank
44th). However Cyprus obtains very low marks for independence of the civil
service (rank 57th), favouritism by public officials (rank 59th) and independence of
government policies from interest groups (rank 59th).
Finance Sector: (32 out of 60)
Cyprus has a very high level of financial depth as measured by assets of the
banking system as a share of GDP. This may be a misleading indicator for
Cyprus due to its role as an offshore banking center. Cyprus also gets high
marks for solvency of banks (rank 12th) and moderate gaps in interest rates
between lending rates and deposit rates (rank 8th). However, national saving
rates and domestic fixed capital formation rates are fairly low. Cyprus also
suffers from a perception that domestic banks are highly protected, with little
effective competition (rank 60th) and not much free entry (rank 56th). Insider
trading is also perceived to be a big problem (rank 60th).
Infrastructure: (24 out of 60)
Cyprus gets high marks for telephone quality (rank 23 rd), access to the Internet
(rank 15th) and generally well functioning communications services. Cyprus
ranks in the mid-30’s in terms of quality of traditional infrastructure such as ports
and roads. However, Internet use for e-commerce by firms is low (rankings 49th55th).
Technological Innovation: (43 out of 60)
Cyprus receives a rank of 37 on the question that asks about the overall level of
technological sophistication and a ranking of 27th on the quality of basic
mathematics and science in schools. The ease of licensing foreign technology is
also moderately high (rank 24th). However, companies in Cyprus are not
perceived to be innovative. Product designs are not developed locally (rank
59th) and companies do not pioneer their own products (rank 60 th). Company
spending on R&D is low (rank 42nd) and overall spending on R&D as a
percentage of GDP is very low (rank 53rd).
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Management: (40 out of 60)
Cyprus received very low marks on overall management ability. The willingness
of management to delegate authority is low (rank 49) and staff training is not
heavily emphasised (rank 45), whereas professionalism in management was
ranked the lowest among the 60 countries and the availability of work incentives
was perceived to be very low (rank 59). Firms, however, were judged to be
attentive to customers (rank 17) and corporate boards were considered to be
highly effective (rank 21).
Labour Market: (18 out of 60)
Cyprus received very high marks in terms of labour market flexibility.
Employment rules are considered fairly flexible (rank 11th), as are hiring and firing
rules (rank 17th). Labour relations are perceived to be relatively peaceful (rank
19th). Interestingly, Union power is perceived to be the highest in the world (rank
1st). The quality of primary education is moderately high (rank 24 th) and is
perceived to be broadly available (rank 21st). However, the link between pay and
productivity is perceived to be extremely weak (rank 49th).
Institutions: (41 out of 60)
Cyprus received moderate to low marks on institutions. Perhaps the most
important indicator is that corruption is perceived to be on the rise (rank 52nd) and
its level is rather high (rank 48th). On the other hand, the Judiciary is perceived to
be moderately independent (rank 27th), and Judicial corruption is perceived to be
lower than other forms of corruption (rank 37th).
Litigation against the
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government is not especially easy (rank 41 ), the cost of litigation is fairly high
(rank 46th) and disputes tend to be settled out of court (rank 52nd).
Conclusion
Cyprus’s ranking of 35 is not heavily influenced by a small set of indicators, but is
better described as the outcome of averaging numerous indicators that tend to be
in the mid-30’s. The discussion above has highlighted the indicators that stand
out in each factor, but this should not obscure the fact that Cyprus ranks in the
mid-30s on numerous other indicators. There are two areas where the Cyprus
data seem to be driven by special Cyprus-specific considerations and where the
ranking may not capture what is intended. One hurts and the other helps Cyprus’
ranking. The one that helps Cyprus’s ranking is the indicator of financial depth,
where Cyprus scores unusually highly due to its role as an offshore banking
center. The one that hurts Cyprus’ ranking are the two indicators of openness to
capital flows. Cyprus receives very low scores on these indicators and this is
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strongly responsible for Cyprus’ surprisingly low ranking on the openness
indicator.