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Wong Yat Fu 05000041 Tsang Heng Cheong 05017475 • Many benchmarks are used to describe an economy e.g. growth rate of GDP, GDP per capita, net export, performance of stock markets, etc • The overall performance of an economy is not reflected by separate use of a few indicators • Biased, not a full picture of the “health” of the economy • Published by the World Economic Forum (WEF) • Provides an overview of factors that are critical to driving productivity and competitiveness • The rankings are drawn from a combination of publicly available hard data, and the results of the Executive Opinion Survey (EOS) EOS: a comprehensive annual survey conducted by the WEF, together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the Report • The EOS captures the expert opinions of over 11,000 business leaders and entrepreneurs on: Macroeconomic Environment Public Institutions: Corruption Technology, Innovation and Diffusion Domestic Competition Human Resources: Education, Health and Labour Cluster Development General Infrastructure Company Operations and Strategy Public Institutions: Contracts and Law Environment • This year (2006), over 11,000 business leaders in 125 countries were polled • Each leader will make a score from 1 to 7 on different areas of economies • The higher score, the better The 2006 GCI rankings and 2005 comparisons (first 40): Country/Economy GCI GCI GCI 2006 Rank 2006 Score 2005 Rank Country/Economy GCI GCI GCI 2006 Rank 2006 Score 2005 Rank Switzerland 1 5.81 4 Ireland 21 5.21 21 Finland 2 5.76 2 Luxembourg 22 5.16 24 Sweden 3 5.74 7 New Zealand 23 5.15 22 Denmark 4 5.70 3 Korea, Rep. 24 5.13 19 Singapore 5 5.63 5 Estonia 25 5.12 26 United States 6 5.61 1 Malaysia 26 5.11 25 Japan 7 5.60 10 Chile 27 4.85 27 Germany 8 5.58 6 Spain 28 4.77 28 Netherlands 9 5.56 11 Czech Republic 29 4.74 29 United Kingdom 10 5.54 9 Tunisia 30 4.71 37 Hong Kong SAR 11 5.46 14 Barbados 31 4.70 — Norway 12 5.42 17 United Arab Emirates 32 4.66 32 Taiwan, China 13 5.41 8 Slovenia 33 4.64 30 Iceland 14 5.40 16 Portugal 34 4.60 31 Israel 15 5.38 23 Thailand 35 4.58 33 Canada 16 5.37 13 Latvia 36 4.57 39 Austria 17 5.32 15 Slovak Republic 37 4.55 36 France 18 5.31 12 Qatar 38 4.55 46 Australia 19 5.29 18 Malta 39 4.54 44 Belgium 20 5.27 20 Lithuania 40 4.53 34 9 pillars 3 sub-indexes Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation We look at the 1st pillar, institutions… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 1st pillar: Institutions A. Public institutions 1. Property rights 2. Diversion of publics funds 3. Public trust of politicians 4. Judicial independence 5. Favoritism in decisions of government officials • 1st pillar: Institutions (cont’d) A. Public institutions 6. Wastefulness of government spending 7. Burden of government regulation 8. Business costs of terrorism 9. Reliability of police services 10. Business costs of crime and violence 11. Organized crime The GCI and public institutions: • 1st pillar: Institutions (Cont’d) B. Private institutions 12. Ethical behavior of firms 13. Efficacy of corporate boards 14. Protection of minority shareholders’ interests 15. Strength of auditing and accounting standards We look at the 2st pillar, infrastructure… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 2nd pillar: Infrastructure 1. Overall infrastructure quality 2. Railroad infrastructure development 3. Quality of port infrastructure 4. Quality of air transport infrastructure 5. Quality of electricity supply 6. Telephone lines (hard data) We look at the 3st pillar, macroeconomy… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 3rd pillar: Macroeconomy 1. Government surplus/deficit (hard data) 2. National savings rate (hard data) 3. Inflation (hard data) 4. Interest rate spread (hard data) 5. Government debt (hard data) 6. Real effective exchange rate (hard data) The GCI and macroeconomy: We look at the 4th pillar, health and primary education… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 4th pillar: Health and primary education A. Health 1. Medium-term business impact of malaria 2. Medium-term business impact of tuberculosis 3. Medium-term business impact of HIV/AIDS 4. Infant mortality (hard data) 5. Life expectancy (hard data) 6. Tuberculosis prevalence (hard data) 7. Malaria prevalence (hard data) 8. HIV prevalence (hard data) B. Primary education 9. Primary enrolment (hard data) We look at the 5th pillar, higher education and training… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 5th pillar: Higher education and training A. Quantity of education 1. Secondary enrolment ratio (hard data) 2. Tertiary enrolment ratio (hard data) B. Quality of education 3. Quality of the educational system 4. Quality of math and science education 5. Quality of management schools C. On-the-job training 6. Local availability of specialized research and training services 7. Extent of staff training The GCI and higher education and training: We look at the 6th pillar, market efficiency … Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 6th pillar: Market efficiency A. Good markets: Distortions, competition, and size 1. Agricultural policy costs 2. Efficiency of legal framework 3. Extent and effect of taxation 4. Number of procedures required to start a business (hard data) 5. Time required to start a business (hard data) 6. Intensity of local competition • 6th pillar: Market efficiency (cont’d) A. Good markets: Distortions, competition, and size 7. Effectiveness of antitrust policy 8. Imports (hard data) 9. Prevalence of trade barriers 10. Foreign ownership restrictions 11. GDP – exports + imports (hard data) 12. Exports (hard data) • 6th pillar: Market efficiency (Cont’d) B. Labor markets: Flexibility and efficiency 1. Hiring and firing practices 2. Flexibility of wage determination 3. Cooperation in labor-employer relations 4. Reliance on professional management 5. Pay and productivity 6. Brain drain 7. Private sector employment of women • 6th pillar: Market efficiency (Cont’d) C. Financial markets: Sophistication and openness 8. Financial market sophistication 9. Ease of access to loans 10. Venture capital availability 11. Soundness of banks 12. Local equity market access We look at the 7th pillar, technological readiness… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 7th pillar: Technological readiness 1. Technological readiness 2. Firm-level technology absorption 3. Laws relating to ICT 4. FDI and technology transfer 5. Cellular telephones (hard data) 6. Internet users (hard data) 7. Personal computers (hard data) We look at the 8th pillar, business sophistication… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 8th pillar: Business sophistication A. Networks and supporting industries 1. Local supplier quantity 2. Local supplier quality B. Sophistication of firms’ operations and strategy 3. Production process sophistication 4. Extent of marketing 5. Control of international distribution 6. Willingness to delegate authority 7. Nature of competitive advantage 8. Value-chain presence We look at the 9th pillar, innovation… Institutions Basic requirement Infrastructure Macroeconomy Health and Primary Education Higher Education and Training GCI Efficiency enhancers Market Efficiency (goods, labor, financial) Technological Readiness Innovation and sophistication factors Business Sophistication Innovation • 9th pillar: Innovation 1. Quality of scientific research institutions 2. Company spending on research and development 3. University/industry research collaboration 4. Government procurement of advanced technology products 5. Availability of scientists and engineers 6. Utility patents (hard data) 7. Intellectual property protection 8. Capacity for innovation • The relative importance of particular factors is different for different economies • Depends on what stage is the economy experiencing • E.g. what presently drives productivity in economy A is necessarily different from what drives it in economy B • Each of the sub-indexes is weighed differently, depending on the stage of a given country • More weight is placed on those pillars that are most important at a given stage of a country’s development Weights Basic requirements Efficiency enhancers Innovation and sophistication factors Factor-driven stage 50% 40% 10% Efficiency-driven stage 40% 50% 10% Innovationdriven stage 30% 40% 30% • The pillars are organized into three sub-indexes: • Institutions • Infrastructure • Macroeconomy • Health and Primary Education • The pillars are organized into three sub-indexes: • Higher Education and Training • Market Efficiency (goods, labor, financial) • Technological Readiness • The pillars are organized into three sub-indexes: • Business Sophistication • Innovation Uses of GCI: • By government, investors, enterprises etc • Investors: to decide whether to invest in that economy • Government: to help make policies to attract foreign investors • Let take Hong Kong and Singapore as examples • Collect data from EOS • Average the score under 9 pillars Basic Requirements Infrastructure Macroeconomy Health and primary education Country Institutions Hong Kong SAR 5.54 6.29 5.65 6.67 Singapore 5.9 6.16 5.67 6.81 • The score of Basic requirements will be average of the underlying 4 pillars – Hong Kong SAR = 6.04 – Singapore = 6.14 • Singapore has a better performance on Basic requirements Efficiency Enhancers Country Higher education and training Market efficiency Technological readiness Hong Kong SAR 5.08 5.69 5.44 Singapore 5.59 5.62 5.69 • The score of Efficiency enhancers will be average of the underlying 3 pillars – Hong Kong SAR = 5.40 – Singapore = 5.63 • Singapore also does a better job on Efficiency enhancing Innovation Factors Country Business sophistication Innovation Hong Kong SAR 5.48 4.46 Singapore 5.17 5.04 • The score of Innovative factors will be average of the underlying 2 pillars – Hong Kong SAR = 4.97 – Singapore = 5.11 • Singapore also does a better job on Innovative factors comparing to Hong Kong • Different stages of economy has to use different weightings Weights Basic requirements Efficiency enhancers Innovation and sophistication factors Factor-driven stage 50% 40% 10% Efficiency-driven stage 40% 50% 10% Innovation-driven stage 30% 40% 30% • Hong Kong and Singapore are also Innovationdriven stage Basic Requirement s Efficiency Enhancers Innovation Factors Final Score Hong Kong SAR 6.04 x 30% 5.44 x 40% 4.97 x 30% 5.46 Singapore 6.14 x 30% 5.63 x 40% 5.11 x 30% 5.63 • Singapore has a higher score on GCI, that is why Singapore ranking 5th and Hong Kong ranking 11th • The relationship between GCI and other economic indicators may not be linear • The information of unemployment rate is limited • The model is using top 20 countries with highest GCI (N = 20) • Unemployment rate is negative economic indicator • Fewer people participate in production • Unemployment rate should be negatively related to global competitiveness 5.85 5.80 5.75 5.70 5.65 GCI 5.60 5.55 5.50 5.45 5.40 5.35 5.30 5.25 5.20 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% Unemployment rate 6.00% 7.00% 8.00% 9.00% • Negatively related • Unemployment rate 1%, GCI 2.3402 GCI = 5.6279+(-2.3402 x Unemployment rate) • R square = 0.0818 • Correlation coefficient = -0.2861 6.20 6.10 GCI - Basic Requirement 6.00 5.90 5.80 5.70 5.60 5.50 5.40 5.30 5.20 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% Unemployment rate 6.00% 7.00% 8.00% 9.00% • Negatively related • Unemployment rate 1%, Basic requirements score 3.8571 GCIBS = 5.9673+(-3.8571 x Unemployment rate) • R square = 0.1007 • Correlation coefficient = -0.3173 5.70 GCI - Efficiency enhancer 5.60 5.50 5.40 5.30 5.20 5.10 5.00 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% Unemployment rate 6.00% 7.00% 8.00% 9.00% • Negatively related • Unemployment rate 1%, Efficiency enhancers score 4.4050 GCIEE = 5.6459+(-4.4050 x Unemployment rate) • R square = 0.2357 • Correlation coefficient = -0.4855 7.00 GCI - Innovation Factors 6.00 5.00 4.00 3.00 2.00 1.00 0.00 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% Unemployment rate 6.00% 7.00% 8.00% 9.00% • Positively related • Unemployment rate 1%, Efficiency enhancers score 2.0053 GCIIF = 5.2602+(2.0053 x Unemployment rate) • R square = 0.01314 • Correlation coefficient = 0.1147 5.9 5.8 5.7 GCI 5.6 5.5 5.4 5.3 5.2 0 10000 20000 30000 40000 50000 60000 GDP per capita at current price (US$) 70000 80000 90000 • Positively related • Nominal GDP per capita US$1000, GCI 0.002923 GCI = 5.3877+(0.000002923 x GDP per capita) • R square = 0.05065 • Correlation coefficient = 0.2250 5.9 5.8 5.7 GCI 5.6 5.5 5.4 5.3 5.2 0.00% 1.00% 2.00% 3.00% 4.00% Percentage change of GDP 5.00% 6.00% • Negatively related • GDP Growth rate 1%, GCI 2.6681 GCI = 5.5832+(-2.668 x GDP growth rate) • R square = 0.03167 • Correlation coefficient = -0.1780 • GCI is negatively related to unemployment rate • GCI is positively related to GDP per capita • The higher GCI, the better • GCI dose not have a well explained relationship with a single economic indicator • With low R square • GCI is not significantly affect by a single economic indicator • GCI is relatively a full-scale index GDP per capita 5.90 5.90 5.80 5.80 5.70 5.70 5.60 5.60 GCI GCI Unemployment rate 5.50 5.50 5.40 5.40 5.30 5.30 5.20 5.20 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 0 10000 20000 Unemployment rate 50000 60000 70000 80000 90000 GDP deflator 5.90 5.90 5.80 5.80 5.70 5.70 5.60 5.60 GCI GCI 40000 GDP per capita GDP growth rate 5.50 5.50 5.40 5.40 5.30 5.30 5.20 0.00% 30000 5.20 1.00% 2.00% 3.00% 4.00% GDP growth rate 5.00% 6.00% 0 20 40 60 80 100 GDP deflator 120 140 160 GCI = 6.6418 + -1.6248 x unemployment rate + -4.8363 x GDP growth rate + 0.000006809 x GDP per capita + -0.01076 x GDP deflator R square = 0.3722 • GCI has a better explained relationship with a group of economic indicator • Again, it proves that GCI is a better all round indicator • Provide a fair and accurate result