Comparative Analysis of Competitiveness World Economic Forum – IMD

UNIVERSITY OF ATHENS

SCHOOL OF LAW, ECONOMICS, AND POLITICAL SCIENCES

DEPARTMENT OF POLITICAL SCIENCE AND PUBLIC ADMINISTRATION

Master’s Program: “European and International Studies”

SUBJECT: METHODOLOGY

PROFESSOR: P. Kazakos

First Semester Assignment

COMPARATIVE ANALYSIS OF COMPETITIVENESS

WorldEconomicForum – IMD

Methodology and Results

Anna Karamanou

February 2005

COMPARATIVE ANALYSIS OF COMPETITIVENESS

WorldEconomicForum – IMD

Methodology and Results

Anna Karamanou

INTRODUCTION

In 1994, Professor Paul Krugman wrote an article titled “Competitiveness: A Dangerous Obsession,” in which he argues three assertions: First, that the interest in competitiveness, as an empirical issue, is almost completely unfounded. Second, defining the economic problem as an issue of international competition is somewhat appealing to many people, and finally, that the obsession with competitiveness is not only mistaken but also dangerous, as it misdirects domestic policy and threatens the international economic system. He insists that if we think in terms of competitiveness, we are led, directly or indirectly, to bad economic policies on a range of issues, whether internal or external, whether concerning healthcare services or trade.

I do not know if Mr. Krugman has changed his views on competitiveness since then, but it is certain that the related rhetoric has not only not subsided, but on the contrary, “competitiveness” enriches all speeches by experts and non-experts about economics. At the level of the European Union, there is an increased use of competition policy as a tool for promoting structural changes and achieving the goals of the “Lisbon Strategy,” in order for the EU to become “the most competitive and the most dynamic knowledge economy in the world” by 2010. The former Commissioner for Competition, Mr. Mario Monti, in his farewell speech on October 28, 2004, spoke about the achievements of his five-year term, which are characterized by reforms and the modernization of competition policy. He notably emphasized the key role that competition policy plays in shaping the single market and the guarantees provided by the Constitutional Treaty, when he states that “the Union will offer its citizens… an internal market where competition will be free and unobstructed.”

However, beyond the opposing views regarding the role, content, and essence of the magic word “competitiveness,” there are also the measurements, evaluations, rankings, and awards of the champions of competitiveness by two major and serious organizations, which willingly offer their experience and theoretical knowledge to those who wish to shape their economic policy based on international data and forecasts for the future. These international organizations are the World Economic Forum and IMD. Both are based in Geneva.

The brief analysis that follows will attempt to compare the analytical methods of the two organizations in the research and measurement of the competitiveness of state economies and their ranking on a global scale.

THE IDENTITY OFWORLDECONOMICFORUM AND IMD

The WorldEconomicForum is an independent international organization that monitors, records, and evaluates the global state of the economy and annually compiles reports that are very useful for political leaders in shaping economic policy and making decisions regarding investments, international trade, etc.

The World Economic Forum compiles its annual report in collaboration with prestigious academics and a global network of 109 institutes and research centers. For 2004, it assessed the competitiveness of 104 countries. The annual Global Competitiveness Report is unique in its methodology because it combines available data with research that captures the perceptions and observations of top business leaders in each country. Every year, at the end of January, it organizes the global meeting of leaders in DAVOS, Switzerland.

IMD is one of the best business schools, with 50 years of experience, providing education to executives of large and medium-sized international businesses, as well as to individuals. The annual publication on global competitiveness (World Competitiveness Yearbook) analyzes and ranks the ability of countries to create and maintain an environment in which competitive businesses can thrive.

METHODOLOGY OFW.E.F.

The World Economic Forum, for more than two decades, has been trying to answer the question of why some countries manage to achieve sustainable development over a long period of time, while others remain stagnant, or even worse, experience a decline in their standard of living.

To provide valid answers, the forum follows the following method:

A. DIALOGUE: It brings to the same discussion table representatives from the private sector and the business world, along with a wide range of high-ranking government and political officials, for the exchange of ideas, experiences, and best practices. This exchange acts as an important catalyst for identifying the critical variables in the development process, such as:

The role of corruption in the delay of development,
The education of women and their contribution to the increase in per capita income,
The safeguarding of political and individual rights – democratic institutions
the facilitation of the public and the provision of incentives for economic activity,
The Role of Press Freedom
The type of safeguards that governments have in place to ensure the development, capacity, and participation of economic actors in the life of the country.

These are some of the issues that are high on the agenda in many summits and other activities of the Forum.

B. INFORMATION COLLECTION The Forum has developed a mechanism (Executive Opinion Survey), which annually collects valuable information regarding obstacles to development in over 100 countries. Through this survey, top business executives assess the importance of a wide range of central factors in creating a healthy business environment and successful economic activity, including, among others:

Taxation and regulations
Labor legislation
Macroeconomic environment
Extent of corruption and other irregular practices in the economy
The quality of institutions and infrastructure
Education

The research provides a treasure trove of information about the strengths and weaknesses of countries, as well as the challenges faced by the business community. Based on the research, profiles of countries are compiled, and the global ranking serves as useful tools for policymakers and those interested in improving their economic performance and quality of life. All this information is included in the annual “GlobalCompetitivenessReport”.

METHODOLOGY OF IMD

IMD bases its annual report on the analysis of leading scholars, as well as its own research and experience regarding the competitiveness of businesses – both public and private. The methodology of the “World Competitiveness Yearbook” proceeds with the following division of the national environment of each of the 59 countries it examines:

a/ Economic Performance

b/ Government effectiveness

c/ Business effectiveness

d/ Infrastructure

Subsequently, each of the four sectors is divided into 5 sub-sectors, which illuminate the sector under analysis as follows:

a/ Economic Performance

International investments
International trade
Employment
Prices
Domestic economy

b/ Government effectiveness

Public finance
Economic policy
Institutional framework
Legislation for businesses
Social context

c/ Business effectiveness

Productivity
Labor market
Fundings
Management practices
Values and behaviors

d/ Infrastructure

Basic infrastructures
Technological infrastructure
Scientific infrastructure
Health and environment
Education

These 20 factors include more than 300 criteria, although each subfield does not have the same number of criteria (for example, more criteria are needed to evaluate education than prices). However, each subfield, regardless of the number of criteria it uses, carries the same weight in the final result, namely 5% (20×50=100).

The criteria may relate to hard elements that analyze competitiveness and can be measured (e.g. GDP) or less tangible soft elements that analyze competitiveness as it can be perceived (e.g. the presence of capable executives). The hard elements represent 2/3 in the final evaluation and ranking of economies, while the soft elements represent 1/3. Additionally, some criteria come from various sources of information, which, however, are not used in the final ranking.

COMPARISON OF METHODS – DIFFERENCES & SIMILARITIES

From the comparison of the two methods, several differences emerge, but also similarities between the two international organizations.

DIFFERENCES

The WEF uses a good combination and a balance of “hard” and “soft” criteria, quantitative and qualitative, related to macroeconomics, the institutional framework, and technology.

The IIMD primarily uses strict “hard” and measurable data (by 2/3).

The WEF places greater value on qualitative data (opinions of specialized scientists and executives, the role of corruption, gender equality, human rights, etc.)

IMD evaluates more the effectiveness of governments and businesses.

The WEF has large information networks (109 research centers)

The IMD is primarily based on its own research and the data of the countries.

The WEF for 2004 assessed 104 countries.

The IMD for 2004 evaluated 59 economies.

SIMILARITIES

They prepare annual reports.
They provide valuable information to leadership, business executives, and those interested in tackling contemporary issues.
Highlight the advantages and disadvantages of the states.
Both monitor, record, evaluate, and rank the economies of the countries of the planet.
They provide forecasts for future economic developments.

RESULTS

The different methods result in the different rankings of countries on the world map. Thus, for 2004, the Forum places Finland first in the global competitiveness ranking, with the USA second, Sweden third, Taiwan fourth, Denmark fifth, and Norway sixth, while the IDM ranks the USA first globally, Singapore second, Canada third, Australia fourth, followed by Iceland and Hong Kong. Finland, which is first in the Forum’s ranking, has number 8 in the IDM table. Regarding Greece, the Forum ranks it in ^37thplace, while the IMD ranks it ^44th.

Obviously, the different criteria for measuring competitiveness used by the two international organizations produce different results, without this implying superiority of one method over the other. In any case, both annual reports illuminate the global economic reality from all sides, as well as the future trends, thus allowing for fairly safe predictions about the future.

RANKING WEF 2004

Finland
USA,
Sweden
Taiwan,
Denmark
Norway,
Singapore
Switzerland
Japan
Iceland

Why Finland?

Finland is a country with very good management of macroeconomic factors, extremely good institutions, efficient public administration, gender equality, and very high rates of female employment, very low levels of corruption, and its businesses operate within a legal environment that respects commitments and legislation. Furthermore, the private sector in Finland tends to adopt new technologies and encourages a culture of innovation. It is worth noting that Finland has been showing a budget surplus for several years, which it allocates to cover future economic needs due to the aging population.

Obviously, the attention that the Forum gives to issues of corruption and the quality of public administration results in bringing all Scandinavian countries into the top ten. At the same time, it is observed that the countries that rank very low are the ones with the highest rates of corruption. I think this is a very interesting element that economists and political analysts should take into account, namely the fact that there is a direct and mutual relationship between corruption and mismanagement with economic underdevelopment and inefficiency.

IMD RANKING

Singapore
Canada
Australia
Iceland
USA
Hong Kong
Denmark
Finland
Luxembourg
Ireland

Why the USA?

The IMD ranks the US first, because “they have the largest, most open and vibrant economy in the world.” As the most competitive country in the world, with a growth rate of 3.1% (2003), it is expected to lead the effort to recover the global economy. However, this intense economic activity has caused an even larger trade deficit ($581.6 bn), which is considered not to disrupt the competitiveness of the economy. According to the IMD, the US has consistently shown a trade deficit over the last decade, although not at such levels. The explanation given is as follows:

The statistical data for products imported into the U.S. pertains only to the country of origin and not to who owns the goods produced. Today, the landscape of competitiveness is characterized by the explosion of foreign direct investments. Companies use the globalization of the economy to gain access to cheaper labor and lower operating costs in order to increase their productivity and profits. This means that American companies (as well as European and Japanese ones) are increasingly producing their products abroad in order to meet domestic demand. As a result, a large part of U.S. imports relates to the production of “national” companies that send back to their country the products and services they produced abroad. Of course, the trade balance is disrupted, but not necessarily the competitiveness of the country, claims IMD!

There is also a problem with the budget deficit. At the beginning of Bush’s term, the budget showed a surplus of 1.4% of GDP. By 2003, the deficit had reached 3.6%, with an upward trend. This situation is obviously the result of tax cuts, the costs of wars, and slowing economic growth. The US will increasingly face the rising costs of debt and the need to pay its foreign creditors. It is worth noting that the problem does not only concern the federal government, but also some states and cities. For now, however, the US continues to attract the largest volume of foreign investments, while other countries with much weaker economies and low creditworthiness compete for the remaining investments. Today, the quality of the borrower seems to matter more than the return on investment. But for how long, one wonders?

The dollar is on the verge of collapse. Foreign creditors of the U.S. are increasingly found in China and Taiwan. Some countries like Russia are trying to change the payments for raw materials, based on the euro. Despite all these woes, the IMD insists on awarding the competitiveness prize to the U.S., mainly due to low interest rates, the construction boom, large investments, and stock markets. Ultimately, one cannot help but wonder about the questions and dilemmas posed by Krugman.

CONCLUSION

THE 10 GOLDEN RULES OF COMPETITIVENESS

(byStephanGarelli)

Create a stable and predictable institutional framework.
Worked for a flexible financial environment
Invest in traditional and technological infrastructure
Promote private savings and investments
Develop an aggressive strategy in international markets and try to attract foreign investments.
Pay attention to quality, speed, and transparency in government and public administration.
Maintain the relationship between the level of wages, productivity, and taxation
Preserve the social fabric by reducing income inequalities and strengthening the middle classes.
Invested a lot in education, especially in secondary education and in the lifelong education of the workforce.
Balance your national economy with the global one, to ensure the creation of wealth while simultaneously maintaining the value system that the citizens desire.

It is a bit difficult to disagree with the above, which are mainly directed at the leadership of politics and the economy. The same could be said for the ten golden rules of economic and social development. Therefore, I will agree with Krugman when he argues that the obsession with “competitiveness” is dangerous and can lead to wrong choices, and that the idea that a country’s economic progress depends on its success in the global market is an unfounded assumption based on empirical analysis.

The World Economic Forum on its part at the recent annual meeting in Davos, January 26-30, 2005, urged political leaders to “take their responsibilities and move forward with tough decisions.” For whom does the bell toll?

BIBLIOGRAPHY

IMD, “The IMD World Competitiveness Yearbook 2004”, Executive Summary by Stephane Garelli

IMD, The World Competitiveness Scoreboard 2004

IMD, Stephan Garelli, “Competitiveness of Nations – the Golden Rules of Competitiveness”

IMD, Suzanne Rosselet-McCauley, “Methodology in a Nutshell”

Krugman, Paul, 1994, “Competitiveness: A Dangerous Obsession”, article, “Foreign Affairs”

Krugman, Paul, 2004, “The Great Unraveling”, W.W.Norton & Company, N.Y.

Monti, Mario, 22.10.2004, speech, “Competition for Consumer’s Benefit”

World Economic Forum, “World Competitiveness Report” Executive Summary, by Augusto Lopez-Claros

World Economic Forum, Petri Ruvinen, “Finland on Top of the Competitiveness Game?”

World Economic Forum, “United States in Second Place Behind Finland in Global Competitiveness Report”, Press Release, 30.10.2003

World Economic Forum, “Nordic Countries Lead the Way in the World Economic Forum’s 2004 Competitiveness Rankings”, Press Release, 13.10.2004

World Economic Forum, “Annual Meeting 2004”, press information, 21-25.01.2004

World Economic Forum, “Annual Meeting 2005”, Press Release, 19.01.2005

Anna Karamanou

11.02.2005

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