This is the first of two posts that briefly describe the twelve pillars on which the Global Competitiveness Index (GCI) is based, which annually and since 2005 is used by the World Economic Forum (WEF) as a tool to measure the competitiveness of countries.
For more than 3 decades, WEF’s annual Global Competitiveness Reports have been studying and measuring the various factors that underpin the competitiveness of countries. The main objective is to provide knowledge and stimulate discussion among all parties involved in strategies and policies that help countries to improve their competitiveness.
Definition of competitiveness according to WEF
The WEF defines competitiveness as “the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity in turn determines the level of prosperity that can be achieved by an economy. ” The concept of competitiveness therefore involves static and dynamic components. The ICG tries in an open and non-definitive way to capture a weighted average of these various components, each of which measures a specific aspect of competitiveness. These components are grouped into 12 pillars of competitiveness. Below is a brief description of each one.
1.-First pillar: Institutions
The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth.This framework influences investment decisions, the organization of production and the way benefits are distributed and the costs of development policies and strategies are borne. It also includes the government’s attitude towards markets, freedoms and the efficiency of its operations. Bureaucracy, excessive regulations, corruption, dishonesty, lack of transparency and lack of independence of the judicial system impose significant costs on businesses and slow down the development process. Another factor considered is the proper management of public finances. Transparency of the private sector, essential for business, is also measured through the use of standards as well as auditing and accounting practices that ensure access to information in a timely manner.
2.- Second pillar: Infrastructure
Extensive and efficient infrastructure is important in determining the level of economic activity and the types of activities and sectors that can be developed within a country. Good infrastructure reduces the effects of distances between regions by integrating and connecting markets at low cost. It also helps reduce inequalities and poverty in different ways. Measures such as transport and communications infrastructure, effective modes of transport (quality of roads, railways, ports and air transport) are measured in order to obtain goods and services in safe and timely conditions and to facilitate the mobilization of labor . This pillar also includes the quality and reliability of the electricity supply and the telecommunications network.
3.- Third pillar: Macroeconomic environment
While it is true that macroeconomic stability alone can not increase the productivity of a nation, it is recognized that macroeconomics can cause damage to a country’s economy, as has been seen recently in many countries in Europe and elsewhere. The government can not provide services efficiently and deprives it of maneuvering power over the future effects of economic cycles if it is managed with high levels of fiscal deficit. Firms in turn can not operate efficiently when there are high inflation rates. In short, the economy can not grow in a sustainable way unless there is a stable macroeconomic environment.
4.-Fourth pillar: Health and primary education
A healthy workforce is vital to the competitiveness and productivity of a country. Low levels of public health bring significant costs to businesses, increasing work absenteeism and operating at low levels of efficiency. In addition to moral considerations, investments in the provision of health services are critical to healthy economies. This pillar also takes into account the quantity and quality of basic education received by the population, considering that basic education allows the development of the potential of workers facilitating their incorporation into more advanced production processes and increasing the individual efficiency of each employee.
5.- Fifth pillar: Higher education and training
Higher quality education and continued job training are crucial factors for economies that want to move forward in the value chain beyond the simplest production processes. The current globalized economy requires that countries promote well-prepared workers’ teams capable of developing complex tasks and rapidly adapting to the changing environment. This pillar contemplates among others, the measurement of aspects that have to do with the recruitment rates and the quality of the education as it is evaluated by the business leaders and the scope of the training in the jobs to ensure the constant updating of the workers talents.
6.- Sixth pillar: Goods market efficiency
Countries with efficient goods market are well-positioned to produce the right mix of products and services according to their particular supplier-demand conditions. They also ensure that these goods can be traded more efficiently in the economy. Generally, markets that are developed efficiently have minimal government intervention. Excessive controls and regulations and heavy fiscal burdens discourage private investment and economic growth. The efficiency of the markets also depends on the conditions of the demand and the sophistication of the buyers and their exigencies that can lead to a country to develop some competitive advantages.
In our next post we will comment on the remaining 6 pillars of competitiveness used to calculate the GCI of the World Economic Forum (WEF).
Based on The Global Competitiveness Report 2013 – 2014. Part 1 Measuring Competitiveness World Economic Forum.