In our last article we present the first part of the pillars on which the Global Competitiveness Index (GCI) is based, which has been used annually by the World Economic Forum (WEF) since 2005 as a tool to measure the competitiveness of countries. 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.
The first 6 pillars are: 1) Institutions 2) Infrastructure, 3) Macroeconomic environment, 4) Health and primary education, 5) Higher education and training, and 6) Efficiency of markets.
The remaining 6 pillars on which the competitiveness of the countries is measured according to the WEF GCI
7 .- Seventh Pillar: Labor market efficiency
Labor market must have the necessary flexibility to facilitate the exchange of workers from one economic activity to another quickly and at low cost, as well as allowing fluctuations in wages without major social disturbances. Labor market must also ensure clear and strong incentives for workers’ efforts and reward meritocracy in jobs and ensure equal opportunities for both men and women. This flexibility has a positive effect on the performance of workers and manages to attract the talents necessary for competitiveness.
8.- Eighth pillar: Financial market development
Efficient financial sectors allocate the resources saved by the citizens of a nation and those of those who enter the economy of that country from abroad, to the most productive uses. They channel resources to entrepreneurs or investment projects with expected high rates of return rather than giving primacy to political connections. A meticulous and appropriate determination of risk is a key ingredient of a sound financial market. Because private investment is critical to productivity, sophisticated markets are able to provide resources for such investments. That is why the banking sector must be reliable and transparent and must have the appropriate regulations to protect investors and other players in the economy.
9.-Ninth pillar: Technological readiness
This pillar measures the agility with which an economy adopts existing technologies to improve the productivity of its industries, with special emphasis on its ability to make full use of information and communication technologies (ICT) in its daily activities and production processes To increase efficiency and enable innovation for competitiveness. The origin of the technology used in a country is not so important, as the technology is available to improve productivity. The technological availability measured in this pillar is different from that of innovation as measured in pillar 12 and is related to a country’s ability to conduct research and develop new technologies.
10.-Tenth pillar: Market size
The market size affects productivity because a large market allows companies to exploit economies of scale. With globalization markets have expanded beyond the borders of a country, this is especially beneficial for countries with small local markets. There is a general consensus that international trade has positive effects on the growth of a country’s economy (even considering asymmetries in trade relations) especially for countries with small markets. Therefore exports are seen as a complement to domestic demand to determine the total size of the business market and should be considered as part of an expanded market for a country’s enterprises.
11.- Eleventh pillar: Business sophistication
This pillar has to do with two intrinsically related elements: the quality of a country’s business networks and the quality of operations and strategies of individual companies. The first aspect is measured by the quantity and quality of local suppliers and the extent of their interactions. When companies and their suppliers focus on specific geographic areas, called clusters, efficiency increases by creating new opportunities for innovation and reducing barriers to entry for new competitors. The second element measures aspects of companies such as brand management, marketing, distribution production processes and the production of unique and sophisticated goods. Both aspects have positive effects on the economies of the countries and modernize the business processes in the different sectors of a country.
12- Twelfth pillar: Innovation
This pillar measures technological innovation (the non-technological is measured in the previous pillar). While all previous pillars translate into gains for the economies and societies of the countries, they all tend to diminish the economic returns in the short term. In the long run, the well-being of a society can be significantly improved through technological innovation. Great technological advances have been the basis of many of the productivity gains of economies in the past. Not only are the ways of doing things changed, but they open up a wider range of possibilities in terms of products and services. Enough investment in innovation and development, public and private, quality institutions in the areas of scientific research, collaboration between universities in research and technology, and protection of intellectual property as well as access to risk capital and financing are some of the Aspects that are measured in this pillar.
The 12 pillars are intimately related however to build the GCI are measured separately so that each country has information on areas for improvement. On the other hand, although all pillars are important for all economies, some are more relevant than others depending on the level of development in which each country is. For this reason, the ICG attributes greater relative weights to those pillars that are more relevant to an economy given its particular level of development.
Based on The Global Competitiveness Report 2013 – 2014. Part 1 Measuring Competitiveness World Economic Forum