Wong Yat Fu Tsang Heng Cheong

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 EnvironmentPublic Institutions: Corruption Technology, Innovation and Diffusion Domestic Competition Human Resources: Education, Health and Labour Cluster Development General InfrastructureCompany 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): GCI Country/Economy2006 Rank2006 Score2005 Rank Switzerland Finland Sweden Denmark Singapore United States Japan Germany Netherlands United Kingdom Hong Kong SAR Norway Taiwan, China Iceland Israel Canada Austria France Australia Belgium GCI Country/Economy2006 Rank2006 Score2005 Rank Ireland Luxembourg New Zealand Korea, Rep Estonia Malaysia Chile Spain Czech Republic Tunisia Barbados314.70— United Arab Emirates Slovenia Portugal Thailand Latvia Slovak Republic Qatar Malta Lithuania

Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI 3 sub-indexes 9 pillars

We look at the 1st pillar, institutions… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

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:

1 st 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

2 nd 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

3 rd 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

4 th 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

5 th 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 … Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

6 th 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

6 th 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)

6 th 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

6 th 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

7 th 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

8 th 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… Basic requirement Institutions Infrastructure Macroeconomy Health and Primary Education Efficiency enhancers Innovation and sophistication factors Higher Education and Training Market Efficiency (goods, labor, financial) Technological Readiness Business Sophistication Innovation GCI

9 th 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 WeightsBasic 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%

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 CountryInstitutionsInfrastructureMacroeconomy Health and primary education Hong Kong SAR Singapore 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 Singapore 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 CountryBusiness sophisticationInnovation Hong Kong SAR Singapore 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 WeightsBasic 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 Innovation- driven stage Singapore has a higher score on GCI, that is why Singapore ranking 5th and Hong Kong ranking 11th 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 Singapore6.14 x 30%5.63 x 40%5.11 x 30%5.63

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

Negatively related Unemployment rate  1%, GCI  GCI = ( x Unemployment rate) R square = Correlation coefficient =

Negatively related Unemployment rate  1%, Basic requirements score  GCIBS = ( x Unemployment rate) R square = Correlation coefficient =

Negatively related Unemployment rate  1%, Efficiency enhancers score  GCIEE = ( x Unemployment rate) R square = Correlation coefficient =

Positively related Unemployment rate  1%, Efficiency enhancers score  GCIIF = ( x Unemployment rate) R square = Correlation coefficient =

Positively related Nominal GDP per capita  US$1000, GCI  GCI = ( x GDP per capita) R square = Correlation coefficient =

Negatively related GDP Growth rate  1%, GCI  GCI = ( x GDP growth rate) R square = Correlation coefficient =

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

GCI = x unemployment rate x GDP growth rate x GDP per capita x GDP deflator R square =

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