1. Latvian Competitiveness Report: Approach, Methodology, Structure Prof. Christian Ketels Latvia Competitiveness Report Riga, 3 August 2011

2. Lessons from the Recent Crisis Need for longer-term policy perspective Need for strategic priorities in policy Need for fact-driven policy design The Latvian Competitiveness Report process is one important step to develop these capabilities

3. Relation to Other Reports National and international assessments Bank of Latvia’s Macroeconomic Developments Report, etc. Ministry of Economy’s Economic Development of Latvia, etc. World Bank’s Doing Business, etc. EU’s Innovation Union Scoreboard, etc. EU Europe 2020 process (European Semester) National Reform Programme Convergence Programme National policy documents Strategic Development Plan of Latvia for 2010–2013 Sustainable Development Strategy of Latvia “Latvia 2030 Latvia Competitiveness Report Draws on national and international data to inform policy design Focused on Latvian economic context and policy needs Firmly rooted in leading academic understanding of competitiveness Comprehensive across policy areas, with specific focus on structural factors

4. Latvia Competitiveness Report Project Objectives Design of a methodology for competitiveness assessment Application of the methodology to deliver 2011 Latvian Competitiveness Report Development of a proposal for an institutional structure to deliver competitiveness reports on Latvia in the future

5. What is Competitiveness? The quality of the underlying economic environment shaped by past and current policy choices and business decisions that sets the level of GDP and GDP per capita that a location can sustain Medium-term measure over the business cycle Reflected in the average productivity of the available labor force Measure of absolute quality of a location in enabling productivity, not of relative prices

6. Criteria for the Methodology Firmly rooted in the best current scientific understanding of the underlying drivers of country prosperity Feasible to implement given the available data, capabilities, and resources in Latvia Effective in generating actionable recommendations that address the needs of Latvian policy makers

7. 7 Dimensions of the Competitiveness Analysis Prosperity Outcomes Intermediate Indicators Competitiveness Global Competitiveness Report Doing Business Governance Logistical Performance Index Corruption Knowledge Economy Innovation FDI flows Investment Exports/Imports Productivity Equality Labor utilization Entrepreneurship Quality of Life Purchasing Power Environmental conditions Imbalances Trust Specialization

8. 8 Findings: Competitiveness and Prosperity Outcomes Delgado/Ketels/Porter/Stern (2011) test an econometric model to assess the impact of different dimensions of competitiveness on prosperity The linear model explains 83% of the variation of GDP per capita across countries The linear model reveals that each broad competitiveness category matters, even when controlling for the others and for endowments –Business environment quality and company sophistication are important, independent drivers of prosperity –The role of microeconomic factors is increasing with an economy’s state of development Current conditions matter, even when controlling for legacy effects (institutional legacy, country fixed-effects) Weights in overall model SIPI53% MICRO35% Macro Policy12% 100% Source: Delgado/Ketels/Porter/Stern, 2011

9. Analytical Approach 1.Assessment of indicators as relative strengths or weaknesses 2.Testing for systematic relationship between outcomes, intermediate indicators, and competitiveness fundamentals 3.Identification of critical root causes/binding constraints

10. 10 Systematic Identification of Root Causes Focusing on Causal Relationships across Indicators Outcome Characteristics Competitiveness Characteristics Competitiveness Characteristics Competitiveness Characteristics Competitiveness Characteristics Competitiveness Characteristics Competitiveness Characteristics Competitiveness Characteristics Intermediate Indicator Characteristics

11. 11 Prosperity Outcomes Per Capita Income Labor Productivity Labor Utilization Domestic Purchasing Power Consumption taxes Efficiency of local industries Level of local market competition Prosperity Skills Capital stock Total factor productivity – Efficiency – Technology Working hours Unemployment Participation rate – Population age profile

12. 12 Prosperity Analysis Inequality Gini- Coefficient, 2009 Source: Eurostat, 2011

13. 13 Understanding Productivity Growth Skill Upgrading, Capital Deepening, and TFP Structural Change Entry, Exit, and Internal Restructuring Economy Sector Firm

14. 14 Understanding Labor Mobilization Age Profile of the Population Labor Mobilization, Unemployment Rate, and Matching Full-time versus Part- time employment, Working hours, and Vacation/Sick leave rates Demography Labor Market Employment

15. 15 Productivity Competitive Environment Trade & Investment Macro- economic stability Composition of the economy Trust in Institutions Dynamism Indicators and Enablers of Competitiveness

16. Profile of Exports Share of High-Tech Exports By Country

17. Diversification of Exports Selected European Countries over Time

18. 18 Macroeconomic Competitiveness Microeconomic Competitiveness Quality of the National Business Environment Sophistication of Company Operations and Strategy Quality of Macroeconomic Policy Social Infrastructure and Political Institutions State of Cluster Development The Competitiveness Framework Endowments Size Natural Resources Geographic Location

19. Latvia Competitiveness Profile 2010 Macro (72 (-10)) Political Institutions (100 (-9)) Rule of Law (65 (-8)) Human Development (53 (-7)) Related and Supporting Industries (89 (-3)) Demand Conditions (75 (-6)) Context for Strategy and Rivalry (69 (-5)) Factor Input Conditions (50 (+1)) Micro (72 (-3)) Skills (40 (-4)) ICT /Energy (40 (=0)) Capital (95 (-8)) Administrat. (51 (-7)) Logistical (48 (+2)) GDP pc (52) Index (71(-8)) Social Infra- structure and Pol. Institutions (63 (-4)) Macroeconomic Policy (112 (-18)) Business Environment Quality (71 (-6)) Company Sophistication (74 (+5)) Source: World Economic Forum Global Executive Opinion Survey 2010, ISC analysis Internationalization (86 (+6)) Organization (71 (-3)) Strategy (69 (+8)) Innovation (75(-3)) Significant advantage Moderate advantage Neutral Moderate disadvantage Significant disadvantage

20. WEF Global Executive Opinion Survey The LCR will use the WEF Global Executive Opinion Survey as one source for its competitiveness assessment –Includes dimensions of competitiveness otherwise poorly covered –Relatively up-to-date –Available across large sample of countries However, the indicator level data is analyzed independently from the WEF, leading to some differences in reported rankings vs. the Global Competitiveness Report –Use of annual data, not two-year moving averages –Exclusion of market size as an indicator of competitiveness –Differences in the aggregation procedure Larger weight for institutional and macroeconomic factors Smaller weight for physical infrastructure relative to other dimensions of the microeconomic business environment –Reporting consistently done for stable sample of countries

21. Baltic Countries’ Competitiveness Ranking Macroeconomic Policy, 2005 - 2010 Latvia Lithuania Estonia Source: World Economic Forum Global Executive Opinion Survey 2010, ISC analysis 1 25 50 75 100

22. Baltic Countries’ Competitiveness Ranking Social Infrastructure and Political Institutions, 2005 - 2010 Latvia Lithuania Estonia Source: World Economic Forum Global Executive Opinion Survey 2010, ISC analysis 1 25 50 75 100

23. Baltic Countries’ Competitiveness Ranking Microeconomic Competitiveness, 2005 - 2010 Latvia Lithuania Estonia Source: World Economic Forum Global Executive Opinion Survey 2010, ISC analysis 1 25 50 75 100

24. Innovation Infrastructure R&D expenditure over time and across countries

25. Administrative Infrastructure Doing Business Indicators, 2011-2010 Source: World Bank, 2011

26. Policy Mapping Prosperity Outcomes Intermediate Indicators Competitiveness Content Main policy initiatives of the last 2 years; current policy plans Collected through interviews with policy makers and review of key policy documents Organized by the dimensions of the competitiveness assessment Objective Are policy priorities aligned with the competitiveness needs of the Latvian economy? NOT: Detailed assessment of individual policies

27. Elements of the Latvia Competitiveness Report (LCR) Methods and Data Sources Assessment Prosperity Outcomes Intermediate Indicators Competitiveness Policy Mapping Analysis Competitiveness Diagnostics Action Priorities & Recommendations In-depth studies of selected policy areas

28. The LCR and Latvian Competitiveness The LCR can significantly improve the policy debate in Latvia –Provide a common understanding of the situation –Provide a tested framework to interpret economic facts and drive towards choices –Provide a an analysis that gives policy makers ideas and alternatives –Provide direct input to key policy documents, like the NRP The LCR can not and should not provide concrete policy proposals –Can not, because it is always a matter of policy choice how to address specific issues –Should not, because it has no political legitimacy to do so The institutional structure for the future LCR process is critical –Neutral, competent, and relevant –Stable over time

29. Back-Up

30. Domestic investment FDI Entrepre- neurship Innovation Trade Indicators and Enablers of Competitiveness External Imbalances Trust Domestic Imbalances Corruption Specialization Economic Geography Microeconomic Macroec.InstitutionsStructure

31. Growth Diagnostics: Systematic Identification of Root Causes Source: Hausmann/Rodrik, 2008

32. Competitiveness Ranking