Competitiveness, who needs it?

The annual hoax of the world “competitiveness” index.

Shock horror, the US economy has fallen from first to sixth place in the world competitiveness league! It now ranks behind Finland and Switzerland. So says the World Economic Forum, the well-heeled private Swiss foundation that organizes the annual Davos junket for the rich and famous; and it’s reported with all seriousness in the quality press.

Except that the exercise is pure business school hokum. The US economy is in trouble, but the report adds no new grounds for thinking so.

“Competitiveness” is a sensible concept for firms; if Boeing wins a contract from Air India, Airbus has lost it. Oligopolistic markets are a zero-sum game in the short run for the individual businesses. But extending the idea to countries is the fallacy of mercantilism, sunk by Adam Smith and David Ricardo two centuries ago. World trade can lift all boats, and generally does so. One can say that China and Morocco compete in the European market for cheap clothes, and Morocco does suffer from the undervalued yuan. It’s also nice to have comparative advantage, as Finland does, in a high growth sector like mobile telecoms, as this means you can probably grow faster for a while. But economies are not heroes in combat. Overall macro competitiveness doesn’t exist. Some countries are richer than others, some grow faster than others; that’s what has to be explained, by going directly to solid causal variables. “Entities are not to be multiplied without necessity”, especially intermediate ones.

The WEF people, faced with the vacuity of their main selling point, have had to look for an operational definition that justifies the grab-bag of factors in their index. From the introduction to the executive summary (my italics) :

At the World Economic Forum, we understand national competitiveness as that set of factors, policies, and institutions which determine the level of productivity of a country. Raising productivity – i.e., making better use of available factors and resources- is the driving force behind the rates of return on investment which, in turn, determine the aggregate growth rates of an economy.Thus, a more competitive economy will be one which will likely grow faster in the medium and long term.

Which is it, high levels or high growth rates of productivity? If you take the second, the trouble is there is no correlation at all between growth and “competitiveness”.

Here are the ten fastest growing countries in 2004 (UN data) :

Country Rank by growth 2004 rate % “Competitiveness” rank
Chad 1 31 123
Venezuela 2 17.3 88
Uruguay 3 12.3 73
Ukraine 4 12.1 78
Ethiopia 5 11.6 120
Angola 6 11.2 125
Tajikistan 7 10.6 96
Armenia 8 10 82
Azerbaijan 9 10.6 96
China 9 9.5 54

I ran a correlation between the 2006 “competitiveness” rankings and 2004 growth rates; it was significantly negative (-0.2). (Spreadsheet on my website here.) Ideally I should have taken a longer-run average but I can’t be bothered to belabour the obvious. Fast-growing countries are poor, often hell-holes. Rich, happy countries like Switzerland (or rich, unhappy ones like the US) can’t grow fast.

The factors in the index make a bit more sense as conditions for high levels of productivity. You need good universities and lots of phone lines to sustain an advanced economy, not to get started out of poverty. Not all of the factors make sense even here. Is low infant mortality important for productivity? I suppose it reduces parental investment per surviving child, but that is hardly why the health of children should be pursued. Some elements are merely fashionable, like “business costs of terrorism” (which are negligible, lost in the noise.) The “burden of government regulation” counts as as a bad, the “strength of auditing and accounting standards” as a good. The weighting is opaque, but that’s a problem with all multifactor indexes like the UN’s human development one.

What the index really covers is businessmen’s welfare. What they want is a safe, orderly, environment with good public services and golf courses, reliable, skilled and obedient workers, honest and conservative government, and low taxes. In fact, Switzerland. The competitiveness index measures variance from Swissness. It’s in many ways an admirable country, and there are worse goals than emulating it, but objective economic advice it ain’t.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

2 thoughts on “Competitiveness, who needs it?”

  1. Even the indices might raise a few eyebrows. I was checking a few figures to see if they appeared to make sense, and found they gave Mexico higher marks for education than they did the U.S.. I am no more educator than I am economist, but I do know that none of my friends have moved to Mexico to give their children a better education.

  2. "Rich, happy countries like Switzerland (or rich, unhappy ones like the US) can't grow fast."
    I'm not sure that's actually true; Hong Kong mananged to maintain a pretty impressive growth rate for several decades, without being a third world hell-hole. Of course, under British rule Hong Kong wasn't making it's own policy…
    I think it would be more accurate to say that political considerations make it difficult to maintain the policies necessary for fast growth once an economy is reasonably prosperous. The importance of fast growth is eclipsed by the importance of buying votes…

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