Current Issues Brief No 6 1998-99

World Competitiveness: Australia Fair to Middling

Guy Woods
Statistics Group
16 February 1999

Contents

Major Issues

Introduction

World Competitiveness Yearbook (IMD)

Competitiveness Schism

Global Competitiveness Report (WEF)

Implications for Australia

Conclusion

Endnotes

Appendix: Competitiveness Rankings 1998

Major Issues

Every year two reports that compare the competitiveness of the world's major economies, including Australia, are released. The objectives of this

Current Issues Brief are to:

• provide background information about the reports and their publishers

• provide a brief history about the development of the two competitiveness reports, and

• highlight some of the issues and implications for Australian policy makers that the reports pose.

Introduction

The end of the twentieth century has seen an opening up of the world economy. Trade barriers have fallen and financial markets have been deregulated exposing national economies to globalised competitive forces. Some believe that the future economic prosperity of a country depends on how these changes are managed by national policy makers.

In order to assess the relative viability of national economies in this environment the concept of the world competitiveness report was developed by two internationally renowned institutions: the International Institute of Management Development (IMD) and the World Economic Forum (WEF).

The IMD is an international business school based in Switzerland with links to the world's leading business organisations. In Australia its representative institute is the Committee for the Economic Development Australia (CEDA).

The WEF is an international forum of leaders from business, government and the media. Since 1971 it has brought together some of the most influential people in the world to the Swiss town of Davos for an annual meeting to discuss business opportunities and economic and social issues. In Australia its representative institute is the Business Council of Australia.

For many years the IMD and WEF published a joint annual report comparing the competitiveness of the world's leading economies. However, since 1996 they have been publishing separate reports.

This Current Issues Brief explains what the IMD and WEF reports are and why the WEF and IMD went their separate ways.

World Competitiveness Yearbook (IMD)

The World Competitiveness Yearbook published by the IMD seeks to measure and rate the ability of national economies to attract and retain investment through the creation of a competitive business environment. The report covers 46 countries in varying stages of economic development. Included are the OECD countries, the rapidly developing nations of Asia such as China, the leading economic growth countries of South America such as Brazil, former communist states such as Poland and from Africa, South Africa.

The IMD constructs an index of competitiveness for each country from 223 'criteria' including indicators such as Gross Domestic Product (GDP), GDP per capita, number of patents in force and public expenditure on education. Two thirds of the data are obtained from official national and international statistical sources and the other third from a survey of top executives and middle managers in the countries covered by the report. The 4134 respondents to the business survey represent a cross section of the business community in each country and only comment on the country they are working in at the time.

The assessment 'criteria' are grouped into eight 'competitiveness input factors'.

The input factors are:

• domestic economy-macroeconomic evaluation of the domestic economy

• internationalisation-extent to which a country participates in foreign trade and investment

• government-extent to which government policies and practices are conducive to competitiveness

• finance-performance of capital markets and quality of financial services

• infrastructure-extent to which natural, technical and communication resources are adequate to serve the basic needs of business

• management-extent to which companies are managed in an innovative, profitable and responsible manner

• science and technology-scientific and technological sophistication, and

• people-availability and qualifications of human resources.

From analysis of this data the IMD has identified four 'competitiveness forces', which are:

• proximity versus globality, which measures the amount of resources devoted to local as opposed to global markets

• attractiveness versus aggressiveness, which measures an economy's performance as an exporter and investor as opposed to its ability to attract investment and to hold onto local investment

• assets versus process, which measures how much an economy relies on exploiting natural resources as opposed to creating wealth through valued added products and services, and

• individual risk versus social cohesiveness, which measures how much a nation values individual risk through such policies as deregulation and privatisation as opposed to a more socially cohesive, but regulated economy and society.

According to the IMD, the most competitive nations are more globally focussed, attractive to investment and process driven with a national character that values the role of individual over the collective. The most competitive economy in 1998 was the USA, while Russia was the most uncompetitive. Australia was ranked as fifteenth (up from eighteenth in 1997). The complete rankings table can be found at the Appendix Competitiveness Rankings 1998.

In respect of the eight 'competitiveness input factors' Australia rated highest in government (9), infrastructure (9) and people (10).

Australia rated lowest in domestic economy (25), internationalisation (27) and science and technology (21).

In the individual 'criteria' that make up the eight factors of competitiveness, Australia rated highly in:

• domestic economy-rent, three room apartment and office space in $US (3)

• internationalisation-exchange rate policy (4)

• government-competition laws (1)

• finance-insider trading (3)

• infrastructure-arable land, square metres per capita (1)

• management-productivity in industry (8)

• science and technology-research cooperation (10), and

• people-quality of life (3).

Areas where Australia rated poorly in relation to the countries surveyed were:

• domestic economy-relocation of production abroad (40)

• internationalisation-current account balance (43)

• government-collected capital and property taxes (38)

• finance-interest rate spread (33)

• infrastructure-railroads, km per square km of land area (42)

• management-entrepreneurship (35)

• science and technology-relocation of research and development (R&D) facilities abroad as threat to economy (41), and

• people-average number of working hours per employee per year (37).

Competitiveness Schism

For several years the IMD and WEF published a joint report, but in 1996 the WEF decided to go its own way. The WEF felt that to be effective, a competitiveness index needed to do more than assess an economy's ability to attract and retain investment and produce solid growth in exports in any given year. It considered that what really mattered was how an economy performed over the medium term and not how well it performed from year to year. Competitiveness needed to be determined by those factors that create sustainable economic growth. It wanted to find those countries with the most effective policies for economic management.

From 1996 the WEF focused on a nation's institutions, the policies of its government and its business culture in an attempt to ascertain the medium term viability of an economy. Statistics such as annual economic growth rates as measured in GDP, the state of the current account balance, the amount of inward investment and level of exports may indicate how well an economy is performing in any given year. However, they say little about whether or not that growth is sustainable(1). For example Malaysia fell from ninth place in WEF's Global Competitiveness Report in 1997 to seventeenth in 1998 and over the same period Indonesia fell from fifteenth to thirty-first reflecting changing perceptions about their economies. Both these economies were ranked higher than Australia in 1997.

The WEF felt it needed to make changes to the format of the report in order to address the concerns of commentators who had been critical of the concept of competitiveness. Chief amongst the critics was the internationally renowned economic commentator Paul Krugman from Stanford University, USA. Krugman argued in an article in Foreign Affairs(2) and again in the Harvard Business Review(3) that countries are not competitive in the same sense that companies are competitive. They do not vie for market share like companies. Unlike companies, that tend to have a focus that is limited to a particular industry or product, national economies are both diverse and complex. In many respects a national economy is self-sustaining in that most of its activity occurs within its own borders. For example Australian exports are equal to about 20 per cent of national GDP(4), which means most Australians are engaged in providing goods and services to other Australians. On the other hand, a global company survives by capturing a share of its external market. BHP would not survive for long if it relied on selling 80 per cent of its products to its employees. In his 1994 article, Krugman further argues that it is quite wrong to say that a country's economic well-being is determined by its success on the world markets. Unlike competition between companies, international trade and investment is not a zero sum game either. The role of trade is to provide a country with the goods it is unable to produce or is relatively inefficient at producing itself. Goods are exported essentially to pay for imports. In this way nations assist in fulfilling each others material needs. All things being equal the value of imports should equal the value of exports in a balanced economy. Furthermore being a net exporter does not necessarily indicate a strong economy. Krugman points to the example of Mexico. During the 1980s foreign investors were reluctant to invest in Mexico, which resulted in trade surpluses as there was little imported capital and consumer goods. This made the economy look good and from 1989 foreign investment poured in leading to boom in imports of capital and consumer goods. However, because the fundamentals of its economy were very weak this speculative boom precipitated the currency crisis of 1994 and the collapse of its economy.

Writing in the first edition of the WEF's Global Competitiveness Report in 1996 Jeffrey Sachs, Harvard University professor of economics, acknowledges these criticisms. Competitiveness, as the term is used in the report, is about how well the institutions and policies of a nation rate within the overall global economy in their ability to produce medium term economic growth and stability. The competitiveness index of the WEF is designed to highlight those countries with the most effective institutions and policies. This is starkly illustrated by the two extremes of the table: Singapore first and Ukraine last.

Global Competitiveness Report (WEF)

When the first Global Competitiveness Report was released in 1996 the emphasis was defined as the ability of an economy to maintain sustained rates of per capita growth in the medium term. With this in mind the WEF ranks 53 countries at varying degrees of economic development. Included are the countries of the OECD, transition economies like Hungary and Poland, developing nations such as India and Peru, and South Africa.

The WEF believes it has developed a 'global competitiveness index' that incorporates all the major criteria that lead to a low cost business environment and sound rules and institutions that allow the market to operate effectively. This in turn creates the foundations for medium term sustainable economic growth. It has grouped these individual criteria under eight 'factors of competitiveness':

• openness of the economy to international trade and finance

• role of government budget and regulation

• developed financial markets

• quality of infrastructure

• quality of technology

• quality of business management

• labour market flexibility, and

• quality of judicial and political institutions.

As with the IMD, the WEF uses a combination of official statistical sources and an international survey of business leaders to construct its index. In 1998 the WEF received 3000 responses to its survey from 53 different countries.

In 1998 Australia was ranked fourteenth (up three places from seventeenth in 1997). The top spot in this index went to Singapore with the USA, which came first in the IMD report, in third place behind Hong Kong; the Ukraine came last.

In eight 'factors of competitiveness' Australia performed highest in infrastructure (4) and technology (8).

The two lowest areas for Australia were in government (29) and openness (26).

In the individual criteria Australia's main assets were in:

• openness-foreign exchange (7)

• government-general government surplus (7)

• finance-hostile takeovers as a concern of management (3)

• infrastructure-satisfied demand for telephones (1)

• technology-computers per 1000 inhabitants (2)

• management-professional managers (9)

• labour-secondary education enrolment (3), and

• institutions-effectiveness of police force (3).

Australia main liabilities were:

• openness-export policy (39)

• government-corporate tax rate (37)

• finance-financial sector risk rating (38)

• infrastructure-growth in telephone usage (42)

• technology-engineering as a profession (34)

• management-managers' international experience/language skills (48)

• labour-strikes (38), and

• institutions-product liability (44).

Implications for Australia

From the point of view of these two reports Australia does not rank in the top end of the first division. However, perhaps more important is what the details of the reports tell about Australia's strengths and weaknesses. Both reports used quantitative data from official statistical sources and the qualitative results from a survey of business people. This combination should reflect not just the success in relation to a nation's main economic indicators, but also how well the business sector views the economic performance of the country.

From a policy perspective the reports could be seen as useful sources of comparative data. The reports could be used to identify those sectors of the economy in need of reform. They might also be used as a way to illustrate the success of policies in areas where Australia is doing well. Having made this point though it must be remembered that while direct comparisons with other countries are useful, cultural and social differences will mean that these comparisons have their limitations. For instance, although there have been significant labour market reforms in Australia, would Australians accept the labour market polices of the United States or Britain? Even the physical attributes of different countries can make some comparisons nonsense. For instance, the IMD defines railroad competitiveness by the density of the network expressed as kilometres of track per square kilometre of land area. It is not surprising that Australia rates at the bottom of the table for this criteria. A more enlightening and perhaps useful approach to this criteria is used by the WEF. It has a series of indicators for this industry, including a business survey question about how adequately the railways fulfil the needs of the business sector, these criteria rank Australia twentieth. Another looks at rail freight per km of track and passenger per km of track per dollar of GDP, which places Australia ninth. The WEF also rates railways by rail traffic adjusted for land area that ranks Australia in sixteenth place well above other countries such as Belgium and Ireland that out performed Australia in the IMD criteria mentioned above.

Some of the data in the reports is also dated by the time they go to press. Both reports have a performance rating for budget balances of government. The IMD's report relies on 1996 data and places Australia thirty-first because of the budget deficit Australia ran that year. The WEF takes data from 1997 when Australia had a surplus that ranks Australia as seventh. Both reports place Australia as seventh under inflation based on 1997 figures. If 1998 CPI figures were considered Australia would probably have rated more highly. In the WEF report there is an indicator for growth in employment to population ratio that has many countries, which are now in recession and rapidly shedding jobs, at a higher rate than Australia because the data is taken from the period 1991 to 1996. Before relying on this data it would be worth cross checking it against more up-to-date sources.

Anticipating this sort of criticism Sachs(5) acknowledges that any attempt to measure competitiveness is going to be difficult. He points out that the assumptions made about what to include in the WEF's index are based on economic theories of economic growth that are far from perfect. The weighting of the individual factors could be wrong. Errors may exist in the way the individual factors are measured and lastly an individual country's performance can be erratic due to short-term shocks brought on by the business cycle. However, it could be argued that any system that tried to evaluate why one economy was more successful than another is going to be flawed just because of the complexity of the subject matter. From this point of view it is not so important that Australia comes fourteenth or fifteenth. What is more important is what the details of the reports can tell policy makers about the effectiveness of their policies. Both reports, for instance, highlight taxes and labour force issues as being a hindrance to Australia's competitiveness in relation to other similar economies. These are both areas that have received a great deal of attention from policy makers and that have been widely debated.

Conclusion

There have been world competitiveness reports now for almost twenty years. For a substantial part of that time the two rival publishers of the post-1996 reports produced a combined report. After some criticism of the philosophy of competitiveness the IMD and WEF went their separate ways. The IMD continued on with a business-cum-market based approach. The WEF adopted an approach that took into account what it considered were factors that contributed to a well managed stable economy that was able to sustain economic growth over the long term. In some cases the two approaches seem to produce quite different results. For instance Britain is ranked as fourth in the Global Competitiveness Report (WEF) and twelfth in the World Competitiveness Yearbook (IMD). However, Australia is ranked fourteenth and fifteenth respectively. In terms of overall performance, the countries at the top of the tables are the USA, Singapore and Hong Kong, which are well ahead of the pack. Australia sits with a cluster of countries, that includes New Zealand, Netherlands, Denmark, Norway, Ireland and Japan which score very closely together. Despite their differing approaches the aim of the IMD and WEF is to discover which countries have the best policy formulas for ensuring the sound management of their economies. In addition to this the reports are a very useful source of interesting and obscure statistics, such as, the number of fax machines per country or the perceived effectiveness of the local police force.

So far Australia has been able to weather the Asian, or now world, financial crisis very well. With that outcome and the proposals to further reform the tax system and labour market it will be interesting to see how Australia rates when the 1999 reports are released in the middle of the year.

Note

Copies of both the reports can be found in the Parliamentary Library, highlights of the reports are also available on the Internet at the WEF and IMD Web sites. The WEF site is at http://www.weforum.org/ and the IMD site is at http://www.imd.ch/.

Sources

International Institute of Management Development, World Competitiveness Yearbook, Lausanne, 1998.

World Economic Forum, The Global Competitiveness Report, Geneva, 1998.

Endnotes

1. Jeffrey D Sachs, 'Why Competitiveness Counts', Global Competitiveness Report, pp. 8-13, Geneva, 1996.

2. Paul Krugman, 'Competitiveness: a dangerous obsession', Foreign Affairs, March-April, 1994, pp. 28-44.

3. Paul Krugman, 'A country is not a company', Harvard Business Review, January-February 1996, pp. 40-44 and 48-51.

4. Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product, September Quarter 1998, Cat No. 5206.0.

5. Sachs, op. cit.

Appendix: Competitiveness Rankings 1998

(1997 in brackets)

Source: IMD, World Competitiveness Yearbook, 1998, WEF, The Global Competitiveness Report, Geneva, 1998.

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