The addiction to competitiveness indicators

Placing too much emphasis on increasing international competitiveness ranking could lead to a misallocation of scarce resources that could have been used for the well-being of people.

Before Egypt’s January 2011 revolution, a prominent Egyptian writer once wrote satirically that he would like to be a “macro citizen.” He was referring to Egypt’s rising macro indicators and its steady rise up global index rankings. Surely, the writer noted, all of this macro success should be good for ordinary Egyptians. Did he write it, tongue in cheek? It wasn’t; and the economic and social frustration boiled over into an uprising that has left Egypt’s future even more uncertain.

How to manage the current turbulent and unpredictable economic climate is a challenge for policymakers all over the world. One of the ways they have sought to address this issue is to look at their countries’ ranking in terms of international competitiveness. These competitiveness indices are the most widely used benchmarks for measuring success in everything from business climates to environmental regulations to national competitiveness.

Advising countries on how they can improve their international competitiveness ranking has become big business for consultants searching for new revenue streams. Indeed, “gaming” the system has become prevalent, with consultants who understand what needs to be done to get a higher score, and governments willing to pay. Countries the world over make large investments in projects designed to push them up the rankings of the most widely used indicators: the World Economic Forum’s (WEF) Global Competitiveness Index (GCI), the International Institute for Management Development’s (IMD) World Competitiveness Yearbook, and the World Bank’s ‘Doing Business Index’. All these systems attempt to measure the relative national economic competitiveness of countries around the globe.

Is the competitiveness genuine?

Despite the vast investments made in the region, policymakers in the Gulf are now asking whether their policies have paid dividends. Perhaps they can offer some advice to Russian President Vladimir Putin who, for instance, released an Executive Order in 2012 outlining plans to oversee Russia’s rise from number 112 to number 20 in the World Bank’s “Doing Business” Index by 2018, an index that measures the relative ease of doing business. Assuming such a meteoric rise is possible, one must ask, “At what cost and to whose benefit?”

Does moving up international competitiveness rankings really lead to genuine improvements in competitiveness? Do investments that are made in order to raise competitiveness rankings lead to greater improvements in job creation and living standards for the average citizen compared to alternative types of investment? Does the sharp focus on a country’s competitiveness rankings distract policymakers from the real, underlying issues they must address if they want to achieve sustainable, long-term improvements in prosperity for their citizens? In the same spirit of the Egyptian satirical writer, might it be better to be “an index citizen” or “competitiveness citizen” rather than a real one living in the real world?

The experience of countries in the region suggests that a broader focus on policies aimed at job creation and building a better quality of life for citizens might provide a better return on investment than a more narrow focus on improvements in specific competitiveness indicators. At the very least, it can be shown that rising in the indices doesn’t always mean a better life for the citizenry. A Gallup poll taken in Tunisia and Egypt on the brink of each country’s revolution illustrates the complexity of macroeconomic indicators and indices and individual fulfillment. As Tunisians and Egyptians saw per capita GDP rise steadily from 2009 onward, the large majority of the populace in each country saw their happiness and prospects declining. Remember the “macro citizen?”

The question is, therefore, whether policymakers should now re-direct their focus away from improving international competitiveness and growing per-capita income, and instead focus on quality-of-life improvements that encompass factors such as well-being, culture, and national belonging. In doing so, policy makers must acknowledge that non-monetary factors also have a role to play in the socio-economic development of a nation.

Complex phenomenon

There is also a question about the usefulness of the indicators themselves that should be addressed. Government-supplied data is usually used. The quality of this data can be highly variable. Some data is also highly subjective. The GCI includes the findings of an annual executive opinion survey in their ranking systems. This subset of a society is clearly not the most representative opinion. How would the rankings change if a broader swath of society offered its input?

International educational rankings offer competing, and often irreconcilable, pictures of pupil achievement from country-to-country. As the Economist recently reported, Pearson’s new “The Learning Curve” study of international student performance offered starkly different conclusions than the standard-bearers like OECD’s Programme for International Student Assessment, the Trends in International Mathematics and Science Study, and the Progress in International Reading Literacy Study. When public-officials rely heavily on studies and indices in making investment and planning decisions, what happens when a purportedly better study comes along and alters outcomes significantly?

Harvard Business School Professor, Michael Porter, a mastermind behind the GIC, admits that while the notion of a competitive “company” is straight forward, the notion of a competitive “nation” is not. Paul Krugman, Professor of economics and international afairs at Princeton University and at the London School of Economics, goes further and argues that “competitiveness is meaningless when applied to national economies,” claiming that, “an obsession with competitiveness is both wrong and dangerous.” A review of academic literature confirms that national economic competitiveness is a complex phenomenon, dependent on a range of inter-related and inter-linked factors.

That said, while these indices may reveal little about the relationship between countries, they certainly reveal something about the state of a single country over time. Indeed, attention should be directed towards specific internal and external factors as well as political and socio-economic activities that might have influenced changes in a country’s indicators overtime. Constructing competitiveness indices that accurately reflect a country’s unique characteristics, including its culture, geography and demographics, is problematic. Difficulties measuring all relevant factors and making valid comparisons across countries mean that indices can only provide an approximate measure of competitiveness.

Clearly the government plays an important role in creating a competitive environment; however, placing too much emphasis on increasing a country’s international competitiveness ranking could arguably lead to a misallocation of scarce resources away from areas that could have a potentially greater impact on the well-being of a country’s citizens.

National economic competitiveness is a complex phenomenon, dependent on a range of inter-related and interlinked factors

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