Making countries more competitive is a booming concern these days, with national governments and international organisations alike embracing it as the objective of economic policy.
Competitiveness is best understood as a country’s ability to generate prosperity by maximising the resources and competencies of its economy. There is no single way for a country to climb the competitiveness rankings, and that is fine. The problem is that country competitiveness itself is frequently misinterpreted, as often happens with such popular concepts.
With this in mind, it seems timely to correct five of the most common misunderstandings about what makes a nation competitive.
Country competitiveness is not a zero-sum game. Countries do not compete in the same way that companies and industries do. Firms compete to gain market share, enjoy economies of scale, or exploit first-mover advantages in new products and markets. Traditionally, competition at the company level is a zero-sum game: you win, I lose.
By contrast, making countries more competitive involves co-operation as well as competition. In particular, trade and markets enable economies to collaborate to increase prosperity for all. IMD World Competitiveness Centre data show that, between 1994 and 2013, the median economy in our 60-country sample enjoyed an increase in GDP per capita (in Purchasing Power Parity terms) of 43 per cent, from $17,691 in 1994 to $25,278 in 2013. None of the 60 economies saw its GDP per capita decline over the 20-year period as a whole, and in only 15 per cent of all cases during that period did a country’s GDP per capita fall from year to year. In the competitiveness race, everybody can win in the long term.
Country competitiveness is not just about exporting more. It is true that the ability to export is a fundamental driver of competitiveness. A closer look at the data shows a positive correlation (of 0.41) between a country’s IMD World Competitiveness score and the criterion that measures its contribution to world exports (in percentage terms, and based on 2012 data).
However, some of the most competitive economies in our 2013 ranking are net importers, including the United States, in the No 1 position. Developing a strong domestic market of consumers and companies that buy foreign goods and services can be desirable if a country lacks a significant comparative advantage in certain industries.
Achieving export excellence should be a governmental priority only to the extent that it creates jobs and prosperity in the country. Exporting construction or banking services, for instance, does not necessarily generate jobs at home. Exporting tourism and travel-related services, manufactured goods and agricultural products does. A country can hinder its competitiveness if it promotes sectors that create jobs mostly abroad.
Country competitiveness does not require democratic institutions. Of the top 10 countries in the IMD World Competitiveness Ranking for 2013, four of them are among the world’s 20 least democratic countries, according to the Economist Intelligence Unit. History shows that democracy leads to lower levels of corruption, more transparency and better respect for property rights – all drivers of competitiveness. However, democracy seems to be a sufficient rather than a necessary condition for greater competitiveness. (It is an interesting empirical question whether democracy leads to more competitiveness, or whether competitiveness ultimately results in a demand for democracy.) Countries such as Singapore and the United Arab Emirates rank very highly without being full-fledged democracies.
For countries in the early stages of building competitiveness, the question is which model to follow. Contrary to what international organisations such as the IMF or the World Bank would have advised 20 years ago, a dispassionate and objective economist cannot suggest that democracy is clearly the starting point to achieve prosperity.
Country competitiveness does not mean greater happiness. The IMD World Competitiveness Rankings do not indicate where people are happier or live better, unless quality of life is identified with the availability of economic resources and financial means. The most competitive countries are the most prosperous, yet not necessarily the happiest.
Happiness is a relative concept, usually measured by asking people how they feel with respect to a reference group. Happiness cannot be an objective of economic policy and is therefore not a key performance indicator in the competitiveness race. The available happiness indicators show that Denmark ranks top, and it is also ranked 12th in the 2013 IMD World Competitiveness Rankings. In contrast, Ukraine has the least happy population within the 60 countries surveyed, and ranks 49th in competitiveness. However, there is no consistent relationship between happiness and competitiveness.
Country competitiveness is not just economic growth. Growth is only a long-term by-product of competitiveness. There is a growing consensus that the so-called MINT countries (Mexico, Indonesia, Nigeria and Turkey) are some of the most promising economies for the next few decades. But it would be a mistake to focus on macroeconomic figures as the only indicators of their success.
As IMD’s World Competitiveness research during the last 25 years has shown, competitiveness results from the combination of economic performance, perceptions, values, resources and competencies. Only by excluding incorrect interpretations of competitiveness will countries be able to respond to the challenges of global markets.
Arturo Bris is professor of finance at IMD and directs the IMD World Competitiveness Centre. The 2014 IMD World Competitiveness rankings of 60 countries, including Thailand, will be released on May 22.