Assessing Latvia s s competitiveness

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1 Assessing Latvia s s competitiveness The Findings of the Global Competitiveness Report Irene Mia Senior Economist, Global Competitiveness Network World Economic Forum Conference on "Competitiveness: the Future Cornerstone of the Latvian Economy" Bank of Latvia, Riga October 10 th, 2007

2 Outline Presentation of the Global Competitiveness Network. The Global Competitiveness Report. The Global Competitiveness Index (GCI) and our data sources. The GCI s rankings for with a focus on Latvia and selected comparators 2

3 The Global Competitiveness Network The most authoritative source for competitiveness Launched in 1979 covering 16 countries; The Report has since expanded its coverage to 125 countries Co-editors: Michael Porter, Xavier Sala-i-Martin and Klaus Schwab Our goal: to provide a benchmarking tool for policymakers and business leaders 3

4 The Global Competitiveness Network Geographical coverage 4

5 The Global Competitiveness Network Thematic coverage: Recent releases Regional and special topic reports recently released: Lisbon Review 2006 Travel and Tourism Competitiveness Report 2007 Global Information Technology Report 2007 Arab World Competitiveness Report 2007 Benchmarking National Attractiveness for Private Investment in Infrastructure in Latin America Africa Competitiveness Report

6 The Global Competitiveness Report What are we trying to measure? Gross domestic product based on purchasing-power-parity per capita, , , , , , , Source: International Monetary Fund, World Economic Outlook, September Latvia Finland Ireland Portugal

7 The Global Competitiveness Report What do we mean by competitiveness? Competitiveness is defined as the set of factors, policies and institutions that determine the level of productivity of a country, Productivity is the main driver of investment in an economy. Investment, in turn, determines the rate of growth of the economy. We say that a more competitive economy is one that is likely to grow faster over the medium to long run. We try to shed light on the factors, policies and institutions that determine the sharply different growth experiences of 125 economies worldwide. 7

8 The Global Competitiveness Index Three stages of development: The process of economic development evolves in three stages captured by the model: 1. Factor-driven stage Firms compete in prices, taking advantage of cheap factors. 2. Efficiency-driven stage Efficient production practices to increase productivity. 3. Innovation-driven stage Economies need to produce innovative products using sophisticated production methods (incorporating and taking full advantage of ICT, among other things.) 8

9 The Global Competitiveness Index The 9 pillars of competitiveness BASIC REQUIREMENTS 1. Institutions Key for 2. Infrastructure factor-driven 3. Macroeconomy economies 4. Health and Primary Education EFFICIENCY ENHANCERS 5. Higher Education and Training 6. Market Efficiency (goods, labour, financial) 7. Technological Readiness INNOVATION & SOPHISTICATIONS FACTORS 8. Business Sophistication 9. Innovation Key for efficiency-driven economies Key for innovation-driven economies 9

10 The Global Competitiveness Index The stages of development All 9 pillars matter to a certain extent for all countries However, the importance of each pillar depends on a country s particular stage of development The pillars are organized into 3 subindexes, each critical to one particular stage: 1. Basic requirements factor-driven stage 2. Efficiency enhancers efficiency-driven stage 3. Innovation and sophistication factors innovationdriven stage 10

11 The Global Competitiveness Index Weights Weights of the three main subindexes at each stage of development: Basic requirements Efficiency enhancers Innovation and sophistication factors Factor-driven stage 50% 40% 10% Efficiency-driven stage 40% 50% 10% Innovation-driven stage 30% 40% 30% 11

12 The Global Competitiveness Index Allocation of countries into stages: Factor-driven stage: GDP per capita below $2,000 Efficiency-driven stage: GDP per capita between $3,000 and $9,000 Innovation-driven stage: GDP per capita above $17,000 Transition from factor efficiency: GDP per capita between $2,000 and $3,000 Transition from efficiency innovation: GDP per capita between $9,000 and $17,000 12

13 The Global Competitiveness Index Countries by stage of development Stage 1 GDP per capita of less than US$2,000 Transition from 1 to 2 Stage 2 Transition from 2 to 3 Stage 3 GDP per capita of GDP per capita of GDP per capita of GDP per capita more than US$2,000-US$3,000 US$3,000-US$9,000 US$9,000-US$17,000 US$17,000 Angola Madagascar Albania Algeria Bahrain Australia Armenia Malawi Bosnia and Herzegovina Argentina Barbados Austria Azerbaijan Mali Colombia Botswana Czech Republic Belgium Bangladesh Mauritania Ecuador Brazil Estonia Canada Benin Moldova El Salvador Bulgaria Hungary Cyprus Bolivia Mongolia Jordan Chile Korea Denmark Burkina Faso Morocco Macedonia, FYR Costa Rica Malta Finland Burundi Mozambique Namibia Croatia Taiwan, China France Cambodia Nepal Peru Dominican Republic Trinidad and Tobago Germany Cameroon Nicaragua Suriname Jamaica Greece Chad Nigeria Thailand Kazahkstan Hong Kong SAR China Pakistan Tunisia Latvia Iceland Egypt Paraguay Lithuania Ireland Ethiopia Philippines Malaysia Israel Gambia, The Sri Lanka Mauritius Italy Georgia Tajikistan Mexico Japan Guatemala Tanzania Panama Kuwait Guyana Timor-Leste Poland Luxembourg Honduras Uganda Romania Netherlands India Ukraine Russian Federation New Zealand Indonesia Vietnam Serbia and Montenegro Norway Kenya Zambia Slovak Republic Portugal Kyrgyz Republic Zimbabwe South Africa Qatar Lesotho Turkey Singapore Uruguay Slovenia Venezuela Spain Sweden Switzerland United Arab Emirates United Kingdom United States 13

14 The Global Competitiveness Index Based on comprehensive and proprietary data Use of hard data (publicly available information from sources such as the IMF, the World Bank, UNESCO, the International Telecommunication Union, etc.) And survey data (from the Executive Opinion Survey), which records the perspectives of business leaders around the world; Survey data is indispensable, particularly for variables where no reliable hard data sources exist. In 2006, over 11,000 business leaders from 125 countries responded to the Survey 14

15 The Global Competitiveness Index The Executive Opinion Survey The sample of respondents is carefully selected in each country by the Partner Institute to reflect the structure of a country s business environment. It is structured around eleven major issue areas, each of significant relevance to the current state of an economy s business environment, the Survey asks participants to respond to a total of 150 questions based on their own experiences of operating a business in the country in which they are based The Survey is translated into over 20 languages. The Survey is also available online. Record response rate this year of over 11,000 responses. 15

16 The Global Competitiveness Index Basic requirements A. Basic requirements Examples of variables Property rights Diversion of public funds 1. Institutions Wastefulness of government spending Organized crime 2. Infrastructure Strength of auditing and accounting standards Overall infrastructure quality 3. Macroeconomy 4. Health & Primary Education Telephone lines Government surplus/deficit Inflation Life expectancy Primary enrolment rates 16

17 The Global Competitiveness Index Efficiency enhancers Examples of variables A. Efficiency Enhancers Secondary and tertiary enrolment rates Quality of the educational system 1. Higher Education & Training Extent of staff training Extent and effect of taxation 2. Market efficiency Prevalence of trade barriers Exports 3. Technological readiness Hiring and firing practices Pay and productivity Financial market sophistication Soundness of banks FDI and technology transfer Internet users 17

18 The Global Competitiveness Index Innovation & sophistication factors A. Innovation & Sophistication Factors 1. Business sophistication 2. Innovation Examples of variables Local supplier quality and quantity Extent of marketing Nature of competitive advantage Quality of scientific research institutions Company spending on R&D Availability of scientist and engineers Utility patents 18

19 The Global Competitiveness Ranking Top 20 and selected economies (Ranks out of 125 economies, 1-7 scale score) Rank Country Score Rank change Rank Country Score Rank change 1 Switzerland Ireland Finland Estonia Sweden Malaysia Denmark Spain Singapore Portugal United States Latvia Japan Lithuania Germany Italy Netherlands India United Kingdom China Hong Kong SAR Turkey Norway Russia Taiwan, China Iceland Israel Canada Austria France Australia Belgium

20 The Global Competitiveness Ranking Top performers in the nine pillars Economy 20 Institutions Infrastructure Macroeconomy Health and primary education Higher education and training Market efficiency Technological readiness Business sophistication Innovation Finland Denmark Iceland Germany Switzerland Hong Kong SAR Algeria Kuwait Qatar Japan Canada Sweden United States United Kingdom Singapore Israel

21 The Global Competitiveness Ranking Largest Moves Rank Country Change Guatemala Institutional reforms, agricultural reform, lower taxation Indonesia Institutions, higher education, labor and financial markets Croatia Macroeconomy: government deficit and savings rate, higher quality of education Turkey Improved basic requirements, in particular health and primary education Israel Better macroeconomy, budget surplus Bulgaria Institutions, labor markets Egypt Budget deficit, inflation, education Argentina Inflation, quality of education, falling behind in business sophistication and innovation Nigeria Increased spread btw borrowing and lending rates; real FX, education 21

22 The Global Competitiveness Ranking Latvia s performance vs. efficiency driven economies Latvia Efficiency-driven economies 1st Pillar: Institutions 9th Pillar: Innovation 2nd Pillar: Infrastructure Pillar: Business sophistication 3rd pillar: Macroeconomy th Pillar: Technological readiness 6th Pillar: Market efficiency 4th Pillar: Health and primary education 5th Pillar: Higher education and training 22

23 The Global Competitiveness Ranking Latvia s competitiveness: Overall assessment and focus areas Rank (out of 125 countries/economies) (out of 117 countries) 39 Basic Requirements 41 1st pillar: Institutions 50 2nd pillar: Infrastructure 39 3rd pillar: Macroeconomy 34 4th pillar: Health and primary education 79 Efficiency Enhancers 36 5th pillar: Higher education and training 28 6th pillar: Market efficiency 40 7th pillar: Technological readiness 43 Innovation Factors 58 8th pillar: Business sophistication 54 9th pillar: Innovation 66 23

24 The Global Competitiveness Ranking Latvia: Relative competitive advantages (Ranks out of 125 economies, 1-7 scale score) 1st Pillar: Institutions rank 6th Pillar: Market efficiency rank Wastefulness of government spending 33 Extent and effect of taxation 38 Burden of government regulation 37 Number of procedures to start business 10 Business costs of crime and violence 39 Time required to start a business 20 Organized crime 41 Prevalence of trade barriers 40 Efficacy of corporate boards 39 Flexibility of wage determination 14 Cooperation in labor/employer relations 37 2nd Pillar: Infrastructure Pay and productivity 17 Railroad infrastructure development 29 Private sector employment of women 14 Quality of port infrastructure 39 Quality of air transport infrastructure 41 7th Pillar: Technological readiness Cellular telephones 40 3rd pillar: Macroeconomy Internet users 34 Interest rate spread 24 Personal computers 32 Government debt 9 9th Pillar: Innovation 4th Pillar: Health and primary education Utility patents 41 Medium-term business impact of malaria 29 Capacity for innovation 42 Medium-term business impact of HIV/AIDS 38 Infant mortality 41 Malaria prevalence 1 5th Pillar: Higher education and training Secondary enrolment 36 Tertiary enrolment 8 Quality of the educational system 35 Quality of math and science education 35 Quality of management schools 39 24

25 The Global Competitiveness Ranking Latvia: Relative competitive disadvantages (Ranks out of 125 economies, 1-7 scale score) 1st Pillar: Institutions rank 7th Pillar: Technological readiness rank Property rights 51 Technological readiness 72 Public trust of politicians 72 Firm-level technology absorption 59 Judicial independence 59 Laws relating to ICT 63 Favoritism in decisions government officials 63 FDI and technology transfer 55 Reliability of police services 55 Ethical behavior of firms 68 8th Pillar: Business sophistication Protection of minority shareholders' interests 81 Local supplier quantity 53 Strength of auditing and accounting standards 53 Extent of marketing 81 Control of internation distributional 81 2nd Pillar: Infrastructure Nature of competitive advantage 51 Overall infrastructure quality 51 Value chain presence 55 Quality of electricity supply 55 9th Pillar: Innovation 3rd pillar: Macroeconomy Quality of scientific research institutions 67 Government surplus/deficit 52 Company spending on R&D 80 National saving rate 67 University/industry research collaboration 51 Inflation 80 Govnment procurement of adv. tech. products 81 Availability of scientists and engineers 58 4th Pillar: Health and primary education Intellectual property protection 66 Medium-term business impact of tuberculosis 58 Life expectancy at birth 66 Tuberculosis prevalence 59 HIV/AIDS prevalence 79 Net primary enrollment 87 6th Pillar: Market efficiency Agricultural policy costs 67 Efficiency of legal framework 61 Intensity of local competition 55 Effectiveness of anti-trust policy 55 Foreign ownership restrictions 48 GDP - exports + imports 81 Hiring and firing practices 52 Reliance on professional management 45 Brain drain 63 Financial market sophistication 61 Ease of access to loans 49 Soundness of banks 52 Local equity market access 71 25

26 The Global Competitiveness Ranking Latvia: the most problematic factors for doing business Inf lation Tax rates Corruption Inef f icient government bureaucracy Tax regulations Access to financing 9.99 Inadequate supply of inf rastructure Inadequately educated w orkf orce Government instability/coups Policy instability Poor w ork ethic in national labour force Restrictive labour regulations Crime and theft Foreign currency regulations Source: EOS The question asked to the firm was: Select among the above 14 constraints the five most problematic factors for doing business in your country Percent of responses 26

27 The Global Competitiveness Ranking Latvia: Regional comparison Latvia EU Accession 10 EU 15 1st Pillar: Institutions 7 9th Pillar: Innovation 6 5 2nd Pillar: Infrastructure 4 3 8th Pillar: Business sophistication 2 3rd pillar: Macroeconomy 7th Pillar: Technological readiness 6th Pillar: Market efficiency 1 4th Pillar: Health and primary education 5th Pillar: Higher education and training 27

28 The Global Competitiveness Ranking Latvia: Comparison with Estonia and Lithuania Latvia Estonia Lithuania 1st Pillar: Institutions 7 9th Pillar: Innovation 6 5 2nd Pillar: Infrastructure 4 3 8th Pillar: Business sophistication 2 3rd pillar: Macroeconomy 7th Pillar: Technological readiness 6th Pillar: Market efficiency 1 4th Pillar: Health and primary education 5th Pillar: Higher education and training 28

29 The Global Competitiveness Ranking Latvia: Comparison with Portugal Latvia Portugal 1st Pillar: Institutions 7 9th Pillar: Innovation 6 5 2nd Pillar: Infrastructure 4 3 8th Pillar: Business sophistication 2 3rd pillar: Macroeconomy 7th Pillar: Technological readiness 6th Pillar: Market efficiency 1 4th Pillar: Health and primary education 5th Pillar: Higher education and training 29

30 The Global Competitiveness Ranking Latvia: Comparison with Finland Latvia Finland 1st Pillar: Institutions 7 9th Pillar: Innovation 6 5 2nd Pillar: Infrastructure 4 3 8th Pillar: Business sophistication 2 3rd pillar: Macroeconomy 7th Pillar: Technological readiness 6th Pillar: Market efficiency 1 4th Pillar: Health and primary education 5th Pillar: Higher education and training 30

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