Is The Global Competitiveness Report Flawed?

PUBLICATIONS / Newsletters / 2014 / Newsletter September

Is The Global Competitiveness Report Flawed?

The World Economic Forum (WEF), in its own words, is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas.
It is known foremost for its Annual Meeting in Davos, Switzerland, bringing together more than 2500 business, government and civil society leaders from over 90 countries as well as for its annual Global Competitiveness Report (GCR). In September WEF published its most recent GCR (2014-2015). The GCR ranks 144 countries according to their Global Competitiveness Index (GCI). The UAE rose as a star from the 19th rank last year to the 12th position.
The report, which the WEF has published for the past 35 years, aims to shed light on the key factors and their mechanisms and interrelations that determine economic growth and the level of present and future prosperity in a country. In its own words: The GCR has studied and benchmarked the many factors underpinning national competitiveness, with the goal to provide insight and stimulate discussion among all stakeholders (businesses, governments, civil society) about the best strategies and policies to help countries to overcome the obstacles to improving competitiveness.
The overall GCI ranking of a country is based on its ranking on 12 indicators: Institutions, Infrastructure, Macroeconomic environment, Health and primary education, Higher education and training, Goods market efficiency, Labour market efficiency, Financial market development, Technological readiness, Business sophistication, and Innovation.
The UAE ranks in the top 10 on half of the indicators, namely: Institutions, Infrastructure, Macroeconomic environment, Higher education and training, Goods market efficiency, Labor market efficiency. A testimony really to the success of UAE’s unique model of paying low fixed fees for doing business, absence of intrusive business regulation, respect for property rights, status as free trading hub, world class infrastructure and access to worldwide labour- both high and low-skilled.
Why is it though that the Global Competitive Report consistently continues to highly rank the socialistic northern European welfare states? Are these economies really that competitive or is perhaps some cynicism warranted and should one suspect a hidden agenda to export these state controlled economic models to the rest of the world?
Compare for instance the scores of the northern European countries, Denmark, the Netherlands, Norway, and Sweden, which sandwich the UAE in the rankings.

Let’s look at Denmark
The Dane Jan Gindrup gives an eye-opening account of what life in competitive Denmark, also known as the happiest country on earth, entails in his article “The grass is always greener on the other side
This is a country where 2 million people working in the private sector support the other 64% of the  population, where almost everyone is highly educated (because it is free), and hiring a plumber costs $125 an hour, where you-the-customer are responsible if the tradesman doesn’t pay his social charges, where entrepreneurship is something you study at university, steaks cost up to US$70 per kilo, cars are taxed with 180%, 25% VAT on everything, unjustifiably driving a car on temporary license plates lands you a huge fine and jail time, tax authorities can barge into your  home and business without a warrant, you cannot carry more on you (including jewellery) than $13600 without declaring it to the authorities first, you get an answering machine when you call 112 (the emergency number). A country with such an envious culture and hatred of wealth that driving an expensive car is not only unattractive because of the huge taxes, but also because of someone will deliberately scratch your car or pierce your tyres.
This is a country that ranks 13 in global competitiveness?
 
And what about the Netherlands?
Or take the Netherlands. A country with one of the highest pre-trial detention rates in the world. Pre-trial detention is increasingly used as a tool to extract early confessions, not to protect society against the risk of continued crimes against person or property. In 30% of the cases all charges for which suspects are held in pre-trial detention are eventually dropped.
You and your business’ bank accounts can be frozen at a whim by a creditor or the government without any evidence or charge; leaving you only the option to contest it with a government provided pro-bono lawyer. This is a country that is ranked 10 for its solid institutions which among others is a measurement for how well property rights and investors are protected.
It is also a country where any small company does the utmost to postpone hiring employees as long as possible because of the liabilities and costs involved (such as the requirement to keep on paying 70% of the wage for 2 years when an employee falls sick). Yet it still ranks 21 on labour market efficiency, higher than for instance Cyprus (ranking 30 on this measure) which for anyone familiar with the two countries much more adheres to the right of freedom of contract in the context of employer-employee relations.Why? Well perhaps it is because the Global Competitiveness Report includes such sub-indicators for determining the efficiency of the labour market such as “Cooperation in labor-employer relations”.
The country’s attitude to education is revealed, in its approach to home-schooling.  As of next year it will be banned, despite the fact that a government commissioned study concluded homeschoolers are doing better on ANY conceivable measure then day-schooled children. No matter; it is set to proceed with banning anyway on the basis that every child should be immersed in the values of its society, as expressed by the government paid teachers. Yet it is well regarded by the GCI in the area of “Health and primary education” in which it ranks 5th.
 

Global Competitiveness Report – (Re-) interpreting The Rankings

The problem with these indices, not only in this case but in general, is that they tend to reflect what the organisation that publishes it likes, but it is put under an objective header, in this case “Competitiveness”. Whether a country is Competitive or not ideally is measured by directly measuring competitiveness, e.g. like the temperature.  I.e. the goal would be to measure the “output” competitiveness which would then give an interesting picture by comparing the different economic systems and how the various features of them “the inputs”, contribute to their competitiveness.
Unfortunately it is not possible to measure Competitiveness directly. So instead the Competitiveness ranking of a country reflects the score on an indicator which the makers of the report consider to be as a constituent part of competitiveness. So for instance, the reports considers “Cooperation in labor-employer relations” is a constituent part of “labour market efficiency”, which in turn is a constituent part of an economy’s competitiveness. So when it scores high on this sub-indicator it increases its competitiveness ranking. It should always be kept in mind therefore that the ranking is just a reflection of the extent to which an economy measures up to what the index framers consider to be important. There is nothing wrong with that but the danger lies therein that the illusion of measuring something objective is created. It is a fundamental problem caused by the fact that inputs are measured, not outputs.
And thus it is that any pro-welfare state bias “the welfare state is good for competitiveness of an economy” of the index framer will result in typical welfare states also scoring high on competitiveness.
Looking into some of the measurements which go into the index and commenting on them individually from the perspective of a businessman will perhaps give a clearer picture. It allows us to reinterpret a ranking on a particular index by filtering out those measurements which only doubtfully would contribute to a higher score on that index.
 
Lets look at the UAE’s ranking. It ranks a high 12 due to mostly very credible measures. It has achieved this high rank despite the fact that it has a low ranking on exactly the kind of constituent indicators for which it is highly doubtful as to whether they in fact contribute to competitiveness or are detrimental to it. Some examples below.
It ranks 50 on “ Fixed telephone lines/100 pop” which is a sub-indicator of its score on “infrastructure”. Perhaps a bit out of date measure since who needs a fixed line telephone at home anymore?
It ranks low on these three “Health and primary education” measures:
Business impact of tuberculosis …………………………………45
Business impact of HIV/AIDS …………………………………..30
Primary education enrolment, net % ………………………….98
The first two probably refer to the fact that any foreign employee to be hired needs to do a AIDS and tuberculosis test. I still have to find the first businessmen who considers this a disadvantage to doing business here.
Primary education enrolment: the framers of the index clearly like this as a policy goal; hence the high score in this area of the likes of Denmark. What is the relevance to a business: very little. What is relevant is that you can hire anyone you need for your particular job. If this person needs to be educated you can hire him or her from anywhere in the world. How many countries allow this? But if you do need a cleaner, a driver or a plumber frankly why would you care if he has a primary education. In Denmark you get a university educated plumber for $125 an hour, while in the UAE he will cost $5.
What is really important here? The strength of this economy lies among others in the fact that high-skilled and low-skilled workers can live and work together in a society that offers something for them both and offers for both an improvement compared to their home country standard of living. How many of the above Western European countries can say that?
It ranks 64 on “Secondary education enrolment”  which is a sub-indicator of its score on “Higher education and training”. Same comments as for primary education above, but likely also adversely affected by the fact that most people come here to work, that is after their secondary education has been completed.
It ranks 57 on “No. procedures to start a business”, and “No. days to start a business” (rank 39) which are sub-indicators of its score on “Goods market efficiency”. Now, sure forming a company in the UAE is a bit more time consuming than say in Denmark. Despite the fact that the time to form a company is always taken as an important yardstick in these type of rankings; we have seldom found that this is something that this substantially discourages entrepreneurs. After all, it is a one time event. Taking a bit of time to form the company is a small downside to the fruits of not being bothered too much afterwards and being spared the continuing draconian regulatory and administrative burdens any businessmen is expected to comply with in many western countries. Besides Freemont is here to help you with starting up a business in the UAE :).
And after your business is set up here, you can focus on … running your business! (instead of filing forms).
Then it ranks a meager 27 on “ Imports as a percentage of GDP”, which also impacts its rating in the category “Goods market efficiency”. With 76% this is high which is supposed to be a bad thing. Presumably the percentage is high because the UAE is historically a free trading hub, it has a very efficient logistics infrastructure which makes it hassle free to import goods, and cheap too with one of the lowest import duties in the world. Being able to import goods makes it feasible to run a business relying on foreign supplies and besides it contributes to the overall standard of living. So why this factor is taken to negatively impact the efficiency of the goods market says more about the mindset of the framers of the index than what any ordinary businessmen would consider desirable.
Then “labour market efficiency”, the UAE ranks very low (126) on the measure “Women in labor force, ratio to men“. A high ranking is supposed to contribute to the efficiency of a labour market. Again, the framers of the index appear to have included something they feel strongly about but which to any ordinary businesswoman has nothing to do with the efficiency of the labour market. What matters to such entrepreneurs more is whether you have access to a world-wide labour pool, whether you can get rid of employees that do not perform without a hassle, and whether you are at liberty to hire anyone you like and not forced to hire anyone you don’t like. Surprisingly, these factors are considered more relevant by the enprepreneur than whether overall female participation in the workforce is high.
It ranks 96 on “Legal rights” which is a sub-indicator of its score on “Financial market development”. Not really clear from the report which legal rights they have taken into account here, and thus how the bias of the framers is reflected here. Let us speak then of the most important legal right which matter to the ordinary businessman: property rights. This entails for instance that property is not taken or frozen without due process. Unlike in the above western countries this is unheard of in the UAE. Old-fashioned property crimes are strongly punished and restitution has to be made to the victim; the kind of crimes like intentionally damaging someone’s car that go unpunished in most of the west because the police has other things to do. On the other hand frivolous lawsuits are discouraged: the plaintiff first has to pay for the court fees, dependent on the height of his claim.
Perhaps, considering the above it is not such an unreasonable statement that the UAE, if the more biased measurements were ignored, would score even significantly higher, close to the top, on the GCI than it already does.
We’ll part with a final statistic, which is not part of the GCI, but if we were the framers of the index we would include it in the measure “Macroeconomic environment”: the number of billionaires. The UAE ranks 11 in terms of the number of billionaires it has produced as a country with only 9 million inhabitants. It ranks 5th in terms of number of billionaires per head of the population. See UBS Billionaire census. It speaks for the business environment too, because it doesn’t only show that this is a place where entrepreneurs come to set up business but also wish to stay when they have amassed significant wealth; perhaps because they feel secure in their property rights.
 
All in all, perhaps we should take the Global Competitiveness Report with a grain of salt and look at where actual businesses are going. And that is out of the West and into places that are friendlier to them, like the UAE.
 
 
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