May 072008

It is currently ranked in the mid-70s out of just over 100 countries surveyed annually by
the World Economic Forum and could drop further if the government keeps mandating
increases in electricity and gas tariffs, POL prices and other manufacturing inputs
By Kaleem Omar

Finland, home to mobile phone giant Nokia, is the world’s most competitive economy followed by Sweden, Denmark and China’s breakaway province of Taiwan, according to the World Economic Forum’s Global Competitiveness Report. Mainland China, which is expected to overtake the United States in ten years as the world’s biggest economy, is also moving up fast in the rankings.

The rankings are mainly based on a worldwide survey of executive opinion carried out by the World Economic Forum (WEF) every year. They therefore reflect perception as much as the reality of countries’ economic performance. The new survey is due to be published in October 2008.

The survey measures economic competitiveness based on three broad categories of variables that drive economic growth: technology, public institutions, and macroeconomic environment.

More specifically, the survey includes a competitiveness index and rankings, an openness index and rankings, a governance index and rankings, a finance index and rankings, an infrastructure index and rankings, a technology index and rankings, a management index and rankings, and a labour practices index and rankings.

Published annually since 1979, The Global Competitiveness Report is the leading cross-country comparison of data and information relating to economic competitiveness and growth. The annual report now covers more than 100 countries, up from 80 countries in the 2002-2003 report. According to the WEF, the survey now covers 97.8 per cent of the world’s economy.

The survey also rates business competitiveness, which has a strong influence on foreign investment.

In preparing its report, the World Economic Forum works closely with partner institutes in countries around the world.

Pakistan is 73rd in the growth competitiveness index rankings, eighteen places behind Gambia (55), a tiny African country known hitherto only for growing groundnuts. Pakistan is 72nd in the business competitiveness index rankings. The tiny island nation of Malta is ranked 19th. Egypt is ranked 58th. So to say there’s plenty of room for improving Pakistan’s global competitiveness would be putting it mildly.

But Pakistan’s ranking is likely to go down further when the new survey comes out in October if the government keeps mandating increases in electricity and gas tariffs, POL prices and the cost of other manufacturing inputs. These increases raise manufacturing costs and make Pakistani products less competitive in export markets.

On the one hand, successive Pakistani governments keep saying that they are formulating policies aimed at boosting exports. On the other hand, however, they keep increasing electricity and gas tariffs, POL prices and the cost of other manufacturing inputs.

The present government appears to be following the same path, and already there is talk in Islamabad of further increasers in electricity and gas tariffs and POL prices. It stands to reason that Pakistan cannot improve its global competitiveness if the government keeps mandating increases in manufacturing costs. Our electricity tariffs are already the highest in the world. Any further increases would make our goods less competitive, resulting in a further widening of the trade gap, which, fueled by soaring international crude oil prices, is currently running at about $ 1.5 billion a month, or about $ 19 billion a year.

India has slipped a little in the growth competitiveness index rankings, dropping to 56th place from 54th last year. In the business competitiveness index, however, India continues in the same position, 37th, as the year before. This means India continues to be below Brazil, South America’s biggest economy.

The new methodology adopted by the WEF in preparing its rankings may reflect a change in the way the scale is constructed, which gives less weight to the size of the public sector and more weight to the perceptions of honest government when considering the quality of public institutions.

According to the WEF, the growth competitiveness index is designed to evaluate “the determination of the complex process of economic growth and development.”

Competitiveness has emerged as one of the key mega-trends in the era of globalisation. As Dr James L. Walker noted in a paper published in March 2002, technological progress plays a major role in increasing productivity and economic growth. While technological innovation and diffusion both affect the growth potential of all countries, for developing countries like Pakistan the focus is on the ability to effectively absorb technology diffusion from advanced industrial countries.

The problem, however, is that most industrial countries are reluctant to share technology with developing countries. Industrial countries fear that transferring technology to developing countries will help them to become rivals to the industrial countries in international markets. The last thing western industrial countries want to see is the emergence of more Asian tiger economies.

China, however, is an exception in this regard. As a rapidly industrialising country and one with an increasingly sophisticated technology base, it has never shown any hesitation in sharing its technologies with friendly countries like Pakistan. The China-Pakistan joint production of the K-8 jet trainer aircraft and the JF-17 light combat aircraft are two examples of this. More recently, China has offered to share with Pakistan the technology it has developed for low-cost desalination plants to convert sea water into potable water.

Like Pakistan, Russia is another country that doesn’t fare well in WEF’s global competitiveness survey. Despite five years of healthy economic growth, the survey puts Russia at No. 70 among the 102 countries surveyed in terms of global competitiveness.

Russia’s poor performance is due to its high rate of inflation, inefficiencies in the banking system and a broad range of institutional factors. In terms of inflation alone, Russia is ranked No. 93.

Of the other former Soviet republics, only the Baltic states and Ukraine are included in the survey. Estonia, Latvia and Lithuania all fare well, ranking 22nd, 37th and 40th, respectively. Ukraine is ranked at No. 84, just ahead of Kenya but behind Bolivia.

The bottom five, in descending order, are: Bangladesh, Mali, Angola, Chad and Haiti. To add to Bangladesh’s woes, Transparency International regularly ranks Bangladesh the world’s “most corrupt country.”

But this “corruption” ranking depends on how corruption is defined. If one were to define it in terms of the total monetary value of illegal activity in a country, the United States of America is by far the most corrupt country in the world, with more than $ 350 billion a year in illegal drug money being laundered through its banking system. This, in fact, makes the US more corrupt than the rest of the world put together.

The main problem preventing Russia from improving its global competitiveness in terms of the WEF survey is inertia on structural reforms, said Natalia Orlova, chief economist at Alfa Bank. “Russia’s current growth is fuelled by the development of the natural resources sector, and the growth of other sectors is dependent on this,” she said.

Orlova said the structural reforms that theoretically should boost Russia’s ranking – such as instituting tax breaks for struggling sectors or reducing bureaucratic red tape – have been slow to arrive, contributing to the deterioration of the overall economic picture. “The simple fact is that with continuing inflation and a stronger ruble, sectors other than natural resources are losing their price-competitiveness,” she said.

The United States, scores high on technology but weak on the quality of its public institutions and economic environment, particularly public finances, where it is ranked 50th.

Germany has moved up one notch to 13th and France has gained two places to 26th. According to the World Economic Forum, both countries show improvements driven by better public institutions and technology, despite budget troubles.

“If there is one lesson from our exercise, it is that the strength and coherence of government policies have an enormous bearing on a country’s ranking,” says WEF’s chief economist.

Italy is the lowest ranked European Union member, 41st. The drop does not reflect well on its government’s economic policies.

Taiwan and Singapore are Asia’s most competitive economies. Each has moved up one place from last year, with Taiwan rising into fifth place due to its technology strengths, and Singapore into sixth place because of a sound economy and quality of public institutions.

Japan has climbed five places from last year’s ranking to 11th, partly driven by its strength in technology and partly by the government’s economic reforms. South Korea has improved to 18th place from 25th last year due to signs of improving technology and a better economic environment.

China’s relative strength is on the Macroeconomic Environment Index, where it ranks 25th in the WEF survey.

China overtook Germany as the world’s third biggest economy in 2007. It is expected to overtake Japan as the world’s second biggest economy in 2010 and the US as the world’s biggest economy in 2018.

China also now has the world’s biggest foreign exchange reserves, over $ 1,100 billion. If Hong Kong’s reserves of more than $ 100 billion are added to this figure, China’s reserves are now over $ 1,200 billion. And even this figure doesn’t include the reserves of China’s breakaway province of Taiwan.

 Posted by at 7:06 pm

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