Understanding Global Competitiveness

This month the World Economic Forum and the Harvard Center for International Development issued the Global Competitiveness Report for 2001. Finland, the US, and Canada ranked first through third among the 75 countries studied, while Nicaragua, Nigeria, and Zimbabwe ranked in the last three places. (All rankings can be found at www.weforum.com ). As a co-director of this annual study, I am often asked what competitiveness actually means. Do countries really compete economically, in the way that they do militarily? Does it make sense to say that Finland is more competitive than, say, Germany or Italy?

For purposes of our report, we define competitiveness in a precise way: as a country’s capacity to achieve sustained economic growth in the medium term – ie, five-years time. In defining competitiveness we are not claiming that one country’s competitiveness means another country’s lack of competitiveness. With better policies all countries in the world could simultaneously achieve higher growth. Even so, it does make sense to rank countries regarding their capacity to achieve growth. Each country is interested in knowing whether its policies and institutions stack up against those of other nations in the capacity to achieve and sustain economic growth.

There are aspects of growth that are like head-to-head competition, in which the gains of one country or region can be at the expense of another country or region. Countries compete for internationally mobile capital. The more one country reaps in foreign direct investment, the less investment another country can attract. This is clear when countries compete for an individual investment project. When Intel plans a new semiconductor plant, it invites bids from various countries. The competition is fierce to attract the project, and usually involves tax breaks, commitments on infrastructure, and even promises about the engineering curriculum in the local university.

In this year’s rankings, we determined a country’s competitiveness (the capacity to grow) according to three broad criteria: (1) technology; (2) public institutions; and (3) macroeconomic stability. Indexes were created in each of these categories and then averaged in a specific manner to create an overall Growth Competitiveness Index.