World Economic Forum

Geneva, Switzerland 2001 Professor Klaus Schwab

President, World Economic Forum

Professor Michael E. Porter

Director, Institute for Strategy and Competitiveness
Harvard Business School &
Co-Director, Global Competitiveness Report

Professor Jeffrey D. Sachs

Director, Center for International Development
Harvard University &
Co-Director, Global Competitiveness Report

The Global
Competitiveness
Report 2001–2002

Project Leaders:

Peter K. Cornelius
World Economic Forum

New York • Oxford

John W. McArthur
Center for International Development Oxford University Press
Harvard University 2002
The Global Competitiveness Report 2001–2002 Oxford University Press
is published by the World Economic Forum. The
Report is the result of a collaboration between Oxford New York Athens Auckland
the World Economic Forum and the Center for Bangkok Bogotá Buenos Aires Calcutta
International Development (CID) at Harvard Cape Town Chennai Dar es Salaam Delhi
University. Florence Hong Kong Istanbul Karachi
Kuala Lumpur Madrid Melbourne Mexico
City Mumbai Nairobi Paris São Paulo
At the World Economic Forum: Singapore Taipei Tokyo Toronto Warsaw

Professor Klaus Schwab

and associated companies in
President
Berlin Ibadan
Dr Peter Cornelius
Director Copyright © 2002
by World Economic Forum
Yong Zhang
Economist
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Director, Center for International Development tem, or transmitted, in any form or by any
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John McArthur
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Research Fellow, Center for International
Development at Harvard University
ISBN 0-19-521837-X
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Principal Associate, Printing (last digit): 9 8 7 6 5 4 3 2 1
Institute for Strategy and Competitiveness
Harvard Business School Printed in the United States of America on
acid-free paper
Dr Weifeng Weng
Senior Research Associate,
The term country as used in this report does
Institute for Strategy and Competitiveness
not in all cases refer to a territorial entity that is
Harvard Business School
a state as understood by international law and
Daniel Vasquez practice. The term covers well-defined, geo-
Research Associate, graphically self-contained economic areas that
Institute for Strategy and Competitiveness are not states but for which statistical data are
Harvard Business School maintained on a separate and independent
basis.

With thanks to Karine Burnet, Krzysztof Bulski,

Alejandra Callejo, and Gilles Fumeaux for
invaluable research assistance at the World
Economic Forum and to Adrian Ma, Jorge-Edgar
Marquez-Garcia, Dimitre Michev, Mannig
Simidian, Padmesh Shukla, and especially
Rebecca Thornton for invaluable research
assistance at CID.
Contents

Part 2: Selected Issues of Competitiveness 77

Preface 7
by Klaus Schwab, World Economic Forum
2.1. Ranking National Environmental Regulation 78
and Performance: A Leading Indicator of Future
Competitiveness?
Introduction 8
by Daniel C. Esty and Michael E. Porter, Yale University
Slowdown and Uncertainty: International Economic
School of Law and Yale School of Forestry and Environmental
Networks in the Wake of September 11, 2001 Studies; Institute for Strategy and Competitiveness,
Peter K. Cornelius, John W. McArthur, Michael E. Porter, Harvard Business School
Jeffrey D. Sachs, and Klaus Schwab, World Economic Forum;
Center for International Development at Harvard University;
2.2. National Innovative Capacity 102
Institute for Strategy and Competitiveness, Harvard Business
School; Center for International Development at Harvard by Michael E. Porter and Scott Stern, Institute for Strategy
University; World Economic Forum and Competitiveness, Harvard Business School; Northwestern
University and the Brookings Institution

Growth Competitiveness Ranking 15

2.3. Economic Creativity: An Update 120
by Andrew M. Warner, Center for International Development
Current Competitiveness Ranking 15 at Harvard University

Executive Summary: Competitiveness and Stages 16 2.4. Sectoral Trade Performance 124
of Economic Development by Peter K. Cornelius, Friedrich von Kirchbach, Mondher
by Michael E. Porter, Jeffrey D. Sachs, and John W. McArthur, Mimouni, Jean-Michel Pasteels, and Shilpa Phadke,
Institute for Strategy and Competitiveness, Harvard Business School; World Economic Forum; International Trade Centre
Center for International Development at Harvard University
2.5. Labor Markets in Europe: Performance, 140
Reform, and Perception
Part 1: The Competitiveness Indexes 27 by Peter K. Cornelius and Yong Zhang, World Economic Forum

1.1. The Growth Competitiveness Index: 28 2.6. Perceptions of the Euro: An Update 156
Measuring Technological Advancement and by Peter K. Cornelius and Andrew M. Warner, World Economic
the Stages of Development Forum; Center for International Development at Harvard University
by John W. McArthur and Jeffrey D. Sachs, Center for
International Development at Harvard University 2.7. The Executive Opinion Survey 166
by Peter K. Cornelius and John W. McArthur, World Economic
1.2. Enhancing the Microeconomic Foundations 52 Forum; Center for International Development at Harvard University
of Prosperity: The Current Competitiveness Index
by Michael E. Porter, Institute for Strategy and Competitiveness,
Harvard Business School
Part 3: Country Profiles and Data Presentation 179

3.1. Country Profiles 180

How country profiles work 181

3.2. Data Tables 334

How data pages work 335
Index to tables 337

3.3. Technical Notes and Sources 444

 Partner Institutes

Argentina Egypt
IAE, Management and Business School, Austral University Federation of Egyptian Industries
Professor Marcelo Paladino Dr. Abdel Moneim Seoudi, Chairman
Jose del Tronco, Research Assistant Ahmed Ezz, Chairman
Australia Loutfi Mazhar, Executive Director
Business Council of Australia, Melbourne Estonia
David Buckingham, Executive Director Estonian Chamber of Commerce, Tallinn
Austria Mart Relve, Director General
University of Economics and Business Administration France
Professor Dr. Christian Bellak Club de l’Expansion, Paris
Bangladesh Centre de Prévision de l’Expansion, Paris
Centre for Policy Dialogue Philippe Lefournier, Managing Director
Professor Rehman Sobhan, Chairman Greece
Dr. Debapriya Bhattacharya, Executive Director Federation of Greek Industries, Athens
Quazi Hasnat Shahriar, Research Associate John Chryssanthacopoulos, Economist, Relations with the
Ria Khan, Administrative Associate State and the Institutional Authorities
Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Antonis Tortopidis, Co-ordinator, Research and Analysis
Nicaragua, Panama Hong Kong
Latin American Center for Competitiveness and Sustainable The Hong Kong General Chamber of Commerce
Development (INCAE) Ian Perkin, Chief Economist
Roberto Artavia, Rector Hungary
Alberto Trejos, Dean KOPINT-DATORG Economic Research, Budapest
Bolivia András Köves, Deputy General Director
Universidad Católica Boliviana “San Pablo” Gábor Oblath, Chairman
Dr. Carlos Alberto Gerke M., Rector – UCB Agnes Nagy, Head of Section
4 Lic. Marcela A. de Guzman, Directora Depto. Economía Iceland
Brazil Samtok Atvinnulifsins
Fundacao Dom Cabral, Belo Horizonte Confederation of Icelandic Employers, Reykjavik
Professor Aldemir Drummond Dr. Finnur Geirsson, President and CEO
Bulgaria Ari Edwald, Managing Director
Center for Economic Development David Stefansson, Project Manager
Amelia Damianova, Senior Expert India
Canada Confederation of Indian Industry
Business Council of National Issues, Ottawa Tarun Das, Director General
Thomas P. d’Aquino, President and Chief Executive Officer TK Bhaumik, Senior Advisor – Policy
Chile Indonesia
Universidad Adolfo Ibanez Boston Institute for Development Economies
Professor Gastón Galleguillos Partnership for Economic Growth
Professor Dieter Wunder Timothy S. Buehrer
China Indonesian Chamber of Commerce and Industry, Jakarta
Institute of Economic System and Management Dr. Tulus Tambunnan
State Council Office for Restructuring Economic Systems Dr. Sjahrir
Li Chen, Deputy Director Ireland
Dr. Yuanzheng Cao, Executive Vice President of Irish Management Institute
BOC International Holdings Barry Kenny, Chief Executive
Dr. Shi-Ji Gao, Chief of International Comparative Systems Conor Hannaway, Director of Corporate Development
Colombia Kevin Hannigan, Head of Economic Research
National Planning Department, Bogota University College Cork, Department of Economics
Juan Carlos Echeverry, Vice-Director Dr. Eleanor Doyle
Maria Isabel Agudelo, Project Manager Israel
Czech Republic Manufacturers Association of Israel, Tel Aviv
CMC – Graduate School of Business, Celàkovice Moshe Nahum, Director, Foreign Trade and International
Peter Loewenguth, President Relations Division
Professor Dr. Jaroslav A. Jiràsek, Honorary Dean Daniel Singerman, Economist
Denmark Italy
Copenhagen Business School Ambrosetti Studi e Servizi Internazionali, Milan
Professor Heather Hazard Enrico Solimene, Managing Director
Ecuador Japan
Catholic University, and ESPOL Keizai Doyukai (Japan Association of Corporate Executives)
Juan Alvarado International Affairs Department
Manuel del Valle Dr. Kiyohiko Ito, Deputy Managing Director
Jordan Romania
Ministry of Planning, Competitiveness Unit Romanian Center for Economic Policy, Bucharest
Nesreen Barakat, Director Professor Daniel Daianu, Co-founder
Korea Alina Andrei, MBA, Economic Analyst
Federation of Korean Industries Russia
Seok-Joong Kim, Director Institute for Private Sector Development and Socio-Economic
Chan-bok Lee, Economic Research Department Analysis, Moscow
Latvia Irina Evseyeva
Institute of Economics, Academy of Sciences, Riga Stockholm School of Economics, St. Petersburg Campus
Raite Karnite Professor Carl F. Frey
Stockholm School of Economics, Riga Campus Singapore
Dr. Karlis Kreslins Economic Development Board, Singapore
Lithuania Corporate Communications and Planning Division
Statistikos Tyrimai – Statistical Surveys, Vilnius Shirley Chen, Director, Corporate Services
Benonas Miksas, Director Slovenia
Malaysia Institute for Economic Research, Ljubljana
Federation of Malaysian Manufacturers, Kuala Lumpur Dr. Peter Stanovnik, Director
Lee Cheng Suan, Chief Executive Officer South Africa
Lee Lee Ng, Assistant Manager International Division Business South Africa
Mauritius Friede Dowie, Secretary General
Joint Economic Council of Mauritius, Port Luis Spain
Raj Makoond, Director High Council of Chambers of Commerce of Spain, Madrid
Mexico Fernando Gomez Avilés, President and Managing Director
Ministry of the Economy, Office for the Coordination of Promotion José Manuel Fernández Norniella
of Trade and Investment Juan José de Lucio
Eduardo J. Solis, Head Sri Lanka 5
New Zealand Institute of Policy Studies of Sri Lanka
New Zealand Employers’ Federation Ajith Colonne, Director of Administration & Corporate Affairs
Anne Knowles, Chief Executive Officer Roshen Epaarachchi, Chief Research Officer for GCR Project
Nigeria Sweden
Nigerian Economic Summit Group Institute of International Business, Stockholm School of Economics
Professor Anya O. Anya, Director General & CEO Professor Örjan Sölvell, Director
Dr. Mary Agboli, Associate Director & Head of Research Vanja Ekberg, Administrative Director
West African Institute for Financial and Economic Management, Lagos Taiwan
Chris Itsede, Director Council of Economic Planning and Development, Taipei
Norway Dr. P.K. Chiang, Chairman
BI Norwegian School of Management Dr. Chi Schive, Vice Chairman
Department of Strategy K.C. Lee, Vice Chairman
Professor Oivind Revang, Head of Department C.Y. Hu, Director, Economic Research Department
Professor Torger Reve Chung-Chung Shieh, Economic Research Department
Professor Erik W. Jakobsen Thailand
Peru National Economic and Social Development Board,
Centro de Desarrollo Industrial, Lima Economic Analysis and Projection Division
Sociedad Nacional de Industrias Arkhom Termpittayapaisith, Director
Dr. Luis Tenorio, Executive Director Ukraine
Fany Sotelo, Project Manager CASE - Ukraine, Kiev
Liliana Arevalo, Project Assistant Vladimir Dubrovskiy, Project Manager
Philippines Uruguay
Makati Business Club, Makati City, Metro Manila ORT University, Montevideo
Guillermo M. Luz, Executive Director Professor Isidoro Hodora
Marc P. Opulencia, Deputy Director Venezuela
Michael B. Mundo, Research Manager CONAPRI, National Council for Investment Promotion, Caracas
Poland Eugenia Labrador, Investment Manager
Warsaw School of Economics Gabriela Reveron, Business Analyst
Professor Bogdan Radomski Vietnam
Portugal Institute for Economic Research, Ho Chi Minh City
Instituto Superior de Estudos Empresariais da Universidade Nguyen Xuan Thanh, Research Fellow
do Porto, Porto Zimbabwe
Professor Rui Guimarães, Dean Zimbabwe National Chamber of Commerce, Harare
AURN – Associaçao das Universidades da Regiao Norte, Porto Nhlanhla Masuku, President
Professor Daniel Bessa Wonder Maisiri, Chief Executive
John Makamure, Chief Economist, Advocacy & Trade Manager
Preface
KLAUS SCHWAB
President, World Economic Forum

This year’s Global Competitiveness Report appears at a time helping in the design of policy measures to remove such
of exceptional uncertainty. Global economic activity has obstacles as a precondition for advancing human well-
slowed substantially, stock markets have shown consider- being across the globe.
able volatility, and the world’s major currencies have expe- This year we have added not fewer than 17 countries
rienced significant fluctuations. In Europe, where the final to our analysis, reflecting the rising integration of develop-
steps toward monetary unification are about to be taken, ing countries into the global economy and ensuring that
output has declined considerably below the region’s pro- the Global Competitiveness Report remains the most com-
duction potential. In Japan, there are serious concerns of a prehensive knowledge source for policymakers, the busi-
prolonged recession, and in several countries throughout ness community, and other key stakeholders.These new
the rest of Asia industrial production has shrunk markedly. entrants are regionally diversified, with one economy from
Other emerging market economies have been subject to Africa (Nigeria), two from Asia (Bangladesh and Sri
financial turmoil that reminds us of the severe crises in Lanka), five from central and eastern Europe (Estonia,
1997 and 1998. Latvia, Lithuania, Romania, and Slovenia), and nine from
The greatest uncertainty, however, concerns the the Western Hemisphere (Dominican Republic,
United States, whose economy has essentially come to a Guatemala, Honduras, Jamaica, Nicaragua, Panama,
standstill in the second quarter of 2001. In the highly inte- Paraguay,Trinidad and Tobago, and Uruguay). As regards
grated world economy, the United States remains critical the latter, I would like to thank the Inter-American
for global economic growth.Yet evidence will emerge Development Bank for their excellent cooperation.
only gradually regarding how the horrific tragedies of In the future, we will certainly continue to expand
September 11 will affect this economy that was already the list of countries covered by the Global Competitiveness 7
experiencing a slowdown. In order to restore confidence, Report. Although this Report remains our flagship publica-
the US Federal Reserve, in concert with other central tion, we plan to publish supplementary reports on specific
banks, has continued to lower interest rates while the regions, including one forthcoming study on Latin
federal government has developed a package for fiscal America and another on the transition economies in cen-
stimulus. It is extremely difficult to predict how fast a tral and eastern Europe and the former Soviet Union.
turnaround can be achieved, but the United States’ We remain indebted to Professor Michael E Porter,
underlying fundamentals will play the most important director of the Institute for Strategy and Competitiveness
role in influencing its return to a sustained growth path. at the Harvard Business School, and Professor Jeffrey D
As this Report confirms, the United States’ fundamentals Sachs, Director of the Center for International
remain highly competitive. Development at Harvard University, for their partnership
To be sure, as the global economy experiences this and for acting as co-directors of the Global Competitiveness
period of economic and political uncertainty, much is at Report.We would also like to thank John W McArthur of
stake. Calls for more protectionism have become louder. the Center for International Development for managing
Commitments to international efforts urgently required to this project on the Harvard side and for applying the rig-
fight killer diseases as well as global climate change could orous standards to the data and analyses that ensure the
be undermined. And, more generally, the recent backlash ongoing excellence of the Report. Furthermore, heading
against globalization could gain increased momentum. the Global Competitiveness Program at the World
There can be little doubt that these measures would hurt Economic Forum, Dr Peter Cornelius has remained in
developing countries most. charge of executing the Survey, coordinating the Report,
Coping with the enormous challenges currently fac- and providing its intellectual driving force. Finally, we
ing the global economy requires pursuing a prudent and extend very special thanks to KPMG, our partner in
proactive macroeconomic policy stance. More importantly, this Report, for their financial support in this important
it requires strengthening the cross-border networks that venture.
promote private investment, entrepreneurship, and social
progress around the world. In this endeavor, the Global
Competitiveness Report remains an invaluable tool by identi-
fying existing impediments to economic growth and thus
 Introduction
PETER K. CORNELIUS, World Economic Forum
JOHN W. MCARTHUR, Center for International Development at Harvard University
MICHAEL E. PORTER, Institute for Strategy and Competitiveness, Harvard Business School
JEFFREY D. SACHS, Center for International Development at Harvard University
KLAUS SCHWAB, World Economic Forum

Slowdown and Uncertainty: International Economic

Networks in the Wake of September 11, 2001

October 5, 2001

The terrorist attacks of September 11, 2001, have led In the short term, the terrorist attacks have probably
to numerous swift reactions in the political and security worked as a catalyst, pushing the world economy into a
spheres. In the economic sphere, short-term reactions recession more quickly and more severely than would
were severe:Through to September 25, an estimated have been the case otherwise.Two factors are largely to
US$ 2 trillion were lost in world equity markets, 20 of the blame. First, the terrorist attacks and the security precau-
world’s major stock market indexes dropped by more than tions taken in their wake have made travel, trade, and
10 percent, and 32 national indexes dropped by at least communication more costly. Possible disruptions in trans-
8
8 percent (see Table 1). Over the same period, at least 15 port networks threaten the functioning and efficiency of
currencies saw their values drop by 4 percent or more global production chains. Second, and more significant,
relative to the US dollar, a tremendous amount over a business and consumer confidence took a significant blow.
short period (see Table 2). But many of these losses were Before September 11, the resilience of US consumer
later recouped: Between September 25 and October 3, spending was one of the few positive signs in an overall
more than $500 billion was regained of the $800 billion slowing world economy. Now there is more consumer
lost in US equity markets in the 14 days following uncertainty, leaving companies to wait and see what will
September 11, and rebounds in other global markets were happen next. Although it is highly probable that these two
similar. Now, a few weeks after the attacks, attention is factors will dissipate over the next year, they could well
turning to the medium- and long-term impacts of place a drag on a global economic recovery.
September 11 on the global economy. In the longer term, the terrorist attacks will have
It is with these medium-term (roughly five years) a lasting negative impact if the policy responses trigger
economic trends that the Global Competitiveness Report is a reversal of the global economic integration that has
concerned. In September 2001, the world economy was characterized the past twenty years.The possibility of
already in the midst of a cyclical slowdown. In line with large-scale global conflict, terrorism, political backlash, and
our stated objective of projecting countries’ economic market uncertainty have the potential to raise the costs
prospects independent of business cycles, this Report makes of cross-border business to levels not seen in decades, and
a key implicit assumption that global economic integra- thereby to limit the gains in economic well-being that
tion will continue in the years ahead, despite shocks such global economic integration can yield.We therefore hope
as the horrendous one of September 11. However, since and believe that the responses to September 11 will be
the events of September 11 were of such potential signifi- resolute and powerful, but that care will be taken to pre-
cance to the world economy and because the Report had vent them from derailing the benefits of global business.
not yet gone to press at that date, we decided to add the
following brief analysis of the post–September 11 world
economy.
 Introduction
Table 1: Fluctuations in equity markets across selected Table 2: Exchange rate fluctuations across GCR
GCR economies economies
Change Change in
in value: value: Change in currency value Change in currency value
Jan 1– Sep 10– relative to US Dollar: relative to US Dollar:
Country Jan 1–Sep 10, 2001 Sep 10–Sep 25, 2001
Country Index Sep 10, 2001 Sep 25, 2001
Argentina –0.1% –0.1%
Argentina Merval –31.1% –15.1%
Australia –7.7% –5.8%
Australia All Ordinaries 0.9% –8.8%
Austria –3.9% 1.0%
Austria ATX 8.7% –9.2% Bangladesh –5.2% –3.7%
Bangladesh Bangladesh SE All Share Price Index 1.2% –3.1% Belgium –3.9% 1.0%
Belgium BEL–20 –9.7% –9.6% Bolivia –5.1% –4.2%
Brazil Bovespa –21.9% –14.2% Brazil –32.4% –10.5%
Bulgaria Bulgarian SE Sofia –12.7% –1.5% Bulgaria –4.2% 2.7%
Canada TSE 300 –17.8% –8.8% Canada –4.6% –0.2%
Chile IPSA 16.0% –8.9% Chile –16.3% –7.6%
China Shanghai Composite –10.5% –3.4% China 0.0% –0.1%
Colombia Colombia SE Price Index –0.3% * –7.3% Colombia –3.6% –4.3%
Costa Rica Costa Rica SE 11.4% 0.0% Costa Rica –4.5% –4.0%
Czech Rep PX 50 –27.7% –3.9% Czech Republic –0.2% 0.0%
Denmark KFX –13.0% –12.7% Denmark –3.6% 1.1%
Ecuador Quito–SE 6.1% 4.6% Dominican Republic –1.7% –4.2%
Egypt CMA 0.3% –2.1% Ecuador 0.0% 0.8%
Estonia Talinn Stock Exchange –16.7% –3.5% Egypt –11.0% 0.1%
Finland Helsinki General –55.4% 5.4% El Salvador 0.0% 0.1%
France CAC 40 –26.0% –11.0% Estonia –3.9% 1.7%
Germany DAX –27.4% –14.2% Finland –3.9% 1.0%
Greece General Share –25.1% –14.7% France –3.9% 1.0%
Hong Kong Hang Seng –31.3% –11.2% Germany –3.9% 1.0%
Hungary Budapest (BUX)–Price Index –20.6% –0.2% Greece –3.9% 1.0%
Iceland Iceland SE ICEX All Share Price Index –18.7% –0.1% Guatemala –3.4% –2.9%
India BSE 30 –19.9% –17.8% Honduras –3.1% –4.2%
Indonesia Jakarta Composite 6.6% –7.8% Hong Kong SAR 0.0% 0.0%
Ireland Ireland ISEQ –2.5% –13.2% Hungary 0.5% –2.1%
Israel TA–100 –20.1% –9.2% Iceland –17.2% –2.6%
Italy MIBTEL –24.7% –15.0% India –1.2% –1.5%
Jamaica Jamaica SE 19.7% –4.9% Indonesia 5.7% –4.1%
Ireland –3.9% 1.0%
Japan Nikkei 225 –26.0% –4.9%
Israel –6.6% –1.0%
Jordan Amman SE Financial Market Price Index 20.5% –8.3% 9
Italy –3.9% 1.0%
Korea Seoul Composite 9.1% –14.3%
Jamaica –1.0% 0.0%
Latvia Latvia Dow Jones RICI (LVL) Price Index 9.0% –4.3%
Japan –5.0% 2.1%
Lithuania Lithuania Litin Price Index –34.6% –2.4%
Jordan –0.2% –0.3%
Malaysia KLSE Composite 2.3% –12.8%
Korea –1.8% –1.1%
Mauritius Mauritius SE SEMDEX Price Index –6.5% –2.8%
Latvia –0.8% 0.8%
Mexico IPC 3.6% –9.4% Lithuania 0.0% 0.1%
Netherlands AEX General –24.2% –11.2% Malaysia 0.0% –0.1%
New Zealand NZSE 40 2.6% –6.7% Mauritius –6.4% –0.5%
Norway Total Share –14.9% –15.8% Mexico 3.0% –0.3%
Panama Panama SE General –9.2% –0.1% Netherlands –5.5% 1.0%
Peru Lima General 7.7% –7.8% New Zealand –2.0% –8.3%
Philippines PSE Composite –13.2% –10.4% Nicaragua –5.6% 0.0%
Poland Warsaw General Price Index –27.9% –7.5% Nigeria –2.4% –2.9%
Portugal BVL 30 –28.0% –2.0% Norway –0.4% 0.8%
Romania BET 10 39.3% –7.6% Panama 0.0% 0.0%
Russia Moscow Times 57.0% –12.8% Paraguay –23.5% –4.0%
Singapore Straits Times –19.1% –17.8% Peru 1.3% –4.8%
Slovak Republic SAX 25.0% 2.4% Philippines –2.8% 0.4%
Slovenia Slovenian Price Index (PIX) –0.3% –0.5% Poland –2.2% –0.4%
South Africa Johannesburg SE All Share 40 Price Index 2.6% –8.6% Portugal –3.9% 1.0%
Spain Madrid General –14.9% –7.4% Romania –16.4% –2.8%
Sri Lanka All Share –8.9% –1.7% Russia –3.1% 0.0%
Sweden Stockholmsborsen All Share Price Index –27.8% 1.6% Singapore –0.8% –1.4%
Switzerland Swiss Market –24.7% –8.3% Slovak Republic –2.0% –0.4%
Taiwan Taiwan Weighted –9.6% –18.5% Slovenia –6.9% –0.3%
Thailand SET 23.2% –16.6% South Africa –11.6% –3.3%
Trinidad & Tobago S&P/IFCF Trinidad & Tobago Price Index 2.5% 0.0% Spain –3.9% 1.0%
Turkey ISE National–100 0.9% –20.2% Sri Lanka –9.0% 0.0%
UK FTSE 100 –19.1% –7.4% Sweden –11.5% –2.6%
Ukraine PFTS Index –9.0% –2.7% Switzerland –3.5% 4.1%
United States Dow Jones –11.0% –9.8% Taiwan –5.0% –4.4%
Venezuela IBC 9.6% –5.1% Thailand –2.7% 0.4%
Zimbabwe Zimbabwe Industrial 175.5% –8.6% Trinidad and Tobago 2.9% 0.0%
Turkey –110.9% –11.4%
*Since August 3, 2001 Ukraine 1.6% 0.1%
United Kingdom –2.2% 0.1%
Sources: Yahoo Business News, Bloomberg, Datastream
Uruguay –17.9% –1.2%
Venezuela –6.8% 0.5%
Vietnam –3.3% –4.2%
Zimbabwe –1.3% –2.4%

Source: Oanda.com
Introduction

Flash survey Anticipated changes in demand

To assess the magnitude of the effects of September 11 On a 1-to-7 scale question where 1 = large increase in
over the coming six months, between September 26 and demand, 4 = no effect, and 7 = large decrease in demand,
October 1 we conducted a “flash survey” of 90 senior 20 percent of respondents anticipated no change in
executives whose companies are members of the World demand for their products, while 18 percent looked for-
Economic Forum.We asked them six questions about how ward to an increase in demand. Meanwhile 62 percent
their business operations had been affected by the terrorist anticipated a decrease, but more than two-thirds of them
attacks in the United States, soliciting their views on both anticipated the drop in demand to be only minor (ie, a
their companies’ operations and their general view of the score of 5).The overall average response was 4.5, with
world economy. Although the limited sample size prevents little variation in mean scores across business sectors.
rigorous statistical analysis, the main results—and their Variation was also fairly limited geographically, with aver-
consistency across regions and sectors—provide useful age scores ranging from 4.0 for companies operating in
insights into the current thinking in global business. Latin America to 4.6 for companies operating in East Asia.
Overall, the survey indicates that the terrorist attack
has had a slightly but not overwhelmingly negative effect Effects of increased risk and costs of business
on business and consumer confidence. It suggests that the Perhaps the most obvious repercussion from the terrorist
global economy is more resilient than many observers hijackings involves increased risks, and therefore costs, of
would suggest. Interestingly, the survey also revealed con- doing business.These costs include, for example, increased
sistent business sentiments around the globe.The intercon- insurance premia, increased shipping times and expenses,
nectedness of the international economy appears to be reduced business travel, and general trade disruptions. In a
yielding broadly similar responses to the current cyclical question that asked executives to rate on a 1-to-7 scale the
economic downturn and the events of September 11. In effects and aftermath of terrorist attacks on business costs
this sense, the terrorist attacks of September 11 hit not (1 = small effect, 7 = large effect), the mean response was
only the United States but also nations around the globe. 4.0. Companies operating in Asia, Sub-Saharan Africa, and
the Middle East and North Africa were slightly more pes-
Changes to corporate investment simistic than their counterparts operating in other regions,
10 Of the executives surveyed, fully 64 percent foresaw no rating means responses of 4.3, 4.4, and 4.3, respectively.
change in corporate investment plans due to the events Interestingly, the average score for executives identifying
of September 11. Meanwhile, 19 percent foresaw their their companies as being in the information technology
company’s investment decreasing by only 10 percent or (IT) sector was 4.7. In a sector already buffeted by declin-
less, and only 15 percent anticipated cutting back more ing demand, pessimism about the effect of the attacks was
than 10 percent on investment. Only 2 percent foresaw greater. Of course, the overall short-term impact of trends
an actual increase in investment. Notably, there was no such as decreases in business travel might have some
geographic trend among the companies anticipating large longer-term benefits. Becoming accustomed to the
drops in investment. Indeed, those expecting the biggest potential of videoconferencing and Internet-based
decreases were companies with global operations spanning communication technology could help many companies
several continents. In sectoral terms, more than half of the lower operating costs.
manufacturing companies anticipated no change in their
investment; nor did a full 75 percent of the financial firms.
Effects of potential disruptions to supply chains
It is of note that these results were collected even before
Anticipated disruptions to supply chains were significant
US interest rates dropped to their lowest point in four
but less severe than expected cost increases. On the same
decades on October 2. Apparently, despite the headline-
1-to-7 scale (1 = small effect, 7 = large effect), the mean
grabbing stories of massive cutbacks in a few industries,
response across the sample was 3.0. Respondents from
many if not most firms have stable investment plans,
firms operating in Asia or the Middle East and North
relatively robust to the aftereffects of September 11.
Africa were slightly more pessimistic than their peers,
rating mean responses of 3.3 and 3.4 respectively, but there
were no other discernible geography-based differences in
responses. In sectoral terms, IT producers were again the
most concerned about supply chain disruptions, with a
mean score of 3.9 for that group.
 Introduction
Effects of potential disruptions in world oil markets Countries at greatest risk
Of great interest to all markets is the possibility that world The flash survey results provide interesting insights into
oil market disruptions will affect businesses’ operating global business perspectives, but they raise an equally
environments.The flash survey responses reflected this important question.Which countries will be the most
uncertainty, with the average score among respondents affected by the heightened uncertainty? We can identify
(with 1 = small effect and 7 = large effect) being 3.7. four main, sometimes overlapping, groups of countries in
Economies operating in Sub-Saharan Africa had worse terms of exposure.
expectations, with an average score of 4.6, while First are those emerging market economies whose
companies operating in Latin America were slightly growth in output is most closely linked to the US business
more optimistic, with an average response of 3.4. Across cycle.These economies were already suffering before
sectors, the average score to this question was quite September 11 and are likely to bear a heavy burden if the
constant, except for firms involved in IT, who were again US economy requires an extended period to regain
slightly more pessimistic with an average score of 4.5. momentum.This is particularly relevant to the East Asian
export-oriented economies. As indicated in Table 3,
Singapore’s exports to the United States in July 2001 were
Overall recession perceptions
a full 30 percent less than for the same month in the pre-
Of the executives surveyed, none foresaw strong world-
vious year, while Taiwan’s decreased by 24 percent. Since
wide economic growth in 2002.Twenty-one percent
Singapore’s exports to the United States accounted for 21
predicted modest growth, but a full 79 percent predicted
percent of its gross domestic product in 2000 and Taiwan’s
recession in the year ahead. Of significant interest, howev-
accounted for 13 percent, these drops represent major
er, is that slightly more than half of those predicting a
changes for those economies. Also affected are Korea,
recession believed that such a downturn was likely even
Malaysia, the Philippines, and Thailand, all of which saw
before September 11. In our sample, executives with opera-
roughly 20 percent drops in July-on-July exports to the
tions in the Middle East and North Africa were slightly
United States. Many of these economies had already expe-
more likely to believe that the events of September 11
will cause a recession, while those operating in Latin
America were somewhat more likely to believe a recession
11
was already in the offing. Among executives with opera-
Table 3: July 2001 versus July 2000 exports to United
tions in Asia,Western Europe, and North America, roughly
States for selected GCR economies most dependent on
45 percent believed a recession was already underway,
US trade
approximately 35 percent perceived September 11 as a Change in Exports to
Exports to United States United States, July 2000
major cause of a coming recession, and the remaining 20 Country as % of GDP in 2000 vs July 2001

percent predicted modest global growth in the year ahead. Canada 33% -5%
The breakdown of responses was quite similar across sec- Trinidad & Tobago 30% -8%
Malaysia 29% -19%
tors. In most areas of business, a large majority of respon-
Nigeria 26% -16%
dents foresaw a recession in the year ahead and roughly Nicaragua 24% -8%
half of those people thought a recession was already Mexico 24% -6%
Dominican Republic 22% -7%
underway.The one exception was for firms in the financial Costa Rica 22% -17%
industry, where slightly more executives (by a 3 to 2 Singapore 21% -30%
margin) saw September 11 as a key element in causing Philippines 19% -20%
Ecuador 17% 15%
a coming recession. Ireland 17% 37%
Together, these results paint an intriguing picture Venezuela 15% -17%
El Salvador 15% -4%
of the world economy. Both corporate investment and
Guatemala 14% -2%
consumer demand will ebb at least slightly in the near Thailand 13% -16%
future, but perhaps not by as much as predicted by early Taiwan 13% -24%
Sri Lanka 12% 4%
fears.The relative stability of planned investment and Israel 12% -22%
only minor anticipated drop in consumer and corporate Estonia 11% -49%
demand suggest that executives do not see the events China 9% -6%
Korea 9% -22%
of September 11 as being cataclysmic for the world Colombia 8% -19%
economy.The persistence of this sentiment will no doubt Jamaica 8% -27%
depend on future political and military developments. Hong Kong SAR 7% -15%
Indonesia 7% 4%
Mauritius 7% 14%

Sources: US Census Bureau, IMF World Economic Outlook May 2001,

and authors' calculations
Introduction

rienced a major slump in demand for their information have an adverse impact for countries such as Jamaica,
and communication technology-based exports as US firms which had tourism receipts equivalent to nearly 18 per-
continued to recover from the technology market bubble cent of its gross domestic product in 1999, the most recent
that burst in 2000. year for which World Bank data are available. Mauritius is
Second are those economies with high levels of sov- similarly exposed to fluctuations in tourism, with tourist
ereign debt, particularly those with high debt-to-export earnings equal to 13 percent of its GDP.The Dominican
ratios. Although interest rates have been lowered across the Republic and Costa Rica, two countries heavily depend-
G-7 since September 11, 10-year US Treasuries have only ent on US markets for their exports, are likewise depend-
decreased approximately 50 basis points, while the risk ent on tourism, with tourist receipts estimated at 9.6 and
premia and long-term bond markets have expanded by 6.6 percent of those economies, respectively. As noted in
nearly 100 basis points (and in some instances much more) Table 5, tourism receipts account for more than 5 percent
in the weeks following the attacks. Economies such as of GDP in several European countries as well, but visitors
Argentina, Bolivia, Brazil, Nicaragua, and Peru that have are less likely to stay away from those economies since air
high debt-to-export ratios could be seriously strained in travel markets have been less disrupted in Europe than in
their ability to finance new debt or refinance old debt in North America and also because train service is an easier
the months ahead.Table 4 indicates some selected fluctua- alternative means for travel in Europe.
tions in bond market risk spreads since September 11.
Third are the economies likely to be disrupted by What can be done?
interruptions to existing trade patterns, caused by With short-term real interest rates low, and corporate
increased insurance and freight costs, lengthened investment plans so far only mildly affected by September
shipping times, and extended delays at customs.This will 11, the economic responses should include a set of confi-
particularly affect economies reliant on ocean shipping dence-building measures to stimulate consumer and corpo-
and air cargo, again including the highly trade-dependent rate demand and help maintain the efficiency of interna-
export-oriented economies of East Asia—notably tional production networks. Amidst the formidable uncer-
Singapore,Taiwan, Korea, and Malaysia. But it is also tainty, means are needed to ensure that the networks of
likely to affect Canadian and Mexican firms facing longer the international economy continue to operate efficiently
12 delays at United States border crossings. and with minimal disruption.
Fourth are those countries dependent on travel and The main lesson of modern economic history is that
tourism as significant sources of national income.The we live in a globally networked economy, where major
World Bank recently estimated that 65 percent of holidays disruptions to global trade, finance, travel, and production
to the Caribbean have been canceled for the short-term. have significant effects across the world economy. Even
It is difficult to predict how long this reluctance to travel before September 11, this became evident once again.This
will last and how long it will take for people to regain year’s global economic fallout from the bursting of the US
confidence in flying, but in the short term it will definitely financial bubble was already proving to be much sharper
than originally predicted because the linkages across mar-
kets were stronger than had been commonly understood.
Even economies such as Singapore and Taiwan, which
Table 4: Selected sovereign bond risk spreads, rank very highly on our lead competitiveness Indexes, are
September 10, 2001, versus October 2, 2001 being severely affected by this fallout.This does not imply
that these economies are becoming less competitive, but
SEP 10, 2001 OCT 2, 2001
rather that even the most competitive economies in the
Sovereign Bond Risk Spreads
world are being affected by a cyclical downturn.
Argentina 12.96 13.39
Brazil 10.14 11.85 Policymakers must avoid confusing structural, cyclical,
Lebanon 5.31 6.72 and short-term issues.When global demand picks up
Mexico 3.30 4.22
again, these competitive economies will be well posi-
Philippines 6.82 8.10
South Africa 2.54 2.96 tioned.The key is to ensure the stability of the networks
Brady Bond Risk Spreads and linkages that allow economies to interact with the
Argentina 5.42 6.32 greatest efficiency. Any central economic response to
Brazil 7.52 9.13 September 11, therefore, must involve bolstering the
Mexico 1.69 2.12
Venezuela 4.24 4.66
framework of globalization and recommitting govern-
US Long-Term Interest Rates
ments around the world to making the world economy
10-Year US Treasuries 4.84 4.51 work for all nations, including the poorest.Without that,
confidence in the international economic framework will
Source: Financial Times remain dented.
 Introduction
Table 5: Selected GCR economies for which tourism access to rich country markets (especially for apparel and
receipts represent a large share of national product agriculture exports) and to negotiate mutually acceptable
solutions to poor countries’ concerns about access to
Tourism Receipts essential medicines.
Country as a % of GDP
Sixth, the United States should comprehensively
Jamaica 17.9%
revamp and expand its assistance efforts for the world’s
Mauritius 13.1%
Dominican Republic 9.6% poorest nations. Lack of economic development is a root
Bulgaria 7.1% cause of social unrest and violence, so the United States
Costa Rica 6.6%
Hungary 6.5%
and other rich countries need to recognize the over-
Greece 6.2% whelming strategic benefits gleaned from supporting poor
Czech Republic 5.8% nations’ economic development. Perhaps most crucially,
Spain 5.5%
Thailand 5.4%
the United States needs to provide more leadership and
Austria 5.3% financing to provide debt relief and financial help for the
Lithuania 5.2% world’s poorest countries so that they can battle the dis-
Slovenia 5.1%
Egypt 4.6% ease epidemics of AIDS, malaria, and tuberculosis that are
Nicaragua 4.5% currently killing millions of poor people each year.
Hong Kong SAR 4.5%

Concluding thoughts
Source: World Bank, World Development Indicators 2001
The international economy has recently become charac-
terized by unprecedented levels of interconnectedness in
Most importantly, policymakers need to continue global production, communication, and transportation net-
pursuing the diplomacy needed to avoid large-scale global works. Even prior to September 11, we were seeing how
conflict. Military reprisals are a certainty, but for many rea- the linkages in those networks intertwine the fates of
sons the biggest mistake would be to instigate the kind of economies around the globe. In light of the unimaginable
response that sends the world into a wider military con- horror of the attacks of September 11, policymakers need
flict. Although less important than the direct loss of lives, to find ways to protect those networks amidst a climate of
the economic costs would be horrendous. uncertainty and, in many instances, fear. 13
Second, there needs to be confidence in the basic The consolidation and expansion of global networks
infrastructure of international trade and transport. Security requires ongoing policy attention both within and
at airports, seaports, and other nodes of commerce and between borders.While policymakers will understandably
travel should be enhanced. focus on the international issues we have highlighted
Third, OPEC should continue making its supply above, they must also continue to focus on the efforts
decisions in a manner that avoids any disruptions in oil to improve the underlying structures of their domestic
supplies or pricing.The OPEC member governments are economies.There can be little doubt that the continued
among the most vulnerable to the current global crisis, development of economies around the world will play
and should readily commit to such an international pledge. a pivotal role in reducing the anger and sense of fatalism
Fourth, the leading central banks must continue to that ferments terror and armed conflict. Moreover, even
ensure the ample supply of liquidity, as they have been amidst the shock and horror we all feel in the aftermath
doing since the attacks in the United States.With Japan of September 11, we must not forget or ignore the
already in recession, the Bank of Japan should take even tremendous economic progress that has been made by
more aggressive action to stabilize the economy by selling dozens of countries in recent years, and that must be
enough yen to prevent any further appreciation of the continued in order to reduce poverty and promote global
currency, and even some depreciation, as that is sorely living standards.To this end, we hope the information
needed for Japanese recovery. contained in this year’s Global Competitiveness Report
Fifth, the world should launch a new trade round at will prove useful for policymakers hoping to enhance
the WTO Ministerial Meeting in November, to signal the continuously their economies’ long-term capacity to
intention of all member countries of the WTO to perse- support and promote the economic foundations of
vere in the path of free trade. It is time for the rich coun- human well being.This is the only way to address security
tries to respect the wishes of the poor in getting such a concerns successfully in the long run.
trade round off the ground.That would require proactive
steps by the wealthy economies of the world to ensure
that the developing country exporters have improved
Table 1. Overall competitiveness rankings

GROWTH COMPETITIVENESS INDEX RANKING CURRENT COMPETITIVENESS INDEX RANKING

Growth Current
Growth Competitiveness Growth Current Competitiveness Current
Competitiveness Ranking 2001 among Competitiveness Competitiveness Ranking 2001 among Competitiveness
Country Ranking 2001 GCR 2000 countries Ranking 2000 Country Ranking 2001 GCR 2000 countries Ranking 2000

Finland 1 1 5 Finland 1 1 1
United States 2 2 1 United States 2 2 2
Canada 3 3 6 Netherlands 3 3 4
Singapore 4 4 2 Germany 4 4 3
Australia 5 5 11 Switzerland 5 5 5
Norway 6 6 15 Sweden 6 6 7
Taiwan 7 7 10 United Kingdom 7 7 8
Netherlands 8 8 3 Denmark 8 8 6
Sweden 9 9 12 Australia 9 9 10
New Zealand 10 10 19 Singapore 10 10 9
Ireland 11 11 4 Canada 11 11 11
United Kingdom 12 12 8 France 12 12 15
Hong Kong SAR 13 13 7 Austria 13 13 13
Denmark 14 14 13 Belgium 14 14 12
Switzerland 15 15 9 Japan 15 15 14
Iceland 16 16 23 Iceland 16 16 17
Germany 17 17 14 Israel 17 17 18
Austria 18 18 17 Hong Kong SAR 18 18 16
Belgium 19 19 16 Norway 19 19 20
France 20 20 21 New Zealand 20 20 19
Japan 21 21 20 Taiwan 21 21 21
Spain 22 22 26 Ireland 22 22 22
Korea 23 23 28 Spain 23 23 23
Israel 24 24 18 Italy 24 24 24
Portugal 25 25 22 South Africa 25 25 25
Italy 26 26 29 Hungary 26 26 32
Chile 27 27 27 Estonia 27 — —
Hungary 28 28 25 Korea 28 27 27
Estonia 29 — — Chile 29 28 26
Malaysia 30 29 24 Brazil 30 29 31
Slovenia 31 — — Portugal 31 30 28
Mauritius 32 30 35 Slovenia 32 — —
Thailand 33 31 30 Turkey 33 31 29 15
South Africa 34 32 32 Trinidad and Tobago 34 — —
Costa Rica 35 33 37 Czech Republic 35 32 34
Greece 36 34 33 India 36 33 37
Czech Republic 37 35 31 Malaysia 37 34 30
Trinidad and Tobago 38 — — Thailand 38 35 40
China 39 36 40 Slovak Republic 39 36 36
Slovak Republic 40 37 38 Jamaica 40 — —
Poland 41 38 34 Poland 41 37 41
Mexico 42 39 42 Latvia 42 — —
Lithuania 43 — — Greece 43 38 33
Brazil 44 40 45 Jordan 44 39 35
Jordan 45 41 46 Egypt 45 40 39
Uruguay 46 — — Uruguay 46 — —
Latvia 47 — — China 47 41 44
Philippines 48 42 36 Panama 48 — —
Argentina 49 43 44 Lithuania 49 — —
Dominican Republic 50 — — Costa Rica 50 42 43
Egypt 51 44 41 Mexico 51 43 42
Jamaica 52 — — Mauritius 52 44 38
Panama 53 — — Argentina 53 45 45
Turkey 54 45 39 Philippines 54 46 46
Peru 55 46 47 Indonesia 55 47 47
Romania 56 — — Colombia 56 48 48
India 57 47 48 Sri Lanka 57 — —
El Salvador 58 48 49 Russia 58 49 52
Bulgaria 59 49 57 Dominican Republic 59 — —
Vietnam 60 50 52 Ukraine 60 50 56
Sri Lanka 61 — — Romania 61 — —
Venezuela 62 51 53 Vietnam 62 51 53
Russia 63 52 54 Peru 63 52 49
Indonesia 64 53 43 El Salvador 64 53 51
Colombia 65 54 51 Zimbabwe 65 54 50
Guatemala 66 — — Venezuela 66 55 54
Bolivia 67 55 50 Nigeria 67 — —
Ecuador 68 56 58 Bulgaria 68 56 55
Ukraine 69 57 56 Guatemala 69 — —
Honduras 70 — — Paraguay 70 — —
Bangladesh 71 — — Nicaragua 71 — —
Paraguay 72 — — Ecuador 72 57 57
Nicaragua 73 — — Bangladesh 73 — —
Nigeria 74 — — Honduras 74 — —
Zimbabwe 75 58 55 Bolivia 75 58 58
 Executive Summary:
Competitiveness and Stages of Economic Development
MICHAEL E. PORTER, Institute for Strategy and Competitiveness, Harvard Business School
JEFFREY D. SACHS, Center for International Development at Harvard University
JOHN W. MCARTHUR, Center for International Development at Harvard University

This year’s Global Competitiveness Report appears in the The Global Competitiveness Report focuses on two distinct
aftermath of the September 11 terrorist attacks in the but complementary approaches to the analysis of econom-
ic competitiveness.The first, led by Professor Jeffrey D
United States. Although this Report was already at the
Sachs of the Center for International Development at
editor on that watershed date, we felt it important to Harvard University, focuses on global competitiveness as
supplement the medium-term (five-year) analysis that is “the set of institutions and economic policies supportive
of high rates of economic growth in the medium term.”
contained in the annual Report with a separate, shorter-
Prior to 2000, the Report presented an overall index based
term analysis of the world economy, which is included on this approach that was known simply as the
in the new Introduction. The Report’s underlying medi- Competitiveness Index. Starting with the 2000 Report, this
measure was relabeled the Growth Competitiveness Index,
um-term analysis is still relevant in the high likelihood
16 or GCI. Building on the foundations of theoretical and
that the world economy and the globalization process empirical macroeconomics, the GCI represents a best esti-
continue apace, despite the shock of this tragedy and the mate of 75 economies’ underlying prospects for growth
short-term uncertainties and dislocations created in its
over the coming five years.This year’s Report assesses the
growth prospects in 17 countries not previously covered,
wake. Indeed, we regard the potential gains from global-
including Bangladesh, Nigeria, Romania, Slovenia, Sri
ization, if properly managed, as so vital to world welfare Lanka, and the three Baltic countries, as well as nine
that we urge the international community to do all in its economies in Latin America and the Caribbean.
The Report’s second approach to competitiveness, led
power to preserve the peaceful and deepening economic
by Professor Michael E Porter of the Institute for Strategy
linkages around the world, and to best ensure that they and Competitiveness at the Harvard Business School, is
serve to benefit all countries rich and poor. embodied in the Current Competitiveness Index, or CCI,
as first presented in last year’s edition.The CCI uses
microeconomic indicators to measure the “set of institu-
tions, market structures, and economic policies supportive
of high current levels of prosperity,” referring mainly to an
economy’s effective utilization of its current stock of
resources.This Index thus assesses the current productive
potential of the same 75 economies.Together the GCI
and CCI present distinct yet highly complementary
insights into sources of national competitiveness.
 Executive Summary
Both the GCI and CCI combine hard data and The principal factors that contribute to global
unique survey data to assess competitiveness in a large competitiveness, and thereby improve living standards,
sample of countries. Central to both Indexes is the will therefore differ for economies at different levels of
Executive Opinion Survey, conducted annually by the development. For some low-income economies, the main
World Economic Forum.The Survey is indispensable to challenge is to get the basic factor markets—for land,
the Report, since no reliable hard data sources exist for labor, and capital—working properly. As countries
many of the most important aspects of an economy such advance, the basic challenge is to make connections with
as the efficiency of government institutions, the sophistica- international production systems by attracting sufficient
tion of local supplier networks, or the nature of competi- flows of FDI. Once reaching high-income status, the basic
tive practices. Even where hard data are available, the data challenge facing countries is typically to generate high
often do not cover all the countries in our sample.The rates of innovation and commercialization of new tech-
Executive Opinion Survey records the perspectives of nologies.The critical institutions in a country, and its
business leaders around the world by asking them to com- barriers to continued growth, will therefore differ
pare aspects of their local business environment with glob- depending on that country’s current position.
al standards, this year including more than 4,600 respon- Successful economic development is thus a process of
dents.The business leaders surveyed actually make many of successive upgrading, in which businesses and their sup-
the investment and policy decisions that drive economic porting environments co-evolve, to foster increasingly
growth and development, so by recording their perspec- sophisticated ways of producing and competing. Seeing
tives we obtain an incomparable, up-to-date knowledge economic development as a sequential process of building
base concerning the current state of economic affairs in not just macroeconomic stability but also interdependent
each of the 75 countries assessed. factors such as quality of governance, societal capacity to
advance its technological capability, more advanced modes
of competition, and evolving forms of firm organizational
structure, helps to expose important potential pitfalls in
Transitions in economic development economic policy.To evolve successfully through different
This year’s Global Competitiveness Report emphasizes an levels of development, key parts of the economic environ-
increasingly important theme confronting many nations: ment must change at appropriate times. Lack of improve- 17
Countries face very different challenges and priorities as ment in any important area can lead to a plateau in pro-
they move from resource-based to knowledge-based ductivity and stalled economic growth.
economies.i As an economy develops, so do its structural At low levels of development, government’s main job
bases of global competitiveness. At low levels of develop- is to provide overall political and macroeconomic stability
ment, economic growth is determined primarily by the and sufficiently free markets to permit the effective utiliza-
mobilization of primary factors of production: land, pri- tion of primary commodities and unskilled labor both by
mary commodities, and unskilled labor. As economies indigenous firms and through attracting foreign invest-
move from low- to middle-income status, global competi- ment. Firms produce commodities or relatively simple
tiveness becomes Investment-Driven, as economic growth products of long-standardized technology designed in
is increasingly achieved by harnessing global technologies other more advanced countries.Technology is assimilated
to local production. Foreign direct investment, joint ven- through imports, foreign direct investment, and imitation.
tures, and outsourcing arrangements help to integrate the In this stage, companies compete on price and often lack
national economy into international production systems, direct access to consumers.They have limited roles in the
thereby facilitating the improvement of technologies and value chain, focused on assembly, labor-intensive manufac-
the inflows of foreign capital and technologies that sup- turing, and resource extraction. A Factor-Driven economy
port economic growth. In most economies, the evolution is highly sensitive to world economic cycles, commodity
from middle-income to high-income status involves the price trends, and exchange rate fluctuations.
transition from a technology-importing economy to a
technology-generating economy, one that innovates in at
least some sectors at the global technological frontier.
For high-income economies at this Innovation-Driven
stage of economic development, global competitiveness is
critically linked to high rates of social learning (especially
science-based learning) and the rapid ability to shift to
new technologies.
Executive Summary

As development proceeds, government priorities need It is our hypothesis that many of the failures in
to focus increasingly on improvements in physical infra- economic development in recent years involve countries
structure (ports, telecommunications, roads) and regulatory getting stuck at critical junctures of economic transition:
arrangements (customs, taxation, company law) to allow Between Factor-Driven and Investment-Driven or
the economy to integrate more fully with global markets. between Investment-Driven and Innovation-Driven stages.
In this Investment-Driven phase, efficiency in producing For example, some countries successfully master the initial
standard products and services becomes a dominant source phase of Factor-Driven growth, but then fail to make the
of global competitiveness.The products and services pro- transition to technology imports and globalized produc-
duced become more sophisticated, but technology and tion systems. Others effectively reach the investment phase
designs still largely come from abroad.Technology is of development, but then fail to progress to homegrown
accessed through licensing, joint ventures, foreign direct innovation.These transition points are indeed difficult to
investment, and imitation. Nations in this stage not only manage from both a macroeconomic and microeconomic
assimilate foreign technology, however, but they also devel- perspective.The shift from one phase of development to
op the capacity to improve on it.The national business the next often requires new ways of organizing govern-
environment supports investment in efficient infrastructure ments, markets, and enterprises, so it is not altogether sur-
and modern production methods. Companies often pro- prising therefore that many countries fail at making the
duce under contract to foreign original equipment manu- appropriate transitions, or even fail to recognize that such
facturers (OEM), which control design and marketing. a transition is needed.The transition from primary com-
Gradually, companies extend capabilities more widely in modities to increased utilization of imported technologies
the value chain. An Investment-Driven economy is con- to innovation requires changes in government priorities
centrated on manufacturing and on outsourced service and spending patterns as well as in the internal structure
exports. It is susceptible to financial crises since it relies and aims of business enterprises. Shifts in both macroeco-
heavily on foreign capital flows, as well as external sector- nomic policy and microeconomic business structure
specific demand shocks. are necessary. Ironically, old strategies become the new
Perhaps the hardest transition is from technology- weaknesses. A highly opportunistic corporate approach
importing, efficiency-based development to innovation- that worked well serving disparate OEM customers, for
18 based development.This requires a direct government role example, becomes a liability in making the long-term
in fostering a high rate of innovation, through public as commitments required for advanced production processes
well as private investments in research and development, and pursuing true innovations.
higher education, and improved capital markets and regu- This framework helps to highlight why some coun-
latory systems that support the start-up of high-technolo- tries enjoy significant economic progress for a period and
gy enterprises. At this innovation stage, enterprises them- then appear to stall in their development.When
selves become less hierarchical, with much more delega- economies reach transition points, they require wholesale
tion of authority to sub-units within the enterprise. transformation of many interdependent dimensions.
Buyers and suppliers and corporate sub-units are often Successful Investment-Driven economies such as Taiwan
linked together in flexible networking arrangements that and Singapore, for example, are finding that their reliance
facilitate innovations and rapid shifts in the division of on sustained infrastructure investments, OEM manufactur-
labor within the organization. Firms invest heavily in the ing for multinationals, and government guidance of the
continual training and upgrading of their workforce. economy to boost efficiency are insufficient to support
Compensation systems involve incentive payment schemes very high levels of prosperity.Their current level of wages
linked to the productivity of different parts of the enter- and domestic costs makes them vulnerable to competition
prise. In the same way, the firms within an industry also from lower-wage countries such as China. Likewise
become much more interactive, with deep industrial Ireland, which has been tremendously successful in
clusters characterized by a sophisticated division of labor, attracting foreign investment for manufacturing, now faces
increasing flows of workers between enterprises, and a mix the need to justify higher wages and higher local costs
of fierce competition and cooperation among enterprises without yet having developed a world-class innovative
within an industry. Companies compete with unique structure. In a more severe example, Argentina has become
strategies that are often global in scope. Such characteris- caught in the early Investment-Driven stage of develop-
tics have been noted in American high-tech regions such ment where it still has to compete on price, but its
as Silicon Valley, Route 128 in Boston, and the Research overvalued exchange rate and lack of technological
Triangle of North Carolina. sophistication and scientific innovative capacity are
combining to keep the economy in crisis.The challenge
for all these economies is to move to an Innovation-
Driven economy with world-class technological capacities
 Executive Summary
and the presence of deep clusters.To do so, companies The GCI not only incorporates the differing forms
need to move to new types of strategies, investment prior- of technological advancement that are linked to growth
ities must change, higher education must take on even in the core and non-core economies, but also stresses the
greater importance, and government’s role in the economy differing importance of technological advancement for
needs to shift. these two groups of economies.The GCI is comprised of
One of the principal goals of the Global three subindexes: the level of technology in an economy,
Competitiveness Report is to identify the policy challenges the quality of public institutions, and the macroeconomic
that face governments at various levels of development. As conditions related to growth. Among the world’s core
suggested earlier, some tasks are common to all govern- economies, statistical evidence indicates that innovation
ments: macroeconomic stability, provision of basic medical plays a dominant role in medium-term economic growth.
and health care, openness of the economy, and a competi- For these economies, the GCI thus places a weight of
tive exchange rate that supports export growth. Some 1/2 on the technology index against weights of 1/4 each
tasks are critical for countries attempting to move beyond on public institutions and macroeconomic environment.
a traditional primary commodity base: improvements of Among the non-core economies, technological advance-
infrastructure, universal secondary education, improved ment, measured largely by the economies’ performance in
technical education, and flexibility of labor markets. skill-based manufacturing exports, appears to play a more
Finally, special tasks are required for countries attempting limited role relative to the other two factors.Thus, the
to move from technology-using to technology-innovating GCI places a weight of 1/3 on each component index
economies: for example, a venture capital sector as well as when calculating overall scores for the non-innovating
other improved financial and legal arrangements for new economies. For the three economies that appear to be at
startups, increased government spending on R&D, and the cusp of innovation-driven growth—Hong Kong SAR,
improved legal tools for intellectual property rights. Ireland, and Singapore—GCI values are calculated as an
Reflecting their complementary perspectives, the Growth average of those economies’ scores using the core and
Competitiveness Index and Current Competitiveness non-core formulas.
Index aim to shed light on the respective macro and micro The new GCI results are listed in Table 1, which
priorities at various phases of economic development. shows this year’s overall rankings as well as the change in
rankings among only those countries included in this and 19
last year’s Reports. Finland, for the first time, ranks first in
the world, indicating that it now has the best prospects for
The Growth Competitiveness Index growth over the next five years.This country’s remarkable
Building on the latest developments in economic growth turnaround over the past decade serves as evidence of how
research, as well as the results from recent years’ Global quickly an economy’s prospects can be transformed by
Competitiveness Reports, the Growth Competitiveness Index strong political institutions, a focus on technology, and
methodology has been updated since last year to provide a sound macroeconomic management.The United States
ranking of the underlying potential for medium-term (five ranks second. Although the United States is currently at
years) growth that better accounts for the widely varying risk of a recession, it is still far and away the world’s tech-
levels of development of the included countries. As out- nological leader and engine of economic growth in the
lined in detail in Chapter 1.1 by John W McArthur and medium term. Canada, the sixth-ranked economy in the
Jeffrey D Sachs, the GCI divides the Report’s sample of 75 2000 GCI, rounds out the top three places, having moved
countries into two main groups based on their level of up in the growth rankings mainly due to this year’s weight
technological capacity. Using patenting as a measure of accorded to tertiary education as a key factor in techno-
innovative capacity, the Growth Competitiveness chapter logical innovation. Australia and New Zealand, two other
identifies the 21 Innovation-Driven economies in the countries with strong measures of university-educated
world today, for which it uses the shorthand term core human capital, have jumped significantly in the growth
economies (a term with no moral judgments intended, rankings from 11th to 5th and 19th to 10th spots, respec-
simply a statement about innovation as the source of tively. Notably, and reflecting their looming challenges in
growth!). It then attempts to identify the specific factors in making the transition from investment-based to innova-
technological advancement among these core economies. tion-based growth, Singapore has dropped from 2nd to
At the same time, the GCI includes an entirely separate 4th place, Ireland has dropped from 4th to 11th, and Hong
measure of technological advancement for the non-inno- Kong SAR has shifted from 7th to 13th. Meanwhile,
vating (or non-core) economies, one that puts more weight Japan’s ongoing economic stagnation is reflected in its
on technological diffusion as these economies absorb and continuing low position at 21st, down one slot from
adapt production practices developed mainly by the inno- last year.
vating economies.
Executive Summary

Other notable GCI results include the strong growth Table 2. Rankings of growth competitiveness component
prospects of new entries Estonia, at 29th, and Slovenia, at indexes
31st. Estonia’s ranking is well ahead of the results for Baltic Public Macroeconomic
neighbors Lithuania (43) and Latvia (47). Results lower Technology Institutions Environment
Country GCI Ranking Index Rank Index Rank Index Rank
down the list are generally more stable, with the important
Finland 1 3 1 10
exceptions of Turkey, which dropped six spots compared United States 2 1 12 7
with last year, and Indonesia, which tumbled 10 places. Canada 3 2 11 13
Singapore 4 18 6 1
Of additional importance are the newly included Latin Australia 5 5 8 17
American economies, most of which scored in the lower Norway 6 7 16 5
Taiwan 7 4 24 15
quintile of the growth rankings, frequently reflecting their Netherlands 8 14 5 9
Sweden 9 6 7 29
difficulty in emerging from a Factor-Driven to an New Zealand 10 11 4 14
Investment-oriented stage of development. Brazil, Ireland 11 28 18 2
United Kingdom 12 10 9 12
nonetheless, has moved up five spots, ranking 44th in Hong Kong SAR 13 33 10 4
the expanded sample, while Chile holds steady in 27th. Denmark 14 12 3 31
Switzerland 15 24 13 3
Other relatively bright spots in Latin America include Iceland 16 19 2 34
new entrants Uruguay at 46th and the Dominican Germany 17 15 17 19
Austria 18 16 15 26
Republic at 50th. Belgium 19 13 22 24
France 20 17 20 22
Bangladesh and Nigeria, the two poorest economies Japan 21 23 19 18
in our sample, are included in this year’s Report for the first Spain 22 27 23 11
Korea 23 9 44 8
time ever and, perhaps not surprisingly, rank near the very Israel 24 26 14 61
bottom of the GCI scale.This should not, however, be Portugal 25 25 25 35
Italy 26 31 27 23
taken as a sign of pessimism about these economies. Chile 27 42 21 21
Indeed, the avid willingness of business people in those Hungary 28 21 26 38
Estonia 29 8 29 43
economies to participate in the Executive Survey reflected Malaysia 30 22 39 20
Slovenia 31 30 30 39
a remarkable interest in policy dialogue and subsequent Mauritius 32 37 32 30
economic transformation. As this Report’s chapter on Thailand 33 39 42 16
South Africa 34 46 35 27
20 Growth Competitiveness also outlines, both Bangladesh Costa Rica 35 32 37 42
and Nigeria have a tremendous opportunity for what Greece 36 38 40 32
Czech Republic 37 20 53 49
economists call “catch-up” growth if those countries are Trinidad and Tobago 38 52 36 25
able to continue to enhance their political and technologi- China 39 53 50 6
Slovak Republic 40 29 38 64
cal capacities under the auspices of stable macroeconomics. Poland 41 35 41 50
Mexico 42 36 56 36
The GCI’s component indexes on technology, public Lithuania 43 41 34 56
institutions, and macroeconomic environment are reported Brazil 44 49 47 33
Jordan 45 54 28 54
within the same chapter and are presented here in Table 2. Uruguay 46 45 31 63
Careful assessment of these indexes and the variables they Latvia 47 34 48 59
Philippines 48 40 64 28
comprise reveals many of the relative strengths and weak- Argentina 49 48 55 40
nesses to growth within each economy. China and Korea Dominican Republic 50 44 54 46
Egypt 51 64 33 51
provide two very brief examples. China ranks 6th on the Jamaica 52 43 43 71
macroeconomic environment index, but only 50th on the Panama 53 57 59 44
Turkey 54 51 46 68
measure of public institutions and 53rd on the technology Peru 55 62 45 58
Romania 56 47 52 67
index, yielding an overall GCI ranking in 39th place. India 57 66 49 45
Korea, on the other hand, ranks 9th in technology and El Salvador 58 58 60 47
Bulgaria 59 50 51 69
8th for its macroeconomic environment, but 44th for its Vietnam 60 65 63 37
public institutions, producing a 23rd place score overall. Sri Lanka 61 59 58 60
Venezuela 62 55 65 53
Underlying these indexes are numerous subindexes that Russia 63 60 61 57
can be investigated in some detail, thereby providing Indonesia 64 61 66 41
Colombia 65 56 57 66
policymakers and business leaders reading this Report with Guatemala 66 68 70 52
Bolivia 67 67 62 70
valuable information regarding how best to advance their Ecuador 68 69 68 62
economies’ growth prospects. Ukraine 69 63 71 73
Honduras 70 70 72 72
Bangladesh 71 74 75 48
Paraguay 72 73 74 65
Nicaragua 73 71 67 74
Nigeria 74 75 73 55
Zimbabwe 75 72 69 75
 Executive Summary
The Current Competitiveness Index Table 3: Rankings on current competitiveness
Whereas the Growth Competitiveness Index strives to component indexes
estimate the underlying conditions for growth over the Company Quality of the
coming five years, the Current Competitiveness Index Operations and National Business
Country CCI Ranking Strategy Ranking Environment Ranking
(CCI) evaluates the underlying conditions defining the
Finland 1 2 1
current level of productivity in each of the 75 economies United States 2 1 2
covered. Using a microeconomic approach focusing on Netherlands 3 3 3
Germany 4 4 4
the detailed conditions that support a high level of sus- Switzerland 5 5 5
Sweden 6 6 6
tainable productivity, measured by GDP per capita, the United Kingdom 7 7 8
CCI aims to move beyond the examination of broad, Denmark 8 9 10
Australia 9 24 7
aggregate variables characteristic of most economic Singapore 10 15 9
growth models. Using common factor analysis, the Canada 11 14 11
France 12 10 12
Current Competitiveness Index (CCI) is an aggregate Austria 13 11 13
measure of microeconomic competitiveness.This chapter Belgium 14 12 14
Japan 15 8 18
also reports two subindexes, one focusing on company Iceland 16 16 15
Israel 17 18 17
sophistication and the other on quality of the national Hong Kong SAR 18 21 16
business environment drawing on a complex array of Norway 19 23 19
New Zealand 20 19 20
variables with a demonstrated statistical relationship to Taiwan 21 20 21
GDP per capita. Ireland 22 17 22
Spain 23 22 23
This year’s CCI rankings are shown in Table 1, while Italy 24 13 24
subrankings on the sophistication of company operating South Africa 25 25 27
Hungary 26 33 25
practices in each country and the quality of the business Estonia 27 32 26
environment are presented in Table 3. For the second Korea 28 26 30
Chile 29 30 28
year, Finland edges out the United States to achieve the Brazil 30 29 32
Portugal 31 38 29
number one ranking. Advanced nations improving their Slovenia 32 28 35
current competitiveness ranking in 2001 include the Turkey 33 44 31
Trinidad and Tobago 34 27 37
Netherlands, Sweden, Australia, Austria, France, and Czech Republic 35 41 33 21
Iceland. Advanced countries that experienced a decline India 36 43 34
Malaysia 37 37 38
in the rankings in 2001 include Germany, Denmark, and Thailand 38 42 39
Belgium in Europe; and Singapore, Japan, and Hong Kong Slovak Republic 39 57 36
Jamaica 40 31 44
SAR in Asia. Developing nations that improved their Poland 41 55 40
Latvia 42 35 43
current competitiveness rankings on a comparable sample Greece 43 51 42
basis include Hungary, India,Thailand, Poland, China, Jordan 44 56 41
Egypt 45 36 46
Russia, and Ukraine. Developing countries whose position Uruguay 46 48 45
has fallen include Chile, Malaysia,Turkey, the Czech China 47 39 47
Panama 48 40 49
Republic, Greece, Jordan, Mauritius, and Peru. As impor- Lithuania 49 47 48
tant as the overall ranking, however, is the subrankings and Costa Rica 50 34 52
Mexico 51 46 53
specific strengths and weaknesses presented in the Report. Mauritius 52 49 50
Argentina 53 53 51
Taken together, they provide a concrete set of priorities Philippines 54 45 54
for national action. Indonesia 55 50 57
Colombia 56 52 59
Sri Lanka 57 58 55
Russia 58 54 56
Dominican Republic 59 59 58
Ukraine 60 62 60
Romania 61 63 61
Vietnam 62 64 64
Peru 63 65 62
El Salvador 64 66 63
Zimbabwe 65 60 67
Venezuela 66 67 66
Nigeria 67 61 68
Bulgaria 68 70 65
Guatemala 69 69 69
Paraguay 70 68 71
Nicaragua 71 73 70
Ecuador 72 71 72
Bangladesh 73 72 73
Honduras 74 74 75
Bolivia 75 75 74
Executive Summary

The CCI measures the level of GDP per capita that To move into middle income, the challenge is to
is sustainable in the long term. However, in the short and make the transition to the Investment-Driven stage.
medium run, nations can over- or underperform their The Investment-Driven stage depends on a high rate of
microeconomic fundamentals because of surges of investment in products, processes, and the acquisition of
inbound FDI, natural resource windfalls, and the like.The technology. Corporate priorities expand to include, for
chapter compares a country’s expected GDP per capita, example, in-house product development, licensing the best
given its current microeconomic competitiveness, with its foreign technology, connecting to foreign markets, and
actual GDP per capita. A positive gap signals upside poten- developing the capacity to improve technology. Among
tial, while a negative gap indicates vulnerability. Finland other things, reducing bureaucratic red tape and enhancing
leads the advanced countries in upside potential, which is the legal system become important to enhance business
consistent with its high GCI ranking. Finland’s stunning efficiency, while local financial markets become much
turnaround in microeconomic competitiveness is still far more necessary to mobilize debt and equity capital.
from being fully realized in terms of reported prosperity. To reach high-income status, incremental improve-
Conversely, Norway, Iceland, and Ireland all continue to ments in quality and efficiency are no longer enough.
enjoy a level of prosperity that exceeds their microeco- To reach the Innovation-Driven stage, companies must
nomic fundamentals.This suggests a challenge for these innovate at the world technology frontier, develop
countries in maintaining their current success.To a lesser unique product designs, sell globally, and create more
extent this is also true for the United States and Canada. decentralized and flexible organizational structures.Truly
Turkey, Brazil, and South Africa are among the world-class research institutions must emerge, along with
middle-income countries that should be able to support a strong research collaboration with universities, venture
higher GDP per but are currently underperforming for capital availability, truly sophisticated demand conditions,
various reasons.The converse is true for Greece, and intense local competition.
Argentina, Russia, and Slovenia, which are among a group The CCI and the GCI measure different but comple-
of countries whose levels of income will be unsustainable mentary dimensions of competitiveness. Figure 1 compares
without substantial microeconomic reform. India heads the two rankings for 2001 and reveals that they are highly
the list of low-income countries with upside potential that correlated. Finland ranks first on both Indexes, while the
22 could be unlocked by governmental and political reform. United States ranks second. However, there are diver-
Our findings make it clear that micro reforms must gences in rankings that are potentially revealing about
go beyond reducing the role of government and abolish- country economic prospects. Of the high-income coun-
ing market distortions. Government also has a range of tries, for instance, Norway and Ireland rank 10 or more
positive roles that are fundamental to prosperity—such positions higher on growth competitiveness than they do
as investing in specialized human resources, building on current competitiveness. Significant micro reform will
innovative capacity, facilitating cluster development, and be a central challenge in these countries. Conversely,
stimulating advanced demand via regulatory standards. Germany and Switzerland rank 10 or more positions
Many nations need to move beyond first stage micro worse on growth competitiveness than they do on current
reforms and address these agendas. competitiveness. Creating the vitality and assets required
In keeping with the overall theme of this year’s for growth looms as the fundamental challenge in already
Report, our results highlight the need to set a nation’s highly productive economies.
economic priorities to be consistent with its level of Of the medium-income countries, Mauritius,
development. Especially challenging are the difficult tran- Costa Rica,Taiwan, and New Zealand rank significantly
sitions between competitive stages. At the Factor-Driven better on growth competitiveness than on current com-
stage, our findings suggest the core challenge for firms is petitiveness.Turkey and Brazil, on the other hand, rank
to increase their efficiency, for example, by improving pro- worse on growth competitiveness than on current com-
duction process sophistication and beginning to delegate petitiveness. Creating more dynamism and the capacity for
authority. Improving transportation and communications change are the challenge for these countries. Of the low-
infrastructure, upgrading public education and the training income countries, Bulgaria, Bolivia, and the Dominican
of management, liberalizing trade, and reducing corrup- Republic are among the countries with higher ranks on
tion are essential.These steps create a foundation of effi- growth competitiveness than on current competitiveness.
ciency, transparency, and competitive pressure necessary to India, Jamaica, Indonesia, Colombia, Ukraine, and
improve the productivity of Factor-Driven competition. Zimbabwe are facing lower growth prospects that lag their
ranking on current competitiveness.
Figure 1: Growth and Current Competitiveness Index rankings

1 United States Finland

Netherlands
Germany
Switzerland
Sweden
United Kingdom Australia
Denmark
Singapore
Canada
France
Austria
Belgium Hong Kong SAR
15 Japan
Israel Iceland New Zealand
Norway
Taiwan
Spain Ireland
Italy
South Africa
Hungary
Estonia
Korea
Chile
30 Brazil
Portugal
Slovenia
Turkey
Trinidad and Tobago
Czech Republic
India Malaysia
Thailand
Slovak Republic
Jamaica
Poland
Latvia
Greece
Jordan
45 Egypt
Uruguay
China
Panama
Lithuania
Costa Rica

Current Competitiveness Index ranking

Mexico
Mauritius
Argentina
Philippines
Indonesia
Colombia
Sri Lanka
Russia Dominican Republic
60 Ukraine
Romania
Vietnam
Peru
Zimbabwe El Salvador
Venezuela
Nigeria
Bulgaria
Guatemala
Paraguay
Nicaragua
Ecuador
Bangladesh
75 Honduras Bolivia

75 60 45 30 15 1

Growth Competitiveness Index ranking

23

Executive Summary
Executive Summary

Structure of the Report The fourth chapter of Part 2 provides a new

Just as the Report includes two distinct perspectives on framework for assessing national trade performance at the
competitiveness, it includes chapters on a range of other sectoral level, as constructed by Cornelius along with
central issues relating to competitiveness and economic International Trade Centre economists Friedrich von
performance. In each case, authors have taken advantage Kirchbach, Mondher Mimouni, Jean-Michel Pasteels, and
of the Executive Opinion Survey’s to inform their own Shilpa Phadke.Taking advantage of sophisticated United
research. Nations data on the trade flows of all 75 GCR countries
The chapter by Daniel Esty of Yale University and over the past five years, the authors are able to assess how
Michael E Porter on “Measuring National Environmental countries’ individual industries are performing compared
Regulation and Performance,” explores the differences with the same industries in other countries.They further-
among countries in environmental performance and their more compare the future prospects for those industries,
link between environmental outcomes and national envi- based on a range of factors that includes the current global
ronmental policy choices.The chapter also explores the demand trends for those industries.
crucial question of whether environmental quality must In the next chapter of Part 2, Peter Cornelius and
come at the expense of competitiveness and economic Yong Zhang of the World Economic Forum review recent
development, as traditional economic theory has suggest- developments in European labor markets and the context
ed.The findings are revealing: environmental performance for ongoing structural reform in this area. Using questions
varies systematically with the quality of a country’s envi- from the Executive Opinion Survey, they then create a
ronmental regulatory regime.The statistical findings are measure of labor market flexibility to compare countries
then used to construct an index that ranks countries in across the European Union.The authors discuss how labor
terms of the quality of their environmental regulations. market restrictions have become an impediment to
The research reveals that there is no evidence that higher growth in the European Union, particularly since
environmental quality compromises economic progress. exchange rates have been removed as a macroeconomic
Environmental performance is positively and highly corre- adjustment mechanism.
lated to GDP per capita.The chapter presents preliminary The chapter on labor markets is followed by an
evidence suggesting that countries with stricter environ- update in which Warner joins Cornelius to assess the
24 mental regulation than would be expected at their level of performance of the euro as of early 2001. Here the
GDP per capita enjoy faster economic growth. authors find some interesting shifts in European execu-
The chapter on “National Innovative Capacity” by tives’ assessment of the euro’s prospects for stability.
Porter and Scott Stern of Northwestern University delves Finally, Part 2 concludes with a review of the
in detail into the conditions that allow a country to inno- Executive Opinion Survey by Cornelius and McArthur,
vate at the global technology frontier.The findings reveal including a brief description of our surveying methodolo-
the striking degree to which the national circumstances gy, several descriptive statistics of our Survey sample, and
actually explain differences across countries in innovative a few key tests of the consistency and accuracy of the
activity measured by US patenting.The statistical findings Survey results.
allow the construction of an overall innovative capacity The third and final section of this Report is broken
ranking of the 75 countries, as well as comparisons across into two parts, country profiles and data tables. In the
countries in important components of innovative capacity country profiles, we outline some key advantages and dis-
including availability of scientific and technical personnel, advantages drawn from the variables and methodologies
innovation-related policy choices, cluster vitality, and the used in constructing the Growth Competitiveness Index
quality of linkage mechanisms between basic research and and the Current Competitiveness Index.We also include
the private sector. numerous strengths and weaknesses of each economy that
The next chapter presents an update on “Economic are not directly included in the respective Indexes but
Creativity” by Andrew M Warner of the Center for might nonetheless be of interest to the reader. In the
International Development at Harvard University.The accompanying data tables, results are listed by country for
concept of economic creativity was central to last year’s most variables covered in the Report.These tables provide
overall Growth Competitiveness Index and moreover easy reference for the reader who wishes to look at each
provided a methodological breakthrough that stimulated variable in detail.The data also provide a wealth of infor-
much of our research over the past year on how to mation for policymakers and business leaders who wish
quantify the distinct effects of innovation versus diffusion to compare their economies to others across a range of
as contributors to economic growth. dimensions. For researchers and data enthusiasts hoping to
gain a much deeper level of knowledge from the Report’s
underlying data, a full electronic version of the Survey
data is available as an accompaniment to this Report.
 Executive Summary
Notes
i We explored the stages of national competitive development in Michael
E Porter, The Competitive Advantage of Nations. New York: The
Free Press; London: Macmillan Press, 1990.

25
The Competitiveness Indexes Part 1
 CHAPTER 1.1 A central objective of the Global Competitiveness Report is
to assess the capacity of the world’s economies to achieve
sustained economic growth.We do this by analyzing the
The Growth Competitiveness extent to which individual national economies have the
structures, institutions, and policies in place for economic
Index: Measuring Technological growth over the medium term, roughly a perspective of
five years.These structural, institutional, and policy features
Advancement and the Stages of of national economies are summarized in the Growth
Development Competitiveness Index (GCI).We do not try to predict
short-term business cycles, though we discuss short-term
issues, especially as they affect the longer-term prospects
JOHN W. MCARTHUR and JEFFREY D. SACHS,
for economic growth.
Center for International Development at Harvard University
Economists’ knowledge of the processes and
policies that underpin economic growth has advanced
tremendously over the past decade.With the increasing
availability of cross-country macroeconomic data, the
rapid evolution in theoretical and statistical methods, and
the increasing sophistication of survey tools—including
the Executive Opinion Survey that is conducted annually
in preparation of this Report—economists have vastly
increased their ability to test theories of economic growth.
At least some of the ideological battles of the past are
receding in the face of improved evidence.i
Of course, our knowledge remains imperfect.We do
not know the exact mechanisms through which growth
occurs, nor are we able to forecast future growth rates
28 with absolute precision. Economic crises sometimes
emerge somewhat out of the blue, as with Japan’s decade
long recession and the East Asian crisis in 1997. Research
into the subject of economic growth is ongoing, and thus
our understanding of the relevant technological, institu-
tional, geographical, and societal factors improves with
every year that passes. As a result, we are constantly updat-
ing the framework used in the Growth Competitiveness
Index.This year’s GCI is no exception.
This chapter on growth competitiveness contains two
distinct sections.The first provides an outline of current
knowledge concerning economic growth and the results
for this year’s GCI.The second proceeds in greater detail,
describing the new GCI methodology and logic used in
the construction of this year’s Index.
 1.1: The Growth Competitiveness Index
ECONOMIC GROWTH AND GROWTH COMPETITIVENESS: of taxation, the faith in the judicial system, and the extent
THE FUNDAMENTALS of macroeconomic stability or instability.Technological
diffusion and innovation are affected by intellectual prop-
An overview of economic growth erty rights, the size of the potential market for a new
Economists have identified three inter-related mechanisms invention, government support for scientific research, the
involved in economic growth.The first is the efficient state of the higher education, and many other factors.
allocation of resources, based on market competition and Economists have increasingly returned to another idea
a sophisticated division of labor. Adam Smith identified of Adam Smith’s as well: that physical geography plays an
this factor already in 1776, and observed that international important role in determining economic growth.When a
trade plays an enormously important role in achieving an poorer economy is close to a richer economy, the poorer
efficient division of labor.The second mechanism is capital neighbor can often benefit by absorbing technologies and
accumulation.When national saving is converted into capital from the richer neighbor. Economic growth then
increasing capital per worker, the output per worker also spreads “within the neighborhood” of the richer economy.
tends to rise. Economists have come to appreciate that A more distant economy, by contrast, may be less able to
productive capital includes not just the plant and equip- benefit from capital inflows and technological diffusion.
ment of business sector, but also the human capital that Climatic factors can also affect long-term development,
results from investments in education, health, and on-the- because of the effects of climate on disease, food produc-
job training.The third mechanism in economic growth is tivity, and other sectors of the economy.
technological advance. Improvements in technology (both By virtue of their distinctive histories, geography, and
new goods and better ways of producing goods) can be social conditions, countries are at widely varying levels of
achieved by creating a truly new technology, or by adopt- income, technological sophistication, capacity to innovate,
ing (and adapting) a technology that has been developed and overall capacity to achieve sustained economic
abroad.The first process is called technological innovation; growth. But perhaps the most significant global division
the second, technological diffusion. today from the view of long-term economic growth is the
All three mechanisms—division of labor, capital one between countries that are able to achieve technolog-
accumulation, and technological advance—are important, ical innovation at a high rate and those that are not.The
but technological advance is probably the most fundamen- main innovators in the world, as measured, for example, by 29
tal of the three in modern history.Without technological the rate at which they patent new products and processes,
advance, the benefits of an improved division of labor, or a are few in number.The United States and Canada,
higher rate of capital accumulation, push the economy to Western Europe, Japan, and a handful of other economies
a higher standard of living but not to continuously high (Israel, Korea, Singapore, and Taiwan) account for the vast
economic growth. For example, as capital is accumulated, bulk of new patents each year. In 2000, these countries
the rate of return on new investment tends to fall over accounted for barely 15 percent of the world’s population,
time unless the capital accumulation is accompanied by but fully 99 percent of the patents issued for new inven-
technological change, which creates new profitable invest- tions by the US Patent Office.
ment opportunities.Thus, the Soviet Union accumulated The world’s technological divide was first incorporat-
capital at a high rate, but because civilian technology was ed into the growth competitiveness framework in last
nearly moribund, the rate of return to new investments year’s Report when our colleague Andrew Warner con-
fell to close to 0 by the 1980s, contributing to the collapse structed the economic creativity index to distinguish
of the system. empirically between growth stimulated by innovation and
Technological advance, on the other hand, has been growth fueled by technology transfer. (An update on eco-
self-perpetuating in the high-income countries. Each new nomic creativity by Dr Warner is included in Chapter 2.3
technological innovation triggers yet further innovation, in of this Report. Another chapter on innovation by Michael
a kind of chain reaction that fuels long-term economic E Porter and Scott Stern appears as Chapter 2.2.) This
growth.Thus, in the science-based, technologically year we build on the distinction between innovation and
advanced economies, economic growth has continued for technology transfer by using the term core economy for a
nearly two centuries without running out of dynamism, country that is a technological innovator; all the rest are
or even slowing down. said to be non-core economies.This classification system
There are, of course, volumes to be written about allows us to distinguish statistically how various factors
how the structural characteristics and economic policies of affect growth at different stages of development. (The
each economy affect economic growth.The division of methodology section in the second half of this chapter
labor is affected by trade policies, state versus private own- describes exactly how this framework applies to our
ership, the legal system, and so forth. Capital accumulation growth competitiveness calculations.) As an empirical mat-
is affected by the confidence in property rights, the rates ter, we define the core group as all economies that achieve
1.1: The Growth Competitiveness Index

at least 15 patents per million population.The economies Globalization has generated new opportunities for
meeting this core criterion in 2000 are listed in Box 1. countries, but also new challenges. By raising the mobility
The core economies are, typically, the richest countries of financial capital, skilled workers, and new technologies,
and typically have achieved sustained economic growth economies now have the capacity to grow at super-
over the course of many years, indeed decades.Their eco- charged annual rates if they can become attractive magnets
nomic growth is powered, fundamentally, by their capacity for investment and technological diffusion. But at the
to innovate.The competition among the core economies same time, globalization punishes the laggard economies
is closely related to their relative capacities to innovate and far more harshly than in the past.When the business envi-
to win new global markets for their technologically ronment is poor, skilled workers and capital simply “pack
advanced products. up their bags” and leave for a more promising location.
Thus, lawless governments impose a particularly high eco-
nomic cost on their countries. Unfortunately, some of the
Box 1: Core innovators as of 2000 losers today are suffering not for their sins, but for their
poor geographical inheritance. Some distant locations
Countries with more than 15 US utility patents registered (such as landlocked countries in Latin American, Africa,
per million population in 2000. and Asia) are experiencing high rates of brain drain and
Australia Hong Kong SAR New Zealand capital outflow because their remoteness raises transport
Austria Iceland Norway costs and diminishes the incentives for investment. Even
Belgium Ireland Singapore here, however, investments in infrastructure (such as better
Canada Israel Sweden
roads and airports, and better Internet connectivity) can
Denmark Italy Switzerland
Finland Japan Taiwan compensate for some of the inherent difficulties.
France Korea United Kingdom The most successful of the non-core economies in
Germany Netherlands United States recent years have achieved fast growth by attracting high
levels of foreign direct investment (FDI) from the high-
tech multinational firms of the core economies.This FDI
brings with it new technology, capital, export markets, and
30 We certainly don’t want to be misunderstood by our use organizational know-how, all in one process.Thus, China,
of terms.The use of core and non-core is not meant as a Singapore, Hong Kong, and more recently Ireland,
value judgment in any way, nor as a slight or insult to the Mexico, and Poland, have all achieved FDI-led growth at
non-innovating regions. It is meant only as a useful short- very rapid rates. Much of this FDI has been export orient-
hand to describe the critical division in today’s world ed.The multinational firm has invested in these non-core
economy between the innovating and non-innovating economies not so much for the local market (though that
economies.The economic dynamics have been very dif- can be important) but rather because it sees the economy
ferent in these two groups of countries, and we highlight as an export platform for the world market.Thus, the
those differences in this Report.We also hope that the regions that have benefited most from this kind of FDI are
description will help more countries to develop the means those that have good access to global shipping lanes (eg,
for higher rates of technological innovation within their coastal regions) or land proximity to major markets
own economies. (Mexico, Poland).
The non-core economies often achieve very high The boundaries between core and non-core
rates of growth, indeed the world’s very highest rates, by economies are clearly not rigid. A technologically laggard
rapidly absorbing the advanced technologies and capital country can become an innovator, but the breakthrough
of the core economies.This process of “catch-up growth” from non-core to core economy is not a simple one, and
has been extremely important for many developing most places in the world have not accomplished the tran-
countries. But we should highlight the fact that catch-up sition.That is, of course, why the group of core economies
growth has its inherent limits. As a non-core economy remains so small as a share of the world’s population.Yet
narrows the income gap with the technological leaders, countries such as Iceland, Ireland, Hong Kong SAR,
its ability to narrow the gap still further tends to diminish, Korea, Singapore, and Taiwan have all achieved a break-
or even disappear. In order to close the income gap fully, through in innovative capacity, and have thereby become
the non-core economy must become a technological part of the “core” of the world economy (see Table 1).
innovator—in other words, it must become part of the They are all growing rapidly based largely on their tech-
core economy itself. nological prowess. One of our goals in this Report is to
identify some of the key factors that allow an economy to
 1.1: The Growth Competitiveness Index
Table 1: Core technology-innovating economies of technological diffusion into the country, in part by
in the 1980s and in 2000 attracting high-tech foreign direct investments. For the
most advanced of the non-core economies, the goal is
Average Annual US Utility Patents likely to be the transition from technological diffusion to
US Utility Patents Granted per technological innovation—in other words, the transition
Granted per Million Million
Population in Population from being a non-core economy to being a core econo-
country 1980s* 1980s rank in 2000* 2000 rank
my. Among the most advanced countries, the main com-
1980s Core technology innovators
petition is in high-tech markets. Success in high-tech
Switzerland 189.6 1 182.1 4
United States 165.8 2 308.7 1 innovation depends on scientific prowess, the translation of
Japan 101.2 3 246.6 2 science into technology, and the commercialization of that
Sweden 94.3 4 177.2 5
Germany 85.1 5 123.6 7 technology, often through start-up businesses.
Netherlands 51.9 6 78.1 11
Canada 50.3 7 111.2 9
Just as the challenges of growth differ according to
United Kingdom 43.2 8 60.6 16 the stage of economic development, we have found that
France 43.0 9 64.4 14
Israel 42.1 10 135.0 6
the explanatory power of our Growth Competitiveness
Austria 40.3 11 62.1 15 Index is improved if we allow for different weightings of
Finland 37.0 12 119.4 8
Denmark 31.7 13 82.3 10
factors depending on the stage of development. For the
Belgium 26.4 14 67.8 13 core countries, for example, the weight accorded to tech-
Norway 22.6 15 55.1 18
Australia 21.4 16 36.7 20 nological indicators (relative to other factors) should be
Italy 16.4 17 29.7 22 higher than for non-core economies. Similarly, the impor-
New Zealand 15.2 18 28.0 23
tance of innovation relative to diffusion is higher for the
1980s Non-core economies that became core innovators by 2000 core economies than for the non-core economies.We ver-
Taiwan 12.8 19 210.3 3 ify through regression analysis that, as the stage of eco-
Iceland 9.0 21 61.6 17
Ireland 8.8 22 32.4 21 nomic development changes, the relative importance of
Hong Kong SAR 5.4 23 26.3 24 various sub-components of the GCI also changes.
Singapore 2.4 26 54.3 19
Korea 1.3 28 70.1 12 Finally, it is important to say a bit about the macro-
economic environment. Government monetary and fiscal
*Note that Luxembourg averaged 71.7 US patents per million population in the policies, and stability of financial institutions, have impor- 31
1980s and achieved 91.8 per million population in 2000 but is not included in our
analysis. tant effects on short-term economic dynamics as well as
on the long-term capacity to grow.The key macroeco-
nomic factors in long-term growth are budget balance,
modest taxation, high rates of national saving, stability in
become an innovator, in order to help more countries
the financial system, and a realistic level of the exchange
achieve the transition to innovation.These factors include:
rate that preserves the competitiveness of the export sec-
sizeable investments in higher education, a good informa-
tor.When one or more of these macroeconomic factors is
tion technology base, high levels of government spending
jeopardized (for example, by large budget deficits or a
on research and development, and effective intellectual
banking crisis), the short-term consequences can be stun-
property laws that promote research and development.
ning. Banking crises in Latin America and Asia during the
Another objective of this Report is to estimate as
1990s resulted in a collapse of GNP of 5 percent or more
accurately as possible the different roles of technology at
in a single year in many countries.The medium-term
different stages of development. Each country’s specific
growth prospects are also implicated, though less dramati-
challenges posed by globalization depend importantly on
cally, since macroeconomic instability seriously damages
its stage of economic and technological development. A
capital accumulation and the efficient division of labor.
very poor country with rudimentary levels of health and
Although the short-term macroeconomic convulsions are
education will generally not be competing on the basis of
often highest in the minds of investors or businessmen
technological innovation. Rather, the goal for that country
planning this year’s strategy, our concern remains focused
will be to attract capital investment and discourage capital
on the medium-term implications of the macroeconomic
flight, and to use the proceeds of economic growth to
environment.
invest in improved health, education, and infrastructure.
For a country somewhat higher up the development lad-
der, the main goal is likely to be to speed up the process
1.1: The Growth Competitiveness Index

The Growth Competitiveness Index 2001–2002 Table 2: Growth Competitiveness Index rankings and
2000 comparisons
Results
GCI 2001 rank
The overall Growth Competitiveness Index (GCI) aims to GCI 2001 GCI 2001 among GCR GCI 2000
country rank score 2000 countries rank
measure the capacity of the national economy to achieve sustained
Finland 1 6.03 1 5
economic growth over the medium term, controlling for the current United States 2 5.95 2 1
level of economic development. Canada 3 5.87 3 6
Singapore 4 5.84 4 2
Using data from recent years’ Executive Opinion Australia 5 5.74 5 11
Survey, and building on other economic research by our- Norway 6 5.64 6 15
Taiwan 7 5.59 7 10
selves and colleagues at the Center for International Netherlands 8 5.56 8 3
Sweden 9 5.55 9 12
Development at Harvard University—especially Andrew New Zealand 10 5.53 10 19
Warner, who has played a leading role in this Report’s Ireland 11 5.52 11 4
United Kingdom 12 5.51 12 8
intellectual development—the GCI 2001 focuses on three Hong Kong SAR 13 5.47 13 7
pillars of growth: technology, public institutions, and the Denmark 14 5.44 14 13
Switzerland 15 5.43 15 9
macroeconomic environment, each with its own index. Iceland 16 5.40 16 23
This is slightly modified from last year’s Growth Index, Germany 17 5.39 17 14
Austria 18 5.33 18 17
which focused on economic creativity (similar to this Belgium 19 5.31 19 16
year’s technology index), finance (closely linked to the France 20 5.29 20 21
Japan 21 5.25 21 20
new macroeconomic environment index); and interna- Spain 22 5.17 22 26
tionalization (which is somewhat related to both the tech- Korea 23 5.13 23 28
Israel 24 5.01 24 18
nology and macroeconomic indexes).We also, for the first Portugal 25 4.92 25 22
time, present a unified Index that distinguishes between Italy 26 4.90 26 29
Chile 27 4.90 27 27
growth factors affecting the world’s core innovator Hungary 28 4.87 28 25
economies and those affecting the non-core technological Estonia 29 4.87 — —
Malaysia 30 4.83 29 24
adapters. Slovenia 31 4.70 — —
Despite the revisions in methodology and labeling, Mauritius 32 4.60 30 35
Thailand 33 4.53 31 30
the reader should be aware that many of last year’s under- South Africa 34 4.50 32 32
32 Costa Rica 35 4.49 33 37
lying variables are still included in this year’s overall Greece 36 4.46 34 33
Growth Index. Many have been re-categorized, however, Czech Republic 37 4.41 35 31
Trinidad and Tobago 38 4.40 — —
and several have also been dropped in light of new evi- China 39 4.40 36 40
dence regarding the role of various factors at different Slovak Republic 40 4.36 37 38
Poland 41 4.30 38 34
stages of development. Broadly speaking, the technology Mexico 42 4.29 39 42
index measures the capacity for innovation and diffusion Lithuania 43 4.27 — —
Brazil 44 4.26 40 45
of technology.The public institutions subindex mainly Jordan 45 4.24 41 46
measures the role of politics and the bureaucracy in sup- Uruguay 46 4.22 — —
Latvia 47 4.19 — —
porting market-based economic activity and the division Philippines 48 4.16 42 36
of labor.The macroeconomic environment index measures Argentina 49 4.11 43 44
Dominican Republic 50 4.10 — —
variables related to capital accumulation and the efficiency Egypt 51 4.03 44 41
of the division of labor. Jamaica 52 3.92 — —
Panama 53 3.88 — —
This year’s results are presented in Tables 2 and 3. Turkey 54 3.86 45 39
Table 2 focuses on the overall rankings, comparing this Peru 55 3.85 46 47
Romania 56 3.84 — —
year’s placings to last year’s for the 58 countries included India 57 3.84 47 48
in both GCIs.Table 3 presents the results for the technol- El Salvador 58 3.84 48 49
Bulgaria 59 3.82 49 57
ogy, public institutions, and macroeconomic environment Vietnam 60 3.77 50 52
Sri Lanka 61 3.74 — —
indexes that, together, form the overall GCI. As explained Venezuela 62 3.70 51 53
in more detail below, these component indexes are con- Russia 63 3.70 52 54
Indonesia 64 3.69 53 43
structed and weighted somewhat differently for the core Colombia 65 3.68 54 51
and non-core economies. Guatemala 66 3.44 — —
Bolivia 67 3.42 55 50
When looking at Table 2, the reader should note that, Ecuador 68 3.36 56 58
given the updates in this year’s GCR methodology as well Ukraine 69 3.26 57 56
Honduras 70 3.11 — —
as the expanded coverage of 17 new countries, a precise Bangladesh 71 3.04 — —
comparison between this year’s and last year’s results is not Paraguay 72 3.01 — —
Nicaragua 73 3.01 — —
recommended.The reader should also note that, due to its Nigeria 74 2.99 — —
perennially small yield in our Executive Opinion Survey, Zimbabwe 75 2.81 58 55
 1.1: The Growth Competitiveness Index
Table 3: Growth Competitiveness Index component indexes

TECHNOLOGY PUBLIC INSTITUTIONS MACROECONOMIC ENVIRONMENT

Country Rank Score Country Rank Score Country Rank Score
United States 1 6.42 Finland 1 6.59 Singapore 1 5.52
Canada 2 6.37 Iceland 2 6.56 Ireland 2 5.20
Finland 3 6.35 Denmark 3 6.42 Switzerland 3 5.18
Taiwan 4 6.19 New Zealand 4 6.33 Hong Kong SAR 4 5.12
Australia 5 6.05 Netherlands 5 6.29 Norway 5 5.08
Sweden 6 5.81 Singapore 6 6.27 China 6 5.04
Norway 7 5.77 Sweden 7 6.19 United States 7 4.97
Estonia 8 5.68 Australia 8 6.17 Korea 8 4.94
Korea 9 5.66 United Kingdom 9 6.14 Netherlands 9 4.88
United Kingdom 10 5.56 Hong Kong SAR 10 6.01 Finland 10 4.82
New Zealand 11 5.55 Canada 11 6.01 Spain 11 4.82
Denmark 12 5.54 United States 12 6.01 United Kingdom 12 4.81
Belgium 13 5.54 Switzerland 13 5.99 Canada 13 4.74
Netherlands 14 5.54 Israel 14 5.98 New Zealand 14 4.70
Germany 15 5.49 Austria 15 5.98 Taiwan 15 4.69
Austria 16 5.45 Norway 16 5.95 Thailand 16 4.68
France 17 5.44 Germany 17 5.93 Australia 17 4.68
Singapore * 18 5.44 Ireland 18 5.87 Japan 18 4.66
Iceland 19 5.41 Japan 19 5.76 Germany 19 4.65
Czech Republic 20 5.39 France 20 5.72 Malaysia 20 4.59
Hungary 21 5.39 Chile 21 5.69 Chile 21 4.56
Malaysia 22 5.36 Belgium 22 5.67 France 22 4.54
Japan 23 5.28 Spain 23 5.47 Italy 23 4.53
Switzerland 24 5.27 Taiwan 24 5.30 Belgium 24 4.48
Portugal 25 5.27 Portugal 25 5.25 Trinidad and Tobago 25 4.48
Israel 26 5.27 Hungary 26 5.20 Austria 26 4.46
Spain 27 5.23 Italy 27 5.05 South Africa 27 4.43
Ireland * 28 5.20 Jordan 28 5.04 Philippines 28 4.42
Slovak Republic 29 5.18 Estonia 29 4.99 Sweden 29 4.40
Slovenia 30 5.18 Slovenia 30 4.90 Mauritius 30 4.34
Italy 31 5.01 Uruguay 31 4.89 Denmark 31 4.28
Costa Rica 32 4.97 Mauritius 32 4.79 Greece 32 4.26
Hong Kong SAR * 33 4.93 Egypt 33 4.76 Brazil 33 4.24
Latvia 34 4.83 Lithuania 34 4.70 Iceland 34 4.24
Poland 35 4.75 South Africa 35 4.69 Portugal 35 4.24
Mexico 36 4.70 Trinidad and Tobago 36 4.63 Mexico 36 4.18 33
Mauritius 37 4.67 Costa Rica 37 4.56 Vietnam 37 4.15
Greece 38 4.62 Slovak Republic 38 4.54 Hungary 38 4.04
Thailand 39 4.54 Malaysia 39 4.53 Slovenia 39 4.02
Philippines 40 4.53 Greece 40 4.50 Argentina 40 3.99
Lithuania 41 4.46 Poland 41 4.40 Indonesia 41 3.96
Chile 42 4.45 Thailand 42 4.36 Costa Rica 42 3.94
Jamaica 43 4.43 Jamaica 43 4.30 Estonia 43 3.94
Dominican Republic 44 4.42 Korea 44 4.25 Panama 44 3.92
Uruguay 45 4.40 Peru 45 4.24 India 45 3.88
South Africa 46 4.39 Turkey 46 4.21 Dominican Republic 46 3.87
Romania 47 4.33 Brazil 47 4.21 El Salvador 47 3.87
Argentina 48 4.33 Latvia 48 4.18 Bangladesh 48 3.81
Brazil 49 4.33 India 49 4.11 Czech Republic 49 3.81
Bulgaria 50 4.32 China 50 4.10 Poland 50 3.75
Turkey 51 4.28 Bulgaria 51 4.07 Egypt 51 3.74
Trinidad and Tobago 52 4.10 Romania 52 4.06 Guatemala 52 3.73
China 53 4.05 Czech Republic 53 4.04 Venezuela 53 3.73
Jordan 54 3.99 Dominican Republic 54 4.02 Jordan 54 3.69
Venezuela 55 3.98 Argentina 55 4.01 Nigeria 55 3.68
Colombia 56 3.92 Mexico 56 3.99 Lithuania 56 3.66
Panama 57 3.89 Colombia 57 3.85 Russia 57 3.64
El Salvador 58 3.86 Sri Lanka 58 3.84 Peru 58 3.62
Sri Lanka 59 3.82 Panama 59 3.83 Latvia 59 3.58
Russia 60 3.78 El Salvador 60 3.79 Sri Lanka 60 3.56
Indonesia 61 3.76 Russia 61 3.68 Israel 61 3.55
Peru 62 3.71 Bolivia 62 3.67 Ecuador 62 3.45
Ukraine 63 3.68 Vietnam 63 3.58 Uruguay 63 3.38
Egypt 64 3.59 Philippines 64 3.53 Slovak Republic 64 3.35
Vietnam 65 3.56 Venezuela 65 3.40 Paraguay 65 3.31
India 66 3.54 Indonesia 66 3.35 Colombia 66 3.29
Bolivia 67 3.52 Nicaragua 67 3.33 Romania 67 3.14
Guatemala 68 3.38 Ecuador 68 3.30 Turkey 68 3.10
Ecuador 69 3.33 Zimbabwe 69 3.30 Bulgaria 69 3.09
Honduras 70 3.29 Guatemala 70 3.22 Bolivia 70 3.08
Nicaragua 71 3.21 Ukraine 71 3.15 Jamaica 71 3.05
Zimbabwe 72 3.20 Honduras 72 3.01 Honduras 72 3.02
Paraguay 73 2.98 Nigeria 73 2.84 Ukraine 73 2.95
Bangladesh 74 2.83 Paraguay 74 2.75 Nicaragua 74 2.48
Nigeria 75 2.44 Bangladesh 75 2.48 Zimbabwe 75 1.93

* = When calculated as core economy. See Table 6B for values when calculated as non-core.
1.1: The Growth Competitiveness Index

Luxembourg is not included in this year’s rankings, so all for the technological core.Yet despite their fast-pace
2000 rankings below third place have been scaled up one growth and their development of local innovative capaci-
spot relative to their published order in the Global ties, they have not yet fully transformed their source of
Competitiveness Report 2000. growth from diffusion to innovation.They appear to be, in
Although the GCI sample has been expanded and a sense, between non-core and core economy status. In
its methodology modified, there is a high correlation our final GCI rankings, we calculated their scores as both
between the rankings for last year and this year.ii In our core and non-core economies, and then averaged the
view, this has two main explanations. First, despite changes two. If we were to have calculated each solely as
in our growth competitiveness methodology in recent non-core economies, each would have had a higher
years, our Index is robustly capturing the key underlying overall ranking.iii
elements affecting medium-run economic growth. Norway marks another interesting shift in the
Second, the consistency in rankings suggests that the rankings—this year up from 15th to 6th—having invested
underlying processes affecting growth have themselves heavily in developing its information and communications
been changing only gradually over the past three to five technology (ICT) capacity, not unrelated to its
years. We urge appropriate caution in the interpretation of Scandinavian neighbors’ strength in this regard, while
the rankings. An index like this cannot finely distinguish its government has concurrently enjoyed enviable macro-
between the growth prospects of countries that are economic conditions thanks to natural resource abundance
very similarly ranked.The trends throughout Table 2 and high oil prices. New Zealand has also scored a dra-
are informative, but one should not over-interpret a matic jump in the rankings, from 19th to 10th, reflecting
movement of a few slots in the ranking. its consistently stable macroeconomic and institutional
Nonetheless, reading through the GCI rankings, the environment and also its growing technological capacity
most obvious changes have taken place in the top spots, that receives increased attention in this year’s methodolo-
where Finland, for the first time, ranks first in the world. gy. Iceland’s move seven spots up, from 23rd to 16th,
This is a notable achievement for a small open economy reflects the positive growth prospects for another
that underwent a deep recession after the Soviet Union country with one of the world’s most advanced ICT
collapsed a decade ago. It also serves as evidence of how infrastructures.
34 quickly an economy’s prospects can be transformed by At the middle and lower ends of the rankings of
strong political institutions, a focus on technology (espe- countries covered in both this and last year’s GCRs, results
cially the prowess of Nokia and the rest of the ICT sec- are more stable, with few countries experiencing dramatic
tor), and sound macroeconomic management.The United shifts. For instance, Chile and South Africa are unchanged
States, currently at risk of a recession but still the world’s at 27th and 32nd spots respectively. Notable exceptions
largest market, technological leader, and engine of eco- include Turkey, which was surveyed during the height
nomic growth, has slipped to second spot—an interesting of its economic crisis in the early months of 2001 and
yet marginal overall change.The United States is still, of dropped six spots on the rankings. Even more dramatic
course, the overwhelming powerhouse of the world econ- was the drop for Indonesia, a country that has experienced
omy in the high-tech industries. Canada, the sixth-ranked ongoing political uncertainty while flirting with the
economy in the 2000 GCI, rounds out the top three prospect of major turmoil over the past year. It dropped
places, having moved up mainly due to this year’s weight 10 places, from 43rd to 53rd. Meanwhile, Mauritius
accorded to tertiary education as a key factor in climbed five spots from 35th to 30th, Jordan moved up
technological innovation. from 46th to 41st, and Bulgaria jumped an impressive
Singapore, the second ranked economy in the 2000 8 places from 57th to 49th. Interestingly, Argentina has
GCI, has dropped two spots to fourth, due more to the barely shifted since last year, improving one place from
increased weight on innovation in this year’s Index than to 44th to 43rd. Argentina is a bit of a paradox, of course.
shifts in the local economy. Similarly Ireland and Hong Many features of its economy are satisfactory, yet the
Kong SAR, still strong economies with impressive growth economy remains trapped with an overvalued currency
prospects, have dropped from 5th to 11th and 8th to 13th, and unimpressive technological dynamics. Argentina may
respectively, because of evidence that they will need to be a quintessential case of an economy that was fairly
become more innovative to maintain their current high sophisticated 40 years ago but failed to develop its
growth rates into the future.These three fast-growing technological capacity.
economies have each been highly successful in pursuing On a less optimistic note, there is year-to-year consis-
technology-diffusing, manufacturing-based export growth tency at the very bottom of the rankings, with three of
strategies.They have concurrently expanded their local the final four spots among the 58 countries covered in
scientific and innovation capacities so that each now easily 2000 still occupied by Ecuador, Ukraine, and Zimbabwe,
surpasses our 15 patents per million population criterion all countries facing ongoing macroeconomic disorder with
 1.1: The Growth Competitiveness Index
Figure 1: Partial regression results of GCI versus 1992–2000 GDP per capita growth, controlling for initial GDP level*

.1
Average growth in GDP per capita, 1992–2000

.05

-.05
-1 -.5 0 .5 1

Growth Competitiveness Index score

*More precisely, growth here is measured as the average annual change in the GDP GAP with the United States from
1992 to 2000 (1995 to 2000 for transition economies), as explained in the methodology section of this chapter.

little positive growth prospect in sight. Joining Ukraine The Growth Competitiveness Index and economic growth 35
toward the bottom of list, Russia continues to suffer the The goal of the GCI is to capture important factors in
consequences of decades of economic mismanagement economic growth over roughly a five-year perspective. Of
under Soviet rule and the haphazard process of economic course, we cannot test the GCI for 2001 based on future
change since 1991. Although it has moved up two slots, growth, so instead we examine whether the GCI helps to
it remains very low, and this year is in the 52nd position. account for patterns of growth during the recent past and
Looking at the 17 countries added to this year’s then extrapolate into the future. Specifically, we examine
expanded GCI sample, one finds some interesting results. the relationship between the GCI and economic growth
The top-scoring new entrant is Estonia, ranking 29th from 1992 to 2000.The basic test equation explains annu-
overall and well ahead of its Baltic neighbors Lithuania al economic growth over this period as a function of the
at 43rd and Latvia at 47th.The Caribbean economies of country’s GCI score and its initial level of income in 1992
Trinidad and Tobago and Jamaica also provide noteworthy (on the grounds that poorer countries, all other things
results, ranking 38th and 52nd respectively. Romania, a equal, will tend to grow faster). As shown in Figure 1,
new addition at 56th, comes slightly behind.The members the GCI has a strong relationship with recent economic
of the largest geographic group of new additions to the growth, controlling for initial income level. (The same test
GCR—Latin American economies—have their economic reveals, as expected, that countries that began the 1990s
difficulties reflected in generally low rankings. Honduras relatively poorer achieved faster average growth over the
at 70th, Paraguay at 72nd, and Nicaragua at 73rd occupy period than their wealthier counterparts.) Of course, the
three of the bottom six rankings. Guatemala, at 66th, is real proof of the pudding for the GCI will be whether the
not far ahead.The relative bright spots among the newly Index helps account for future rather than past growth!
included Latin American countries are found in Uruguay
(46th), the Dominican Republic (50th) and Panama
(53rd). Interspersed among these rankings are Latin
American economies included in previous years’ Reports:
El Salvador (58th),Venezuela (62nd), Colombia (65th),
and Bolivia (67th).
1.1: The Growth Competitiveness Index

Interpreting the Growth Competitiveness Index but no major export markets nearby. Similarly, Mexico has
Although changes in the GCI rankings are informative, an intrinsic growth advantage over Argentina, and Poland
several points need to be established in order to ensure over Romania. At the same time, New Zealand has very
proper interpretation of the Index. First, as mentioned, the strong institutional, macroeconomic, and technological
underlying methodology of the Index has been updated prospects for growth, as evidenced by its top-10 ranking
since last year, so year-to-year comparisons are not exact. on this year’s Index, but it is located thousands of miles
Second, as also outlined above, the growth prospects of an from most major markets, with the minor exception of
economy depend not only on the GCI score but also on Australia.We hope in future studies to incorporate these
the level of per capita income.The catch-up effect is not factors more directly in the GCI.
included within the GCI itself, so a poor country with a Sixth, there are fundamental limitations to the statisti-
low GCI might still have good growth prospects because cal analysis of medium-term growth. Regression tools
it has room to “catch up” relative to a richer country with allow us to capture and estimate the effects of numerous
a somewhat higher GCI score. factors across a wide range of economies, but the range of
Third, GCI rankings should not be confused with countries with available data is inherently small and the
GCI scores.The difference in growth prospects for period available for analysis is unfortunately short.
economies, say, five spots apart from one another on Individual countries have specific characteristics that will
the rankings are not the same at all points on the GCI inevitably be missed in our cross-sectional research, which
distribution. For instance, Finland’s top GCI score of 6.03 relies on averages and trends. Also, our unit of analysis—
is roughly 0.3 greater than Australia’s 5th place score, the national economy—is blunt.The economies in our
whereas New Zealand’s 10th place score of 5.53 is only sample range from small and homogeneous societies such
0.1 greater than Switzerland’s 15th ranked value of 5.43. as Iceland, with a population of fewer than 300,000, to the
In an even tighter bunching, Panama’s 53rd place score massive and diverse countries of India and China, each
of 3.88 is barely different from El Salvador’s value five with more than one billion people and an incredible
slots lower at 3.84. internal diversity.The GCI does not account for these
Fourth, the maximum possible score on the GCI is 7; internal variations in growth prospects.
the lowest is 1. All component variables, whether taken Finally, one must be sure not to confuse the last places
36 from the GCR Executive Opinion Survey or from hard on the GCI ranking with the worst growth prospects in
data sources, have been re-based so that the “top” score is the world.There are more than 150 countries around the
always equal to 7 and the “lowest” score is always to 1. world with populations of greater than one million. In this
Based on our statistical analysis, for two economies at the study we cover only 74 of those plus Iceland.We do not
same level of per capita income, an increase of one point yet include the other 75 economies due to problems in
in GCI score (on the 1-to-7 scale) is linked, on average, to collecting data, problems that are often highly related to
a rise of the growth rate of slightly more than 3 percent- the lack of economic development and growth competi-
age points per annum. Conversely, the GCI implies that tiveness.The countries that occupy the last few spots of
two economies with similar scores but different starting the GCI are far from lost causes—they merely represent
income levels will have different growth rates. For exam- the economies with the most policy work to do among
ple, an economy with GDP per capita of $10,000 and a our sample of countries.They also represent the countries
GCI score of 5 is predicted to grow, on average, nearly 2 with the greatest opportunity for “catch-up” growth as
percentage points faster per year than an economy with described above. Nigeria, for example, as the most popu-
GDP per capita of $20,000 and the same GCI score of 5. lous country in Africa, stands truly at the dawn of a new
Fifth, although we and our colleagues at the Center economic and political era and, despite its fragile policy
for International Development at Harvard have spent a environment, could make great strides in economic devel-
great amount of time studying such important growth fac- opment with good domestic policies and international
tors as climate and proximity to markets, these geographi- help. Rather than seeing a low score on the ranking as
cal factors are not directly included in the GCI. cause for despair, we would instead hope that policymak-
Geographical factors do appear indirectly, because they ers and business leaders will view the information con-
affect industrial structure and other economic variables tained in this report as a useful means to identify policy
that are included in the Index.We want to stress, however, priorities and, in the future, to benchmark the success of
the importance and relative neglect of these geographical new initiatives. Indeed, regardless of national income level,
factors.The Baltic countries, for instance, with their sea- we aim for the information contained in the GCI to help
port access and proximity to Western European markets, policymakers and private-sector representatives in every
have an intrinsic advantage—independent of their poli- country identify their national priorities as they seek to
cies—over land-locked economies in South America or enhance their citizens’ levels of economic welfare.
economies such as Nigeria that have ample ocean access
 1.1: The Growth Competitiveness Index
A brief comment on the United States The United States does have its relative weaknesses,
With the United States in slowdown, all eyes are on the however. Although the United States ranks second overall,
country for clues about economic prospects in the coming this is a reflection of extraordinary strength in technology,
few years.Will the United States go into a deep and pro- combined with notably lower scores on the other two
longed slump, as Japan did after the bursting of its financial GCI component indexes. On the macroeconomic
bubble in the early 1990s? Will it recover fairly quickly environment index, it rates seventh, somewhat behind
and resume its dynamic growth of the second half of the the top countries of Singapore and Ireland. On the public
1990s? Although we are reluctant to make short-term institutions index, it ranks even lower, placing 12th, with
forecasts, especially given the purposes of the GCI, we a score roughly comparable with those of Hong Kong
stress that the underlying competitiveness of the United SAR and Israel. On more specific points, the dollar is
States economy remains very strong, auguring well over surely overvalued relative to the euro.The rule of law is
a five-year perspective. Of course, there are some notable not as strong as Americans sometimes assume, as evidenced
blemishes that merit our attention. by 11th place ranking on the US corruption subindex
The United States is in a slowdown now related to and 17th place ranking on its measure of contracts and
the end of a huge wave of investment in ICT capital law.The low placing on the latter measure is due to poor
stock.There are three reasons for the slowdown. First, after scores on Executive Opinion Survey questions relating
an enormous building period in information technology, to government neutrality in public contracts and policy
companies are taking a breather in their ICT investments. (18th overall) and a 22nd place ranking on the business
They have no need to keep accumulating IT equipment costs imposed by organized crime. Note that this latter
as rapidly as they did in the second half of the 1990s. ranking is roughly the same as last year’s, when the
Second, the roll out of high bandwidth applications is cer- United States scored 25th on the same question.
tainly proceeding more slowly than expected just a few Perhaps most notably, and somewhat notoriously, the
years ago.Third, the United States experienced a financial United States is an unequal society, with huge perceived
bubble when optimism about the IT revolution led to a (and likely quite real) discrepancies between services
euphoric overpricing of the technology sector.The risks enjoyed by the rich and the poor. In our Executive
of the US bubble have been evident for years, even before Opinion Survey question that asks about the difference in
the stock market crash of 2000–2001. In mid-1998, the health care availability for the rich and poor, the United 37
Global Competitiveness Report warned about the apparent States scores 27th, behind Estonia and just ahead of
overvaluation of the stock market.iv The worry was Malaysia. In a parallel question that asks about discrepan-
repeated in the 1999 GCR, when we wrote, “Everybody cies in schools available for rich versus poor children, the
with sufficient stock market holdings feels rich and very United States ranks even worse at 43rd, after Russia and
clever. . . . Our best guess is that they will feel a little less barely above Uruguay.These Survey results highlight the
clever in a year’s time,”v a view that was vindicated by inequalities in the United States when compared with
the subsequent end of the bubble beginning in the spring inequalities in other countries, especially those in Western
of 2000. Europe, where the social welfare state is far more inclusive
Does the bursting of the bubble undermine the case and therefore the quality of public services compared with
for the competitiveness of the United States? Not really, if private services also considered to be quite high. It is
we take a view over five or more years.The dynamism of notable that Finland, the top country in this year’s GCI,
the US economy remains tremendous.The flexibility of ranks best in the world on the measure of perceived
labor markets, ease of startups, technological prowess, and educational equality and third on the measure of health
fiscal balance are all very strong.The financial sector care equality.Thus, Finland has achieved a technologically
appears to be sound, even after the collapse of the bubble, sophisticated economy with a high degree of social
though undoubtedly there will be a stream of bad news as equality as well.
some heavily indebted enterprises go under. It seems
unlikely to us that the United States will therefore enter
into a prolonged slump of the sort that afflicted Japan in
the 1990s. It is notable that Japan’s competitiveness rank-
ing has always been much lower than that of the United
States in the past five years, and continues to be much
lower in this year’s Report.
1.1: The Growth Competitiveness Index

METHODOLOGY BEHIND THE GROWTH have found growth trends from the past decade that are
COMPETITIVENESS INDEX strikingly clear and thus not likely to change dramatically
over the coming five years.These are the trends that
As outlined in the previous section, because of the differ-
inform our analysis and give rise to the growth forecast
ent growth trajectories that economies typically face at
represented by the GCI.
different levels of development, a fundamental issue must
The steps of our methodology in uncovering and
be considered when assessing growth competitiveness
determining relative weights for these trends are as follows:
around the world: Different growth factors play different
roles at different stages of development.vi Our research has
1. First, for our 1990s economic analysis, we divided our
suggested that public institutions, for instance, play a more
sample of 75 economies into core and non-core
crucial role at low and middle levels of development than
groups based on an objective measure of their level of
they do at high levels, where economies tend to have less
technological sophistication: the 1980s average annual
variation in institutional quality and a satisfactory thresh-
number of utility patents registered in the United
old of organizational efficiency has already been met.
States per million population.This variable has
Likewise, once overall macroeconomic stability is
strengths and weaknesses as a general indicator of
achieved, including sustainable fiscal balances and a healthy
technology, but it does help to provide a clear group-
banking system with broad access to credit, “increased”
ing of the economies that were registering technolog-
stability becomes difficult to measure and its benefits
ical advances—at an international standard—at the
become less pronounced.
beginning of the 1990s. By this criterion, we identi-
Technology plays a key role in all stages of develop-
fied 18 core economies with more than 15 US utility
ment. But again, the means through which technological
patents granted per million population in the 1980s.
progress occurs, and the conditions conducive to its
These were Switzerland, the United States, Japan,
advance, will vary at different levels of development. At
Sweden, Germany, the Netherlands, Canada, the
low levels of development, growth competitiveness is
United Kingdom, France, Israel, Austria, Finland,
achieved mainly through the effective exploitation of land,
Denmark, Belgium, Norway, Australia, Italy, and New
primary commodities, and unskilled labor. As economies
Zealand.Table 1 lists the economies included in the
move from low- to middle-income status, competitiveness
38 1980s core and also those that achieved the core cri-
is increasingly achieved by harnessing global technologies
terion by 2000 and were hence counted as core
to local production. Foreign direct investment, joint ven-
economies in calculations for this year’s GCI.
tures, and outsourcing arrangements help to integrate the
national economy into international production systems,
2. As a second step, we calculated the 1992 and 2000
thereby facilitating the improvement of technologies and
levels of Gross Domestic Product (GDP) per capita,
the inflows of foreign capital that support economic
measured at purchasing power parity (PPP), for all 75
growth.The transition from middle-income to high-
countries in our sample, with the exception of the
income status involves a transition from a technology-
former Eastern Bloc transition economies, for which
importing economy to a technology-generating economy,
we calculated 1995 levels.We then calculated the ratio
from technological adoption to innovation. At high levels
of each country’s GDP per capita PPP to US GDP
of income, global competitiveness depends on innovation,
per capita PPP in both 1992 (1995 for the transition
high rates of social learning, and rapid adaptability to new
economies) and 2000, and calculated the average
technologies.
annual change in the ratio over that period as our
By adding 17 countries to our analysis since last year’s
measure of economic growth. As a shorthand, we call
GCR, we have significantly expanded our competitiveness
this ratio to US GDP the GDP GAP.We chose 1992
research capacity. Most of the economies added to the
as a starting point, since it marks the end of the last
GCR are middle-income developing countries, so includ-
major industrialized world recession and removes
ing them provides more information about economic
business cycle fluctuations that might otherwise
growth in the non-core economies.We should reiterate
distort the analysis of growth rates. For the transition
that the inherently backward-looking nature of empirical
economies, we selected 1995 in order to avoid
economic research poses a fundamental limitation in pro-
incorporating the general negative growth that
jecting future growth rates.The patterns that typified
occurred during the first years of those economies’
growth in the 1990s are not exactly the same as those that
post-communism adjustment period.
characterized growth in the 1960s or even the 1970s, and
one can never fully predict what future technological
innovations or revolutions will transform economic
dynamics around the world. Despite these limitations, we
 1.1: The Growth Competitiveness Index
3. Third, drawing on the economic growth literature Fourth, we examined the relationship between the
and our own research at CID, we constructed more GCI and growth during 1992 to 2000 using the
than a dozen subindexes to test their links with eco- following growth equation:
nomic growth (as defined above).The indexes were
typically comprised of both “hard” and “soft” data, the Average Annual Change in GAP = ß0 + ß1 x GCI
latter coming from the results of the Executive + ß2 x natural log (percentage GDP GAP in 1992)vii
Opinion Survey. Using these subindexes, and testing
them in a variety of specifications, we created indexes The results of this regression equation were displayed
for three broad factors that were linked to economic in Figure 1.viii We now turn to a more detailed dis-
growth in the 1990s: the quality of public institutions, cussion of the subcomponents of the overall Index.
the macroeconomic environment, and technology. As
we have already stressed, these three factors are inter-
woven—strong institutions, for example, are needed Technology
for technological development to occur; a sophisticat- Capturing the various processes of technological develop-
ed technology base will contribute greatly to macro- ment forms a central challenge of our competitiveness
economic stability—but they do each have close and research. Constructing measures that are precise enough
statistically distinct relationships with recent trends in to represent trends in specific countries yet broad enough
economic growth. Measurements for each of these to allow global comparability is a long-term research
three pillars of growth, as well as their weightings in endeavor in which we are still in the early stages.
the GCI, are given below. Nonetheless, in the preparation of this year’s Report we
have investigated and developed technology indicators
4. We then combined the component indexes into the that provide a crucial advance in the evolution of global
overall GCI. For the core economies, our statistical competitiveness comparisons. Since the core and non-core
analysis suggested we should place extra emphasis on technology economies follow distinctly different processes
the role of innovation and technology. Accordingly, of technological development, we have developed
the weightings for the core economies were as respective measures of technology that are used in
follows: competitiveness calculations for each group. 39

Core GCI = 1/2 technology index Technology in the core economies

+ 1/4 public institutions index For the core economies, the technology index is a simple
+ 1/4 macroeconomic environment index. average of an innovation subindex and an information and
communication technology (ICT) subindex, both of
Meanwhile, for the non-core economies, our which are comprised of hard and soft data. (The reader
statistical analysis suggested a more balanced should note that the innovation subindex presented here is
weighting between technology, institutions, and different from the “innovative capacity index” constructed
macroeconomic conditions.We therefore calculated by Michael E Porter and Scott Stern in Chapter 2.2 of
GCI values for these countries as a simple average this Report.That measure seeks to explain the underlying
of the three component indexes: factors that contribute to innovation as measured by
patents.The innovation subindex here seeks to explain the
Non-core GCI = 1/3 technology index
elements of innovation, such as patents, that are linked
+ 1/3 public institutions index
measurably to growth.) Using a simple linear transforma-
+ 1/3 macroeconomic environment
index.
tion, the hard data were converted to a 1-to-7 scale so that
they could be easily merged with the Executive Opinion
Survey questions, most of which have possible responses
As noted above, for Ireland, Singapore, and Hong
on a range of 1 to 7, with 1 being the low score and 7 the
Kong SAR—economies in transition from non-core
high score.ix The precise composition of the technology
to core status—we averaged their core GCI and non-
index is outlined in Box 2.
core GCI scores to calculate an overall score.
1.1: The Growth Competitiveness Index

Innovation subindex
Box 2: Technology index components When considering economic growth, a measure of inno-
vation is central to measuring levels of technological
Technological core economies sophistication in the core economies. Innovation is a
core technology index = 1/2 innovation subindex product of many factors, but foremost among these are
+ 1/2 ICT subindex. skilled human resources, well-developed market incentive
structures for science, and intensive interaction between
Technological non-core economies
scientific and business sectors.The innovation measure
non-core technology index = 1/8 innovation subindex aims to capture many of these processes through the use
+ 3/8 technology transfer subindex
+ 1/2 ICT subindex. of hard and Survey data. On the hard side, we include two
variables: US utility patents granted per million population
1. Innovation subindex and gross tertiary enrollment rates.
innovation subindex = 1/4 Survey data + 3/4 hard data. Patents are not a perfect measure of innovation, since
they do not distinguish between very minor innovations
innovation Survey questions
that are simply technological refinements and major inno-
3.01 What is your country’s position in technology relative
to world leaders? vations that revolutionize a field. However, on average
3.02 Does continuous innovation play a major role in they present a very useful measure of innovation intensity
generating revenue for your business? in an economy and, to some extent, of the frequency with
3.06 How much do companies in your country spend on which innovations are taken to market rather than simply
R&D relative to other countries?
left in a laboratory.Tertiary education enrollment rates
3.09 What is the extent of business collaboration in R&D
with local universities?
form a similarly broad but useful measure.They do not tell
us the specific skill composition of a workforce, nor the
innovation hard data
3.16 US Utility Patents Granted per million population in 2000 precise number of product and process innovators in an
3.19 Gross Tertiary Enrollment Rate in 1997* economy, but they do provide a sound indication of a
country’s capacity to develop new technology and prod-
2. Technology transfer subindex ucts at all levels of its economy. In fact, when performing
40 technology transfer subindex = 1/2 technology transfer statistical tests in which different variables were assessed in
Survey question terms of their relationship with 1990s growth in the core
+ 1/2 technology-in-trade residual. economies, tertiary enrollment rates were found to be the
3.04 Is foreign direct investment in your country an important variable most closely linked to high growth in the 1990s.
source of new technology? We hence placed a greater weighting on it (3/4) than on
3.23 Technology-in-trade residual in 1999* patents (1/4) in the construction of the hard data portion
of the innovation subindex.
* Or latest available year.
The Survey questions incorporated in the innovation
3. Information and communication technology subindex subindex form broad indicators of technological sophisti-
cation and product development. As shown in Box 2, the
ICT subindex = 1/3 ICT Survey data + 2/3 ICT hard data
innovation subindex blends the hard data score with aver-
ICT Survey questions age country Survey scores from questions on the overall
4.03 How extensive is Internet access in schools? level of technology in the economy, the role of continuous
4.07 Is competition among ISPs sufficient to ensure high quali- innovation in generating revenue, company R&D spend-
ty, infrequent interruptions and low prices?
ing relative to international peers, and private sector R&D
4.08 Is ICT an overall priority for the government?
4.09 Are government programs successful in promoting the collaboration with local universities.The overall innova-
use of ICT? tion subindex places a 3/4 weight on the hard data and
4.11 Are laws relating to ICT (electronic commerce, digital sig- 1/4 weight on the soft data.
natures, consumer protection) well developed and Innovation subindex scores and rankings are listed for
enforced?
the full sample in Table 4 and for only the core in Table
ICT hard data 6A. In both tables, one sees that Canada is ranked first
4.13 Number of mobile telephone users per capita
among the core economies, just slightly ahead of the
4.14 Number of Internet users per capita
4.15 Number of Internet hosts per capita United States, while Hong Kong, Iceland, and Ireland
4.16 Number of telephone mainlines per capita occupy the bottom positions.The greatest driving factor
4.17 Number of personal computers per capita on these rankings is gross tertiary enrollment, a measure
on which Canada’s 88 percent ratio is the highest in the
world by a significant margin.x The United States has
the second-highest ratio at 81 percent and Australia the
 1.1: The Growth Competitiveness Index
Table 4: Innovation subindex
innovation subindex = 3/4 hard data score + 1/4 Survey data score
Innovation Innovation
Innovation Hard Data Survey Data
Country Subindex Rank Country Score Rank Country Score Rank
Canada 6.51 1 Canada 6.84 1 Finland 6.14 1
United States 6.50 2 Taiwan* 6.76 2 United States 6.11 2
Taiwan 6.37 3 United States 6.63 3 Sweden 5.99 3
Finland 6.12 4 Australia 6.24 4 Switzerland 5.93 4
Australia 5.96 5 Finland 6.12 5 Germany 5.89 5
Korea 5.46 6 Korea 5.69 6 Israel 5.79 6
Norway 5.27 7 Norway 5.34 7 France 5.73 7
Belgium 5.19 8 New Zealand 5.27 8 Japan 5.72 8
Sweden 5.17 9 Belgium 5.07 9 Netherlands 5.70 9
New Zealand 5.11 10 Sweden 4.89 10 Singapore 5.70 10
United Kingdom 5.02 11 United Kingdom 4.84 11 United Kingdom 5.55 11
France 5.01 12 France 4.78 12 Belgium 5.54 12
Germany 4.98 13 Germany 4.67 13 Canada 5.51 13
Netherlands 4.88 14 Denmark 4.66 14 Austria 5.38 14
Denmark 4.83 15 Austria 4.62 15 Denmark 5.35 15
Austria 4.81 16 Netherlands 4.61 16 Ireland 5.32 16
Japan 4.74 17 Spain 4.45 17 Iceland 5.27 17
Israel 4.71 18 Italy 4.44 18 Taiwan 5.19 18
Singapore 4.48 19 Japan 4.42 19 Australia 5.10 19
Spain 4.48 20 Israel 4.35 20 Norway 5.06 20
Italy 4.47 21 Ireland 4.13 21 Hong Kong SAR 4.79 21
Switzerland 4.44 22 Singapore 4.08 22 Korea 4.77 22
Ireland 4.43 23 Iceland 4.04 23 South Africa 4.76 23
Iceland 4.35 24 Greece 3.99 24 New Zealand 4.63 24
Greece 3.95 25 Switzerland 3.94 25 Hungary 4.63 25
Estonia 3.94 26 Estonia 3.80 26 Czech Republic 4.61 26
Slovenia 3.80 27 Russia 3.73 27 Italy 4.58 27
Russia 3.72 28 Slovenia 3.65 28 Spain 4.56 28
Hong Kong SAR 3.67 29 Argentina 3.55 29 Chile 4.40 29
Argentina 3.61 30 Portugal 3.49 30 Brazil 4.38 30
Portugal 3.58 31 Ukraine 3.47 31 Estonia 4.34 31
Costa Rica 3.51 32 Hong Kong SAR 3.29 32 Slovak Republic 4.30 32
Ukraine 3.48 33 Bulgaria 3.29 33 India 4.29 33
Chile 3.41 34 Costa Rica 3.25 34 Poland 4.29 34
Hungary 3.30 35 Chile 3.08 35 Costa Rica 4.28 35 41
Latvia 3.29 36 Latvia 3.05 36 Slovenia 4.24 36
Panama 3.24 37 Panama 3.03 37 China 4.23 37
Czech Republic 3.24 38 Hungary 2.85 38 Malaysia 4.23 38
Bulgaria 3.19 39 Venezuela 2.80 39 Trinidad and Tobago 4.14 39
South Africa 3.10 40 Uruguay 2.79 40 Philippines 4.02 40
Uruguay 3.03 41 Czech Republic 2.78 41 Latvia 4.02 41
Venezuela 3.01 42 Poland 2.55 42 Thailand 3.98 42
Poland 2.98 43 South Africa 2.55 43 Indonesia 3.91 43
Slovak Republic 2.97 44 Slovak Republic 2.53 44 Jamaica 3.87 44
Philippines 2.80 45 Bolivia 2.46 45 Portugal 3.86 45
Dominican Republic 2.78 46 Dominican Republic 2.46 46 Panama 3.85 46
Thailand 2.77 47 Lithuania 2.46 47 Greece 3.82 47
Lithuania 2.76 48 Philippines 2.39 48 Mexico 3.80 48
Brazil 2.66 49 Peru 2.38 49 Jordan 3.79 49
Malaysia 2.64 50 Thailand 2.36 50 Argentina 3.79 50
Peru 2.62 51 Romania 2.33 51 Dominican Republic 3.75 51
Mexico 2.61 52 Mexico 2.21 52 Uruguay 3.74 52
Romania 2.51 53 Egypt 2.15 53 Russia 3.68 53
Bolivia 2.50 54 Malaysia 2.11 54 Vietnam 3.68 54
Egypt 2.47 55 Turkey 2.09 55 Lithuania 3.64 55
Turkey 2.45 56 Brazil 2.08 56 Nigeria 3.64 56
Colombia 2.39 57 Colombia 2.03 57 Zimbabwe 3.63 57
Jamaica 2.29 58 Ecuador 2.01 58 Sri Lanka 3.63 58
Ecuador 2.25 59 Jamaica 1.76 59 Venezuela 3.62 59
Jordan 2.25 60 Jordan 1.73 60 Mauritius 3.56 60
India 2.16 61 El Salvador 1.73 61 Turkey 3.53 61
El Salvador 2.08 62 Honduras 1.64 62 Ukraine 3.50 62
China 2.07 63 Guatemala 1.58 63 Colombia 3.47 63
Indonesia 2.06 64 India 1.44 64 Egypt 3.44 64
Guatemala 2.00 65 Indonesia 1.44 65 Peru 3.34 65
Honduras 1.96 66 Nicaragua 1.40 66 Guatemala 3.26 66
Trinidad and Tobago 1.94 67 China 1.35 67 El Salvador 3.14 67
Nicaragua 1.83 68 Paraguay 1.32 68 Nicaragua 3.11 68
Sri Lanka 1.81 69 Trinidad and Tobago 1.21 69 Romania 3.05 69
Vietnam 1.77 70 Sri Lanka 1.21 70 Bangladesh 3.01 70
Zimbabwe 1.75 71 Vietnam 1.14 71 Paraguay 3.00 71
Paraguay 1.74 72 Zimbabwe 1.12 72 Ecuador 3.00 72
Mauritius 1.71 73 Mauritius 1.10 73 Honduras 2.92 73
Nigeria 1.66 74 Bangladesh 1.09 74 Bulgaria 2.89 74
Bangladesh 1.57 75 Nigeria 1.00 75 Bolivia 2.61 75

*Note that Taiwan's hard data innovation score is based solely on patent levels, since gross tertiary enrollment data comparable with the other countries is not available.
1.1: The Growth Competitiveness Index

Table 5: Information and communications technology subindex

ICT subindex = 2/3 hard data score + 1/3 Survey data score

ICT ICT Hard ICT Survey

Country Subindex Rank Country Data Score Rank Country Data Score Rank
Finland 6.58 1 Norway 6.83 1 Finland 6.37 1
Iceland 6.47 2 Iceland 6.83 2 Singapore 6.06 2
Sweden 6.45 3 Sweden 6.77 3 Sweden 5.82 3
Singapore 6.40 4 United States 6.70 4 Iceland 5.75 4
United States 6.34 5 Denmark 6.69 5 United States 5.63 5
Norway 6.28 6 Finland 6.68 6 Canada 5.55 6
Denmark 6.25 7 Switzerland 6.63 7 Hong Kong SAR 5.47 7
Canada 6.23 8 Netherlands 6.62 8 Estonia 5.45 8
Netherlands 6.20 9 Australia 6.60 9 Denmark 5.37 9
Hong Kong SAR 6.19 10 Canada 6.57 10 United Kingdom 5.37 10
Australia 6.15 11 Singapore 6.56 11 Netherlands 5.36 11
Switzerland 6.10 12 Hong Kong SAR 6.56 12 Austria 5.33 12
Austria 6.09 13 Japan 6.52 13 Australia 5.26 13
United Kingdom 6.09 14 Taiwan 6.48 14 Norway 5.18 14
Germany 6.01 15 Austria 6.48 15 Ireland 5.16 15
Taiwan 6.01 16 Germany 6.46 16 Korea 5.15 16
New Zealand 5.99 17 United Kingdom 6.46 17 Germany 5.11 17
Ireland 5.97 18 New Zealand 6.45 18 France 5.09 18
Belgium 5.90 19 Ireland 6.38 19 Taiwan 5.07 19
Estonia 5.88 20 Belgium 6.36 20 New Zealand 5.06 20
France 5.87 21 Israel 6.30 21 Switzerland 5.05 21
Korea 5.87 22 France 6.26 22 Belgium 4.97 22
Israel 5.83 23 Korea 6.23 23 Israel 4.88 23
Japan 5.82 24 Portugal 6.15 24 Spain 4.86 24
Portugal 5.68 25 Italy 6.15 25 Portugal 4.73 25
Spain 5.63 26 Estonia 6.10 26 Hungary 4.60 26
Italy 5.55 27 Slovenia 6.07 27 Czech Republic 4.59 27
Slovenia 5.47 28 Spain 6.01 28 India 4.57 28
Czech Republic 5.45 29 Czech Republic 5.88 29 Chile 4.57 29
Hungary 5.30 30 Greece 5.85 30 Jordan 4.56 30
Slovak Republic 5.26 31 Slovak Republic 5.69 31 Malaysia 4.49 31
Chile 5.20 32 Hungary 5.66 32 Brazil 4.49 32
Malaysia 5.16 33 Uruguay 5.62 33 Japan 4.42 33
Uruguay 5.15 34 Chile 5.51 34 Slovak Republic 4.40 34
42 Greece 5.14 35 Malaysia 5.50 35 Italy 4.37 35
Latvia 5.02 36 Latvia 5.48 36 Slovenia 4.27 36
Poland 4.90 37 Poland 5.46 37 South Africa 4.27 37
Brazil 4.86 38 Argentina 5.31 38 Egypt 4.24 38
Argentina 4.84 39 Mauritius 5.29 39 Uruguay 4.21 39
South Africa 4.80 40 Lithuania 5.22 40 Jamaica 4.11 40
Mauritius 4.77 41 Costa Rica 5.15 41 Latvia 4.09 41
Costa Rica 4.69 42 Trinidad and Tobago 5.11 42 Philippines 4.07 42
Lithuania 4.67 43 South Africa 5.07 43 China 3.96 43
Trinidad and Tobago 4.64 44 Turkey 5.05 44 Colombia 3.95 44
Turkey 4.61 45 Brazil 5.04 45 Thailand 3.94 45
Mexico 4.60 46 Mexico 4.99 46 El Salvador 3.93 46
Jamaica 4.57 47 Bulgaria 4.94 47 Argentina 3.92 47
Venezuela 4.51 48 Venezuela 4.85 48 Panama 3.86 48
Panama 4.48 49 Romania 4.84 49 Dominican Republic 3.86 49
Bulgaria 4.45 50 Jamaica 4.81 50 Venezuela 3.84 50
Colombia 4.40 51 Panama 4.79 51 Mexico 3.82 51
Jordan 4.26 52 Russia 4.66 52 Costa Rica 3.78 52
Thailand 4.23 53 Colombia 4.62 53 Poland 3.77 53
Russia 4.16 54 Thailand 4.37 54 Turkey 3.75 54
Philippines 4.12 55 Peru 4.23 55 Mauritius 3.73 55
China 4.04 56 Philippines 4.14 56 Greece 3.71 56
Dominican Republic 4.02 57 Jordan 4.10 57 Trinidad and Tobago 3.71 57
Peru 4.01 58 Dominican Republic 4.10 58 Lithuania 3.58 58
Romania 4.00 59 China 4.08 59 Peru 3.57 59
El Salvador 3.93 60 Ukraine 4.01 60 Bulgaria 3.48 60
Egypt 3.82 61 El Salvador 3.92 61 Indonesia 3.44 61
Ukraine 3.77 62 Paraguay 3.90 62 Sri Lanka 3.43 62
Ecuador 3.62 63 Ecuador 3.88 63 Ukraine 3.29 63
Paraguay 3.56 64 Bolivia 3.87 64 Vietnam 3.24 64
Bolivia 3.52 65 Guatemala 3.77 65 Nigeria 3.17 65
Guatemala 3.50 66 Egypt 3.61 66 Russia 3.15 66
Indonesia 3.44 67 Indonesia 3.44 67 Ecuador 3.11 67
India 3.43 68 Sri Lanka 3.41 68 Nicaragua 3.05 68
Sri Lanka 3.42 69 Honduras 3.36 69 Guatemala 2.97 69
Honduras 3.22 70 Nicaragua 3.29 70 Bangladesh 2.94 70
Nicaragua 3.21 71 Zimbabwe 3.21 71 Zimbabwe 2.94 71
Zimbabwe 3.12 72 India 2.86 72 Honduras 2.92 72
Vietnam 2.84 73 Vietnam 2.64 73 Paraguay 2.89 73
Nigeria 2.16 74 Nigeria 1.66 74 Bolivia 2.80 74
Bangladesh 1.96 75 Bangladesh 1.47 75 Romania 2.34 75
 1.1: The Growth Competitiveness Index
third-highest at 80 percent. Finland, the top European that were not among the core in the 1980s, both rank
country in this regard, is next at 74 percent. Hong Kong among the top 8 economies on this measure in 2001.
has the lowest ratio among core economies at 22 percent, Singapore, with its large push to develop local technologi-
anchoring it in a low innovation ranking. On the patent cal capacity, ranks just behind France. Further behind are
measures, the United States and Japan are clearly the Hong Kong and Ireland, two economies that, despite their
world leaders, with 309 and 246 respective US patents fast growth, have not yet reached the top global tier of
granted per million people in 2000. Canada ranks 9th technological innovation processes.
among patent recipients, with 111 per million population
in the same year. On the Survey measures of innovation, Technology in the non-core economies
Finland comes out on top, followed closely by the United For countries that have not yet reached the stage of global
States and Sweden. Italy, New Zealand, and Korea mean- technological competitiveness, one needs a measure of
while fill out the bottom side of the same scale, indicating how quickly they are absorbing and implementing inter-
low levels of firm-based innovation and university-business nationally competitive production technologies from the
research collaboration in those countries. most sophisticated economies.To do this, we used the
United Nations’ COMTRADE database and also Statistics
Information and communications technology subindex Canada’s World Trade Analyzer to create a variable that
The ICT subindex is comprised of 2/3 hard data and measures the extent of manufacturing technology in the
1/3 Survey data.The hard data include simple per capita export structure of non-core economies. Countries with a
measures of telephone lines, personal computers, Internet technology-based export sector are judged to be more
usage, Internet hosts, and mobile phone users, as published adept, in general, at absorbing technologies from abroad
by the International Telecommunications Union.These than economies with a primary commodity–based export
data were again combined into an overall 1-to-7 scale that structure. Regression analysis confirms strongly that, all
was in turn merged with Survey questions regarding other things equal, primary commodity–based economies
ICT usage and government policies, as outlined in Box 2. indeed grew less rapidly in the past decade (and since
Table 5 shows the ICT subindex scores, with the 1970) than did more technology-based export economies.
Scandinavian countries occupying three of the top six To construct the technology-in-trade variable, we first
positions. Finland takes the top spot by virtue of its calculated the average value of non-primary product 43
highest average score on the Survey questions along with exports as a proportion of GDP throughout the 1990s.To
a high ranking on the hard measures of ICT, reflecting the ensure the broadest possible reference base, we calculated
overall prioritization of communications technology in this not just for the GCR sample, but also for the more
that economy. Notably, Norway has the highest combined than 100 countries for which detailed international trade
score on the hard ICT variables, followed closely by data are available. Non-primary exports were defined to
Iceland and Sweden. Last among the core economies on include most processed textiles and manufactured goods,
the overall ICT scores are Israel, Japan, and Italy, each but not mining products or processed raw materials.xi
of which have a low ranking among the core on hard
We then regressed the natural logarithm of the average
measures of connectivity.These three countries score
1990s value of non-primary exports as a percent of GDP
particularly poorly, however, on the survey measures of
on the natural logarithm of national population in the
ICT, suggesting less of an emphasis on ICT in the public
same period, and then converted the residual to a 1-to-7
policies of these economies. scale, as with our other hard data.xii This trade residual term
To form the overall core-economy technology index, is important because small economies are inherently more
the ICT subindex is averaged with the innovation open to trade, so when measuring extent of trade one
subindex.The results are presented in Table 6A, which lists
needs to control for the size of an economy to understand
technology rankings for the core separately from the non-
the underlying variation in its trade performance.
core.The United States ranks as the global technological
The technology transfer subindex was created by
leader, followed by Canada, Finland, and Taiwan. Note
averaging the technology-in-trade variable with a Survey
that this ranking represents a broad measure of technology,
question on the extent to which foreign direct investment
reflecting current ICT infrastructure, recent history of
“is an important source of new technology.”This technol-
scientific innovation and product innovation, human
ogy transfer subindex was then given a 3/8 weight against
resource potential for future innovation, and the policy
a 1/8 weight for the innovation subindex and a 4/8
environment for future scientific and product discovery.
weight for the ICT subindex to create non-core values on
Several western European economies, including Germany,
the overall technology index.The rationale for the various
France, Austria, and Belgium, are tightly clustered in the
technology weightings merits a brief explanation. In our
middle of the group, all lagging behind their Scandinavian
simple least squares regression analysis, we found that,
neighbors. Impressively, Korea and Taiwan, two countries
1.1: The Growth Competitiveness Index

Table 6A: Technological core economies

Technology Innovation ICT

Country Index Core Rank Country Subindex Core Rank Country Subindex Core Rank
United States 6.42 1 Canada 6.51 1 Finland 6.58 1
Canada 6.37 2 United States 6.50 2 Iceland 6.47 2
Finland 6.35 3 Taiwan 6.37 3 Sweden 6.45 3
Taiwan 6.19 4 Finland 6.12 4 Singapore 6.40 4
Australia 6.05 5 Australia 5.96 5 United States 6.34 5
Sweden 5.81 6 Korea 5.46 6 Norway 6.28 6
Norway 5.77 7 Norway 5.27 7 Denmark 6.25 7
Korea 5.66 8 Belgium 5.19 8 Canada 6.23 8
United Kingdom 5.56 9 Sweden 5.17 9 Netherlands 6.20 9
New Zealand 5.55 10 New Zealand 5.11 10 Hong Kong SAR 6.19 10
Denmark 5.54 11 United Kingdom 5.02 11 Australia 6.15 11
Belgium 5.54 12 France 5.01 12 Switzerland 6.10 12
Netherlands 5.54 13 Germany 4.98 13 Austria 6.09 13
Germany 5.49 14 Netherlands 4.88 14 United Kingdom 6.09 14
Austria 5.45 15 Denmark 4.83 15 Germany 6.01 15
France 5.44 16 Austria 4.81 16 Taiwan 6.01 16
Singapore 5.44 17 Japan 4.74 17 New Zealand 5.99 17
Iceland 5.41 18 Israel 4.71 18 Ireland 5.97 18
Japan 5.28 19 Singapore 4.48 19 Belgium 5.90 19
Switzerland 5.27 20 Italy 4.47 20 France 5.87 20
Israel 5.27 21 Switzerland 4.44 21 Korea 5.87 21
Ireland 5.20 22 Ireland 4.43 22 Israel 5.83 22
Italy 5.01 23 Iceland 4.35 23 Japan 5.82 23
Hong Kong SAR 4.93 24 Hong Kong SAR 3.67 24 Italy 5.55 24

Table 6B: Technological transition economies

Rank Among Rank Among Rank Among Technology Rank Among
Technology Non-core Innovation Non-core ICT Non-core Transfer Non-core
Country Index Economies Country Subindex Economies Country Subindex Economies Country Subindex Economies

Singapore 6.26 1 Singapore 4.48 1 Singapore 6.40 1 Singapore 6.67 1

Ireland 5.96 2 Ireland 4.43 3 Hong Kong SAR 6.19 2 Ireland 6.46 3
Hong Kong SAR 5.93 3 Hong Kong SAR 3.67 8 Ireland 5.97 3 Hong Kong SAR 6.32 4
44

among the technology variables, ICT was linked to In Table 6B, we present the technology index results
approximately half of the variation in average annual obtained for the technological transition economies—
growth, so we gave it a corresponding weight in the tech- Hong Kong SAR, Ireland, and Singapore—when they are
nology index. Calculating the remainder of technology considered non-core economies. In clear contrast to their
transfer and innovation subindexes was slightly more com- rankings on the innovation-based core technology index,
plicated. Using a statistical tool known as nonlinear least these economies score significantly ahead of the rest of the
squares, we estimated the relative weights on innovation non-core economies when a technology transfer approach
relative to technology transfer, and found an almost per- is used to assess their technological competitiveness. In
fectly symmetrical result for the core and non-core.With Table 6C, we rank only the non-core economies as
the average annual 1992 to 2000 change in the per capita defined by 2000 patent levels. Notable on this list are the
GDP GAP still as the dependent variable, for the core countries ranked 1st through 3rd: Estonia, the Czech
economies we found our measure of innovation to merit a Republic, and Hungary. Each of these economies has
weighting of 0.85 relative to technology transfer.This adopted manufacturing-based export-led growth strate-
result and other statistical tests not reported here support- gies, and the success of those policies is clearly reflected in
ed our emphasis on innovation in the core technology their index scores.
index.xiii For the non-core economies, we found that Portugal and Spain are also of significant interest.
technology transfer merited a weighting of 0.81 relative to Both of these economies have enjoyed average real per
innovation. Given the small sample, the relatively short capita growth rates of more than 3 percent over the past
time period covered in this assessment, the other variables five years, but neither has been a tremendously successful
affecting growth that are not included in our model, and innovator. Neither has a sufficient patenting rate to be
our general hesitation to place too much emphasis on any included among the European core economies, and nei-
single factor in the development process, we scale back the ther ranks among the top 15 non-core skilled manufactur-
coefficient on technology transfer to 0.75 in our GCR ing exporters.Through their close links with the rest of
calculations. Western Europe, these economies do have high ICT
scores, results that bolster their overall technology scores.
 1.1: The Growth Competitiveness Index
Table 6C: Technological non-core economies

Technology Non-core Innovation Non-core ICT Non-core Technology Non-core

Country Index Rank Country Subindex Rank Country Subindex Rank Country Transfer Subindex Rank

Estonia 5.68 1 Spain 4.48 1 Estonia 5.88 1 Malaysia 6.54 1

Czech Republic 5.39 2 Greece 3.95 2 Portugal 5.68 2 Hungary 6.19 2
Hungary 5.39 3 Estonia 3.94 3 Spain 5.63 3 Czech Republic 6.03 3
Malaysia 5.36 4 Slovenia 3.80 4 Slovenia 5.47 4 Estonia 5.98 4
Portugal 5.27 5 Russia 3.72 5 Czech Republic 5.45 5 Costa Rica 5.84 5
Spain 5.23 6 Argentina 3.61 6 Hungary 5.30 6 Slovak Republic 5.81 6
Slovak Republic 5.18 7 Portugal 3.58 7 Slovak Republic 5.26 7 Philippines 5.65 7
Slovenia 5.18 8 Costa Rica 3.51 8 Chile 5.20 8 Thailand 5.56 8
Costa Rica 4.97 9 Ukraine 3.48 9 Malaysia 5.16 9 Mexico 5.53 9
Latvia 4.83 10 Chile 3.41 10 Uruguay 5.15 10 Mauritius 5.52 10
Poland 4.75 11 Hungary 3.30 11 Greece 5.14 11 Dominican Republic 5.50 11
Mexico 4.70 12 Latvia 3.29 12 Latvia 5.02 12 Romania 5.37 12
Mauritius 4.67 13 Panama 3.24 13 Poland 4.90 13 Portugal 5.28 13
Greece 4.62 14 Czech Republic 3.24 14 Brazil 4.86 14 Slovenia 5.24 14
Thailand 4.54 15 Bulgaria 3.19 15 Argentina 4.84 15 Poland 5.15 15
Philippines 4.53 16 South Africa 3.10 16 South Africa 4.80 16 Vietnam 5.12 16
Lithuania 4.46 17 Uruguay 3.03 17 Mauritius 4.77 17 Latvia 5.08 17
Chile 4.45 18 Venezuela 3.01 18 Costa Rica 4.69 18 Sri Lanka 5.01 18
Jamaica 4.43 19 Poland 2.98 19 Lithuania 4.67 19 Jamaica 4.96 19
Dominican Republic 4.42 20 Slovak Republic 2.97 20 Trinidad and Tobago 4.64 20 Spain 4.96 20
Uruguay 4.40 21 Philippines 2.80 21 Turkey 4.61 21 Indonesia 4.76 21
South Africa 4.39 22 Dominican Republic 2.78 22 Mexico 4.60 22 Lithuania 4.74 22
Romania 4.33 23 Thailand 2.77 23 Jamaica 4.57 23 China 4.73 23
Argentina 4.33 24 Lithuania 2.76 24 Venezuela 4.51 24 Bulgaria 4.51 24
Brazil 4.33 25 Brazil 2.66 25 Panama 4.48 25 Turkey 4.45 25
Bulgaria 4.32 26 Malaysia 2.64 26 Bulgaria 4.45 26 Bangladesh 4.41 26
Turkey 4.28 27 Peru 2.62 27 Colombia 4.40 27 El Salvador 4.37 27
Trinidad and Tobago 4.10 28 Mexico 2.61 28 Jordan 4.26 28 South Africa 4.27 28
China 4.05 29 Romania 2.51 29 Thailand 4.23 29 Jordan 4.21 29
Jordan 3.99 30 Bolivia 2.50 30 Russia 4.16 30 Brazil 4.17 30
Venezuela 3.98 31 Egypt 2.47 31 Philippines 4.12 31 Greece 4.15 31
Colombia 3.92 32 Turkey 2.45 32 China 4.04 32 India 4.14 32
Panama 3.89 33 Colombia 2.39 33 Dominican Republic 4.02 33 Trinidad and Tobago 4.09 33
El Salvador 3.86 34 Jamaica 2.29 34 Peru 4.01 34 Argentina 3.88 34
Sri Lanka 3.82 35 Ecuador 2.25 35 Romania 4.00 35 Bolivia 3.86 35
Russia 3.78 36 Jordan 2.25 36 El Salvador 3.93 36 Uruguay 3.85 36 45
Indonesia 3.76 37 India 2.16 37 Egypt 3.82 37 Honduras 3.84 37
Peru 3.71 38 El Salvador 2.08 38 Ukraine 3.77 38 Chile 3.80 38
Ukraine 3.68 39 China 2.07 39 Ecuador 3.62 39 Colombia 3.78 39
Egypt 3.59 40 Indonesia 2.06 40 Paraguay 3.56 40 Zimbabwe 3.78 40
Vietnam 3.56 41 Guatemala 2.00 41 Bolivia 3.52 41 Nicaragua 3.69 41
India 3.54 42 Honduras 1.96 42 Guatemala 3.50 42 Peru 3.67 42
Bolivia 3.52 43 Trinidad and Tobago 1.94 43 Indonesia 3.44 43 Guatemala 3.66 43
Guatemala 3.38 44 Nicaragua 1.83 44 India 3.43 44 Egypt 3.66 44
Ecuador 3.33 45 Sri Lanka 1.81 45 Sri Lanka 3.42 45 Ukraine 3.63 45
Honduras 3.29 46 Vietnam 1.77 46 Honduras 3.22 46 Venezuela 3.60 46
Nicaragua 3.21 47 Zimbabwe 1.75 47 Nicaragua 3.21 47 Panama 3.32 47
Zimbabwe 3.20 48 Paraguay 1.74 48 Zimbabwe 3.12 48 Ecuador 3.31 48
Paraguay 2.98 49 Mauritius 1.71 49 Vietnam 2.84 49 Russia 3.30 49
Bangladesh 2.83 50 Nigeria 1.66 50 Nigeria 2.16 50 Nigeria 3.06 50
Nigeria 2.44 51 Bangladesh 1.57 51 Bangladesh 1.96 51 Paraguay 2.62 51

Other interesting stories are found further down the Public institutions
non-core technology rankings.With the exception of Although technology provides a key pillar of economic
Mexico, Uruguay, and the Dominican Republic, most growth, so too does the quality of the public institutions.
Latin American economies rank among the bottom half of Institutions are crucial for their role in ensuring the pro-
the list. Argentina, one of the wealthiest countries in the tection of property rights, the objective resolution of con-
non-core group, ranks 24th, just ahead of Brazil, which has tract and other legal disputes, efficiency of government
a per capita GDP (PPP) nearly 50 percent smaller. Like spending in public services, and transparency in all levels
much of Latin America, Argentina is an economy that of government.xiv All of these factors underpin the division
needs to develop its technological base in order to grow. of labor, and therefore the efficiency of resource allocation.
They are also fundamental in establishing the societal stabil-
ity required for growth. Although the quality of institutions
has been difficult to measure historically, in recent years the
Global Competitiveness Report’s Executive Opinion Survey
has played an important role in developing new tech-
niques to quantify institutional quality across countries.xv
1.1: The Growth Competitiveness Index

As with technology, institutions play different roles at Honduras have the lowest scores. It is further interesting
different stages of economic development. Our regressions to note the countries that score significantly better or
have shown evidence that once a threshold of institutional worse than one might expect based on their GDP per
development has been met, it is very difficult to detect the capita.The Czech Republic and Argentina, for instance,
growth effects of further modest improvements in institu- score 53th and 55th, despite the fact that they have the
tional quality. (This is of course a working hypothesis that 29th and 31st highest respective incomes per capita in
could be disproved with the development of more sophis- the world. And even though it has grown to be the 24th
ticated measures of institutional quality.) Our regressions richest economy today, Korea still rates almost as poorly
also show that institutional quality is closely linked to at 44th. On the positive side, Egypt rates 33rd on the PII,
economic growth in the non-core countries.This is why contrasting with its 64th place ranking in per capita
we place a weight of 1/3 on the public institutions index wealth. Jordan also ranks at 28th and Uruguay 31st on
in the non-core GCI calculations and a weight of only the PII, compared to 58th and 41st, respectively, on
1/4 in the core GCI calculations. income per person.
Looking at the subindexes of the PII, Finland,
Iceland, and Denmark cover the top three places on
both the contracts and law measure and the corruption
Box 3: Public institutions index
subindexes.These closely linked rankings suggest that
public institutions index = 1/2 contracts and law subindex
the three countries have strong overall public and legal
+ 1/2 corruption subindex. institutions relative to the rest of the world. Indeed,
looking through the rest of the sample in Table 7, one
contracts and law subindex Survey questions finds that for the most part there is a strong similarity
6.01 Is the judiciary independent from the government
between countries’ rankings on the two subindexes.This
and/or parties to dispute?
6.02 Are financial assets and wealth clearly delineated suggests that the subcomponents are capturing similar
and well protected by law? information about the rule of law in society.
6.04 Is your government neutral among bidders when Some important information may also be found
deciding upon public contracts? when countries have significantly different rankings on
6.12 Does organized crime impose significant costs on
46 the two subindexes. Among the high-income countries,
business?
for instance, Canada ranks 6th on corruption but 19th on
corruption subindex Survey questions
contracts and law. Switzerland’s case is nearly the exact
7.01 How common are bribes paid in connection to import
and export permits? opposite, rating 6th on contracts and law but 20th on
7.02 How common are bribes paid when getting connected corruption.
to public utilities? Lower down the list, at income levels where our
7.03 How common are bribes paid in connection with with research shows that differences in institutional quality play
annual tax payments?
a much larger role in economic development, is where the
most important information seems to be found. Consider
Egypt. Its legal system of contracts and government neu-
trality scores in 24th place, which is high relative to its
The public institutions index (PII) is based entirely income level. Unfortunately, corruption seems to be
on Survey data and has two main components, as outlined weakening its institutions tremendously, according to
in Box 3.The first is a measure of contract and law the views of the business community, as indicated by its
enforcement. It consists of economies’ average score on 54th place ranking on that subindex. India shares a similar
questions concerning neutrality in government procure- problem, ranking 33rd on contracts and law but right
ment, judicial independence, clear delineation and respect near the bottom, at 66th, on corruption. Likewise,
for property rights, and costs related to organized crime. Thailand ranks 34th and 59th, Romania 39th and 64th,
The second element of the public institutions index is a and Vietnam 49th and 71st on the respective subindexes.
subindex of corruption, or the abuse of public service These are countries where effective anti-corruption meas-
positions for personal financial gain.This subindex ures could dramatically improve the prospects for growth.
measures the pervasiveness of bribery in three key public Conversely, in many instances corruption is much less
service areas: imports and exports, connection to public of a problem than weaknesses in contracts and law.
utilities, and tax collection. Lithuania achieves a high score at 17th on frequency of
Results for the PII and its main components are listed bribery, but it ranks near the bottom at 59th on the meas-
in Table 7. Finland, Iceland, Denmark, and New Zealand ure of law and property rights.The pattern is similar in
rank as the countries with the four top scores for overall Peru (30th and 60th), Bulgaria (34th and 64th), and
institutional quality. Bangladesh, Paraguay, Nigeria, and Colombia (40th and 67th). Dramatic institutional reforms
 1.1: The Growth Competitiveness Index
Table 7: Public institutions index
public institutions index = 1/2 contracts and law subindex + 1/2 corruption subindex

Public Contracts and Corruption

Country Institutions Index Rank Country Law Subindex Rank Country Subindex Rank
Finland 6.59 1 Finland 6.35 1 Iceland 6.98 1
Iceland 6.56 2 Denmark 6.21 2 Finland 6.83 2
Denmark 6.42 3 Iceland 6.14 3 Denmark 6.62 3
New Zealand 6.33 4 Netherlands 6.09 4 New Zealand 6.61 4
Netherlands 6.29 5 New Zealand 6.05 5 Singapore 6.56 5
Singapore 6.27 6 Switzerland 5.97 6 Canada 6.52 6
Sweden 6.19 7 Singapore 5.97 7 Sweden 6.51 7
Australia 6.17 8 Germany 5.89 8 Australia 6.49 8
United Kingdom 6.14 9 Austria 5.89 9 Netherlands 6.48 9
Hong Kong SAR 6.01 10 Sweden 5.87 10 United Kingdom 6.42 10
Canada 6.01 11 Australia 5.86 11 United States 6.38 11
United States 6.01 12 United Kingdom 5.86 12 Hong Kong SAR 6.38 12
Switzerland 5.99 13 Israel 5.78 13 Chile 6.35 13
Israel 5.98 14 Ireland 5.71 14 Japan 6.29 14
Austria 5.98 15 France 5.69 15 Norway 6.28 15
Norway 5.95 16 Hong Kong SAR 5.64 16 Israel 6.18 16
Germany 5.93 17 United States 5.64 17 Lithuania 6.07 17
Ireland 5.87 18 Norway 5.62 18 Austria 6.07 18
Japan 5.76 19 Canada 5.50 19 Ireland 6.02 19
France 5.72 20 Belgium 5.41 20 Switzerland 6.01 20
Chile 5.69 21 Jordan 5.27 21 Germany 5.98 21
Belgium 5.67 22 Spain 5.23 22 Taiwan 5.98 22
Spain 5.47 23 Japan 5.23 23 Belgium 5.92 23
Taiwan 5.30 24 Egypt 5.15 24 France 5.75 24
Portugal 5.25 25 Portugal 5.06 25 Spain 5.71 25
Hungary 5.20 26 Chile 5.03 26 Hungary 5.69 26
Italy 5.05 27 Uruguay 5.01 27 Italy 5.56 27
Jordan 5.04 28 Mauritius 4.91 28 Portugal 5.44 28
Estonia 4.99 29 Hungary 4.70 29 Estonia 5.42 29
Slovenia 4.90 30 Taiwan 4.62 30 Peru 5.31 30
Uruguay 4.89 31 Estonia 4.55 31 Slovenia 5.29 31
Mauritius 4.79 32 Italy 4.55 32 South Africa 5.21 32
Egypt 4.76 33 India 4.54 33 Slovak Republic 5.13 33
Lithuania 4.70 34 Thailand 4.53 34 Bulgaria 5.12 34
South Africa 4.69 35 Costa Rica 4.52 35 Trinidad and Tobago 5.10 35 47
Trinidad and Tobago 4.63 36 Slovenia 4.50 36 Malaysia 4.97 36
Costa Rica 4.56 37 Greece 4.44 37 Jordan 4.81 37
Slovak Republic 4.54 38 Poland 4.32 38 Uruguay 4.78 38
Malaysia 4.53 39 Romania 4.30 39 Latvia 4.73 39
Greece 4.50 40 South Africa 4.17 40 Colombia 4.73 40
Poland 4.40 41 Trinidad and Tobago 4.15 41 Jamaica 4.70 41
Thailand 4.36 42 Malaysia 4.10 42 Mauritius 4.67 42
Jamaica 4.30 43 Korea 4.09 43 Costa Rica 4.60 43
Korea 4.25 44 Turkey 3.98 44 Greece 4.57 44
Peru 4.24 45 Brazil 3.97 45 Poland 4.48 45
Turkey 4.21 46 Slovak Republic 3.95 46 El Salvador 4.47 46
Brazil 4.21 47 Jamaica 3.89 47 Dominican Republic 4.46 47
Latvia 4.18 48 Czech Republic 3.85 48 China 4.46 48
India 4.11 49 Vietnam 3.77 49 Brazil 4.45 49
China 4.10 50 Argentina 3.75 50 Turkey 4.44 50
Bulgaria 4.07 51 China 3.74 51 Korea 4.41 51
Romania 4.06 52 Sri Lanka 3.66 52 Mexico 4.40 52
Czech Republic 4.04 53 Latvia 3.62 53 Russia 4.38 53
Dominican Republic 4.02 54 Dominican Republic 3.59 54 Egypt 4.37 54
Argentina 4.01 55 Mexico 3.58 55 Argentina 4.28 55
Mexico 3.99 56 Philippines 3.54 56 Bolivia 4.26 56
Colombia 3.85 57 Panama 3.41 57 Panama 4.26 57
Sri Lanka 3.84 58 Indonesia 3.35 58 Czech Republic 4.23 58
Panama 3.83 59 Lithuania 3.34 59 Thailand 4.19 59
El Salvador 3.79 60 Peru 3.16 60 Guatemala 4.12 60
Russia 3.68 61 El Salvador 3.11 61 Venezuela 4.05 61
Bolivia 3.67 62 Bolivia 3.08 62 Sri Lanka 4.03 62
Vietnam 3.58 63 Zimbabwe 3.01 63 Ecuador 3.91 63
Philippines 3.53 64 Bulgaria 3.01 64 Romania 3.82 64
Venezuela 3.40 65 Nigeria 2.98 65 Nicaragua 3.76 65
Indonesia 3.35 66 Russia 2.97 66 India 3.67 66
Nicaragua 3.33 67 Colombia 2.96 67 Honduras 3.64 67
Ecuador 3.30 68 Nicaragua 2.91 68 Zimbabwe 3.58 68
Zimbabwe 3.30 69 Bangladesh 2.84 69 Philippines 3.51 69
Guatemala 3.22 70 Ukraine 2.84 70 Ukraine 3.47 70
Ukraine 3.15 71 Venezuela 2.76 71 Vietnam 3.39 71
Honduras 3.01 72 Paraguay 2.72 72 Indonesia 3.35 72
Nigeria 2.84 73 Ecuador 2.70 73 Paraguay 2.77 73
Paraguay 2.75 74 Honduras 2.37 74 Nigeria 2.70 74
Bangladesh 2.48 75 Guatemala 2.31 75 Bangladesh 2.13 75
1.1: The Growth Competitiveness Index

are still needed in these countries in order to advance price inflation in 2000, and the national savings rate.
economic development, but on the more optimistic side, These variables, which as always are rescaled to 1-to-7
the somewhat lower perceived extent of corruption may scores for index calculations, are each evenly weighted
indicate an opening for increasing transparency and with two Survey questions, one asking about prospects
objectivity in key areas of governance and law. for recession in the coming year and another asking about
Let us reiterate that these measures are not objective the tightening of credit over the past year.
standards, but rather perceptions among business execu- Table 8 reviews the results of the macroeconomic
tives.We believe that governments should take these stability subindex. Singapore, with its high savings rates,
perceptions seriously, not just dispute their exactitude.xvi sound financial system, and strong history of fiscal respon-
These kinds of perception indexes, in our studies and in sibility, rates first again on this measure. Norway, which
many other studies, have helped account for differences last year enjoyed a general government surplus of nearly
in economic growth, with countries with high perceived 15 percent, ranks 2nd. Next are Finland, the Netherlands,
corruption suffering lower growth. Sweden, and Switzerland, each of which has healthy
macroeconomic environments at the moment.The United
States, largely due to its low savings rate and expectations
Macroeconomic environment of recession, has the lowest of all its subindex rankings
The third and final pillar of the GCI is formed by an here, placing 42nd in the sample. Most unstable are the
index of the macroeconomic environment.This index has economies with headline-grabbing fiscal histories in
three main elements: hard data to measure the overall sta- recent years, including Bolivia, Nicaragua, and Zimbabwe.
bility of a country’s macro economy, Survey data to assess To calculate the overall macroeconomic environment
the short-term outlook of private agents in the economy, index, the stability subindex is given a 1/2 weighting
and a measure of the share of government expenditures as against the broad measure of a country’s current macro-
a percentage of GDP. economic situation provided by the Institutional Investor’s
The hard data components of the macroeconomic country credit rating, which receives a 1/4 weight, and
stability subindex, as outlined in Box 4, include the real government expenditure as a percent of GNP, which also
exchange rate relative to the United States,xvii the interest receives a 1/4 weight.xviii Many studies have shown that
48 rate spread between deposits and loans, the general gov- high levels of government expenditure relative to GNP
ernment budget balance as a percent of GNP, consumer are associated with low economic growth.xix This is
probably because high rates of taxation are then required
to pay for the government expenditures, and the high
rates of taxation have a depressing effect on economic
Box 4: Macroeconomic environment index growth.The most heavily taxed region in the world,
Western Europe, probably suffers a reduced rate of
macroeconomic economic growth as a consequence.
environment index = 1/2 macroeconomic stability subindex
We recognize that the optimal level of government
+ 1/4 country credit rating in March 2001
+ 1/4 general government expenditure in 2000 expenditures is a much more complex issue than suggest-
ed by our approach. It certainly would not be correct to
Macroeconomic stability subindex infer that economic growth would be maximized at zero
government expenditures (though our equation has that
macroeconomic perverse property).When government spending is too low,
stability subindex = 5/7 macroeconomic hard data
+ 2/7 macroeconomic survey data then governments do not meet even the core needs for
education, health, and public services needed to underpin
Macroeconomic environment hard data economic growth.This is the case, for example, in
2.28 Inflation in 2000 Guatemala, which has extremely low government spend-
2.30 Lending – borrowing interest rate spread in 2000
ing—too low to meet even the basic health and education
2.29 Real exchange rate relative to the United States in 2000
(1990–95 = 100)
needs of the population. Higher levels of government
2.24 General government surplus in 2000 spending, as in Western Europe, may be justified by the
2.26 National savings rate in 2000 services provided or by the benefits for social equality
even if they come at some price in terms of economic
Macroeconomic environment Survey questions growth.These are difficult political, economic, philosophi-
2.01 Is your country’s economy likely to be in a recession
cal tradeoffs.We hope in future studies to develop a more
next year?
2.03 Has obtaining credit for your company become easier
sophisticated evaluation of different types of government
or more difficult in the past year? spending and their effects on competitiveness, stability, and
other dimensions of economic performance.
 1.1: The Growth Competitiveness Index
Table 8: Macroeconomic environment index
macroeconomic environment index = 1/2 stability subindex score + 1/4 country credit rating score + 1/4 government expenditure score

Macroeconomic Macroeconomic Country Government

Environment Stability Credit Rating Expenditure
Country Index Score Rank Country Subindex Rank Country Score Rank Country Score Rank
Singapore 5.52 1 Singapore 5.37 1 Switzerland 7.00 1 Guatemala 7.00 1
Ireland 5.20 2 Norway 5.35 2 Germany 6.92 2 Dominican Republic 6.70 2
Switzerland 5.18 3 Finland 5.25 3 Netherlands 6.87 3 Thailand 6.34 3
Hong Kong SAR 5.12 4 Netherlands 5.13 4 France 6.83 4 China 6.29 4
Norway 5.08 5 Sweden 5.13 5 United States 6.82 5 El Salvador 6.17 5
China 5.04 6 Switzerland 5.13 6 United Kingdom 6.79 6 Bangladesh 6.13 6
United States 4.97 7 Korea 5.03 7 Norway 6.67 7 Hong Kong SAR 6.10 7
Korea 4.94 8 Spain 5.03 8 Austria 6.57 8 Philippines 6.07 8
Netherlands 4.88 9 France 5.01 9 Canada 6.48 9 Venezuela 5.77 9
Finland 4.82 10 Italy 4.98 10 Denmark 6.47 10 Indonesia 5.66 10
Spain 4.82 11 Austria 4.91 11 Finland 6.42 11 Costa Rica 5.65 11
United Kingdom 4.81 12 Ireland 4.91 12 Japan 6.40 12 Mexico 5.49 12
Canada 4.74 13 Belgium 4.90 13 Belgium 6.38 13 Argentina 5.39 13
New Zealand 4.70 14 Canada 4.89 14 Sweden 6.35 14 Vietnam 5.28 14
Taiwan 4.69 15 China 4.83 15 Singapore 6.29 15 Mauritius 5.22 15
Thailand 4.68 16 Germany 4.83 16 Ireland 6.29 16 Korea 5.20 16
Australia 4.68 17 Hong Kong SAR 4.77 17 Spain 6.19 17 Chile 5.06 17
Japan 4.66 18 Denmark 4.74 18 Italy 6.17 18 Ecuador 5.05 18
Germany 4.65 19 Vietnam 4.70 19 Portugal 5.97 19 Peru 5.05 18
Malaysia 4.59 20 Trinidad and Tobago 4.66 20 Australia 5.78 20 Singapore 5.03 20
Chile 4.56 21 Nigeria 4.65 21 New Zealand 5.62 21 South Africa 5.03 20
France 4.54 22 Hungary 4.64 22 Taiwan 5.56 22 Sri Lanka 5.03 20
Italy 4.53 23 New Zealand 4.61 23 Iceland 5.34 23 Trinidad and Tobago 4.92 23
Belgium 4.48 24 Malaysia 4.60 24 Greece 5.18 24 Malaysia 4.89 24
Trinidad and Tobago 4.48 25 Greece 4.60 25 Hong Kong SAR 4.86 25 Brazil 4.88 25
Austria 4.46 26 United Kingdom 4.60 26 Chile 4.76 26 Paraguay 4.82 26
South Africa 4.43 27 Taiwan 4.53 27 Slovenia 4.63 27 Ireland 4.71 27
Philippines 4.42 28 South Africa 4.53 28 Korea 4.51 28 United States 4.71 27
Sweden 4.40 29 Japan 4.52 29 Israel 4.49 29 Bolivia 4.66 29
Mauritius 4.34 30 Russia 4.52 30 Czech Republic 4.38 30 Panama 4.58 30
Denmark 4.28 31 Brazil 4.50 31 Hungary 4.35 31 Colombia 4.42 31
Greece 4.26 32 Slovenia 4.41 32 Poland 4.28 32 Egypt 4.33 32
Brazil 4.24 33 Portugal 4.41 33 Malaysia 4.25 33 India 4.29 33
Iceland 4.24 34 Thailand 4.39 34 China 4.22 34 Nigeria 4.29 33 49
Portugal 4.24 35 Australia 4.39 35 Mexico 4.13 35 Lithuania 4.22 35
Mexico 4.18 36 Estonia 4.39 36 Estonia 3.81 36 Australia 4.15 36
Vietnam 4.15 37 Iceland 4.33 37 Mauritius 3.74 37 Taiwan 4.12 37
Hungary 4.04 38 Philippines 4.28 38 Trinidad and Tobago 3.66 38 Honduras 4.08 38
Slovenia 4.02 39 Indonesia 4.26 39 Uruguay 3.65 39 Jordan 3.99 39
Argentina 3.99 40 Chile 4.20 40 South Africa 3.62 40 New Zealand 3.95 40
Indonesia 3.96 41 Mauritius 4.20 41 Thailand 3.59 41 Jamaica 3.86 41
Costa Rica 3.94 42 United States 4.17 42 India 3.40 42 Uruguay 3.84 42
Estonia 3.94 43 Czech Republic 4.12 43 Egypt 3.38 43 Ukraine 3.84 42
Panama 3.92 44 Israel 4.04 44 Latvia 3.25 44 Russia 3.69 44
India 3.88 45 Latvia 4.03 45 Slovak Republic 3.23 45 Turkey 3.61 45
Dominican Republic 3.87 46 Jordan 4.03 46 Panama 3.22 46 Romania 3.54 46
El Salvador 3.87 47 Slovak Republic 4.00 47 Costa Rica 3.14 47 Nicaragua 3.47 47
Bangladesh 3.81 48 Poland 3.98 48 Lithuania 3.11 48 Switzerland 3.45 48
Czech Republic 3.81 49 Panama 3.95 49 Brazil 3.09 49 United Kingdom 3.25 49
Poland 3.75 50 India 3.91 50 Turkey 3.09 49 Japan 3.22 50
Egypt 3.74 51 Argentina 3.88 51 Philippines 3.05 51 Estonia 3.18 51
Guatemala 3.73 52 Ecuador 3.75 52 Colombia 2.85 52 Spain 3.04 52
Venezuela 3.73 53 Lithuania 3.66 53 Argentina 2.79 53 Latvia 3.00 53
Jordan 3.69 54 Egypt 3.63 54 El Salvador 2.71 54 Iceland 2.98 54
Nigeria 3.68 55 Bangladesh 3.62 55 Jordan 2.70 55 Bulgaria 2.97 55
Lithuania 3.66 56 Romania 3.56 56 Peru 2.70 55 Norway 2.92 56
Russia 3.64 57 Mexico 3.55 57 Venezuela 2.49 57 Poland 2.74 57
Peru 3.62 58 Costa Rica 3.49 58 Bulgaria 2.43 58 Canada 2.71 58
Latvia 3.58 59 Bulgaria 3.48 59 Sri Lanka 2.40 59 Greece 2.65 59
Sri Lanka 3.56 60 Ukraine 3.45 60 Dominican Republic 2.38 60 Czech Republic 2.61 60
Israel 3.55 61 Sri Lanka 3.40 61 Guatemala 2.25 61 Slovenia 2.61 60
Ecuador 3.45 62 Peru 3.37 62 Paraguay 2.05 62 Hungary 2.53 62
Uruguay 3.38 63 Venezuela 3.32 63 Bolivia 1.97 63 Netherlands 2.38 63
Slovak Republic 3.35 64 El Salvador 3.30 64 Jamaica 1.94 64 Finland 2.37 64
Paraguay 3.31 65 Honduras 3.22 65 Vietnam 1.94 64 Portugal 2.18 65
Colombia 3.29 66 Dominican Republic 3.21 66 Romania 1.92 66 Slovak Republic 2.17 66
Romania 3.14 67 Jamaica 3.20 67 Bangladesh 1.85 67 Germany 2.04 67
Turkey 3.10 68 Paraguay 3.18 68 Russia 1.82 68 Italy 1.97 68
Bulgaria 3.09 69 Uruguay 3.02 69 Indonesia 1.68 69 Belgium 1.76 69
Bolivia 3.08 70 Colombia 2.94 70 Honduras 1.59 70 Zimbabwe 1.71 70
Jamaica 3.05 71 Turkey 2.85 71 Ecuador 1.26 71 Israel 1.62 71
Honduras 3.02 72 Guatemala 2.84 72 Nigeria 1.14 72 Austria 1.44 72
Ukraine 2.95 73 Bolivia 2.84 73 Ukraine 1.08 73 France 1.33 73
Nicaragua 2.48 74 Nicaragua 2.72 74 Nicaragua 1.01 74 Denmark 1.17 74
Zimbabwe 1.93 75 Zimbabwe 2.50 75 Zimbabwe 1.00 75 Sweden 1.00 75
1.1: The Growth Competitiveness Index

CONCLUSION References
Barro, Robert J. “Economic Growth in a Cross-Section of Countries.”
As the world becomes increasingly interconnected but the Quarterly Journal of Economics, CVI: 407–443 (1991).
disparities between wealthy and poor countries become ———. Determinants of Economic Growth: A Cross-Country Empirical
ever starker, policymakers, business leaders, academics, and Study. Cambridge, MA: MIT Press, 1997.
other globally minded citizens all require a much keener The Institutional Investor Online. “Country Credit Ratings,” accessed at
understanding of the forces contributing to economic http://www.iimagazine.com/premium/rr/ countrycredit/ccr/2001.htm
on August 12, 2001.
growth in both the medium and long term, and how the
importance of those forces changes at different stages of The International Monetary Fund. World Economic Outlook: May 2001.
Washington, DC: The International Monetary Fund, 2001.
economic development.This chapter has focused on the
International Trade Centre and United Nations Statistics Division. PC-TAS
central processes underpinning medium-term economic Trade Analysis System, 1995–1999 (CD-ROM). December 2000.
growth, with particular emphasis on technological
Kaufman, Daniel and Shang-jin Wei. “Does ‘Grease Money’ Speed Up the
advancement. Wheels of Commerce?” NBER Working Paper No. 7093, 1999.
Marking a new direction in competitiveness research, Knack, Stephen and Philip Keefer. “Institutions and Economic
we outlined key empirical distinctions between techno- Performance: Cross-Country Tests Using Alternative Institutional
Measures,” Economics and Politics, VII (1995), 207–220.
logical diffusion and innovation as pertains to economic
growth. In so doing, we estimated not just the changing Mauro, Paolo. “Corruption and Growth,” Quarterly Journal of Economics,
CX: 681–713 (1995)
nature of technological advancement that typically accom-
Sachs, Jeffrey D. “Ten Trends in Global Competitiveness in 1998,” Global
panies economic development, but also the increasing Competitiveness Report 1998. Geneva: World Economic Forum,
importance of technology as economies create a sustain- 1998.
able capacity for innovation. Sachs, Jeffrey D and Andrew M Warner. “Year in Review,” Global
By dividing our sample of GCR countries into two Competitiveness Report 1999. Geneva: World Economic Forum,
1999.
groups, core and non-core technological innovators, we
were able to estimate the respective growth-related effects Statistics Canada. World Trade Analyzer: 1980–1996 (CD-ROM), Ottawa:
Statistics Canada, 1998.
of innovation and diffusion in the 1990s. Our evidence
United Nations. Human Development Report 1990. New York: Oxford
indicates that innovation matters substantially more than University Press, 1990.
diffusion in the core economies, and that diffusion matters
50 Warner, Andrew M. “Economic Creativity,” Global Competitiveness
proportionately more in the non-core ones. Our evidence Report 2000. New York: Oxford University Press, 2000.
furthermore suggests that public institutions and the Wei, Shang-jin. “Why is Corruption So Much More Taxing Than Tax?
macroeconomic environment remain more important for Arbitrariness Kills,” NBER Working Paper No. 6255, 1997.
economic growth within the non-core economies than World Bank Task Force on Education. Higher Education in Developing
within the core economies.This is partly due to the limit- Countries: Peril and Promise. Washington, DC: The World Bank,
2000.
ed variation in institutional quality and macroeconomic
The World Bank. World Development Indicators 2001 (CD-ROM).
factors among core economies. It is also likely due to a Washington DC: The World Bank, 2001.
threshold effect, whereby economies that have attained a
certain level of quality in institutions and macroeconomic
policymaking yield increasingly small benefits from mar-
ginal improvements in those areas.
All of these findings are incorporated in the new
Growth Competitiveness Index, which blends core and
non-core measures of technological advancement with
measures of institutional quality and the macroeconomic
environment to create a unified competitiveness ranking
across 75 countries. GCI scores represent our best estimate
at the underlying growth prospects for each country, once
their current level of GDP is taken into account. Of equal
importance, rankings in the GCI’s three component
indexes of technology, public institutions, and macroeco-
nomic environment provide important insight into each
economy’s specific sources of growth competitiveness.
 1.1: The Growth Competitiveness Index
xiii The specific results of the nonlinear least squares regression were as
Notes
i Much of the empirical knowledge today was stimulated by Robert J follows, with the average annual percentage change in GDP GAP rel-
ative to the United States still as the dependent variable in the fol-
Barro’s seminal work, “Economic Growth in a Cross-Section of
lowing equation:
Countries,” Quarterly Journal of Economics CVI (1991): 407–443.
ii The simple correlation coefficient between the rankings for the two Growth = Constant + B1 x 1980s non-core x {N1 {0.5
x ICT subindex + 0.5 [(1 – N2) innovation subindex
years is 0.97.
+ N2 x technology transfer subindex]}
iii Specifically, Singapore would jump from 4th to 2nd overall on the GCI, + (1 – N1) (macroeconomic index + institutional index)}
Ireland would shift from 11th to 8th, and Hong Kong SAR would leap + B2 x 1980s core x {C1 {0.5 x ICT subindex
from 13th to 6th—compared with their 2000 overall rankings of 2nd, + 0.5 [C2 x innovation subindex
4th, and 7th, respectively. + (1 – C2) technology transfer index]}
+ (1 – C1) (macroeconomic index + institutional index)}
iv See Jeffrey D Sachs, “Ten Trends in Global Competitiveness in 1998,”
+ G x (GDP GAP in 1992),
Global Competitiveness Report 1998, (Geneva: World Economic
Forum, 1998) p.18. where B1, C1, C2, G, N1, and N2 are the coefficients
to be estimated.
v Jeffrey D Sachs and Andrew M Warner “Year in Review,” in Global
Competitiveness Report 1999, (Geneva: World Economic Forum, The variables “1980s non-core” and “1980s core” take a
1999) p.21. 0 or 1 value depending on an economy’s status in that period.
The regression results are as follows:
vi Indeed, there is strong evidence that even the catch-up effect occurs
only once a minimum threshold of economic development has been Coefficient Coefficient Standard
met. For instance, of the 36 countries ranked as having “high” Variable symbol value error
human development in the United Nations’ 1990 Human Initial GDP GAP in 1992 G –.027 .007
Development Report, 35 achieved rising living standards from 1990 Non-core Index weight B1 .029 .005
to 1998 and the entire group averaged 2.3 percent average annual Core Index weight B2 .032 .007
economic growth over the same period. At the same time, the 34 Non-core technology weight N1 .642 .116
middle-development countries achieved a slightly lower average Non-core diffusion weight
growth rate of 1.9 percent per year, with 7 experiencing declines in over innovation N2 .808 .257
GDP per capita. Meanwhile, low-development countries averaged 0 Core technology weight C1 .896 .268
percent economic growth, with 15 of 34 experiencing an outright Core innovation weight over
decline in living standards. diffusion C2 .849 .397
Constant term — –.213 .033
vii Again, the GDP GAP term is measured as a country’s GDP per capita
(PPP) as a percentage of the United States GDP per capita (PPP) in
Number of observations = 75
1992, ie, all values in 1992 were between 0 and1. We then calculated
the natural logarithm of those values for the regression estimates. In Adjusted R 2 = 0.50
parallel fashion, the dependent variable in this equation was calculat-
ed as the average annual change in the GDP GAP with the United 51
States from 1992 to 2000. As mentioned in the text, for transition xiv Stephen Knack and Philip Keefer, “Institutions and Economic
economies 1995 was used as the base year rather than 1992.
Performance: Cross-Country Tests Using Alternative Institutional
viii The regression results for the overall GCI, with the average annual Measures,” Economics and Politics, VII (1995): 207–220; Paolo
change in GDP GAP relative to the United States as the dependent Mauro, “Corruption and Growth,” Quarterly Journal of Economics,
variable, are as follows: CX: 681–713 (1995); Robert J Barro, Determinants of Economic
Growth: A Cross-Country Empirical Study (Cambridge, MA: MIT
Press, 1997.
Variable Coefficient Standard Error xv See, for example, Shang-jin Wei, “Why Is Corruption So Much More
ln (Initial GDP GAP) –.028 .005 Taxing Than Tax? Arbitrariness Kills,” NBER Working Paper No.
GCI .033 .005 6255, 1997; Daniel Kaufman and Shang-jin Wei, “Does ‘Grease
Constant term –.187 .026 Money’ Speed Up the Wheels of Commerce?” NBER Working
Paper No. 7093, 1999.
Number of observations = 75; Adjusted R 2 = 0.41
xvi Nonetheless, in one noteworthy example of the robustness of
the Survey results, we find that national scores on the public
ix The standard formula for converting each hard variable to the 1-to-7
institutions index remain almost exactly the same when half the
scale was: Survey responses from the sample are randomly excluded. For
(Country Value – Sample Minimum) more details on the consistency of Executive Opinion Survey
6x +1
(Sample Maximum – Sample Minimum) results and the possibility of national-level perception bias, consult
the final chapter of this Report.
In some instances, minor adjustments were made to account for xvii For the real exchange rate measure, the average value from 1990
extreme outliers in the hard data.
to 1995 is set to 100, except for the transition economies where
x Gross tertiary enrollment data were taken from the World Bank’s World we set 1995 values to 100. To avoid excessive complication, real
Development Indicators 2001 and the World Bank Task Force on exchange rates were converted to simple scores on the standard
Education’s Higher Education in Developing Countries: Peril and 1-to-7 scale. Values of less than 80, ie, those that are strongly
Promise (Washington, DC: World Bank, 2000). Most of these figures overvalued, were given a score of 1. Those with values of less
are for 1995 and 1996. The most recent are for 1997. Many national than 100 and greater than 80 were given a score of 2.5. Values
enrollment rates have undoubtedly changed substantially since then, of 100–120, 120–140, and 140 and above were given scores
but data for more recent cross-country analysis are simply not of 4, 5.5, and 7 respectively.
available. xviii The Institutional Investor’s country credit ratings are taken from
xi Specifically, we included all exports falling under the United Nations’ http://www.iimagazine.com/premium/rr/countrycredit/ccr/2001.htm.
Standard Industrial Trade Classification codes 54, 57, 58, 65, 7, 81, xix Most prominent among these studies is Barro 1997, op cit.
82, 83, 84, 85, 87, 88, 893, 894, 898, 8996, and 95.
xii Note that we again used the 1995–99 values for the transition
economies to match our analysis of the average growth rate over
the same period.
 CHAPTER 1.2 Competitiveness has become a central preoccupation of
both advanced and developing countries in an increasingly
open and integrated world economy. Despite its acknowl-
Enhancing the Microeconomic edged importance, the concept of competitiveness is often
misunderstood. Here, we define competitiveness concrete-
Foundations of Prosperity: ly and show its direct relationship to a nation’s standard of
living.The Current Competitiveness Index provides a
The Current Competitiveness conceptual framework and a data-rich basis to analyze the
i
Index fundamental competitiveness of countries in a comparative
context.
Much discussion of competitiveness has focused on
MICHAEL E. PORTER, Institute for Strategy and Competitiveness,
the macroeconomic, political, and legal circumstances that
Harvard Business School
underpin a successful economy.These circumstances are
becoming increasingly well understood. A stable set of
political institutions, a trusted legal context, and sound fis-
cal and monetary policies contribute greatly to a healthy
economy. However, these macroeconomic conditions are
necessary but not sufficient.They provide the opportunity
to create wealth, but do not by themselves create wealth.
Wealth is actually created in the microeconomic founda-
tions of the economy, rooted in company operating prac-
tices and strategies as well as in the quality of the inputs,
infrastructure, institutions, and array of regulatory and
other policies that constitute the business environment in
which a nation’s firms compete. Unless there is appropri-
ate improvement at the microeconomic level, political,
52 legal, and monetary and fiscal reforms will not bear
full fruit.
Beginning in 1998, we began an effort to examine
statistically the microeconomic foundations of competi-
tiveness and prosperity across a wide array of countries.
The microeconomic approach focuses on the detailed
conditions that support a high level of sustainable produc-
tivity and prosperity, measured by GDP per capita.The
approach aims to move beyond the examination of broad,
aggregate variables characteristic of most economic
growth models, such as marginal savings and investments
rates, and examines the complex array of national circum-
stances that support productivity.These microeconomic
differences between nations prove to account for a very
high proportion of the variation across countries in the
level GDP per capita.ii The approach also recognizes that
improvement in competitive potential and prosperity is
not a simple linear process in which nation’s progress on a
constant set of dimensions. Instead, successful economic
development involves the successive focus on competing
on increasingly sophisticated dimensions.This year’s Report
highlights especially the shifting priorities that arise at dif-
ferent stages of economic development.
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
In the Global Competitiveness Report 2001–2002, we Fourth, we investigate the variations in the causes of
again present separate indexes for current (sustainable) prosperity at different stages of economic development.
competitiveness and growth competitiveness.These index- This allows us to highlight the most salient challenges for
es focus on different dimensions of the challenge of low-income, middle-income, and high-income nations
improving prosperity, and provide greater insight into the and the major challenges those nations face in making the
strengths and challenges of nations than is possible in a transition from one stage to another.
single index. Fifth, we briefly analyze the impact of microeconom-
The Current Competitiveness Index examines the ic indicators on economic growth and the relationship of
microeconomic bases of a nation’s GDP per capita.While imbalances between actual and predicted income levels
nations can over- or underperform their fundamentals in with growth of GDP per capita.
the short and medium run, the index provides insights Finally, we utilize the Index to generate the country
into the level of GDP per capita that is sustainable in the current competitiveness rankings (see Table 1) and identify
long term.The Growth Competitiveness Index looks at those countries whose current competitiveness will sup-
the more macroeconomic sources of GDP per capita port higher incomes and who may be poised for improve-
growth, and generates predictions about the ability of a ment, as well as those countries whose current perform-
country to improve its per capita income over time at ance is ahead of their measured competitiveness and may
more/less than the convergence growth rate. Although the face challenges in sustaining it.
sustainable level of current GDP per capita and the rate of As in any such investigation of a complex topic in a
growth are correlated in the long term, each requires its large number of countries, the data and the methods that
own distinctive agenda. are available are far from perfect.There are simply no
This year’s Current Competitiveness Index includes available “hard” data on most of the salient dimensions of
further enhancements in country coverage, variables meas- competitiveness, especially for a broad array of countries.
ured, and methods compared with previous years.We are Another challenge is establishing causality, because a strong
particularly pleased to have added more countries, bring- statistical association does not prove the direction in which
ing the total to 75, up from 58 last year.The countries causality proceeds.We proceed pragmatically, while aiming
added are all developing countries, providing a much rich- to improve the effort each year.What is heartening is the
er platform for exploring the earlier stages of development. consistency of the findings over time, and the remarkable 53
Despite the significant expansion of the sample, the robustness of the results to sensitivity analysis.
statistical findings are remarkably stable compared with the We believe strongly that insights into the microeco-
2000 Report.The results again provide strong support for nomic correlates of rising prosperity are important even if
the importance of microeconomic competitiveness for causality remains unproven. Although there may be a nat-
prosperity and economic development. Our findings also ural tendency for some microeconomic conditions to
verify the striking and regular pattern of microeconomic improve as GDP per capita grows, such improvement is
changes that accompany economic development. clearly far from automatic. Along virtually all dimensions,
This chapter presents six sets of results: First, we ana- microeconomic circumstances can be influenced markedly by
lyze the impact of individual microeconomic indicators on purposeful action in both government and the private sec-
the level of GDP per capita to verify statistical validity, and tor. It will be many years before definitive tests of causality
test for the functional form of the relationship. will be possible, but this does not diminish the importance
Second, we create an aggregate measure of microeco- of understanding the microeconomic changes that accom-
nomic competitiveness, the Current Competitiveness pany successful development and the patterns by which
Index (CCI), together with two subindexes focusing on nations improve them.
company sophistication and the quality of the national Our results again highlight the pressing need to
business environment.We analyze the impact of these incorporate microeconomic and competitive thinking bet-
overall indexes on GDP per capita. ter into efforts to stimulate economic growth. In advanced
Third, we use the statistical models to generate countries, which have largely gotten their macro policies
strengths and weaknesses for each country as well as right, it is micro reform that holds the key to reversing
insights into the overall patterns of competitive develop- unemployment problems and translating economic growth
ment in the world economy. into a rising standard of living.The process of microeco-
nomic reform also needs to move to a new stage: In coun-
tries such as New Zealand and the United Kingdom,
microeconomic reforms so far have been focused on the
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Table 1: The Current Competitiveness Index

Company Operations Quality of the National 2000 GDP
CCI Ranking and Strategy Ranking Business Environment Ranking per Capita
(ppp adjusted)
Country 2001 2000 1999 1998 2001 2000 1999 1998 2001 2000 1999 1998

Finland 1 1 2 2 2 3 7 8 1 1 2 2 24,864
United States 2 2 1 1 1 2 1 2 2 2 1 1 33,886
Netherlands 3 4 3 3 3 7 8 5 3 3 3 4 25,598
Germany 4 3 6 4 4 1 5 1 4 6 5 8 24,931
Switzerland 5 5 5 9 5 5 2 3 5 10 9 10 28,518
Sweden 6 7 4 7 6 6 3 4 6 11 7 9 23,884
United Kingdom 7 8 10 5 7 11 13 9 8 9 8 5 23,197
Denmark 8 6 7 8 9 8 9 10 10 4 6 7 27,120
Australia 9 10 13 15 24 20 19 22 7 7 10 12 25,758
Singapore 10 9 12 10 15 15 14 12 9 5 12 6 23,000
Canada 11 11 8 6 14 16 12 15 11 8 4 3 27,783
France 12 15 9 11 10 9 6 6 12 15 11 13 24,032
Austria 13 13 11 16 11 12 10 11 13 12 13 17 26,314
Belgium 14 12 15 19 12 10 11 13 14 13 15 18 26,958
Japan 15 14 14 18 8 4 4 7 18 19 19 19 25,796
Iceland 16 17 22 24 16 14 21 28 15 16 21 23 29,167
Israel 17 18 20 21 18 13 18 21 17 20 20 20 19,577
Hong Kong SAR 18 16 21 12 21 23 24 17 16 14 18 11 24,448
Norway 19 20 18 14 23 21 23 14 19 18 16 15 29,500
New Zealand 20 19 16 17 19 22 16 19 20 17 14 16 20,010
Taiwan 21 21 19 20 20 18 17 16 21 21 22 21 17,223
Ireland v 22 22 17 13 17 19 20 18 22 22 17 14 25,200
Spain 23 23 23 22 22 24 22 23 23 23 23 22 19,202
Italy 24 24 25 26 13 17 15 20 24 26 27 27 23,304
South Africa 25 25 26 25 25 26 28 33 27 25 25 25 9,189
Hungary 26 32 33 31 33 34 36 39 25 31 33 31 12,335
Estonia 27 — — — 32 — — — 26 — — — 9,178
Korea 28 27 28 28 26 25 27 24 30 28 30 28 17,311
Chile 29 26 24 23 30 27 26 25 28 24 24 24 9,187
Brazil 30 31 35 35 29 29 32 27 32 32 37 39 7,389
Portugal 31 28 29 33 38 35 37 48 29 27 26 30 16,882
Slovenia 32 — — — 28 — — — 35 — — — 17,127
Turkey 33 29 31 29 44 28 33 26 31 29 32 29 6,870
Trinidad and Tobago 34 — — — 27 — — — 37 — — — 8,771
54 Czech Republic 35 34 41 30 41 41 55 31 33 34 36 33 13,721
India 36 37 42 44 43 40 48 50 34 37 43 42 2,403
Malaysia 37 30 27 27 37 30 25 34 38 30 31 26 8,924
Thailand 38 40 39 37 42 47 43 37 39 40 39 36 6,469
Slovakia 39 36 48 36 57 31 51 40 36 36 47 37 11,035
Jamaica 40 — — — 31 — — — 44 — — — 3,657
Poland 41 41 37 41 55 36 38 38 40 41 38 40 8,971
Latvia 42 — — — 35 — — — 43 — — — 6,838
Greece 43 33 36 38 51 32 45 32 42 33 34 38 16,326
Jordan 44 35 32 32 56 46 44 42 41 35 28 32 4,079
Egypt 45 39 43 40 36 44 49 47 46 39 42 35 3,602
Uruguay 46 — — — 48 — — — 45 — — — 8,904
China 47 44 49 42 39 38 31 35 47 45 50 44 3,953
Panama 48 — — — 40 — — — 49 — — — 6,169
Lithuania 49 — — — 47 — — — 48 — — — 6,999
Costa Rica 50 43 38 — 34 39 35 — 52 42 41 — 9,236
Mexico 51 42 34 39 46 42 30 29 53 43 35 41 8,914
Mauritius 52 38 30 — 49 37 29 — 50 38 29 — 9,512
Argentina 53 45 40 34 53 45 39 30 51 44 40 34 12,314
Philippines 54 46 44 45 45 43 34 41 54 46 46 45 3,956
Indonesia 55 47 53 51 50 51 47 52 57 47 52 51 3,014
Colombia 56 48 52 49 52 48 40 43 59 48 53 49 5,923
Sri Lanka 57 — — — 58 — — — 55 — — — 3,512
Russia 58 52 55 46 54 33 42 45 56 53 55 47 8,213
Dominican Republic 59 — — — 59 — — — 58 — — — 5,962
Ukraine 60 56 56 52 62 52 50 51 60 56 56 52 3,693
Romania 61 — — — 63 — — — 61 — — — 6,309
Vietnam 62 53 50 43 64 50 41 36 64 52 49 43 1,974
Peru 63 49 46 47 65 53 56 49 62 51 44 46 4,797
El Salvador 64 51 47 — 66 57 46 — 63 50 48 — 4,477
Zimbabwe 65 50 45 48 60 56 54 46 67 49 45 48 2,697
Venezuela 66 54 51 50 67 49 53 44 66 55 51 50 5,677
Nigeria 67 — — — 61 — — — 68 — — — 871
Bulgaria 68 55 54 — 70 54 52 — 65 54 54 — 5,469
Guatemala 69 — — — 69 — — — 69 — — — 3,784
Paraguay 70 — — — 68 — — — 71 — — — 4,396
Nicaragua 71 — — — 73 — — — 70 — — — 2,396
Ecuador 72 57 57 71 55 57 72 58 57 3,068
Bangladesh 73 — — — 72 — — — 73 — — — 1,561
Honduras 74 — — — 74 — — — 75 — — — 2,469
Bolivia 75 58 58 75 58 58 74 57 58 2,408
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
opening of markets and reducing the role of the govern- The market share view of competitiveness, however, is
ment. Microeconomic reforms need to move to a second deeply flawed.Where this thinking is entrenched, it
stage in which investments are made to upgrade the busi- becomes a principal reason why nations fail to progress
ness environment and enhance the productivity of clusters. economically.The goal of economic development is a ris-
Developing countries, again and again, are tripped up ing standard of living.The need for low wages reveals a
by microeconomic failures.With global capital markets, lack of competitiveness rather than competitive strength.
countries can engineer spurts of growth through macro- Devaluation means that a nation takes a collective pay cut
economic and financial reforms that bring floods of capital by discounting its products and services in world markets
and cause the illusion of progress as construction cranes and paying more for the goods it purchases abroad.
dot the skyline. Such reforms allow countries to exploit Nations with substantial export shares are often poor,
current comparative advantages. Unless firms are funda- while those with focused positions are often prosperous.
mentally improving their operations and strategies and To understand competitiveness, it is necessary to
competition is moving to a higher level, however, growth move beyond the misleading metaphor of direct market
will be snuffed out as jobs fail to materialize, wages stag- competition and relate competitiveness to the sources of a
nate, and returns to investment prove disappointing. nation’s prosperity. A nation’s standard of living is deter-
Capital flows and attention then shifts elsewhere.The aus- mined by the productivity of its economy, which is meas-
terity that results from such cycles is at the core of the ured by the value of goods and services produced per unit
backlash against globalization that is becoming perhaps the of the nation’s human, capital, and natural resources.
most important global economic problem. Productivity depends both on the value of a nation’s prod-
Successful economic development requires progress ucts and services, measured by the prices they can com-
on multiple fronts simultaneously. Reform efforts also mand in open markets, and the efficiency with which they
need to be tightly connected to the current stage of each can be produced.
country’s development. As an economy progresses, the True competitiveness, then, rests on productivity.This
constraints to continued advancement shift. Also, at strate- reveals the fundamental flaw in market share–based think-
gic points in the development process, the whole basis of ing. Productivity allows a nation to support a strong cur-
national competitiveness must be transformed.This rency, and with it a high standard of living. Productivity is
requires a change in many aspects of company strategy as the goal, not exports per se. Exports of low-priced prod- 55
well as new requirements for the national business envi- ucts, which support only subsidence wages, are not suffi-
ronment.We investigate these inflection points in this cient to make a nation prosperous. It is the productivity to
chapter. manufacture high-quality products that support rising
wages that really matters.The productivity underpinnings
of competitiveness also make it clear that the entire econ-
What is competitiveness? omy matters for standard of living, not just the traded sec-
Despite widespread acceptance of its importance, competi- tor.The productivity of domestic industries has a major
tiveness remains a concept that is not well understood. influence on the cost of living and the cost of doing busi-
The most intuitive definition of competitiveness is a coun- ness, not to mention the level of wages in the domestic
try’s share of world markets for its products.This makes economy.
competitiveness a zero-sum game, because each country’s The world economy is not a zero-sum game. Many
gains come at the expense of others.This view of compet- nations can improve their prosperity if they can improve
itiveness is used to justify intervention to skew market productivity and specialize in the products and services
outcomes in a nation’s favor, as well as policies to hold where they are most productive.
down local wages and devalue the nation’s currency to The central challenge in economic development,
expand exports. In fact, it is still often said that devaluation then, is how to create the conditions for rapid and
“makes a nation more competitive.” Business leaders are sustained productivity growth. Stable political/legal
prone to the market share view, because the policies seem institutions and sound macroeconomic policies create
to help solve their short-term problems in coping with the potential for improving national prosperity. But wealth
international rivals. is actually created at the microeconomic level—in the
ability of firms to create valuable goods and services using
productive methods. Only in this way can a nation sup-
port high wages and attractive returns to capital. Political
and legal institutions coupled with macroeconomic poli-
cies set the overall context, yet prosperity depends on
improving a nation’s capabilities at the microeconomic
level (see Figure 1).
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Figure 1: Determinants of productivity and Government plays an inevitable role in economic

productivity growth development because it affects many aspects of the busi-
ness environment. Government shapes the quality of factor
conditions, for example, through its training and infra-
Macroeconomic, Political, and Legal Context for Development
structure policies.The sophistication of home demand
derives in part from regulatory standards and processes,
Sophistication Quality of the
of Company Microeconomic consumer protection laws, government purchasing, and
Operations and Business
Strategy Environment
openness to imports. Similar policy influences are present
in all four parts of the business environment (sometimes
Microeconomic Foundations of Development referred to as the diamond).There are distinct roles for
government in improving the business environment at the
national, state, and local levels as well as in coordinating
policies with neighboring countries. A concerted effort to
The microeconomic foundations of productivity rest improve the business environment is needed at all these
on two interrelated areas: (1) the sophistication with governmental levels.
which companies or subsidiaries based in the country In addition to government, however, many other
compete, and (2) the quality of the microeconomic busi- institutions in an economy have a role in economic devel-
ness environment. National productivity is ultimately set opment. Universities, schools, infrastructure providers,
by the productivity of a nation’s companies. An economy standard-setting agencies, and a myriad of other organiza-
cannot be competitive unless companies operating there tions contribute in some way to the microeconomic busi-
are competitive, whether they are domestic or subsidiaries ness environment. Such institutions must not just develop
of foreign companies. However, the sophistication of com- and improve themselves, but must also become more con-
panies is inextricably intertwined with the quality of the nected to the economy and better linked with the private
national business environment. More sophisticated strate- sector.
gies by companies require more highly skilled people, bet- The private sector itself is not only a consumer of the
ter information, improving infrastructure, more advanced business environment but can and must play a role in
56 institutions, and stronger competitive pressure. shaping it. Individual firms can take steps such as establish-
To support rising prosperity, companies must trans- ing schools, attracting suppliers, or defining standards that
form their ways of competing.The types of competitive not only benefit themselves but also improve the overall
advantages a nation’s companies enjoy must shift from environment for competing. Collective industry bodies,
comparative advantages (low-cost labor or natural such as trade associations and chambers of commerce, also
resources) to competitive advantages due to more distinc- have important roles to play in improving infrastructure,
tive products made with more productive methods.The upgrading training institutions, and the like, that are often
transitions in goals, operating practices, and strategies not recognized.The private sector can also take collective
required for successful development are described in detail steps to enhance the ability of individual companies to
in previous years’ Reports.What were strengths in compet- improve operating practices and strategies.
ing at earlier stages become weaknesses at more advanced
levels of development. Rapid copying of foreign technolo-
gy, for example, must give way to internal development of
indigenous technology. Changes are often resisted by the
corporate sector, because past approaches were profitable
and because old habits are deeply ingrained in companies.
Moving to more sophisticated ways of competing
depends on parallel changes in the microeconomic busi-
ness environment.The business environment can be
understood in terms of four interrelated influences: the
quality of factor (input) conditions, the context for firm
strategy and rivalry, the quality of demand conditions, and
the presence of locally related and supporting industries
(see Figure 2).
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
Figure 2: The microeconomic business environment

Context for Firm Strategy and Rivalry

The context shaping the extent of
corporate investment, the types of
strategies employed, and the
intensity of local rivalry

Factor (Input) Conditions

The efficiency, quality, and specialization of
underlying inputs firms draw on in competing
• human resources Demand Conditions
• capital resources The sophistication of home
• physical infrastructure demand and the pressure
• administrative infrastructure from local buyers to upgrade
• information infrastructure products and services
• scientific and technological
infrastructure
• natural resources

Related and Supporting

Industries
The availability and quality
of local suppliers and relat-
ed industries, and the
state of development of
clusters

57

Economic development high rates of capital investment will not translate into ris-
Successful economic development is a process of succes- ing productivity, for example, unless the forms of invest-
sive upgrading, in which the business environment in a nation ment are appropriate, the company skills and supporting
evolves to support and encourage increasingly sophisticated and industries are present to make the investments efficient,
productive ways of competing. Nations at different levels of and strong competitive pressures and adequate corporate
development face distinctly different challenges.The suc- governance provide the needed market discipline. In Asia,
cession of improvements in the microeconomic environ- for example, it was weaknesses in these areas that brought
ment that accompany successful development were down economies that looked solid in terms of macroeco-
explored in detail in previous years’ Reports. nomic indicators. Moreover, high rates of public invest-
Seeing economic development as a sequential process ment in human capital will not pay off unless a nation’s
of building interdependent microeconomic capabilities, microeconomic circumstances create the demand for skills
evolving the modes of competing, improving incentives, in companies. Removing distortions in exchange rates and
and increasing rivalry also exposes important pitfalls in other prices will eliminate impediments to productivity,
economic policy.The influence of one part of the micro- but microeconomic foundations must be in place if pro-
economic business environment depends on others. Lack ductivity is actually to increase.The prudence of foreign
of improvement in any important area can lead to a debt levels depends on exactly what the capital is invested
plateau in productivity growth and stalled development. in, together with the microeconomic fundamentals sur-
Worse yet, it can undermine the whole reform process. rounding its deployment and governance. Regulating
When well-trained college graduates cannot find appro- overall debt levels is less important, in many ways, than
priate jobs because companies are still competing based on improving the microeconomic foundations. For sound
cheap labor, a backlash against business is created. policies at the macroeconomic level to translate into an
This analysis makes it clear why macroeconomic poli- increasingly productive economy, then, parallel microeco-
cy alone is insufficient. Macroeconomic policies fostering nomic improvements must take place.
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Figure 3: Stages of economic development This analysis also begins to make it clear why
countries find the transition to a new stage of develop-
ment so difficult. Such inflection points require wholesale
Factor-Driven Investment-Driven Innovation-Driven transformation of many interdependent dimensions of
Economy Economy Economy competition. In Asia, for example, successful Investment-
Driven economies such as Taiwan and Singapore are
Input Cost Efficiency Unique Value
finding that their reliance on sustained infrastructure
investments, OEM manufacturing for multinationals, and
government guidance of the economy to boost efficiency
As nations develop, they progress through a number
are insufficient to support higher levels of prosperity.
of stages in terms of their characteristic competitive
Yet their current level of wages and domestic costs
advantages and modes of competing (see Figure 3).iii In
makes them vulnerable to competition from lower-wage
the Factor-Driven stage, basic factor conditions such as
countries such as China.The challenge for both Taiwan
low-cost labor and access to natural resources are the
and Singapore is to move to an Innovation-Driven
dominant sources of competitive advantage and interna-
economy with a presence of deep clusters.To do so,
tional products. Firms produce commodities or relatively
however, companies need to move to new types of
simple products designed in other, more advanced coun-
strategies, investment priorities must change, and
tries.Technology is assimilated through imports, foreign
government’s role in the economy needs to shift.
direct investment, and imitation. In this stage, companies
compete on price and lack direct access to consumers.
They have limited roles in the value chain, are focused on Measuring microeconomic competitiveness
assembly, labor-intensive manufacturing, and resource The Current Competitiveness Index (CCI) is constructed
extraction. A Factor-Driven economy is highly sensitive to from measures of microeconomic competitiveness based
world economic cycles, commodity price trends, and primarily on Survey data drawn primarily from senior
exchange rate fluctuations. business leaders and, to a much lesser extent, from govern-
In the Investment-Driven stage, efficiency in produc- ment officials. Only through a detailed survey can textured
ing standard products and services becomes the dominant measures of the competitive environment and company
58
source of competitive advantage.The products and services practices be assembled across many countries. Although
produced become more sophisticated, but technology and quantitative measures are available for some variables for
designs still largely come from abroad.Technology is some countries, a consistent ranking of a large number of
accessed through licensing, joint ventures, foreign direct countries is simply impossible at this time without the
investment, and imitation. However, nations in this stage Survey. Moreover, the informed judgments of thousands
not only assimilate foreign technology, but also develop of actual participants in the economies or companies are
the capacity to improve on it.The national business envi- important in their own right.
ronment supports heavy investment in efficient infrastruc- This year’s Survey involves more than 4,600 respon-
ture and modern production methods. Companies largely dents from 75 countries. Approximately 37 percent of
serve OEM customers and extend capabilities more wide- the respondents were from largely domestic companies,
ly in the value chain. An Investment-Driven economy is 34 percent were from significant exporters, 15 percent
concentrated on manufacturing and on outsourced service were from multinationals operating in the country, and
exports. It is susceptible to financial crisis and external, 4 percent were from government. Survey data from the
sector-specific demand shocks. various categories of respondents in a country were
In the Innovation-Driven stage, the ability to produce quite similar, and the Survey findings have been quite
innovative products and services at the global technology consistent from year to year.
frontier using the most advanced methods becomes the Appendix A lists the questions included in this year’s
dominant source of competitive advantage.The national Survey about the sophistication of company operations
business environment is characterized by strengths in all and strategy and the quality of the microeconomic
areas together with the presence of deep clusters. business environment, grouped by part of the diamond.
Institutions and incentives supporting innovation are well Questions on company operations and strategy were
developed. Companies compete with unique strategies similar to 2000. New questions were added on the
that are often global in scope. An Innovation-Driven willingness to delegate authority and the extent of
economy has a high service share, and is resilient to incentive compensation.
external shocks.
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
To assess the microeconomic business environment Elements of microeconomic competitiveness
better, new questions were added in all four parts of the To construct an overall index of competitiveness, we must
business environment: In the area of factor conditions, we identify the most important individual dimensions of
added questions on the quality of math and science edu- microeconomic capability and validate their statistical rela-
cation and the availability of scientists and engineers.To tionship to GDP per capita. In this section, we identify the
measure demand conditions, we added questions on the most important explanatory variables.
extent of government procurement of advanced technolo- Table 2 shows the bivariate relationships between the
gy products and the laws relating to information technol- available set of microeconomic variables in this year’s
ogy. A series of new questions measured cluster depth and Survey and GDP per capita.We also include US patents
vitality.We added questions on the extent of product and per capita for each country, a measure of scientific and
process collaboration, the local availability of components technological prowess that is available for all countries.
and parts, the local availability process machinery, local The variables are grouped into those measuring the
access to specialized research and training services, and sophistication of company operations and strategy and
local information technology services. In the area of the variables measuring the quality of the national business
context for firm strategy and rivalry, we added a question environment. Included in the table is the slope of the
on the extent of cooperation in labor-employee relations. regression relationship, an indication of statistical signifi-
The questions aim to capture the state of practice or cance, and the adjusted R2 (or proportion of variation in
the quality of capabilities in a nation, but do so in way GDP per capita explained adjusted for statistical degrees
that is meaningful for Survey respondents. For example, of freedom).vi
we get at the stock of basic human capital with a question All the reported variables are highly statistically
on the quality in public schools because this is something significant in the full set of countries. A wide range of
that respondents can compare more readily across coun- company practices and multiple dimensions of the business
tries.The quality of schools, a flow measure, will be highly environment prove strongly related to competitiveness.
correlated with the stock of basic skills. Of the new indicators available from this year’s Survey, all
The sample of 75 countries extends our previous are statistically significant.These findings are highly consis-
sample by adding almost 20 countries.The countries tent with results from the earlier Global Competitiveness
included in this year’s Index are shown in Table 1. In Reports.The stability of the results provides an important 59
Appendix B, we report the results for the same set of indication that the relationship between microeconomic
countries as last year’s Index to facilitate comparisons. circumstances and GDP per capita is robust and not an
To estimate the CCI, the principal dependent variable artifact of a single year or set of respondents.
used is the level of GDP per capita in 2000, adjusted for Among the company variables, production process
purchasing power parity (PPP). GDP per capita is the sophistication, the nature of the competitive advantage
broadest measure of national productivity and is tightly of a nation’s companies and subsidiaries, the extent of
connected over time to a nation’s standard of living.iv It is training, and the extent of marketing have the strongest
the best single, summary measure of current competitive- bilateral association with per capita GDP. By itself, the
ness available across all countries.v Purchasing power parity measure of whether competitive advantage rests on cheap
adjustments for 2000 are not yet available.To derive the labor/natural resources versus innovative products and
2000 GDP per capita figures used in our models, we start- processes explains a remarkable 75 percent of the variance
ed with the 1999 GDP per capita adjusted for purchasing in GDP per capita.The overall competitive approach of
power parity, grew it at the growth rate of real GDP per local companies thus represents a powerful indicator of
capita in each country, and adjusted for inflation using the the state of economic development. Of the new company
US GDP deflator. variables, the measure of willingness to delegate authority
In our analysis, we sometimes explored differences has a very strong association (R2 of 70 percent) with
across countries at different income levels.Three groups GDP per capita.
of countries were defined based on their purchasing
power–adjusted US-dollar GDP per capita in 2000:
28 low-income countries with a GDP below $6,500; 28
middle-income countries with a GDP per capita between
$6,500 and $23,000; and 19 high-income countries with a
GDP per capita above $23,000.The cut-off points were
selected based on an analysis of Survey reply patterns.
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Table 2: Bivariate regression results, dependent variable: 2000 GDP per capita (PPP-adjusted)
All Countries (N = 75) Low GDP Countries Moderate GDP Countries High GDP Countries
GDP per capita GDP per capita > $6,500 GDP per capita >
< $6,500 (N = 28) and < $23,000 (N = 28) $23,000 (N = 19)
Slope Adj. R 2 Slope Adj. R 2 Slope Adj. R 2 Slope Adj. R 2

I. COMPANY OPERATIONS & STRATEGY

Production Process Sophistication 8184.71** 0.806 964.66 0.087 4621.84** 0.323 1027.15 0.017
Nature of Competitive Advantage 6111.00** 0.754 997.38* 0.117 3496.76** 0.484 -136.85 0.002
Extent of Staff Training 8263.19** 0.751 797.71 0.065 3922.71** 0.243 2088.32* 0.157
Extent of Marketing 8091.45** 0.716 1003.97** 0.176 4158.14** 0.271 727.71 0.011
n Willingness to Delegate Authority 8141.51** 0.700 953.76 0.081 4017.67** 0.236 1206.29 0.098
Capacity for Innovation 7396.04** 0.687 782.33 0.066 3910.86** 0.343 248.71 0.004
Company Spending on R&D 7606.92** 0.677 -187.31 0.003 4158.02** 0.374 598.79 0.031
Value Chain Presence 6746.92** 0.673 590.42 0.034 3264.57** 0.281 -316.66 0.009
Breadth of International Markets 6329.62** 0.665 416.97 0.030 3249.32** 0.348 -940.91 0.065
Uniqueness of Product Designs 8023.89** 0.658 365.66 0.011 2903.52* 0.121 -131.17 0.001
Degree of Customer Orientation 9746.03** 0.653 637.65 0.061 4767.19** 0.230 3734.92* 0.170
Control of International Distribution 10553.50** 0.647 646.69 0.032 5578.89** 0.288 646.10 0.013
Extent of Branding 7194.89** 0.638 921.85* 0.101 4262.93** 0.336 -273.10 0.006
Reliance on Professional Management 7456.50** 0.543 102.92 0.002 2822.89** 0.145 1141.45 0.060
n Extent of Incentive Compensation 8365.11** 0.528 56.64 0.000 4652.96** 0.339 322.74 0.006
Extent of Regional Sales 6866.33** 0.516 190.83 0.007 575.87 0.009 -2283.83 0.067
Prevalence of Foreign Technology Licensing 6337.95** 0.251 351.02 0.037 3878.54** 0.199 -1400.29 0.044

II. NATIONAL BUSINESS ENVIRONMENT

A. FACTOR (INPUT) CONDITIONS
1. Physical Infrastructure
Overall, Infrastructure Quality 5380.61** 0.740 1149.16** 0.367 3017.68** 0.333 744.41 0.066
a. Basic
n Road Infrastructure Quality 7314.57** 0.308 468.29 0.027 1734.43 0.043 41.37 0.000
Railroad Infrastructure Development 3548.73** 0.413 42.73 0.001 1739.60** 0.224 -519.64 0.085
Port Infrastructure Quality 5657.46** 0.621 694.93** 0.156 2345.19** 0.211 375.47 0.011
Air Transport Infrastructure Quality 5751.99** 0.519 1015.18** 0.353 1514.00* 0.109 1150.81 0.043
60 b. Advanced
Telephone/Fax Infrastructure Quality 4960.14** 0.494 652.94** 0.337 2708.61** 0.250 769.29 0.007
Availability and Cost of Cellular Phones 7021.03** 0.361 863.67** 0.206 2437.21** 0.144 -450.81 0.001
Speed and Cost of Internet Access 6259.46** 0.647 1938.23** 0.571 2223.78** 0.182 597.99 0.037
2. Administrative Infrastructure
Police Protection of Businesses 5419.61** 0.680 439.55 0.085 3123.24** 0.496 1434.99 0.084
Judicial Independence 5046.87** 0.631 93.67 0.004 2485.05** 0.273 1014.93 0.053
Administrative Burden for Start-Ups 5731.16** 0.331 -77.02 0.001 1786.74* 0.105 878.64 0.065
Adequacy of Public Sector Legal Recourse 5787.16** 0.680 91.44 0.003 2696.93** 0.239 1137.59 0.041
Extent of Bureaucratic Red Tape 13206.03** 0.476 -115.34 0.001 4547.71** 0.168 1873.19 0.045
3. Capital Availability
Ease of Access to Loans 7688.69** 0.692 355.72 0.019 3610.15** 0.253 1473.22 0.094
Financial Market Sophistication 5885.85** 0.657 653.75 0.086 2022.18** 0.155 403.85 0.012
Local Equity Market Access 4769.81** 0.407 -383.55 0.086 1973.30** 0.199 891.39 0.022
Venture Capital Availability 7005.05** 0.718 -186.27 0.004 3815.33** 0.403 865.22 0.052
4. Human Resources
Quality of Public Schools 5006.30** 0.673 714.45** 0.184 2276.11** 0.277 528.01 0.012
n Quality of Math and Science Education 5148.26** 0.413 421.90 0.085 2027.69** 0.164 -1532.57 0.098
n Availability of Scientists and Engineers 6548.85** 0.355 371.78 0.050 3055.10** 0.166 2217.21 0.101
Quality of Management Schools 6351.34** 0.485 442.69 0.047 1469.08 0.057 1004.14 0.070
5. Science & Technology
Patents per capita (2000) 107.32** 0.520 2544.00** 0.198 54.12** 0.277 16.50** 0.228
Quality of Scientific Research Institutions 7726.51** 0.660 34.59 0.000 4367.60** 0.357 1531.69 0.090
University/Industry Research Collaboration 7849.99** 0.685 61.71 0.001 4257.33** 0.364 809.44 0.020
B. DEMAND CONDITIONS
Buyer Sophistication 7864.18** 0.735 39.98 0.000 5400.97** 0.529 1768.98 0.074
Consumer Adoption of Latest Products 8553.92** 0.693 498.01 0.036 4813.38** 0.413 1687.84 0.069
Presence of Demanding Regulatory Standards 7132.39** 0.805 860.26* 0.123 4886.87** 0.422 1410.50 0.036
Stringency of Environmental Regulations 6170.81** 0.809 991.30** 0.165 4005.35** 0.425 998.22 0.058
n Government Procurement of Advanced 9967.47** 0.528 167.40 0.004 5362.12** 0.384 561.55 0.004
Technology Products
n Laws Relating to Information Technology 7368.22** 0.742 880.41* 0.121 3800.17** 0.393 993.97 0.027
(cont’d.)
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
Table 2: Bivariate regression results, dependent variable: 2000 GDP per capita
All Countries (N = 75) Low GDP Countries Moderate GDP Countries High GDP Countries
GDP per capita GDP per capita > $6,500 GDP per capita >
< $6,500 (N = 28) and < $23,000 (N = 28) $23,000 (N = 19)
Slope Adj. R 2 Slope Adj. R 2 Slope Adj. R 2 Slope Adj. R 2

II. QUALITY OF THE BUSINESS ENVIRONMENT (cont’d.)

C. RELATED AND SUPPORTING INDUSTRIES
Local Supplier Quantity 11287.11** 0.580 582.40 0.030 4903.60* 0.129 -26.16 0.000
Local Supplier Quality 9400.61** 0.767 1785.27** 0.257 4253.02** 0.178 992.45 0.019
State of Cluster Development 7797.84** 0.490 604.81 0.046 1909.25 0.078 -539.17 0.012
n Extent of Product and Process Collaboration 10177.43** 0.583 882.13 0.053 3405.46** 0.156 546.58 0.009
n Local Availability of Components and Parts 5144.44** 0.226 674.23** 0.143 1215.54 0.029 -613.71 0.033
n Local Availability of Process Machinery 4904.12** 0.262 441.17 0.065 1104.88 0.027 3.39 0.000
n Local Availability of Specialized Research and Traning Services8286.02** 0.603 714.08 0.059 2201.04 0.085 839.70 0.026
n Local Availability of Information Technology Services 8666.74** 0.585 386.07 0.022 2824.35* 0.114 1380.16 0.046
D. CONTEXT FOR FIRM STRATEGY AND RIVALRY
Favoritism in Decisions of Government Officials 7621.17** 0.642 755.78* 0.102 4344.58** 0.403 -217.08 0.002
Extent of Irregular Payments 7275.30** 0.719 1337.44** 0.350 3229.07** 0.255 1888.55 0.077
Extent of Distortive Government Subsidies 6557.01** 0.275 317.55 0.013 3278.33** 0.215 -1048.91 0.082
Decentralization of Corporate Activity 6597.65** 0.545 234.49 0.016 2509.01* 0.140 1158.65 0.085
n Cooperation in Labor-Employer Relations 6150.76** 0.247 540.74 0.033 2098.02 0.092 410.53 0.018
Tariff Liberalization 9260.09** 0.590 585.41 0.045 4475.84** 0.276 -2517.04 0.079
Hidden Trade Barrier Liberalization 6695.28** 0.664 898.09* 0.124 3318.45** 0.321 -927.23 0.038
Intellectual Property Protection 6446.12** 0.834 1185.60** 0.248 4550.83** 0.505 1018.75 0.035
Intensity of Local Competition 8366.32** 0.374 -188.15 0.006 2295.62 0.045 667.94 0.012
Extent of Locally Based Competitors 7539.95** 0.334 -58.87 0.001 1787.01 0.038 825.18 0.019
Effectiveness of Anti-Trust Policy 7473.45** 0.726 1432.50** 0.230 3603.66** 0.355 358.22 0.006
Efficacy of Corporate Boards 7344.27** 0.430 946.92* 0.125 2256.99* 0.111 996.55 0.081

NOTE: * denotes p < 0.10, ** denotes p < 0.05, n denotes new question infroduced into model in 2001.

61
Moving to the measures of the quality of the business Of the new business environment variables, the quali-
environment, the findings again provide strong support for ty of laws relating to IT has particularly great explanatory
the relationship between all four dimensions of the com- power.The local availability of components and parts
petitive context and economic performance. Among factor proves to be an especially powerful predictor of GDP per
conditions, overall infrastructure quality, venture capital capita in the low-income country group.
availability, quality of public schools, adequacy of legal As in previous years, many of the individual variables
recourse, police protection of business, and university- are quite highly correlated with each other.This suggests
business research collaboration have the strongest bilateral that economic progress involves multiple dimensions of
association with GDP per capita. Many of the most competitiveness moving together. Also evident is that indi-
important influences are in institutions and rules, not in vidual elements have different influences at different levels
sheer accumulation of assets. of development, a subject we will turn to later in this
Measures of local demand conditions (IIB) perform chapter.
particularly strongly in explaining the variation in GDP As with previous years’ results, it is important to
per capita.They range from buyer sophistication to con- acknowledge that causality can be argued in both direc-
sumer adoption of the latest products to the presence of tions for some of the variables, though the Survey ques-
stringent regulatory standards.These results run counter to tions were worded to avoid spurious reverse causality.
the perceived wisdom that local demand and local markets Note that the same causality issue applies in macroeco-
are irrelevant in a global economy. Linkages among related nomic and economic growth analyses.The quality of sci-
industries and cluster development (IIC) are also impor- entists and engineers or the sophistication of buyers, for
tant.These results suggest a powerful role of cluster link- example, could be partly the result of high per capita
ages in competitiveness. Connections across entities and GDP and not the cause.We provide provocative evidence
industries prove important to competitiveness, as do con- of causality from microeconomic conditions to GDP per
ditions within firms themselves. Finally, the rules and con- capita later in this chapter, but more years of surveying
text governing competition itself are strongly related to will be required to establish definitive cause and effect
measured productivity.The strongest are intellectual prop- relationships.
erty protection and the application of antitrust that are
particularly potent.
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Table 3: Significant changes in microeconomic conditions, 1998–2001

Improving International Microeconomic Conditions Worsening International Microeconomic Conditions

No. of countries No. of countries

Sophistication of Company Reliance on Profess. Management . . . . . . . . . . . . 34 . . . . l,m,h Value Chain Presence . . . . . . . . . . . . . . . . . . . . . . . 27 . . . . l,m
Operations and Strategy Extent of Regional Sales . . . . . . . . . . . . . . . . . . . . . 28 . . . . l,m,h Breadth of International Markets . . . . . . . . . . . . . 21 . . . . l,m,h
Extent of Marketing . . . . . . . . . . . . . . . . . . . . . . . . . 23 . . . . h Extent of Branding . . . . . . . . . . . . . . . . . . . . . . . . . . 20 . . . . l,m
Degree of Customer Orientation . . . . . . . . . . . . . . 21 . . . . h Control of International Distribution . . . . . . . . . . . 15 . . . . h
Uniqueness of Product Designs. . . . . . . . . . . . . . . 11 . . . . m Uniqueness of Product Designs. . . . . . . . . . . . . . . 10 . . . . m
Breadth of International Markets . . . . . . . . . . . . . . 8 . . . . l,m,h

Quality of the Business Environment Quality of Scientific Research Institutions . . . . . . 37 . . . . l,m,h Venture Capital Availability. . . . . . . . . . . . . . . . . . . 17 . . . . l,m,h
Overall, Infrastructure Quality . . . . . . . . . . . . . . . . 33 . . . . m,h Extent of Distortive Government Subsidies. . . . . . 15 . . . . h
Availability and Cost of Cellular Phones . . . . . . . . 31 . . . . l,m,h Intellectual Property Protection. . . . . . . . . . . . . . . 15 . . . . l,m
Road Infrastructure Quality . . . . . . . . . . . . . . . . . . 30 . . . . l,m,h Quality of Public Schools . . . . . . . . . . . . . . . . . . . . 12 . . . . l,m,h
Railroad Infrastructure Development . . . . . . . . . . 30 . . . . l,m,h
Financial Market Sophistication . . . . . . . . . . . . . . 26 . . . . m,h
Extent of Locally Based Competitors. . . . . . . . . . . 22 . . . . h
Port Infrastructure Quality . . . . . . . . . . . . . . . . . . . 21 . . . . m,h
Air Transport Infrastructure Quality. . . . . . . . . . . . 19 . . . . l,m
University/Industry Research Collaboration . . . . . 18 . . . . m
Effectiveness of Anti-Trust Policy . . . . . . . . . . . . . 17 . . . . m
Quality of Management Schools . . . . . . . . . . . . . . 17 . . . . m
Administrative Burden for Start-Ups . . . . . . . . . . . 17 . . . . m,h
Quality of Public Schools . . . . . . . . . . . . . . . . . . . . 17 . . . . l,m,h
Local Equity Market Access. . . . . . . . . . . . . . . . . . 15 . . . . m
Efficacy of Corporate Boards . . . . . . . . . . . . . . . . . 13 . . . . h
Intensity of Local Competition . . . . . . . . . . . . . . . . 13 . . . . h
Venture Capital Availability. . . . . . . . . . . . . . . . . . . 12 . . . . l,m,h
Favoritism in Decisions of Gov. Officials . . . . . . . . 12 . . . . h

NOTE: l (low), m (medium), and h (high) indicates 8 or more countries from this income group included in the total number
62

Patterns of competitive development in the global research collaboration between industry and universities.
economy In high-income countries, there is widespread improve-
Now that there are several years of consistent Survey data, ment in the vigor of local competition, upgrading of
analysis of the overall patterns of change in the individual corporate boards, and improvements in the fairness and
dimensions of competitiveness between the 1998 Survey transparency of government.
and the 2001 Survey are possible.vii Table 3 identifies those Two areas of the business environment represent fault
areas where substantial changes in company practice and lines where some countries are progressing while others
the quality of the business environment (either positive or fall behind.The quality of public schools and the availabil-
negative) were reported in eight or more countries (about ity of venture capital are increasingly dividing countries.
10 percent).These data provide a picture of the evolution Broader challenges include the following: In low- and
of microeconomic capability in the world economy. medium-income countries, protection of intellectual
Overall, there is clear upgrading in national business property rights is perceived as worsening in relative terms
environments, which means that the bar is rising. Among as competition moves to more knowledge-based activities.
company operations and strategy, there are clear areas In high-income countries, the extent of distortive govern-
of broad progress, but signs of the growing intensity of ment subsidies is on the rise as governments are struggling
competition. to cope with international competition.
The standard that must be met in terms of national Companies are working to professionalize manage-
business environments is clearly rising.The quality of ment in increasingly competitive markets, the single most
physical infrastructure, especially, is improving in countries widespread global development. Companies in nations
at all development stages. Nations at all income levels are at all levels of development are expanding sales within
working to improve research institutions. In middle- neighboring countries. In high-income countries,
income countries, there are widespread improvements in stepped-up marketing and a greater customer orientation
antitrust policy, the sophistication of financial markets, the are the rule.
quality of management education, and the extent of
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
While companies are improving in some respects, Reasons for country overperformance seem to vary.
they are struggling to cope with tough international com- For example, Norway, Iceland, Bolivia, and Canada have
petition. Companies in many countries report a decreasing natural resource endowments that may be supporting
breadth of international markets. In low- and medium- unsustainable income levels. Ireland has had extraordinary
income countries, companies are reporting narrower pres- recent income growth due to investments by multination-
ence in the value chain and have difficulty building als, while the United States has extraordinary size,
brands. Uniqueness of product designs is a strong differen- resources, and world influence. Greece and Argentina are
tiating factor in medium-income countries, with about an experiencing deteriorating microeconomic conditions that
equal number of countries gaining versus falling back. In will likely be reflected in future GDP per capita.
high-income countries, control of international distribu- Countries lying below the regression line are those
tion is weakening. whose microeconomic competitiveness is stronger than
current GDP per capita (underperformers).
Underperformance bodes well for the future, because the
Measuring overall microeconomic competitiveness platform is in place to support higher GDP per capita if
To compute an overall measure of current competitive- macroeconomic, political, or other constraints can be
ness, we combine all the individual dimensions using eased.
common factor analysis to provide a single composite pic- The reasons for underperformance also seem to vary.
ture of the relative microeconomic competitiveness of Macroeconomic or political challenges such as in Turkey,
each country.viii Because many of the dimensions of com- Thailand, or Brazil are one reason. Egypt and Jordan face
pany sophistication and the quality of the business envi- challenges due to regional turmoil in the Middle East.
ronment tend to move together, the relatively small sample More encouragingly, rapidly improving nations such as
size means that the impact of individual variables cannot Estonia or Finland experience lags in GDP per capita
be statistically distinguished. Hence we use common fac- improvement that should correct themselves.
tor analysis instead of multiple regressions. To analyze each country’s competitive circumstances
One dominant factor was present that captured 69 further, we computed separate common factors for those
percent of the covariance among the variables, represent- variables related to company operations and strategy and
ing a robust composite picture of the overall microeco- those variables related to the microeconomic business 63
nomic environment. The first factor score is defined as environment.xi One of the central tenets of our theoretical
the Current Competitiveness Index (CCI). Regressing the framework is that the sophistication of company opera-
CCI against GDP per capita explains a very high 84.2 tions and strategies depend on the quality of the micro-
percent of the variance across countries.The explained economic business environment and vice versa. Statistical
variance is up slightly from the 83.8 percent from previous analysis supports this relationship—the correlation
years’ Reports, in spite of the addition of 17 developing between the two subfactors is 0.929.
countries to the sample.We again find a strong relation- To explore the relative state of company sophistica-
ship between microeconomic circumstances and current tion versus the quality of the microeconomic business
national prosperity. environments in countries, the normalized factors are
Figure 4 plots the CCI against 2000 GDP per capita plotted against each other in Figure 5. Company sophisti-
for each country in the sample.The line through the cen- cation is plotted on the vertical axis and the quality of the
ter of the country data points is the regression line, while business environment on the horizontal axis. Countries
the bands above and below the regression line delineate lying above the 45-degree line are those whose companies
the 95 percent confidence forecast region.x The fit is are more advanced than the state of their business envi-
tight, with only two countries (Norway and India) falling ronment, while those below the line are countries whose
just outside the forecast region. business environment is more advanced than the average
Countries lying above the regression line (overper- sophistication of local companies and subsidiaries.
formers) are those whose current GDP per capita exceeds
that predicted by their microeconomic competitiveness, as
measured by the CCI factor.This is a danger sign, because
it means that a country’s per capita income may be unsus-
tainable.
 64
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Figure 4: The relationship between current competitiveness and GDP per capita

40,000

35,000
United States

30,000
Norway Iceland
Canada Switzerland

v
Belgium Denmark
Ireland Austria
Japan Netherlands
Australia
25,000 Finland
Hong Kong SAR Germany
France
Sweden
Italy Singapore
United Kingdom

New Zealand
20,000
Spain Israel

Korea Taiwan
Slovenia
Greece Portugal

15,000
Czech Republic
Argentina Hungary
Costa Rica

2000 GDP per capita (adjusted for purchasing power parity)

Slovakia Chile Estonia
10,000 Mauritius Uruguay Malaysia
Mexico South Africa
Romania Poland Trinidad and Tobago
Russia
Bulgaria Lithuania Latvia
Brazil
Peru Colombia
Guatemala Venezuela Panama Thailand
Turkey
5,000 Dominican Republic
Paraguay
El Salvador China Jordan
Ecuador Jamaica
Zimbabwe Ukraine
Bolivia Nicaragua Philippines Egypt India
Vietnam
Sri Lanka Indonesia
Honduras Bangladesh Nigeria
0
–2 –1.5 –1 –0.5 0 0.5 1 1.5 2 2.5
Current Competitiveness Index
Figure 5: The relative development of companies and the microeconomic business environment

2.5

United States
2
Switzerland Netherlands Finland
Germany
United Kingdom
Sweden
Japan
Denmark
1.5
France
Austria
Canada
Italy Belgium
New Zealand Iceland Singapore
1
Ireland Israel
Spain Hong Kong SAR Australia
Taiwan Norway
0.5

Trinidad and Tobago South Africa

Korea

Panama Slovenia Brazil

0 Chile
Costa Rica Jamaica Estonia Hungary
Mexico
Philippines Egypt Latvia Malaysia
Czech Republic
Indonesia China Portugal
India Turkey
–0.5 Colombia Uruguay
Mauritius Greece Thailand
Zimbabwe Lithuania Poland
Russia

Index of the Sophistication of Company Operations and Strategy

Argentina Jordan
Nigeria Ukraine Slovakia
Sri Lanka
Vietnam
–1 Peru Dominican Republic
Venezuela Romania
Paraguay El Salvador
Guatemala
Bulgaria
Ecuador
Bangladesh
–1.5
Honduras Nicaragua

Bolivia

–2
–2 –1.5 –1 –0.5 0 0.5 1 1.5 2 2.5
Index of the Quality of the Business Environment
65

1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Countries whose company development is ahead of We proceed with a number of approaches.The right
the business environment include Japan, Italy, Paraguay, hand side of Table 2 presents regressions within the sub-
and, to a lesser extent, Switzerland, Germany, and Sweden. groups.We explore both the statistical significance of each
Significant changes in public policy are necessary in these variable as well as the differences in slope even where
countries to underpin future prosperity. Japan remains the variables do not achieve statistical significance.We also
country with the most glaring weaknesses in the business examine alternative functional forms of the relationships
environment.The consequences for Japan’s economic in the entire sample to see which has the best fit. An
growth have been severe.xii The business environments of exponential relationship implies a greater effect at higher
Thailand, Sweden, and Hungary have improved most in levels of a variable, while a semi-log relationship implies a
relative terms compared to the 2000 Report, while those of greater effect at lower levels.This provides some indication
Greece, Singapore, and Denmark have worsened. of which variables are particularly important earlier in
Countries whose business environment is ahead of development and which ones take greater prominence at
company practice include Australia, Slovakia, Portugal, later stages.
Singapore, Hong Kong, Canada, and New Zealand. Many What follows is our composite interpretation of all
of the leading companies in these countries are still heavi- this evidence.
ly involved in natural resource extraction (eg, Australia,
Canada, and New Zealand), while others (Singapore and Low-income countries
Hong Kong) depend heavily on OEM production and the The ability to move beyond competing solely on cheap
subsidiaries of foreign multinationals. Efforts to improve labor/natural resources is the essential company challenge
entrepreneurial and managerial practice as well as business in the low-income countries, as revealed in the regres-
education are high priorities in these countries. sions. In other words, the challenge is to become increas-
ingly efficient as a Factor-Driven economy.To do so,
improving production process sophistication, introducing
Microeconomic competitiveness and the state
marketing and brand development, and beginning to dele-
of country development
gate authority are important steps in enhancing company
The appropriate company strategy and operations prac-
sophistication. Advancing other dimensions of corporate
66 tices, as well as the influence of particular elements of the
strategy and operations is premature at this stage.
business environment, will differ for countries at different
Supporting priorities in terms of improving the busi-
levels of income (and productivity).We expect the transi-
ness environment at the low-income stage with a positive
tion to be particularly challenging as economies shift from
relationship with GDP per capita are improving trans-
Factor-Driven to Investment-Driven to Innovation-
portation and communications infrastructure, improving
Driven, because the stages involve different bases of com-
public education and training of management, liberalizing
petitive advantage and modes of integration with the
trade, reducing corruption, protecting intellectual property,
global economy.
and introducing a meaningful antitrust policy. Improving
To examine these issues, we divide the countries in
the quality of suppliers and introducing tighter regulatory
the sample into three groups based on per capita GDP:
standards are also important, as is beginning to improve
low income, medium income, and high income.While the
corporate governance via effective corporate boards. All
reported variables are statistically significant across the
these steps create a foundation of efficiency, transparency,
entire sample and strongly distinguish countries across the
and competitive pressure to improve Factor-Driven com-
three groups, the question is which variables have the
petition.
strongest influence within groups. Unfortunately, however,
Plotting the regressions of Survey respondents by sub-
our ability to distinguish these differences faces statistical
group for each variable helps reveal these patterns, and
hurdles. Limitations on sample size and in the variation in
Figures 6 through 9 provide some representative examples.
the dependent variable within groups reduce statistical
Improving buyer sophistication and scientific research
power in the low-income and high-income subgroups.
institutions are not yet important in low-income coun-
Within these subgroups, only the most robust variables
tries, for example.
will rise to the level of statistical significance.
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
Figure 6: Prevalence of foreign technology licensing

2000 GDP per capita in

US$ (PPP adjusted)

30,000

Mean: 5.3
25,000 High-income countries

20,000

15,000

Medium-income countries Mean: 5.0

10,000

5,000 Low-income countries

Mean: 4.4

1 2 3 4 5 6 7

Mean Survey response

Source: Executive Opinion Survey, 2001

67

Figure 7: Buyer sophistication

2000 GDP per capita in

US$ (PPP adjusted)

30,000

High-income countries

25,000 Mean: 5.5

20,000

15,000

Medium-income countries Mean: 4.3

10,000

5,000 Low-income countries

Mean: 3.4

1 2 3 4 5 6 7

Mean Survey response

Source: Executive Opinion Survey, 2001

1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Figure 8: Quality of scientific research institutions

2000 GDP per capita in

US$ (PPP adjusted)

30,000

High-income countries

25,000 Mean: 5.7

20,000

15,000

Medium-income countries Mean: 4.6

10,000

5,000 Low-income countries

Mean: 3.8

1 2 3 4 5 6 7

Mean Survey response

Source: Executive Opinion Survey, 2001

68

Figure 9: Venture capital availability

2000 GDP per capita in

US$ (PPP adjusted)

30,000

High-income countries

25,000 Mean: 4.9

20,000

15,000
Medium-income countries
Mean: 3.3
10,000

5,000 Mean: 2.5 Low-income countries

1 2 3 4 5 6 7

Mean Survey response

Source: Executive Opinion Survey, 2001

 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
Medium-income countries Microeconomic competitiveness and improvement
Moving into middle income, a series of new dimensions in GDP per capita
becomes essential.The challenge is to move beyond the The focus of the CCI is on measuring sustainable current
Factor-Driven stage to the Investment-Driven stage. competitiveness. However, many of the same microeco-
The regressions suggest the following patterns: Corporate nomic fundamentals also bear on the rate of productivity
priorities expand to include the greater orientation to growth. Measures of the vitality of local competition, the
customers versus the previous stage where products were environment for innovation, and demand side pressure,
either commodities or designed by foreign OEMs. for example, boost current competitiveness as well as
Licensing foreign technology (Figure 6), developing the productivity growth. For example, the most influential
capacity to improve technology, and company spending on single variable, not surprisingly, is the intensity of local
R&D become important. Gaining control of international competition, which was strongly associated with differences
distribution is essential to moving beyond the role of pas- in GDP per capita growth across countries, especially in
sive commodity or labor exporter. Introducing employee low- and high-income countries (not reported).
training is also important to enhance efficiency. We briefly examined how changes in microeconomic
The Investment-Driven stage also creates new conditions relate to changes in national income.We
demands on the business environment. Reducing bureau- regressed the absolute change in GDP per capita 1997
cratic red tape and enhancing the legal system become to 2000 on absolute changes in microeconomic conditions
important to enhance business efficiency.The financial between 1997 and 2000. A rising intensity of local
markets become much more important to mobilize debt competition has the strongest associations with increases
and equity capital.The Investment-Driven stage depends in GDP per capita.
on a high rate of investment in products, processes, and Finally, we explore the extent to which overperfor-
acquisition of technology. Improving demand conditions mance and underperformance versus microeconomic
are important to pressure improvements in producer quality competitiveness relate to subsequent GDP per capita
(Figure 7). Full cluster development is needed to support growth. A test of the causal influence of microeconomic
higher levels of efficiency. As nations reach upper middle conditions on GDP per capita is shown in Table 4.We cal-
income, companies must utilize the best available foreign culated a measure (GAP), which is the difference between
technology, produce products with quality levels at world a country’s predicted level and its actual level of 1997 GDP 69
standards, and organize at very high levels of efficiency. per capita based on its current competitiveness index for
that year. In other words, GAP measures the degree to
which a country was “overperforming” or “underper-
High-income countries
forming” its microeconomic fundamentals in 1997.
To reach high-income status, further improvements in
If microeconomic fundamentals cause GDP per
quality and efficiency are no longer enough.The hurdle is
capita, GAP should be related to GDP per capita growth
to move to the Innovation-Driven stage.The patterns of
in subsequent years. Countries with negative GAP, which
regressions suggest the following priorities: Companies
were overperforming their fundamentals in 1997, would
must innovate at the world technology frontier, develop
be expected to experience slower growth between
unique product designs, and sell globally. Reliance on for-
1997 and 2000, controlling for 1997 GDP per capita.
eign technology must fall in importance (Figure 6). In
The reverse should be true for countries underperforming
order to implement this transformation, a series of organi-
their fundamentals in 1997. Hence we expect a positive
zational changes becomes necessary. One is the complete
sign.The strength of the effect may be modest, however,
professionalization of management, with a break from the
because of the relatively short time period and the
family orientation common in the previous stage. Another
susceptibility of GDP per capita growth to a myriad of
organizational priority is the widespread adoption of
transient and other disturbances.
incentive compensation to encourage risk taking.The
ability to delegate authority remains important to whether
a nation’s firms achieve full Innovation-Driven capability.
Supporting enhancements in the business environ-
ment are also needed to achieve the Innovation-Driven
stage. Some of the most important priorities are the emer-
gence of truly world-class research institutions (Figure 8),
strong research collaboration with universities, an improv-
ing supply of scientists and engineers, venture capital avail-
ability (Figure 9), truly sophisticated demand conditions,
and intense local competition.
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Table 4: The relationship between predicted and actual income and change in subsequent GDP per capita

Source SS df MS
Number of obs = 47
Model 0.037313189 2 0.018656595 F (2, 44) = 3.47
Residual 0.236362426 44 0.005371873 Prob > F = 0.0398
Total 0.273675615 46 0.024028468 R2 = 0.1363
Adj R 2 = 0.0971
Root MSE = 0.07329

GDP pc growth,
1997–2000 Coefficient Std. Error t P > |t| [95% Conf. Interval]
GAP, 1997 0.00000499 0.00000303 1.65 0.107 –0.0000081 0.0000348
GDP pc level, 1997 0.00000386 0.00000147 2.61 0.012 –0.0000725 0.0000304
Constant 0.0067456 0.0244175 0.28 0.784 –0.1603345 0.2846049

The results are consistent with the notion that micro- Finland again tops the United States as the leader in
economic conditions determine the level of GDP per capi- the CCI ranking, though the United States regained the
ta. Regressing 1997 to 2000 GDP per capita growth on number one company ranking. Advanced nations improv-
GAP for the countries that have been included for all four ing their current competitiveness rankings include the
years yielded positive coefficients overall and for all Netherlands, Sweden, Australia, Austria, France, and
income categories.The coefficient was statistically signifi- Iceland. Advanced countries slipping in the rankings
cant at virtually the 90 percent level for the overall sample include Germany, Denmark, Singapore, Belgium, Japan,
and is close to significant for low-income countries (not and Hong Kong.
reported). Among low-income countries, GAP accounts Developing nations improving their current competi-
for 21 percent of the variation in the subsequent change tiveness rankings on a comparable sample basis include
in GDP per capita, controlling for initial level.These Hungary, India,Thailand, Poland, China, Russia, and the
70 results provide a tentative indication of causality from Ukraine.Those falling in current competitiveness include
microeconomic conditions to changes in income. Chile, Malaysia,Turkey, the Czech Republic, Greece,
Jordan, Mauritius, and Peru.
Of the newly added countries, Estonia and Slovenia
Ranking microeconomic foundations are the top-ranked performers. Estonia shows particular
As noted earlier, competitiveness is not a zero-sum game. promise for future improvements in GDP per capita
Many countries can improve productivity and prosperity. because it is underperforming its microeconomic poten-
The Current Competitiveness Index tracks the perform- tial. Bangladesh and several newly added Latin American
ance of countries on this absolute level. However, the countries register the greatest competitiveness challenges
Index also supports comparisons among countries in their among our population of countries.
progress in building a productive economy, and hence has While each of the improving countries is different,
a relative component as well. there are some striking commonalities if one examines
This year’s overall CCI rankings are shown in Table 1, individual country patterns. Improving countries are ones
along with the last three years’ rankings. Also included are where the effectiveness of antitrust policy is increasing,
the rankings across countries in company sophistication distortive government subsidies are declining, and
and the quality of the business environment.The inclusion weaknesses in physical infrastructure are being addressed.
of 17 new countries makes year-to-year comparisons diffi- In the gaining countries, companies are becoming more
cult, especially for developing countries. Appendix B gives customer oriented and more marketing savvy, improving
comparative rankings for the countries common to this the uniqueness of product designs, and upgrading
and last year. production processes.
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
The countries that lost position exhibit a number of Table 5: GDP per capita relative to current
common characteristics:They are countries in which dis- competitiveness
tortive government subsidies are becoming more preva-
lent, the quality of overall infrastructure is losing ground, Advanced Middle Developing
Countries Countries Countries
the local supplier base is shrinking, and the extent of com-
UPSIDE POTENTIAL
petition is falling. Companies in countries losing ground Current competitiveness
Finland South Africa India
exhibit weakening regional sales, eroding control of their would support a higher
Sweden Brazil Egypt
per capita income
international distribution channels, and less distinctiveness United Kingdom Turkey Jordan
Chile China
in brands and product designs. Taiwan Thailand
Please refer to the Country Profiles section of this Hungary Indonesia
Report for detailed descriptions of the competitive advan- Israel Philippines
Malaysia Vietnam
tages and disadvantages of each country. Ukraine
Further insight into the potential of each country Zimbabwe
can be gained from the analysis of overperformance and NEUTRAL
underperformance discussed previously.Table 5 lists coun- Income and
Germany Singapore Colombia
tries in order of the divergence between actual GDP per competitiveness
Netherlands New Zealand
are balanced
capita and the expected GDP, given their microeconomic France Poland
Switzerland Spain
competitiveness. Underperforming countries are those Australia Slovakia
with potential to improve GDP per capita over time— Denmark
we term this upside potential. Countries whose actual and CURRENT OVERACHIEVERS
predicted GDP per capita are similar are termed neutral. Per capita income is Norway Greece Bolivia
Countries where predicted GDP per capita is lower than high relative to current Iceland Argentina Ecuador
competitiveness Ireland Portugal Bulgaria
current GDP per capita are termed overachievers. Note that
United States Korea Venezuela
countries whose current competitiveness ranking has Canada Russia Peru
slipped modestly could still have upside potential, and Belgium Mauritius El Salvador
Italy Czech Republic
vice versa.
Hong Kong SAR Mexico
Finland leads the advanced countries with upside Austria Costa Rica 71
potential. Its stunning turnaround in microeconomic com- Japan

petitiveness is still far from realized in terms of reported

prosperity. Conversely, Norway, Iceland, and Ireland all
continue to enjoy a level of prosperity that exceeds their
microeconomic fundamentals.To a lesser extent this is also
true for the United States and Canada.
Turkey, Brazil, and South Africa are among the
middle-income countries that should be able to support a
higher GDP per capita given their microeconomic funda-
mentals.The converse is true for Greece, Argentina, and
Russia, which are among a group of countries whose lev-
els of income will be unsustainable without substantial
microeconomic reform. India heads the list of low-income
countries with microeconomic capability that could be
unlocked by microeconomic and political reform.
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Conclusions Our findings indicate that it is unwise to view micro

National prosperity depends on competitiveness, which reforms only in terms of reducing the role of government
reflects the productivity with which a nation uses and abolishing market distortions. Such steps remain a
resources. Competitiveness is rooted in a nation’s micro- critical challenge for many countries to master.Yet gov-
economic fundamentals and manifested in the nature of ernment has a range of positive roles that are fundamental
company operations and strategy and in the quality of the to prosperity, such as investments in human resources,
microeconomic business environment. Political stability building innovative capacity, and stimulating advanced
and sound macroeconomic policies, accompanied by mar- demand via regulatory standards. Many nations need to
ket opening and privatization, have long been considered move beyond first stage reforms and address these agendas.
the cornerstone for economic development.The results Also, the private sector has an important role in improving
here suggest that they are necessary but not sufficient.We a nation’s competitive platform through collective activi-
find strong evidence that microeconomic upgrading is a ties and cluster development initiatives. Second-stage
sequential process in which countries at different levels of micro reforms require a new perspective on the role of
development face distinctly different challenges. the private sector.
While institutions such as the IMF have strongly Our results also highlight the need to set a nation’s
encouraged macro reforms, our findings suggest that micro economic priorities to be consistent with its level of
reforms are equally if not more important.Without micro development.We describe how the challenges are different
reforms, growth in GDP induced by sound macro policies for low-, medium-, and high-income countries. Especially
will be unsustainable and will not translate into improve- challenging are the difficult transitions between develop-
ments in GDP per capita. Appropriate micro reforms, ment stages. Countries that have been very successful in
which boost productivity and productivity growth, can one stage of development, such as Taiwan and Singapore
also greatly ease the challenge of meeting government’s in the Investment-Driven stage, need to recognize the
fiscal obligations and reducing macroeconomic distortions. multifaceted adjustments needed to manage the transition
A greater focus on microeconomic reforms will pay to the Innovation-Driven stage.
another essential dividend.While macro reforms almost If there is to be continued momentum for economic
inevitability inflict hardship in the short and medium run reform in nations around the world, there is a pressing
72 through raising interest rates and prices while cutting pub- need to move to the next level of thinking and practice.
lic expenditures, micro reforms can produce tangible and Approaches centered largely on responding to internation-
visible benefits for citizens. Breaking up local cartels and al financial markets and ceding choices to impersonal
monopolies, for example, can lower the cost of food, global forces are producing a backlash that erodes the con-
housing, electricity, telephone service, and other costs of sensus for global economic progress and encourages pop-
living. Regulatory reform can rapidly begin to ease ineffi- ulist national policies that are fundamentally self-defeating.
ciencies, reduce pollution, raise product and service quali- Protests at international meetings should be a wake-up call
ty, and improve unsafe practices. Bold steps to improve that economic reform must move beyond now standard
education and training are particularly important, because approaches and embrace domestic competition, stringent
they offer the hope of a better life for children. If citizens environmental standards, and policies that meaningfully
see businesses reforming themselves and having to con- boost the skills and opportunities of citizens.
front tough competitive challenges, they themselves will Countries are converging on macroeconomic poli-
be more willing to live with personal sacrifices and less cies, and strong market forces penalize any nation that fails
likely to side with anti-reform interest groups.The politi- to reform in this arena.The central challenge to the world
cal will and public support to make real economic change economy is now microeconomic reform, but reform that
is elevated. moves beyond past approaches. Progress in improving the
Our results again challenge the notion that microeco- sophistication of companies and the quality of the business
nomic improvement is automatic if proper macroeconom- environment is the only way to produce real improve-
ic policies are instituted.While there may be a tendency ments in efficiency, product quality, new business opportu-
for microeconomic conditions to improve because GDP nities, and a rising standard of living for citizens.
per capita rises, such improvement appears to be far from auto-
matic. Moreover, the rate of improvement in current com-
petitiveness can be affected markedly by purposeful action in
both government and the private sector. Microeconomic
conditions can move ahead of or fall behind current GDP
per capita, and we find evidence that this has an influence
on subsequent economic growth.
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
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1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Notes vi Statistical significance at ** = 5 percent and * = 10 percent (all two-

tailed tests) is noted in the table.
i Elisabeth de Fontenay, Christian Ketels, Daniel Vasquez, and Weifeng
Weng I would like to thank for their major role in the analyses report- vii This analysis covers the questions that have been common over the
ed here. Lyn Pohl provided able supervision of the final production of three years, which comprise the great majority of questions.
the paper.
viii Common factor analysis is a statistical technique for summarizing data
ii The proportion has grown modestly over the last several years as the by accounting for the common variance among all included variables.
model has been improved. An alternative approach using a principal components analysis yield-
ed similar qualitative results.
iii Stages were first introduced in Michael E Porter, The Competitive
Advantage of Nations, Macmillan Press, 1990. ix No other factor accounted for more than 4.6 percent of the covariance.

iv GDP per worker is employed as a productivity measure in some stud- x The forecast region has wider bands than a 95 percent mean confidence
ies. We used the broader measure here because GDP per worker region. The latter provides a confidence interval for a given level of
can be increased by high unemployment or low workforce participa- competitiveness over repeated observations. The forecast region
tion, which do not increase wealth. Also, holders of capital, not only method, in contrast, reflects a higher degree of inherent uncertainty
workers, contribute to national productivity. In comparing the United in predicting a single observation. As a result, interpretation of the
States and France, for example, the United States has absorbed a proximity of data points to the regression line should be undertaken
huge influx of new workers (higher workforce participation) over the with appropriate caveats. Note that the forecast region widens
last decade, while France has maintained high GDP per worker but slightly as it moves away from the “center” of the graph. The center
with high unemployment and a large student population not counted is the point located at the intersection of the mean GDP per capita
as part of the potential workforce. level and mean factor score.

v In the case of Ireland, we used GNP instead of GDP because of the size xi In each case, a statistically significant, dominant factor again explains
of dividend outflows to foreign investors. Ireland’s GDP is about 20 the great majority of the variance (77.4 percent for company opera-
percent higher than its GNP. tions and strategy and 67.6 percent for the business environment).

xii For a more detailed examination of Japan’s competitive situation, see

Porter et al (2000).

74
 1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index
Appendix A: Survey Questions
I. COMPANY OPERATIONS & STRATEGY II. NATIONAL BUSINESS ENVIRONMENT (Cont’d.)
Production Process Sophistication B. DEMAND CONDITIONS
Nature of Competitive Advantage Buyer Sophistication
Extent of Staff Training Consumer Adoption of Latest Products
Extent of Marketing Presence of Demanding Regulatory Standards
Willingness to Delegate Authority . . . . . . . . . . . . . . . . . . . . New question Stringency of Environmental Regulations
Capacity for Innovation Government Procurement of Advanced
Company Spending on R&D Technology Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . New question
Value Chain Presence Laws Relating to Information Technology . . . . . . . . . . . . . . New question
Breadth of International Markets
C. RELATED AND SUPPORTING INDUSTRIES
Uniqueness of Product Designs
Local Supplier Quantity
Degree of Customer Orientation
Local Supplier Quality
Control of International Distribution
State of Cluster Development
Extent of Branding
Extent of Product and Process Collaboration . . . . . . . . . . . New question
Reliance on Professional Management
Local Availability of Components and Parts . . . . . . . . . . . . New question
Extent of Incentive Compensation . . . . . . . . . . . . . . . . . . . . New question
Local Availability of Process Machinery . . . . . . . . . . . . . . . New question
Extent of Regional Sales
Local Availability of Specialized Research
Prevalence of Foreign Technology Licensing
and Traning Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . New question
II. NATIONAL BUSINESS ENVIRONMENT Local Availability of Information Technology Services. . . . New question

A. FACTOR (INPUT) CONDITIONS D. CONTEXT FOR FIRM STRATEGY AND RIVALRY

1. Physical Infrastructure Favoritism in Decisions of Government Officials
Overall, Infrastructure Quality Extent of Irregular Payments
a. Basic Extent of Distortive Government Subsidies
Road Infrastructure Quality Decentralization of Corporate Activity
Railroad Infrastructure Development Cooperation in Labor-Employer Relations . . . . . . . . . . . . . . New question
Port Infrastructure Quality Tariff Liberalization
Air Transport Infrastructure Quality Hidden Trade Barrier Liberalization
b. Advanced Intellectual Property Protection
Telephone/Fax Infrastructure Quality Intensity of Local Competition
Availability and Cost of Cellular Phones Extent of Locally Based Competitors
Speed and Cost of Internet Access Effectiveness of Anti-Trust Policy
2. Administrative Infrastructure Efficacy of Corporate Boards 75
Police Protection of Businesses
Judicial Independence
Administrative Burden for Start-Ups
Adequacy of Public Sector Legal Recourse
Extent of Bureaucratic Red Tape
3. Capital Availability
Ease of Access to Loans
Financial Market Sophistication
Local Equity Market Access
Venture Capital Availability
4. Human Resources
Quality of Public Schools
Quality of Math and Science Education . . . . . . . . . . . . . . . New question
Availability of Scientists and Engineers. . . . . . . . . . . . . . . . New question
Quality of Management Schools
5. Science & Technology
Patents per capita (2000)
Quality of Scientific Research Institutions
University/Industry Research Collaboration
1.2: Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index

Appendix B: The Current Competitiveness Index (Constant Country Sample)

Company Operations Quality of the National 2000 GDP

CCI Ranking and Strategy Ranking Business Environment Ranking per Capita
(ppp adjusted)
Country 2001 2000 1999 1998 2001 2000 1999 1998 2001 2000 1999 1998

Finland 1 1 2 2 2 3 7 8 1 1 2 2 24,864
United States 2 2 1 1 1 2 1 2 2 2 1 1 33,886
Netherlands 3 4 3 3 3 7 8 5 3 3 3 4 25,598
Germany 4 3 6 4 4 1 5 1 4 6 5 8 24,931
Switzerland 5 5 5 9 5 5 2 3 5 10 9 10 28,518
Sweden 6 7 4 7 6 6 3 4 6 11 7 9 23,884
United Kingdom 7 8 10 5 7 11 13 9 8 9 8 5 23,197
Denmark 8 6 7 8 9 8 9 10 9 4 6 7 27,120
Australia 9 10 13 15 22 20 19 22 7 7 10 12 25,758
Singapore 10 9 12 10 15 15 14 12 10 5 12 6 23,000
Canada 11 11 8 6 14 16 12 15 11 8 4 3 27,783
Austria 12 13 11 16 11 12 10 11 13 12 13 17 26,314
France 13 15 9 11 10 9 6 6 12 15 11 13 24,032
Belgium 14 12 15 19 12 10 11 13 14 13 15 18 26,958
Japan 15 14 14 18 8 4 4 7 18 19 19 19 25,796
Iceland 16 17 22 24 16 14 21 28 15 16 21 23 29,167
Israel 17 18 20 21 18 13 18 21 17 20 20 20 19,577
Hong Kong SAR 18 16 21 12 21 23 24 17 16 14 18 11 24,448
Norway 19 20 18 14 24 21 23 14 19 18 16 15 29,500
New Zealand 20 19 16 17 19 22 16 19 20 17 14 16 20,010
Taiwan 21 21 19 20 20 18 17 16 21 21 22 21 17,223
Irelandv 22 22 17 13 17 19 20 18 22 22 17 14 25,200
Spain 23 23 23 22 23 24 22 23 23 23 23 22 19,202
Italy 24 24 25 26 13 17 15 20 24 26 27 27 23,304
South Africa 25 25 26 25 25 26 28 33 26 25 25 25 9,189
Hungary 26 32 33 31 29 34 36 39 25 31 33 31 12,335
Korea 27 27 28 28 26 25 27 24 29 28 30 28 17,311
Chile 28 26 24 23 28 27 26 25 27 24 24 24 9,187
Portugal 29 28 29 33 33 35 37 48 28 27 26 30 16,882
Brazil 30 31 35 35 27 29 32 27 32 32 37 39 7,389
76 Turkey 31 29 31 29 38 28 33 26 30 29 32 29 6,870
Czech Republic 32 34 41 30 35 41 55 31 31 34 36 33 13,721
India 33 37 42 44 37 40 48 50 33 37 43 42 2,403
Malaysia 34 30 27 27 32 30 25 34 35 30 31 26 8,924
Thailand 35 40 39 37 36 47 43 37 36 40 39 36 6,469
Slovakia 36 36 48 36 49 31 51 40 34 36 47 37 11,035
Poland 37 41 37 41 46 36 38 38 37 41 38 40 8,971
Greece 38 33 36 38 43 32 45 32 39 33 34 38 16,326
Jordan 39 35 32 32 48 46 44 42 38 35 28 32 4,079
Egypt 40 39 43 40 31 44 49 47 40 39 42 35 3,602
China 41 44 49 42 34 38 31 35 41 45 50 44 3,953
Costa Rica 42 43 38 — 30 39 35 — 45 42 41 — 9,236
Mauritius 43 38 30 — 41 37 29 — 42 38 29 — 9,512
Mexico 44 42 34 39 40 42 30 29 44 43 35 41 8,914
Argentina 45 45 40 34 45 45 39 30 43 44 40 34 12,314
Philippines 46 46 44 45 39 43 34 41 46 46 46 45 3,956
Indonesia 47 47 53 51 42 51 47 52 47 47 52 51 3,014
Colombia 48 48 52 49 44 48 40 43 49 48 53 49 5,923
Russia 49 52 55 46 47 33 42 45 48 53 55 47 8,213
Ukraine 50 56 56 52 51 52 50 51 50 56 56 52 3,693
Vietnam 51 53 50 43 52 50 41 36 53 52 49 43 1,974
Peru 52 49 46 47 53 53 56 49 51 51 44 46 4,797
El Salvador 53 51 47 — 54 57 46 — 52 50 48 — 4,477
Zimbabwe 54 50 45 48 50 56 54 46 56 49 45 48 2,697
Venezuela 55 54 51 50 55 49 53 44 55 55 51 50 5,677
Bulgaria 56 55 54 — 56 54 52 — 54 54 54 — 5,469
Ecuador 57 57 57 — 57 55 57 — 57 58 57 — 3,068
Bolivia 58 58 58 — 58 58 58 — 58 57 58 — 2,408