It matters how competitive your country is. Here are three reasons why

It happens every year: as the World Economic Forum publishes its annual Global Competitiveness Report, national media around the world headline their reports with their own country’s ranking, congratulating or criticising the government accordingly.

But this isn’t a football league table, where one team’s win is another’s loss: it is possible for a country to go down in the ranking even if it improves its competitiveness. If that seems counter-intuitive, it’s because the word “competitiveness” can be misleading. It implies competition in the sporting sense, with countries pitted against each other in a zero-sum game – and that’s not how to interpret the index.

Instead, think of a country’s competitiveness as its level of productivity: its ability to produce more outputs with the same amount of inputs. Clearly, it is possible for all countries to improve at once. Competitiveness, in this sense, matters for three reasons.

The first, and ultimately most important, is that more productive countries can create greater wealth, higher living standards and more happiness for their citizens.

Secondly, more productive countries offer greater returns on investment. This matters to companies choosing whether to invest in physical capital. But it also means that national investments in areas such as infrastructure, education and skills development have greater potential to translate into economic growth.

Finally, competitiveness implies economic stability and resilience. Data analysed in last year’s Global Competitiveness Report found that the more competitive an economy was in 2007, the less severely it was affected by the recession that followed.

In the last year, the importance of competitiveness for resilience has been demonstrated once again, as lower commodity prices cause headaches for emerging economies which depend heavily on one or two natural resources for their wealth. More competitive economies tend to be more diversified, and less vulnerable to shocks.

While the word “competitiveness” creates some confusion, it is essentially what economists have been talking about since Adam Smith wrote ‘The Wealth Of Nations’. Some elements of national competitiveness have long been recognised, such as the nature of a country’s institutions: do they reward people who have good ideas, or people who cosy up to political power? The answer can be deeply rooted in a nation’s history, and challenging to change.

Over the years, economists have identified the salience of many factors – from railroads and electricity grids to education and vocational training to fiscal deficits and availability of financial services. It is in the nature of economic theorizing that, in demonstrating the importance of these factors, an economist tends to isolate them from others.

Yet all can be important. The Global Competitiveness index seeks to capture this reality by combining 120 separate indicators, organised under 12 “pillars”, into its overall ranking.

The index has existed in various forms since it was created by Klaus Schwab in 1979, and was once published in two parts: the microeconomic Business Competitiveness Index, designed by Michael Porter, and the macroeconomic Growth Competitiveness Index, the work of Jeffrey Sachs. Since 2004, the Index has not changed much – a necessity if rankings are to be comparable from year to year.

But, in some ways, 2004 now belongs to another economic era: nobody, for example, knew what “quantitative easing” meant. Recent advances in our understanding of competitiveness now necessitate some changes in the index.

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Have you read?
What is competitiveness?
These are the world’s most competitive economies

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Innovation is a case in point. Traditionally, economists have placed great emphasis on research and development – and the index has reflected that. But economists have gradually come to appreciate just how much innovation happens without any formal R&D.

Consider three examples of companies that have led transformations in their industries in the last couple of decades: Zara, Starbucks and Cirque du Soleil. These are industries – clothing, coffee, and circuses – that have existed for millennia without changing much. And the transformative ideas that have recently created new value did not come from R&D, as traditionally associated with industries such as pharmaceuticals or computing.

So where did they come from? Recent theories of innovation place more emphasis on connectivity: countries are more likely to come up with good ideas the better they are, for example, at bringing together diverse people with different mindsets, and the more open they are to trade and the internet.

As the World Economic Forum seeks to remain at the forefront of intellectual leadership on competitiveness, this year’s Global Competitiveness Report explains the changes in how the index will be calculated in the future, and invites feedback.

These component parts of the index matter, because many policy-makers use them to understand their relative strengths and weaknesses at a more granular level. One country might see that it is being outperformed on transparency, another that its broadband penetration is falling behind.

So look beyond the news reports that dwell on the overall ranking, and instead drill down into the detail: where are improvements needed? By using the index in this way, every country can become more competitive together.

The Global Competitiveness Report 2016-2017 is available here. You can explore the results of the report using the heatmap below.