Top 10 most competitive economies in Asia Pacific

The competitiveness landscape in the Asia-Pacific region remains one of stark contrasts. According to the latest edition of the World Economic Forum’s Global Competitiveness Report 2014-15, the region is home to three of the 10 most competitive economies in the world, and a further three feature in the top 20. However, at the other end of the regional spectrum, five countries rank below the 100 mark in this study of 144 economies. The Asian Tigers continue to perform strongly as measured by the report’s Global Competitiveness Index (GCI), but with the steady decline of South Korea, now 26th, the group led by Singapore is becoming a less coherent one.

The competitiveness gap between South Asian and South-East Asian nations runs deeper than ever. The five largest South-East Asian economies (ASEAN-5) all progress in the ranking. Malaysia, up four places, breaks into the top 20. Thailand gains six, Indonesia four, the Philippines seven and Vietnam is up two. They now all feature in the top half of the rankings. The Philippines is the most improved country since 2010, according to the report.

In contrast, among the six South Asian countries, only India features in the first half of the rankings. The country loses a further 11 places this year and has now been dropping for six consecutive editions. Because of the region’s extreme diversity, the challenges necessarily vary enormously, but there are some common priorities. For the most advanced economies, such as Japan, Korea and Taiwan, the rigidity of their labour market is a challenge, and they need to create conditions that lead to disruptive innovation – not just incremental.

For emerging economies, there remains an infrastructure deficit and the need to reduce red tape and corruption and improve market efficiency, which is undermined by various barriers to entry and distortionary measures. And in the poorest economies, like India, Myanmar and Laos, which are developing a manufacturing base, a sound and stable institutional framework and a focus on education are needed. The report ranks countries in 12 key areas that drive competitiveness, including governance, infrastructure, education, market efficiency, and innovation. These are the top 10 performers in the Asia-Pacific region.

1. Singapore ranks first in the region and second in the world for the fourth consecutive year, owing to an outstanding and stable performance across all the dimensions of the GCI. Again this year, Singapore is the only economy to feature in the top three in seven out of the 12 pillars used to measure competitiveness. Singapore tops the goods market efficiency pillar and ranks second in the labour market efficiency and financial market development pillars. It boasts one of the world’s best institutional frameworks and world-class infrastructure, with excellent roads, ports and air transport facilities. Its economy can also rely on a sound macroeconomic environment and fiscal management, with a budget surplus of 6.9% of GDP in 2013. The country has a strong focus on education and is becoming more innovative.

2. Up three places to reach sixth position overall, Japan posts the largest improvement of the top 10 economies, thanks to small improvements across the board. Japan continues to enjoy a major competitive edge in business sophistication. High R&D spending, excellent availability of talent, world-class research institutions and a high capacity to innovate are among Japan’s strengths. Severe macroeconomic challenges drag down its overall performance, however. For the past five years, its budget deficit has been hovering around 10% of GDP, one of the highest ratios in the world, and public debt is high, though the country’s battle against deflation has started to bear fruit, with prices in 2013 increasing for the first time in five years.

3. Featured in the global top 10 since 2012, Hong Kong SAR retains its seventh position overall. It tops the infrastructure pillar, reflecting the outstanding quality of its transport systems. It has an efficient, trustworthy and stable financial market, and its dynamic and efficient goods and labour markets further contribute to its excellent overall positioning. Hong Kong is also one of the most open economies in the world, and has a high degree of technological readiness. To enhance its competitiveness, Hong Kong must improve on higher education and innovation, particularly the limited availability of scientists and engineers.

4. Taiwan (China) ranks 14th in the world, dropping two places despite maintaining its score. The third of the Asian Tigers, its performance has been very stable over the past six years. Notable strengths include its capacity to innovate, its highly efficient goods markets, its world-class infrastructure and strong higher education. To enhance its competitiveness, Taiwan will need to further strengthen its institutional framework, which is undermined by inefficiency and corruption. Encouraging and facilitating the participation of women in the workforce would also enhance competitiveness.

5. New Zealand advances one rank to 17th place in the world – its best rank since the introduction of the current GCI methodology. Among the highlights, the country is ranked first in the institutions pillar and third in the financial market development pillar. It also features in the top 10 of four more pillars. It boasts an excellent education system, while the efficiency of its goods and labour markets is among the highest in the world.

6. Continuing its upward trend, Malaysia makes its way into the top 20 (in 20th position overall) for the first time since the current GCI methodology was introduced in 2006, and remains the highest ranked among the developing Asian economies. Malaysia’s strong performance in the financial markets pillar reflects its efforts to position itself as the leading centre of Islamic finance. In a region plagued by corruption and red tape, Malaysia stands out as one of the very few countries that have been relatively successful at tackling these two issues. A high budget deficit – 4.6% of GDP in 2013 – and the low level of female participation in the workforce remain challenges.

7. Since reaching its best rank of 15^th in 2009, Australia has been dropping continuously in the rankings. It ranks well, though not outstandingly, across a range of measures, achieving its best performance in the financial market development pillar, with its sound banking sector. It also has a strong higher education and training sector. Australia’s macroeconomic situation has deteriorated slightly, mainly due to an increase in its budget deficit, but its public debt-to-GDP ratio is the fourth-lowest among OECD countries. Overall, the quality of Australia’s public institutions is excellent, though red tape remains a problem, especially the rigidity of its hiring and firing practices and wage setting. As part of the Forum’s Executive Opinion Survey, Australian businesses consistently say restrictive labour regulations are the greatest hurdle to doing business there.

8. After exiting the top 20 last year, the Republic of Korea drops one more position to 26th in the world. Its performance remains uneven across the different dimensions of the index, with ratings on its institutions and labour market efficiency both declining; a middling ranking on financial market development in particular is preventing Korea from closing the competitiveness gap with the three other Asian Tigers. Korea possesses a remarkably sound macroeconomic environment has excellent infrastructure and enrolment rates at all levels of education. The country’s high degree of technological adoption and business sophistication are strong factors behind its remarkable capacity for innovation.

9. The People’s Republic of China has risen one position in the rankings this year to 28th in the world, making it the leader among the BRICS economies by some distance. The country has made small gains on most measures of the GCI, creating a more conducive ecosystem for entrepreneurship and innovation. Problems endure in the critically important financial sector, and while the functioning of the market is improving, barriers to entry and investment rules greatly limit competition. The macroeconomic situation remains favourable, with a public debt-to-GDP ratio among the lowest in the world, but with some manufacturing jobs being lost to less-developed countries – and even to advanced economies – there is a need to create high-value jobs that will sustain rising standards of living.

10. Despite its prolonged political crisis, Thailand advances six places to 31st in the world, performing well on macroeconomics and the environment pillars. In 2013, Thailand almost balanced its budget, its financial development improved, as did market efficiency. Market competition remains limited by a number of barriers to entry, especially those affecting foreign investments. Considerable challenges remain in other areas: first and foremost these relate to governance. Political and policy instability, excessive red tape, pervasive corruption, security concerns and high uncertainty around property rights seriously undermine the institutional framework. The level of trust in politicians is among the lowest in the world, and education is of mediocre quality. Data used was collected before the May 2014 coup.

Read the Global Competitiveness Report 2014-15.

See how well different countries perform on our latest Global Competitiveness Index:

Author: Thierry Geiger, Associate Director, Economist, Global Benchmarking Network, Global Competitiveness and Risk, World Economic Forum

Image: People take photos with the skyline of the financial district of Singapore in the background April 14, 2014. REUTERS/Edgar Su