1.3 The Global Comp Index

CHAPTER 1.
The Global Competitiveness Index 1

XAVIER SALA-I-MARTIN, Columbia University, Universitat Pompeu Fabra, and NBER ELSA V. ARTADI, Harvard University
Competitiveness has become a constant fixation among political leaders, popular press, corporations, and national and international institutions. Even plain citizens worry about the competitiveness of a nation when they observe, puzzled, how outsourcing or manufacturing relocation takes jobs from their home country. This chapter presents a new index of competitiveness: the Global Competitiveness Index.We designed this new index with the goal of unifying the two indexes currently produced by the World Economic Forum (the Growth Competitiveness Index [McArthur and Sachs (2001)] and the Business Competitiveness Index [Porter (2001)]), and it is meant eventually to replace them in the Global Competitiveness Report. Competitiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of a country.2 The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens.The productivity level also determines the rates of return obtained by investments in an economy. Given that the rates of return are the fundamental determinants of the aggregate growth rates of the economy, a more competitive economy is one that is likely to grow at larger rates over the medium to long run. The World Economic Forum has been publishing two indexes of competitiveness that are supposed to describe two aspects of the same phenomenon.While the Growth Competitiveness Index (GCI) refers to the aggregate or macroeconomic determinants of productivity, the Business Competitiveness Index (BCI) captures the microeconomic components of productivity (in fact, in 2002, the BCI was called the Microeconomic Competitiveness Index).We believe that the macroeconomic and microeconomic determinants of competitiveness cannot and should not be separated.The ability of firms to prosper depends, among other things, on the efficiency of the public institutions, the excellence of the education system, and the overall macroeconomic stability of the country in which they operate. But an excellent macro environment does not guarantee national prosperity unless firms create valuable goods and services using efficient methods and processes at the microeconomic level. Only by reinforcing each other can the micro and macroeconomic characteristics of an economy jointly determine its level of productivity and competitiveness.Thus, it is not surprising that the correlation between the GCI and BCI has always been very high (for example, last year the rank correlation between the two indexes was 95.4 percent). Another difference between the BCI and GCI is supposed to be that, while the BCI captures the static or level determinants of productivity of a country, the GCI is supposed to capture its dynamic or growth
1.3: The Global Competitiveness Index 51
1.3: The Global Competitiveness Index
prospects. As mentioned above, we think that the concept of competitiveness involves static and dynamic components: although the productivity of a country clearly determines its ability to sustain a high level of income, it is also one of the central determinants of the returns to investment, which is one of the central factors explaining an economys growth potential.Thus, given that productivity has both static and dynamic implications for a countrys standard of living, an alternative (although almost identical) definition of competitiveness would be the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic prosperity.3 In this chapter we propose a unified approach that captures both the microeconomic and macroeconomic foundations of competitiveness as well as its static and dynamic consequences in a single index that we call the Global Competitiveness Index.We call it Global because the index is destined to become the flagship index of the Global Competitiveness Report, and because it is meant to capture the entirety of factors that help determine the productivity of nations. The new index is based on three principles.
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Principle 1. Productivity is complex: Twelve pillars of competitiveness The first principle is that the determinants of competitiveness are many and complex. Some of the best economic minds of the last two hundred years have asked what determines the wealth of nations. Adam Smith argued that specialization and the division of labor was key.Thomas Malthus and David Ricardo, two of the best economists of the 19th century, thought that natural resources imposed a binding limit on the level of prosperity.The law of diminishing returns meant that population growth would eventually require the use of low-quality land, and this would reduce production per capita and cap the potential for economic growth. The neoclassical economists of the 20th century emphasized investment in physical capital and infrastructures.This belief underlay many plans that governed the economy of the Soviet Union and the countries under its political influence. It was also the foundation upon which institutions such as the World Bank operated for decades.4 The failure of many developing countries to grow despite the aid of the donors proved that investing in physical capital was not enough to generate aggregate wealth. Economists, then, looked for other mechanisms. Education and training (or human capital, as modern economists call it) became the center of economic research. Developing countries were advised to educate their children and to invest in the expansion of their human capital.They did...but economic growth failed to materialize in most of them.
Technological progress (whether created by the country or copied from the leading economies) was then thought to be a central determinant of economic growth.5 Few people today disagree with this idea, although this merely shifts the question from what determines the growth rate of GDP? to what determines the rate of technological progress?This is why economists have kept searching. Many answers have been proposed: openness, macroeconomic stability, governance, the rule of law, institutions, lack of corruption, market orientation, government waste, firm sophistication, demand conditions, market size, and many others. Each of these conjectures rests on solid theoretical foundations and makes economic sense; some even have strong empirical support.The central point, however, is that they could all be true at the same time because they are not mutually exclusive.The main lesson from two centuries of economic thinking should be that the process of economic development is rather complex and many factors are needed for a country to succeed. As William Easterly (2002) famously put it: there is no such a thing as a Holy Grail of economic success. We capture this complexity by assigning the many factors that underlie competitiveness to 12 areas that we call the 12 pillars of economic competitiveness.These pillars are:
First pillar: Institutions
The institutional environment forms the framework within which private individuals, firms, and governments interact to generate income and wealth. In 1776, Adam Smith argued that wealth could not be created in a world where property rights are not well defined and guaranteed. De Soto (2000) also defends the importance of the system of property rights. Owners of land, corporate shares, and even intellectual property are unwilling to invest in the improvement and upkeep of their property if their rights as owners are insecure. Equally importantly, if property cannot be bought and sold with the confidence that the authorities will endorse the transaction, the market itself will fail to generate dynamic growth.The absence of property rights also drives people out of formal markets into the informal sector. De Soto estimates that people the developing and former communist countries hold more than US$9 trillion in what he calls dead capital property that is owned informally, but not legally, and is thus incapable of forming the basis of robust economic development. More recently, an important and voluminous strand of empirical research confirms the importance of public institutions as key determinants of the current level of GDP per capita.6 The importance of institutions is not restricted to the legal framework. Government attitudes toward markets and freedoms and the efficiency of its operations are also very important: excessive bureaucracy and red tape,7
overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, or the political dependence of the judiciary system impose significant economic costs to businesses and slows down the process of economic development. Although the economic literature has mainly focused on public institutions, private institutions are also important ingredients in the process of creation of wealth. Corporate governance, transparency, and accountability, for example, are seen as important by economists who focus on the theory of the firm: bargaining over the ex-post rents of a firm become important in a world in which is impossible to write contracts that fully specify the division of rents under all possible contingencies.8
Second pillar: Physical infrastructures
it, wealth and prosperity can hardly be created if the safety of managers, administrators, employees, or even customers cannot be guaranteed because of military conflicts, terrorism, organized crime, or political and economic kidnappings. A country that cannot guarantee the personal safety of its citizens is a country that cannot be competitive.12
Fifth pillar: Human capital
A second important determinant of competitiveness is the physical infrastructure environment. For many years, economic development economists,9 practitioners, international institutions, and donors10 have emphasized investment in physical infrastructures as a required ingredient in the process of economic growth. Private firms cannot operate satisfactorily in a economy where it is hard to transport factors of production, final goods, or services; where it is hard to communicate or transmit information (because telephone lines are down a substantial fraction of the time or internet connections are hard and expensive); or where the electrical supply is unreliable.
Third pillar: Macro stability
The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is not less true that macroeconomic disarray harms the economy. Firms cannot make informed decisions when the inflation rate is in the hundreds (typically as a result of public finances being out of control).The financial sector cannot function if the government runs gigantic deficits (especially if, as a result, it represses banks and it forces them to lend it money at below-market interest rates).The government cannot provide services efficiently if it has to make enormous interest payments on its past debts. In sum, the economy cannot grow unless the macro environment is stable or favorable. This is why the macroeconomic environment is the third pillar of economic competitiveness.11
Fourth pillar: Security
Human capital is the factor of production associated with the human body.We think of it as having two important components.The first one is what we could call basic human capital, which consists of the basic requirements for a human body to function and be productive. Chief among these requirements is health.The productivity of an unhealthy human body is less than that of a healthy counterpart.The recent AIDS and malaria pandemics in large regions of the world makes it clear that business conditions deteriorate when the health of the population declines.13 Another component of basic human capital is basic education: literacy and primary schooling have nowadays become essential requirements for competitiveness. In more advanced economies, good health and basic education are not enough for citizens to earn a decent living. Advanced education (secondary and tertiary schooling) and flexible skills need to be acquired in high-quality schools or in the firm through sophisticated on-the-job training.The quality of the education system, therefore, not only its enrollment rates and the quantity of scientists and engineers, plays an essential role in the process of wealth creation for these more advanced forms of human capital.14
Sixth pillar: Goods market efficiency
Although not much attention is given in the economic development literature to the problem of personal security, and although neither the GCI nor the BCI (the two indexes published by the World Economic Forum) include
The efficiency of the products and services markets is also an important factor in a nations productivity. Goods market efficiency is needed in at least three levels. First, efficient markets require non-disruptive public interventions (that is, policies and regulations need to cause as little disruption as possible). Excessive or inefficient taxes, burdensome subsidy policies, or nontransparent legal systems are some ways in which government actions distort the markets for goods and services. Second, market efficiency is driven by business competition. Competition imposes the necessary discipline and readiness on firms so that they operate in the most efficient manner. Market dominance by one or a few firms tends to generate market inefficiencies, as do restrictions to competition from foreign rivals. Third, market efficiency depends on demand conditions such as customer sophistication: customers who accept poor treatment by firms tend not to impose the necessary discipline on companies for efficiency to be achieved in the market.
Seventh pillar: Labor market efficiency
Many economic analysts (especially in Europe) emphasize the flexibility of the labor market as a leading determinant of competitiveness.The usual complaint is that tax and transfer systems tend to reduce incentives to work and that regulations impeding the hiring and firing of workers tend to impose heavy costs on business. Although we agree with this view, we think of efficiency of the labor market in a broader sense that includes not only public actions (taxes, transfers, regulations, and so on), but also private practices. For example, labor-employer relations that are very confrontational tend to generate an adverse business environment.The systematic promotion of relatives rather than workers with superior qualification, or the payment of wages that are not related to productivity, tend to have perverse effects on the productivity of the economy. Another labor practice that is harmful to competitiveness is discrimination. Discrimination consists of not allocating jobs based on the talent of the candidates but based instead on their race, religion, gender, or some such similar consideration. One of the most widespread discriminatory practices is the one that affects womens labor participation: countries that exclude half of their populations from the best jobs are countries that misallocate half of their talent.This has important consequences for a countrys ability to generate prosperity.
Eighth pillar: Financial market efficiency
is that these inventions are available to the business community. This does not mean that the process of innovation is irrelevant. However, the level of technology available to firms in a country needs to be distinguished from the countrys ability to innovate and expand the frontiers of knowledge.That is why we separate technological readiness from innovation, which is the 12th pillar below.
Tenth pillar: Openness and market size
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An efficient financial sector is needed to allocate the resources saved by a nations citizens to its most productive uses. A proficient financial sector channels resources to the best entrepreneurs rather than to the politically connected. A modern financial sector develops products and methods so that small innovators with good ideas can implement them. A well-functioning financial sector needs to provide risk capital and loans and be trustworthy and transparent. In a globalized world, the role of foreign financing is also important, especially for economies with less developed financial systems.Thus, we include the foreign financing (in the form of foreign direct investment) in our analysis of financial market efficiency.
Ninth pillar: Technological readiness
One of the central differences between rich and poor countries is that rich countries tend to use more advanced and complex production processes and tend to produce more sophisticated products and services. In other words, they tend to have a superior technological background. Whether the technology used has or has not been invented within its borders is immaterial for our purposes.The central point is that the firms operating in the country have access to these advanced products and blueprints. That is, it does not matter whether a country has invented electricity, the Internet, or the airplane.What is important
The size of the market affects productivity because large markets allow firms to better exploit economies of scale. Traditionally, the markets available to firms have been constrained by the borders of the nation. In the era of globalization, exports have become a substitute for domestic markets, especially for small countries. The empirical evidence on the relation between international trade and growth is highly controversial. There is a lot of evidence showing that trade is positively associated with growth.15 There is some evidence suggesting that these results are not as strong and convincing as one would like, but there is no evidence suggesting that trade and growth are negatively associated. Our reading of the literature is that the relation between openness and growth is likely to be positive and robust, especially for small countries with small domestic markets. For larger economies, the domestic market may be large enough that no extra gains are achieved by further opening borders to trade.Thus, we think of international trade as a substitute for domestic demand in determining the size of the market for the firms of the country.This is particularly important in a world in which economic borders are not as clearly delineated as political ones. In other words, when Belgium sells goods to the Netherlands, the national accounts register the transaction as an export (so the Netherlands is a foreign market of Belgium), but when California sells the same kind of output to Nevada, the national accounts register the transaction as domestic (so Nevada is a domestic market of California). By adding domestic and foreign markets in our measure of market size, we avoid discriminating against geographic areas (such as the European Union) that are broken into many countries but have one common market.This is why we do so when we construct the tenth pillar of economic competitiveness: the market size.
Eleventh pillar: Business sophistication
Economic development usually requires increasing degrees of business sophistication. One form of sophistication is the formation of clusters. As defined by Porter (2003), clusters are geographically proximate groups of interconnected companies, suppliers, service providers, and associated institutions in a particular field, linked by commonalities and complementarities. Clusters affect
competitiveness in various ways: first, firms with a cluster have more efficient access to specialized suppliers, employees, information, and training than isolated firms, and this increases their productivity. Second, clusters increase the capacity for productivity growth.This is because opportunities for innovation are often seen more easily within clusters, and because the skills, assets, and capital required to innovate tend to be more available around clusters.The third way in which clusters affect competitiveness is by the formation of new businesses through the reduction of barriers to entry (for example, the presence of many experienced workers and access to all the needed inputs and specialized services within a proximity makes it easy to set up new firms, which reduces barriers to entry). A second form of business sophistication is through more complex operations and strategies. For example, the use of marketing or branding, the utilization of superior distribution systems, the access to advanced technologies, and the introduction of modern business organizational forms are all ingredients in the process of business modernization (see Porter, 2003).
Twelfth pillar: Innovation
inefficient markets (6th, 7th, and 8th pillars), without infrastructures (2nd pillar), or in nations at war (4th pillar). Although the actual construction of the index will involve the aggregation of the 12 pillars into a single index, we report measures of the 12 pillars separately because offering a more disaggregated analysis can be more useful to countries and practitioners.This is because such an analysis gets closer to the actual areas in which a particular country needs to improve.
The last pillar of competitiveness is technological innovation. One of the central tenets of neoclassical growth theory is that, in the long run, the only sustainable source of economic prosperity is technological progress.16 Although substantial gains can be obtained by improving institutions, building infrastructures, reducing macroeconomic instability, or increasing the human capital of the population, all these factors seem to run into eventual diminishing returns.The same is true for the efficiency of the labor, financial, or goods markets. In the long run, standards of living cannot be expanded without technological innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge and the possibility of copy and imitation tend to disappear.The environment that is most inductive to innovation includes modern universities and research institutions that cooperate with businesses, a legal environment that protects intellectual property rights, public institutions that understand the importance of knowledge and act on this understanding when they make purchasing decisions, and the availability of scientists and engineers who can participate in the process of technological improvement. Although we describe the 12 pillars of competitiveness separately, we do so only for expository purposes. This should not obscure the fact that they are not independent: not only they are related to each other, but they tend to reinforce each other. For example, innovation (12th pillar) is not possible in a world without institutions (1st pillar) that guarantee intellectual property rights, it cannot be performed in countries with no human capital (5th pillar), and will never take place in economies with
Principle 2. Stages of development The second principle on which the Global Competitiveness Index is founded is that economic development is a dynamic process of successive improvement, in which economies find increasingly sophisticated ways of producing and competing. In other words, the process of economic development evolves in stages. Many economists in the past have postulated theories of stages of development. Perhaps the most famous of all these theories was that of American historian W.W. Rostow.17 Although Rostows theory involves five stages, his was essentially a theory of industrialization through savings and investment.The various stages were phases through which the required resources to invest were accumulated, but successive take off occurred only through physical capital accumulation. Our view is that the process of growth and development is a lot more complicated than a simple process of investment in physical capital. It involves the successful implementation of policies and institutions on many different fronts. How important each factor is depends on the level of development of a particular country: what makes the United States competitive may not be the same as what makes Angola competitive because these two countries are in different phases of development.Thus, we adopt the framework of stages of development to organize the index.This framework is close in spirit to that of Porter (1990) for a variety of reasons. One reason is that, since the index presented in this chapter is destined to eventually substitute for the GCI and BCI, and given that the BCI is theoretically based on Porter (1990), we prefer not to break too much with the past and so continue to use a theoretical framework similar to that of the BCI. But continuity is not the main reason for adopting a theory of stages of development close in spirit to Porters.The central point is that we do believe that the main factors determining competitiveness for poor countries are essentially different from those that matter in more advanced economies. Moreover, some elements of Porters view are useful for both our understanding of those stages and their implementation as an empirical index. Although the theory underlying our index is close in spirit to that of Porter, there are some important discrepancies.
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One difference is that, while he thinks of the process of development as involving four phases, we will use only three stages. Porters fourth stage of development, which he calls the Wealth-Driven stage, leads to a decline in standards of living.The economy is driven by alreadyaccumulated wealth, which shifts incentives away from efficient investment and innovation. Since we do not observe declining growth rates for economies with the highest levels of per capita GDP, we do not include this fourth stage in our analysis. Another difference is that the exact elements that are important at each stage are not the same. A third difference is the way Porter sees the second stage as driven by the ability and willingness to invest, while we see it as being driven by efficiency. A fourth difference is in the way countries are classified.18 But the most important difference is in the exact translation of the concepts to a measurable index.19 In the most basic stage, called the factor-driven stage, firms compete in price.That is, they take advantage of their cheap factors (including low-cost labor and cheap unprocessed natural resources). In this phase, firms produce commodities and simple products originally invented and designed in other countries. In order to be competitive at this initial stage, an economy must satisfy some basic requirements. Chief among them are good institutions, sufficient infrastructures, basic human capital, macroeconomic stability, and overall personal security. An important point is that being successful in this stage eventually means losing competitiveness unless economies prepare for the next stage.The reason is that successful economies experience positive growth rates, and this means growing wage rates. For a country whose source of competitiveness is the low price of its labor, a growing salary implies a loss of competitiveness. In the second stage, which we call the efficiency-driven stage, efficient production practices become the main source of competitiveness.The quality of an economys products (not only its prices) and the effectiveness of the production processes determine the productivity of firms in this phase.To achieve this, nations need to improve the efficiency of their goods markets, labor markets, and financial markets.They also need to have an improved education and training system and to have access to the best technologies (even if they need to import them from abroad). Because competitiveness at this level is founded on efficiency, access to larger markets allows business to exploit economies of scale.20
Finally, in the third stage, which we call innovationdriven stage, successful economies can no longer compete in price or even quality because their own success has increased prices (especially wages) so much that they can no longer compete by producing the same goods. It is time for these economies to produce different goods, innovative products and practices using the most advanced methods of production and organization. In this phase, businesses need to increase their sophistication by organizing in clusters and by opting for advanced and superior operations. Firms compete with unique strategies. Institutions and incentives supporting innovation become the central part of economic competitiveness. Of course, each of the 12 pillars of competitiveness outlined in the previous section matter for every one of the stages of development. But different factors matter differently for countries in different stages. For example, although the ability to innovate matters for all nations, it is undoubtedly more important for advanced countries than for economies in the early stages of development.We, therefore, implement the idea of stages of development by giving different weights to each of the 12 pillars in each of the three stages.To this end, we group the pillars that we think are more important in the factor-driven stage into what we call basic requirements. Basic requirements include institutions (1st pillar), physical infrastructures (2nd pillar), basic human capital (first part of the 5th pillar), macroeconomic stability (3rd pillar), and personal security (4th pillar). We group the pillars that are more important in the efficiency-driven stage into what we call efficiency enhancers. The efficiency enhancers include goods market efficiency (6th pillar), labor market efficiency (7th pillar), financial market efficiency (8th pillar), advanced human capital (second part of the 5th pillar), technological readiness (9th pillar), and openness/market size (10th pillar). Finally, we group the pillars that are more important in the innovation-driven stage into what we call innovation and sophistication factors, which includes business sophistication and innovation, our 11th and 12th pillars respectively. An important practical advantage of framing the process of economic development in stages is that it helps countries prioritize the areas in which they should focus their attention. By giving more weight to some pillars than to others, the analysis presented in this chapter can be used as a tool for countries to pay attention to the pillars that are more important for their stage of development. Countries in stage 1 that score low in innovation or in business sophistication should not worry too much. Countries in stage 2 that are fast approaching stage 3, on the other hand, should worry about not doing well in these areas. The allocation of pillars to each of the three groups is summarized in Figure 1.
Figure 1: The twelve pillars of competitiveness
The Twelve Pillars of Competitiveness

1. 2. 3. 4. 5a. 5b. 6. 7. 8. 9. 10. Institutions Infrastructures Macroeconomic Stability Personal Security Basic Human Capital Advanced Human Capital Good Market Efficiency Labor Market Efficiency Financial Market Efficiency Technological Readiness Openness/Market Size Innovation and Sophistication Factors Basic Requirements
Key for Factor-Driven Economies
Efficiency Enhancers
Key for Efficiency-Driven Economies
11. Business Sophistication 12. Innovation
Key for Innovation-Driven Economies
Once the three basic groups are defined, the index of competitiveness is constructed as a weighted average of the three groups. In other words,
GCI =
Table 1: Weights of the three main groups of pillars at each stage of development
Weights (s) Basic Requirements Efficiency Enhancers Innovation and Sophistication Factors
1 x basic requirements + 2 x efficiency enhancers + 3 x innovation factors
(Eq 1)
Factor-Driven Stage Efficiency-Driven Stage Innovation-Driven Stage
50 percent 40 percent 30 percent
where 1, 2, and 3 are the weights that each subindex gets in the overall index.21 The idea behind the concept of stages of development is that all components matter in all stages, but some matter more than others in different stages. In other words, the weights (the s) that each subindex gets in the overall GCI depend on the stage of a particular country. The exact weights of each of the three groups are displayed in Table 1. In the factor-driven stage, the basic requirements have 50 percent, the efficiency enhancers have a weight of 40 percent, and the innovation and sophistication factors have small weight of 10 percent.
In the efficiency-driven stage, the weights of the basic requirements and the efficiency enhancers are reversed (that is, 40 percent and 50 percent respectively), while the weight of the innovation and sophistication factors remains at 10 percent. Finally, in the innovation-driven stage, the weight of the basic requirements falls to 30 percent, the weight of the efficiency enhancers goes back to 40 percent while that of the innovation and sophistication factors increases to 30 percent.22
Principle 3. Transitions The third principle on which the new GCI index is founded is that, as economies develop, they move from one stage to the next in a smooth fashion rather than in abrupt jumps.23 Thus, the weights of each of the subindexes (the s in equation 1), change smoothly as a country develops.This means that we have five groups of countries: the three groups that belong to the three stages described above, plus the countries that are moving from stage 1 to stage 2 plus those that are moving from stage 2 to 3. In practice, the allocation of countries to each group is done as follows: 1. A country belongs to the factor-driven stage (stage 1) if its GDP per capita is below US$2,000 or the fraction of its exports in the form of primary goods is above 70 percent.24 A total of 41 countries are in this stage (see Table 2 for a list of countries). A country with a per capita income between US$3,000 and $9,000 that does not export more than 70 percent in primary goods belongs to the second stage. A total of 21 countries are in this stage. A country with more than US$17,000 per capita income and less than 70 percent of the exports in primary goods belongs to the third stage. A total of 24 countries are in this stage. Countries with income per capita between US$2,000 and $3,000 are said to be in transition from stage 1 to stage 2.The shares of basic requirements for these countries decline continuously from 50 percent to 40 percent and the share of efficiency enhancers continuously increase from 40 percent to 50 percent as the level of income increases from $2,000 to $3,000. Notice that, because the share of the innovation factors is 10 percent in both stage 1 and stage 2, economies in transition between these two stages do not suffer changes in the share of innovation factors. The precise formula for the change in these shares is given in the next section.25 A total of 10 countries are in this transitional phase. Countries with income per capita between US$9,000 and $17,000 are said to be in transition between stages 2 and 3. For these countries, the shares of basic requirements continuously decline from 40 percent to 30 percent, the share of efficiency enhancers declines from 50 percent to 40 percent and the share of innovation factors increases from 10 percent to 30 percent. A total of 8 countries move along this transition.
2.
3.
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4.
5.
The list of countries in each stage is given in Table 2. The stages of development theory suggests that the three basic subindexes get different weights for countries
at different stages of development. For example, the basic requirements get a 50 percent weight for countries that are unambiguously in stage 1 and a 40 percent for countries that are in stage two. For countries in between, the weight smoothly declines from 50 percent to 40 percent as their level of income increases. Similarly, for countries in the third stage of development, the basic requirements subindex weight is 30 percent.Thus, for countries that move along the transition between the second and third stages, the weight of this subindex smoothly declines from 40 percent to 30 percent.The relation between the weight of the basic factors and the level of development is depicted in Figure 2. Similarly, the weights of the efficiency enhancers component gets a 40 percent weight for countries in stage 1, a 50 percent weight for countries in stage 2, and smoothly increases from 40 percent to 50 percent as the country grows between these two stages.The weight then smoothly declines back to 40 percent as countries move between stages 2 and 3.The evolution of the importance of efficiency factors as the economy develops is depicted in Figure 3. Finally, the weight of the innovation factors remains constant at 10 percent between stages 1 and 2, and it then smoothly increases to 30 percent as countries move between stages 2 and 3.The evolution of the weight of innovation factors in the overall global competitiveness index is depicted in Figure 4. One advantage of allowing for the weights of each subcomponent to change smoothly along the transition is that countries that do not prepare for more advanced phases of development as they grow out of stage 1 into stage 2 get penalized.We think that countries that do not adapt their economic environments to the new stages tend to lose competitiveness.The reason is that wages tend to increase in economies that grow.Thus, countries that grow from the factor-driven stage to the efficiency-driven stage tend to lose their ability to compete in prices and low costs. In other words, as economies in stage 1 grow, they slowly lose their competitiveness. A good index of competitiveness, therefore, must capture this phenomenon and must therefore partly penalize economies that, while approaching stage 2, do not prepare for the challenges involved in this more sophisticated phase of economic development. Our index has this property because, for countries that do not adapt to the more advanced phases, the values of the efficiency enhancers tend to be lower than the values of the basic requirements. By smoothly reducing the weights of the basic requirements and increasing those of the efficiency enhancers, we tend to lower the overall value of the index for those countries as their economy grows. We do a similar thing for economies that move along the transition from stage 2 to stage 3.
Table 2: List of countries in each stage

Stage 1 Income of less than US$2,000 or more than 70% primary exports Transition from 1 to 2 Income between US$2,000 and $3,000 Stage 2 Income of more than US$3,000 and less than $9,000 Transition from 2 to 3 Income between US$9,000 and $17,000 Stage 3 Income of more than US$17,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
Algeria** Angola* Bahrain** Bangladesh Bolivia Bosnia and Hercegovina Chad* China Colombia Dominican Republic Egypt Ethiopia Gambia Georgia Ghana Guatemala Honduras India Indonesia Jordan Kenya Madagascar Malawi Mali* Morocco Mozambique Namibia Nicaragua Nigeria* Pakistan Paraguay Philippines Serbia and Montenegro Sri Lanka Tanzania Uganda Ukraine Venezuela** Vietnam Zambia Zimbabwe
Brazil Bulgaria Ecuador El Salvador Jamaica Macedonia Peru Romania Thailand Tunisia
Argentina Botswana Chile Costa Rica Croatia Czech Republic Estonia Hungary Latvia Lithuania Malaysia Mauritius Mexico Panama Poland Russian Federation Slovak Republic South Africa Trinidad and Tobago Turkey Uruguay
Cyprus Greece Israel Korea Malta Portugal Slovenia Taiwan
Australia Austria Belgium Canada Denmark Finland France Germany Hong Kong SAR Iceland Ireland Italy Japan Luxembourg Netherlands New Zealand Norway Singapore Spain Sweden Switzerland United Arab Emirates United Kingdom United States
* Countries that satisfy both requirements for being in stage 1. ** Countries with income per capita above US$2,000 but with primary exports as a fraction of total exports higher than 70 percent.
Figure 2: The importance of basic requirements at various stages of development
Weight of basic requirements (1)
50%
40%
30%
Stage 1
Transition from 1 to 2
Stage 2
Stage 3
$2,000
$3,000
$9,000
$17,000
Income per capita (not to scale)
60
Figure 3: The importance of efficiency enhancers at various stages of development
Weight of efficiency enhancers (2)
50%
40%
30%
Stage 1
Stage 2
Stage 3
$2,000
$3,000
$9,000
$17,000
Figure 4: The importance of innovation factors at various stages of development
Weight of innovation factors (3)
30%
20%
10%
Stage 1
Stage 2
Stage 3
$2,000
$3,000
$9,000
$17,000
Summary of the methodology: Building the Global Competitiveness Index

Step 1: Construct the twelve pillars
Following the tradition of both our predecessors (the Growth Competitive Index and the Business Competitive Index), our index combines hard data and Survey data collected by the World Economic Forum through its Executive Opinion Survey. These data are combined to estimate the 12 pillars of economic development described in Section 1.The exact allocation of Survey questions and hard data to each of the pillars is described in Appendix 1. All questions get the same weight within subsections of the pillar.26
Step 2: Build the three subindexes
Subindex 2: Efficiency Enhancers: 5th Pillar: Advanced Human Capital 6th Pillar: Goods Market Efficiency 7th Pillar: Labor Market Efficiency 8th Pillar: Financial Market Efficiency 9th Pillar:Technological Readiness 10th Pillar: Openness and Market Size Subindex 3: Innovation Factors: 11th Pillar: Business Sophistication 12th Pillar: Innovation
Step 3: Allocate countries to stages of development
Each pillar is allocated to a subindex as follows: Subindex 1: Basic Requirements: 1st Pillar: Institutions 2nd Pillar: Infrastructures 3rd Pillar: Macroeconomic Stability 4th Pillar: Security 5th Pillar: Basic Human Capital
We then allocate each of the 104 countries to one of the three stages of development (or the transitional stages) as described in Section 3.The results are displayed in Table 2.
Step 4: Estimate the shares that each subindex gets for each country
Once a country is assigned to a stage of development, we assign the weights that each of the three subindexes gets for each country. Remember that the theory of stages of development suggests that, for less advanced economies, the basic requirements are more important; for intermediate economies, the efficiency enhancers are key; and for advanced countries, the innovation factors are central.The exact weights are depicted in Table 1.
Step 5: Estimate the Global Competitiveness Index
The Global Competitive Index is then estimated as the weighted average of the three subindexes (see Equation 1).
62
How to interpret the Index When observing the index, some analysts might be puzzled by the low value of the Global Competitive Index for countries that have experienced high growth rates in the past, or the high values obtained by countries with poor recent economic growth performances. First of all, we should remember that the Index is not meant to capture anything to do with short-term business cycles. In other words, highly competitive economies are as subject to short-term booms and recessions as noncompetitive ones. Having experienced high or low growth rates in the recent past has little to do with the competitiveness of a nation because competitiveness is not a vaccine against business cycles.This is rightly captured by our Index. Second, and perhaps more importantly, low current competitiveness is consistent with elevated growth rates in the past because the process of economic growth is determined both by the level of productivity and by the convergence components of a country. Convergence growth is the growth that economies experience as various types of investment react to changes in the medium- to long-term economic environment. As an example, imagine that a country, which in 1980 had very low levels of productivity and efficiency, increased those levels dramatically between 1980 and 2004.The new levels of competitiveness may still not be the best in the world, but they are much larger than they were 24 years ago. Under those circumstances, we expect the growth rate of this country to have been very large over the last 24 years, yet our index will probably give this nation a middle ranking in the world. Similarly, a country with a high level of productivity may have experienced very low growth rates of GDP per capita over a period of 20 years if this level of competitiveness has not improved much in the past. In other words, the values of the Global Competitiveness Index should not necessarily be correlated with the past growth performance of a country. Changes in the value of the index over the medium to long term, on the other hand, should be correlated with the rate of economic growth.
Results Table 3 displays the results of computing the Global Competitiveness Index for 2004.The countries are ranked in decreasing order.The second column contains the value of the index and the third column the rank number.The following six columns contain the information (value and
rank) for each of the three subindexes: the basic requirements subindex, the efficiency enhancers subindex, and the innovation factors subindex respectively.The next three tables decompose the index into its 12 pillars. The most competitive country in the world is the United States, with an overall score of 5.21, followed by Finland (5.04), and Denmark (4.95), Switzerland (4.93), and Sweden (4.92), which conclude the top five.The United States does not score particularly well in basic requirements (rank 18: the main cause is its dismal macroeconomic stabilityrank 83and its not-so-great performance in securityrank 37), but it is the worlds leader in both efficiency enhancers and innovation factors. Since the United States is in the third stage of development (the innovation stage), the weight of the basic requirements is relatively minor, so the other two subindexes put this country in the leading position. Finland leads the world in basic requirements, but it only ranks 6th in efficiency enhancers (it is interesting to notice its 18th place in labor market efficiency) and 4th in innovation factors. Denmark is 2nd, 5th, and 8th respectively. The next five are Germany (4.86), Singapore (4.85), Hong Kong (4.81), United Kingdom (4.80), and Japan (4.79). Of particular interest is the extremely low score of Germany in labor market efficiency (82nd in the world). Sweden is ranked quite low in that same pillar (25th), which is led by Hong Kong (1st) and Singapore (2nd). At the other end of the spectrum, the least competitive country in the world is Angola (2.55), closely followed by Chad (2.64). Angola ranks 104th in basic requirements and innovation factors and 103rd in efficiency enhancers. Chads scores are 103rd and 104th respectively. The rest of the bottom five are also African countries: Ethiopia (102nd with 2.88), Zimbabwe (101st with 2.96), and Mozambique (100th with 2.98).These countries score dismally almost across the board in the pillars that are most important for their level of development (the exception is the relatively good macroeconomic performance experienced by Mozambiquerank 42nd in the world). The next five countries at the bottom of the competitiveness rankings are not all African, and they include two European countries: the former republics of Yugoslavia Bosnia-Hercegovina (3.13) and Serbia-Montenegro (3.16), two African countries Mali (3.13) and Tanzania (3.14), and one Latin American, Bolivia (3.19). Averaging out the value of the index by region (see Figure 5), we see that the most competitive region in the world is North America.The values of the second and third regions (Western Europe and East Asia) are quite close to each other.The fourth position is for the Middle East and North Africa.The next three regions (Eastern Europe, South and Central America, and South and Central Asia respectively) are also quite close. Sub-Saharan Africa closes the ranking in the last position.
Figure 5: Global competitiveness by region
5.0 4.8 4.6 4.4 4.2
Score
4.0 3.8 3.6 3.4 3.2 3.0 North America Western Europe East AsiaPacific MENA* Eastern Europe Central and South America South-Central Asia Sub-Saharan Africa
* Middle East and North Africa
Table 3: The Global Competitiveness Index

Three main components
Overall Index
Country Score Rank
BASIC REQUIREMENTS
Score Rank
EFFICIENCY ENHANCERS
Score Rank
INNOVATION FACTORS
Score Rank
64
United States Finland Denmark Switzerland Sweden Germany Singapore Hong Kong SAR United Kingdom Japan Taiwan Netherlands Iceland Norway Canada Australia France Austria Belgium New Zealand Luxembourg Israel Malaysia Estonia Bahrain Korea Ireland Jordan Chile Tunisia United Arab Emirates China Thailand Spain Slovenia South Africa India Czech Republic Lithuania Portugal Slovak Republic Malta Namibia Latvia Morocco Hungary Egypt Indonesia Brazil Mauritius Greece Cyprus Costa Rica Panama El Salvador Italy Romania Botswana Dominican Republic Mexico Vietnam Algeria Trinidad and Tobago Russian Federation
5.21 5.04 4.95 4.93 4.92 4.86 4.85 4.81 4.80 4.79 4.72 4.72 4.70 4.69 4.66 4.63 4.60 4.57 4.54 4.54 4.52 4.48 4.47 4.46 4.39 4.38 4.38 4.32 4.29 4.25 4.21 4.20 4.17 4.10 4.09 4.08 4.07 4.06 4.06 4.05 4.03 4.01 3.98 3.97 3.97 3.96 3.95 3.92 3.88 3.86 3.84 3.83 3.83 3.81 3.80 3.80 3.75 3.75 3.71 3.70 3.68 3.68 3.68 3.67
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
5.50 6.03 5.99 5.88 5.76 5.75 5.89 5.95 5.48 5.35 5.31 5.59 5.80 5.96 5.58 5.70 5.49 5.61 5.51 5.60 5.76 5.06 5.36 5.31 5.20 5.30 5.23 5.25 5.20 5.17 5.55 4.85 4.90 5.08 5.13 4.76 4.53 4.83 4.80 5.21 4.78 5.01 4.80 4.86 4.70 4.75 4.67 4.56 4.39 4.86 4.94 5.02 4.57 4.65 4.51 4.56 4.48 4.62 4.42 4.47 4.48 4.71 4.50 4.42
18 1 2 6 8 10 5 4 20 22 23 14 7 3 15 11 19 12 17 13 9 34 21 24 29 25 27 26 30 31 16 41 38 33 32 46 56 42 43 28 45 36 44 40 49 47 50 55 67 39 37 35 53 51 58 54 61 52 64 62 60 48 59 65
5.02 4.54 4.55 4.45 4.45 4.27 4.60 4.65 4.61 4.26 4.38 4.36 4.42 4.25 4.30 4.28 4.15 4.13 4.12 4.25 4.16 4.18 3.91 4.03 3.71 3.87 4.11 3.49 3.76 3.55 3.81 3.59 3.57 3.79 3.63 3.63 3.60 3.60 3.61 3.64 3.61 3.52 3.24 3.47 3.27 3.51 3.23 3.28 3.51 3.24 3.47 3.53 3.36 3.32 3.21 3.48 3.19 3.25 3.07 3.21 2.95 2.70 3.16 3.18
1 6 5 8 7 14 4 2 3 15 10 11 9 16 12 13 20 21 22 17 19 18 25 24 30 26 23 45 29 40 27 38 39 28 32 33 37 36 34 31 35 42 56 47 53 44 57 52 43 55 48 41 49 51 59 46 60 54 69 58 79 92 62 61
5.18 4.70 4.42 4.61 4.69 4.74 4.15 3.90 4.38 4.94 4.44 4.32 3.97 4.01 4.23 4.04 4.30 4.11 4.14 3.87 3.75 4.28 3.69 3.26 3.01 3.87 3.88 3.04 3.27 3.32 3.40 3.43 3.31 3.53 3.41 3.60 3.69 3.35 3.30 3.20 3.16 2.78 2.83 2.93 3.14 3.08 3.18 3.27 3.55 2.98 3.13 2.93 3.18 2.89 2.69 3.48 2.88 2.79 2.70 3.02 2.63 2.50 2.96 3.14
1 4 8 6 5 3 14 20 9 2 7 10 19 18 13 17 11 16 15 23 24 12 26 40 55 22 21 51 38 35 33 31 36 29 32 27 25 34 37 41 44 74 68 63 45 48 43 39 28 59 47 62 42 64 80 30 65 73 79 54 87 91 60 46
(contd)
Table 3: The Global Competitiveness Index (contd.)

Three main components
Overall Index
Country Score Rank
BASIC REQUIREMENTS
Score Rank
EFFICIENCY ENHANCERS
Score Rank
INNOVATION FACTORS
Score Rank
Jamaica Sri Lanka Turkey Ghana Colombia Bulgaria Uruguay Poland Ukraine Philippines Argentina Peru Nigeria Uganda Croatia Venezuela Gambia Macedonia, FYR Guatemala Kenya Madagascar Georgia Pakistan Ecuador Honduras Paraguay Zambia Nicaragua Malawi Bangladesh Bolivia Serbia and Montenegro Tanzania Bosnia and Hercegovina Mali Mozambique Zimbabwe Ethiopia Chad Angola
3.66 3.65 3.62 3.62 3.61 3.60 3.57 3.57 3.55 3.55 3.54 3.53 3.53 3.50 3.46 3.45 3.45 3.40 3.37 3.37 3.36 3.35 3.35 3.34 3.29 3.26 3.25 3.24 3.22 3.20 3.19 3.16 3.14 3.13 3.13 2.98 2.96 2.88 2.64 2.55
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104
4.23 4.31 4.41 4.18 4.15 4.24 4.52 4.25 4.18 4.03 4.44 4.19 4.08 4.02 4.21 4.16 3.94 4.08 4.02 3.72 3.97 3.94 3.78 4.18 4.13 3.99 3.61 3.98 3.70 3.81 3.90 3.55 3.47 3.66 3.60 3.53 3.41 3.42 3.09 2.92
71 68 66 75 78 70 57 69 74 82 63 73 80 83 72 77 89 81 84 93 87 88 92 76 79 85 96 86 94 91 90 98 100 95 97 99 102 101 103 104
3.33 3.03 3.10 3.11 3.10 3.08 2.98 3.13 2.90 3.11 2.96 3.00 2.97 3.01 3.00 2.77 3.01 2.83 2.75 3.01 2.76 2.85 2.91 2.55 2.49 2.60 2.93 2.58 2.80 2.63 2.55 2.80 2.84 2.67 2.70 2.48 2.48 2.35 2.23 2.26
50 70 66 65 67 68 76 63 82 64 78 74 77 73 75 88 72 85 90 71 89 83 81 98 99 95 80 96 87 94 97 86 84 93 91 101 100 102 104 103
3.00 2.81 3.08 2.82 3.00 2.68 2.66 2.99 3.03 2.84 2.81 2.64 3.07 2.87 2.80 2.64 2.77 2.57 2.60 3.03 2.71 2.36 2.94 2.44 2.30 2.25 2.76 2.16 2.57 2.41 2.18 2.64 2.73 2.35 2.48 2.26 2.65 2.23 2.04 1.88
56 71 49 69 57 81 82 58 53 67 70 85 50 66 72 86 75 89 88 52 78 95 61 93 97 99 76 102 90 94 101 84 77 96 92 98 83 100 103 104
Table 4: Global Competitiveness Index: Basic requirements

1. Institutions
Country Score Rank
2. Physical infrastructures
Score Rank
3. Macro stability
Score Rank
4. Security
Score Rank
5. Basic human capital

Score Rank
66
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
5.22 5.50 5.37 5.16 5.13 5.15 5.53 5.18 5.43 4.73 4.65 5.18 5.45 5.13 5.05 5.26 4.60 4.99 4.62 5.31 4.98 4.53 4.74 4.50 4.60 3.87 4.78 4.48 4.53 4.61 4.69 3.91 4.01 4.10 3.97 4.59 3.92 3.44 3.89 4.16 3.75 4.24 4.46 3.57 4.08 3.80 3.97 3.87 3.80 3.80 3.94 4.19 3.96 3.51 3.90 3.38 3.24 4.15 3.13 3.50 3.67 3.50 3.62 2.99
8 2 5 11 13 12 1 9 4 20 22 10 3 14 15 7 26 16 23 6 17 28 19 30 25 50 18 31 29 24 21 47 41 39 43 27 46 72 49 36 56 33 32 65 40 54 42 51 55 53 45 35 44 68 48 77 80 38 84 69 61 70 64 93
6.12 6.28 6.61 6.43 6.16 6.44 6.34 6.48 5.45 6.12 5.36 6.02 5.77 5.85 5.87 5.83 6.37 5.72 6.09 4.96 5.85 4.87 5.30 4.74 4.76 5.19 4.11 4.33 4.62 4.34 5.52 3.49 4.30 4.80 4.55 4.87 3.35 4.66 4.17 4.68 3.86 3.86 5.04 4.02 3.74 3.75 3.84 3.93 3.53 4.17 4.33 4.78 3.14 3.94 3.86 3.87 3.31 3.81 3.15 3.39 2.45 3.20 3.60 3.59
9 7 1 4 8 3 6 2 20 10 21 12 17 15 13 16 5 18 11 25 14 26 22 31 30 23 42 37 34 36 19 60 39 28 35 27 63 33 40 32 48 47 24 43 53 52 50 45 58 41 38 29 70 44 49 46 64 51 69 62 91 67 55 56
4.79 5.71 5.55 5.52 5.43 5.02 5.79 5.75 5.10 4.60 5.47 5.31 5.19 6.41 5.41 5.49 5.04 5.32 5.22 5.53 5.81 4.64 5.53 5.77 5.22 6.06 5.54 5.43 5.59 5.29 5.53 6.06 5.74 5.48 5.49 5.21 4.68 5.14 5.29 5.14 5.24 4.83 5.25 5.64 5.04 4.97 4.81 5.08 4.32 5.36 4.95 4.85 4.84 5.09 4.96 4.86 5.15 5.67 5.10 5.31 5.48 6.31 5.58 5.72
83 12 17 22 31 65 6 9 54 90 29 35 47 1 32 23 62 34 44 21 5 89 19 7 43 4 18 30 15 37 20 3 10 27 24 45 87 51 38 52 41 77 40 14 60 68 81 58 96 33 70 75 76 57 69 74 50 13 56 36 26 2 16 11
4.44 5.74 5.52 5.34 5.13 5.19 5.29 5.38 4.56 4.33 4.54 4.49 5.64 5.47 4.61 4.95 4.51 5.08 4.66 5.23 5.23 4.32 4.59 4.73 4.63 4.54 4.84 5.22 4.39 4.85 5.27 4.14 4.15 4.08 4.71 3.41 4.33 4.00 3.87 5.19 4.19 5.20 3.77 4.31 4.48 4.38 4.10 3.49 3.65 4.19 4.65 4.58 4.04 3.91 3.11 3.74 4.07 4.38 4.11 3.40 4.20 3.90 2.94 3.14
37 1 3 6 15 13 7 5 30 42 31 34 2 4 26 17 33 16 23 9 10 44 27 20 25 32 19 11 39 18 8 53 52 56 22 82 43 59 65 14 49 12 69 45 35 40 55 80 75 48 24 29 58 62 92 70 57 40 54 83 47 63 96 90
6.91 6.94 6.92 6.97 6.98 6.94 6.49 6.93 6.86 6.99 6.52 6.94 6.97 6.95 6.96 6.96 6.96 6.95 6.94 6.94 6.94 6.95 6.63 6.80 6.81 6.86 6.92 6.76 6.88 6.76 6.74 6.64 6.28 6.95 6.91 5.73 6.35 6.90 6.80 6.90 6.86 6.94 5.50 6.75 6.16 6.83 6.62 6.42 6.64 6.78 6.85 6.68 6.90 6.80 6.70 6.96 6.62 5.06 6.60 6.77 6.58 6.62 6.75 6.64
23 18 21 4 2 13 74 20 31 1 72 15 3 9 6 5 8 10 16 17 14 11 62 41 36 29 22 47 28 46 50 60 80 12 24 86 79 26 37 25 30 19 88 49 81 35 65 75 61 44 33 55 27 40 54 7 64 90 68 45 70 63 48 59
(contd)
Table 4: Global Competitiveness Index: Basic requirements (contd.)

1. Institutions
Country Score Rank
2. Physical infrastructures
Score Rank
3. Macro stability
Score Rank
4. Security
Score Rank
5. Basic human capital

Score Rank
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104
3.72 3.70 3.48 4.20 3.54 3.07 3.74 3.17 2.75 3.39 3.15 3.23 3.32 3.56 3.10 2.89 4.15 3.04 3.03 3.64 3.25 3.03 2.96 2.91 3.01 2.69 3.67 3.08 3.84 2.80 2.74 3.07 3.44 2.95 3.68 2.95 3.39 3.42 2.69 2.47
58 59 71 34 67 88 57 82 100 75 83 81 78 66 85 98 37 89 90 63 79 91 94 97 92 103 62 86 52 99 101 87 73 96 60 95 76 74 102 104
3.55 2.79 3.21 2.88 3.06 3.18 3.63 3.07 3.48 2.55 3.52 2.72 2.35 2.47 3.30 3.08 2.90 2.83 2.64 2.42 2.33 2.47 2.81 2.60 2.83 2.23 2.68 2.19 2.55 2.31 2.17 2.46 2.63 2.18 2.16 2.14 2.80 2.22 1.36 1.73
57 80 66 75 73 68 54 72 61 87 59 81 93 88 65 71 74 77 83 92 94 89 78 85 76 96 82 98 86 95 100 90 84 99 101 102 79 97 104 103
4.35 4.66 4.54 4.75 4.98 5.18 3.95 5.07 5.49 5.04 5.26 5.10 5.76 4.82 4.90 5.02 3.70 5.10 5.16 4.74 4.53 4.57 5.03 5.47 5.01 4.83 4.72 4.07 3.38 5.20 4.54 4.07 4.82 4.80 4.87 5.23 2.45 4.23 4.91 3.52
95 88 92 84 67 48 100 59 25 61 39 55 8 79 72 64 101 53 49 85 94 91 63 28 66 78 86 99 103 46 93 98 80 82 73 42 104 97 71 102
2.72 3.66 4.18 4.73 2.43 3.00 4.43 3.07 3.28 2.67 3.50 3.34 3.32 3.42 3.82 3.02 4.45 2.69 2.70 2.56 3.71 3.29 3.78 3.30 3.21 3.53 4.16 3.90 3.92 2.37 3.70 3.93 3.70 3.57 4.58 3.14 3.87 4.28 2.93 3.55
98 74 50 21 103 95 38 93 88 101 79 84 85 81 67 94 36 100 99 102 71 87 68 86 89 78 51 64 61 104 72 60 73 76 28 91 66 46 97 77
6.79 6.73 6.66 4.32 6.73 6.79 6.85 6.86 5.92 6.51 6.80 6.59 5.65 5.83 5.94 6.80 4.48 6.71 6.56 5.23 6.04 6.36 4.31 6.60 6.61 6.68 2.80 6.66 4.79 6.35 6.37 4.19 2.78 4.80 2.72 4.20 4.53 2.96 3.58 3.35
43 51 57 95 52 42 34 32 84 73 38 69 87 85 83 39 94 53 71 89 82 77 96 67 66 56 102 58 92 78 76 98 103 91 104 97 93 101 99 100
Table 5: Global Competitiveness Index: Efficiency enhancers

5. Advanced human capital
Country Score Rank
6. Goods market efficiency

Score Rank
7. Labor market efficiency

Score Rank
8. Financial market efficiency

Score Rank
9. Technological readiness
Score Rank
10. Openess and market size

Score Rank
68
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
5.01 5.36 5.06 4.95 5.10 4.62 4.81 4.24 4.72 4.75 4.96 4.84 4.73 4.79 4.83 4.89 4.82 4.81 4.88 4.66 3.89 4.51 3.90 4.34 3.56 4.49 4.50 3.68 3.70 3.97 3.52 3.23 3.65 4.30 4.35 3.57 3.67 4.00 4.12 3.78 3.90 3.73 2.84 4.00 3.14 3.96 3.44 3.27 3.61 3.19 4.04 3.69 3.52 3.09 2.80 3.85 3.68 3.03 2.78 3.14 2.85 2.77 3.17 3.75
4 1 3 6 2 19 12 26 17 15 5 9 16 14 10 7 11 13 8 18 35 20 34 24 51 22 21 43 41 31 53 61 46 25 23 50 45 30 27 38 33 40 78 29 67 32 56 60 48 63 28 42 54 69 79 36 44 71 80 66 77 81 65 39
4.59 4.29 4.33 4.36 4.14 4.22 4.80 4.90 4.53 4.02 4.50 4.35 4.27 4.11 4.32 4.38 4.06 4.19 3.97 4.49 4.39 3.88 4.18 4.12 4.14 3.92 4.25 3.72 3.92 3.89 4.38 3.58 3.87 3.72 3.72 3.99 3.67 3.43 3.51 3.65 3.63 3.44 3.59 3.33 3.64 3.40 3.42 3.74 3.48 3.58 3.50 3.86 3.38 3.20 3.25 3.30 3.04 3.50 3.04 3.05 3.32 3.02 3.34 3.22
3 14 12 10 21 17 2 1 4 25 5 11 15 23 13 8 24 18 27 6 7 31 19 22 20 28 16 37 29 30 9 43 32 36 35 26 38 50 45 39 41 49 42 58 40 52 51 34 48 44 46 33 56 71 66 61 77 47 79 76 59 80 57 70
5.05 4.33 4.64 4.79 4.13 3.51 5.11 5.37 4.67 4.35 4.72 4.11 4.91 4.43 4.48 4.19 3.57 3.81 3.81 4.33 4.46 4.17 4.56 4.55 4.32 3.47 4.00 3.99 4.12 4.11 4.77 3.98 4.48 3.64 3.70 3.77 3.78 4.12 3.88 3.86 4.23 3.66 3.91 4.03 4.12 3.92 3.91 3.66 3.82 3.46 3.57 3.79 4.11 3.82 3.98 3.14 3.73 4.20 4.09 3.69 4.08 3.57 3.82 4.03
3 18 9 5 25 82 2 1 8 16 7 31 4 15 13 23 78 56 57 17 14 24 10 11 19 85 37 38 26 32 6 40 12 75 66 61 60 27 46 47 20 72 45 36 28 43 44 74 52 87 77 58 29 54 39 102 65 22 33 69 34 76 53 35
5.93 5.88 5.88 5.59 5.77 5.25 5.61 6.00 6.27 4.43 4.89 5.77 5.27 5.48 5.61 5.76 5.43 5.14 5.33 5.77 5.84 5.43 4.93 5.23 5.22 4.13 5.71 4.65 5.32 4.42 4.68 3.77 4.30 5.05 4.16 5.29 4.85 4.16 4.86 5.17 4.63 4.69 4.76 4.47 4.32 4.55 3.97 4.28 4.76 4.53 4.67 4.49 4.63 5.08 4.76 4.08 4.07 4.50 4.06 4.39 3.72 3.32 4.56 3.61
3 4 5 14 8 22 12 2 1 52 30 9 21 15 13 10 17 26 18 7 6 16 29 23 24 67 11 40 19 53 38 82 59 28 65 20 32 66 31 25 42 36 34 49 58 44 72 60 33 45 39 47 41 27 35 68 69 46 70 56 85 100 43 91
5.32 5.34 5.31 4.86 5.50 5.09 5.22 5.27 5.03 5.16 5.10 4.86 5.66 5.06 4.69 4.92 4.60 4.86 4.59 4.71 4.52 5.04 4.13 4.59 3.72 5.06 4.34 3.48 4.08 3.47 4.02 3.24 3.48 4.12 4.22 3.71 3.44 4.27 3.78 3.95 3.87 4.11 3.07 3.69 2.91 3.73 3.15 2.99 3.69 3.18 3.56 3.87 2.94 3.40 3.04 4.11 3.24 2.94 3.19 3.25 2.46 2.31 2.84 2.81
4 3 5 17 2 10 7 6 14 8 9 16 1 12 20 15 21 18 22 19 24 13 28 23 39 11 25 45 32 47 33 54 46 29 27 40 48 26 37 34 36 30 60 41 67 38 58 64 42 57 44 35 66 49 61 31 53 65 56 52 88 94 72 73
4.20 2.05 2.12 2.15 2.06 2.93 2.02 2.16 2.47 2.82 2.12 2.21 1.67 1.64 1.88 1.54 2.44 1.99 2.15 1.52 1.83 2.05 1.74 1.34 1.30 2.16 1.86 1.43 1.40 1.46 1.51 3.74 1.65 1.88 1.65 1.44 2.16 1.60 1.48 1.47 1.38 1.48 1.26 1.31 1.48 1.49 1.51 1.75 1.69 1.49 1.47 1.49 1.59 1.34 1.42 2.38 1.40 1.29 1.28 1.74 1.28 1.18 1.24 1.66
1 18 15 12 16 3 19 10 5 4 14 8 29 33 21 37 6 20 13 39 24 17 26 65 68 9 23 56 59 51 41 2 32 22 31 54 11 34 47 50 61 46 76 67 48 43 40 25 28 45 49 44 35 66 58 7 60 71 75 27 74 92 82 30
(contd)
Table 5: Global Competitiveness Index: Efficiency enhancers (contd.)

5. Advanced human capital
Country Score Rank
6. Goods market efficiency

Score Rank
7. Labor market efficiency

Score Rank
8. Financial market efficiency

Score Rank
9. Technological readiness
Score Rank
10. Openess and market size

Score Rank
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104
3.21 2.87 3.18 2.71 3.08 3.63 3.49 3.83 3.55 3.37 3.57 3.03 2.73 2.51 3.39 2.88 2.54 3.31 2.33 2.76 2.26 3.01 2.18 2.53 2.05 2.37 2.54 2.40 2.37 2.21 2.71 3.12 2.20 2.88 2.11 1.99 2.74 1.98 1.62 1.57
62 76 64 86 70 47 55 37 52 58 49 72 84 90 57 75 87 59 94 82 95 73 98 89 100 93 88 91 92 96 85 68 97 74 99 101 83 102 103 104
3.27 3.30 3.26 3.39 3.18 3.23 3.04 2.90 2.88 3.19 2.90 2.92 3.28 3.39 2.92 2.62 3.39 2.82 2.81 3.24 2.94 2.57 3.27 2.47 2.54 2.87 3.11 2.41 2.93 2.97 2.55 2.97 3.25 2.89 3.09 2.66 2.68 2.59 2.33 2.30
63 60 65 54 73 69 78 87 90 72 88 85 62 53 86 96 55 92 93 68 83 98 64 101 100 91 74 102 84 81 99 82 67 89 75 95 94 97 103 104
3.96 3.51 3.68 3.95 3.66 3.66 3.48 3.23 3.78 3.74 3.30 3.57 3.83 3.86 3.41 3.39 4.11 3.69 3.48 3.76 3.85 4.21 3.23 3.22 3.33 3.31 3.82 3.55 3.69 3.42 3.09 3.75 3.84 3.37 3.46 3.28 2.75 3.45 3.30 3.36
41 81 70 42 73 71 84 99 59 64 97 79 51 48 90 91 30 68 83 62 49 21 100 101 94 95 55 80 67 89 103 63 50 92 86 98 104 88 96 93
4.47 4.41 3.68 4.69 4.40 3.75 3.83 3.99 3.25 3.84 3.68 4.47 3.96 4.23 3.69 3.72 4.28 3.70 3.86 4.36 3.82 3.64 4.44 3.39 3.58 3.57 4.27 3.96 4.18 3.81 3.56 3.33 3.97 3.46 3.89 3.61 3.29 3.27 3.28 3.37
50 54 88 37 55 83 79 71 104 78 89 48 74 63 87 84 61 86 77 57 80 90 51 97 93 94 62 75 64 81 95 99 73 96 76 92 101 103 102 98
3.63 2.71 3.30 2.72 2.84 3.01 2.88 3.29 2.49 3.00 3.07 2.75 2.62 2.76 3.20 2.87 2.48 2.26 2.71 2.65 2.55 2.42 2.90 2.49 2.20 2.42 2.58 2.08 2.33 2.23 2.22 2.49 2.57 2.21 2.45 2.19 2.38 1.75 1.72 1.83
43 78 50 76 71 62 69 51 84 63 59 75 80 74 55 70 87 95 77 79 83 91 68 85 99 90 81 101 93 96 97 86 82 98 89 100 92 103 104 102
1.45 1.35 1.50 1.22 1.44 1.22 1.20 1.58 1.43 1.54 1.25 1.26 1.38 1.29 1.36 1.16 1.25 1.18 1.29 1.29 1.16 1.25 1.44 1.19 1.21 1.06 1.26 1.08 1.30 1.16 1.16 1.17 1.19 1.20 1.21 1.14 1.04 1.08 1.09 1.12
52 64 42 83 55 84 88 36 57 38 80 77 62 72 63 96 81 91 73 70 94 79 53 89 86 103 78 102 69 95 97 93 90 87 85 98 104 101 100 99
Table 6: Global Competitiveness Index: Innovation factors

11. Business sophistication
Country Score Rank
12. Innovation
Score Rank Country
11. Business sophistication

Score Rank
12. Innovation
Score Rank
70
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64
5.66 5.34 5.23 5.25 5.33 5.49 4.81 4.85 5.24 5.60 5.13 5.18 4.75 4.83 5.08 4.87 5.15 4.99 4.99 4.78 4.58 4.75 4.47 3.96 3.91 4.64 4.74 3.68 4.22 4.06 4.48 4.01 4.21 4.45 4.05 4.47 4.56 4.04 4.07 3.96 3.91 3.46 3.51 3.75 4.00 3.67 4.09 3.93 4.49 3.75 3.86 3.80 3.92 3.72 3.58 4.54 3.47 3.34 3.52 3.82 3.17 3.02 3.75 3.71
1 4 8 6 5 3 18 16 7 2 11 9 21 17 12 15 10 14 13 19 24 20 30 43 48 23 22 62 32 36 28 39 33 31 37 29 25 38 35 42 47 75 69 55 40 63 34 44 27 54 49 52 46 59 67 26 72 80 68 51 87 93 56 60
4.70 4.06 3.61 3.97 4.06 3.98 3.49 2.94 3.52 4.28 3.74 3.46 3.19 3.18 3.38 3.21 3.45 3.24 3.29 2.96 2.93 3.82 2.90 2.56 2.10 3.11 3.01 2.40 2.32 2.58 2.32 2.84 2.41 2.61 2.76 2.73 2.82 2.67 2.53 2.43 2.41 2.10 2.15 2.11 2.28 2.50 2.27 2.60 2.61 2.21 2.40 2.07 2.45 2.06 1.79 2.43 2.28 2.24 1.89 2.23 2.10 1.98 2.18 2.56
1 3 9 6 4 5 11 23 10 2 8 12 18 19 14 17 13 16 15 22 24 7 25 36 73 20 21 44 49 34 50 26 42 31 28 29 27 30 37 40 43 74 67 70 55 38 56 33 32 60 45 77 39 79 95 41 53 57 90 59 75 88 63 35
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104
3.66 3.46 3.99 3.40 3.79 3.34 3.22 3.68 3.74 3.60 3.63 3.47 3.85 3.36 3.38 3.24 3.48 3.11 3.32 3.73 3.28 2.73 3.92 3.12 2.95 2.94 3.48 2.68 3.07 3.09 2.74 3.13 3.33 2.89 2.86 2.67 3.31 2.73 2.61 2.35
64 74 41 76 53 79 86 61 57 66 65 73 50 78 77 85 71 90 82 58 84 99 45 89 94 95 70 101 92 91 98 88 81 96 97 102 83 100 103 104
2.33 2.15 2.17 2.23 2.20 2.03 2.11 2.30 2.32 2.08 2.00 1.81 2.28 2.37 2.21 2.04 2.06 2.03 1.88 2.33 2.14 1.98 1.96 1.76 1.64 1.55 2.04 1.64 2.06 1.74 1.61 2.15 2.13 1.81 2.10 1.85 1.99 1.74 1.47 1.41
47 65 64 58 62 84 71 52 51 76 85 94 54 46 61 81 80 83 91 48 68 87 89 96 99 102 82 100 78 97 101 66 69 93 72 92 86 98 103 104
(contd)
Concluding Remarks This chapter presents a new index of competitiveness based on 12 pillars that capture the complex nature of the determinants of the productivity of nations.The pillars are comprised of institutions, physical infrastructures, macroeconomic stability, personal security, human capital, the efficiency of the goods, labor and financial markets, technological readiness, market size, business sophistication, and innovation. The 12 pillars are aggregated into three subindexes called basic requirements, efficiency enhancers, and innovation factors.These subindexes are cast in a framework of stages of development in which different factors matter differently at different stages of economic development. In the first stage of development, (the factor-driven stage), the key factors are the basic requirements. In the second stage, (the efficiency-driven stage), the most important are the efficiency enhancers. In the last stage, (the innovationdriven stage), the central inputs are the innovation factors. The index is computed for 104 countries and world competitiveness rankings are provided.The United States is the most competitive economy in the world, followed by Finland, Denmark, Switzerland, Sweden, Germany, Singapore, Hong Kong, the United Kingdom, and Japan. At the lower end, Angola is the worst-ranked economy in the world, followed by Chad, Ethiopia, Zimbabwe, Mozambique, Mali, Bosnia-Hercegovina,Tanzania, and Serbia-Montenegro. The disaggregated nature of the 12 pillars allows us to pin down the most and least favorable components of competitiveness for each country.
4 The idea was that the growth rate of a country depended only on the fraction of its GDP that it invested. If the savings generated by its citizens were not enough to finance the investment required to achieve the desired growth rate, the World Bank would finance the difference (this is why this line of thought was, and still is, called the financing gap). See Easterlys chapter in this volume for more on the role of investment as an engine of growth. 5 Schumpeter (1942), Solow (1956), and Swan (1956). Recent research on the importance of R&D for growth includes Romer (1990), Aghion and Howitt (1992), and Grossman and Helpman (1991). See Aghion and Howitt (1992) and Barro and Sala-i-Martin (2003) for a technical exposition of technology-based growth theories. 6 See Acemoglu et al. (2001 and 2002); Rodrik, Subramanian, and Trebi (2002); Easterly and Levine (1997); and Sala-i-Martin and Subramanian (2003). 7 See De Soto (1990) for an illuminating analysis of how bureaucracy harms growth. 8 See Shleifer and Vishny (1997) for a comprehensive survey of corporate governance and the firm. See also Zingales (1998). 9 World Bank (1994); Gramlich (1994); Aschauer (1989); and Canning, Fay, and Perotti (1992). 10 Easterly (2002) explains how important the World Bank has usually thought physical infrastructures are for the process of economic development. 11 See Fischer (1993). 12 See World Bank (2004) for research papers on the economic causes and consequences of crime, violence, and war. 13 See Sachs (2001) for a comprehensive review of how health affects the economic prosperity of nations. 14 See Schultz (1961), Becker (1993), and Lucas (1988). 15 See Frenkel and Romer (1999), Rodrik and Rodriguez (1999), and Sachs and Warner (1995). 16 See Solow (1956), Swan (1956), Romer (1991), Aghion and Howitt (1992), and Grossman and Helpman (1991). 17 See Rostow (1960). 18 Our allocation of countries to stages is described below. We did not agree with Porter that Canada or Australia belong to the FactorDriven stage. 19 In the papers that accompany the presentation of the BCI (Porter, 2003), the process of development is described as consisting of different stages. However, the actual implementation of the index does not allow for stages since all countries are treated symmetrically, independent of their level of income or the stage in which they are found. This contrasts with the companion paper to the GCI, which allows for two types of countries: those that are in the early stages (called non-core economies) and those that are more advanced (called core economies). The only difference between core and non-core economies, however, is the way in which technological progress occurs: in the core economies, technological improvements occur through R&D; in the non-core countries, it occurs through imitation. 20 In the factor-driven stage, the size of the market is not as important because basic production processes may not be subject to economies of scale. In fact, some of these processes (such as the extraction of natural resources) may exhibit diminishing returns. In the industrial world, where many processes require large sunk costs and fixed factors, economies of scale become important. In the world of technology and innovation, the economies of scale are even larger because ideas are non-rival (that is, they can be used by many people at the same time). Non-rivalry means that once an invention is produced, the larger the market in which it can be sold, the more profitable it is for the entrepreneur who invented it. 21 Since these are weights, the coefficients 1, 2, and 3 are required to add up to 1.
Notes
1 We thank Jennifer Blanke and Augusto Lopez-Claros for their thoughts and long conversations over the last few months. We also thank Catherine Vindret for extraordinarily able research assistance and Michael Porter and Christian Kettels for comments on an earlier draft. 2 This definition is similar to the one used by Porter (2004). 3 Competitiveness, on the other hand, should NOT be characterized as a countrys share of world markets for its products. As suggested by Porter (2003), the competitiveness of a nation is not a zero-sum game in which one countrys gain comes at the expense of others. It is important to emphasize that this is a flawed definition of competitiveness because it has been widely used to justify intervention to tilt markets in ones favor. Countries have engaged in industrial policy, provided subsidies, and devalued their currencies all in the hope of expanding exports at their neighbors expense, all in the hope of improving a countrys competitiveness. Subsidies, however, shift resources away from the most productive activities, and devaluations (even when they are called competitive devaluations) are nothing but a reduction of the price of ones products and are a signal that the firms are not competitive enough. Moreover, devaluations tend to increase the price of imported capital goods, which tends to make domestic firms even less competitive.
22 Technical note: These weights were chosen using a maximum likelihood method of an econometric model that had the growth rate of per capita GDP between 1960 and 2000 as the explanatory variable, and various proxies for basic requirements, efficiency enhancers, and innovation factors as dependant variables. The regression allowed countries in different stages to have different coefficients. The coefficients that maximized likelihood, then, were rounded and became the weights for each stage reported in Table 1. A related and interesting point for future research is that the stages of development theory suggests that econometric analysis that forces all countries to have the same regression coefficients is misspecified. Thus, empirical results that suggest that certain variables are not robustly correlated with economic growth, with competitiveness or with productivity are flawed. See Sala-i-Martin, Doppelhofer, and Miller (2004) for a paper on robust econometric methods in cross-country growth regressions. 23 Note that the Growth Competitive Index, the only index of the GCR that actually allows for two stages of the development, introduces a discrete jump as countries move from non-core to core economies. Since the definition of core economy is based exclusively on the number of patents (core economies are those with more than 15 patents per million population and a non-core country is one that has fewer than that), as a country increases its innovation effort and moves across the 15-patent threshold, the weights assigned to each subindex change discretely. It could, therefore, be the case that a country that increases its innovation rate ends up suffering a dramatic fall in the ranks. Although this has never happened since the GCI was first introduced in 2001, this is a potential problem and an additional reason why the GCI needs to be improved. 24 Factor-driven economies are those that compete in low prices. We proxy low wages with low income levels, which is why we assign countries with 2003 income per capita below US$2000 to this group. GDP per capita is measured at exchange rates: international firms competing for low-cost production should look at exchange-rate comparable costs rather than PPP-adjusted costs. Primary exports are important factors that usually compete in prices. This is why we include countries with a high primary goods content in their exports in this category. 25 See also Figures 2, 3, and 4. 26 We think of each question as addressing slightly different aspects of the same phenomenon. Since there are no theoretical or empirical reasons to believe that some aspects are more important than others, we decide to give the same weight to all questions within a pillar. However, seven Survey question variables and one hard-data variable are used in two sections in the construction of the index. In order to avoid double counting, we divide their value by 2 before we include them in the computation.
Becker, Gary S. 1993. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 3rd Edition. Chicago: University of Chicago Press. Canning, D., M. Fay, and R. Perotti. 1994. Infrastructure and Economic Growth. In M. Baldarassi, L. Paganetto, and E. Phelps, eds. International Differences in Growth Rates. New York: MacMillan. De Soto, H. 2000. The Mystery of Capital New York: Basic Books. De Soto, H. and J. Abbot. 1990. The Other Path: The Economic Answer to Terrorism. New York: Harper Perennial. Easterly, W. 2002. The Elusive Quest for Growth Cambridge, MA:MIT Press. Easterly, W. and R. Levine. 1997. Africas Growth Tragedy: Policies and Ethnic Divisions, Quarterly Journal of Economics, CXII: 12031250. Easterly, W. and R. Levine. 2002. Tropics, Germs, and Crops: How Endowments Influence Economic Development, NBER Working Paper No. 9106, August. Cambridge, MA: National Bureau of Economic Research. Fischer, S. 1993. The Role of Macroeconomic Factors in Growth, Journal of Monetary Economics 32(3): 485512. Frenkel, J. and D. Romer. 1999. Does Trade Cause Growth? American Economic Review 89(3): 379399. Gramlich, E. M. 1994. Infrastructure Investment: A Review Essay, Journal of Economic Literature 32(3): 11761196. Grossman, G. and E. Helpman. 1991. Innovation and Growth in the World Economy,Cambridge, MA: MIT Press, Chapters 3 and 4. Lucas, R. E. 1988. On the Mechanics of Economic Development, Journal of Monetary Economics 22(1): 342. McArthur, J. W. and J. D. Sachs. 2001. The Growth Competitiveness Index: Measuring Technological Advancement and the Stages of Development. In The Global Competitiveness Report 20012002. New York: Oxford Univeristy Press for the World Economic Forum. Porter, M. 1990. The Competitive Advantage of Nations New York: Macmillan, Inc. Porter, M. 2001. Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index. In The Global Competitiveness Report 20012002. New York: Oxford Univeristy Press for the World Economic Forum. Porter, M. 2003. Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness Index. In The Global Competitiveness Report 20022003. New York: Oxford Univeristy Press for the World Economic Forum. Porter, M. 2004. Building the Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index. In The Global Competitiveness Report 20032004. New York: Oxford Univeristy Press for the World Economic Forum. Rodrik, D. and F. Rodriguez. 1999. Trade Policy and Growth: A Skeptics Guide to Cross National Evidence. NBER Working Paper No. 7081, April. Cambridge, MA: National Bureau of Economic Research. Rodrik, D., A. Subramanian, and F. Trebbi. 2002. Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development. Mimeo, Harvard University, October. Romer, P. 1990. Endogenous Technological Change, Journal of Political Economy 98 (October): X71S102. Sachs, J. and A. Warner. 1995. Economic Reform and the Process of Economic Integration. Brookings Papers on Economic Activity, 1118. Sachs, J. 2001. Macroeconomics and Health: Investing in Health for Economic Development: Report of the Commission on Macroeconomics and Health. Geneva: World Health Organization. Sala-i-Martin, X., G. Doppelhoffer, and R. Miller. 2004. Cross-Sectional Growth Regressions: Robustness and Bayesian Model Averaging, American Economic Review, September.
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Sala-i-Martin, X. and A. Subramanian. 2003. Addressing the Natural Resources Curse: An Illustration from Nigeria. NBER Working Paper No. 9804, June. Cambridge, MA: National Bureau of Economic Research. Schultz, T. W. 1961. Investment in Human Capital, American Economic Review 1(2): 117. Schumpeter, J. 1942. Capitalism, Socialism and Democracy. New York: Harper & Row, 1942, 381 pp.; 3rd Edition, 1950, 431 pp. Shleifer, A. and R. Vishny. 1997, A Survey of Corporate Governance. Nobel Symposium on Law and Finance, August, 1995, Journal of Finance 52 (June): 737783. Solow, R., (1956) A Contribution to the Theory of Economic Growth, Quarterly Journal of Econnomics 70 (February): 6594. Swan, T. W. 1956. Economic Growth and Capital Accumulation, Economic Record, 32(2): 334361. World Bank. 2004. The Economics of Civil War, Crime, and Violence. Washington, DC: World Bank. Available at http://econ.worldbank.org/programs/conflict/ Zingales, L. 1998. Corporate Governance. In The New Palgrave Dictionary of Economics and the Law, P. Newman, ed. New York: Macmillan.
Appendix 1: How Executive Opinion Survey questions and hard data are assigned to each pillar 1 This appendix provides details on how the Global Competitiveness Index is constructed. All of the Survey and hard data variables used in this index can be found in the data tables section of this Report with more detailed descriptions.
1st Pillar: Institutions
C. Transparency 6.34: Pervasiveness of money laundering through banks 6.35: Pervasiveness of money laundering through nonbank channels D. Charity and Social Responsibility 9.25: Charitable causes involvement 9.26: Company promotion of volunteerism
The 1st pillar is an average of two subindexes: public institutions and private institutions. Public institutions, in turn, is an average of three components: property rights, honesty and corruption of the public sector, and government inefficiencies (which captures red tape, excess bureaucracy and waste). Private institutions is an average of four components: honesty of the corporate sector, accountability, transparency, and social responsibility. The list of Survey questions we assign to each component is:
1. Public Institutions A. Property Rights 2.10: Effectiveness of bankruptcy law 6.03: Property rights 6.04: Intellectual property protection (weight = 1/2) 2 6.16: Reliability of police services (weight = 1/2)
2nd Pillar: Physical Infrastructures
The 2nd pillar is again the average of two subindexes: general infrastructures and specific infrastructures (rail, ports, air, and electricity). The Survey questions and hard data we assign to each subindex are:
1. General Infrastructures 5.01: Overall infrastructure quality
2. Rail, Ports, Air, Electricity 5.02: Railroad infrastructure development 5.03: Port infrastructure quality 5.04: Air transport infrastructure quality 5.05: Quality of electricity supply 5.08: Telephone lines, 2003 (hard data)
74
B. Honesty and Corruption 6.01: Judicial independence 6.10: Favoritism in decisions of government officials 6.28: Business costs of irregular payments 6.29: Diversion of public funds 6.31: Public trust of politicians 6.32: Prevalence of illegal political donations
3rd Pillar: Macro Stability
The 3rd pillar is an average of five hard-data variables:

2.22: Government surplus/deficit, 2003 2.23: National savings rate, 2003 2.25: Inflation, 20033 2.26: Interest rate spread, 2003 2.29: Government debt/GDP ratio, 2003
C. Government Inefficiency (red tape, bureaucracy and waste) 6.06: Wastefulness of government spending 6.07: Burden of central government regulation 6.08: Burden of local government regulation 6.09: Transparency of government policy-making 7.05: Administrative burden for startups
4th Pillar: Personal Security
The 4th pillar has only one component, which consists of four Survey questions:
2.02: Business costs of terrorism 6.16: Reliability of police services (weight = 1/2) 6.17: Business costs of crime and violence 6.18: Organized crime
2. Private Institutions A. Honesty 9.05: Ethical behavior of firms B. Accountability 9.17: Efficacy of corporate boards 9.22: Protection of minority shareholders interests 9.24: Strength of auditing and reporting standards
5th Pillar: Human Capital
The 5th pillar contains two subindexes: basic human capital and advanced human capital. Basic human capital is an average of two components: health and primary education. See Appendix 5 for a complete description of how we use hard and Survey data to obtain an estimation of national health.
Appendix 1: How Executive Opinion Survey questions and hard data are assigned to each pillar (contd.) Advanced human capital is an average of three components: the quantity of education, the quality of the education system, and on-the-job training. The Survey questions and hard data used in each component are:
Basic Human Capital 1. Health (See Appendix 5 for details): 4.05: Current business impact of malaria 4.06: Current business impact of tuberculosis 4.07: Current business impact of HIV/AIDS 4.08: Medium-term business impact of malaria 4.09: Medium-term business impact of tuberculosis 4.10: Medium-term business impact of HIV/AIDS 4.15: Infant mortality (hard data) 4.16: Life expectancy at birth (hard data) 4.17: Tuberculosis prevalence (hard data) 4.18: Malaria prevalence (hard data) 4.19: HIV/AIDS prevalence (hard data)
We again combine survey and hard data in these components.The list of variables in each of them is the following:
1. Government-Induced Distortions: 2.17: Tax burden 2.20: Agricultural policy costs 6.02: Efficiency of legal framework 6.13: Extent and effect of taxation (weight = 1/2)
2. Competition (weights should be the fraction of Imports on GDP) A. Domestic Competition 7.01: Intensity of local competition 7.03: Extent of market dominance 7.06: Effectiveness of anti-trust policy 7.07: Prevalence of mergers and acquisitions 2.12: Cost of importing foreign equipment 2.13: Business impact of domestic trade barriers 2.14: Business impact of foreign trade barriers 2.15: Business impact of customs procedures 2.28: Imports, 2003 (hard data)
B. Foreign Competition (Imports)
2. Primary Education 4.20: Gross primary enrollment (hard data)
Advanced Human Capital 1. Quantity of Education 3.10: Availability of scientists and engineers (weight = 1/2) 4.21: Gross secondary enrollment (hard data) 4.22: Gross tertiary enrollment (hard data)
3. Customers (Demand Conditions) 3.09: Government procurement of advanced technology products (weight = 1/2) 8.01: Buyer sophistication 9.08: Degree of customer orientation
2. Quality of Education System 3.12: Internet access in schools 4.01: Quality of the educational system 4.03: Quality of math and science education 9.16: Quality of management schools
7th Pillar: Labor Market Efficiency
The 7th pillar is an average of three subindexes: labor market flexibility, female participation, and meritocracy. The Survey questions assigned to each one are:
1. Labor Market Flexibility 6.13: Extent and effect of taxation (weight = 1/2) 9.18: Hiring and firing practices 9.19: Flexibility of wage determination 9.20: Cooperation in labor-employer relations
3. On-the-Job Training 8.10: Local availability of specialized research and training services (weight = 1/2) 9.12: Extent of staff training
6th Pillar: Goods Market Efficiency
2. Female Participation 4.13: Maternity laws impact on hiring women 7.08: Private sector employment of women
The 6th pillar is an average of three subindexes: government-induced distortions, competition, and demand conditions. Competition, in turn, is a weighted average of two components: domestic competition and foreign competition.4
3. Meritocracy (incentives/effort): 4.12: Brain drain 9.15: Reliance on professional management (weight = 1/2) 9.21: Pay and productivity
Appendix 1: How Executive Opinion Survey questions and hard data are assigned to each pillar (contd.)
8th Pillar: Financial Markets Efficiency 11th Pillar: Business Sophistication
The 8th pillar is a (weighted) average of three subindexes: efficiency of the financial sector, trustworthiness, and foreign direct investment.5 The Survey questions that belong to each subindex are:
1. Efficiency 2.03: Financial market sophistication 2.05: Ease of access to loans 2.06: Venture capital availability
The 11th pillar is the average of two subindexes: networks and supporting industries (clusters), and sophistication of firms operations and strategy. The Survey questions in each subindex are:
1. Networks and Supporting Industries (Clusters) 8.02: Local supplier quantity 8.03: Local supplier quality 8.06: State of cluster development 2. Sophistication of Firms Operations and Strategy 9.06: Production process sophistication 9.07: Extent of marketing 9.09: Control of international distribution 9.13: Willingness to delegate authority 9.15: Reliance on professional management (weight = 1/2)
2. Trustworthiness / Confidence 3. FDI 2.16: Business impact of rules on FDI 9.23: Foreign ownership restrictions 2.04: Soundness of banks 2.09: Regulation of securities exchanges
9th Pillar: Technological Readiness:
12th Pillar: Innovation
The 9th pillar is simply the average of five Survey questions and two hard data variables:
3.01: Technological readiness 3.02: Firm-level technology absorption 3.13: Quality of competition in the ISP sector 3.16: Laws relating to ICT 3.18: Cellular telephones, 2003 (hard data) 3.19: Internet users, 2003 (hard data) 8.10: Local availability of specialized research and training services (weight = 1/2)
The 12th pillar is the average of seven survey questions and two hard data variables:
3.05: Quality of scientific research institutions 3.06: Company spending on research and development 3.08: University/industry research collaboration 3.09: Government procurement of advanced technology products (weight = 1/2) 3.10: Availability of scientists and engineers (weight = 1/2) 3.17: Utility patents, 2003 (hard data) 6.04: Intellectual property protection (weight = 1/2) 9.04: Capacity for innovation GDP Exports + Imports (weight = 1/2) (hard data)
76
10th Pillar: Openness and Market Size
The 10th pillar is an average of two subindexes: local market size and foreign market size.The foreign market size is an average of two components: quantity of exports and the quality of exports.6 The Survey questions and hard data assigned to each subindex are:
1. Local Markets Size GDP - Exports + Imports (weight = 1/2) (Hard data)
Notes
1 See Appendix 2 for a description of how hard data are transformed into Survey-comparable values. See Appendix 3 for a description of how we deal with data that are ranked backwards. 2 Half weight to avoid double accountability, as discussed before. 3 See Appendix 4 for a description of how we deal with inflation and deflation. 4 See Appendix 6 for a description of how the relative weights of domestic and foreign competition are estimated. 5 See Appendix 7 for a description of the relative weights of FDI and local financial markets. 6 See Appendix 8 for a description on how this is constructed.
2. Foreign Markets (Exports) Size A. Quantity of exports 2.27: Exports, 2003 (hard data) 9.01: Nature of competitive advantage 9.02: Value chain presence B. Quality of exports
Appendix 2. Combining hard data and Executive Opinion Survey data Answers to the Executive Opinion Survey questionnaires are ranked in a 1-to-7 scale. In most of the cases (see below for exceptions), 7 indicates the best possible outcome while 1 indicates worst possible outcome. Our index combines these Survey data with hard data (hard data are those that can be objectively measuredGDP, the number of patents, or the number of Internet connections in a country would be examples of hard data). Of course hard data do not come in 1-to-7 rankings.We follow McArthur and Sachs (2001) and transform all hard data into a 1-to-7 scale using the following procedure. If the highest value for a data series is max and the lowest value is min, then the new 1-to-7 rank value is related to original value using the formula:
New value = 6 x (original value min) (max min) + 1
Notice that this formula will assign a 7 to the country with the highest value, a 1 to the country with the lowest value, and numbers between 1 and 7 to all other countries. For some variables, a higher value indicates a worse outcome. For example, high levels of infant mortality are bad. In this case we reverse the series by subtracting the newly created variable from 8.
Appendix 3. Dealing with Survey data ranked backwards A small number of questions in the Survey are written a way that numerically higher answers imply worse outcomes and numerically lower numbers imply better outcomes.That is, the answers are reported backwards relative to vast majority of the Survey. Moreover, the choices available in the Survey do not always restrict the answers to six categories. Of course, we need to transform the information before we combine it with the rest of the variables.We follow a procedure similar to the one for transforming hard data. In order to do this, we first locate the highest and the lowest country average.We create then an intermediate variable that is equal to the maximum plus the minimum value (both common for all countries) minus the original number (the one reported for each particular country).We finally use this intermediate variable to apply a formula similar to the one above:
New = 6 x (intermediate min) (max min) + 1
Appendix 4. The way we treat inflation Economists recognize that large levels of inflation are bad for competitiveness because large price increases tend to be associated with uncertainty and instability. Neither the theories of inflation nor empirical evidence suggests that low levels of inflation are bad for productivity, competitiveness, or economic growth. Finally, economic analysts suggest that deflation harms the economy. We capture all of these phenomena in our index by introducing inflation in our macroeconomic stability pillar in a U-shaped manner, as depicted by Figure A1. That is, for values of inflation between 0 and 4 percent, the country receives best possible score (that is, the lowest level of instability). In other words, we think that inflation rates between 0 and 4 are equally harmful to the economy. Beyond this range, both inflation and deflation tend to reduce competitiveness. Because of the scaling system we use, 1 = worst to 7 = best, the country with the highest deviation will get a 1, all countries with an inflation rate within the 04 range will obtain a 7, and the remaining countries are scored relative to the worst one. In practice, we create an intermediate variable equal to 0 if a country has an inflation between 0 and 4 percent, and a positive number otherwise (as depicted by Figure A1).The positive number is equal to the deviation below 0 for countries with deflation and equal to the inflation level minus 4 for countries with inflation above the optimal range Higher numbers mean worse outcomes and the range is not restricted between 1 and 7.We need, once again, to rescale the variable so it conforms with the rest of the variables. As usual, we first rescale into a 1-to-7 scale and we then reverse the number so that higher is better, as discussed above.
78
Figure A1: Inflation in the pillar of macroeconomic stability
Macro instability
Inflation rate 0% 4%
Appendix 5. How diseases are treated to construct the health component of basic human capital In our health section, we include the economic impact of three diseases: malaria, tuberculosis, and HIV. To estimate the economic impact of diseases, we combine hard data on incidence collected by the World Health Organization with questions from the Executive Opinion Survey that reflect how these diseases affect business.The idea is that impact of a disease on competitiveness depends not only on its incidence in the population but also on how costly this incidence is. If many people are infected with a disease that has no economic impact, then incidence should have little effect on productivity (for example, different strains of a disease have different severity and the segments of population affected by it differ across countries, which then might have a distinct impact on the local economies). On the other hand, if a country has little incidence of a very costly disease, the effects on competitiveness might be major. Thus, we need to combine the hard data on incidence with the Survey data on the costs of these diseases for business. To combine these data we first rank each countrys prevalence relative to the highest prevalence in the world.That is, we create a ratio of own-country prevalence divided by the prevalence in the highest country. Higher numbers (those closer to 1) indicate worse scenarios. Since the answer to Survey questions are ranked in the opposite direction (where a higher number indicates a better outcome), we reverse the Survey numbers so higher values indicate worse outcomes (see details above on how to do this). Once hard and Survey data are ranked in the same direction, we multiply the ratio (hard data) with the Survey average.This product is then transformed into a 1-to-7 variable using the method described above; it is then reversed so that higher values denote better outcomes. Note that all counties where the malaria prevalence is 0 obtain a 7 in the ranking (since their competitiveness is not directly affected by it), regardless of what the Survey says.
Appendix 6. Domestic and foreign competition The 6th pillargoods market efficiencyhas a component called competition. Using Survey data, we evaluate how distorted firms competition is in both the domestic and the foreign market.The relative importance of these distortions depends, however, on the relative size of domestic versus foreign competition. We create two new variables that indicate this relative importance. Domestic competition is the sum of consumption (C), investment (I), government spending (G), and exports (X); foreign competition is equal to imports (M).Thus, we assign a weight of (C + I + G + X)/(C + I + G + X + M) to the Survey questions related to local competition and M/(C + I + G + X + M) to those related to foreign competition.
Appendix 7: Financial markets The financial markets efficiency pillar (the 8th pillar) consists of two components related to local financial markets and foreign investment respectively.We believe that foreign direct investment (FDI) should have more crucial importance in countries with bad financial markets. In other words, if the local financial sector is very efficient, foreign financing is less necessary.Thus, the weight that FDI should get in the financial efficiency pillar depends on the efficiency of the local financial market. We give a weight of at least 50 percent to the home financial sector.The other 50 percent of the weight is an average of local financial market and FDI where the relative weight depends on the efficiency of the local financial sector. For the extreme case of the worst local financial market in the world, the 8th pillar is constructed with half of the weight for local financial market and half of the weight for FDI. At the other extreme, when the local markets are well functioning, the importance of FDI is zero. The exact formula used, therefore, is:
Financial market = 1/2 x local + 1/2 x
local x (local 1) 6
] ]
+ FDI x
1 (local 1) 6
80
Appendix 8. Openness and market size The 10th pillar of competitiveness measures the size of the market to which local firms have access. This has two components: the size of the local market and the value of exports. Local market should be the sum of consumption (C), investment (I), and government spending (G).We lack the data on these three macro components, but we do have data on exports (X), imports (M), and GDP. By definition,
GDP = C + I + G + (X M)
Therefore, we compute as:

Local market = GDP + M X
Note that for comparability purposes across countries, we measure local market in GDP-PPP adjusted units. The second component of market size is exports. In order to establish comparability with the local market size, we also measure exports in domestic PPP prices.

1.3 The Global Comp Index

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CHAPTER 1.

The Global Competitiveness Index 1

1.3: The Global Competitiveness Index 51

1.3: The Global Competitiveness Index

1.3: The Global Competitiveness Index 53

1.3: The Global Competitiveness Index

Seventh pillar: Labor market efficiency

1.3: The Global Competitiveness Index 55

1.3: The Global Competitiveness Index

Figure 1: The twelve pillars of competitiveness

The Twelve Pillars of Competitiveness

Key for Factor-Driven Economies

Key for Efficiency-Driven Economies

11. Business Sophistication 12. Innovation

Key for Innovation-Driven Economies

1 x basic requirements + 2 x efficiency enhancers + 3 x innovation factors

Factor-Driven Stage Efficiency-Driven Stage Innovation-Driven Stage

50 percent 40 percent 30 percent

40 percent 50 percent 40 percent

10 percent 10 percent 30 percent

1.3: The Global Competitiveness Index 57

1.3: The Global Competitiveness Index

Table 2: List of countries in each stage

Cyprus Greece Israel Korea Malta Portugal Slovenia Taiwan

1.3: The Global Competitiveness Index 59

1.3: The Global Competitiveness Index

Figure 2: The importance of basic requirements at various stages of development

Weight of basic requirements (1)

Income per capita (not to scale)

Figure 3: The importance of efficiency enhancers at various stages of development

Weight of efficiency enhancers (2)

Income per capita (not to scale)

Figure 4: The importance of innovation factors at various stages of development

Weight of innovation factors (3)

Income per capita (not to scale)

Summary of the methodology: Building the Global Competitiveness Index

1.3: The Global Competitiveness Index 61

1.3: The Global Competitiveness Index

Step 5: Estimate the Global Competitiveness Index

Figure 5: Global competitiveness by region

5.0 4.8 4.6 4.4 4.2

* Middle East and North Africa

1.3: The Global Competitiveness Index 63

1.3: The Global Competitiveness Index

Table 3: The Global Competitiveness Index

Table 3: The Global Competitiveness Index (contd.)

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

71 68 66 75 78 70 57 69 74 82 63 73 80 83 72 77 89 81 84 93 87 88 92 76 79 85 96 86 94 91 90 98 100 95 97 99 102 101 103 104

50 70 66 65 67 68 76 63 82 64 78 74 77 73 75 88 72 85 90 71 89 83 81 98 99 95 80 96 87 94 97 86 84 93 91 101 100 102 104 103

56 71 49 69 57 81 82 58 53 67 70 85 50 66 72 86 75 89 88 52 78 95 61 93 97 99 76 102 90 94 101 84 77 96 92 98 83 100 103 104

1.3: The Global Competitiveness Index 65

1.3: The Global Competitiveness Index

Table 4: Global Competitiveness Index: Basic requirements

5. Basic human capital

Table 4: Global Competitiveness Index: Basic requirements (contd.)

5. Basic human capital

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

58 59 71 34 67 88 57 82 100 75 83 81 78 66 85 98 37 89 90 63 79 91 94 97 92 103 62 86 52 99 101 87 73 96 60 95 76 74 102 104

57 80 66 75 73 68 54 72 61 87 59 81 93 88 65 71 74 77 83 92 94 89 78 85 76 96 82 98 86 95 100 90 84 99 101 102 79 97 104 103