Competitive Chic

The World Economic Forum's big report isn't all it's cracked up to be.

What is competitiveness? The World Economic Forum thinks it knows. Every year, it publishes the Global Competitiveness Report, which purports to measure "the set of institutions, policies, and factors that determine the level of productivity of a country." Understandably, countries eager to attract investment and tout their economic progress take notice of the report. But is the WEF actually onto something?

Judging by the global media's reaction to the 2013-14 report, which came out last month, the WEF has caught lightning in a bottle. The Wall Street Journal mocked Argentina for its slide in the rankings, and the Indian Express bemoaned India's lowest-ever position in the competitiveness table. African countries including Namibia and Ghana were dissected in depth by their local outlets, and even in Bhutan, where the government ostensibly pursues "gross national happiness" rather than material living standards, the report made national news.

This attention undoubtedly pleases the WEF, whose intended audience includes leaders from government, business, and civil society. "We are aiming to have all of these groups be interested in the results, because all of them have a stake in the prosperity of their economies," WEF chief economist Jennifer Blanke said in an interview last week. "We want it to be used. We want it to be a reference document." In fact, Blanke added, some governments already use the report this way. "It particularly focuses attention among the policymakers," she said. "There's a number of countries that integrate it into their own strategies."

Clearly, a lot of people think competitiveness is an important goal. But what exactly is the WEF measuring? It uses a complex formula devised under the leadership of Xavier Sala-i-Martin, a professor of economics at Columbia University, to weigh dozens of factors, from the extent of marketing in business to Internet access in schools. For all of its complexity, however, the WEF's definition of competitiveness sounds rather like the definition of "total factor productivity," or TFP, a term that economists have used for decades to refer to aspects of growth not explained by changes in capital and labor.

I asked Blanke if the WEF's concept of competitiveness was indeed the same as TFP. "Yes, basically," she said. "I mean, how well are you doing things." But later in the interview, she gave a slightly different spin. "We're not only interested in TFP," she said. "The things that we've seen that matter for driving prosperity over time are numerous and interlinked. We're not so dogmatic about ensuring that it is mapping any particular indicator, because we're interested in economic development. I don't think we want to get more specific than that."

It all sounded a bit nebulous to me, and I said so. "Nebulous, perhaps," Blanke responded, "but that's why we had to define an entirely new concept which we're calling competitiveness."

New or not, there is a fairly straightforward way to test whether this concept is indeed an important factor driving economic growth in the same way as TFP. In the Neoclassical Growth Model, taught to students of macroeconomics around the globe, TFP has a very special role. All countries in the model are growing toward limits in their material living standards. To make progress, the countries give their workers more capital, which makes the workers more productive. Poorer countries tend to grow faster, since even a tiny bit of capital can go a long way for workers who start with very little.

In the model, TFP captures everything that goes into production besides capital and labor: technology, economic institutions, exchange of ideas, etc. So all other things equal, countries with similar TFP tend to converge on the same living standards, with the poorer ones catching up to the richer ones. Economists say countries that converge like this are in the same "convergence club." To get into a new club with a higher limit for living standards, a country needs to raise its TFP.

If the WEF's notion of competitiveness has similar relevance to growth, then we should be able to use it to divide countries into convergence clubs. In each convergence club, per capita income should be negatively correlated with economic growth.

To check this, I compared the WEF's 2011-12 competitiveness scores for 139 countries and regions to the International Monetary Fund's 2011 estimates of economic growth (adjusted for changes in prices) and per capita income (adjusted for differences in purchasing power). The IMF doesn't keep figures for Puerto Rico, so I dropped it.

Going down the rankings in order, there were 35 groups of 10 countries that differed by at most 0.1 points on the WEF's overall metric for competitiveness, which ranged from 2.87 for Chad to 5.74 for Switzerland. Among these groups of 10, some of which overlapped, the average correlation between growth and per capita income was -0.46. That was a pretty good sign for convergence, considering that the correlation among all the countries in the sample was just -0.13.

For a more refined selection of convergence clubs, I looked at the WEF's three main subindexes: basic requirements, efficiency enhancers, and innovation and sophistication factors. This time I chose groups where no country differed from another by more than 0.5 points in any of the subindexes. I managed to find three groups of eight countries. In each group, the countries were also within 0.16 points of each other in the overall metric.

In the group containing Armenia, Egypt, El Salvador, Georgia, Greece, Lebanon, Moldova, and Serbia, the correlation between growth and per capita incomes was -0.92. This was driven to a great degree by Greece's extraordinary downturn; even if Greece had grown by a couple of percentage points, though, the correlation still would have been about -0.55. In a group of wealthier countries -- Australia, Austria, Belgium France, Malaysia, Norway, Qatar, and Saudi Arabia -- the correlation was strongly positive at 0.58, a sign of divergence rather than convergence. The poorer group of East Timor, Ivory Coast, Lesotho, Madagascar, Mali, Mozambique, Swaziland, and Zimbabwe showed a correlation of 0.22, positive and divergent again.

Taken as a whole, this rudimentary evidence neither supports nor negates a central role for the WEF's concept of competitiveness in convergence. The fact that convergence is not present at a more granular level suggests that the results for the overall metric may be partly due to chance. To be sure, the metric is highly correlated with living standards, and economists have indeed found causal relationships between some of its components and living standards. Yet the metric itself seems to have a connection that is, well, nebulous. That may be exactly what the WEF intended, but it may also give pause to those leaders who would use the report as a reference.


Daniel Altman

Can India Keep Growing?

It depends on which India you're talking about.

Just a few years ago, it seemed the sky was the limit for India. Its budding high-tech industries were supplying software and services to countries around the world, its call centers were ubiquitous at the end of English-speakers' phone lines, and its pharmaceuticals industry was pumping out low-cost cures for hundreds of millions of customers in emerging economies. Now, skepticism about India's growth abounds. Is it justified?

India certainly doesn't lack potential. As I've written before, the main ways for a country to raise living standards are to put more capital within the reach of its workers and to adopt new technologies from abroad. India has room to do much more of both.

One way to bring workers and capital together is urbanization, which tends to track economic growth fairly closely. The graph below shows the strong relationship between urbanization and per capita incomes. Each point represents a country, and the green one is India. It's right on trend, and it has a good long way to go.


Other populous countries have trodden India's path already. Indonesia was at a similar point in the early 1990s, as was China in the late 1990s. Both continued to urbanize, with about 50 percent of their populations living in cities today. But China's per capita income is higher, and it also urbanized more quickly. There's room for plenty of variance around the trend line, so India's future is far from certain.

India, too, grew rapidly in the past two decades, but it was not the fastest mover. In 1993, its population was 26 percent urbanized; in 2012, it was 32 percent, with growth in GDP per capita, adjusted for inflation, of 5.2 percent per year. Yet during the same period, Vietnam reached 32 percent urbanization after starting at 21 percent, with growth in GDP per capita of 5.8 percent per year.

What slowed India down? After all, it was a capitalist democracy that had the good fortune to be a British (rather than a French or Belgian) colony, and British colonies have tended to do better than their counterparts during globalization. What about India was so retrograde that a supposedly communist country that was more corrupt and only joined the World Trade Organization in 2007 could perform better during the peak era of globalization?

One answer is that India lagged in human development. People need health care, education, access to opportunities, and a raft of other intangibles to realize their full potential in society and the economy. For the majority of Indians, these pillars of human development were and are still far below par.

According to the United Nations Development Program's most recent measure, India ranks 136th in the world for human development, with Vietnam 127th. When the figures are adjusted for inequality, India sits 21 places behind Vietnam. To understand why, consider that life expectancy in India was about 66 years in 2012, while in Vietnam it was over 75. Children in India can also expect a year less schooling than their Vietnamese counterparts.

Even though India's GDP per capita is similar to Vietnam's in dollar terms, the money is not making it down to the grassroots. A few elites pulling in hundreds of millions of dollars every year can boost average incomes, but their children still count as only one person each for life expectancy and schooling. By the same token, an urbanized population living in slums without decent shelter or basic services isn't necessarily a productive one. These disjoints may be at the heart of India's underperformance.

Nevertheless, there is one enormous caveat in any discussion of India's economic prospects: There are many Indias. India is made up of 35 states and territories that vary enormously along all of the axes I've mentioned so far. Generalizations about India make about as much sense as generalizations about Africa.

For example, consider India's much bemoaned corruption. In 2010, a survey by CMS India, an independent watchdog, found vast differences between Indian states in the likelihood that people would be asked for a bribe. In Andhra Pradesh, an eastern state of almost 85 million people, only 7.4 percent of respondents reported being asked for a bribe by a public official or civil servant. That's not a bad market for investment -- a relatively clean place that would rank among the top 20 countries in the world by population. By contrast, more than half the respondents in neighboring Chhattisgarh said they had been asked for a bribe, and more than three-quarters of them said they had paid.

The variation extends to human development, too. Life expectancy in Kerala, a state of 34 million people, was 74 years in 2010, but in Madhya Pradesh it was only 58. This is a stunning difference, equivalent to the gap between Romania -- a member of the European Union! -- and Djibouti.

Of course, there is a limit to these differences. State governments have little say in the regulation of foreign investment, capital controls, openness to trade, and competition. But to echo the Indian saying "yahan kuch nahi ho sakta" (essentially, "nothing works here") is to take a very narrow view of an enormous and complex country. Some things are clearly working in some parts of India, and those parts are sure to grow. The question is whether they will carry the other parts of India with them.