Wednesday, September 29, 2010

World Economic Forum, competitiveness report. A BRIC and GCC perspective.

This year report has confirmed global trends that we clearly discussed in this blog a few times before.
While this report doesn't provide enough predictive detail for the long period provides an interesting historical insight for the progress made by countries in relationship to 12 variables selected to identify "competitiveness". 

The Gulf Countries make interesting progress in the rankings and offer interesting opportunities for investors that are looking to establish a presence in the emerging markets.
The data further substantiate one fact that I tend to emphasize consistently: the progress of the Gulf countries with regards to infrastructure, goods market and financial markets efficiency tend to further strengthen their position as effective gateways INTO emerging markets economies like African and Indo-China. In fact it is more and more common that companies set up their headquarters in the GCC to then reach out to Indo-China taking advantage of favorable tax laws as well as infrastructure.

In more details some of the highlights of the report for what it concerns emerging markets.
Please note that the rankings are based upon 12 competitive pillars and weighted against 3 different phases of development.
Briefly below about the 3 different development phases and further at the end of the posting the list of all 12 development pillars.

Phase 1: the economy is "factor driven" and countries compete mainly on on their factor endowments: unskilled labor and natural resource.

Phase 2: the economy is moving towards an "efficiency-driven" stage of development whereby production processes are improved. As a country improves and becomes more competitive productivity will increase and wages will rise. At this point,competitiveness is increasingly driven by higher education and training (pillar 5), efficient goods markets (pillar 6), well-functioning labor markets (pillar 7), developed financial markets (pillar 8), the ability to harness the benefits of existing technologies (pillar 9), and a large domestic or foreign market (pillar 10)

Phase 3: Finally, as countries move into the innovation-driven stage, wages will have risen by so much that they are able to sustain those higher wages and the associated standard of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete by producing new and differ- ent goods using the most sophisticated production processes (pillar 11) and through innovation (pillar 12).

List of countries/economies at each stage of development:

One final note before continuing with our analysis: the future development of a country cannot be predicted using this report. This is more of a comprehensive ranking of how well countries have done in the past. We remain convinced that countries in the emerging markets will in the long run consistently outperform the growth of the G7++ group due to the underlying demographic trends, although it will take decades to see some of these countries at the top of this report.
Out of the traditional BRIC lot Russia is the only country out of the emerging economies that we believe will NOT keep up with the long term economic development due to its very unfavorable demographic. 
Further, high competition doesn't equal great opportunities: depending on the business nature, the most business opportunities often remain in areas that developing fast but are not completely regulated. 

So how do the traditional emerging markets fair this year?
Let's take a look at the typical BRIC (Brazil, Russia, India & China) group before going any further.

Brazil: 58th position, down 2 positions from previous survey. The position remains fairly stable with a slight improvement from the previous year. The progress that was made over the last decade has definitely contributed to the country's ability to rebound from the crisis in a sound manner: while the country's GDP slightly contracted in 2009, in 2010 the GDP is expected to grow at an annual healthy rate of 5.5%. In spite of the positives the outlooked remains partially mixed. The pros of: market size, well developed financial market and relatively well functioning higher education are matched by a weak saving rate, high interest rate and a high rate of public sector indebtedness. Goods and labor markets reveal some important rigidity and the quality of institutions remains poor with limited trust into politicians and the rule of law.

Russia: 63th position, same as last year. After the significant slide of the previous year, Russia maintains its position. While infrastructure, health, education and technology improves significantly other components of the index suffer. The major area of concern highlighted in the report are market competitiveness and efficiency of the goods markets. Competition is hindered by inefficient anti monopoly laws and restrictions on trade and foreign ownership. One of the main issue highlighted further in the report remains the weak institutions that translate in weak property rights (126th rank) and weak corporate governance standards (119th rank).

India: 51st position, fell two positions from last year. India's competitive advantage often remains its large market side as well as good development in the financial markets sector (17th rank) and business sophistication (44th rank) and innovation (39th). Unfortunately the country missed the development mark on few of the basic competitiveness drivers: health & primary education (104th rank). Life expectancy remains 10 years less than in China and Brazil. Another significant issue is also its infrastructure that is in need of an upgrade (86th rank), especially with respect to quality of roads, ports, and electricity supply. 

China: 27th place, up two positions from previous year. As you can see from the previous analysis this is the only BRIC country that improves this position this year.
While most of the pillars have remained stable from last year the two point climb in the ranking is almost all due to its better assessment of its financial markets (up 24 places to 57th tank). This is the result of easier access to credit and financing via equity markets, banks and venture capital. ICT is another traditional area of development for China, although the country has moved major steps forward the overall ICT penetration remains underperforming as compared to other economies (78th rank).

Let's now take a look at the Gulf Countries. All countries moved up in the ranking with the exception of the UAE that lost a couple of places due to the crisis that has engulfed mostly its real estate industry and forced the Dubai World conglomerate to restructure its debt.

Qatar: 17th place, moved five place up from last year. This country stays at the top among all GCC countries reaffirming its leadership in the region as the fastest developing country in the world. Its competitiveness rests on a strong combination of factors among which: low corruption, stable macroeconomic environment, high-quality institutional framework and efficient goods markets. It obviously helps that the country sits on the largest liquified gas reserves that have fueled much of the development effectively leaving the country completely untouched by the global economic crises.

United Arab Emirates: 25th rank, looses two places from last year. This is the only economy in the region that looses positions from the previous year given the negative impact of the economic crises over the Dubai emirate especially. The country remains a leader for its infrastructure (3rd rank overall), the high penetration of new technologies (14th rank) and the highly efficient goods markets (6th rank). The issue have appeared in the stability of the private institutions such as Dubai World that have raised the issue of the long term development sustainability of the country.

Bahrain: 37th rank, one place up from last year. The position remains stable and further outlines the country ability to provide a stable microeconomic performance (10th rank) and an excellent goods market efficiency (9th rank). Particularly good is also the ranking with regards to the financial market development (20th rank), although the country is obviously penalized by its market size (98th rank) and its ability to innovate (59th).

Saudi Arabia: 21st rank, seven places up from last year. The country has been consistently climbing the ladder over the past few years. In particular: the changes to the institutional framework and a stronger corporate governance have favorably impacted its position. Further, the government has enacted a massive stimulus package focused on improving the infrastructure on the country. While the stimulus package has deteriorated the macroeconomic stability of the country moving into a 'deficit' position the infrastructure project are going to benefit it for long time to come.
In spite of the long list of positives the country still faces significant challenges in critical areas such as health and education where it doesn't meet the standards of other countries at the similar level.

Oman: 34th rank, up 7 places from previous year. The country has made great progress with regards to its institutions (16th rank), overall macroeconomic environment (3rd rank) and goods market efficiency (25th rank). It completely lags, as compared to some of countries in similar overall ranking, for health and primary education (99th rank), higher education and training (63rd rank) and technological readiness (59th rank). The country is also further penalized by its market size only 73rd in the overall rankings. 

About the methodology and the 12 pillars.
From the report (page 17 of 515):
Since 2005, the World Economic Forum has based its competitiveness analysis on the Global Competitiveness Index (GCI), a highly comprehensive index for measuring national competitiveness, which captures the micro- economic and macroeconomic foundations of national competitiveness.2
We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sus- tainable 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 (physical, human, and technological) in an economy. Because the rates of return are the fundamental drivers of the growth rates of the economy, a more competitive econ- omy is one that is likely to grow faster in the medium to long run.
The concept of competitiveness thus 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 key factors explaining an economy’s growth potential.

12 pillars of competitiveness:

1. Institutions
2. Infrastructure
3. Macro economic environment
4. Health & primary education
5. Higher education and training
6. Goods market efficiency
7. Labor market efficiency
8. Financial market development
9. Technological readiness
10. Market size
11. Innovation

To download the original World Economic Forum report please follow this link: