Note 1. Seo Krugman 1994, References. Bursar 0,08." noi Fue of Bp elf Eero: Popsi Krugman, P, 1994, “Competitiveness: A Dangerous Obsession” Farign Afr 73, no. 2 (March/April): 2844. ‘Prescot 1: 2004, “Why Do Americans Work So Much More than Buropeans?” Feder Re- ere Bank of Minnenplls Quarterly Review 8, no. 1: 2-13. ‘| __ The Economics behind the World Economic Forum’s Global Competitiveness Index Xavier Sala-i-Martin Competitiveness is defined as the set of institutions, policies, and fac- tors that determine the level of productivity of a country. The level of productivity, in tum, sets the sustainable level of prosperity that can bbe earned by an economy. In other words, more competitive econo- ies tond to be able to produce higher levels of income for their citi- zens. ‘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 higher rates over the medium to Jong run. Thus, given that produc- tivity has both static and dynamic implications for a country’s star dard of living, an alternative (although almost identical) definition of conrpetitiveness would be the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic ‘prosperity. (Competitiveness should not be characterized as “a country’s share of ‘world markets for its products.” As suggested by Porter (2003), the competitivencss of a nation is not 2 zero-sum game in which ene country’s gain comes at the expense of others. It is important to em phasize that this is a flawed definition of competitiveness because it hhas been widely used to justify intervention to tilt markets in one's fax vor. 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 country’s “competitiveness.” Subsidies, however, shift resources away fom the most productive activities, and devaluations (even when they are called “competitive devaluations”) are nothing but a reduction of the price of one’s products and are a signal that the firms are not competi- five enough. Moreover, devaluations tend to increase the price of‘imported capital goods, which tends to make domestic firms even less competitive. ‘The World Economic Forum's Global Competitive Index (GCI) is based on three principles. Principle 1: Competitiveness Is a Complex Issue 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 nineteenth cen- tury, thought that natural resources imposed a binding limit on the level of prosperity. The law of diminishing returns meant that popula- tion growth would eventually require the use of low-quality land, and this would reduce production per capita and cap the potential for eco- nomic growth. The neoclassical economists of the twentieth century emphasized in- vestment in physical capital and infrastructures. 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: human capi- ‘al, technological progress (whether created by the country or copied from the leading economies), openness, macroeconomic stability, gov- emance, the rule of law, institutions, lack of comuption, market orien- tation, government waste, firm sophistication, demand conditions, market size, and many others. Bach 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 tine 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. ‘To think about the (complex) determinants of productivity, we start ‘with supply and demand (see figure 1.1). On the demand side, the size of the demand (domestic and international) is key. The elasticity of demand with respect to price is also important (less-developed economies depend more on prices whereas consumers in advanced coutizies may be less sensitive to prices and more sensitive to quality or design). Market (macro factors) Supply Demand (rmioro factors} Figure 21 Groneth in two dimensions, ‘The factors that determine supply are also numerous: the quality of infrastructures; the quality of human capital (in terms of its health and in terms of its availability and quality at the school, university, and on- the-job-training levels); the incentives that the labor force has to work hard (which may depend on wage structures and how they zelate to effort and individual productivity, meritocracy, and female participa- tion). Other elements affecting supply include the availability of tech~ nology (not whether technology is invented in a particular country but whether technologies invented elsewhere can be used in a particular place); financial capital (the strength of the banking system and the availability of alternative, more sophisticated ways of financing risky ventures); and institutional capital (such as protection of property rights, trust, and legal security). ‘Of course supply and demand meet in the market. The efficiency of markets therefore represents the third corner of this triangle in figure 11, Competition in the goods market is necessary for firms to achieve maximum efficiency, and this competition depends partly on market structure and partly on government policies (protectionist policies, tax policies, and various Kinds of regulation). ‘The efficiency of the labor ‘market and the financial market are also important to ensure efficiency. Such efficiency can be broken if the environment becomes unsafe (from ‘war, terrorism, or other kinds of personal insecurity)Innovation Supply Domand (rior factors) Figure 12 Growth in thee diznersions. At the center of the triangle we place the central player in the econ- omy: the government. When we think of how governments operate to affect the competitiveness of an economy, we must remember that gov- ‘emmenis are sometimes moved by the desire to do good, but most often are moved by the desire to stay in power and satisfy the neods of lobbies and pressure groups. And with this in mind, they introduce regulations and legislation and follow policies that affect each of the comers of the triangle: from monetary policy, to red tape, to a legal framework, to subsidies, to protection. The triangle is the base on which the third dimension is built: inno- vation. We think of innovation as a third dimension of the triangle be~ cause all of the factors at the base affect innovation (see figure 1.2). Innovation is not R&D. If done well, R&D may generate ideas. But be- fore ideas become productive they must be implemented by entrepre- ours. And before they implement an idea, the entrepreneurs will look at a particular economy to see if the quality of the labor force and the availability of technology is satisfactory, ifthe regulatory environment is favorable or if the size of the market is sufficient. Hence, although in- novation isa very important factor, especially for advanced economies, ‘we must understand that innovation cannot occur in the absence of a strong, base: strong demand, strong supply, and efficient markets in which supply and demand factors interact. ‘Twelve Pillars To capture the complexity of competitivencss, we group the aforemen- tioned factors into twelve areas that we call the “twelue pillars of eco- nomic 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 im- portance of the system of property rights. Owners of land, corporate shares, and even intellectual property are unwilling to invest in the im- provement 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 righis also drives people out of formal markets into the infor- mal sector. De Soto estimates that people in 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 develop- ‘ment. More recently, an important and voluminous strand of empirical esearch confirms the importance of public institutions as key determi- nants of the current level of GDP per capita? ‘The importance of institutions is not restricted to the legal frame- ‘work. Government attitudes toward markets and freedoms and the efficiency of its operations are also very important: excessive bureau- cracy and red tape,? overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, or the political dependence of the judiciary system impose significant eco- nomic costs to businesses and slow down the process of economic development. Although the economic literature has mainly focused on public insti- tutions, “private institutions” are also important ingredients in the pro- cess 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 frm becomes important in a world in which itis impossible to write contracts that fully specify the division of rents under all possible contingencies.Second Pillar: Physical Infrastructures A second important determi- nant of competitiveness is the physical infrastructure environment. For many years, economic development economists,* practitioners, inter- national institutions, and donors® have emphasized investment in physical infrastructures as a required ingredient in the process of eco- ‘nomic growth. Private firms cannot operate satisfactorily in an econ- ‘omy 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 Infernet connections are hard and expensive); or where the electrical supply is unreliable. Third Pillar: Macroeconomic Stability The stability of the macroeco- nomic environment is important for business and, therefore, for: the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a na- tion, it is not less true that macroeconomic disarray harms the econ- omy. 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 forces them to lend it money at below-market interest rates). The goverment cannot provide services efficiently if it has to make enormous interest payments on its past debts, In sum, the economy cannot grow unless the macroenvironment is stable or favorable. This is why the macro- economic environment is the third pillar of economic competitiveness.® Fourth Pillar: Basic Human Capital Human capital is the factor of production associated with the human body. We think of it as having ‘vo important components. The first 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 make it clear that business conditions deteriorate ‘when the health of the population declines. Another component of basic human capital is basic education: literacy and primary schooling ‘have nowadays become essential requirements for competitiveness.” Fifth Pillar Higher Education and Training In more advanced economies, good health and basic education are not enough for citizens to earn a decent living. Advanced ectucation (secondary and tertiary schooling) and flexible skills need to be acquired in high-quality schools or in the workplace through sophisticated on-the-job training, ‘The quality of the education system, therefore, and not only its enroll- ment rates and the quantity of scientists and engineers it yields, plays an essential role in the process of wealth creation for these more advanced forms of human capital.* Sixth Pillar: Goods Market Efficiency The efficiency of the products and services markets is also an important factor in a nation’s produc- tivity. Goods market efficiency is needed in at least three levels. First, cflcient markets require nondistuptive public interventions (that is, policies and regulations need to cause as little disruption as possible). Excessive or inefficient taxes, burdensome subsidy policies, or non- ‘transparent legal systems are some ways in which goverment 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 effi- cient manner. Market dominance by one or a few firms tends fo gener- ate market inefficiencies, as do restrictions to competition from foreign vals. 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 eff- Giency to be achieved in the market. Seventh Pillar: Labor Market Efficiency Many economic analysts (especially in Europe) emphasize the flexbility of the labor market as a leading determinant of competitiveness. The usual complaint is that tax and (cansfer systems tend ty 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, Iabor-employer relations that are very confrontational tend to generate an adverse business environment. ‘The systematic promotion of relatives rather than workers with supe- rior qualifications, or the payment of wages that are not related to pro- Guctivity, tend to have perverse effects on the productivity of the economy. ‘Another labor practice that is harmful to competitiveness is discrimi- zation, of allocating jobs not on the basis of the talent of the candidates,but instead on the basis of their race, religion, gender, or similar con- sideration. One of the most widespread discriminatory practices con- cems women’s labor participation: countries that exclude half of their populations from the best jobs misallocate half of their talent. This Aas important consequences for a country’s ability to generate prosperity. ighth Pillar: Financial Market Efficiency An efficient financial sec- tor is needed to allocate the resources saved by a nation’s citizens to its most productive uses. A proficient financial sector channels resources to the best entrepreneurs rather than to the politically connected. A modem financial sector develops products and methods so that small innovators with good ideas can implement them. A well-functioning fi nancial sector needs to provide risk capital and loans and be trustwor- thy and transparent. In a globalized world, the role of foreign financing is also important, especially for economies with less-leveloped finan- Gal systems. Thus, we include the foreign financing (in the form of foi ign 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 andi complex production processes and to produce more so- phisticated 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 the country’s 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 1s, it does not matter whether a country has invented electricity, the ntemet, or the airplane. What is important is that these inventions are available to dhe Dusinesss comununity. This does not mean that the process of innovation is irelevant. However, the level of technology available to firms in a country needs to be distinguished from the country’s ability to innovate and expand the frontiers of knowledge. That is why we separate technological readiness from innovation, which is the twelfth pillar, to follow. ‘Tenth Pillar: Market Size 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 be- come a substitute for domestic markets, especially for small countries. ‘The empirical evidence on the relation between intemational trade and growth is highly controversial. There is a lot of evidence showing that trade is positively associated with growth? There is some evi- dence suggesting that these resulls 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 countsies with smnall 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 ai 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 trans- action 8s an export (s0 the Netherlands is a foreign market of Belgium), but when California sells the same kind of output to Nevada, the na- tional accounts register the transaction as domestic (60 Nevada is a do- smestic market of Califomia). By adding domestic and foreign markets in our measure of market size, we avoid discriminating against geo- graphic areas (such as the European Union) that are broken into many counties 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, 2004), “clusters are geographically proximate groups of inter- connected companies, suppliers, service providers, and associated institutions in a particular feld, linked by commonalities and comple- ‘mentarities.” Clusters affect competitiveness in various ways: first, firms with a cluster have more efficient access to specialized suppliers, employees, information, and training than do 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 moré 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 prox mity makes it easy to set up new firms, which reduces barriers to entry). A second form of business sophistication is through the introduction of 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 modem ‘business organizational forms are all ingredients in the process of busi- ness modemization (see Porter 2008). ‘Twelfth Pilla: Lmovation ‘The last pillar of competitiveness is tech- nological 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." Although substantial gains can be obtained by improving institutions, building infrastructures, redtic- {ing macroeconomic instability, or increasing the human capital of the population, all these factors scem to run into eventual diminishing, zetums, The same is true for the efficiency of the labor, financial, or goods markets. In the long run, standards of living cannot be ox panded without technological innovation. Innovation is particularly important for economies as they approach the frontiers of Inowledge and the possibility of copy and imitation tends to disappear. The types of environment most inducive to imovation includes modem univer- sities and research institutions that cooperate with businesses, a legal regime that protects intellectual property rights, public institutions that understand the importance of knowledge and act on this under standing when they make purchasing decisions, and the availability of scientists and engineers who can participate in the process of techno- logical improvement. ‘Although we describe the twelve pillars of competitiveness sepa- rately, 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 also tend to reinforce each other. Again, innovation (twelfth pillar) is not possible in a world without institutions (first pillar) that guarantee intellectual property: rights; it cannot be per- formed in countries with no human capital (fifth pillay); and will never take place in economies with inefficient markets (sixth, seventh, and eighth pillars), or without infrastructures (second pillar). 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 succes- sive improvement, in which economics find increasingly sophisticated ‘ways of producing and competing. In other words, the process of eco- nomic 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.#! Although Rostow’s theory involves five stages, his was essentially a theory of industrial- ization through savings and investment. The various stages were phases through which the required resources to invest were accumu- lated, but successful 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 cap- ital. It involves the successful implementation of policies and institue tions 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 de- velopment. Thus, we adopt the framework of stages of development to organize the index. This frathework is close in spirit to that of Porter (1990), although there ate some important discrepancies. One differ- ence is that, while he thinks of the process of development as involving four phases, we will use only three. Porter's fourth stage of devel- ‘opment, which he cails the wealth-driven stage, leads to a decline in standards of living. The economy is driven by «ledy-accumulated ‘wealth, which shifts incentives away from efficient investment and in- novation. Since we do not observe declining growth rates for econo- mies with the highest levels of per capita GDP, we do not include this fourth stage in our analysis. Another difference is that the exact ele- ‘ments that are important at each stage are not the same. A third differ- ence 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 counizies are classified. But the most Jmpoztant difference isin the exact translation of the concepls to a mea- surable index.In the most basic stage, called the fector-driven stage, firms compete in price, That is, they take advantage of their cheap factors (including low-cost labor and unprocessed natural resources). In stage 1, 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 capi- {al, macrovconomic stability, and overall personal security. An impor ‘ant point is that being, successful in this stage eventually means losing competitiveness unless economies prepare for the next stage. The rea son is that successful economies experience positive growth rates, and this means growing wage rates. For a country whose source of compet- itiveness is the low price ofits labor, a growing salary implies a loss of competitiveness. In stage 2, which we call the eficiency-driven stage, efficient produc tion practices become the main source of competitiveness. The quality of an economy's products (not only its prices) and the effectiveness of the production processes determine the productivity of firms in this stage. To achieve this, nations need to improve the elficiency 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 effi- ciency, access to larger markets allows business to exploit economies of scale, Finally, in stage 3, which we call innovation-driven stage, successful economies can no longer compete in price or even quality because their town success has increased prices (especially wages) eo 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 stage, businesses need to increase their sophisti- cation by organizing in clusters and by opting for advanced and supe- ior operations. Firms compete with unique strategies. Institutions and incentives supporting innovation become the central part af economic competitiveness. Of course, each of the twvelve pillars of competitiveness outlined in the previous section maiter for every one of the stages of development. ‘The point, however, is that different factors matter differently for coun lties 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 twelve pillars in each of the three stages. To this end, we group the pillars that we think are more impor- tant in the factordriven stage into what we call basic requirements, Basic requirements include institutions (first pillar), physical infrastructures (Gecond pillas), macroeconomic stability (third pillar), and basic human capital (fourth pillar). ” We group the pillars that are more important in the elliciency-driven stage into what we call eficiency enhancers. The efficiency enhancers in- clude higher education and training (Eith pillar), goods mazket effi ciency (sixth pillar), labor market efficiency (seventh pillar) financial market efficiency (eighth pillar), technological readiness-(ninth pillar), and market size (tenth pillar), Finally, we group the pillars that are more important in the innovation-driven stage into what we call itnavation and sophistication factors, which include business sophistication and innovation, our elev enth and twelfth pillars respectively. An important practical advantage of framing the process of eco- nomic development in stages is that it helps countries prioritize the areas in which they should focus their attention. By giving moze 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 pil- lars 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 ap- Proaching stage 3, on the other hand, should worry about not doing ‘well in Pheve areas, Constructing the Index Once the three basic groups are defined, the index of competitiveness is constructed as a weighted average of the three groups. In other words, CCI = ay x basic requirements +c x efficiency enhancers +4 x irmovation and sophistication factors (11) where ay, oy, and os are the weights that each subindex gets in the overall index.Table 1 Stages af development New shares Stage Suge? ‘Sages Basic requirements 06 04 02 Biilency enhancers 035 a5, 0s Iimovaton and sophistication factors 05, 01 03 ‘The idea behind the concept of stages of development is that all com- ponents matter in all stages, but some matter more than others in dif- ferent stages. In other words, the weights (a in equation 1.1) 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 L1. In stage 1, the basic requirements have a weight of 60 percent, the efficiency enhancers have a weight of 35 percent, and the innova. tion and sophistication factors have a small weight of 5 percent. In stage 2, the weights of the basic requirements and the edficiency enhancers are 40 and 50 percent respectively, while the weight of the innovation and sophistication factors is 10 percent, Finally, in the innovation-driven stage, the weight of the basic re- quirements fall to 20 percent, the weight of the efficiency enhancers slays at 50 percent, while that of the innovation and sophistication fac- tors increases to 30 percent, Principle 8: 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. Thus, the weights of each of the subindexes (shown as a in equation 1.1), change smoothly as a countzy develops. This means that we have five groups of countries: the three ‘groups that belong to the three stages previously described, plus the counties that are moving from stage 1 to stage 2 plus those that are moving from stage 2 to stage 3. One advantage of allowing for the weights of each subcomponent to change smoothly along the transition is that countries that do not pre- pare 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 com- etitiveness. 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 eco- nomic development. Our inex has this property because for countries that do not adapt to the more advanced phases, the values of the eff- ciency enhancers tend to be lower than the values of the basic require- ments. 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. Final Thoughts ‘The World Fconomic Forum’s Global Competitiveness Index is a use~ fal way to organize the results of the WEMs Executive Opinion Sur- vyeys, Although on publication af each year’s resulls the popular press pputs all the emphasis on the relative rankings, we believe that the data used in constructing the index can be used by policymakers to priori- ‘ize policies and reforms. After all, when filling in the surveys exect five officers are implicitly ranking the various aspects of the economy in which they operate. One therefore can use this implicit ranking of subcomponents as the opinion of the business community on what it believes are the bottlenecks of a particular country. Notes 3, See Acemogl, Jabrson, and Robinson 2001, 2002; Barro and Séla-iMartin 1992, 2008; Roath, Subrarnarian, and Trsbbi 2002; Basterly and Levine 1997; and Sela Martin ane Subramanian 2003, 2, See De Soto 1950 for an thuminating analysis of how burenacracy hazms growth. 3. Sco Shleifer and Vishny 1997 for a comprchensive survey of corporate governance snd (he firm, See also Zingales 1998, ‘4 World Bank 2004; Gramlich 1994; Aschauer 1983; end Canning, Fay, and Perotti 1994, 5; Basterly 2002 explains hove important the World Bank has usually though physical ‘nmastructures are for the process of economic development.6, See Sala--Martin, Doppelhofier ant Mile 2008. 7, Sea Sachs 2001 for a comprehensive review of how health afects the economic pros peity of nations. 8, See Schull 1961; Becker 1985; and facas 1988. 9, Seo Frntel and Komer 1999; Rodrik and Rodriguez 1995; and Sachs and Wamer 195. 10. See Solow 1956; Swan 1856; Romer 1980; Aghion and Howitt 1992; and Grossman. and Holpman 151. M1, See Rostov 1960, 1. Sinoe these are weights, the coeficients a, and ap are roquired to ad up to References Acemoglu, D, S Jobson, snd J. 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New Yor: Mace. 2 Competitiveness, Economic Performance, and Structural Polices: An OECD Perspective Jean-Philippe Cotis, Alain de Serres, and Romain Duval | 21 Introduction The world is obsessed with competitiveness. Conferences are held to "discuss competitiveness. Politicians emphasise competitiveness. Major policy initiatives, such as the Lisbon Agenda in Burope, are Jaunched with reference to competitiveness. Yet, the focus on competitiveness makes little sense for a discussion of economic policies. At face value, the notion of competitiveness as a policy objective has a mercantilist Alavor. It is suggestive of a zero-sum game whereas, in fact, one coun- tty’s economic success rarely hampers, and frequently benefits, that of other countries. A focus on competitiveness may thus lead to counter- productive policy reactions. It is easy to imagine an “armaments race” 2s countries try to improve or preserve perceived competitiveness, for example by ramping up subsidies for certain activities or by protecting “strategic” inclustres from foreign competition and investment. Every fone may ultimately lose in such a noncooperative, negative-sum game, even though the competitiveness obsession may also bring benefits, much as forcing countries into needed structural zeforms. Even abstracting from the possibility that other countries may react, improving external competitiveness is no recipe for improved eco- nomic performance. Germany and to.a lesser extent Japan have been _ prime examples for most of the past decade, with theiz combination of low growth and strong external competitiveness. In order to provide a meaningful policy discussion, while still using the e-word in the title, ‘we will therefore interpret the concept of competitiveness in a much ‘broader sense. More specifically, we think of competitiveness as a ‘gauge of the extent to which policies creste the right environment for ‘output maximization,