The Rule of Law as a Factor for Competitiveness

The Rule of Law as a Factor for Competitiveness Lessons from the Global Competitiveness Index 2008-2009 Irene Mia Director, Senior Economist Global Competitiveness Network, World Economic Forum OECD Workshop on Indicators of Regulatory Management Systems BEER Conference Centre - London April 2 nd and 3 rd, 2009

London April 2 nd and 3 rd, 2009 Outline The Global Competitiveness Network and the Global Competitiveness Report (GCR) series. The Global Competitiveness Index (GCI) and sources. Focus on the institutions and rule of law as basic requirements for competitiveness. The impact of the Forum s competitiveness work on national agendas. 2

London April 2 nd and 3 rd, 2009 Global Competitiveness Network Flagship product: Global Competitiveness Report: launched in 1979 covering 16 countries; The Report has since expanded its coverage to 134 countries. Co-editors: Professors Klaus Schwab and Michael Porter. Our goal: to provide a benchmarking tool for policymakers and business leaders. 3

London April 2 nd and 3 rd, 2009 The Global Competitiveness Report 2008-2009 Geographical coverage 4

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index The 12 pillars of competitiveness BASIC REQUIREMENTS 1. Institutions 2. Infrastructure 3. Macroeconomic stability 4. Health and primary education Key for factor-driven economies EFFICIENCY ENHANCERS 5. Higher education and training 6. Goods market efficiency 7. Labor market efficiency 8. Financial market sophistication 9. Technological Readiness 10. Market size Key for efficiency-driven economies INNOVATION & SOPHISTICATION FACTORS 11. Business sophistication 12. Innovation Key for innovation-driven economies 5

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Weights Weights of the three main groups of pillars at each stage of development Factor-driven stage Efficiencydriven stage Innovation-driven stage Basic requirements 60% 40% 20% Efficiency enhancers 35% 50% 50% Innovation and sophistication factors 5% 10% 30% 6

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Data sources Use of hard data (publicly available information from sources such as the International Monetary Fund, the World Bank, UNESCO, United Nations, etc.). And survey data (from the Executive Opinion Survey), which records the perspectives of business leaders around the world; survey data is indispensable, particularly for variables where no reliable hard data sources exist. In 2008, over 11,000 business leaders from 134 countries responded to the Survey. 7

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Data sources: The Executive Opinion Survey The sample of respondents is carefully selected in each country by the Partner Institute to reflect the structure of a country s GDP. It is structured around eleven major issue areas, each of significant relevance to the current state of an economy s business environment, asking participants to respond to a total of 144 questions based on their own experiences of operating a business in the country in which they are based. The Survey is translated into over 20 languages and is available online. 8

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Institutions as a key driver for competitiveness There are strong indications that differences in institutions explain much of the growth differential between countries, and therefore have an influence upon countries growth performance well beyond simply getting inflation right or addressing other macroeconomic weaknesses. Our concept of competitiveness explicitly incorporates notions of public sector accountability, efficiency, transparency and, more generally, the various ways in which the government interacts with economic agents in the domestic economy, particularly the business sector. Also elements of private institutions efficiency are taken into consideration. 9

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Institution pillar: Composition Institution Index 2/3 1/3 Public Institutions Private Institutions Both the Public Institution and Private Institution sub-pillars are composed only by Survey data. 10

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Public Institution sub-pillar: Composition Property rights Government inefficiencies Ethics and corruption Public Institutions Security Undue Influence All criteria are given the same weight in the sub-pillar s computation 11

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Public Institution sub-pillar: Variables used A. Public institutions 1. Property rights Property rights Intellectual property protection 2. Ethics and corruption Diversion of public funds Public trust of politicians 3. Undue influence Judicial independence Favoritism in decisions of government officials 4. Government inefficiency Wastefulness of government spending Burden of government regulation Efficiency of legal framework Transparency of government policymaking 5. Security Business costs of terrorism Business costs of crime and violence Organized crime Reliability of police services 12

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Private Institutions Good governance is not a concept that applies to the public sector only. Quality and transparency of private institutions are also crucial for economic efficiency. An economy is well served by businesses that are run honestly, where managers abide by strong ethical practices in their dealings with the government, other firms, and the public. Private sector transparency is indispensable to business, notably the financial sector, using standards, auditing, and accounting practices that ensure access to information in a timely manner. 13

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Private Institution sub-pillar: Composition Corporate Ethics Private Institutions Accountability Both criteria are given the same weight in the component s computation 14

London April 2 nd and 3 rd, 2009 Global Competitiveness Index 2006-2007 Private Institution pillar: Variables used B. Private institutions 1. Corporate ethics Ethical behavior of firms 2. Accountability Strength of auditing and reporting standards Efficacy of corporate boards Protection of minority shareholders interests 15

London April 2 nd and 3 rd, 2009 The Global Competitiveness Index Institution related variables used in other pillars of the index Other institution-related variables are used in other pillars of the GCI. A few examples: Effectiveness of anti-monopoly policy Extent and effect of taxation Foreign ownership restrictions Business impact of rules on FDI Restrictions on capital flows Regulation on securities exchanges Laws relating to ICT 16

Institution Pillar Rankings 2008-2009 Top 20 and selected economies Economy Rank 2008 Score Economy Rank 2008 Score Singapore 1 6.20 Denmark 2 6.18 Finland 3 6.17 Switzerland 4 5.97 Sweden 5 5.95 Iceland 6 5.91 Norway 7 5.87 Hong Kong SAR 8 5.77 New Zealand 9 5.70 Netherlands 10 5.68 Luxembourg 11 5.66 Austria 12 5.65 Australia 13 5.63 Germany 14 5.59 Qatar 15 5.52 United Arab Emirates 16 5.40 Canada 17 5.36 Ireland 18 5.29 Oman 19 5.26 Tunisia 20 5.18 Korea, Rep. 27 4.86 United States 35 4.73 Botswana 37 4.67 Chile 42 4.50 South Africa 49 4.33 China 54 4.16 India 56 4.07 Italy 81 3.56 Turkey 82 3.56 Mexico 102 3.23 Russian Federation 112 3.13 Venezuela 134 2.05 Public Institutions Sweden 1 6.34 Finland 2 6.22 Denmark 3 6.18 New Zealand 4 6.16 Singapore 5 6.13 Norway 6 6.09 Netherlands 7 6.02 Australia 8 6.00 Iceland 9 5.99 Switzerland 10 5.96 Austria 11 5.96 Canada 12 5.92 Germany 13 5.85 Hong Kong SAR 14 5.81 Luxembourg 15 5.74 Ireland 16 5.68 United Kingdom 17 5.61 United States 18 5.54 Belgium 19 5.51 Chile 20 5.41 Qatar 22 5.33 South Africa 25 5.21 Korea, Rep. 26 5.21 Botswana 39 4.92 India 48 4.71 Brazil 61 4.39 China 77 4.24 Mexico 78 4.24 Turkey 86 4.19 Italy 93 4.03 Russian Federation 108 3.76 Chad 134 2.96 Private Institutions 17

Institution Pillar 2008-2009 OECD and selected comparators (score out of 7) 7 6 5 4 3 2 Institutions Public institutions Private institutions 1 0 Singapore EU 15 EU27 MENA Latin America & the Caribbean GCR sample average OECD 18

Public Institution Pillar 2008-2009 OECD vs. top performer Singapore (score out of 7) Singapore OECD Business costs of crime and violence Reliability of police services Organized crime Competitive advantages 7 6 5 4 3 2 1 0 Intellectual property protection Diversion of public funds Public trust of politicians Business costs of terrorism Judicial independence Transparency of government policymaking Favoritism in decisions of government officials Efficiency of legal framework Wastefulness of government spending Burden of government regulation 19

Private Institution Pillar 2008-2009 OECD vs. top performer Sweden (score out of 7) OECD Sweden Ethical behavior of firms 7 6 5 4 3 Protection of minority shareholders interests 2 1 Strength of auditing and reporting standards Efficacy of corporate boards 20

Institution Pillar 2008-2009 Property rights (score out of 7) 7 6.66 6.64 6.51 6.51 6.50 6.43 6 5 4.80 4.70 4 4.20 4.09 3.96 3 2 1 Switzerland Denmark Finland Germany Sweden Canada Italy Czech Republic Turkey Mexico Poland Source: EOS 2007, 2008. The question asked to the firm was: Property rights in your country, including over financial assets, are: (1 = Poorly defined and not protected by law ; 7 = Clearly defined and well protected by law) 21

Institution Pillar 2008-2009 Wastefulness of government spending (score out of 7) 7 6 6.06 5 5.13 5.04 4.85 4.79 4.69 4 3 2.82 2.80 2.70 2.26 2.21 2 1 Singapore Finland Denmark Switzerland Netherlands Australia Czech Republic Japan Poland Hungary Italy Source: EOS 2007, 2008. The question asked to the firm was: The composition of public spending in your country: (1 = Is wasteful ; 7 = Efficiently provides necessary goods and services not provided by the market) 22

Institution Pillar 2008-2009 Burden of government regulations (score out of 7) 7 6 5.66 5 4.47 4.45 4.39 4 3.83 3.83 3 2 2.41 2.27 2.26 2.23 2.14 1 Singapore Japan Switzerland Finland Korea, Rep. Denmark Mexico France Poland Hungary Italy Source: EOS 2007, 2008. The question asked to the firm was: Complying with administrative requirements for businesses (permits, regulations, reporting) issued by the government in your country is: (1 = Burdensome ; 7 = Not burdensome) 23

Institution Pillar 2008-2009 Efficiency of legal framework (score out of 7) 7 6 6.30 6.04 6.01 6.01 6.00 5.95 5 4 3.22 3 2.96 2.89 2.88 2.80 2 1 Denmark Switzerland Germany Finland Norway Sweden Czech Republic Slovak Republic Poland Mexico Italy Source: EOS 2007, 2008. The question asked to the firm was: The legal framework in your country for private businesses to settle disputes and challenge the legality of government actions and/or regulations is: (1 = Inefficient and subject to manipulation ; 7 = Efficient and follows a clear, neutral process) 24

Institution Pillar 2008-2009 Transparency of government decision-making (score out of 7) 7 6.27 6 5.85 5.82 5.74 5.56 5.47 5 4 3 3.64 3.56 3.39 3.25 2.98 2 1 Singapore Sweden Denmark Finland Switzerland Norway Greece Czech Republic Italy Hungary Poland Source: EOS 2007, 2008. The question asked to the firm was: Are firms in your country usually informed clearly by the government on changes in policies and regulations affecting your industry? (1 = Never informed ; 7 = Always informed) 25

Institution Pillar 2008-2009 Judicial Independence (score out of 7) 7 6.63 6.63 6.60 6.54 6.52 6.51 6 5 4 4.00 3.72 3.65 3.60 3.41 3 2 1 New Zealand Finland Sweden Germany Denmark Netherlands Turkey Poland Slovak Republic Italy Mexico Source: EOS 2007, 2008. The question asked to the firm was: Is the judiciary in your country independent from influences of members of government, citizens or firms? (1 = No heavily influenced ; 7 = yes entirely independent) 26

Institution Pillar 2008-2009 Burden of customs procedures (score out of 7) 7 6.45 6 5.97 5.90 5.79 5.30 5.18 5 4 3.98 3.88 3.77 3.60 3.47 3 2 1 Singapore Sweden Denmark Finland Norway Netherlands Greece Italy Poland Mexico Turkey Source: EOS 2007, 2008. The question asked to the firm was: Customs procedures (formalities regulating the entry and exit of merchandise) in your country are: ( 1 = Extremely slow and cumbersome ; 7 = Rapid and efficient) 27

Institution Pillar 2008-2009 Extent and effect of taxation (score out of 7) 7 6 6.22 5 4 5.06 4.98 4.93 4.15 3.69 3 2.47 2.34 2.29 2.14 2 1.93 1 United Arab Emirates Switzerland Slovak Republic Ireland Korea, Rep. Norway Sweden Poland Italy Belgium Hungary Source: EOS 2007, 2008. The question asked to the firm was: The level of taxes in your country: (1 = Significantly limits incentives to work or invest ; 7 = Has little impact on incentives to work or invest) 28

Global Competitiveness Network The impact: a platform for private-public dialogue Policymakers around the world increasingly pay close attention to the Report s results. The Global Competitiveness Network is increasingly asked by governments to help identify priority areas for reform. Provides a highly useful platform for business to enter into dialogue with governments on policy issues that affect the country s and their industries competitiveness. 29

Global Competitiveness Network The impact: Latam Roadshows The findings of our Reports have been used over the years as a neutral platform to trigger private-public dialogue on countries competitiveness weaknesses. A notable example has been the Latin America Roadshow, sponsored by Microsoft, and carried over annually in up to 10 countries to raise national awareness and generate a high level debate with and within the government and business sector about the structural weaknesses of the countries visited and identification of the remedial steps needed. 30

Global Competitiveness Network The impact: the National Competitiveness Councils The Global Competitiveness Network played the key catalytic role in launching in 2004 the Egyptian Competitiveness Council. This council has spearheaded the efforts in other Arab countries to setup similar bodies (e.g. UAE, Bahrain, Kuwait, Morocco), following the Forum s guidelines. Also in many countries, the Global Competitiveness Index is used as a tool to assess national advancements and to set policy targets. The Forum is working closely with the government led competitiveness institutions in charge of the above in a number of countries, including Mexico, Peru, Colombia, Dominican Republic and Ecuador. 31

Global Competitiveness Network The impact: The National Competitiveness Reports A number of National Competitiveness Councils or public and or private organizations have published or are writing National Competitiveness Reports based primarily on the findings and methodology of the Global Competitiveness Reports. Countries include: Egypt, Kuwait, Bahrain, Pakistan, Armenia and Croatia. The Forum has also been asked to produce national specific reports to address competitiveness challenges in different countries. Pilot project: the Ukraine Competitiveness Report 2008 Also: Mexico Competitiveness Report and Brazil Competitiveness Report upcoming 32

THANK YOU FOR YOUR KIND ATTENTION Visit our interactive website: http://gcr.weforum.org/gcr/ The Global Competitiveness Report 2008-2009 is freely downloadable from our website at http://www.weforum.org/pdf/gcr08/gcr08.pdf 33