ECON 2180 Comparative Economic

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ECON 2180 Comparative Economics
Global Competitiveness Index And Unemployment Rate
Wong Yat Fu 05000041 Tsang Heng Cheong 05017475
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Introduction

• Many benchmarks are used to describe an economy
• e.g. growth rate of GDP, GDP per capita, net
  export, performance of stock markets, etc

What's the problem?
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Introduction

• The overall performance of an economy is not
  reflected by separate use of a few indicators
• Biased, not a full picture of the health of the
  economy

And the consequence would be
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The Global Competitiveness Index

• Published by the World Economic Forum (WEF)
• Provides an overview of factors that are critical
  to driving productivity and competitiveness
• The rankings are drawn from a combination of
  publicly available hard data, and the results of
  the Executive Opinion Survey (EOS)
• EOS a comprehensive annual survey conducted by
  the WEF, together with its network of Partner
  Institutes (leading research institutes and
  business organizations) in the countries covered
  by the Report

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The Executive Opinion Survey

• The EOS captures the expert opinions of over
  11,000 business leaders and entrepreneurs on

Macroeconomic Environment Public Institutions Corruption
Technology, Innovation and Diffusion Domestic Competition
Human Resources Education, Health and Labour Cluster Development
General Infrastructure Company Operations and Strategy
Public Institutions Contracts and Law Environment
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The Executive Opinion Survey

• This year (2006), over 11,000 business leaders in
  125 countries were polled
• Each leader will make a score from 1 to 7 on
  different areas of economies
• The higher score, the better

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The GCI Ranking
The 2006 GCI rankings and 2005 comparisons (first
40)
GCI GCI GCI
Country/Economy 2006 Rank 2006 Score 2005 Rank
Switzerland 1 5.81 4
Finland 2 5.76 2
Sweden 3 5.74 7
Denmark 4 5.70 3
Singapore 5 5.63 5
United States 6 5.61 1
Japan 7 5.60 10
Germany 8 5.58 6
Netherlands 9 5.56 11
United Kingdom 10 5.54 9
Hong Kong SAR 11 5.46 14
Norway 12 5.42 17
Taiwan, China 13 5.41 8
Iceland 14 5.40 16
Israel 15 5.38 23
Canada 16 5.37 13
Austria 17 5.32 15
France 18 5.31 12
Australia 19 5.29 18
Belgium 20 5.27 20
GCI GCI GCI
Country/Economy 2006 Rank 2006 Score 2005 Rank
Ireland 21 5.21 21
Luxembourg 22 5.16 24
New Zealand 23 5.15 22
Korea, Rep. 24 5.13 19
Estonia 25 5.12 26
Malaysia 26 5.11 25
Chile 27 4.85 27
Spain 28 4.77 28
Czech Republic 29 4.74 29
Tunisia 30 4.71 37
Barbados 31 4.70
United Arab Emirates 32 4.66 32
Slovenia 33 4.64 30
Portugal 34 4.60 31
Thailand 35 4.58 33
Latvia 36 4.57 39
Slovak Republic 37 4.55 36
Qatar 38 4.55 46
Malta 39 4.54 44
Lithuania 40 4.53 34
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Structure of the GCI
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The 9 pillars of GCI
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We look at the 1st pillar, institutions
Structure of the GCI
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Basic Requirements

• 1st pillar Institutions
• A. Public institutions
• 1. Property rights
• 2. Diversion of publics funds
• 3. Public trust of politicians
• 4. Judicial independence
• 5. Favoritism in decisions of
  government officials

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Basic Requirements

• 1st pillar Institutions (contd)
• A. Public institutions
• 6. Wastefulness of government spending
• 7. Burden of government regulation
• 8. Business costs of terrorism
• 9. Reliability of police services
• 10. Business costs of crime and
  violence
• 11. Organized crime

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Basic Requirements
The GCI and public institutions
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Basic Requirements

• 1st pillar Institutions (Contd)
• B. Private institutions
• 12. Ethical behavior of firms
• 13. Efficacy of corporate boards
• 14. Protection of minority
  shareholders interests
• 15. Strength of auditing and accounting
  standards

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We look at the 2st pillar, infrastructure
Structure of the GCI
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Basic Requirements

• 2nd pillar Infrastructure
• 1. Overall infrastructure quality
• 2. Railroad infrastructure development
• 3. Quality of port infrastructure
• 4. Quality of air transport infrastructure
• 5. Quality of electricity supply
• 6. Telephone lines (hard data)

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We look at the 3st pillar, macroeconomy
Structure of the GCI
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Basic Requirements

• 3rd pillar Macroeconomy
• 1. Government surplus/deficit (hard data)
• 2. National savings rate (hard data)
• 3. Inflation (hard data)
• 4. Interest rate spread (hard data)
• 5. Government debt (hard data)
• 6. Real effective exchange rate (hard data)

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Basic Requirements
The GCI and macroeconomy
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We look at the 4th pillar, health and primary
education
Structure of the GCI
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Basic Requirements

• 4th pillar Health and primary education
• A. Health
• 1. Medium-term business impact of
  malaria
• 2. Medium-term business impact of
  tuberculosis
• 3. Medium-term business impact of
  HIV/AIDS
• 4. Infant mortality (hard data)
• 5. Life expectancy (hard data)
• 6. Tuberculosis prevalence (hard data)
• 7. Malaria prevalence (hard data)
• 8. HIV prevalence (hard data)
• B. Primary education
• 9. Primary enrolment (hard data)

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We look at the 5th pillar, higher education and
training
Structure of the GCI
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Efficiency enhancers

• 5th pillar Higher education and training
• A. Quantity of education
• 1. Secondary enrolment ratio (hard
  data)
• 2. Tertiary enrolment ratio (hard data)
• B. Quality of education
• 3. Quality of the educational system
• 4. Quality of math and science
  education
• 5. Quality of management schools
• C. On-the-job training
• 6. Local availability of specialized
  research and training
• services
• 7. Extent of staff training

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Efficiency enhancers
The GCI and higher education and training
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We look at the 6th pillar, market efficiency
Structure of the GCI
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Efficiency enhancers

• 6th pillar Market efficiency
• A. Good markets Distortions, competition,
  and size
• 1. Agricultural policy costs
• 2. Efficiency of legal framework
• 3. Extent and effect of taxation
• 4. Number of procedures required to
  start a business (hard data)
• 5. Time required to start a business
  (hard data)
• 6. Intensity of local competition

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Efficiency enhancers

• 6th pillar Market efficiency (contd)
• A. Good markets Distortions, competition,
  and size
• 7. Effectiveness of antitrust policy
• 8. Imports (hard data)
• 9. Prevalence of trade barriers
• 10. Foreign ownership restrictions
• 11. GDP exports imports (hard data)
• 12. Exports (hard data)

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Efficiency enhancers

• 6th pillar Market efficiency (Contd)
• B. Labor markets Flexibility and efficiency
• 1. Hiring and firing practices
• 2. Flexibility of wage determination
• 3. Cooperation in labor-employer
  relations
• 4. Reliance on professional management
• 5. Pay and productivity
• 6. Brain drain
• 7. Private sector employment of women

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Efficiency enhancers

• 6th pillar Market efficiency (Contd)
• C. Financial markets Sophistication and
  openness
• 8. Financial market sophistication
• 9. Ease of access to loans
• 10. Venture capital availability
• 11. Soundness of banks
• 12. Local equity market access

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We look at the 7th pillar, technological
readiness
Structure of the GCI
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Efficiency enhancers

• 7th pillar Technological readiness
• 1. Technological readiness
• 2. Firm-level technology absorption
• 3. Laws relating to ICT
• 4. FDI and technology transfer
• 5. Cellular telephones (hard data)
• 6. Internet users (hard data)
• 7. Personal computers (hard data)

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We look at the 8th pillar, business
sophistication
Structure of the GCI
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Innovation and sophistication factors

• 8th pillar Business sophistication
• A. Networks and supporting industries
• 1. Local supplier quantity
• 2. Local supplier quality
• B. Sophistication of firms operations and
  strategy
• 3. Production process sophistication
• 4. Extent of marketing
• 5. Control of international
  distribution
• 6. Willingness to delegate authority
• 7. Nature of competitive advantage
• 8. Value-chain presence

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We look at the 9th pillar, innovation
Structure of the GCI
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Innovation and sophistication factors

• 9th pillar Innovation
• 1. Quality of scientific research
  institutions
• 2. Company spending on research and
  development
• 3. University/industry research
  collaboration
• 4. Government procurement of advanced
  technology
• products
• 5. Availability of scientists and engineers
• 6. Utility patents (hard data)
• 7. Intellectual property protection
• 8. Capacity for innovation

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The Stage of the Economy

• The relative importance of particular factors is
  different for different economies
• Depends on what stage is the economy experiencing
• E.g. what presently drives productivity in
  economy A is necessarily different from what
  drives it in economy B

(1) Factor-driven
(2) Efficiency-driven
(3) Innovation-driven
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The Stage of the Economy

• Each of the sub-indexes is weighed differently,
  depending on the stage of a given country
• More weight is placed on those pillars that are
  most important at a given stage of a countrys
  development

Weights Basic requirements Efficiency enhancers Innovation and sophistication factors
Factor-driven stage 50 40 10
Efficiency-driven stage 40 50 10
Innovation-driven stage 30 40 30
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Factor-driven economies

• The pillars are organized into three sub-indexes

Basic Requirements sub-index

• Institutions
• Infrastructure
• Macroeconomy
• Health and Primary Education

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Efficiency-driven economies

• The pillars are organized into three sub-indexes

Efficiency enhancers sub-index

• Higher Education and Training
• Market Efficiency (goods, labor, financial)
• Technological Readiness

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Innovation-driven economies

• The pillars are organized into three sub-indexes

Innovation and sophistication factors sub-index

• Business Sophistication
• Innovation

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The top 20 of GCI are all Innovation-driven
economies
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The Global Competitiveness Index

• Uses of GCI
• By government, investors, enterprises etc
• Investors to decide whether to invest in that
  economy
• Government to help make policies to attract
  foreign investors

For example...
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Calculating GCI
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Calculating GCI

• Let take Hong Kong and Singapore as examples
• Collect data from EOS
• Average the score under 9 pillars

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Calculating GCI
Basic Requirements Basic Requirements Basic Requirements Basic Requirements
Country Institutions Infrastructure Macroeconomy Health and primary education
Hong Kong SAR 5.54 6.29 5.65 6.67
Singapore 5.9 6.16 5.67 6.81

• The score of Basic requirements will be average
  of the underlying 4 pillars
• Hong Kong SAR 6.04
• Singapore 6.14
• Singapore has a better performance on Basic
  requirements

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Calculating GCI
Efficiency Enhancers Efficiency Enhancers Efficiency Enhancers
Country Higher education and training Market efficiency Technological readiness
Hong Kong SAR 5.08 5.69 5.44
Singapore 5.59 5.62 5.69

• The score of Efficiency enhancers will be average
  of the underlying 3 pillars
• Hong Kong SAR 5.40
• Singapore 5.63
• Singapore also does a better job on Efficiency
  enhancing

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Calculating GCI
Innovation Factors Innovation Factors
Country Business sophistication Innovation
Hong Kong SAR 5.48 4.46
Singapore 5.17 5.04

• The score of Innovative factors will be average
  of the underlying 2 pillars
• Hong Kong SAR 4.97
• Singapore 5.11
• Singapore also does a better job on Innovative
  factors comparing to Hong Kong

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Calculating GCI

• Different stages of economy has to use different
  weightings

Weights Basic requirements Efficiency enhancers Innovation and sophistication factors
Factor-driven stage 50 40 10
Efficiency-driven stage 40 50 10
Innovation-driven stage 30 40 30
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Calculating GCI

• Hong Kong and Singapore are also
  Innovation-driven stage

Basic Requirements Efficiency Enhancers Innovation Factors Final Score
Hong Kong SAR 6.04 x 30 5.44 x 40 4.97 x 30 5.46
Singapore 6.14 x 30 5.63 x 40 5.11 x 30 5.63

• Singapore has a higher score on GCI, that is why
  Singapore ranking 5th and Hong Kong ranking 11th

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Relationship between GCI and Economic Indicators
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Limitation of regression model

• The relationship between GCI and other economic
  indicators may not be linear
• The information of unemployment rate is limited
• The model is using top 20 countries with highest
  GCI (N 20)

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Relationship between GCI and Unemployment rate
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Theoretical relationship

• Unemployment rate is negative economic indicator
• Fewer people participate in production
• Unemployment rate should be negatively related to
  global competitiveness

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GCI and Unemployment rate

• Negatively related
• Unemployment rate ? 1, GCI ? 2.3402
• GCI 5.6279(-2.3402 x Unemployment rate)
• R square 0.0818
• Correlation coefficient -0.2861

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Relationship between GCI and 3 sub-indexes of GCI
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GCI - Basic Requirements and Unemployment rate

• Negatively related
• Unemployment rate ? 1, Basic requirements score
  ? 3.8571
• GCIBS 5.9673(-3.8571 x Unemployment
  rate)
• R square 0.1007
• Correlation coefficient -0.3173

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GCI - Efficiency enhancers and Unemployment rate

• Negatively related
• Unemployment rate ? 1, Efficiency enhancers
  score ? 4.4050
• GCIEE 5.6459(-4.4050 x Unemployment
  rate)
• R square 0.2357
• Correlation coefficient -0.4855

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GCI - Innovation factors and Unemployment rate

• Positively related
• Unemployment rate ? 1, Efficiency enhancers
  score ? 2.0053
• GCIIF 5.2602(2.0053 x Unemployment
  rate)
• R square 0.01314
• Correlation coefficient 0.1147

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Relationship between GCI and GDP Measurement
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GCI and GDP per capita at current (US)

• Positively related
• Nominal GDP per capita ? US1000, GCI ?
  0.002923
• GCI 5.3877(0.000002923 x GDP per
  capita)
• R square 0.05065
• Correlation coefficient 0.2250

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GCI and GDP Growth rate

• Negatively related
• GDP Growth rate ? 1, GCI ? 2.6681
• GCI 5.5832(-2.668 x GDP growth
  rate)
• R square 0.03167
• Correlation coefficient -0.1780

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Overall Summary

• GCI is negatively related to unemployment rate
• GCI is positively related to GDP per capita
• The higher GCI, the better

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Overall Summary

• GCI dose not have a well explained relationship
  with a single economic indicator
• With low R square
• GCI is not significantly affect by a single
  economic indicator
• GCI is relatively a full-scale index

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Conclusion

• GCI 6.6418
• -1.6248 x unemployment rate
• -4.8363 x GDP growth rate
• 0.000006809 x GDP per capita
  
• -0.01076 x GDP deflator
• R square 0.3722

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Conclusion

• GCI has a better explained relationship with a
  group of economic indicator
• Again, it proves that GCI is a better all round
  indicator
• Provide a fair and accurate result

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Thank You