Wong Yat Fu05000041 Tsang Heng Cheong05017475. Many benchmarks are used to describe an economy e.g....

Wong Yat Fu 05000041

Tsang Heng Cheong 05017475

• Many benchmarks are used to describe an economy

e.g. growth rate of GDP, GDP per capita, net export, performance of stock markets, etc

• 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

• 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

• 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

• 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

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

Basic requirement

Institutions

Infrastructure

Macroeconomy

Health and Primary Education

Efficiency enhancers

Innovation and sophistication factors

Higher Education and Training

Market Efficiency

(goods, labor, financial)

Technological Readiness

Business Sophistication

Innovation

GCI

3 sub-indexes

9 pillars

We look at the 1st pillar, institutions…

Basic requirement

InstitutionsInfrastructure

Macroeconomy





Market Efficiency




Innovation

GCI

• 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

• 1st pillar: Institutions (cont’d)

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

The GCI and public institutions:

• 1st pillar: Institutions (Cont’d)

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

We look at the 2st pillar, infrastructure…

Basic requirement

Institutions

InfrastructureMacroeconomy





Market Efficiency




Innovation

GCI

• 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)

We look at the 3st pillar, macroeconomy…

Basic requirement

Institutions

Infrastructure

Macroeconomy





Market Efficiency




Innovation

GCI

• 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)

The GCI and macroeconomy:

We look at the 4th pillar, health and primary education…

Basic requirement

Institutions

Infrastructure

Macroeconomy





Market Efficiency




Innovation

GCI

• 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)

We look at the 5th pillar, higher education and training…

Basic requirement

Institutions

Infrastructure

Macroeconomy




Higher Education and TrainingMarket Efficiency




Innovation

GCI

• 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

The GCI and higher education and training:

We look at the 6th pillar, market efficiency …

Basic requirement

Institutions

Infrastructure

Macroeconomy





Market Efficiency (goods, labor, financial)Technological Readiness


Innovation

GCI

• 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

• 6th pillar: Market efficiency (cont’d)

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)

• 6th pillar: Market efficiency (Cont’d)

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

• 6th pillar: Market efficiency (Cont’d)

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

We look at the 7th pillar, technological readiness…

Basic requirement

Institutions

Infrastructure

Macroeconomy





Market Efficiency (goods, labor, financial)



Innovation

GCI

• 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)

We look at the 8th pillar, business sophistication…

Basic requirement

Institutions

Infrastructure

Macroeconomy







Business SophisticationInnovation

GCI

• 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

We look at the 9th pillar, innovation…

Basic requirement

Institutions

Infrastructure

Macroeconomy








Innovation

GCI

• 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

• 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

• 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 country’s development

Weights Basic requirements



Factor-driven stage

50% 40% 10%

Efficiency-driven stage

40% 50% 10%

Innovation-driven stage

30% 40% 30%

• The pillars are organized into three sub-indexes:

• Institutions

• Infrastructure

• Macroeconomy

• Health and Primary Education


• Higher Education and Training

• Market Efficiency (goods, labor, financial)

• Technological Readiness


• Business Sophistication

• Innovation

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

• Let take Hong Kong and Singapore as examples

• Collect data from EOS

• Average the score under 9 pillars

Basic Requirements

Country Institutions Infrastructure MacroeconomyHealth 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

Efficiency Enhancers

CountryHigher education and

trainingMarket 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 also does a better job on Efficiency enhancing

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 also does a better job on Innovative factors comparing to Hong Kong

• Different stages of economy has to use different weightings

Weights Basic requirements



Factor-driven stage

50% 40% 10%

Efficiency-driven stage

40% 50% 10%

Innovation-driven stage

30% 40% 30%

• Hong Kong and Singapore are also Innovation-driven stage

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

Basic Requirement

s

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

• 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)

• Unemployment rate is negative economic indicator

• Fewer people participate in production

• Unemployment rate should be negatively related to global competitiveness

5.20

5.25

5.30

5.35

5.40

5.45

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Unemployment rate

GC

I

• Negatively related• Unemployment rate 1%, GCI 2.3402

GCI = 5.6279+(-2.3402 x Unemployment rate)

• R square = 0.0818• Correlation coefficient = -0.2861

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

6.00

6.10

6.20

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Unemployment rate

GC

I - B

asi

c R

eq

uire

me

nt

• 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

5.00

5.10

5.20

5.30

5.40

5.50

5.60

5.70

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Unemployment rate

GC

I - E

ffici

en

cy e

nh

an

cer


• Unemployment rate 1%, Efficiency enhancers score 4.4050

GCIEE = 5.6459+(-4.4050 x Unemployment rate)

• R square = 0.2357


0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Unemployment rate

GC

I - In

no

vatio

n F

act

ors

• 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

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

GDP per capita at current price (US$)

GC

I

• Positively related

• Nominal GDP per capita US$1000, GCI 0.002923

GCI = 5.3877+(0.000002923 x GDP per capita)

• R square = 0.05065

• Correlation coefficient = 0.2250

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

Percentage change of GDP

GC

I


• GDP Growth rate 1%, GCI 2.6681

GCI = 5.5832+(-2.668 x GDP growth rate)

• R square = 0.03167


• GCI is negatively related to unemployment rate

• GCI is positively related to GDP per capita

• The higher GCI, the better

• 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

Unemployment rate

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Unemployment rate

GC

I

GDP per capita

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

GDP per capita

GC

I

GDP growth rate

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

GDP growth rate

GC

I

GDP deflator

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

0 20 40 60 80 100 120 140 160

GDP deflator

GC

I

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

• 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

Wong Yat Fu05000041 Tsang Heng Cheong05017475. Many benchmarks are used to describe an economy e.g....

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