Kazakhstan’s Competitiveness: How Will We Join Club 50?

KAZAKHSTAN International Business Magazine №4, 2006
Kazakhstan’s Competitiveness: How Will We Join Club 50?

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Kazakhstan’s Competitiveness: How Will We Join Club 50?

Editorial

*This survey is based on the Global Competitiveness Report for 2006-2007, which was kindly provided to our magazine by the WEF’s public relations department.

Kazakhstan’s Strategy to Join the World’s 50 Most Competitive Countries, announced in an address by the country’s president on 1 March 2006, is now considered the most important priority for the country’s future development. However, it is not clear what competitiveness means in the global context, how it is calculated and what mechanisms are used to assess it. The answer is given in the annual Global Competitiveness Report by the World Economic Forum (WEF). The latest report was published in September 2006 and contained the ratings of 125 countries, including Kazakhstan.

Even though Kazakhstan managed to achieve good results, occupying 56^th place in this chart, the situation is not quite so colourful if we consider the changing environment around it. Let us start with the fact that soon after the report was published some Kazakh media outlets reported that Kazakhstan had improved its competitiveness. They used the previous year’s report as an argument that the country occupied 61^st place in 2005. However, they did not take into account that in the latest report the WEF changed the methodology of ranking which led to reconsidering the results of the previous report. Under the new scale Kazakhstan occupied not 61^st place in 2005 but 51^st which means it actually dropped five ranks.

The very fact of this mishap as the inaccuracy of interpreting the WEF report means that the methodology of assessing competitiveness should be considered in detail. This will also explain why despite being in such a favourable situation with the prices for raw materials and the establishment of development funds and institutions Kazakhstan actually worsened its position.

How We Were Ranked…

According to the WEF, Switzerland, Finland, Sweden, Denmark and Singapore are the world’s most competitive economies, whereas the outsiders are Chad, Burundi and Angola (see Table 1). Why did precisely the Alpine country occupy first place in the WEF report this year, having jumped ahead of last year’s champion the USA? The point is that, according to the compilers of the chart, Switzerland has now everything the real leader needs. This is, above all, the stable institutions, efficient market mechanisms and a high level of infrastructural and technological development. In addition, Switzerland protects intellectual property rights and has created all the conditions for private companies to invest in scientific research. Its public and government institutions are stable and their policies are transparent.

As for the USA, its “drop” to sixth place was caused by significant macroeconomic deficits, in particular, the growing government debt linked to budget and trade deficits. Scandinavians’ leading positions, in contrast, are explained by their stable monetary policies, budget surpluses and low public debts.

As for Kazakhstan, in 2006 it was behind China (54^th place) and Mauritius (55^th). Kazakhstan was followed by Panama (57^th), Mexico (58^th) and Turkey (59^th). Kazakhstan’s rank was better than that of most CIS countries, leaving behind Russia (62^nd), Azerbaijan (64^th), Ukraine (78^th), Georgia (85^th), Moldova (86^th) and Kyrgyzstan (107^th). However, Kazakhstan was far behind the Baltic countries – Estonia was 25^th behind South Korea (24^th) and Latvia (36^th) behind Thailand (35^th).

… Revised …

The WEF uses the so-called index methodology, which derives the composite index through incorporating various indicators. In the reports published in the past five years nations were ranked in terms of the Growth Competitiveness Index, which assessed macroeconomic factors enabling economies to achieve sustainable growth in the medium and long-term future. This index is based on 35 indicators grouped into three subindixes, including the technology index, the public institutions index and the macroeconomic environment index. In terms of this indicator, Kazakhstan, ranked by the WEF for the first time, occupied 61^st place last year. However, in the 2006 report the WEF used a new tool to assess countries’ competitiveness: the Global Competitiveness Index (GCI). The new index was developed by Professor Xavier Sala-i-Martin of Columbia University, a leading expert on growth and economic development.

“The introduction of the Global Competitiveness Index is a logical extension of the World Economic Forum’s competitiveness work. Changes in the global economy and the increasing complexity which characterise the business environment have made it necessary to develop an instrument that captures a larger set of factors affecting the evolution of economic growth,” said Augusto Lopez-Claros, author of the report, chief economist and the head of the WEF’s Global Competitiveness Network. “We at the WEF are confident that this index will become an important tool for dialogue with policy-makers and the business community on the key drivers of productivity.”

The new index was adopted to make a comprehensive assessment of competitiveness in the increasingly globalising world taking into account a greater number of indicators. For example, factors such as infrastructural distortion in the economy, the flexibility of labour market and the freedom of movement in local and regional markets should be taken into account in order to interpret economic growth rate. In addition, it is important to know the level of the quality of the education and health systems, a country’s potential to adopt modern technology and many other factors.

That is why the GCI, developing the previous model, is based on about 90 key factors that are critical to a country’s productivity and competitiveness. These factors are grouped into nine pillars:

· Institutions

· Infrastructure

· Macroeconomy

· Health and primary education

· Higher education and training

· Market efficiency

· Technological readiness

· Business sophistication

· Innovation

Another distinctive feature of the new methodology is that the GCI separates countries into three specific stages: factor-driven, efficiency-driven, and innovation-driven. GDP per capita in purchasing power parity is used as a criterion for this. The WEF’s logic is clear: the final aim of improving any country’s competitiveness is to improve the well-being of its citizens.

The pillars are organised into three subindexes:

· the basic requirements subindex (institutions, infrastructure, macroeconomy, health and primary education);

· the efficiency enhancers subindex (higher education and training, market efficiency, technological readiness);

· the innovation and sophistication factors subindex (business sophistication, innovation).

The contribution of each of these subindexes to the GCI for a specific country depends on this country’s particular stage of development (Table 2). This approach makes it possible to efficiently compare changes in the competitiveness of such different countries as Angola and the USA: the achievement of the basic requirements is the main task for the former whereas the latter has long been focusing on innovation factors.

It is important to note that two main sources of information are used to draw the rankings. The first is the Executive Opinion Survey, a comprehensive annual survey conducted by the WEF and its partner institutes in the countries covered by the report. In 2006, over 11,000 business leaders were polled in 125 countries worldwide. The survey questionnaire is designed to capture a broad range of factors affecting an economy’s business climate that are critical determinants of sustained economic growth. The survey makes it possible to identify factors such as governance, labour relations, corruption, environmental protection and the quality of life.

The second source is publicly available hard data. They are used as a supplement to the Executive Opinion Survey and are a collection of statistical information, including surveys made by the IMF and the World Bank.

As in the previous reports, a separate chapter of the report discusses macroeconomic trends. It is based on the Business Competitiveness Index (BCI), which assesses macroeconomic indicators critical to the productivity of a national economy. Two groups of factors are used for the BCI: the first group assesses of the strategy and efficiency of companies’ activities and the second group is used to assess the quality of national business climate. This year in terms of the BCI (which was developed by Professor Michael Porter, who is known for his cluster concept) Kazakhstan was ranked 70^th out of 121.

… and Structurised

It should be noted that while assessing competitiveness one should not rely only on the final ranking, because a high combined result can be achieved by a significant jump even in one components of the GCI index. That is why the WEF presents country ratings on each structural indicator.

“With the growing complexity of the global economy, The Global Competitiveness Report is a contribution to enhancing our understanding of the key factors which determine economic growth and will help explain why some countries are much more successful than others in raising income levels and opportunities for their respective populations. By providing detailed assessments of the economic conditions of nations worldwide, the report offers policy-makers and business leaders an important tool in the formulation of improved economic policies and institutional reforms,” said Klaus Schwab, founder and executive chairman of the World Economic Forum.

As is seen in Table 3, Kazakhstan performed best in terms of the basic requirements and climbed to 51^st place. However, in terms of the efficiency enhancers the country came 56^th and in terms of the innovation and sophistication factors only 74^th. According to the WEF’s rating, Kazakhstan (with a GDP (PPP) per capita of $8,318) is in the group of countries which are at the second stage of their development. This means that the efficiency enhancers play a greater role in boosting Kazakhstan’s competitiveness than the basic requirements and this is seen from the fact that the country’s ratings in terms of the GCI and the second subindex are similar. Taking into account Kazakhstan’s plans to treble its GDP by 2015 it is clear that its competitiveness will heavily depend on the innovation and sophistication factors subindex. The country’s lag in terms of innovations is crucial at the moment.

Based on the ratings the WEF draws a separate list of advantages and shortcomings critical to a specific country’s competitiveness. The list for Kazakhstan is given in Table 4. In general, thanks to its natural resources, the country managed to achieve significant improvements in the macroeconomic sphere – Kazakhstan occupies 10^th place for this. The country has a budget surplus (ninth place), low public debt (sixth place), high savings rate (23^rd place) and reduced interest rate spread (22^nd). The latter possibly reflects more financial market efficiency and/or less perceived lending risk. In addition, in terms of market efficiency Kazakhstan jumped eight ranks to 44^th place in 2006, boosted by less red tape and more competition in the goods markets but still impeded by the prevalence of trade barriers (103^rd place) and still relatively underdeveloped or unsophisticated financial markets.

Recognising Kazakhstan’s achievements in some spheres, the WEF believes that it still has to do a lot to improve the institutions (75^th place). Particular attention should be paid here to ensuring the independence of judiciary (96^th place) and intellectual rights protection, boosting efficiency in governance and increasing people’s trust in the government and confidence in the security of business.

Augusto Lopez-Claros said that Kazakhstan climbed down in terms of innovations, technological readiness and the level of the complexity of business projects. This is linked to a lack of qualified scientific and technical specialists (100^th place), reduction in companies’ spending on research and development and lesser collaboration (compared to other countries) between scientific centres and industry.

Kazakh top managers involved in the WEF poll named corruption, the low qualification level of local labour, the low professional and educational level of bureaucrats, tax regulation which does not meet international standards, high tax rates and a lack of opportunities to obtain additional funding as the main reasons for obstructions to business projects in the country (Diagr.).

Sitting Continues

Experts suggest that Kazakhstan’s rating mainly depends on high oil revenue. For example, the oil and gas sector’s share in GDP growth is 49.5% now (in 2001 it was 25.4%) and in exports is over 50%. The extractive sector is also leading in terms of attracting investment.

It is clear that one of the reasons for this is the inefficient use of oil revenue in reconstructing and modernising non-extractive sectors. This means that Kazakhstan is not ready to wisely diversify its financial resources. For its part, foreign capital is not rushing into these sectors because of high risks and low profitability. As a result, a fall in productivity in many sectors (specifically in agriculture) is becoming a serious barrier to boosting the economy’s competitiveness.

Another obstacle is a still low level of investment and innovation activity. For example, the existing system of technology parks in the country does not so far ensure that investment projects consistently undergo all the stages of the innovation process, from fundamental research to creating and selling finished products.

In addition, Kazakhstan should continue to bring its laws in line with the legal norms of developed partner countries, particularly with regard to licensing and accreditation.

The WEF’s report is the result of joint work between the WEF and a number of international and regional partner institutes and organisations. One of the main sources of information for the competitiveness report is the Doing Business survey prepared by the World Bank in 2006. According to this survey, over 80% of all business projects are not implemented in Kazakhstan because of excessive red tape and the complexity of the procedure to file import-export documentation. For example, in order to meet all the requirements for exporting goods 93 days should be spent in Kazakhstan (87 in Chad, 69 in Azerbaijan and six days in Lithuania, Germany and Denmark). In order to set up a business 14 days are needed to file all the necessary documents in Kazakhstan (as in Rwanda), whereas only four days in Germany and Austria.

To be honest, the country is forming technical legislation which will make it possible to enter the common legal field to ensure the quality and safety of products and processes. The government is also taking measures to strengthen the national scientific potential and carrying out programmes recommended by the World Bank on diversifying the economy. The government has made important initiatives to create the special Science Fund and to double the registered capital of the Kazyna Sustainable Development Fund’s development institutions.

Taking into account that in the globalising world, human resources are becoming the most important factor, Kazakhstan should pay particular attention to improving the level of professional training, creating a modern and efficient education system and developing the health system. The latter is very important because while building “economic muscle”, Kazakhstan should remember that in terms of infant mortality the WEF ranked the country in 100^th place. What long-term and sustainable development can be discussed in this situation?

In conclusion, it should be noted that in aiming to join the world’s top 50 most competitive countries Kazakhstan is facing a very complicated task. The analysis of WEF rankings shows that paradise cannot be achieved only through macroeconomic indicators and the country’s potential in this sphere is not unlimited. With the qualitative growth of the economy every new step will demand that Kazakhstan should put greater efforts, and success will depend only on balanced and comprehensive improvement in all the factors influencing competitiveness. As Augusto Lopez-Claros noted correctly, the country’s leadership will have to work hard in the near future.

By Sergey Gakhov and Yelena Zabortseva

_____________

The basics of scientific research in the sphere of competitiveness were founded by the executive chairman of the WEF, Klaus Schwab, in 1979 on the basis of comparative studies of economic indicators in 16 European countries. The Global Competitiveness Index was first used in 1986. As a result of long research a number of fundamental rules were introduced so that countries can boost their competitiveness:

· stable and predictable legislation;

· flexible economic structure

· investment in traditional and technological infrastructure;

· encouraging private savings and local investment;

· increasing exports and attracting foreign direct investment;

· improving the quality, efficiency and transparency of governance;

· mutual dependence between wages, productivity and taxes;

· cutting the gap between minimum and maximum salaries in the country and strengthening the middle class;

· significant investment in education, particularly in secondary education, and improving people’s qualifications continuously;

· a balance in the advantages of the globalising economy and national specifics and preferences.

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Kazakhstan’s Competitiveness: How Will We Join Club 50? Editorial