Competitiveness: We are Lowered on one Position

Yelena Zabortseva, MGIMO Master of Arts, University of Sydney PhD researcher

The findings of the current Global Competitiveness Report 2009–2010 brought only disappointments to Kazakhstan again. We fall one more place in the World Economic Forum’s ranking that has lowered Kazakhstan to 67^th. Although the situation is not yet developing as an avalanche, however, the fall of the country’s competitiveness is nevertheless implacable.

International kaleidoscope

According to the WEF, the Switzerland’s economy was recognized as the most competitive in the world in 2009. Reuters news agency reported that “the WEF applauded Switzerland for high potential to innovations, diversified business culture, effective public services, and well operating commodity markets”. The USA, due to the weakening in its financial markets and macroeconomic stability, quite rightly lost the leader’s position, now ranking second in the list. Further, Singapore, Sweden, Denmark, Finland, Germany, Japan, Canada, and the Netherlands follow (See Table 1). The United Kingdom, still remaining very competitive, has continued its fall from last year, moving one position down this year to 13^th. This is not a surprise – the global economic recession resulted in reduced trust in the financial system. So, by the banking sector sustainability ratio, Switzerland now takes the 44^th place, while USA is 108^th (behind Tanzania) and Great Britain is 126^th. It is worthy noting that now Canada is at the top of this indicator.

In the top twenty, the Republic of Korea underwent the most considerable changes in its position, falling from 13^th to 19^th. The PRC is worthy of note as well: China’s economy rose just one place to 29^th.

In the first half places of the ranking, there are the countries of the Middle East and North Africa: Among them are Qatar, the United Arab Emirates, Israel, Saudi Arabia, Bahrain, Kuwait, and Tunis.

Margareta Drzeniek Hanouz, Director and Senior Economist with the Global Competitiveness Network at the World Economic Forum, commented on the situation to our journal that in general, those countries, which managed to better withstand the crisis, were accordingly in a more winning position, and the UAE is an example of that. Further on, she pointed out the rise of the UAE in the ranking from 31^st to 23^rd is a result of improvement of the business environment that was being implemented in the last few years. “The issue of the competitiveness growth was an important constituent of the political agenda of development of certain emirates, such as Dubai and Abu Dhabi. As a result, the United Arab Emirates was steadily raising its position in the last few years”. The expert emphasized that the ranking does not cover the last few months, thus, the crisis that took place recently in Dubai were not taken into consideration. 

Among the energy producing countries, strong positions were recorded to Norway (14), Australia (15), and Kuwait (39). On how the political regime and economy transparency influence the overall competitiveness one can judge by the ranking of the raw material producing countries, such as Venezuela and Bolivia, holding the 113^th and 120^th places, respectively.

In the WEF’s ranking, which comprises 133 countries this year, the outsiders are the Chad’s and Burundi’s economies.

Post-Soviet Table of Ranks

In the Post-Soviet era, the only country that maintains its position in the rank of 50 most competitive economies in the world is Estonia, although it dropped three positions from 32^nd to 35^th. To our question as to what thing was the most decisive that added to the high competitive level of this Baltic state, compared to the neighboring countries, Margareta Drzeniek Hanouz answered that from the moment of acquiring their independence Estonia has been demonstrating a serious approach to reforming of its national economy and creation of a favorable and liberal business climate. In view of the above, it has outstripped considerably Latvia and Lithuania. The WEF’s expert focused special attention on the indicators within the institutional development, by which Estonia ranks 31^st. For comparison, Latvia ranks 65^th, while Lithuania 59^th. The state-run and public institutions in this country, by estimate of the WEF, are transparent and efficient that, in aggregate, backed by the high level of technological development of the country (the 16^th position) makes it among the advanced countries in the world.

Along with that, the only Post-Soviet state that managed to cardinally better its competitiveness in 2009, is Azerbaijan, which has jumped 18 positions up to 51^st, now almost near to achieve positive competitiveness assessment.

For all our other neighbors, the post Soviet Union states, the past year cannot be called successful. The greater part of them fell in global competitiveness index. The most considerable reduction was observed in Latvia – 14 positions down to 68^th. Russia (63^rd), Ukraine (82^nd), and Lithuania have dropped 11, 10, and 9 positions down, respectively. Tajikistan fell from 116^th to 122^nd, while Kyrgyzstan, having lost one place in the ranking, is now occupying the 123^rd place.

Alas, the sad tradition is now the lack of information on Turkmenistan and Belarus. Besides, this year’s ranking by the WEF does not include Uzbekistan and Moldova also.

The methods of the strongest minds in this world

Prior to further considering in detail Kazakhstan’s results, we would like to remind the fundamentals of the WEF’s methodology, the history of which we have been tracking in relative detail in the last three years (See The Kazakhstan magazine, Issues #4 in 2006, #4 in 2007, and #5/6 in 2008).

While making up the ranking, two sources of information are used. The first one is the Executive Opinion Survey. It is formed, based on the results of the poll of top management officials in the countries under survey, which is carried out by the WEF jointly with a number of international institutions. The second source is hard data criteria. The latter is used as a supplement to the Executive Opinion Survey and represents a set of statistical information, including the results of a survey by the IMF, the World Bank, and many other subsidiaries of the UN.

The major rating in the Global Competitiveness Report is the so-called Global Competitiveness Index (GCI). First, every country is appraised by 110 indicators, those most critical for productivity and competitiveness. The results so gained are then aggregated into 12 groups, or the so-called ”pillars of competitiveness”. The latter, in their turn, are grouped into three subindexes: Basic Requirements, Efficiency Enhancers, and Innovation and Sophistication Factors, on the basis of which the GCI is acquired. The contribution of every of the subindexes in the total GCI depends on at what stage the economy development of the country is at.          

GCI of Kazakhstan and its components

So, the competitiveness of Kazakhstan in 2009 reduced again. In the overall rating of GCI, Kazakhstan dropped one place down from 66^th to 67^th, although, in comparison with the majority of other Post-Soviet countries, the situation with Kazakhstan does not look dramatic.

According to the WEF’s methodology, to Kazakhstan, the weightiest, from the point of view of contribution in the total GCI ranking, is the Basic Requirements subindex. Following the serious drop by 8 positions in 2008, Kazakhstan’s position by this subindex  in 2009 remained unchanged ranking 74^th.

This is despite that two of four pillars, constituting the subindex, demonstrated considerable leaps: “Institutions” dropped from 81^st to 86^th, while “Macroeconomic stability” won back partly the last year’s crisis drop, having risen 15 places up from 74^th to 59^th. It seems that the various directions of these trends leveled their effect on the overall result (See Table 2).

Kazakhstan’s position in the Innovation and Sophistication Factors subindex dropped one place down to 78^th. Both of the pillars, constituting this index, the “Business sophistication” and “Innovation”, demonstrated a fall two positions down.

Traditionally, of the three subindexes that form GCI, the best situation to Kazakhstan is with the Efficiency Enhancers subindex. Even with this, the more anxious the situation as seen in the last few years: Kazakhstan ranked 56^th in 2006, 58^th in 2007, and 64^th in 2008. In 2009, this subindex dropped five more places, placing the country 69^th. In particular, by the goods market efficiency Kazakhstan now ranks 84^th, having dropped four places down, by labor market efficiency 18^th (-6), while the “financial market sophistication” pillar worsened in Kazakhstan, dropping 14 positions to 111^th. The only pillar of this subindex that demonstrated betterment was the technological readiness – 69^th (+6).

Our “pluses”

In general, of 110 indicators only 19 characterize positively the competitiveness of our economy. Compared to last year’s ranking, the list of indicators, by which Kazakhstan holds the place in a ranking above 50, has not undergone considerable changes (See Table 3). We managed to win back our competitiveness from the viewpoint of the “government surplus/deficit”, – the 29^th place (+30!), while losing it with regard to ease of doing business. Thus, the indicator of a “number of procedures required to start a business” lost 16 positions, dropped to 60^th, while in the “time required to start a business“ we are now ranking 62^nd (-18).

Among the most prominent competitive advantages of our country, besides the “government surplus/deficit” – 14^th place (+34!). Such sharp positive changes only prove the fact that despite the serious drop in positions in the first year of the crisis, the macroeconomic policy of Kazakhstan is still our chief merit. Here, one can refer the “government debt” – 11^th place in the world. By itself, this indicator reflects the independence of the sovereign from the international creditor’s claims. Nevertheless, as the crisis showed, the state had to finally pay for the private banking structures’ debts; to say exactly, the population had to. Besides, we must not forget that in 2009 Kazakhstan has already raised directly external borrowings and FDI, in the amount of $25 billion. This means that the burden on the given indicator will increase seriously. 

Our chances to develop innovative components of the competitiveness are high as ever. At least, from the point of view of capacity for innovation, Kazakhstan is now holding the same 50^th place. This is only the potential by now, which we have to manage to develop.

By the tertiary enrollment, our republic is placed relatively high 45^th position. Although this seems quite good, nevertheless, we cannot omit one drawback: Quantity and quality are not the same. Thus, by the quality of the educational system, on the whole, we are ranked only 66^th, while by our local management schools even worse – 97^th. Of course, private educational institutions are profitable ventures, from the financial point of view. However, the surface approach, which, according to formal inspections and publications in local mass media, prevails in domestic institutions of higher education, bears negative consequences already.

The WEF’s ranking assesses positively the domestic labor market efficiency: The result is 18^th place in the world. In particular, by the hiring and firing practices indicator, Kazakhstan ranks 12^th, outstripping not only Russia (43^rd) and China (77^th), but the GCI’s ranking leader, Switzerland (15^th), as well. This picture is overshadowed by the low indicators of the level of “cooperation in labor-employer relations” – 76^th place (-13) and the “reliance on professional management” – 100^th place (-21). Although, taking into account the above-said low quality of business schools, the latest corporate scandals (for example, in the banking sector), as well as the anti-crisis cut of expenses, occurring everywhere, (including at the expense of personnel laying off), such trends can hardly be called a surprise.

Where it is presently

As was said before, from the viewpoint of global competitiveness, the indicators on Kazakhstan look more negative than positive. Unfortunately, by any of the three GCI subindexes Kazakhstan is not in the ranking of the 50 most competitive economies in the world. Moreover, by 20 of 110 indicators, our republic is at the level of 100^th or lower (some of these indicators are presented in Table 4).

One of our big headaches is institutional development. Within the framework of this category, there is no ranking above 50^th awarded to Kazakhstan. The WEF experts constantly pay attention to the aspect that the key to successful economic development is efficient state and public institutions. If they operate successfully, this positively affects those pillars within the framework of other indexes, since the efficient political structure system is usually a security of successful economic policy.

The crisis revealed more vividly our lag by some indicators, such as the “property rights” – 103^rd (-8), “efficiency of legal framework in settling disputes” – 82^nd (-15), “burden of government regulation” – 85^th (-6), “transparency of government policymaking” – 83^rd (-13), “reliability of police services” – 105^th (-8), “efficacy of corporate boards” – 98^th (-27). The low indicators are still on “judicial independence” – 97^th, “protection of minority shareholders’ interests” – 109^th, and “strength of auditing and reporting standards” – 98^th.

It is worthy of note that within this background the level of “public trust to politicians” did not fall, but even rose to 53^rd (+9). This says that the leadership of the country still has its “carte blanche” to correct the current situation.

Huge work lies ahead to recover and develop the financial market. Today, this is the weakest pillar for Kazakhstan in the GCI ranking – 111^th place. It is self-explanatory: The “financing through local equity market” – 99^th (-3), “ease of access to loans” – 86^th (-27), “restriction on capital flows” – 116^th (-2), “soundness of banks” – 128^th (-4). As it is said, no comment.

In conclusion, let us come to a stop on the factors, the most critical for implementation of the new Program of Accelerated Innovative and Industrial Development (PAIID), which is to start in 2010. Under the conception of the program designers, it has to take into consideration the drawbacks of the previous initiatives and to raise the level of competitiveness of Kazakhstan. Judging by the WEF ranking, the stumbling block in the implementation of new industrial projects can be the issues of infrastructure: By the “quality of roads” we are ranking 116^th, while by the “quality of port infrastructure” and the “quality of air transport infrastructure” – 110^th and 94^th, respectively. The “effectiveness of anti-monopoly policy” holds the 92^nd place. Critically low is the “extent of staff training” indicator, placing Kazakhstan 83^rd. In the course of introduction of new technologies, precisely this factor contributes greatly to the aggregate efficiency of the enterprise or company. The “local supplier quality” (97^th) does not meet world standards.

The “Technological readiness” pillar is also worthy of attention. Despite the comparatively high rank (69^th), it is achieved mainly due to saturation of the market with cellular communications and broadband Internet. However, any developed country has to have these areas developed on default. Such critical conditions in the light of the in the PAIID, such as the “availability of latest technologies”, “FDI and technology transfer”, “firm-level technology absorption” are at quite a low level – 101^st, 113^th and 85^th, respectively. In this connection, no optimism is seen towards expectations of the successful outcome of the PAIID because of the fall in the “quality of scientific research institutions” – 80^th (-22), an increasing gap between the science and industry in R&D – 77^th (-13), as well as the low level of “utility patents” – 85^th (-13).

Unfortunately, the fact that in the last five years we lost more than 16 positions in the global competitiveness ranking evidences that the leadership of Kazakhstan has to seriously revise the current approaches to assessment of the country’s development while developing the policy at a local level by introducing serious adjustments.

Of course, one can refer all this to the crisis, and from the point of view of a short-term plan of events on overcoming the crisis consequences, Kazakhstan looks quite good, compared to many other countries of the world. However, focusing on the “macroeconomic” trees, the chief thing is not to forget about the forest. A wide range of interrelated issues, involving the basic things such as education, science, and healthcare, affect the total position.

According to a Professor in the Department of Economy at Columbia University and Co-Editor of the WEF’s report, Xavier Sala-i-Martin, in the condition of the crisis, it is extremely important that the leaders of the countries do not miss the long-term fundamentals of competitiveness and solve the short-term problems today. The competitive economies are the economies that have the factors that strengthen their productivity, on which the present and future prosperity is based. It is possible that the analysis of our country’s position, compared to other countries, will help Kazakhstan not only reveal all our drawbacks, but start overcoming them with more eagerness.

The expert’s opinion: Dr. Margareta Drzeniek Hanouz, Director of the WEF Competitiveness Network, Senior Economist         

In 2008, when the USA was holding the leading position in the index, the WEF experts noted that the results of the GCI were mostly not taken into account, but that this would be reflected in the next report. Could you please comment on why the US international position remains so high?

What happened, is that in the 2008-2009 ranking we could not take into account the developments in the second half of the year, because of data lags. For this reason, the financial crisis which started in Fall 2008, approximately at the time when the Global Competitiveness Report 2008-2009 was published could not be taken into account properly.

Actually, this is quite a shift for a number of reasons. The US worsened more than most countries in the top ten. At the same time, the financial sector, which was mostly affected by the crisis, represents only one out of 12 pillars of competitiveness, so the impact on the overall ranking is limited. If you look at the categories the GCI takes into account, then you can easily see that the financial and economic crisis has not altered many of them so far. The US remain highly innovative and companies have a highly sophisticated business culture. In addition, markets for labour and for goods and services are very flexible, the country is adopting technology very easily and also disposes of a large market, which enables businesses to realize economies of scale.

Which countries have lost the most in the ranking in 2009 and is it possible to refer to general reasons of such losses?

Many of the countries which have been hit hard by the crisis have lost positions in the ranking. In addition to Iceland, this most notably applies to Spain and to Baltic countries: Latvia, Lithuania and Estonia. Although the reasons are different for each of these countries, we see that very often the slip in rankings reflects the eroding confidence in the governance structures as well as the deterioration in terms of financial sophistication and macroeconomic stability following stimulus measures and bail outs.

An amazing increase in the international ranking this year was demonstrated by Azerbaijan. Taking into account similarities that exist between our countries – both economies depend upon the Caspian Sea oil revenues and pursue the goal of economy diversification – what are keys to Azerbaijan’s success?  

The improvements to the country’s business legislation policy are certainly among the key aspects. These changes have unleashed entrepreneurship in Azerbaijan and have therefore contributed to the astounding growth rates the country achieved over the past years, which were among the highest worldwide. This translated into a generally more positive assessment of the business environment and institutions. We have also observed significant improvements in the quality and availability of infrastructure in Azerbaijan as well as the quality of education and improvement in educational enrolment rates. 

Kazakhstan is ranked 111^th place to the index of “Prevalence of foreign owhership”. From what perspective do you consider this index? Does it have a positive or negative character? Do you take into account national economic security aspects?

We in general consider foreign ownership (FDI) to be positive, as contributes to economic growth in many respects. It contributes to intensifying the competition in country, brings capital, generates technological and managerial spill-overs to name just a few effects. This particular variable is measures through our survey, so we ask business leaders in each country to assess the prevalence of foreign ownership. As this is an index that measures competitiveness, it restricts itself to assessing the economic effects of foreign ownership, so national security is not taken into account. Even after the financial crisis, foreign ownership will remain an important part of the global economy and will continue to contribute to economic growth through the effects mentioned above. Changes will affect only a small share of international investment flows, so this part of the index will remain equally valid for competitiveness.