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GOVERNMENT & BUSINESS   A new breakthrough or a false start? 
NEWS

A new breakthrough or a false start?

In 2015, after a three-year pause in the ascent in the WEF’s global competitiveness ranking, Kazakhstan jumped from 50 to 42. However, the fact that it was downgraded to a country in transition to effective development, as well as the continuing imbalance in certain competitiveness pillars, show that the main battle for a glorious future is yet to come.

In the new 2015–2016 Global Competitiveness Report of the World Economic Forum, the number of ranked countries fell again, this time from 144 to 140. Still, the top three remained unchanged. For the seventh year in a row, Switzerland is ranked 1. Its high performance in all aspects of competitiveness may be due to the country’s amazing resilience to the financial crisis and the shocks that followed. Singapore and the United States remain 2 and 3 respectively. Germany moved one position up to 4, while the Netherlands returned to 5 where it was three years ago (table 1). Then go Japan, Hong Kong SAR and Finland which for the first time dropped to 8, followed by Sweden and the United Kingdom which this year switched places in the top 10 most competitive countries in the world.

In Europe, the biggest achievers are Spain (+2 to 33) and Italy (+6 to 43). The positive impact of similar reforms in France (+1 to 22) and Portugal (–2 to 38) was cancelled out by failures in other areas. Greece remained 81: according to the WEF, the main challenge facing this and all the countries in the region is limited access to funding, which impedes investment.

The largest developing economies suffer from decline or stagnation. Pleasant exceptions here are India (+16 to 55) and South Africa which returned to the top 50, jumping 7 positions up to 49. Macroeconomic instability and loss of trust in politicians have led to a serious drop in the competitiveness of Turkey (–6 to 51) and Brazil (–18 to 75). China seems to be doing better than the rest of this group, staying at 28 in the WEF rating.

Trends in the Asian region look positive, despite some difficulties and growing internal conflicts. Specifically, five ASEAN members – Malaysia (+2 to 18), Thailand (–1 to 32), Indonesia (–3 to 37), the Philippines (+5 to 47) and Vietnam (+12 to 56) – remain in the top half of the ranking, while South Asian countries and Mongolia (–6 to 104) continue to lag behind.

The end of the commodity super cycle strongly affected Latin America and the Caribbean which need more reforms and investment in infrastructure, education and innovation. Leaders here are Chile (–2 to 35), Panama (–2 to 50) and Costa Rica (–1 to 52).
There is a mixed picture in the Middle East and North Africa. Although UAE now is behind Qatar even more (–5 to 17 vs. +2 to 14), the latter’s economy is less diversified and hence fragile. Their strong performance contrasts with North African states, where Morocco is ranked the highest (72). Amid geopolitical conflicts and the threat of terrorism, countries in this region should focus on transforming their business environment and strengthening the private sector.

As for the biggest ups and downs of the 2015 ranking, the worst performers include Oman (–16 to 62), Bolivia (–12 to 117), Kenya (–9 to 99) and Nicaragua (–9 to 108). While the best performers are Côte d’Ivoire (+24 to 91), as well as the already mentioned India and Vietnam.

The situation in the post-Soviet states varies. Estonia (–1 to 30), Azerbaijan (–2 to 40), Latvia (–2 to 44), Ukraine (–3 to 79) and Moldova (–2 to 84) showed a slight decline. Yet, Lithuania (+5 up to 36), Russia (+8 up to 45), Georgia (+3 to 66), Tajikistan (+11 to 80), Armenia (+3 to 82) and Kyrgyzstan (+6 to 102), by contrast, have improved their competitiveness. As a result, WEF’s top 50 currently includes 6 post-Soviet countries, including Kazakhstan which rose from 50 to 42 and is now between Poland (41) and Italy (43).

Commenting on the results of the ranking, Klaus Schwab, founder and Executive Chairman of the World Economic Forum, said that the ongoing fourth industrial revolution leads to the rise of absolutely new and the demise of a large number of traditional industries. In these economic conditions, governments should focus on key performance factors, such as the development of human capital and innovation.

Xavier Sala-i-Martin, co-author of the report and professor at the Columbia University, agrees and says that the lower average productivity growth in the post-crisis period poses a serious threat to the global economy and limits the ability of governments to address such pressing issues as unemployment and income inequality. According to him, the best way to cope with these challenges is to focus on reforms and attracting investment in innovation and labor markets. “This will unlock entrepreneurial talent and increase human capital,” he said.


Absolute breakthrough

So, in 2015 Kazakhstan was ranked 42 in the Global Competitiveness Index (GCI) which the WEF uses to rank countries. On the 7-point scale, Kazakhstan rose by 0.1 from 4.4 to 4.5 points1.

1. For those of our readers who are not familiar with the WEF’s ranking methodology, we recommend reading our previous publications on this topic in the Kazakhstan magazine archive (issues 4’2006, 4’2007, 5/6’2008, 6’2009, 5/6’2010, 6’2011, 6’2012, 5’2013, 5’2014) available at www.investkz.com.

As you can seen from table 2, we have made some progress in all three subindexes forming the GCI. In particular, Kazakhstan rose from 51 to 46 in “Basic requirements.” The greatest contribution came from two combined components: “Institutional development” (+7 to 50) and “Infrastructure” (+4 to 58). In the face of a rapidly deteriorating economic environment, the trump card of our competitiveness, “Macroeconomic environment,” showed the worst performance, rising by only 2 positions to 25. However, the last component of this subindex, “Health and primary education,” causes the greatest concern: ranked 93 (+3) in 2015, this area is a time bomb threatening Kazakhstan’s competitiveness.

Kazakhstan rose by 3 points in the “Efficiency enhancers” subindex, climbing from 48 to 45. Five out of six components in this subindex showed growth, except “Technological readiness” which remained unchanged (61). The most impressive progress was made in the “Financial market development” (+7 to 91), as well as in “Market size” (+6 to 46).

Growth in the weakest subindex, “Innovation and sophistication factors,” is encouraging. Rising from 89 to 78, Kazakhstan has virtually returned to the pre-crisis level of 2006–2007. Importantly, both components inside this pillar showed growth: “Business sophistication” rose by 12 positions to #79 and “Innovation capital” went 13 positions up to 72. It seems that the fall in commodity prices and lingering problems with access to funding have finally convinced the government and the private sector to focus on productivity improvement and cost reduction through innovation and new technologies.  
 

More pros, less cons

The general trend in Kazakhstan’s competitiveness looks quite positive. Of the 114 components forming the final GCI index, our country showed improvement in 72 (against 62 a year earlier), declined in 31 (43 a year earlier), and remained unchanged across 11 components. 

For the first time in the past four years, the number of areas which Kazakhstan can consider its strengths has increased (table 3). Today, we are among the world’s 50 most competitive countries by 35 components vs. 29 just a year ago.

The new components in 2015 include ”Favoritism in decisions of government officials” (+3 to 50), “Burden of government regulation” (+17 to 46), “Efficiency of legal framework in settling disputes” (+11 to 48), as well as “Criminal influence on business environment” (+6 to 47). Internet access in Kazakhstani schools improved considerably (+15 to 41), just as the broadband Internet speed (+7 to 47). Kazakhstan has also made great strides in terms of the impact of non-tariff barriers on trade (+15 to 45). However, we can no longer be proud of our position in such areas as “Country credit rating” (–6 to 54), “Venture capital availability” (–12 to 59) and “Cooperation in labor-employer relations” (–4 up to 53).

Incidentally, the latter is one of the components of “Labor market efficiency” which is currently our strongest pillar (+3 to 18). Unfortunately, 7 out of 9 components of this pillar slumped, so growth was mainly the result of progress in “Effect of taxation on incentives to work” (+14 to 29) and “Country capacity to retain talents” (+14 to 57). The worst performer here is “Confidence in the professionalism of salaried management” (–4 to 79).

Kazakhstan’s strongest position in the global competitiveness ranking remains in “Government budget balance” (–1 to 10), “Government debt” (–1 to 12) and “Mobile-cellular telephone subscriptions” (–3 to 7). The fastest growing components in 2015 were “Effectiveness of anti-monopoly policy” (+26 to 68), “Trade tariffs” (+28 to 73) and “Control of international distribution,” where Kazakhstan jumped 31 positions up to 60.

The number of weaknesses in our competitiveness this year fell from 85 to 77. The number of components where Kazakhstan is not in the top 100 also continues to fall, going from 16 to 13 (in 2011, there were 44 such components). What we believe to be the most important areas are presented in table 4. This time, Kazakhstan’s weakest competitiveness components were high dependence on imports which increased again over the past year (–3 to 126), as well as “Inflation” (–8 to 115), which is no surprise considering the devaluation shocks. Then we have “Quality of port infrastructure” (+14 to 114) and “State of cluster development” (+2 to 114). Sadly, devaluation of the national currency again had a negative impact on the competitiveness of Kazakhstan’s banking system (–2 to 110).

As for the worst performing components, these include “Quality of business schools” (–9 to 101), “Tertiary school enrollment rate” (–14 to 76) and “Agricultural policy cost” (–13 to 70). Considering that last year the last component also declined by 17 positions, we have to admit that Kazakhstan is fast becoming an outsider in this area.


Two flies in the ointment

The fact that it only took Kazakhstan 12 months to come almost half way to its new goal of becoming one of the world’s top-30 most competitive countries is inspiring. However, in conclusion, it is important to point out two factors that we think are major concerns in the current situation.

Firstly, as is the case with Russia, our success is largely due to the fact that the IMF has revised its purchasing power parity (PPP) estimates, which resulted in a 40% increase in our countries’ GDP derived from PPP calculations. For example, although in absolute terms Kazakhstan’s GDP fell from $12,843 to $12,184, our share in the global GDP (PPP) rose from 0.28 to 0.39%.

We have to remember though that PPP is a limited measure for international comparison of economies. It is based on the idea of a “fair” exchange rate, where the same set of goods will cost the same in all countries. It is believed that the main advantage of PPP-based GDP is that it is more useful for gauging well-being. However, this method has serious limitations. For example, the countries have to rely on the international rather than fair exchange rate when paying for imports, so considering Kazakhstan’s dependence on foreign manufacturers, this is a serious matter for us. Besides, unlike Russian rouble, because tenge’s value mostly slid in the second half of this year, it was probably ignored in the current WEF report. Which means that we may have an unpleasant surprise waiting for us as soon as next year.

Another thing that we need to consider is that Kazakhstan has returned to the group of countries between the first and second stages of economic development. This is despite the fact that Kazakhstan has long outgrown this phase by the size of GDP and was ranked by the WEF as a country in transition to innovative competitiveness drivers since 2012.

The WEF uses three groups (or stages) to rank a country’s state of development: the first group includes economy focused on such basic benefits as natural resources, market size, etc.; the second one includes economies based on effective development; and the third one includes countries whose growth is driven by innovation. In addition, there are two intermediate stages between the first and the second, and also between the second and the third stages. When ranking a country, the WEF uses GDP per capita data and the level of the economy’s dependence on commodities. For example, if commodities make up 70% of exports, the country’s competitiveness is more dependent on factors in the “Basic requirements” subindex and therefore they have more weight in the final index calculations.

Therefore, although the decline has provided Kazakhstan with a number of tactical advantages in the WEF 2015 ranking, this can hardly be called a victory from the point of view of long-term strategic goals.

Sergey Gakhov






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