Do Competitiveness Rankings Help Emerging Economies to Improve Their Economic Performance?

The world’s most prestigious competitiveness indices are often taken into account when governments develop policies and programs. In many countries, they are used to guide government actions in areas such as technological adaptation, economic development and the promotion of SMEs or certain economic sectors.

Since the 1980s, driven by the increasing globalization of goods and services, the issue of competitiveness has been gaining prominence, both in academia and in the business sector. Two of the major rankings that measure competitiveness at the international level are the World Competitiveness Yearbook (WCY), from the Institute for Management Development (IMD), and the Global Competitiveness Index (GCI), published by the World Economic Forum. But, what does competitiveness mean in the current context?

There is no single theory of the concept of “competitiveness” in economics; in fact, “competitiveness” is not the same for a company as it is for a country. For example, a competitive company may want to expand its market share, while a competitive country focuses on attracting foreign investment. To increase national competitiveness, governments tend to focus on all the factors that contribute to economic performance, which tend to coincide with those measured by the rankings.

The risk of these rankings lies in the perception they generate: public authorities use them to decide on the distribution of their resources, whether in the form of investments, subsidies or public spending. Countries with more resources and strong institutions have the potential to secure adequate investment, while countries with weak institutions often face a series of economic difficulties.

In an effort to understand how these rankings can distort countries' progress in terms of competitiveness and to offer alternative approaches to improve their effectiveness, the article “Are competitiveness rankings and institutional measures helping emerging economies to improve?” was published recently in the Competitiveness Review.

This paper reveals a paradox in the world’s most prestigious rankings: the countries analyzed tend to maintain their general position, even if there are changes in the different aspects they include. Thus, the progress made from one year to the next is hidden, especially in those countries with low scores.

A more suitable ranking for emerging countries

As an alternative to the main rankings, a methodology was proposed that examines the evolution of competitiveness indicators and measures structural changes at different levels over time. Thus, with the help of statistical analysis, the Alternative Institutional Quality Index (AIQI) was designed for 48 emerging economies.

Its construction examined the performance of 48 emerging and ‘frontier’ economies during the period 2007-2017. Although there is no single definition of this type of economy, the consensus is that they are characterized by sustained and stable growth, because they have the capacity to produce high value-added goods and participate in international trade. They have also undergone institutional transformations, deploying rules of the game that apply equally to all actors, although they may still lag behind in certain aspects.

The analysis yielded suggestive results for a set of 30 indicators. By examining the evolution of these indicators – belonging to three dimensions: political, resource and systemic – it was possible to evaluate the distribution of the scores for each dimension in the economies analyzed. For example, for the resource and systemic dimensions, the increase in the gap between the countries with the best scores and those with the lowest scores reflected the better performance of the leading countries, distancing them even more from the other countries.

Since 2007, there have been structural changes aimed at closing the AIQI gap; practically every year the difference in scores obtained has been closing, suggesting a greater convergence of emerging countries. However, this reduction is generally related to improvements in the rankings of the leading countries.

Global recipes, poor results

Although country scores vary over time, when the changes detected are compared, the structural pattern of the gaps is maintained, indicating that the impact of global policies and recommendations has not generated significant changes in such countries. In fact, up to 50% of the countries maintained their scores in the period analyzed. This leads to the conclusion that countries maintain their global positions in the rankings, despite the fact that they register individual improvements in the indicators that compose them.

It is difficult to understand the nature of competitiveness factors if competitiveness is viewed only as a quantifiable macroeconomic variable, with a well-defined origin. Determining policies based on rankings can lead to ill-advised actions at the regional and national levels. Although the common objective is to generate growth and well-being, countries are internally and externally diverse, making the standardization of economic recipes inapplicable across the board.

While they can be useful for reference purposes, ranking results should not be viewed as goals in and of themselves. However, competitiveness strategies should determine which market failures affect competitive capabilities, especially the evolution of the dynamics of comparative advantage. They can also be used to determine which failures can be addressed through government policy.

The author is a professor in the Strategy and Leadership Departament at EGADE Business School.