Global Competitiveness Index
Among 140 countries included in the annual "Global Competitiveness Index" (GCI) in 2018 Latvia takes 42nd place, while Lithuania is ranked 40th and Estonia is 32nd. Due to methodological changes, this index is not comparable with the results of previous years.
Taking into account the latest trends that define national competitiveness, the World Economic Forum has made significant changes to the methodology of GCI. The index now focuses on analysing factors that contribute to the productivity of the economy, taking into account the latest trends in the specificity of competitiveness, that comes with globalisation and new digital technologies.
In Latvia the research “Global Competitiveness Index” is represented by the Centre for Sustainable Business at SSE Riga; the Director of the Centre, Associate Professor Arnis Sauka, emphasises that: “The “Global Competitiveness Index” is still based on the comparison of world countries according to twelve criteria groups, or pillars. However, considering the focus on productivity, which is the primary basis for the development of a sustainable economy, as well as the changes in competitiveness that come with the new digital technologies and globalisation processes, the “World Economic Forum” has included a number of other pillars in the analysis of competitiveness. Following the latest trends in research and changes in the specifics of competitiveness, the new methodology also introduces changes to how these pillars are measured, including, additionally to entrepreneur surveys, putting more emphasis on different statistical sources when defining national competitiveness.”
The results of the new “Global Competitiveness Index” show that the most competitive countries in the world are the United States, Singapore and Germany, followed by Switzerland, Japan, the Netherlands, Hong Kong, the United Kingdom, Sweden and Denmark. From the countries of Central and Eastern Europe, the Czech Republic ranks the highest in the competitiveness index (29th place), ahead of China one by place. Estonia is in 32nd place, between Italy and Chile. Slovenia ranks in 35th place, Poland - 37th, Lithuania and Slovakia, 40th and 41st respectively.
In the latest “Global Competitiveness Index”, Latvia has been ranked 42nd in terms of competitiveness, outperforming countries such as Cyprus (44th place), Hungary (48th place), Bulgaria and Romania (51st and 52nd place), Greece (57th place), Turkey (61st place), Croatia (68th place).
As Dr Sauka points out, “The results of the latest Global Competitiveness Index, due to significant changes in methodology, cannot be directly compared to the results of previous years. However, estimates from the World Economic Forum show that, if the new methodology was used in 2017, in 2018 Latvia would have a slight increase in competitiveness, by about one place, while Lithuania and Estonia would fall by two positions. So, in term of competitiveness we practically do not change, despite the economic growth”, Sauka concludes. Yemen and Chad conclude the competitiveness index of the countries.
According to the new methodology, the twelve pillars by which national competitiveness is measured, are divided into four categories:
- Environment. Pillars: institutions, infrastructure, macroeconomic stability, adaptation of information and communication technologies (ICT).
- Human capital. Pillars: health, skills.
- Markets. Pillars: product market efficiency, labour market efficiency, financial system, market size.
- Innovation ecosystem. Pillars: business vitality, innovation capacity.
The 2018 results of the “Global Competitiveness Index” show that in the category “environment”, pillar “Macroeconomic stability” Latvia, together with the other 32 countries share 1st (!) place in the world! Both indicators of this pillar are highly valued: inflation, as well as sovereign debt dynamics. Latvia is also highly ranked in the ICT adaptation pillar - 11th place, where, among other things, the quantity of internet usage, quality of internet connection and tendencies of use of mobile phones are evaluated.
However, Latvia has been rated significantly worse in the “environment” category pillars such as “institutions” (49th out of 140) and “infrastructure” (47th place). As Sauka points out, “... in both this and many other pillar assessments we see the same problems that the “Global Competitiveness Index Study” has also paid attention to in the past two or three years.” Namely, indicators that are evaluated the lowest for Latvia from the pillar “Institutions” are future - orientated government (111th place), the effectiveness of legal regulation in dispute settlement (109th place), social capital (99th place), the effectiveness of the legal regulation, when arguing the regulations (99th place). In turn, indicators such as freedom of the press (22nd place) and the incidence of corruption (37th place) are relatively better assessed. In turn, the indicators from the pillar “infrastructure” that are evaluated at the lowest in 2018, are the liner shipping connectivity index (96th place), road quality (92nd place) and airport connection index (82nd place).
On the background of other countries in the category “human capital” the pillar “skills” is rated highly (23rd place). The most valued indicators in this pillar are the average number of years spent at school (training) (6th place), the proportion of students and teachers in primary education (15th place). In turn, the following indicators are low: the simplicity of finding skilled employees (97th place), the quality of vocational training (82nd place), the level of skills of graduates (68th place) and critical thinking in the training process (59th place). While, in another pillar of category “Human capital” - “health” - Latvia only ranks in 76th place.
In the category “markets”, the highest rated pillar for Latvia in 2018 is “efficiency of the labour market” (29th place). In this pillar, indicators such as the labour tax rate (116th place) and the recruitment of a simple foreign labour force (107th place) are critically low. “The Latvian entrepreneurs talk about these issues more and more in recent years, and hopefully politicians will listen to these voices,” says Sauka. The recruitment and dismissal practice is also rated low (98th place). In turn, in the pillar “labour market efficiency” in Latvia, the following indicators are evaluated at the highest: flexibility of wage determination terms (8th place), participation of women in the labour market (16th place) and respecting employee rights (25th place).
Another pillar of the “markets” category - “product market efficiency” - is ranked 49th between 140 countries, rating the following components low - the degree of complexity of tariffs (112th place) and the negative impact of taxation and subsidies on competition (75th place). Traditionally and objectively, the pillar “market size” is ranked below 94th place, where the indicator “import % from GDP” is estimated to be relatively high: in 29th place. The pillar “financial system” of the category “markets” is also considered to be low (94th place). Only the indicator of bank regulatory capital is valued as respectable in this pillar (24th place), while no other indicator is rated above 59th place. The following indicators are rated critically low: “credit gap” (138th place), market capitalisation (102nd place) and financing of small and medium-sized enterprises (101st place).
Latvia's ratings are not particularly high in the category “innovation ecosystem”: 47th place in pillar “business vitality”, but in pillar “innovation capacity”: 52nd place. In the business vitality pillar, significant indicators such as the attitude to business risk is rated very low (95th place). In turn, several indicators are rated relatively high - the time it takes to start a business (25th place), insolvency regulation (28th place) and start-up costs (38th place). In turn, in the pillar “innovation capacity” indicators rated the lowest are buyer's sophistication (99th place), diversification of the workforce (97th place) and quality of research institutions (79th place).
Experts from the World Economic Forum emphasise that using the latest methodology, the Global Competitiveness Index can be a very useful tool for policy makers in their efforts to increase the competitiveness of the country. However, as Dr Sauka emphasises, as with all indices, it also has a number of flaws that policy-makers should take into account when using them in developing their policy initiatives: “One of them - the index compares very different countries and factors that are considered bad in one country, can be judged as highly relevant in another country; the rating is often relative. For example, it is hard to believe that Latvia really has one of the worst highways in the world” states Sauka, adding that in the total number of different factors, it is likely that Latvia's real place in the index might be slightly higher than that reported in the GCI study of 2018. However, it would be important for policy-makers to take these very low ratings into account, as they indicate the dissatisfaction of Latvian entrepreneurs with specific spheres. Experts from the World Economic Forum also give advice to all world economies, including to Latvia. Namely, to strengthen competitiveness, a comprehensive approach is required: being strong in one or some categories cannot compensate the weaknesses in other categories.