The Growth Competitiveness Index Analyzing Key Underpinnings of Sustained Economic Growth JENNIFER BLANKE World Economic Forum FIONA PAUA World Economic Forum XAVIER SALA I MARTIN Columbia University and Universitat Pompeu Fabra Few things matter more for the welfare of a country s citizens than the aggregate growth rate of the economy For rich countries positive growth rates tend to mean higher wages larger profits more employment and expanded business opportunities For poor countries positive growth rates tend to lift people out of poverty as their incomes tend to rise along with average GDP Indeed a 1 percent increase in per capita GDP tends to be associated with a 1 percent increase in the incomes of the poorest 20 percent of the population 1 Moreover positive growth rates in the developing world tend to be associated with improvements in other dimensions reductions in infant mortality longer life expectancy increased access to water and sanitation expanded education reduced female discrimination declines in child labor especially child prostitution and child soldiers and improvement in freedom civil liberties and democracy Thus the aggregate growth rate of a nation is important perhaps one of the most important factors affecting human welfare Despite its enormous importance the determinants of the growth rate of a country remain one of economics biggest mysteries This is true even though the greatest economic minds of the last two centuries have tried hard to explain what can be done to increase a country s growth rate Adam Smith thought that specialization and the division of labor was the engine of growth The great classical economists of the 19th century such as Thomas Malthus or David Ricardo thought that natural resources imposed a binding limit on the growth opportunities of a nation The law of diminishing returns to land meant that population growth would eventually require the use of low quality land and this would reduce production per capita and cap the potential for economic growth During the 20th century economists thought that the ultimate force driving economic growth was investment in physical capital and infrastructures This belief underlay the many plans that governed the economy of the Soviet Union and the countries under its political or intellectual influence It was also the foundation upon which the international aid packages of institutions such as the World Bank operated for decades The idea was that the growth rate of a country depended only on the fraction of its GDP that it invested If the savings generated by its citizens were not enough to finance the investment required to achieve the desired growth rate the World Bank would finance the difference this is why this line of thought was and still is called the financing gap The collapse of the Soviet model and the failure of many developing countries to grow despite the aid of the Bretton Woods institutions showed economists that investing in physical capital was not enough to improve the growth opportunities of a country We had to look for other mechanisms Education and training or human capital as modern economists call it became the center of economic research for a 1 1 The Growth Competitiveness Index CHAPTER 1 1 1 1 1 The Growth Competitiveness Index 2 couple of decades During this time developing countries were advised to educate their children and to invest in the expansion of their human capital They did but economic growth failed to materialize in most of them Technological progress whether it was created by the country or copied from the leading economies was then thought to be a central determinant of economic growth 2 Few people today disagree with this idea although this merely shifts the question from what determines the growth rate of GDP to what determines the rate of technological progress This is why economists kept searching Many answers have been proposed openness macroeconomic stability governance the rule of law institutions lack of corruption market orientation government waste and many other factors have been found to at least partially affect the aggregate growth rate of a nation Having confronted many failures through the years it is increasingly clear that there is no magic solution to the problem of economic growth The process of economic growth is rather complex and many factors are needed if a country is to succeed It is this complexity that the World Economic Forum tried to capture when it started estimating the Growth Competitiveness Index GCI a few years ago Indeed one of the fundamental objectives of the Global Competitiveness Report is to evaluate the potential for the world s economies to attain sustained economic growth over the medium and long term With this goal in mind the World Economic Forum developed the GCI The index is based on economists understanding of the determinants of the complex process of economic growth and development Again our understanding is far from perfect In fact we learn new things every year as new development experiences teach us new lessons and as new data become available 3 But our existing knowledge can be used to evaluate the growth potential of a country by combining available data and the Executive Opinion Survey conducted annually by the WEF into an index that we call the GCI The GCI was developed by Jeffrey Sachs and John McArthur two years ago and it was first presented in The Global Competitiveness Report 2001 2002 The index summarizes the set of institutions policies and structures driving the growth process of many countries 102 this year from every corner of the world The three pillars The GCI is founded on three central ideas The first one is that the process of economic growth can be summarized with three important broad mechanisms the macroeconomic environment the quality of public institutions and technology These three mechanisms are what Sachs and McArthur called the three pillars on which the process of economic growth rests Macroeconomic environment Macroeconomic stability is important for growth Although it is certainly not true that macroeconomic stability alone can increase the growth rate of a nation it is no less true that macroeconomic disarray kills its growth prospects Firms cannot make informed decisions in environments where the inflation rate is in the hundreds typically as a result of public finances being out of control The banking system which is essential if an economy is to grow in the medium and
View Full Document
Unlocking...