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The Global Competitiveness Report 2017–2018 | 1
CHAPTER 1
The Quest for
More and Better Growth
The Global Competitiveness Index has been measuring
the factors that drive long-term growth and prosperity
for over four decades, helping policymakers identify
challenges to be addressed and strengths to build on
when designing the economic growth strategies for their
countries. And while the notion of competitiveness and
the economic environment in which economic policy
and investment decisions are made have continuously
evolved, the past decade has seen a buildup of
significant shifts that are fundamentally transforming the
context in which policy decisions to foster economic
growth are made.
After a long period of low growth following the
global financial crisis, the world economy appears to
have picked up speed.^1 This is welcome news. Yet
despite this gradual improvement, policymakers in many
countries are concerned about the prospects for long-
term economic development. This is partly because
the current expansion appears to be cyclical, bolstered
by exceptionally low interest rates rather than by the
fundamental drivers of structural growth. Productivity
improvements appear to remain sluggish and are not
expected to return to the levels experienced in past
decades.
In a related challenge, prevailing growth strategies
and models of economic progress are increasingly
being called into question. In advanced economies,
distributional questions have moved to the foreground,
occasionally with political consequences. In emerging
markets, such questioning could be fueled by the
unfulfilled aspirations of a broadening middle class.
However, there is widespread agreement that
economic growth is important for human development
and well-being. Growth creates the resources needed
for better education, health, and security, and for higher
incomes. Although growth does not guarantee human
development, there are no examples of countries
improving the welfare of their populations without
growth.^2 Often the deep web of connections that link
growth to broader societal values remains unspoken.
Instead of focusing on welfare, the measurement of
economic progress and consequently economic analysis
and policy are dominated by headline GDP numbers,
encouraging the confusion of means and ends. Yet
economic growth should not be an end in itself. It
should contribute to human welfare, be rooted in political
legitimacy, and be defined and measured based on
a multidimensional notion of economic progress that
includes values such as:^3
- a broad-based distribution of economic gains,
- environmental sustainability, and
- intergenerational equity for young people and future
generations.
2 | The Global Competitiveness Report 2017–
experienced prolonged comparatively sluggish growth.^4
In emerging markets, the impact of the global financial
crisis was lessened in part by interest rate differentials,
with advanced economies fueling capital inflows in
the form of foreign direct investment, the commodity
superboom, and—related to this—the rapid growth of
China.^5 Only recently have advanced and emerging
economies begun to show signs of recovery.^6
We are still in the process of understanding
the causes of change in the way economies have
performed over the last decade. There are demand-side
explanations, focusing on the ways that high savings and
low investment tend to depress demand and, hence,
growth. Investment has been below historical levels in
recent years: between 2008 and 2015, for example,
Europe experienced an average annual decline of €
The evolution of the global economy has been largely
motivated and justified by its enormous contribution to
economic growth over the past few decades. To the
extent that broad-based social inclusion was given any
consideration in that process, it was primarily limited to
an ex-post re-distribution of any economic gains. With the
evolving global political context and the advent of the Fourth
Industrial Revolution, that approach will need to change—
not only to make globalization work for more people than it
has benefited to date, but also to ensure that globalization
has a large enough constituency going forward to allow it
to continue driving economic growth in the first place. We
must shift the economic policy debate and interventions
to unlock productivity and deliver broad-based prosperity
by simultaneously solving for economic growth and social
inclusion before the fact, not after it. This must be the
case even if it results in a substantially modified form of
globalization with potentially dampened growth but more buy-
in and inclusion. In order to succeed, we must also establish
modern venues and means for deliberating about the impacts
of future policy efforts that include a fuller set of stakeholders
than currently play a role in driving change.
To that end, the World Economic Forum’s Global Future
Council on Economic Progress has identified and is exploring
four interrelated themes:
- Making globalization more inclusive, which includes
proposals to improve skilling, re-skilling, and dealing
with job displacements; taxation, social protection, and
addressing inequality; financial markets that work for all;
competition and avoiding capture; and fostering a new
era of international cooperation.
- Unleashing productivity and economic potential in the
context of the Fourth Industrial Revolution, which is
fundamentally changing the constructs and limits of
productivity growth, and raising questions about the future
potential for improved well-being and how to best capture
and share the rewards of new efficiencies, especially in
light of the evolving nature of employment and jobs.
- Promoting and achieving multidimensional inclusion,
notably by developing a multidimensional tool that is
informed by tested aggregate-level indices of inclusive
growth and well-being and that can be used to evaluate
the degree to which countries and communities are
inclusive at the household level.
- Evolving communications, connectivity, and organizations
to incorporate new developments in social media,
counteracting self-reinforcing echo chambers and the
increasing polarization of ideas, thus expanding the set
of channels and messages that resonate with people
whose lives are affected in order to improve broad-based
engagement and ensure buy-in for sound policy choices.
Contributed by Diana Farrell, Council Co-Chair.
Box 1: The Global Future Council on Economic Progress
Delivering growth is difficult at the best of times,
and it is complicated now by various tensions and
transformations that characterize the contemporary
world (Box 1). Four of these stand out and are likely
to shape economic discourse in the year ahead:
structural headwinds to growth, the disruptions of rapid
technological change, the need for greater economic
inclusiveness, and uncertainties about the future
evolution of globalization.
STRUCTURAL HEADWINDS AND MEASUREMENT
CHALLENGES
Ten years ago, the global financial crisis interrupted a
period of sustained economic growth dating back to the
1960s. Since then, despite unorthodox monetary policy
and fiscal stimulus packages, advanced economies have
4 | The Global Competitiveness Report 2017–
is creating increasingly complex systems. As a result,
technology is making the political and economic
environment more asymmetric and uncertain.^18 It is
difficult for policymakers to predict future developments
or work out how best to shape them.
One emerging challenge that will require
policymakers’ attention is the growing concentration
in some market structures as a result of network
effects.^19 This will likely have macroeconomic impacts
on productivity, growth, and inequality.^20 Economic
concentration is also linked to political power and
influence, creating the risk that policies will be skewed
in favor of incumbents. Policymakers will need to renew
their focus on antitrust regulations—and increase their
understanding of the impact of new technologies and
business models on costs, production functions, and
industry structures—to preserve dynamic markets,
broad-based participation, and the power of creative
destruction.^21
DISRUPTIVE INEQUALITIES
There are already clear signs that technology is
contributing to labor market polarization, with a drop
in the number of middle-skilled jobs and growth in
both low- and high-skilled jobs.^22 In many countries,
distributional considerations have emerged as one
of the most pressing challenges for policymaking on
competitiveness and growth.
Globally, inequality has decreased over recent
decades, because the growth of the very poor and highly
populated economies of Asia has been substantially
larger than the growth rates of the advanced economies,
bringing about what economists have dubbed “the
great convergence” (Box 2). Within countries, however,
inequality has on average increased.^23 In many advanced
economies, income inequality has widened or plateaued
at a high level in the last two decades—often with large
regional discrepancies, for example between rural and
urban areas—as richer households pull away from their
middle- and lower-income peers. The trend is more
mixed for emerging economies, though absolute levels
of inequality remain much higher there than in advanced
countries. In countries where data allow comparisons,
wealth is significantly more unequally distributed than
income.^24 Figure 2 shows the level of inequality and
evolution over past years for selected economies.
The combination of stagnating economies and
rising income inequality has led to considerable political
disaffection and tension around the world. In some
countries this has begun to undermine the smooth
functioning of political institutions and processes,
complicating the formulation and implementation of
policy. In advanced economies, frustration has focused
on the relative gains made by those at the top of the
The Global Competitiveness Index (GCI) aims to measure
factors that determine productivity, because this has been
found to be the main determinant of long-term growth.
But does strong performance on the GCI in fact predict
future growth? Comparing the results of the GCI in 2007
with economic growth over the following 10 years suggests
that it does. Within each income group, the three most
competitive economies in the 2007 GCI have since grown
significantly more strongly than the three least competitive
countries. In the case of high-income economies, the three
least competitive economies actually had negative growth
(Figure 1).
The comparison also shows evidence of
convergence, with lower-middle and low-income
economies growing at faster rates than high-income and
upper-middle-income economies. The most competitive
countries in the lower-middle and low-income groups
are catching up more quickly, showing the importance of
a comprehensive competitiveness agenda for reducing
between-country inequality.
Box 2: Global Convergence and Competitiveness
Figure 1: Competitiveness and 10-year average growth rates, 2007– Average growth rate, percent
Low income (21)
Lower-middle income (30)
Upper-middle income (24)
Other high income (16)
High income OECD (26)
ITA, HUN, GRC
PRY, LSO, GUY
ARG, SRB, VEN
CYP, MLT, TTO
ZWE, BDI, TCD
USA, CHE, DNK
SGP, KOR, HKG
VNM, PAK, NGA
MYS, CHL, LTU
THA, CHN, IND
Source: Calculations based on the results of the Global Competitiveness Index 2007– 2008 through 2016–2017. Note: The three-letter economy codes refer to the ISO Country Codes. These are: ARG = Argentina; BDI = Burundi; CHE = Switzerland; CHL = Chile; CHN = China; CYP = Cyprus; DNK = Denmark; GRC = Greece; GUY = Guyana; HKG = Hong Kong; HUN = Hungary; IND = India; ITA = Italy; KOR = Republic of Korea; LSO = Lesotho; LTU = Lithuania; MLT = Malta; MYS = Malaysia; NGA = Nigeria; PAK = Pakistan; PRY = Paraguay; SGP = Singapore; SRB = Serbia; TCD = Chad; THA = Thailand; TTO = Trinidad and Tobago; USA = the United States; VEN = Venezuela; VNM = Vietnam; ZWE = Zimbabwe.
n Most competitive economies n Least competitive economies
The Global Competitiveness Report 2017–2018 | 5
domestic wealth and income distributions, as well as
those made by foreign workers in a globalized world.
This has prepared the ground for populist movements
and politicians on both the left and right of the political
spectrum, who have proposed a return to more
isolationist and interventionist policies.^25
How to address income inequality forms an
integral part of the World Economic Forum’s economic
progress agenda. The Forum’s Inclusive Growth and
Development Report proposes a set of policies and
institutional features to ensure a more inclusive outcome
of the growth process and a multidimensional measure
of economic progress, the Inclusive Development Index
(see Box 3 on pages 6–7).^26
TRADE PRESSURES
Trade and investment flows have been important drivers
of economic growth in the past, but the relationship
between globalization and growth remains imperfectly
understood. Policies that revive growth will require a
better understanding of the interactions between trade
liberalization, factor liberalization, technological change,
and domestic policy frameworks across dimensions
of economic progress such as employment, income,
inequality, health, and education.
This is important because growth in international
trade has not recovered to pre-crisis levels—after falling
close to 15 percent in 2009 it is currently growing more
slowly than global GDP. Global investment has also
Figure 2: Income inequality and its evolution over past decade in selected countries
Gini Index, Income inequality = 100
Source: SWIID (Standardized World Income Inequality Database), available at http://fsolt.org/swiid/. Note: GINI coefficients are for the latest year available over the previous decade: *2002–2012; †2004–2014; ‡2005–2015, §2006–2016.
Russian France† India* Indonesia‡ Federation‡
United China† Germany †Australia† States‡
South Africa *
Korea, Rep. §
United Italy† Japan† Canada‡ Mexico† Kingdom§
Argentina‡Turkey‡ Brazil‡
–0. –0.3 –0.
–5.
–4.
–1.
–6.
stagnated since the crisis.^27 Uncertainty about the future
evolution of the global economic order is likely to continue
to weigh on international trade and investment flows.
Many countries have experienced a popular backlash
against further liberalization as a result of concerns about
the negative impact of globalization on living standards,
particularly in advanced economies, and claims that
it adversely affects fundamental socio-political values
such as national identity and sovereignty.^28 New forms of
protectionism are emerging, with an increase in the use of
laws, regulations, standards, border controls, and other
forms of non-tariff protection.^29
Two other factors have been mooted as additional
contributors to the post-crisis slowdown in trade that
may change influence economic policy decisions. One
hypothesis is that there are now diminishing returns from
dividing production into global value chains spanning
numerous jurisdictions, which has been a key driver of
trade in recent decades. Technological developments
such as 3D printing may further reduce trade in the future
by moving the production of physical goods closer to
consumers. Another hypothesis is a change in consumer
preferences, because younger people strive less toward
owning internationally traded physical assets and prefer to
consume locally produced services such as leisure.
LOOKING TO THE FUTURE
Rising to the challenge of sustainable and equitable
economic progress will require ingenuity and application
from diverse stakeholders across the world as well as
n Latest year available minus 10 years (t–10) n Latest year available (t)
The Global Competitiveness Report 2017–2018 | 7
the challenge facing policymakers. In 42 percent of countries,
the IDI overall score decreased even as GDP per capita
increased. In three-quarters of these cases, wealth inequality
was a chief culprit; across all economies, it rose 6.3 percent
on average during this period.
Efficient markets and macroeconomic stability are
essential for economic growth. But how well growth benefits
society as a whole depends on the framework of rules,
incentives, and institutional capacities that shape the quality
and equity of human capital formation: level and patience of
real-economy investment, pace and breadth of innovation,
effectiveness and flexibility of worker protections, coverage
and adequacy of social insurance systems, quality and
breadth of access to infrastructure and basic services, probity
of business and political ethics, and breadth and depth of
household asset-building.
Because many of these factors promote socioeconomic
inclusion as well as growth and competitiveness, there is no
inherent trade-off between the two: it is possible to be pro-
equity and pro-growth at the same time. Governments need
to recognize this, and rebalance policy priorities accordingly,
if they are to respond more effectively to decelerating growth
and rising inequality.
The social frustrations increasingly being expressed,
through the ballot box and on the streets, have an essential
validity—the implicit income distribution system within
many countries is severely underperforming or relatively
underdeveloped. This is due to a lack of attention rather
than an ironclad law of capitalism. Inequality is largely an
endogenous, not exogenous, challenge for policymakers;
addressing it with urgency needs to be prioritized to sustain
public confidence in the capacity of technological progress
and international economic integration to support rising living
standards for all.
Figure 2: Competitiveness vs inclusive growth performance in advanced economies, scores from 1 (worst) to 7 (best) Inclusive Development Index 2017
Global Competitiveness Index 2017–
Source: Data from the Global Competitiveness Index 2017–2018 and World Economic Forum 2017. Note: Malta and Cyprus are excluded from The Inclusive Growth and Development Report 2017 because of data limitations.
Box 3: Inclusive Development Index (cont’d.)
l Europe and North America l East Asia and Pacific l Middle East and North Africa
8 | The Global Competitiveness Report 2017–
a truly collaborative approach. The competitiveness
agenda that lies at the heart of the Global
Competitiveness Index (GCI) is an important starting
point, and not only because long-term productivity
and growth generates the resources for wider societal
goals. The competitiveness agenda, as part of the
wider economic progress agenda, has intrinsic as well
as instrumental value for human development and well-
being: for example, health and education are among the
12 pillars of the GCI.
The following two chapters highlight the results
of the 2017–2018 GCI, as well as key trends from a
thematic and geographic perspective. Chapter 2 looks
back over the last 10 years to identify the key legacies of
the global financial crisis, while Chapter 3 analyses GCI
results by region and in selected economies.
NOTES
1 IMF 2017.
2 See Baumol 1986 and updates of The Maddison Project Database at http://www.ggdc.net/maddison/maddison-project/home.htm.
3 These dimensions are captured in the Inclusive Development Index, presented in Box 3.
4 For a comparison of recent recessions in the United States, epicentre of the Great Recession of 2007–09, see Federal Reserve Bank of Minneapolis 2017. An explanation of the spread of the Great Recession can be found in Bacchetta and Eric van Wincoop
5 UNCTAD 2009.
6 IMF 2017.
7 McKinsey Global Institute 2016.
8 IMF 2017.
9 Gordon 2014.
10 McAfee and Brynjolfsson 2017.
11 IMF 2017.
12 Boskin et al. 1996.
13 McMillan and Rodrik 2011.
14 Andrews, Criscuolo, and Gal 2016.
15 Schwab 2016.
16 For a new measurement approach using Massive Online Choice Experiments, see Brynjolfsson, Eggers, and Gannameneni 2017, referenced in the Economist 2017b. See also Boskin et al. 1996.
17 McAfee and Brynjolfsson 2017; Ito and Howe 2016.
18 Ito and Howe 2016.
19 See De Loecker and Jan Eeckhout 2017, cited in Schechter 2017. See also Chen 2016.
20 De Loecker and Eeckhout 2017.
21 The Economist 2017a.
22 Darvas and Wolff 2016; OECD 2017.
23 Sala-i-Martin 2006; Lakner and Milanovic 2016.
24 OECD 2017.
25 For an analysis of the sources of populism, see Rodrik 2017.
26 World Economic Forum 2017.
27 Hoekman, ed. 2015.
28 For a recent review of the link between trade and inequality see Helpman et al. 2017.
29 Baldwin and Evenett, eds. 2009.
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