Competitiveness Indices - Tools for Policy Design

Effective policy addressing competitiveness depends on an analysis of Israel's economy in comparison with a reference group of countries competing for the same investment and human capital. Competitiveness indices aid policy design, measuring success, and influence the national discourse.

Executive Summary

  1. Achieving a leap in quality of life in Israel depends on Israel's ability to compete for human capital and investments in a global marketplace.

  2. Effective policies for improving national competitiveness are grounded in comparison with a reference group of competing countries.

  3. A competitive-comparative approach is common in strategic economic planning among leading countries worldwide.

  4. Competitiveness indices, namely the GCI and the IMD, can assist in the process of policy making and assessing success, and affect the economic discourse.

  5. This paper examines the relevancy of competitiveness indices to the Israeli decision making process, compares their use across different countries, and presents policy recommendations.

National Competitiveness: A Key to Prosperity

Growth and quality of life depend on national competitiveness - Prolonged growth in Israel depends on the capacity to obtain and develop human capital, and to attract investments. Globalization requires Israel to compete with other economies worldwide on quality of life and future returns to investors.

Therefore, national competitiveness is a key consideration in designing strategic economic policy.1

Competitiveness2 depends on productivity - an increase in productivity3 raises the potential return on investments.4 It is also a key to job growth5 and to poverty reduction.6

The following factors affect market productivity: 7

    • Microeconomic factors - the quality of business planning, level of innovation and technology, human capital development and the quality of infrastructure

    • Macroeconomic stability - inflation, interest rates, national debt, deficits, and exchange-rate volatility

    • Institutions - Political, economic, social, and judicial institutions that dictate the norms of action.

The importance of a comparative approach - In order to asses Israel's ability to compete on human capital and investments, monitoring market changes over time should be complemented by evaluation of the Israeli market in a global context. Specifically, it is essential that Israel be compared with other countries competing for the same human capital and investments.8

This competitive-comparative approach is common in strategic-economic planning in leading countries.9

Competitiveness Indices: A Tool for Policy Planning

Different indices can assist strategic policy making in three ways:

    • Policy design and planning - Indices can provide reliable and relevant information regarding the areas of operation.

    • Estimating policy success - Indices can measure the results of policy intervention.

    • Affecting the discourse - The use of indices introduces key concepts that can define a common language within the political system and the public sphere.

Competitiveness indices rank countries based on different factors that contribute to market productivity.

The leading competitiveness indices are:

    • The World Economic Forum's Global Competitiveness Index (GCI):10 The index ranks 125 countries. It is composed of ninety variables that emphasize different aspects of market efficiency.

    • The International Institute for Management Development (IMD):11 The index ranks 55 countries. It is composed of 323 variables that emphasize the market's support for entrepreneurship and ability to attract investment.

Governments and economic organizations world wide use competitiveness indices for strategic planning of socio-economic policies.12 The relative advantage of the use of these indices is based on:

    • Comprehensive and timely information regarding the structure and functioning of major world economies.

    • Because of the quality of their brand, a country's high rank in the indices serves as a mark of excellence.13

Using indices in a relevant national context - The use of competitiveness indices in policy planning should be guided by national goals on the one hand, and the unique characteristics of the Israeli market on the other. This context provides the groundwork for policy design promoting competitiveness.

Limitations of competitiveness indices:

    • Disregard for unique characteristics ­- Unique characteristics of a national economy, such as geography, culture and demography, affect productivity differently in different countries. These characteristics are not reflected by the indices.14

    • Different definitions of competitiveness - The choice of variables and their weight is based on particular concepts of competitiveness.15 A country's competitiveness rank will vary according to the index used.16

Using the Indices - In spite of these limitations, competitiveness indices can be used by decision makers in the process of strategic economic policy planning:

    • Policy planning and design - examining a country's rank in the different variables enables: (1) identifying the challenges facing the market17 and (2) mapping competitiveness in a global context. 18

      The wide range of variables that compose each index draw a clear picture of the steps needed to improve productivity in different sectors of the economy.

      Only a small portion of the competitiveness variables can be manipulated by direct policy intervention ('1st order variables').19 Setting policy objectives for single variables is not recommended.

    • Estimating policy success in improving national competitiveness can be done by examining the overall rank, examining the rank of certain variables, or by comparison to a defined reference group.

      In this context, the GCI and the IMD indices are used as a part of a larger data source to draw a picture of a country's economy, taking into account unique characteristics of the economy.20

    • Affecting the discourse - a systematic use of competitiveness indices in policy planning improves the ability to create a common language in the field of economic development in a global context. This language is essential as a publicity and management tool.

Institutional aspects - Competitiveness indices are typically integrated informally into ongoing government work. However, some countries have institutionalized policy planning based on competitiveness in formal government agencies.21 These bodies analyze competitiveness indices, propose recommendations, and monitor the process of improving national competitiveness.

The establishment of such a body has the following advantages:

    • Increases the carrying capacity of the decision making system - A body that serves as a repository of data on national competitiveness provides ongoing support on comparative issues to government agencies, coordinates government offices, and monitors policy implementation.

    • Affect public discourse - Institutionalizing competitiveness places productivity and international comparison on the public agenda.

Appendix A: National Competitiveness Policy Planning - International Comparison


1 See Yehezkel Dror, A letter to an Israeli Zionist-Jewish Leader, Jerusalem 2005, pg. 74-75: "In light of far reaching changes and globalization, a competitiveness mindset and an effort to increase competition in many fields are the conditions to prosperity in the twenty-first century. Increasing Israel's and the Jewish people's competitiveness is an essential, and in many fields sufficient, condition for long-term prosperity".

2 A distinction should be made between 'competitiveness' (the ability to compete on human capital and investments) and 'competition' in terms of barriers of entry to markets stemming from regulation or monopoly. Competition is a necessary, but insufficient, condition for improving national competitiveness. 3 A market's productivity is defined as production per unit input (labor, capital, or natural resources). See OECD definition.

4 Increased productivity yields higher returns on investment, attracting investors. See: J. Prokopenko, Enterprise and Management Development Working Paper, Globalization, competitiveness and productivity strategies.

5 There is a correlation between productivity and employment. When productivity increases, the market becomes more competitive, production increases, and resources become available to create more jobs to meet local and global demand. Ibid.

6 An increase in productivity means the reduction of production costs which in turn leads to increased wages, or in a competitive market, to reduced prices - effectively increasing purchasing power. Productivity increases coupled with human capital development allow for low-wage workers to increase their incomes. See: National Economic Council, A Socio-Economic Agenda for Israel -2008-2010, April 2007, pg. 47.

7 UN Research and Statistics Branch, Determinants of productivity: cross-country analysis and country case studies, October 2006.

8 Financial Times' chief economist Martin Wolf analyzes productivity levels in Israel in comparison with a reference group of other western countries. Wolf avoids productivity analysis in absolute terms. See: Interview with Martin Wolf. A. Abriel, The Marker, 08/06/2007.

9 In February 2006, the US launched the American Competitiveness Initiative. Its aim is to maintain US leadership in scientific and technological development. For further information, see: file:///C:/Documents%20and%20Settings/gaddy/Local%20Settings/Temporary%20Internet%20Files/OLKA2/

10 The World Economic Forum annually publishes these reports. See: file:///C:/Documents%20and%20Settings/gaddy/Local%20Settings/Temporary%20Internet%20Files/OLKA2/

11 The IMD annually publishes competitiveness books. See: file:///C:/Documents%20and%20Settings/gaddy/Local%20Settings/Temporary%20Internet%20Files/OLKA2/

12 See Appendix A.

13 Countries advertise their high rank on the WEF or the IMD index in an attempt to attract investors. See: Finland, France and Denmark.

14 Dependence on trade in natural resources leaves Australia vulnerable to price and exchange-rate fluctuations. The indices do not attribute as much importance to these factors as might be necessary in Australia's case. See: John Hawkins, The concept of Competitiveness, Treasury working paper, pg. 13. 2006.

In Israel, due to the religious curriculum dominant in the Orthodox sector, years of schooling is not a valid indicator of relevancy to the labor market and does not correctly reflect productivity potential.

15 While calculating the effect of a single variable, it is important to remember that large standard errors would mean that the effect of that variable would have a wide range, and any threshold or slope chosen would be arbitrary. See: Jennifer Blanke, Fiona Paua, Xavier Sala-I-Martin. The Growth Competitiveness Index: Analyzing Key Underpinnings of Sustained Economic Growth. Pg. 23.

16 The GCI and IMD competitiveness indices have different definitions of the factors affecting national competitiveness. Therefore, they differ in their structure, the variables chosen, and the data they are based upon. See: Petri Rouvien. Finland on Top of the Competitiveness Game? The Research Institute of Finnish Economy. 2001. pg. 55

17 An analysis of Israel according to the latest GCI report reveals that the productivity of the public sector in Israel is low in comparison to the private one. For a detailed analysis see Reut Institute analysis: Public Sector Puts Breaks on Top 15 Agenda.

18 Identifying a country's strengths and weaknesses in particular fields in comparison with a reference group of relevant countries is essential for evaluating its competitive chances. The reference group might change according to the field in question.

19 Variables susceptible to direct manipulation tend to measure regulatory matters such as property rights or the number of procedures needed to start a business. On the other hand, variables that examine the quality of infrastructure, transportation, macro-economic stability and education require long-term policies that combine the government and the private sector. Variables such as the number of strike days, brain drain and public trust are affected by 'soft' aspects of culture and other factors which are beyond direct government control.

20 See Appendix A.

21 See Appendix A.