Changing mindset

Investors around the world are exploring destinations that maximize returns or create cost efficiencies via: proximity to markets, access to technology, finance or natural resources, or the cost of doing business. To improve country ranking and the overall business environment in a way that successfully and sustainably maximizes impact and returns on the economy, three steps can be taken to introduce a competitiveness mindset that wins in regional and global markets: collect/define, evaluate, and execute reforms. In this article we review what it takes to be competitive and how the Kingdom of Saudi Arabia launched the National Competitive Center to rise up the competitiveness ladder.

What makes an economy truly competitive?

According to the IMD World Competitiveness Center: “Competitiveness is the extent to which a country is able to foster an environment in which enterprises can generate sustainable value.” In other words, competitiveness is the outcome when strategy, systems, policy, and innovation come together to spur economic growth. The Competitiveness Model, shown in Figure 1, helps explain how competitiveness contributes to economic growth at a national level. The bottom line is that competitiveness leads to productivity growth, which means more output with the same amount, or even fewer resources.

Competitiveness at its core includes increasing economic freedom and overall quality of life. Countries that do not adopt the Competitiveness Model may increase their rankings in international reports, but not the prosperity of their citizens, as measured by the Legatum Prosperity Index (LPI), which measures national prosperity based on economic and social well-being. As shown in Table 1, BRIC countries (Brazil, Russia, India, China) experienced super-heated economic growth in the late 1990s and early 2000s that favorably impacted their rankings in major competitiveness reports. 

However, their momentum slowed down and then declined after 2010, indicating that their competitiveness did not lead to prosperity because their reforms did not truly reinvent their economies. Their latest rankings in key competitiveness-oriented reports show that their competitiveness models have become impediments to sustained growth. While one may rightly argue that rankings in reports are not true indicators of national competitiveness, they do provide a lens through which one can examine the factors that drive these rankings. In contrast to BRIC, some of the world’s most prosperous countries continue to make major gains in economic growth due to constant reinvention. This is illustrated by Table 2, which highlights rankings in major global competitiveness reports. These rankings reflect an approach to competitiveness that has established a pattern of ongoing increase in the quality of life and economic livelihood of their citizens.

In the GCC region, countries have improved competitiveness according to key metrics and rankings in global reports, but structural, institutional and policy deficiencies continue to be areas that require additional focus. The challenge will be enabling these countries to sustain competitiveness through a combination of strategy, good governance, business-friendly reforms, and innovation that leads to ongoing reinvention and strategic course corrections. Within the Middle East, the governments of countries like Egypt, the Kingdom of Saudi Arabia (KSA), the United Arab Emirates (UAE) and Morocco, are designing and investing in programs with the sole purpose of increasing national rankings across multiple indexes. 

What are economic indicators and how do they measure competitiveness?

International competitiveness experts understand the value of analyzing data, quantitative and qualitative (explained in Table 3), as a way to measure competitiveness. 

Quantitative data is typically segmented into macro and micro indicators, as shown in Figure 2. Macro indicators track economic trends on a high level while micro indicators track trends within economic categories that relate to these macro indicators. When data is tracked over a number of years, it provides insight into overall trends regarding a country’s current state of competitiveness. A competitiveness expert analyzes the collected data to draw conclusions that provide insight into strategy, policy, or implementation changes that can establish an alternative competitiveness course or develop an entirely new one.

What are the different approaches to improve regional competitiveness within a country?

There are many approaches that a country can adopt to improve the competitiveness of its regions. A popular competitiveness model is the circular cumulative causation model developed by Swedish economist Gunner Myrdal. Myrdal argued that increasing returns in faster developing regions typically sets in motion a process where production factors, especially human capital, move away from lower developing regions to embrace opportunities in those that are more competitive, thus providing more opportunity. The consequences faced by many countries adopting this model are that they force migration to high-performing regions, which further erodes the ability of low-performing regions to compete. This causes a lack of competitiveness in low-performing regions, which affects overall competitiveness. In attempting to correct this problem, monetary investment and/or incentives are directed towards low-performing regions, which in turn pulls resources away from high-performing ones. This undermines competitiveness in high-performing regions while typically having only a marginal impact on low-performing ones. Myrdal argued that state intervention in terms of policy and resources is required to “level the playing field” between regions, which makes sense in theory, but can only be so if a country understands the competitiveness of its regions and has a clear picture of what needs to be done to address inequities.

The ability of countries to track, analyze and thus understand regional competitiveness is more compatible with the endogenous growth theory that was developed by Nobel prize-winning economist Paul Romer and others. This theory postulates that accumulation of knowledge generates increased returns. Thus, enhancing regional competitiveness occurs when leaders harness strategy and resources that lay the foundation for sustainable regional competitiveness. This requires a rethinking of Myrdal’s more spatially-oriented approach to instead focus on the broader areas of people and institutions, thus adopting a “spatial blindness” approach. Figure 3 provides an overview of these theories of regional development. Also included are examples of countries that have utilized each concept.