We Need Change to Compete 112.0

The World Economic Form (WEF) 2009 Global Competitiveness Report shows how badly the Philippines is performing absolutely and relative to its neighbors. The Philippines dropped 16 places to #87 out of 133 countries from #71 in 2008.

I have always read the Report with reservations based on Paul Krugman’s comment that competitiveness does not apply to nations. The good Professor said that nations are not like companies because, in orthodox, Ricardian macroeconomics, nations can always trade up and achieve growth based on comparative advantages.

Note, 12.20.10: Subsequently, I have read the definition of ‘Competitiveness’ used by the WEF and revise the comment in above paragrph. The problem may well be how the WEF report findings are being used in the Philippines to support firm-like behavior expectations of the country (to ask for government support that work more like transfer payments). Please visit Post 274 for more based on the 2010 – 2011 WEF report.

I do agree with the Report on our performance: the Philippines lags in competitiveness, stagnates in GDP per capita, and survives by mainly exporting labor services on low-cost positioning, and so she does need to change to compete.

The Report identifies the top four problematic factors for doing business in the Philippines as:

1. Corruption ……………………………………………………………24.3
2. Inefficient government bureaucracy ……………………………20.6
3. Inadequate supply of infrastructure ……………………………15.0
4. Policy instability …………………………………………………….12.6

It is in this list that I have new reservations of the Report. These reservations come from the implied priority for action in the list above. This list is the result of assumptions and biases from the definitions and metrics used in the apparently logical indexation process used by the WEF in creating the report.

Lately, I have taken baby steps toward alternative, heterodox economics and national innovations systems. I will cite two of my new reservations below after the following brief discussion of the Report’s methodology.

You can access the details of the 2009 – 2010 WEF Competiveness Report here.

In summary, as in the figure below, the Report gathers statistics on 12 pillars of competitiveness grouped into three categories: basic requirements, efficiency enhancers and innovation and sophistication factors.

Source: World Economic Forum Report

The WEF uses a typical factor weight by rating scheme to sum up the products into index results by pillar and for each country. For a descriptive (i.e. not-prescriptive or theory-building) index, the methodology is acceptable to me only if applied consistently over time. Notably, the authors are careful to list the factors as problematic rather than courses of action (which is just subtly implied). The unquestioning readers take the list as such.

Each country is first categorized into one of the five groups in the table below.

The country classification uses two factors: the GDP per capita based on market rates as per the table above and the ratio of mineral export to total. From the CIA Factbook (extracted 9.20.09), the Philippines stays in stage 1 with a 2008 market rate GDP per capita of US$1,740 (it is US$3,300 on purchasing power parity) even as we handily pass the mineral export standard at only 5.1% versus the 70% bar. China crossed over to Stage 2 in the 2009 Report with a US$3,300 per capita (US$6,000 PPP). We are well and definitely left behind.

From our Stage 1 classification, the factor weights assigned as a Factor-driven economy are given in the table below.

Multiplying the weights to the ratings obtained previously, the World Economic Forum computes a score of 3.90 for the Philippines and a rank of #87 among all 133 countries indexed from a rank of #71 in 2008; a steep drop of 16 places.

Reservations. As I have said, my reservations do not rest on the score above but more on the sense of priority for action from the list of problematic factors derived from the index process.

My first reservation, broadly, is that the pillars, definitions and rating scale reflect a bias for orthodox economics where government intervention is only justified in terms of market failure. The success of Japan, Korea, Singapore, Malaysia and China shows that the alternative where the government creates winners, and not just prevents market failure, is always available.

Also, I would not focus on corruption as a specific “good and evil” issue. I see corruption as a distraction to the more important one of implementing specific and practical, i.e. firm- or sector-level, investments that add value. I will only tighten and harshly enforce existing laws to make sure that corruption is minimized as each positive project is implemented. In the list above, only infrastructure, to me, is the real priority.

Similarly, the bias for orthodox macroeconomics can also be taken as a bias for globalization and the entry of foreign investments versus domestic investments that add value we can retain.

My second reservation, more narrowly, is in the S&T-focused definition of innovation used for the WEF pillar as in the definition below.

WEF Definition of Innovation. The final pillar of competitiveness is innovation. Although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, all these factors eventually seem to run into diminishing returns. The same is true for the efficiency of the labor, financial, and goods markets. In the long run, standards of living can be expanded only with innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge and the possibility of integrating and adapting exogenous technologies tends to disappear.

Although less-advanced countries can still improve their productivity by adopting existing technologies or making incremental improvements in other areas, for those that have reached the innovation-driven stage of development. This is no longer sufficient to increase productivity. Firms in these countries must design and develop cutting-edge products and processes to maintain a competitive edge. This requires an environment that is conducive to innovative activity, supported by both the public and the private sectors. In particular, this means sufficient investment in research and development (R&D) especially by the private sector, the presence of high-quality scientific research institutions, extensive collaboration in research between universities and industry, and the protection of intellectual property. In this time of crisis, it will be important to resist pressures to cut back on the R&D spending both at the private and public levels that will be so critical for sustainable growth going into the future.

This definition is inappropriate for a latecomer country. While it references Paul Romer and increasing returns from knowledge, it stays the narrow path of science and technology and says nothing about learning by doing-using-interacting. Beyond the Romer reference, it does not consider applications of endogenous technological change like the design of non-rival, partially excludable goods.

As with criticism I have already written about elsewhere (See Post #87), the definition is based on the original OECD concept implemented through the Community Innovation Survey (CIS). The South Americans and the Africans have already created addendum to the CIS’s Oslo protocol that is relevant to themselves.

The measures of innovation using R&D spending, patents and PhD counts are similarly biased for the developed countries. There is also the often-repeated criticism that focusing on R&D spending, patents and PhDs only serves the needs of developed countries through the brain drain of the latecomer countries best and brightest. Innovation in latecomer countries is normally in the form of adaptive research coming from scan-and-diffuse activities and not basic research.

Furthermore, many of the innovations in countries like the Philippines are in the diffusion end of the innovation system and are focused as much on social innovation than science and technology. Thus, forcing a measure based on S&T is a disservice as it does not reflect local priorities and available resources.

If one goes to the details of the Philippines’ rating, we did very badly on innovation because of the definition and metrics issue above. The impact on the final score is not as big given we are counted as factor-driven and the innovation weight is low.

In succeeding posts, we will go beyond this critique and feature innovation successes in the Philippines like electronic wallets, phone banking, seaweed farming and carrageenan. We will try to determine success factors in sectoral studies to determine firm- or industry-based approaches to creating value-added. We have a surfeit of world-class S&T which are not successfully diffused. We will also look at the reasons for this lack of success.

Given the WEF methodology, these successes fall through the cracks in the methodology. It does not really matter; I am more interested in the practical needs of our people than scoring well in such index.