Chapter 9 (supplemental)

1. Chapter 9 (supplemental) World Economic Forum Global Competitiveness Report 2011 - 2012

2. The 12 Pillars of Competitiveness • Basic Requirements • Institutions • Infrastructure • Macroeconomic environment • Health & primary education • Efficiency Enhancers • Higher education & training • Goods market efficiency • Labor market efficiency • Financial market development • Technological readiness • Market size • Innovation & Sophistication Factors • Business sophistication • Innovation • Key for factor-driven economies • Key for efficiency-driven economies • Key for innovation-driven economies

3. First Pillar: Institutions • The quality of institutions has a strong bearing on competitiveness and growth. • For example, owners of land, corporate shares, or intellectual property are unwilling to invest in the improvement and upkeep of their property if their rights as owners are not protected.

4. Second Pillar: Infrastructure • Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular instance. • Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs.

5. Third Pillar:Macroeconomic Environment • The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country. • The government cannot provide services efficiently if it has to make high-interest payments on its past debts. Running fiscal deficits limits the government’s future ability to react to business cycles. Firms cannot operate efficiently when inflation rates are out of hand. • A topic of particular relevance given the growing concerns about the potential sovereign defaults in Europe, Japan, and the United States, which, if not prevented, could endanger the still fragile recovery worldwide.

6. Fourth Pillar: Health & Primary Education • A healthy workforce is vital to a country’s competitiveness and productivity. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. • In addition to health, this pillar takes into account the quantity and quality of the basic education received by the population, which is increasingly important in today’s economy. Basic education increases the efficiency of each individual worker.

7. Fifth Pillar: Higher Education & Training • Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. • The extent of staff training is also taken into consideration because of the importance of vocational and continuous on-the-job training—which is neglected in many economies—for ensuring a constant upgrading of workers’ skills.

8. Sixth Pillar: Goods Market Efficiency • Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand conditions. • Healthy market competition, both domestic and foreign, is important in driving market efficiency and thus business productivity by ensuring that the most efficient firms, producing goods demanded by the market, are those that thrive; without this, monopolies would arise.

9. Seventh Pillar: Labor Market Efficiency • The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most efficient use in the economy and provided with incentives to give their best effort in their jobs. • Efficient labor markets must also ensure a clear relationship between worker incentives and their efforts to promote meritocracy at the workplace, and they must provide equity in the business environment between women and men.

10. Eighth Pillar: Financial Market Development • The recent economic crisis has highlighted the central role of a sound and well-functioning financial sector for economic activities. • The banking sector needs to be trustworthy and transparent. • Financial markets need appropriate regulation to protect investors and other actors in the economy at large.

11. Ninth Pillar: Technological Readiness • In today’s globalized world, technology is increasingly essential for firms to compete and prosper. • Emphasis is on the capacity to fully leverage information and communication technologies (ICT) in daily activities and production processes for increased efficiency and competitiveness, which has evolved into the “general purpose technology” of our time.

12. Tenth Pillar: Market size • The size of the market affects productivity since large markets allow firms to exploit economies of scale. • International markets have become a substitute for domestic markets, especially for small countries. • Exports can be thought of as a substitute for domestic demand in determining the size of the market for the firms of a country. Geographic areas (such as the European Union) that are divided into many countries but have a single common market contribute to export-driven economies.

13. Eleventh Pillar: Business Sophistication • Sophisticated business practices are conducive to higher efficiency in the production of goods and services. • Best practices include branding, marketing, distribution, advanced production processes, and the production of unique and sophisticated products.

14. Twelfth Pillar: Innovation • The final pillar of competitiveness is technological innovation. • Substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, which may eventually seem to run into diminishing returns. • In the long run, standards of living can be enhanced only by technological innovation. • In light of the recent sluggish recovery and rising fiscal pressures faced by advanced economies, it is important that public and private sectors resist pressures to cut back on the R&D spending that will be so critical for sustainable growth going into the future.