The Growth Competitiveness Index
The Key Underpinnings of Sustained Economic Growth
Few things matter more for the welfare of a country’s citizens than the aggregate growth rate of the economy.
For rich countries, growth rates tend to mean higher wages, larger profits, more employment, and expanded business opportunities.
For poor countries, positive growth rates tend to lift people out of poverty as their incomes tend to rise along with average GDP. Moreover, positive growth rates in the developing world tend to be associated with improvements in other dimensions: reductions in infant mortality, longer life expectancy, increased access to water and sanitation, expanded education, reduced female discrimination, declines in child labor (especially child prostitution and child soldiers), and improvement in freedom, civil liberties, and democracy.
Despite its enormous importance, the determinants of the growth rate of a country remain one of economics’ biggest mysteries. It is increasingly clear that there is no magic solution to the problem of economic growth. It is this complexity that the World Economic Forum tried to capture when it started estimating the Growth Competitiveness Index (GCI) a few years ago.
The Growth Competitiveness Index (Index)
The Index primarily assesses the impact of those factors that economic theory and the accumulated experience of policymakers in a broad range of countries have shown to be critical for growth, whether narrowly focused on elements of the macroeconomic environment or reflecting the latest insights in the economics literature, institutional and other factors. The GCI is composed of three “pillars,” all of which are widely accepted as being critical to economic growth:
• the quality of the macroeconomic environment;
• the state of a country’s public institutions; and,
•given the increasing importance of technology in the development process, a country’s technological readiness.
MacroeconomicEnvironment
Macroeconomic stability is important for growth. Although it is certainly not true that macroeconomic stability alone can increase the growth rate of a nation, it is no less true that macroeconomic disarray kills its growth prospects. Firms cannot make informed decisions in environments where the inflation rate is in the hundreds, typically as a result of public finances being out of control. The banking system (which is essential if an economy is to grow in the medium and long run) cannot function if the government runs gigantic deficits (especially if, as a result, it forces banks to lend it money at below market interest rates). And the business sector suffers unnecessarily if the taxes they pay are wasted away by the government. In sum, the economy cannot grow unless the macro environment is favorable. This is the idea that the first pillar of the GCI is meant to capture.
Institutions
The second pillar of the GCI relates to public institutions. Although, in a market economy, wealth is largely created by private businesses, these businesses have to operate within a country and have to deal with the institutions created and maintained by the government. It is important, for example, that property rights are guaranteed by a legal and judicial system. Private companies cannot operate efficiently in environments where contracts cannot be enforced or where the rule of law is weak or nonexistent. As a result, the GCI measures the soundness of the public institutions and it introduces it as one of the three pillars of economic growth and development.
Technology
Finally, the third pillar is technological progress. One of the main lessons of neoclassical growth theory is that, in the long run, an economy cannot grow unless technological progress occurs. The key difference between rich and poor countries is not that the citizens of rich countries have more rice, more meat, or more milk (which they do) but that they have more and better things. If we sit in a rich country and simply look around, we will notice that most of the products we see did not exist just a few years ago: from the computer to color TV to genetically modified food to the latest designer drugs. Moreover, the products that did exist are much cheaper now than they were in the past or their quality has improved dramatically. Technological progress is, therefore, at the heart of economic growth.
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