Global Competitiveness of the Philippines


World Economic Forum defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas.

For more than three decades, the World Economic Forum??™s annual Global Competitiveness Reports have studied and benchmarked the many factors underpinning national competitiveness. From the onset, the goal has been to provide insight and stimulate discussion among all stakeholders on the best strategies and policies to overcome the obstacles to improved competitiveness. In the current challenging economic environment, our work is a critical reminder of the importance of taking into account the consequences of our present actions on future prosperity based on sustained growth.

There are many determinants driving productivity and competitiveness. Understanding the factors behind this process has occupied the minds of economists for hundreds of years. While a lot of factors are likely to be important for competitiveness and growth, they are not mutually exclusive??”two or more of them can be significant at the same time, and in fact that is what has been shown in the economic literature.

This open-endedness is captured within the GCI by including a weighted average of many different components, each measuring a different aspect of competitiveness.
These components are grouped into 12 pillars of competitiveness:

A. 1st Pillar: Institutions
The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth. The importance of a sound and fair institutional environment became even more apparent during the economic crisis and is especially important for solidifying the fragile recovery given the increasing role played by the state at the international level and for the economies of many countries.

B. 2nd 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. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. In addition, the quality and extensiveness of infrastructure networks significantly impact economic growth and reduce income inequalities and poverty in a variety of ways. A well-developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services.

C. 3rd Pillar: Macroeconomic environment
The stability of the macroeconomic environment is important for business and, therefore, is important for the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is also recognized that macroeconomic disarray harms the economy, as we have seen recently. 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. In sum, the economy cannot grow in a sustainable manner unless the macro environment is stable.

D. 4th Pillar: Health and primary education
A healthy workforce is vital to a country??™s competitiveness and productivity. Workers who are ill cannot function to their potential and will be less productive. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Investment in the provision of health services is thus critical for clear economic, as well as moral, considerations. 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.

E. 5th Pillar: Higher education and training
Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. In particular, today??™s globalizing economy requires countries to nurture pools of well-educated workers who are able to adapt rapidly to their changing environment and the evolving needs of the production system. This pillar measures secondary and tertiary enrollment rates as well as the quality of education as evaluated by the business community. 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.

F. 6th 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, as well as to ensure that these goods can be most effectively traded in the economy. 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. The best possible environment for the exchange of goods requires a minimum of impediments to business activity through government intervention.

G. 7th 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. Labor markets must therefore have the flexibility to shift workers from one economic activity to another rapidly and at low cost, and to allow for wage fluctuations without much social disruption. 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. Taken together these factors have a positive effect on worker performance and the attractiveness of the country for talent.
H. 8th Pillar: Financial market development
Economies require sophisticated financial markets that can make capital available for private-sector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital, and other financial products. In order to fulfill all those functions, the banking sector needs to be trustworthy and transparent, and??”as has been made so clear recently??”financial markets need appropriate regulation to protect investors and other actors in the economy at large.

I. 9th Pillar: Technological readiness
In today??™s globalized world, technology is increasingly essential for firms to compete and prosper. The technological readiness pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries, with specific emphasis on its capacity to fully leverage information and communication technologies (ICT) in daily activities and production processes for increased efficiency and competitiveness. ICT has evolved into the ???general purpose technology??? of our time, given the critical spillovers to the other economic sectors and their role as industry wide enabling infrastructure. Therefore ICT access and usage are key enablers of countries??™ overall technological readiness.

J. 10th Pillar: Market size
The size of the market affects productivity since large markets allow firms to exploit economies of scale. Traditionally, the markets available to firms have been constrained by national borders. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries. There is vast empirical evidence showing that trade openness is positively associated with growth. Even if some recent research casts doubts on the robustness of this relationship, there is a general sense that trade has a positive effect on growth, especially for countries with small domestic markets

K. 11th Pillar: Business sophistication
There is no doubt that sophisticated business practices are conducive to higher efficiency in the production of goods and services. Business sophistication concerns two elements that are intricately linked: the quality of a country??™s overall business networks and the quality of individual firms??™ operations and strategies. These factors are particularly important for countries at an advanced stage of development, when, to a large extent, the more basic sources of productivity improvements have been exhausted.

L. 12th Pillar: Innovation
The final pillar of competitiveness is technological 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 enhanced only by technological 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.

While all of the pillars described above will matter to a certain extent for all economies, it is clear that they will affect them in different ways: the best way for Vietnam to improve its competitiveness is not the same as the best way for Canada to do so. This is because Vietnam and Canada are in different stages of development: as countries move along the development path, wages tend to increase and, in order to sustain this higher income, labor productivity must increase.

In line with the economic theory of stages of development, the GCI assumes that, in the first stage, the economy is factor-driven and countries compete based on their factor endowments??”primarily unskilled labor and natural resources. Companies compete on the basis of price and sell basic products or commodities, with their low productivity reflected in low wages. Maintaining competitiveness at this stage of development hinges primarily on well-functioning public and private institutions (pillar 1), a well-developed infrastructure (pillar 2), a stable macroeconomic environment (pillar 3), and a healthy workforce that has received at least a basic education (pillar 4).

Yet as a country becomes more competitive, productivity will increase and wages will rise with advancing development. Countries will then move into the efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality because wages have risen and they cannot increase prices. At this point, competitiveness is increasingly driven by higher education
and training (pillar 5), efficient goods markets (pillar 6), well-functioning labor markets (pillar 7), developed financial markets (pillar 8), the ability to harness the benefits of existing technologies (pillar 9), and a large domestic or foreign market (pillar 10).
Finally, as countries move into the innovation-driven stage, wages will have risen by so much that they are able to sustain those higher wages and the associated standard of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete by producing new and different goods using the most sophisticated production processes (pillar 11) and by innovating new ones (pillar_12).

The GCI takes the stages of development into account by attributing higher relative weights to those pillars that are more relevant for an economy given its particular stage of development. That is, although all 12 pillars matter to a certain extent for all countries, the relative importance of each one depends on a country??™s particular stage of development. To implement this concept, the pillars are organized into three subindexes, each critical to a particular stage of development. The basic requirements subindex groups those pillars most critical for countries in the factor-driven stage.
The efficiency enhancers subindex includes those pillars critical for countries in the efficiency-driven stage. And the innovation and sophistication factors subindex includes
the pillars critical to countries in the innovation-driven stage. The three subindexes are shown in the figure below. The weights attributed to each subindex in every stage of development are shown in figure below. To obtain the weights shown in the table, a maximum likelihood regression of GDP per capita was run against each subindex
for past years, allowing for different coefficients for each stage of development.20 The rounding of these econometric estimates led to the choice of weights displayed in figure below.

Global Competitiveness in the Philippines

Up 10 places to 75th, the Philippines posts one of the largest improvements in this year??™s rankings. The vast majority of individual indicators composing the GCI improve, sometimes markedly. Yet the challenges are many, especially in the areas at the foundation of any competitive economy, even at an early stage of development.

The quality of the country??™s public institutions continues to be assessed as poor: the Philippines ranks beyond the 100 mark on each of the 16 related indicators. Issues of corruption and physical security appear particularly acute (127th and 117th, respectively). The state of its infrastructure is improving marginally, but not nearly fast enough to meet the needs of the business sector. The country ranks a mediocre 113th for the overall state of its infrastructure, with particularly low marks for the quality of its seaport (123rd) and airport infrastructure (115th). Finally, despite an enrollment rate of around 90 percent, primary education is characterized by low-quality standards (110th). Against such weaknesses, the macroeconomic situation of the Philippines is more positive: the country is up 14 places to 54th in the macroeconomic environment pillar, thanks to slightly lower public deficit and debt, an improved country credit rating, and inflation that remains under control.

In the other, more complex pillars of the Index, the Philippines continues to have a vast opportunity for improvement. In particular, the largely inflexible and inefficient labor market (113th) has shown very little progress over the past four years. On a more positive note, the country ranks a good 57th in the business sophistication category, thanks to a large quantity of local suppliers, the existence of numerous and welldeveloped clusters, and an increased presence of Filipino businesses in the higher segments of the value chain. Finally, the sheer size of the domestic market (36th) confers a notable competitive advantage.

Comparison of the Philippines and ASEAN-6

Compared to the ASEAN-6, Philippines is already falling behind. Despite the leap of 10 places, the Philippines still can??™t compete with the economy of the neighboring countries.


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? World Trade Organization
? The Global Competitiveness Report 2011-2012 ?© 2011 World Economic Forum
? The Global Competitiveness Report 2010-2011 ?© 2010 World Economic Forum