April 12-15, 2015, Osijek, Croatia

Fostering the ICT Ecosystem

Remarks by Dr. Margareta Drzeniek Hanouz

Transcript Margareta Drzeniek Hanouz Remarks

The Brown Forum, April 5, Dubrovnik, Croatia

Thank for the kind introduction and good evening.

I’m going to do my best to keep you entertained and give you some information and background about the competitiveness of this region that we’re talking about. First of all let me thank the organizers to give me the opportunity to speak here and it is a pleasure to be here in beautiful Dubrovnik on the beautiful Croatian coast.

I’m going to talk today about the competitiveness of the region that is the theme of the topic today of southeast Europe, focusing mainly on the former Yugoslavian countries. And I’m going to do so based on the WEF global competitiveness report which over the years have evolved into the most comprehensive study in terms of competitiveness.

I’m going to start by giving you a little intro on the Global Competitiveness Report, what it is and what we do and what the other activities of our center are, a little on our methodology very quickly and then move on to the results for the SE Europe region touching on some of the strengths of these countries.

First of all, the flagship product of the Centre for Global Competitiveness and performance at WEF, is the Global Competitiveness Report. Some of you may be aware of it. It has been around for many years, launched in 1969 with only 16 economies and has evolved in the meantime to cover 139 countries from all over the world. In addition to this key report that will be the theme of my report today we also cover a number of other topics, most notably special topics such as for example trade, we look at the travel and tourism competitiveness report, which may be of particular interest to the region and we also look at information technology and how it is used to promote growth of countries. In addition to topical reports we have a number of regional studies. A number of years back in 2007 we had a study specifically on the southeast European region but it’s done on an ad hoc basis and we haven’t done one since then. For now we have an Africa competitiveness report, a Russia and an Indonesia report planned for this year.

Just before I move on to the methodology and the results, a few key features of the competitiveness report. First, the principle of the report is to enable comparison and benchmarking across countries. So it is a purpose to provide a platform for the public and private sectors to discuss on an objective basis the benchmarking results from across many countries. The report has been over the past years has been produced in collaboration with a number of academics, presently its growth economist from Columbia University Javier Solin Mapin who is advising us. We also work with a network of research institutes worldwide who help us to collect the data. And thanks to this collaboration with partner institutes, we are able to have a very comprehensive data set on indicators on competitiveness.

The key data sources for this report are the executive opinion survey, which we conduct ourselves, and the second type of data is the hard data the statistical data that we obtain from international organizations. It is important to maintain the distinction because about two thirds of the data and indicators that I am going to talk about reflect the opinions of business leaders in the region. So these are qualitative data that have a perception element in them. We asked the respondents to compare the national operating environment with the countries that are the best in the world in this particular field.

With respect to other data, we use traditional quantitative measures.

As some of you may probably know there are many different definitions of competitiveness out there. You can speak about enterprise competitiveness, sector competitiveness, you can speak also, as we do, about country or national competitiveness. As to national competitiveness, there is little understanding about what competitiveness means in very specific cases. From our perspective, what we look at is the potential of countries to grow. We try to measure and to assess the factors that actually affect the growth performance of economies. You can see here on this chart an illustration of this. The factors that we take into account and the methodologies we put into place actually attempt to explain those factors that actually explain the different performance of Korea, which is this line, compared to Nigeria, which is this line or even China, which is the red line. As you can see, at the beginning of 1980, these countries were very similar as regards GDP per capita, which is the major indicator of prosperity, which is in the end what economic policy should be about. But over the past 30 years, these countries have evolved very differently. So you can see that Korea and china have achieved some progress. It is difficult to see in the case of China since they started at such a low level but you can see clearly that in the case of Nigeria, which was ahead of china in 1980 in terms of GDP per capital it has fallen behind quite considerably and has not evolved. So we try to explain those factors that lie behind those developments.

Just out of curiosity, I would like to show you the same growth path for the countries of the southeast European region. Montenegro is unfortunately missing, because the IMF did not provide the source for this data, but you can see that there some considerable differences already. The orange line is Serbia, the purple line is Macedonia, the red line is BiH, the green is Croatia, the blue on top is Slovenia. And you can see already that, with respect to those three countries on the bottom, they started already in 1998, with more or less a similar level of GDP per capita, but evolved already quite differently, with Serbia moving ahead a bit faster than the other two.

And actually, this focus on growth leads us to our definition of competitiveness. The key driver of growth according to economic theory and research in general is actually productivity. Which means the more a country can produce with the given resources, the more return to investment it can attract generally, and the more it can grow over the medium to long term. And growth in the end is what determines the prosperity that a country can earn.

This is my last slide on methodology, but I would like to highlight the 12 categories we take into account. We call them pillars. And you can see actu8ally here on the left hand side, they are the 12 categories that assess the overall quality of the economy. It starts with institutions, which describes the overall institutional framework, which includes the court system, the government administration, also private institutions such as corporate governance, security and the like, it continues with infrastructure, macro stability, health and primary education, which are a little more straightforward, and continues with higher education, training, but also goods market efficiency which is basically an assessment of competition, the competitive forces and how far are they healthy in a country. And looks at financial markets, technological readiness, market size, business sophistication and innovation, all of them are a little bit less abstract as concepts. So these are the 12 factors we assess against and we use about 113 indicators to assess each of the countries according to each of these categories. Those 12 categories are not equally important to all the countries. For some of the less developed countries, the first category is going to be more important and as a country moves up in the development ladder, the second category is going to be more important, the efficiency enhancers. And for the most developed countries, with high salaries and highly developed, such as EU countries or Japan or US, the last category of factors, innovation or sophistication factors are going to be more important.

This slide shows the top 10 ranking and then selected countries including countries of the SE European region here. You can see in the top 10 number 1 is Switzerland for the second year in a row. It’s not because we’re based in Switzerland, that’s just a coincidence. And if you lived in Switzerland you won’t worry about it, just like everywhere I suppose. Here the key driver of Swiss performance in this index is that, Switzerland, despite the image it sometimes has, is actually a highly innovative and sophisticated economy. If you think about some of the pharmaceutical companies around Basel. If you think about some of the highly sophisticated multi nationals such as Nestle, then you can imagine that Switzerland is a country that has a high level of business sophistication and innovation. And actually this has been the driver of Swiss success over the past years. In addition, Switzerland has really excellent institutions, public administration, and public governance framework. It has excellent infrastructure as well and compared to many other European countries especially, it has a relatively stable macro environment and labor markets that are relatively flexible. You see in the second place Sweden, followed by Singapore. Both those countries are characterized by very strong institutional frameworks and in this case, Sweden the high level of transparency we have seen in most Scandinavian countries contributes greatly to the country’s efficiency as technological readiness and good infrastructure, which is also the case for Singapore.

As a last country, let me focus for a moment on the United States because it may be a country of particular interest. We have seen over the past, two or three years ago US was number one, and we have seen it has fallen last year to number two, and this year to number 4. We have seen in the U.S. a deterioration of three key weaknesses that the index shows and that have been reflected in discussion about the economy of the U.S. over the past years. And here in the first place it was the institutional framework which started deteriorating relatively quickly due to some of the political decisions taken during the financial crisis and even before, it has actually started deteriorating before the financial crisis. A lot of doubts emerged about the United States institutions’ ability to cope with the difficult situation. Then there was a deterioration in financial markets obviously, and then the macro economy. Those three factors have actually led to the U.S. falling from first to fourth position in relatively short time.

Back to the countries from southeast Europe region, we see Slovenia in 41st position out of 139, relatively well placed. Right behind Poland, ahead of Italy, ahead of Hungary as well as the Slovak Republic, some of the more successful EU members, followed by Montenegro at 49th position, Croatia at 77th, Macedonia at 79, and the last, weakest performance, Serbia at 96 and BiH at 102nd. And you can see already the way these countries are spread across the ranking, it is a region with considerable diversity in economic competitiveness. This is at least what we can see from the results.

Let me now take a quick look at the comparison across the 12 categories of indicators for the se Europe region with the EU 27 average. And you can see here actually that in 3 areas, the SE Europe region comes relatively close to the EU average. In terms of macro environment, which granted the EU 27 today is not the best possible benchmark, but still it reaches the level of the EU 27 in terms of health and primary education. So there is a strength in terms of educated population that there is in the region and in terms of labor market efficiency, where probably also the EU is not the best of benchmarks. But it is still relatively close to fairly developed countries in the area of labor market efficiency. This looks at the flexibility of labor markets, the use of talent, the meritocracy that is present in the country, so these are actually very important factors for investors to take into account. However, we also see significant differences and I would like to point your attention in particular to three areas here. First of all, institutions, the overall institutional framework, anything that has something to do with public administration, transparency, corporate governance and the like. There are considerable differences in this field. There is a considerable difference, maybe the largest even, in terms of infrastructure. And there is a considerable difference also in the terms of market size. And I will deal with those three areas of challenge throughout the rest of my presentation. There is also a difference with respect to innovation and business sophistication, however if you remember the slide with the methodology, it showed the countries from this region are not yet developed enough so that innovation and business sophistication are really of key importance. They should prepare and they should keep it in mind but it is not an area of key importance that’s why it’s not the focus of my speech today.

The average number hides actually this diversity that I was talking about earlier. And if you see here, I’m not sure how much in the back you can see the slide, but those bars actually show the spread of the European Union, so this is the weakest performer in the European Union. And this is the best performer in the European Union, across the 12 indicators so institutions are here, innovation is here. And you can see here in this case that most of the countries in the region, these are the little colorful dots here, actually fall within the range of the European Union in terms of economic competitiveness. So they will be well prepared to join the EU once this process continues, with the exception of some countries that fall out of this range. And you can see very often this green dot which is Bosnia and Herzegovina, which consistently performs lower than the rest of the countries, and the other one is Serbia, which we also see very often here in terms of business sophistication as well, and in some of those areas. In some of those areas we also see that Macedonia, which is this little cross here, it must be hard to see, but in terms of higher education and training, in terms of health and primary education, Macedonia is also below the level of the weakest EU member. But in some areas, for example in terms of labor market efficiency, actually all the countries are within the range of the European Union, and some, Montenegro for example, is actually performing better than the European Union member countries. And in terms of overall competitiveness, we actually see that Croatia, as well as Macedonia, are at the lower level of European Union countries, and Montenegro and Serbia are actually within the range.

So I’m going to focus on the three challenges to improving competitiveness over the next years for this region. I’m going to start with infrastructure. And you can see here some of the data – this is actually a composite indicator already and it consists of a qualitative assessment of the transport infrastructure in the region based mainly on opinions of business leaders in the region. This is the same for electricity and telephony infrastructure as well, but it contains some hard data as well so it’s not only perception based. But you can see actually the dark bars are the countries from the region and compared to many countries from Europe and some of the better performers in terms of the GCI, Croatia, Slovenia, Montenegro, Macedonia, Serbia and Bosnia Herzegovina actually are among the weaker performers in this area and on those indicators. Similar for the electricity and telephony infrastructure, where you see that even Slovenia, which is among the better performers, which is at the level of Canada, and Croatia, most the countries are significantly lagging behind the best performers in this area, however, most of them are also better than the laggard members of the European Union such as Romania and Bulgaria.

In terms of market size, it’s a particular challenge for this region since most of the economies are relatively small and the big advantage of market size is that it allows you to realize economies of scale. However, the small domestic market size, and this has been done successfully by many countries, can be relatively easily overcome by expanding exports. So here you see the domestic market size, which is in blue, and the foreign market size, which is basically the exports, in red. And if you look at some of the countries, for example Serbia, here, as the country with the largest domestic market in the region, and compare it to Bulgaria which is right above, which is a very similar size market and Bulgaria has done significantly better at expanding its international market and using international markets for productivity enhancement in the country. So expanding exports, and taking particular advantage of the excellent geographical situation the country is in and expanding, obviously for some countries the tourism sector which is their strength could lead to a bigger foreign market and would be a step in the right direction towards raising productivity and improving competitiveness.

Now the last area and the one most related to what we commonly understand as the business environment and investment climate as well, is the field of institutions. You can see here actually, this chart illustrates the importance. You can see there is a close correlation, a close relationship, between GDP and institutions. The countries that are doing better, the wealthier countries, generally have very good institutions in place. There are very few exceptions to this rule. This is an example here, Rwanda, which is doing relatively better because they have done a lot of reforms, so these are countries that are catching up. But all the countries that are above this line obviously have institutions that do not keep up with the GDP per capita. And you can see that all the countries of this region, with the exception of Montenegro, which is just on the line, are actually above this line. So in all those countries, compared to the GDP per capita that we observe, the institutional environment is actually not up to the levels we would expect. Therefore, there is a huge call for action in terms of improving the institutional environment, and I’m going to show you some more examples of this. The advantage of improving the institutional environment is also that, of all the 12 pillars, 12 categories that we look at, it probably is the one that has the most spill over to other areas. So improving institutions, improving the court system will enable the country to better implement intellectual property rights. Improving government regulations or administrative capacity will enable country to better implement reforms across many of the other areas as well.

The three areas out of institutions, there are public institutions and we look also at private institutions, which is basically corporate governance as well. You can see here Bosnia and Herzegovina and Serbia on this end and Slovenia on this end. Between the weakest country in the region and the EU average there is far over a one point difference and about a one point difference between the average of the SEE region and the EU 27, which is a considerable difference when you look at the results across the countries. And this difference persists across both public institutions as well as private institutions, which is mainly corporate ethics and corporate governance.

And some of the variables actually show the extent to which the situation is serious in the region. Here for example we see Singapore, which is the first country in terms of burden of government regulations and you see the sizable difference at which we see the countries of the region. Montenegro for example is the best performer but it is still a considerable distance from Singapore. Down to, surprisingly, Croatia, candidate country for the European Union entering 136th out of 139 countries, which is a sample that includes many of the least developed countries, many of the African countries, that have at least GDP that is significantly lower than GDP in the region.

And what is actually even more worrying, particularly in the case of Croatia is that, although we have seen some improvement through the region on burden of government regulation over the past 5 years, you can see that, in Slovenia we’ve seen some improvement. There has been a little deterioration due to the financial crisis, but in Montenegro there has been a colossal improvement over the past years, there has been some improvement in Serbia as well and there has been some improvement in Bosnia and Herzegovina, however when you look at the Croatia line, it goes up and then goes down and is actually slightly below the level we have observed five years ago in terms of burden of government regulation. And this is based directly on the views of the business community. So there is certainly something that needs to be done in terms of burden of government regulations in Croatia.

The other aspect where the countries are particularly challenged is the protection of property rights and this includes land rights, for example, as well. And also the protection of intellectual property rights, which are two fundamental aspects of any market economy which are key for activity and for investment. All six countries actually do relatively poorly, with Croatia, Macedonia, Serbia, and Bosnia and Herzegovina on the bottom of the sample of countries here and for the protection of intellectual property, only Slovenia sticks out a little bit, but the countries are below the levels of the European Union. Also, and these are assessments by business people from the region.

There have been some improvements, but over the past years the progress has been stagnating so we didn’t observe a particular progress in this region. Some countries, the trend is reversed, Bosnia Herzegovina here has arrived at a level that is lower than what we have seen five years ago. In general, we have seen some improvements, but those are probably not sufficient to catch up to the EU.

The efficiency of the court system also stands out as relatively weak. Also again Singapore you have again on the top but you can see that many of the countries from the region, Montenegro, Slovenia, Macedonia, Croatia also, down to Bosnia Herzegovina at 137, only two from the bottom actually, perform relatively weakly on this aspect and do not reach levels that are even two thirds of the best performer, Singapore. So this is an area that is in urgent need of action for reform of the court system. This is a question really, by the way, about the business disputes, specifically related to settling business disputes, which has a very important impact, obviously, on investment and economic activity on a day to day basis. Related to this also, transparency of government policy making, which is some cases is the weakest in the entire sample, such as Bosnia and Herzegovina. So they are in need of improving their transparency of economic policy making in the region in order to be more transparent for the business community, so the business community can be more aware of what the changes in economic policy are. This is also important obviously for the reducing of corruption. The more transparent policy making is, the less opportunity there is to influence or capture the state.

There has been some discussion ahead of this meeting with respect to the potential the countries have to attract FDI, and there are many reasons why these countries have a huge potential for attracting FDI. Probably the most important being the proximity to the European Union, the relatively well-educated labor force, flexible labor markets as well. Huge potential for developing specific sectors, such as the tourism sectors in some countries. Yet this potential does not seem to be fully exploited. See on this slide here, the prevalence of foreign ownership, and the comparison between some of the selected economies such as Chile, Hungary, Ireland, which have been relatively successful at attracting foreign investment, with the countries from the region. You can see here, Montenegro and Bosnia Herzegovina lag considerably behind Chile and Hungary. And Montenegro actually has a very high investment grade, in terms of investment per capita. But some of the countries are among the weakest performers and surprisingly it is Slovenia and Macedonia. Macedonia actually ranks 131st out of 139 countries. So this is a very weak positioning and it certainly points to a lot of potential for attracting FDI.

One of the reasons we capture in the index for low FDI is the impact of the rules in the country to attract or to, to attract most of the time, FDI and what the impact of these rules are whether they attract FDI or not. This is just one aspect, but an aspect that captures it relatively well. You can see that Montenegro does relatively well on this indicator, in terms of rules to attract FDI. But all the other countries, and especially with Croatia here in 131st position, do significantly less well. So there is certainly a need for an overhaul of the rules related to foreign direct investment in most of the countries of the region.

After all of this, just a quick summary of the key messages that I would like to convey to you today. I think first of all, the region is very diverse in terms of competitiveness. I’m sure you know this much better than I do. But that most countries actually fall within the range of the EU 27 and would be very well prepared to join the European Union and would not lead to major shocks. The key advantages according to the Global Competitiveness Index are macroeconomic stability, health and education, and efficient labor markets and to this I would like to add the geographical location, which is not taken into account because of data issues, but this is also among the key advantages in terms of developing trade and investment in the region. The key disadvantages that certainly need to be tackled on a priority basis is improvement in infrastructure, upgrading of institutional framework and expanding the market size in terms of promoting exports to countries and taking more advantage of the advantages the region is providing. Among those three challenges the priority would probably be to address institutions because of the spillover effects first of all but also because of the signaling effect they have on international investment as well. According to experience from other countries, the most important ingredient in terms of reforming institutions is actually very strong political will. None of the countries that have really succeeded in changing institutions, for example Czech Republic or Estonia, really have done so without strong political leadership and some political will to change the institutional framework. The advantage, actually, of institutional reforms is that the results show relatively quickly in terms of economic growth and prosperity and also in terms of foreign direct investment. And with this I would like to leave you and invite you to ask any questions, we’re going to have a Q&A now.