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Arab World Competitiveness Report 2007. Part 1/11

Arab World Competitiveness Report 2007. Part 1/11

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Measures competitiveness of countries and economies in the Arab world.

Chapter 1.1: Competitiveness in the Arab World: Removing Obstacles to Growth: "Assessing Competitiveness in the Arab World: Strategies for Sustaining the Growth Momentum"
Measures competitiveness of countries and economies in the Arab world.

Chapter 1.1: Competitiveness in the Arab World: Removing Obstacles to Growth: "Assessing Competitiveness in the Arab World: Strategies for Sustaining the Growth Momentum"

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Published by: World Economic Forum on Sep 29, 2008
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CHAPTER 1.1
Assessing Competitivenessin the Arab World:Strategies for Sustaining the Growth Momentum
MARGARETA DRZENIEK HANOUZ,
World Economic Forum
TARIK YOUSEF,
Dubai School of Government
The high energy prices of the past few years havebrought the Arab world the highest growth rates innearly three decades.In the oil-exporting countries,theoil boom has gone hand in hand with surging fiscal andexternal surpluses,shrinking public debts and raisinglevels of foreign reserves.This windfall has been sharedby the non–oil-exporting countries through investmentflows,remittances,and trade.These developments appear to have dramatically transformed the economic prospectsof the region,bringing a renewed sense of optimism andovershadowing the heightened geopolitical insecurity of the past few years.As long as energy prices remain at their presenthigh levels,it is safe to suggest that the Arab economies —especially those endowed with substantial oil and gasreserves—could sustain the ongoing prosperity for awhile.But therein lies the danger as well.What if oilprices take an unexpected downward dive,as they havedone over the past three decades? More worrisome,what if the current prosperity postpones the adoption of structural reforms needed to achieve international com-petitiveness and sustain the current growth momentum?After all,oil booms have traditionally provided breathingspace for governments and delayed the implementationof reform programs.Such concerns about the long-term prospects of the region and the likely trajectory of reform are sharedby international observers and,more importantly,poli-cymakers and the general public in the Arab world.Yetonly a few regular assessments of economic develop-ments in the Arab world are produced,notwithstandingthe increased relevance of the region’s energy resources,financial liquidity,and geopolitics to the stability of theworld economy.In addition,the region suffers fromserious gaps in the availability of basic economic andfinancial indicators (see Box 1),not to mention a lack of transparency in policymaking and limited accountabilityin reviewing outcomes.This chapter makes a contribution toward closingthis gap by assessing the competitiveness of Arabeconomies.Utilizing the results of the most recentWorld Economic Forum’s Executive Opinion Survey,the chapter benchmarks the competitive performance of Arab countries against selected comparators.The assess-ment is designed not only to identify present areas of strength and weakness but also to pinpoint areas of reform that should be addressed in the near future.
Methodology
The World Economic Forum defines
competitiveness
asthe set of factors,policies,and institutions that deter-mines the level of productivity in a country.
Productivity
describes how efficiently available resources are used andtherefore the growth performance of an economy.Thuswhat is assessed is the potential of an economy toachieve sustained economic growth over the medium to
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long term.The model controls for the starting level of income and thus predicts that countries with lower per capita income will tend to grow faster because theyneed to catch up with the more advanced economies.This methodology reflects latest theoretical andempirical research and a long-standing experience withassessing competitiveness.The World Economic Forumconducted the first competitiveness assessment in 1979,and has been continuing this work since then.Themethodology has significantly evolved in response toadvances in economic research and to the increasingdiversity of countries covered by
The Global Competitiveness Report 
,including the expansion of cover-age of countries from the Arab world.In particular,three principles that today governthe assessment of competitiveness have emerged.First,competitiveness of countries cannot be determined by anarrow set of factors but is rather the result of multiplesets of variables and processes that span the entire econ-omy.Second,as the global economy evolves,these factorstend to change and so does their impact.For example,advances in technology such as data processing andInternet capacity have altered the way of doing business.As a result,the diverging economic performance of countries on the two sides of the digital divide hasunderlined the key role played by ICT in growth andcompetitiveness.By contrast,inflation is no longer thefocus of policy in light of the present global environmentof low inflation.And,third,different factors matter indifferent ways across countries,depending on the stageof development.Although an advanced country such as Japan will have to keep innovating in order to remaincompetitive,more basic factors such as primary educa-tion and law and order matter more for countries thatlack the basic conditions for growth,such as Mauritania.Before diving into the structure of the index,it isuseful to describe the two types of data that make up itscomponents.Out of the 90 variables that make up theindex,24 are obtained from international organizationssuch as the United Nations Educational,Scientific andCultural Organization (UNESCO),the InternationalMonetary Fund (IMF),and the World Bank.By usingthese sources we ensure that the data and their sourcesare comparable across countries,a crucial requirementwhen undertaking international comparisons.We uti-lized the latest reported figures for each variable.
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Theremaining variables come from the Executive OpinionSurvey (Survey),undertaken annually by the WorldEconomic Forum in all countries covered by the
Report 
.This Survey is addressed to business leaders in eachof the countries to gauge their perceptions of thenational business environment.These data are used mainlyfor assessing crucial determinants of competitiveness for which comparable data do not exist for the entire set of countries covered by the
Report 
.Examples of variablesincluded in the Survey are the quality of public and pri-vate institutions and the quality of infrastructure andeducation,as well as some aspects of market efficiency,business sophistication,and innovation.Although surveydata are often criticized for their subjectivity,the use of these data is now widely accepted as it captures percep-tions by business leaders of the business environmentand,hence,is of great value to policymakers.The determinants of competitiveness are capturedby the structure of the Global Competitiveness Index(GCI).Developed by Professor Xavier Sala-i-Martin incooperation with the World Economic Forum,the GCIhas been used since
The Global Competitiveness Report 2006–2007 
for all competitiveness assessments under-taken by the Forum.The detailed structure of the GCI
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Box 1: Data (un)availability
Each quantitative assessment of competitiveness or economic performance in the region relies heavilyon available data.In the particular case of the GCI,the data we use need to be collected according tointernational standards in order to enable a mean-ingful comparison across countries.Unlike for mostother regions in the world,obtaining internationallycomparable data is difficult for most countries in theregion,in particular for Gulf economies.Oftencountries do not even collect basic data;for exam-ple,accurate year-on-year inflation is hard to obtainfor the United Arab Emirates and consequently,realGDP cannot be calculated precisely.Improved data availability would enable policy-makers in the region to take more targeted deci-sions,benchmark their countries against internation-al or regional best performers,and identify bestpractice in specific areas.It would also aid potentialforeign investors in making the strategic choice totake advantage of the growing competitiveness of the region.In this respect,the data obtained through theExecutive Opinion Survey provide a rich source of information on countries of the region and anexcellent complement to existing data.However,they are no substitute for hard data on economicperformance.Regional governments must take stepsto develop and enhance their statistical and data col-lection capabilities.International cooperation,for example at the level of the Gulf CooperationCouncil,could also help alleviate this problem.
 
is presented in Appendix A to this chapter.It groups thefactors affecting competitiveness into nine pillars:
1. Institutions
The institutional framework has a strong bearingon competitiveness and growth because it shapesincentives in an economy and affects how busi-ness,the political sphere,and the remaining soci-ety interact with each other.
2. Infrastructure 
Quality infrastructure reduces the cost of com-munication,transport,and energy.By renderingbusiness operations more efficient it contributesto lowering the cost of doing business and there-fore increases competitiveness.
3. Macroeconomy
Macroeconomic stability has come to be recog-nized as one of the basic preconditions for growth;this has been widely confirmed in theo-retical and empirical research.Soaring andvolatile prices render the business environmentunpredictable,and high interest rates—resulting,for example,from refinancing government debt— increase the cost of credit and investment.
4. Health and primary education
The importance of health for competitivenessbecomes clear when one considers some Africancountries,where the HIV/AIDS epidemic affectsone-quarter of the working-age population.Although these are extreme cases,almost all eco-nomic activity requires a healthy and literateworkforce.Prevalent lack of access to basic healthservices and education reduces not only the over-all growth potential,but also forecloses the bene-fits of economic growth for significant parts of the population.
5. Higher education and training 
The availability of qualified staff is a preconditionnot only for innovation but also for adoptingtechnologies from abroad and improving businesspractice.All these aspects,which are reflected inthe structure of the Global CompetitivenessIndex,become even more crucial when a coun-try climbs up the value chain and moves awayfrom low-cost production and resource extractiontoward more efficient processes and more sophis-ticated products.
6. Market efficiency
This pillar assesses how far goods,labor,andfinancial resources are allocated to the most effi-cient use in an economy.In order to functionefficiently,goods markets need a certain level of competition,which directs goods toward their best use.Three components can contribute toincreasing competition in an economy:efficientantitrust regulation,openness to trade,and regula-tions that keep market distortions to a minimum.For labor markets,flexibility and efficiency arecritical for ensuring that businesses can maintaina workforce that suits their needs at all times.Factors such as flexibility of wage determinationand hiring and firing are essential in this respect.Finally,given the link between effective financialintermediation and growth,financial markets arevital for making available credit and other finan-cial products at an appropriate cost.
7. Technological readiness
This pillar measures the capacity of an economyto absorb latest technologies and to use them toenhance the productivity of its industries.Consequently,it encompasses the ability to adapttechnologies from abroad through technologytransfer but also the use and penetration of advanced information and communication tech-nologies,in particular Internet and mobiletelephony.
8. Business sophistication
The ability to manage a business efficiently isimperative for increasing productivity,particularlyat the top end of the value chain.Significant dif-ferences in company performance can beexplained by looking at the level of managementpractice.In this respect,supporting the clusteringof firms has proven an important vehicle of pub-lic policy to enhance the performance of firms.
9. Innovation
While technological readiness refers to the adop-tion of technologies from abroad,the innovationpillar measures the extent to which countries areable to develop entirely new products and servic-es.This is particularly important for countries atthe most advanced stage of development becauseinnovation is the only self-sustaining driver of growth for countries that have reached the high-tech frontier,while less-advanced countries canstill improve their productivity by adopting tech-nologies from abroad.
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