October 2006
Barometer - October 2006
All sorts of theories have been propounded-from cultural values to geographic reasons to economic characteristics-to explain the phenomenon of the East Asian miracle. In their analysis of the economic performance of Asian countries, economists ask, “What are the most important prerequisites for economic development?” Strategic investors, on the other hand, want to know, “What factors indicate whether an economy is going to grow quickly?” And some portfolio managers simply want to know, “Where are the highest returns found?” The review Barometer of Asian Development takes a fresh look at all these questions.
We know this may seem presumptuous. Plenty of highly educated and smart people have already tried to address these questions with complicated formulae, indepth surveys and mathematical models, in an attempt to rank countries according to their wealth-creating environment. From competitiveness to investment flows to political liberties, existing indices (or rankings) provide snapshots of national economies for global leaders. Some of these include:
• The Global Competitiveness Report, produced by the World Economic Forum.
• The FDI Confidence Index and the Global Retail Development Index, created by A.T. Kearney.
• The World Competitiveness Yearbook, published by the Institute for Management Development.
• The World Business Environment Survey conducted by the World Bank.
These indices contain plenty of useful information, and indeed we used some of their publicly available data points. Because they focus on different factors or qualities, individually, they offer glimpses into a country’s competitive strengths and weaknesses.
However, the problem is that much of this information is already priced into the market. For instance, everyone knows that Japan (ranked #8 by WEF and #21 by IMD) is generally a better place to do business than, say, Indonesia (ranked #44 by WEF and #59 by IMD). Global investors have certainly acted accordingly and, as a result, Japan has become a wealthy country while Indonesia has yet to even take off from the launching pad.
Thus, these indices—typically constructed on the basis of surveys or commonly accepted data on, say, factor accumulation, foreign direct investment levels, productivity, and the like—run the risk of merely confirming what business leaders and investors have seen in the marketplace. So when we look ahead to the future and try to anticipate trends, it is difficult to rely on them to get beyond the conventional wisdom.
A Fresh and Fun Approach
If you just want to know which countries are poised for rapid growth, look to the savings rate. Where a high percentage of national income is being invested rather than consumed, GDP is likely to soar. However, high savings also depress returns on capital, meaning such countries are not necessarily the best place to invest. Moreover, if the savings fund unproductive investments, the results can be catastrophic, as Asia learned in 1997. The question then is which countries will grow consistently.
Any index, no matter how scientific it claims to be, is bound to be subjective. The decision to include certain factors and exclude others is, in itself, a matter of choice. So we’ll be forthright about our own point of view: Sustainable growth is built on openness to competition both domestically and internationally, and the cultivation of human talent and management. Prosperity comes when governments (and international institutions) get out of the way of private enterprise—not when they try to micromanage development.
Determining who is best positioned for such growth is a tall order indeed. The debate over the determinants of economic growth has shed more heat than light, so we’ve decided to step back and take a fresh and fun approach. We took factors which serve as proxies for a country’s preparedness for globalization to see if we might beat the econometricians and statisticians at their own game.
When it comes to trying to predict future opportunities, relative changes are often more meaningful than absolute levels. In other words, looking at an indicator’s trend line gives us a better sense of how open a country is to change.
In our Barometer, then, countries are scored on the change in the data over the last five years, not on the basis of the latest numbers. Thus, for example, if a country’s performance in a given area remains unchanged, it will receive zero points for that factor. Improvement or deterioration of a factor warrant a positive or negative score.
This emphasis on relative change removes the difficulty associated with comparing countries at various stages of development. It also eliminates the need to find data that has been compiled using perfectly consistent methods and allows us, as it were, to mix some apples and oranges depending on what data is available.
The REVIEW Barometer is designed to be a thought-provoking exercise rather than an all-inclusive ranking of countries. We are skeptical of the idea that a country’s competitiveness can really be reduced to a single number. In other words, the final number for a given country included in the Barometer may not be as useful as considering each of the factors by which it is composed. In fact, while we chose our factors as leading indicators of change in a given economy, we also chose them because their importance tends to be underappreciated.
Just as a barometer is a sailor’s rough guide of the sea ahead, we hope to build and refine the review Barometer into a tool that helps businesspeople chart a course through the region’s often uncertain economic waters.
A full introduction to the methodology and data of the Barometer is available at www.feer.com. Here is a brief
introduction to the factors:
• Education (10 points) High levels of literacy and numeracy are essential to development. However, the importance of tertiary education is often highly overrated, particularly when students are not paying the costs themselves. The most important task of education policy is to provide workers with a basic education so that they are trainable. Efficient firms can then school them in the techniques needed to achieve world-class productivity. So we have looked at primary and secondary education funding and completion rates as positive factors, and spending on tertiary education by the state as a negative factor.
• Human Mobility (5 points) A country with a competitive economy normally attracts laborers, while an ailing economy sees the best and the brightest “voting with their feet” as they go abroad to look for opportunities.
• Dependency Ratio (10 points) The standard dependency ratio serves not only as an indicator of how quickly a society is aging, but also as a measure of how dynamic and elastic the labor market is. M Gender Equality (5 points) An economy is not using its full complement of huma n ta lent if it does not af ford opportunities for women to move into leadership positions.
• Energy Market (5 points) Unexplained losses in distribution or transmission of electricity reflect inefficiency, corruption and poor protection of property rights.
• Housing Market (10 points) Regulations concerning a country’s real-estate market are a proxy indicator of property rights and the rule of law. The ease with which a person can register a property also indicates the level of bureaucracy.
• Labor Flexibility (5 points) By looking at youth unemployment, we gain an idea of how flexible is the labor market.
• Creative Rights (10 points) When a country’s population is dynamic, skilled, creative and, most importantly, free to invent, create and innovate, the level of patents and copyrights should necessarily reflect this. These also reflect the perceived reliability of intellectual property protection.
• Aid Dependence (10 points) High levels of multilateral or bilateral aid tend to encourage corruption and create incentives for policy makers to take the easy road of insulating politically influential industries from competition.
• Creative Destruction (5 points) Putting aside the influence of the business cycle, a higher level of bankruptcies is actually a positive indicator, since it shows that market exit is possible, allowing more efficient firms to gain market share. It can also be a sign of entrepreneurial activity.
• Capital Access (10 points) The vco Online database and the Capital Access Index from the Milken Institute measure access to venture capital.
• Regulatory Burden (10 points) The number of steps (and days) necessary to build a warehouse, as well as the fees to start a business, show the level of regulatory barriers to entry.
• Communication Costs (10 points) The price of an international call, and the price and speed of a courier delivery show the level of competition in these critical industries.
• Logistics (10 points) The efficiency and activity within the ports shows connectedness to the global economy, as well as the level of regulation and competition.
• Antiglobalization Sentiment (5 points) The number of delegates a country’s leftist groups send to the annual World Social Forum, the anticapitalist version of the World Economic Forum, and other measures of these groups strengths show the level of resistance to economic development.
• Openness and Tolerance (5 points) The work of Richard Florida has highlighted the importance of welcoming creative people for a dynamic knowledge economy. One simple indicator is the number of restaurants and bars listed at a gay portal such as www.fridae.com.
Mr. Fantini is a London-based writer and development consultant. Mr. Restall is editor of the REVIEW.
