Do those rankings matter?

by Tan Khay Boon, Published TODAY, 6 Jun 2012

There are many reports that rank economies in various aspects of doing business and Singapore tends to rank favourably among these reports. 

For example, the World Bank Ease of Doing Business Index (benchmarked to June 2011) ranks Singapore first in having a conducive environment in starting and operating a business. The Political and Economic Risk Consultancy (PERC) 2011 survey consistently ranked Singapore as the least corrupt country in Asia and favourably in overall country risk. 

The World Economic Forum ranked Singapore second in the Global Competitiveness Report 2011-2012 and recently IMD ranked Singapore fourth in the World Competitiveness Yearbook 2012. 

We are naturally happy when the ranking improves (ranking by Global Competitiveness Report improves from third position in 2010-2011) but should we be worried when the ranking drops (ranking by World Competitiveness Yearbook drops from third position in 2011)?

DIFFERENT METHODOLOGIES

The Ease of Doing Business Index concentrates on daily business activities such as getting electricity and getting contracts, while the PERC survey focuses more on risk factors such as corruption and labour quality. 

The reports by World Economic Forum and IMD consider overall competitiveness of the economies but their methodologies are different. 

The Global Competitiveness Index comprises 113 indicators, about 20,000 data points with about 12,000 drawn from the Executive Opinion Survey. The World Competitiveness Yearbook uses 329 ranking criteria over four main factors, with one-third coming from exclusive surveys of more than 4,200 international executives. 

While these reports may use similar macroeconomic indicators in assessing the economies, they tend to give different weights to the indicators and have different focus in their reports. The feedback provided by the executives may also affect the ranking of some economies in the reports. Thus the overall ranking for some economies may be quite different in different reports.

RANKINGS HELP MNCs DECIDE

The table on the next page shows the comparison of the competitiveness of selected economies in the latest Global Competitiveness Index and the World Competitiveness Yearbook.

Although the ranking on Switzerland, Singapore and Sweden are quite consistent, there are wider fluctuations in the ranking of the United States and Hong Kong. 

The US is ranked favourably in the World Competitiveness Yearbook because of its unique economic power, but is ranked less favourably in the Global Competitive Index due to its budget deficits and macroeconomic instability. 

Hong Kong scored highly in the World Competitiveness Yearbook due to its business-friendly environment and may have the advantage in exchange rate stability over Singapore due to its fixed exchange rate with the US dollar. But it needs improvement in the areas of education and innovation as reflected in the Global Competitiveness Index. 

The ranking is relevant and important to policymakers in that MNCs will consider these rankings when deciding their investment location. Countries that wish to attract foreign direct investment and foreign funds should have a favourable ranking in these reports. 

If a high ranking succeeds in attracting foreign investment, the general public will also benefit from more jobs and higher income, and firms can also reap benefits from more business opportunities. 

However, one should not be too obsessed with the ranking. It is more important for a country to assess its strengths and weaknesses in these reports in order to enhance its competitiveness in the global business environment. 

SINGAPORE'S ADVANTAGES

Singapore is not cost competitive due to its scarce land, tight labour market, car population control system and strong Singapore dollar. Hence it scores relatively poorly in the World Competitiveness Yearbook in the cost criteria. 

However, it scores well in the Global Competitiveness Index due to being relatively free of corruption, high government efficiency and its efficient goods, labour and financial markets. There is a limit to what the Government can do to reduce the production costs but Singapore could still compete on productivity and efficiency. 

Singapore has advantages in its location, connectivity, reputation, infrastructure and efficiency to enhance its competitiveness. However, to stay competitive, it will need to boost its productivity, enhance its innovative capability and strengthen its research and development capacity. 

In addition to increasing spending in research and development, more help could be extended to small and medium enterprises to adopt the latest technology to seek new export markets. 

RELOOK MANUFACTURING

As an economy develops, the services sector will play an increasingly important role while the manufacturing sector declines and is outsourced. 

The "reindustrialisation" described by Professor Stephane Garelli in the commentary "Manufacturing strikes back" (May 31), where outsourced manufacturing flows back to the original country, may not occur in Singapore due to cost disadvantages. The services sector which has competitive advantage will continue to dominate the Singapore economy. 

However, services can also be outsourced and for sustainable and inclusive growth, there is an increasing need to cultivate an indigenous manufacturing sector producing middle to high end products to enhance Singapore's competitiveness. 

Dr Tan Khay Boon is a Senior Lecturer at the School of Business at SIM University.