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The Importance of Country Competitiveness
BY JAIME AUGUSTO ZOBEL DE AYALA, Chairman and CEO, Ayala Corporation
Member, National Competitiveness Council
Countries, like companies, compete. Just as our companies compete in the marketplace for customers, market share, capital and investors, and value creation; nations compete for investments, trade in goods, trade in services, and tourists. In our case, the Philippines even has to compete for its own people! Every year, hundreds of thousands of our own workforce vote with their feet and leave the country in search of jobs and careers abroad in countries vying for their services.
Country competitiveness has become a central theme for both developed and developing nations. We are in the midst of an increasingly open and integrated world economy where countries compete for investment and human capital that are critical to their economic growth. This focus on national competitiveness has been increasingly reinforced by global competitiveness rankings published, on a regular basis, by a variety of institutions. They measure and track nations across various metrics and indicators, including the strength of their public and private institutions, the quality of their infrastructure, their macroeconomic environment, education, health, market efficiency, financial market development, and their state of bureaucracy and transaction costs and flows, among others. These are comprehensive reports that benchmark our performance and attractiveness as nation states in the economic sphere.
Competitiveness has been generally defined as the set of institutions, policies, and factors that determine the level of productivity of a country, taking into account its level of development. In other words, these rankings paint a picture of a country’s ability to attract investments, raise per capita GDP, create jobs and wealth for itself, and ultimately raise the standard of living for its own people.
In my opinion, while one may choose to ignore these rankings, one does so at one’s own peril. Virtually the entire world is now covered by these reports.
For instance, the World Economic Forum’s Global Competitiveness Index – one of the most important we track – covers 142 economies, representing 99% of world GDP. Another important report we track, the International Finance Corporation’s Doing Business Report, covers 184 economies. And Transparency International’s Corruption Perception Index covers 183 countries.
These global rankings are important for two reasons.
First, they are a set of diagnostic tools which highlight the strengths we can build on, as well as the challenges that must be overcome, in order to become more globally competitive.
Second, investors (and the media) pay close attention to the indicators and use the information to assess country standings across a variety of metrics.
While the Philippines has not ranked favorably in many of these surveys, it is encouraging to see a significant improvement in its latest rankings. Everything is relative in this fast changing world and we have been on a positive, upward trajectory. In the latest edition of the World Economic Forum’s annual Global Competitiveness Index, the Philippines showed a marked improvement, moving up ten places, from 85th (of 139) in 2010 to 75th out of 142 countries in 2011. It was one of the largest jumps recorded by a country in 2011 worldwide.
In Transparency International’s Corruption Perception Index, we also moved up five positions to 129th compared to the prior year. However, we slipped by two positions to 136th in IFC’s Doing Business Report.
Clearly, while our country has achieved some gains, there is always room for improvement.
Our top three immediate challenges, as defined by the surveys, are in the areas of Corruption, Inefficient Government Bureaucracy, and Inadequate Infrastructure. Our longer term challenges lie in the area of Education, Science and Technology, and Innovation.
It is for this reason that the National Competitiveness Council, a public-private task force on Philippine Competitiveness jointly headed by DTI Secretary Greg Domingo, to represent the public sector, and by Bill Luz for the private sector, was formed to focus on improving the factors that affect our competitiveness metrics. The Council closely tracks the Philippines’ ranking and initiates reforms in various aspects of the local operating and business environment, with the end goal of raising our overall global standing from its current position in the bottom one-third of the list, to the top one-third by 2016.
Among the top priorities of the Council this year is improvement in transparency and accountability, which are very important to building trust in our society and our institutions. Ultimately, trust in our institutions, both public and private, is the foundation for attracting more investments into our economy which, in turn, drives job and wealth creation within a country. We have to initiate a sustainable cycle of progressive development.
I must point out, however, that the overall mission of the Council goes beyond competitiveness ranking and the expected impact that that may have on investments and economic growth for the country. Ultimately, the Council’s goal is to encourage and promote greater inclusive growth, where we see significant drops in the incidence of poverty and create a corresponding growth in our middle-class, which stands at only 8% of the population. It is only by developing this middle-class that we can hope to create more stability – socially, politically, and economically – that leads to genuine economic development. This was the case in Brazil, which saw increased competitiveness create greater prosperity for its people. Through the use of policies designed for inclusive growth, Brazil raised its global competitiveness ranking by almost 20 positions and increased the size of its middle-class from 38% to 50% from 2003 to today. As a result it has become the world’s sixth largest economy and an economic powerhouse in its own right.
Drivers of Country Competitiveness
Let me highlight four drivers of country competitiveness.
The first is Firm-level competitiveness. I think it is important to note that while a trusted and efficient economic system, with stable institutions coupled with strong political, legal, and social frameworks underpin the success of an economy; they are not by themselves sufficient to sustain country competitiveness. They are certainly necessary and important conditions, but, by themselves, they do not create wealth for a nation. These broader macro conditions are only half of the competitiveness equation. The other half lies in the micro, or firm level, of an economy, and where the private sector carries much of the responsibility.
At the heart of it, firms and companies are the entities that create national wealth and so their productivity, efficiency, and dynamism is central to country competitiveness. An economy cannot be competitive unless companies operating within it are competitive and productive, and this is, in turn, linked to the quality of the broader macroeconomic and business environment.
Productivity, therefore, is the ultimate driver of country competitiveness. Country competitiveness improves as companies operating in it increase their productivity. This highlights the important and crucial role of the private sector in improving national competitiveness. We are not only “consumers” in the business environment; we also have a role in shaping the right framework for success. There are many ways by which we can contribute positively to this efficiency framework.
One is by constantly raising our operating standards to match global best practices. Raising the standards under which we run our individual businesses, continuously upgrading our technological skills and business models, and constantly innovating on our products and services ultimately not only benefit our consumers, but also improve the overall environment for business and industry.
I am inclined to cite as an example our experience in the telecom industry. As the government created an enabling and competitive operating environment for other players to come in under the Ramos administration, the entire sector grew phenomenally. From a monopolistic industry structure that resulted in severe underinvestment in the sector, the telecom sector has grown today to be significantly competitive, where products and services are constantly improving to the benefit of end users, be they companies or individual consumers. The level of development of our telecom sector is also reflected in our competitiveness ranking where the Philippines ranks 90th (out of 142) or in the top 35% globally in terms of availability and mobile penetration.
Few people appreciate that the competitive industry structure has resulted in significant investments in the industry. For our part in Globe, we have made over P 220 billion in investment over the past decade. President Aquino has continued this tradition of supporting a level playing field encouraging competition in the industry. After his decision to reallocate spectrum in the telecommunications industry, Globe Telecom committed to a massive transformation project, worth US$800M in new capital investments over two years, to completely modernize its network and prepare it for the sophisticated data needs of the next decade.
This illustrates that while it is possible for few companies to thrive in an uncompetitive business environment, the presence of a competitive, enabling environment can create more opportunities, more competitive companies, better services for more customers, more jobs, and greater value for more investors. This has been amply demonstrated in virtually every industry where a competitive environment has been established and supported by government; from banking and financial services to retail, airlines, water services, power and energy, and many others.
The second driver is Human Resources. At the core of productivity is the quality of the human resources of a nation. Human resources, and their skills, ultimately affect productivity. This is greatly influenced by the quality and standard of education we provide to the youth at the very basic level, at the tertiary level, and at the professional level. It is imperative that we invest in the proper education and training of our youth and our workforce to prepare them for jobs in industries where our country has a competitive advantage. In the same manner, continuous professional training is imperative to keep our human resources at par with global standards.
Here lies one of the greatest long-term challenges to global competitiveness for the Philippines. In recent years, our general education standards, along with our science and technology education, research and development, ability to innovate, and our level of industry-academe collaboration have been rated low by investors. In a world where comparative advantage is increasingly based on human capital rather than on natural resources or endowments, we absolutely cannot afford to ignore this sector. Our ability to address new problems and the challenges of tomorrow is directly linked to our ability to raise our educational standards today.
The third driver is Inclusive Growth. Another way businesses can impact national competitiveness is by creating an environment for inclusive growth.
We cannot, as businesses operating in an emerging economy like ours, ignore the needs of the broader population, the majority who belong to lower income groups and who are oftentimes left with poor access to basic goods and services. As businesses, we are in a unique position to be able to put resources to work to address the needs of this broader market effectively, while simultaneously generating new growth for our own businesses. National competitiveness simply cannot be achieved if majority of the population is struggling to meet their most basic needs.
Finally, the last key building block lies in regional competitiveness. I do not think it is possible for a country to become globally competitive based on only one or two economic hubs. We need to build more economic growth centers across the country. For this, we will need to turn to national regional groupings and make use of their political and economic structures, including their Regional Development Councils and regional business associations. This year, we plan to work with more of these groups to develop suitable metrics for measuring their own competitiveness. More importantly, they need to begin to measure themselves not against another city in the Philippines (such as Davao versus, say, Cebu) but rather against a similarly-situated city in ASEAN (say Penang or Kota Kinabalu or Chiang Mai or Jogjakarta) since countries basically compete against other countries. In addition, their perception of, and engagement in, proper infrastructure planning has to be elevated to a whole new level.
The Challenge of Maintaining Improvements in Country Competitiveness
Ultimately the challenge for any nation is how to sustain its competitiveness over the long term. We may have moved up 10 notches in yesterday’s ranking, but how do we stay there, if not move higher, as other nations also constantly improve on their competitiveness?
The first thing to remember is that change is a constant. In the short-to-medium term, the competitiveness bar gets raised as one moves up in terms of GDP per capita. Like a boxer moving up a weight class, countries moving up to higher GDP per capita groupings face tougher, bigger competitors. At the same time, some factors decline in importance while others increase.
The second is that the whole definition of competitiveness is also evolving. It is moving in the direction of measuring sustainable competitiveness in the sense that metrics now include measuring the ability of today’s economy to grow without compromising the ability of future generations to meet their own needs.
Thus, while businesses strive to increase productivity and generate growth, we must also re-evaluate our models of engagement and examine how we measure that growth. Traditionally, there has always been a strong emphasis on the financial or economic aspects of growth but with little or no regard on how it was achieved or how resources that were used affect all other aspects of quality of life and the state of our environment.
I would tend to subscribe to emerging thinking that as businesses drive productivity, we must also expand our metrics of it to account for our impact on the environment and the communities wherein we operate. We must, as they say, consider “netting out” what we consumed on the way to producing any value. This, I believe, is particularly important at this period in history where serious environmental issues confront us globally that can ultimately threaten our competitiveness and quality of life. In the long run, businesses cannot compete or thrive in an environment that is constantly degraded or where poverty is so prevalent.
In our own way in the Ayala group, we are expanding our metrics and have taken the time to publish these in our group-wide sustainability reports. These reports comply with Global Reporting Initiative standards. There are various levels of compliance in this reporting framework, depending on the extent of reporting we do along prescribed environmental, economic, and social impact measurements. We continue to refine our compliance on these expanded metrics and hope to raise our reporting level to the highest level prescribed by this global reporting framework over time. Our group-wide sustainability report gives us a more holistic benchmarking of our operations and performance based not only on purely financial metrics, but also on the environmental and the social development aspects of our operations.
In the final analysis, there is no single policy or grand step to achieve competitiveness. It comes from a series of many improvements across all sectors, over long periods of time. Everything matters in improving country competitiveness---education matters, infrastructure matters, efficient financial and capital markets matter, workforce matters, social and political environments matter. As Michael Porter rightly pointed out “Improving competitiveness is a marathon, not a sprint.” I could not agree more. However, when aiming for long term goals, sustaining momentum and pace in competitiveness improvements is a key challenge for all of us.
But clearly, one sector cannot do it without the other moving in step. It is for this reason that we all have to work together both in the public and private sectors to truly improve country competitiveness. We are both equal sides to the equation. For our part, we in the private sector have to go beyond our individual needs and take the initiative to improve the industry and national factors that lead to raising our country’s competitiveness—whether it be in basic or advanced education, improving the skills of workers, investing in products and services that create value and impact on the quality of lives of others and helping provide or democratize access to goods and services for those who typically do not have the capacity to do so. Today, more than ever, we are all called upon to take a more active role in doing business more responsibly and creating value beyond our own needs at the corporate level.
We can influence the external environment that impacts the country’s competitiveness through industry or trade associations and collective industry bodies such as yourselves here in FINEX. Industry bodies have important roles to play in improving infrastructure, providing training, and developing markets and setting global benchmarks. FINEX has been a progressive example of this.
I am confident that FINEX, as a group of financial executives, with its national advocacies to improve governance and transparency and driven by its aspiration to broaden financial participation and access, is certainly in a unique position to improve our country’s competitiveness. I have no doubt you will maintain the leadership you have already carved out for yourselves in this area.
Once again, I congratulate the new officers. Your leadership will add great value to the organization and in our collective effort to move the country forward.
Thank you and good day.
Abridged version of a speech delivered before the Financial Executives Institute of the Philippines (FINEX) on 12 January 2012.