WEF and other WEF and other indicators: what works indicators: what works

for policy reforms?for policy reforms?

Dr. Krassen Stanchev,CEO KC2 Ltd., Board Chairman of the Institute for Market Economics (www.ime.bg)

6 October 2010 1

WEF and other indexesWEF and other indexesThe WEF’s Global Competitiveness Report

(GCR) and other sources demonstrate some gaps in assessments of business environment, esp. Doing Business indexes (DBI).

Some countries that are believed to be best performers under DBI (e.g. Georgia, Macedonia, Serbia) perform poorly in GCR, FDI, property rights, etc.

These gaps suggest there is problem adhering to first of all DBI as a source policy and reforms design.

6 October 2010 2

2010 International Property Rights Index 2010 International Property Rights Index (IPRI) and DBI and GCR(IPRI) and DBI and GCR

Country IPRI World

ranks (of 125)

IPRI New Europe and FSU (of 25)

Doing Business (of 183)

GCR (of 133)

Azerbaijan

101 20 38 51

Armenia 109 22 43 97

Georgia 113 24 11 90

Macedonia 97 17 32 79

6 October 2010 3

TopicsTopicsI will compare different indexes, DBI

with GCR; explain their technical merits and political utility;

Then, attempt a reality check (GDP, FDI, fixed capital formation), and test whether macro developments might be explained by finding of GCR;

and I will conclude with a discussion of what are possible uses of the GCR.

6 October 2010 4

A personal noteA personal noteMy knowledge on the subject comes from my key role in: the Balkan Network’s Barriers to Growth Studies

(1994-2000), World Bank Competitive Future Surveys of the

Balkans (1996-1998) Bulgarian Competitiveness Initiative (1998-2000),

under which CED mapped Bulgaria into WEF’s GCR and IME did the sector survey and competitiveness education;

Launching 1997-2007 reforms for which in 2008 DBI praised Bulgaria a “top reformer”;

Similar initiatives in other countries.

Irrespectively all these, I remain profoundly skeptical about isolated uses of rational argument in reform advocacy – EFWN and EFI.

6 October 2010 5

Methodology and Methodology and characteristics of different characteristics of different

indexes - 1indexes - 1DBI is as objective index as possible: it

measures monetary costs and time (man/days, easy to monetarize) for different procedures of dealing with government and regulations;

GCR core proprietary information comes from Executive Opinion Survey, i.e. it often measures opinion.

IPRI is a methodological mixture of both: it borrows rule-of-law related indicators from the WBI Governance Indicators, scores on registries and access to credit – from DBI and GCR.

6 October 2010 6

Methodology and Methodology and characteristics of different characteristics of different

indexes - 2indexes - 2 DBI, covering virtually all countries generalizes

procedures, in order to achieve comparability of measurement.

Assessments, perceptions used in other indexes give an opportunity for a more detailed country picture, GCR reflects sectors bundled into “efficiency” indicators.

DBI presumes that barriers are enforced and enterprises have no choice but to comply with tax and quasi-tax requirements.

GCR and IPRI give some idea about entrepreneurs decision (e.g. to invest or not); GCR emanates from competitiveness theory (Michal Porter’s factors), DBI is based, ultimately, on Ronald Coase’ concept of firm and on Coase/North interpretation of institutions and transaction costs.

6 October 2010 7

Political utility of different Political utility of different indexesindexes

DBI country specifics comes the Business Environment and Enterprise Performance Survey (BEEPS) – a joint venture of EBRD and IBRD; it completes the picture.

Both banks have financial facilities to support reforms and policies, the DBI Reformers Club requires benchmark performance in three business environment areas and gives a reputation gain.

GCR’s subjectivity is not necessarily a weakness: perception is reality, especially in business decisions.

Both sets of indicators may motivate reforms; GCR has the advantage of reflecting what entrepreneurs may discover, not so much the compliance (“tax”) effort of existing players.

6 October 2010 8

Recent developments: GDP Recent developments: GDP (EBRD)(EBRD)

  2008 2009 2010 2011(f)

Albania 7,6 3,3 1,4 2,3

Bosnia and Herzegovina 5,7 -3,2 0,4 1,7

FYR Macedonia 5,0 -0,5 0,5 2,5

Montenegro 7,0 -5,3 -0,1 2,0

Serbia 5,5 -3,0 1,9 3,0

6 October 2010 9

Recent developments: Recent developments: private sector share of GDP private sector share of GDP

(EBRD)(EBRD)

  2008 2009 2010 2011(f)

Albania 75 75 75 77

Bosnia and Herzegovina 60 60 60 60

FYR Macedonia 70 70 70 70

Montenegro 65 65 65 65

Serbia 65 65 65 65

6 October 2010 10

Recent developments: FDI Recent developments: FDI $ bln (UNCTAD)$ bln (UNCTAD)

+ Croatia $12.5 bln in 2007  2007 2008 2009

Albania 0.662 0.988 0.979

Bosnia and Herzegovina 2.08 1.06 0.5

FYR Macedonia 0.699 0.587 0.248

Montenegro 0.921 0.916 1.3

Serbia 3.5 3 1.9

6 October 2010 11

Recent developments: GCRRecent developments: GCR

 2008-2009

2009-2010

2010-2011

Albania 108 96 88Bosnia and

Herzegovina 107 109 102

FYR Macedonia 89 84 79

Montenegro 65 62 49

Serbia 85 93 96

6 October 2010 12

Recent developments: DBIRecent developments: DBI

  2009 2010

Albania 89 82

Bosnia and Herzegovina 119 116

FYR Macedonia 69 32

Montenegro 77 71

Serbia 90 88

6 October 2010 13

Problematic GCR areas: Problematic GCR areas: theory theory

Profit seekingThe motivator of

business decisions is profit.

It emerges if an entrepreneur judges the future prices of the products more correctly and prices of factors of production lag behind the prices which the entrepreneur receives for the product.

Economic securityIncentive rule-

frameworks include:personal security,property protection,voluntary contracts,

free competition and association.

And disincentives: lack of rule of law,government failure,

etc.

6 October 2010 14

Country problematic areas according to GCR Country problematic areas according to GCR (excluding factors like markets size and other (excluding factors like markets size and other

“geographic” factors)“geographic” factors)

  2010-2011 Ranks (of 139)

Albania

Capital market regulations (131), scientific research (128), property rights (116), fiscal balance (109), competition

defense (109),Bosnia and

HerzegovinaGovernment policymaking (139), business ethics (139), minority shareholding (139), quality of infrastructure (139), inefficient

dispute settlement (137)

FYR Macedonia

Airline infrastructure (134), brain drain (126), minority shareholding (112), inefficient legal frameworks (110),

dependent judiciary (103)

Montenegro

Quality of infrastructure (118), procedures to start a business (114),

auditing and reporting standards (85), competition defense (84)

Serbia

Market dominance (138), minority shareholding (137), inefficient boards

(134), inefficient dispute settlement (132)

6 October 2010 15

Conclusions re use of Conclusions re use of GCRGCR

Trends in both DBI and GCR are the same;DBI is a bit optimistic (due to cost-based

approach and global measurements);GCR perceptions of business reality give a more

detailed on choices firms and individual make in different countries;

GCR assessments are easily falsifiable through BEEPS, Economic Freedom Indexes (not reviewed) and common economic sense; this fact may contribute to visioning, outlining and advocating pro-growth reforms.

In comparison to BEEPS perceptions tracking GCR looks more objective.

6 October 2010 16

What to do about all What to do about all thesethese

RCI legacy could be somewhat secured through organizations interested in follow-up removal of GCR identified (worst) hurdles.

The criterion for selecting those shall be two-fold: a) provisional impacts on profit-making (seeking); b) replacement of disincentive (to investment) frameworks with those that are supporting savings, investment and exchange.

6 October 2010 17

What to do about theseWhat to do about theseSome further fine-tuning of the

argument is needed – BEEPS, Economic Freedom Indexes, national statistics (re fixed capital formation, savings, FDIs and business creation), etc.

Local ownership of the initiative is needed.

6 October 2010 18