You're reading: Business Sense: Political instability, inflation, taxes hurt global competitiveness rank

How do some nations attain long-term economic growth and an ever higher standard of living while others do not? What determines living standards of people in a given country, including Ukraine?

The World Economic Forum’s (WEF) Global Competitiveness Report helps to answer these questions by studying factors that enable national economies to achieve sustained economic growth and long-term prosperity. Growth is important, because it increases income, thereby improving the standard of living of a country’s citizens and reducing poverty. The same set of factors also determines the level of national competitiveness.

This year, Ukraine ranks 72nd out of 134 countries. The report found that Ukraine is between Morocco and the Philippines in the Global Competitiveness ranking, having outperformed many countries in Africa and Latin America. Meanwhile, it is notably behind EU-15 (old EU members) and is ranked 4th among CIS countries, behind Russia, Kazakhstan and Azerbaijan. The United States continues to occupy a leading position in the global competitiveness ranking, followed by Switzerland, Denmark, Sweden, Singapore, Finland and Germany.

The report is an important tool for policymakers in many countries around the world to highlight strengths and weaknesses of their economies, track progress over time, and set reform priorities both at the national and regional level. It is especially important for the emerging market economies. It also provides businesses with necessary information in order to make informed strategic investment choices.

In many countries, the World Economic Forum’s Competitiveness Report has been used as a platform for a dialogue between the government and businesses. The use of the Global Competitiveness Report by Croatia’s National Competitiveness Council is a good example of how this research can be used to impact the policy agenda. The prime minister of Croatia made the recommendations implied by the report an integral part of his economic agenda. Saudi Arabia is another example where the results of the report, and the public-government debate that followed, helped the country to move up eight ranks in one year (2007-2008), placing it 27th out 134 countries.

The WEF has been assessing the competitiveness of nations for nearly three decades since its first competitiveness report in 1979. With continuous progress in economic research, the methodology used by the WEF has inevitably evolved over time and currently is the most reputable and recognized around the world. Due to the worldwide recognition of the WEF Global Competitiveness Report, and since its main purpose to facilitate economic growth coincides with the mission of the Foundation for Effective Governance, the Foundation has offered the World Economic Forum a partnership in order to implement this project in Ukraine. This is the second year that the Foundation for Effective Governance has prepared and published the Ukraine Competitiveness Report employing the World Economic Forum’s methodology and guidance. The Foundation plans to continue doing this study in the years to come.

It is important to indicate that the Ukraine Competitiveness Report is a unique study for Ukraine. Its focus is not only on national competitiveness, but it also covers regions. This year it included 15 Ukrainian regions (oblasts), versus 12 last year, representing all geographical areas of the country with different economic structures.

According to the results of the study, there is a significant difference in competitiveness among the Ukrainian regions. Kyiv is the best performer this year, followed by Odesa, Zaporizhya and Dnipropetrovsk regions. Lviv and Donetsk regions are slightly above the regional average while Crimea, Zhytomyr and Zakarpattya perform below the average. Interestingly, the top five Ukrainian regions are on par with Eastern European countries that have recently joined the EU, such as Poland and Hungary, while some regions are on the same level with Ghana, Tajikistan and Burundi.

According to the WEF’s methodology, Ukraine’s competitiveness was assessed based on the factors, policies and institutions that matter most for the country’s economic growth. In total, there are 113 different variables that are organized into 12 categories, so-called pillars of competitiveness. These are: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, efficiency of goods, labor, and financial markets, technological readiness, market size, business sophistication and innovation. This is a universal approach designed for evaluation of countries and regions with very different economies: small and large, advanced and developing, agricultural and industrial. In the case of Ukraine, the results show that it needs to improve its basic factors before it will ever be able to catch up with more developed countries.

Parts of the competitiveness index are culled from official quantitative data, while others are drawn from an opinion survey of top business executives. The respondents to the executive opinion survey were asked to select among the list of 15 factors the five most problematic ones for doing business in their region, and rank these factors from one (most problematic) to five. The results were computed for the country in general and each region in particular. Results of this year’s survey show that policy instability, inflation, tax rates, corruption, and access to financing are the top five barriers for doing business in Ukraine.

Basic reforms implied by the report include establishment of a better business environment for companies in Ukraine that should promote foreign and domestic investment. Improvements in the business climate are directly linked to the technological readiness pillar. It is important to recognize that technologies do not have to be produced at home to benefit a country. For Ukraine, the ability to adapt technologies from abroad is even more important than to produce them domestically. Foreign direct investments can be a major means of transferring technology and know-how. The mobile telephone industry is a good example of a sector where growth became possible with the arrival of new foreign investors.

Overall, the Ukraine Competitiveness Report is not a set of recommendations. Instead, it provides information necessary to make informed, intelligent decisions and set reform priorities. There are numerous examples of countries that, by introducing the right policies and reforms, were able to significantly reduce or eliminate poverty and boost the standard of living of their citizens within one generation. South Korea is one of them. Between 1975 and 2005, the country has increased its income per capita by a factor of 15 and developed from a mainly rural, unindustrialized country to a technologically advanced economy.

Ukraine maintains a substantial growth potential that is far ahead of its current rankings. The crisis provides a unique opportunity for the country to join efforts and implement long-delayed structural reforms to improve national competitiveness. The future success will depend on the actions and willingness of the government to implement these key reforms.

Nataliya Izosimova is Managing Director of the Ukrainian Foundation for Effective Governance, an independent public policy institution funded by Rinat Akhmetov, Ukraine’s richest man. The foundation’s main objective is to encourage the development of long-term national economic programs for Ukraine. Nataliya Izosimova can be reached at [email protected]