At this pivotal moment, there are growing calls for “building back better”. While the immediate priority is to respond to the health crisis, this moment in time also offers a unique opportunity to reflect on the fundamental drivers of growth and productivity that have degraded since the financial crisis. It is also a moment to determine how we may shape our economic systems in the future so that they are not just productive but also lead to environmental sustainability and shared prosperity.
The Global Competitiveness Report series has since its first edition aimed to prompt policymakers beyond short term growth and to aim for long-run prosperity. The 2019 edition of the Global Competitiveness Report showed how declining trends in fundamental aspects of productivity have been masked by long-standing accommodative monetary policy but have remained bottlenecks for strengthening economic development.
This unusual moment calls for unusual and much-needed shifts in policy. In 2020, we therefore pause the long-standing Global Competitiveness Index rankings and instead dedicate this special edition to elaborating on the priorities for recovery and revival and consider the building blocks of a transformation towards new economic systems that combine “productivity”, “people” and “planet” targets. In 2021, we aim to revert to a benchmarking exercise that will provide a new “compass” for the future direction of economic growth.
This special edition analyses historical trends on factors of competitiveness as well as the latest thinking on future priorities. It provides recommendations against three timelines: a) those priorities that emerge from the historical analysis before the crisis, b) those priorities needed to restart the economy, beyond immediate responses to COVID-19 crisis, while embedding people and planet into economic policies (revival over the next 1-2 years), c) those priorities and policies needed to reboot economic systems in the longer run to achieve sustainable and inclusive prosperity in the future (transformation over the next 3-5 years).
We group these recommendations and timeframes within four broad areas of action: reviving and transforming the enabling environment, reviving and transforming human capital, reviving and transforming markets, and reviving and transforming the innovation ecosystem.
The key findings of the Report are summarized below.
Reviving and transforming the enabling environment
- Before the crisis, a long-standing issue had been the ongoing and consistent erosion of institutions, as shown by declining or stalling checks and balances and transparency indicators. Against this backdrop, in the revival phase governments should prioritize improving long-term thinking capacity within governments and enhance mechanisms to deliver public services, including greater digitization of public services. In the transformation phase, governments should work to ensure that public institutions embed strong governance principles and to regain public trust by serving their citizens.
- A second area of concern before the crisis was high levels of debt in selected economies as well as widening inequalities. The emergency and stimulus measures have pushed already high public debt to unprecedented levels, while tax bases have eroding or shifting. To respond to these issues, in the revival phase, the priority should be on preparing support measures for highly indebted low-income countries and plan for future public debt deleveraging. In the longer run (transformation) countries should focus on shifting to more progressive taxation, rethinking how corporations, wealth and labour are taxed. This will require both national reforms and setting an international cooperative framework.
Reviving and transforming human capital
- For several years before the crisis, skills mismatches, talent shortages and increasing misalignment between incentives and rewards for workers had been flagged as problematic for advancing productivity, prosperity and inclusion. With the health crisis and subsequent acceleration of technology adoption, these challenges have become even more pronounced and compounded further by permanent and temporary losses of employment and income. To address these issues, in the revival phase, countries should focus on gradually transitioning from furlough schemes to new labour market opportunities, scaling up reskilling and upskilling programs and rethinking active labour market policies. In the transformation phase, leaders should work to update education curricula and expand investment in the skills needed for jobs in markets of tomorrow, and in parallel, rethink labour laws for the new economy and use new talent management technologies to adapt to the new needs of the workforce.
- As a second issue in this area, the COVID-19 crisis has highlighted how healthcare systems’ capacity has lagged behind increasing populations in the developing world and ageing populations in the developing world. To respond to this trend, in the revival phase, countries should expand health system capacity to manage the dual burden of current pandemic and future healthcare needs. In the longer run (transformation) there should be an effort to expand eldercare, childcare and healthcare infrastructure and innovation.
Reviving and transforming markets
- Over the past decade while financial systems have become sounder compared to the pre-financial crisis situation, they continued to display some fragility, including increased corporate debt risks and liquidity mismatches. In addition, access to finance, despite efforts to increase inclusion in recent years (including through fintech applications), is not sufficiently widespread. Against this backdrop, in the revival phase, countries should prioritize reinforcing financial markets stability, while starting to introduce financial incentives for companies to engage in sustainable and inclusive investments. In the transformation phase, the attention should shift to create incentives to direct financial resources towards long-term investments, strengthen stability while continuing to expand inclusion.
- Pre-crisis there was increasing market concentration, with large productivity and profitability gaps between the top companies in each sector and all others, and the fallout from the pandemic and associated recession is likely to exacerbate these trends. To address this issue, in the revival phase, countries should strike a balance between continuing measures to support firms and prevent excessive industry consolidation with sufficient flexibility to avoid keeping “zombie-firms” in the system. In the transformation phase, countries should rethink competition and anti-trust frameworks needed in the Fourth Industrial Revolution, ensuring market access, both locally and internationally. As a complementary policy, countries should facilitate the creation of “markets of tomorrow”, especially in areas that require public-private collaboration.
- A third trend in this area was the ongoing reduction on trade openness and the international movement of people, now vastly stalled due to the pandemic. In the revival and transformation phase, countries should lay the foundations for better balancing the international movement of goods and people with local prosperity and strategic local resilience in supply chains.
Reviving and transforming the innovation ecosystem
- In this area, a paradox had emerged: a positive evolution of entrepreneurial culture in the past decade, but the creation of new firms and breakthrough technologies had stalled. Technology has lagged especially in the capacity to delivering solutions to energy consumption, emissions and meeting the demand for inclusive social services. To manage these complexities, in the revival phase, countries should expand public investments in R&D, incentivize venture capital, R&D in private sector, and support the diffusion of existing technologies that support the creation of new firms and employment in markets of tomorrow. In the longer run (transformation) countries should create incentives that favour patient investments in research, innovation and invention, support the creation of new “markets of tomorrow” and incentivize firms to embrace diversity, equity and inclusion to enhance creativity.
Assessing readiness for economic transformation
Aggregating the 11 priorities that emerge from this analysis for the economic transformation phase, we provide a preliminary measure of countries’ “transformation readiness”. In this novel framework we use the latest available statistics to measure where countries stand today in this process. This exercise covers a small set of countries (37), measuring only priorities for economic transformation rather than the complete set of factors needed to drive productivity, sustainability and shared prosperity.
The aim of this exercise is three-fold. First, it maps the areas of priority against available data points, in an effort to better define the actions and/or policies needed to “build back better” economies that are productive, sustainable and inclusive. Second, it provides a snapshot of the current situation in each country, assessing the extent to which countries today are on the way towards transforming their economies. Third, it highlights where the key data gaps lie in assessing current national policies and performance.
While noting that the available statistics are insufficient to measure all aspects for achieving economic transformation, the results show that no country is yet fully ready to transform. Among the currently measurable policies, however, the “Nordic” model stands out as the most promising in shifting towards a productive, sustainable and inclusive economic system.
Assessing disruption and resilience through business sentiment
The impact of the current health crisis had a profound impact on the perception of business leaders, captured by the Executive Opinion Survey. Perceptions in some areas indicated that progress critically stalled or declined during the crisis, while in others there was a marked improvement compared to previous trends.
The top 5 areas that experienced the most movement downward in advanced economies were:
- Competition in network services
- Collaboration between companies
- Competition in professional services
- Competition in retail services
- Ease of finding skilled employees
While in emerging economies, these were:
- Business costs of crime and violence
- Judicial independence
- Organized crime
- Extent of market dominance
- Public trust of politicians
The top 5 areas that experienced the most upward movement in advanced economies were:
- Government’s responsiveness to change
- Collaboration within a company
- Venture capital availability
- Social safety net protection
- Soundness of banks in advanced economies
While in emerging economies these were:
- Collaboration within a company
- Government’s responsiveness to change
- Efficiency of train services
- Venture capital availability
- Country capacity to attract talent in emerging economies
The Executive Opinion Survey also helps to identify some common features that helped countries better manage the impact of the pandemic on their economy and their people. Based on the assessment of business leaders i) economic digitization and digital skills; ii) safety nets and financial soundness; iii) governance and planning, and iv) health system and research capacity have contributed to countries’ resilience to the health crisis.
By Klaus Schwab and Saadia Zahidi : World Economic Forum : 16 décembre 2020.