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How Countries Are Performing on the Road to Recovery

World Bank IMF and Dev Agencies	1407 VIEWS
World Bank IMF and Dev Agencies
1407 VIEWS

Tuesday, January 12, 2021 / 09:25 AM / By World Economic Forum / Header Image Credit: World Economic Forum

The 2020 special edition of The Global Competitiveness Report (GCR) series comes out at a very difficult and uncertain historical moment. The outbreak of the COVID-19 pandemic has not only led to a global health crisis and deep economic recession-deeper than the downturn during the 2008-2009 financial crisis-but has also created a climate of profound uncertainty about the future outlook.

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 innovative and much-needed shifts in policy. Therefore, in 2020 the long-standing Global Competitiveness Index (GCI) rankings have been paused. Instead, this special edition is dedicated to elaborating on the priorities for recovery and revival, and considering the building blocks of a transformation towards new economic systems that combine "productivity", "people" and "planet" targets. In 2021, the report will 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 health crisis; b) those priorities needed to restart the economy, beyond immediate responses to the COVID-19 crisis, while embedding people and planet into economic policies (revival over the next 1-2 years); and 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).

Recommendations and timeframes are grouped into four broad areas of action: 1) reviving and transforming the enabling environment, 2) reviving and transforming human capital, 3) reviving and transforming markets, and 4) reviving and transforming the innovation ecosystem. An initial assessment of countries on readiness for transformation is also provided that converts key priorities into quantitative measures for 37 economies.

The key findings of the report are summarized below.

Reviving and transforming the enabling environment

Before the COVID-19 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 digitalization 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 2020 pandemic 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 continued 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 phase) 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.
Before the COVID-19 crisis, despite the significant expansions of ICT access, ICT availability and use remained far from universal. The COVID-19 crisis has accelerated digitalization in advanced economies and made catching up more difficult for countries or regions that were lagging before the crisis.

To address this challenge, in the revival phase, countries should upgrade utilities and other infrastructure as well as closing the digital divide within and across countries for both firms and households. In the transformation phase, the priority should be on upgrading infrastructure to broaden access to electricity and ICT, while, at the same time, accelerating energy transition.

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. Because of the pandemic 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, countries should focus in the revival phase on gradually transitioning from furlough schemes to new labour market opportunities, scaling up reskilling and upskilling programmes 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.
The COVID-19 crisis has highlighted a second issue: how healthcare systems' capacity has lagged behind increasing populations in the developing world and ageing populations in the developed world. To respond to this trend, countries should in the revival phase 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, countries should in the revival phase 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, strengthening 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, countries should in the revival phase strike a balance between continuing measures to support firms and prevent excessive industry consolidation with sufficient flexibility to avoid keeping "zombiefirms" 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 that has emerged in this area is the ongoing reduction on trade openness and the international movement of people, now vastly stalled due to the pandemic. In both the revival and transformation phases, 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 recently 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, countries should in the revival phase expand public investments in R&D, incentivize venture capital and R&D in private sector, and promote 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

In aggregating the 11 priorities that emerge from this analysis for the economic transformation phase, the report provides a preliminary measure of countries' "transformation readiness". This novel framework uses the latest available statistics to measure where countries stand today in this process. This exercise covers a small set of countries (37), measuring only those 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 of the 37 countries, assessing the extent to which many 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 resilience and crisis disruptions 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, and 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, and Public trust of politicians.

The top 5 areas that experienced the most upward movement were Government's responsiveness to change, Collaboration within a company, Venture capital availability, Social safety net protection, and Soundness of banks in advanced economies; and Collaboration within a company, Government's responsiveness to change, Efficiency of train services, Venture capital availability, and 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.

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