The latest Global Competitiveness Report of the World Economic Forum ranks India 56 out of 142 countries. This is a much better rank than India gets on the UN Human Development Index or the World Bank?s Ease of Doing Business Index. Is this a good sign about the country?s future growth potential? Probably not.
First, India?s ranking here has actually been slipping. It was 51 out of 139 countries last year, and 49 out of 133 the year before that. That is not a good trend. More importantly, the index and the ranking it produces may flatter, and not reflect India?s actual situation. Here?s why.
On ?basic requirements?, which make up 60% of the weighting of the index, India?s rank is only 91st. The four components of basic requirements are institutions, infrastructure, macroeconomic environment, and health and primary education. In the infrastructure category, the worst rankings come for telephone lines and quality of electricity supply. Thus, despite the rapid diffusion of mobile phones in India, it still has a long way to go. And power sector reform has not touched the political equilibrium that perpetuates theft of electric power, shortages of coal and inefficient operations. Targets for additional generation capacity have routinely been missed, leaving the sector as probably the biggest single technical constraint on growth.
Inadequate infrastructure is also the main problematic factor identified by businesses surveyed for the report, followed by corruption and inefficient bureaucracy. Interestingly, labour market restrictions come much lower down the list of problems from the business perspective.
India appears to do a lot better in the category of ?efficiency enhancers?, which have 35% weight in the index, and include higher education and training, goods and labour market efficiency, and technological readiness. Overall, India ranks 37th on this set of factors, but the reason for this is entirely the relative strength of its financial market development, and even more so, the country?s ?market size?. Take these two factors away (and India does not really take advantage of its potential market size), and India would do much worse, since the other components have ranks ranging from 70th to 93rd.
Finally, India does relatively well on innovation and business sophistication, but these together have only 5% weight in the index. The real point to note, therefore, is that if one sets aside size and India?s relatively well-rated financial sector development (which may also be less successful than it appears), India?s relevant rank might be in the 80-90 range, rather than the actual rank of 56.
Aside from suggesting that India?s competitiveness might be worse than we would think from its ?official? WEF rank, is there any other use of the exercise? The competitiveness index is built up from over 100 components, organised into 12 categories. The simple aggregation of these components may be less instructive than a detailed look at each one of them. Even assuming that the aggregation is the right one, it is possible to explore variations. How competitive would India be according to this index, if it had China?s infrastructure, for example? The ranking and its sub-rankings provide benchmarks for identifying realistic improvements, and for gauging their possible impacts.
The approach being suggested to using these rankings is somewhat in the spirit of work by academics Ricardo Hausmann, Dani Rodrik and Andr?s Velasco. They have a technique called ?growth diagnostics?, which tries to identify the binding constraints to growth for any economy, rather than pushing for across-the-board change. But their approach requires more judgement and it needs detailed knowledge of the economy being studied. Neither quality is to be undervalued, but studying the various components of the competitiveness index may provide clues to where to look further for improvement, even without such knowledge and judgement skills.
In the past, I have also argued for an even simpler approach to policymaking and assessment of policy success. If one believes some variant of a Schumpeterian model of creative destruction, or even just in industrial capitalism as a driver of growth, perhaps the focus of policy should be just on moving up the rankings on the ease of doing business. If this improves, growth will follow. Or one might choose to combine this approach with targeting improvements in the Human Development Index, which was created precisely to give a more general measure of progress than per capita GDP.
Not using models with precise causality and cost-benefit calculations may offend intellectual purists, and may lead to mistakes of emphasis and focus, but there is something to be said for having simple targets that focus on the way stations to growth and human welfare improvements. Easy measurement, benchmarking and relative status seem to be good ways to guide policymaking and to test its success. The proliferation of global rankings and the measurements that underlie them should be put to better use than just being the subject of newspaper articles.
The author is professor of economics. University of California, Santa Cruz