THE 12 PILLARS OF COMPETITIVENESS

First pillar: Institutions

The institutional environment is determined by the legal and administrative framework
within which individuals, firms, and governments interact to generate wealth. The
importance of a sound and fair institutional environment has become all the more
apparent during the recent economic and financial crisis and is especially crucial for
further solidifying the fragile recovery, given the increasing role played by the state at
the international level and for the economies of many countries. The quality of
institutions has a strong bearing on competitiveness and growth.4 It influences
investment decisions and the organization of production and plays a key role in the ways
in which societies distribute the benefits and bear the costs of development strategies
and policies. For example, owners of land, corporate shares, or intellectual property are
unwilling to invest in the improvement and upkeep of their property if their rights as
owners are not protected.5 The role of institutions goes beyond the legal framework.
Government attitudes toward markets and freedoms and the efficiency of its operations
are also very important: excessive bureaucracy and red tape,6 overregulation,
corruption, dishonesty in dealing with public contracts, lack of transparency and
trustworthiness, inability to provide appropriate services for the business sector, and
political dependence of the judicial system impose significant economic costs to
businesses and slow the process of economic development. In addition, the proper
management of public finances is critical for ensuring trust in the national business
environment. Indicators capturing the quality of government management of public
finances are therefore included here to complement the measures of macroeconomic
stability captured in pillar 3. Although the economic literature has focused mainly on
public institutions, private institutions are also an important element in the process of
creating wealth. The global financial crisis, along with numerous corporate scandals, has
highlighted the relevance of accounting and reporting standards and transparency for
preventing fraud and mismanagement, ensuring good governance, and maintaining
investor and consumer confidence. An economy is well served by businesses that are run
honestly, where managers abide by strong ethical practices in their dealings with the
government, other firms, and the public at large.7 Private-sector transparency is
indispensable to business; it can be brought about through the use of standards as well
as auditing and accounting practices that ensure access to information in a timely
manner.8
Second pillar: Infrastructure
Extensive and efficient infrastructure is critical for ensuring the effective functioning of
the economy, as it is an important factor in determining the location of economic activity
and the kinds of activities or sectors that can develop within a country. Well-developed
infrastructure reduces the effect of distance between regions, integrating the national
market and connecting it at low cost to markets in other countries and regions. In
addition, the quality and extensiveness of infrastructure networks significantly impact
economic growth and reduce income inequalities and poverty in a variety of ways.9 A
well-developed transport and communications infrastructure network is a prerequisite for
the access of less-developed communities to core economic activities and services.
Effective modes of transportincluding quality roads, railroads, ports, and air transport
enable entrepreneurs to get their goods and services to market in a secure and timely
manner and facilitate the movement of workers to the most suitable jobs. Economies
also depend on electricity supplies that are free from interruptions and shortages so that

businesses and factories can work unimpeded. Finally, a solid and extensive
telecommunications network allows for a rapid and free flow of information, which
increases overall economic efficiency by helping to ensure that businesses can
communicate and decisions are made by economic actors taking into account all
available relevant information.
Third pillar: Macroeconomic environment
The stability of the macroeconomic environment is important for business and, therefore,
is significant for the overall competitiveness of a country.10 Although it is certainly true
that macroeconomic stability alone cannot increase the productivity of a nation, it is also
recognized that macroeconomic disarray harms the economy, as we have seen in recent
years, conspicuously in the European context. The government cannot provide services
efficiently if it has to make high-interest payments on its past debts. Running fiscal
deficits limits the governments future ability to react to business cycles. Firms cannot
operate efficiently when inflation rates are out of hand. In sum, the economy cannot
grow in a sustainable manner unless the macro environment is stable. Macroeconomic
stability captured the attention of the public most recently when some advanced
economies, notably the United States and some European countries, needed to take
urgent action to prevent macroeconomic instability when their public debt reached
unsustainable levels in the wake of the global financial crisis. It is important to note that
this pillar evaluates the stability of the macroeconomic environment, so it does not
directly take into account the way in which public accounts are managed by the
government. This qualitative dimension is captured in the institutions pillar described
above.
Fourth pillar: Health and primary education
A healthy workforce is vital to a countrys competitiveness and productivity. Workers who
are ill cannot function to their potential and will be less productive. Poor health leads to
significant costs to business, as sick workers are often absent or operate at lower levels
of efficiency. Investment in the provision of health services is thus critical for clear
economic, as well as moral, considerations.11 In addition to health, this pillar takes into
account the quantity and quality of the basic education received by the population,
which is increasingly important in todays economy. Basic education increases the
efficiency of each individual worker. Moreover, often workers who have received little
formal education can carry out only simple manual tasks and find it much more difficult
to adapt to more advanced production processes and techniques, and therefore they
contribute less to devising or executing innovations. In other words, lack of basic
education can become a constraint on business development, with firms finding it
difficult to move up the value chain by producing more sophisticated or valueintensive
products.
Fifth pillar: Higher education and training
Quality higher education and training is crucial for economies that want to move up the
value chain beyond simple production processes and products.12 In particular, todays
globalizing economy requires countries to nurture pools of well-educated workers who
are able to perform complex tasks and adapt rapidly to their changing environment and
the evolving needs of the production system. This pillar measures secondary and tertiary
enrollment rates as well as the quality of education as evaluated by business leaders.
The extent of staff training is also taken into consideration because of the importance of

vocational and continuous on-thejob trainingwhich is neglected in many economies

for ensuring a constant upgrading of workers skills.
Sixth pillar: Goods market efficiency
Countries with efficient goods markets are well positioned to produce the right mix of
products and services given their particular supply-and-demand conditions, as well as to
ensure that these goods can be most effectively traded in the economy. Healthy market
competition, both domestic and foreign, is important in driving market efficiency, and
thus business productivity, by ensuring that the most efficient firms, producing goods
demanded by the market, are those that thrive. The best possible environment for the
exchange of goods requires a minimum of government intervention that impedes
business activity. For example, competitiveness is hindered by distortionary or
burdensome taxes and by restrictive and discriminatory rules on foreign direct
investment (FDI)which limit foreign ownershipas well as on international trade. The
recent economic crisis has highlighted the high degree of interdependence of economies
worldwide and the degree to which growth depends on open markets. Protectionist
measures are counterproductive as they reduce aggregate economic activity. Market
efficiency also depends on demand conditions such as customer orientation and buyer
sophistication. For cultural or historical reasons, customers may be more demanding in
some countries than in others. This can create an important competitive advantage, as it
forces companies to be more innovative and customer-oriented and thus imposes the
discipline necessary for efficiency to be achieved in the market.
Seventh pillar: Labor market efficiency
The efficiency and flexibility of the labor market are critical for ensuring that workers are
allocated to their most effective use in the economy and provided with incentives to give
their best effort in their jobs. Labor markets must therefore have the flexibility to shift
workers from one economic activity to another rapidly and at low cost, and to allow for
wage fluctuations without much social disruption.13 The importance of the latter has
been dramatically highlighted by events in Arab countries, where rigid labor markets
were an important cause of high youth unemployment. Youth unemployment continues
to be high in a number of European countries as well, where important barriers to entry
into the labor market remain in place. Efficient labor markets must also ensure clear
strong incentives for employees and efforts to promote meritocracy at the workplace,
and they must provide equity in the business environment between women and men.
Taken together these factors have a positive effect on worker performance and the
attractiveness of the country for talent, two aspects that are growing more important as
talent shortages loom on the horizon.
Eighth pillar: Financial market development
The financial and economic crisis has highlighted the central role of a sound and wellfunctioning financial sector for economic activities. An efficient financial sector allocates
the resources saved by a nations citizens, as well as those entering the economy from
abroad, to their most productive uses. It channels resources to those entrepreneurial or
investment projects with the highest expected rates of return rather than to the
politically connected. A thorough and proper assessment of risk is therefore a key
ingredient of a sound financial market. Business investment is also critical to
productivity. Therefore economies require sophisticated financial markets that can make
capital available for private-sector investment from such sources as loans from a sound
banking sector, well-regulated securities exchanges, venture capital, and other financial

products. In order to fulfill all those functions, the banking sector needs to be trustworthy
and transparent, andas has been made so clear recentlyfinancial markets need
appropriate regulation to protect investors and other actors in the economy at large.
Ninth pillar: Technological readiness
In todays globalized world, technology is increasingly essential for firms to compete and
prosper. The technological readiness pillar measures the agility with which an economy
adopts existing technologies to enhance the productivity of its industries, with specific
emphasis on its capacity to fully leverage information and communication technologies
(ICTs) in daily activities and production processes for increased efficiency and enabling
innovation for competitiveness.14 ICTs have evolved into the general purpose
technology of our time,15 given their critical spillovers to other economic sectors and
their role as industry-wide enabling infrastructure. Therefore ICT access and usage are
key enablers of countries overall technological readiness. Whether the technology used
has or has not been developed within national borders is irrelevant for its ability to
enhance productivity. The central point is that the firms operating in the country need to
have access to advanced products and blueprints and the ability to absorb and use
them. Among the main sources of foreign technology, FDI often plays a key role,
especially for countries at a less advanced stage of technological development. It is
important to note that, in this context, the level of technology available to firms in a
country needs to be distinguished from the countrys ability to conduct blue-sky research
and develop new technologies for innovation that expand the frontiers of knowledge.
That is why we separate technological readiness from innovation, captured in the 12th
pillar, described below.
Tenth pillar: Market size The size of the market affects productivity since large markets
allow firms to exploit economies of scale. Traditionally, the markets available to firms
have been constrained by national borders. In the era of globalization, international
markets have become a substitute for domestic markets, especially for small countries.
Vast empirical evidence shows that trade openness is positively associated with growth.
Even if some recent research casts doubts on the robustness of this relationship, there is
a general sense that trade has a positive effect on growth, especially for countries with
small domestic markets.16 Thus exports can be thought of as a substitute for domestic
demand in determining the size of the market for the firms of a country.17 By including
both domestic and foreign markets in our measure of market size, we give credit to
export-driven economies and geographic areas (such as the European Union) that are
divided into many countries but have a single common market.
Eleventh pillar: Business sophistication
There is no doubt that sophisticated business practices are conducive to higher efficiency
in the production of goods and services. Business sophistication concerns two elements
that are intricately linked: the quality of a countrys overall business networks and the
quality of individual firms operations and strategies. These factors are especially
important for countries at an advanced stage of development when, to a large extent,
the more basic sources of productivity improvements have been exhausted. The quality
of a countrys business networks and supporting industries, as measured by the quantity
and quality of local suppliers and the extent of their interaction, is important for a variety
of reasons. When companies and suppliers from a particular sector are interconnected in
geographically proximate groups, called clusters, efficiency is heightened, greater
opportunities for innovation in processes and products are created, and barriers to entry

for new firms are reduced. Individual firms advanced operations and strategies
(branding, marketing, distribution, advanced production processes, and the production of
unique and sophisticated products) spill over into the economy and lead to sophisticated
and modern business processes across the countrys business sectors.
Twelfth pillar: Innovation
Innovation can emerge from new technological and non-technological knowledge. Nontechnological innovations are closely related to the know-how, skills, and working
conditions that are embedded in organizations and are therefore largely covered by the
eleventh pillar of the GCI. The final pillar of competitiveness focuses on technological
innovation. Although substantial gains can be obtained by improving institutions,
building infrastructure, reducing macroeconomic instability, or improving human capital,
all these factors eventually run into diminishing returns. The same is true for the
efficiency of the labor, financial, and goods markets. In the long run, standards of living
can be largely enhanced by technological innovation. Technological breakthroughs have
been at the basis of many of the productivity gains that our economies have historically
experienced. These range from the industrial revolution in the 18th century and the
invention of the steam engine and the generation of electricity to the more recent digital
revolution. The latter is not only transforming the way things are being done, but also
opening a wider range of new possibilities in terms of products and services. Innovation
is particularly important for economies as they approach the frontiers of knowledge, and
the possibility of generating more value by merely integrating and adapting exogenous
technologies tends to disappear.