Global Competitiveness Index (GCI) vs Unemployment Rate

CHONG Ngok Ki, Nathan PENG Fei, Rick NG Sze Ho, Stephen ZHANG Yifei, Kelvin 07000820 06050654 05014778 05051584

Content

 Introduction of GCI  Stage of the economy  Introduction to 3 sub-sections and relative ranking  Classification of 12 pillars  Key competitive advantages of Hong Kong and China & Suggestions for achieving higher GCI  Comparison between GCI (overall) and unemployment rate

Introduction to GCI

 The Global Competitiveness Index measures  the set of institutions,  policies  factors that set the sustainable current and medium term levels of economic prosperity.”

Different Stages of Economy

Weights of the three main groups of pillars at each stage of development

Criteria of deciding the stages

 Percent of specific types of goods allocated in total export  Level of GDP per capita at market exchange rates

Basic Requirement

Institution

Divided into two major parts   Public institutions Private Institution

Public institutions

 Property rights  Public trust of politicians  Wastefulness of government spending  Reliability of police services

Private institutions

 Ethical behavior of firms  Corporate Governance  Protection of minority shareholders’ interests  Strength of auditing and accounting standards

Infrastructure

 Transportation System  Telecommunication System  Electricity Supply

Transportation System

 Transport for goods, people  Efficiency of roads, railways, ports and airports will be taken into account  Get the good to the market in a timely manner  Facilitate movement of workers

Telecommunication System

 Rapid, free flow of information (fast)  Solid and extensive network (board & stable)  Enhance wiser decision making, by taking all relevant information into account

Electricity Supply

 Electricity supply in a reasonable price  Free of interruption and shortages  Business and factories can run smoothly

Marcoeconomy

 Relative passive factor  Stable Marcoeconomy alone not able to increase productivity  Only when macroeconomy disarray harms productivity (in a reverse way)

Example

 Inflation too high  Government spending too high (deficit)  Bad economic environment Lower living standard Motivation

Health and primary education

 Impact of health on productivity  Importance of basic education

Impact of health on productivity

 Ill worker cannot function in full potential  Business operation in a low efficiency  Productivity decreases enhances the country less competitive

Importance of basic education

 Basic education will increase efficiency of individuals  Much easier to be adapted to new technique and technology  Administrative staff requires basic education

Efficiency Enhancer

What is competitiveness?

T h e m o s t i n t u i t i v e d e f i n i t i o n o f competitiveness is a country’s share of w o r l d m a r k e t s f o r i t s p r o d u c t s .

In fact, it is still often said that lower wages or devaluation “make a nation more competitive.”

What is competitiveness?

T h e m o s t i n t u i t i v e d e f i n i t i o n o f competitiveness is a country’s share of w o r l d m a r k e t s f o r i t s p r o d u c t s .

Prosperity is determined by the

productivity

of an economy

is measured by the value of goods and services produced per unit of the nation’s human, capital, and natural resources.

Value of a nation’s products and services, measured by the prices they can command in open markets Efficiency with which they can be produced

Countries begin to develop more Efficient production processes and increase product Quality .

 Higher Education and Training  Technological readiness Production F(K,L,Tech)   Goods Market Efficiency  Labor Market Efficiency  Financial Market Sophistication Market Size Market

Higher Education and Training:  Move up the value chain Technological Readiness :  Ability to adopt existing technologies to enhance the productivity  Adapt rapidly to changing the environment Measurement  Secondary and Tertiary enrollment rates  Quality of education  Increasing relative importance of technology adoption to national competitiveness  Vocational and continuous on-the job training

Goods Market Efficiency:  produce the right mix of products and services given supply-and-demand conditions  Healthy domestic and foreign market competition  best possible environment for the exchange of goods  demand conditions such as customer orientation and buyer sophistication

Labor Market Efficiency:  Workers are allocated to their most efficient use in the economy  Ensure a clear relationship between worker incentives and their efforts  Workers are allocated appropriately and provided with incentives to give their best effort in their jobs  Labor markets must have the flexibility to shift workers from one economic activity to another quickly  Allow for wage fluctuations without much social disruption

Financial Market Sophistication:  Channels resources to the best entrepreneurs or investment projects rather than to the politically connected  Develop products and methods so that small innovators with good ideas can implement them  Provide risk capital and loans and be trustworthy and transparent  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, and venture capital

Market Size:  The size of the market affects productivity because large markets allow firms to exploit economies of scale  International trade as a substitute for domestic demand in determining the size of the market for the firms of a country

Innovation and Sophistication factors

Business sophistication

 Business sophistication is conducive to higher efficiency in the production of goods and services. This leads to increased productivity, thus enhancing a nation’s competitiveness. A. Networks and supporting industries   Local supplier quantity Local supplier quality B. Sophistication of firms’ operations and strategy      Production process sophistication Extent of marketing Control of international distribution Nature of competitive advantage Value-chain presence



Innovation

Basic requirements and efficiency enhancers like building infrastructure and improving the human capital eventually seem to run into diminishing returns. In the long run, therefore, when all the other factors run into diminishing returns, standards of living can be expanded only by technological innovation.  Quality of scientific research institutions  Company spending on research and development  University/industry research collaboration  Government procurement of advanced technology products  Availability of scientists and engineers  Utility patents (hard data)  Intellectual property protection  Capacity for innovation

Key competitive advantages of Hong Kong and China Suggestions for achieving higher GCI

Ranking in different pillars (Hong Kong)

Pillars (1) Institutions (1) Infrastructure (1) Macroeconomic stability (1) Health and primary education (2) Higher education and training (2) Goods market efficiency (2) Labor market efficiency 1 4 (2) Financial market sophistication 1 (2) Technological readiness 6 (2) Market Size (3) Business sophistication (3) Innovation 27 15 23 Ranking Sub section ranking 12 5 5 5 28 26 3 21 Overall: 12

Key competitive advantages and suggestions for Hong Kong

Advantages      *Financial market sophistication *Goods market efficiency Labor market efficiency Infrastructure Macroeconomic stability Suggestions   Increasing enrollment rates at all levels of the educational ladder Allocating more resources on R&D / Innovations * Rank No.1 around he world

Ranking in different pillars (China)

Pillars (1) Institutions (1) Infrastructure (1) Macroeconomic stability (1) Health and primary education (2) Higher education and training (2) Goods market efficiency 78 58 (2) Labor market efficiency 55 (2) Financial market sophistication 118 Ranking Sub section ranking 77 52 44 7 61 45 Overall: 34 (2) Technological readiness (2) Market Size (3) Business sophistication (3) Innovation 73 2 57 38 50

Key competitive advantages and suggestions for China

Advantages   Domestic and *foreign market size Macroeconomic stability Suggestions   Optimizing the financial markets Boosting the higher education and training  Improving the quality of public and private institutions * Rank No.1 around he world

Statistical Analysis

By SAS Software

Statistics Methodology

     Plot and deal with the raw data Check assumptions: Normality assumption Random assumption Detection of outliers Run regression with the preprocessed data Explanation of the results

Descriptive Statistics

 Number of countries: 89 Variable Mean Std Dev Min Max Unemployment rate 8.1% 6.97% 0.7% 48% GCI 4.29

0.69

3.07

5.77

Simple Linear Regression

 Model: (For any country) Unemployment = f (GCI, ß) + є Where ß is a parameter vector, and є is uncorrelated random error that follows the normal distribution .

Unemployment Rate VS GCI

Regression Results Summary

 R-Square 0.1580

Variable Parameter Estimates ߺ 25.20143

Standard Error 4.28689

95% Confidence Limits (16.68077, 33.72208) ß¹ -3.99042

0.98756

(-5.95331, -2.02754)

Normal PP Plot of Residual

Statistics Methodology

     Plot and deal with the raw data Check assumptions: - Normality assumption Random assumption Detection of outliers Run regression with the preprocessed data Explanation of the results

Residual VS GCI

Residual VS Predicted

Statistics Methodology

     Plot and deal with the raw data Check assumptions: - Normality assumption Random assumption Detection of outliers Run regression with the preprocessed data Explanation of the results

Unemployment Rate VS GCI

Statistics Methodology

     Plot and deal with the raw data Check assumptions: - Normality assumption - Random assumption Detection of outliers Run regression with the preprocessed data Explanation of the results

Outliers by Hat Matrix

Country/Regi on Senegal Unemployme nt Rate 48% GCI 3.33

Macedonia 35% South Africa 24.2% 3.45

4.44

Statistics Methodology

     Plot and deal with the raw data Check assumptions: - Normality assumption - Random assumption Detection of outliers Run regression with the preprocessed data Explanation of the results

Revised Sample

Regression Results Summary

 R-Square 0.182

Variable Parameter Estimates Standard Error ߺ 18.711

2.713

ß¹ -2.689

0.622

Regression Results Summary

 Intuition regarding to the slope  ß¹ change from -3.99042 to -2.689

 ߺ change from 25.20143 to 18.711

Final Model

 Unemployment Rate = 18.711 – 2.689 * GCI Remark:  Negative Relation  Increase on GCI by 1 unit, the Unemployment Rate will decrease up to 2.7 percentage.

Further Study Possibility

 Introduce high order variable (Polynomial)  Times series model replace regression model - Autocorrelation among the GCI and unemployment rate is strong.

- Suitable Models could be: ARMA or ARIMA model