Using the WEF 12 Pillars to Evaluate Global and Country Risk

Wearing my hat as a global management consultant specializing in corporate governance and risk management, I look forward to two reports in particular from the World Economic Forum (WEF). One of those reports is the WEF‘s Annual Global Competitiveness Index (GCI). This massive tome, weighing in at more than 500 pages, ranks 148 countries, benchmarking the world’s economy using 100 factors.

Over the years, I’ve come to see this report as a kind of global risk and opportunity yearbook presenting pictures of economies in all stages of development, from the awkward adolescence of emerging economies like Chad and Burundi to the sophisticated elegance of Switzerland – the country dubbed “most competitive” for five consecutive years. The contrasting of various countries has always been fascinating to me as I have done business in 30 countries and been blessed to visit many others for pleasure.

For the record, the United States ranks fifth in this year’s survey. That’s up from seventh last year – an improvement WEF researchers attribute to improved financial markets and increased confidence in public institutions. What a difference three years can make!

I would never suggest that a ranking process could possibly present all there is to know about global competitiveness, but with 75 percent of the world’s countries represented, the GCI is a remarkable undertaking. Also, the auditor in me likes the framework used to evaluate the competitive landscape.

The WEF framework groups 100 factors into 12 pillars that represent the structural supports of a competitive economy. With regard to a country and its economy, these pillars should be among the key areas of focus for board members and executive management of organizations with operations there or with short- or long-term plans to enter that market. Here are those pillars, and why they are important:

1. Institutions. These collective bodies and structures comprise the legal and administrative environment in which individuals, firms and governments interact to generate wealth. Simply stated, investors need to believe the marketplace is fair and that their investments are going to be protected.

2. Infrastructure. Roads, transportation and reliable utilities are crucial to facilitating the sale, purchase and transporting of goods and services.

3. Macroeconomic environment. Healthy competition requires a stable economy with a reasonably stable monetary unit. Businesses find it challenging to operate efficiently during periods of high inflation.

4. Health and primary education. Basic healthcare and education are critical to a trainable, sustainable workforce with low absenteeism and the skills to perform more than just rudimentary manual labor.

5. Higher education and training. Economies that want to move beyond simple production and products need to provide a way for workers to adapt and continuously improve their skills. Otherwise, they are forced to import skills.

6. Goods market efficiency. Healthy competition – both domestic and foreign – encourages the efficient production of the right goods in the right quantities at a fair price.

7. Labor market efficiency. A healthy labor market that allows workers to be employed at their highest and best use enhances quality and productivity.

8. Financial market development. An efficient financial sector weighs risks and allocates resources to those entrepreneurial or investment projects with the highest expected rates of return, rather than to the politically connected.

9. Technological readiness. A competitive economy needs to provide access to existing and emerging technologies or risk falling behind other countries with those capabilities.

10. Market size. Economies of scale can make a big difference in pricing and productivity.

11. Business sophistication. The most competitive economies are those with the most networked and advanced operations and strategies.

12. Innovation. Beyond technological readiness, a competitive economy must nurture original thought, leading to the creation of new technologies, new applications, and new processes and procedures.

The above pillars are used by WEF to construct a radar chart (often called a web chart) for each of the profiled countries. While this analysis is certainly not bulletproof, it provides an interesting context for evaluating country risk, particularly when tracking trends over time. The WEF analysis may be useful for evaluating a company’s existing geographical profile or when evaluating whether to invest in a new country or region. At the very least, it can trigger when to access expertise in the specific countries in question to ensure the right questions are asked.

In an upcoming entry to this blog, I will take a deeper dive into that last pillar, on innovation, and talk about how Switzerland has managed to dominate the global competitive landscape for so long.

In your travels and perhaps in managing your businesses, I’m sure you’ve seen these pillars in action. Add to the conversation. I’d love to read your observations.Jim

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