12 Nov 2001  Views on News

Facing the New World Order

HBS professor Michael Porter, and Jeffrey Sachs, director of Harvard's Center for International Development, discuss the ramifications — especially after September 11—of the WEF's Global Competitiveness Report 2001-2002. Is this a time of retrenchment, or opportunity?

 

Editor's Note— Published since 1979 by the World Economic Forum, the Global Competitiveness Report ranks seventy-five countries and measures the comparative strengths and weaknesses of their economies. At a press conference announcing publication of the 2001 report, comments were offered by two major contributors to the study, Harvard Business School Professor Michael Porter and Jeffrey Sachs, director of the Center for International Development at Harvard University. In the edited remarks below, they discuss the findings and implications of September 11 on an already weakened global economy. (Links to the report are included.) Harvard's John W. McArthur, of the Center for International Development, also contributed to the study.

Peter Cornelius, Director of the Global Competitiveness Program at the World Economic Forum:

The Global Competitiveness Report, as usual, ranks countries according to their competitiveness. We also include a number of special chapters focusing, among other things, on environmental regulations and competitiveness, a paper that was authored by Professor Porter and Professor Daniel Esty on innovation and also on labor markets and a number of others. The data underlying our analysis are based on publicly available information, and also, and perhaps even more importantly, on our Chief Executive's survey we have conducted earlier this year. More than 4,500 Chief Executive Officers have responded to that survey. Most of this data are gained from the pre-September 11th period. However, the Global Competitiveness Report does include an analysis of the short- or medium-term economic impact of these tragic events and it is cut with a number of specific policy recommendations.

I wanted to draw your attention to a number of innovations in the report. Most importantly, we have included a number of new countries. We have now seventy-five in the Global Competitiveness Report, many of them from Central America, but also from Central and Eastern Europe, Asia and Africa. Estonia and Slovenia—and I wanted to single out these two countries on both rankings, the Global Competitiveness ranking and the current competitiveness ranking—are the highest new entrants, indicating that there have been a lot of programs in terms of transforming these economies into market.

Now, before turning over to Professor Sachs, I wanted to mention that the World Economic Forum, in partnership with Harvard University, will be publishing a special regional report on this transitional economy and on Latin America later this year, and also a report on IT.

Professor Jeffrey Sachs, Director of the Center for International Development at Harvard University:

This is an extraordinary period, obviously, in which the short-term uncertainty is profound. Our study traditionally has been a medium- to long-term focus. That is, looking at the determinants of high levels of living standards and sustained economic growth over a prospective five to ten years. Under the current circumstances, where we have both a global slowdown and the remarkable economic uncertainty following the terrorist attacks in the United States, we need to pay attention, I think without question, to the short term as well as to the long term.

Many of the countries that we regard as having the most favorable prospects in the medium and long terms are probably the hardest hit right now.
—Jeffrey Sachs

There's almost a paradox of the current situation, which is that many of the countries that we regard as having the most favorable prospects in the medium and long terms are probably the hardest hit right now. Because the two great disturbances that are shaking the world economy are the cyclical downturns in the United States, and especially in the information and communications technology sectors, and the global supply networks. That double whammy is particularly hurting very competitive economies in East Asia, which are both high technology and linked to U.S. production systems. So I want to draw your attention to the fact that we really need to be clear, and I hope we're right also about the distinctions of the short term and the medium to long term.

Our medium- to long-term scenario gives a very high grade to several of the countries in East Asia. It puts technology at the center of the story. The real winners, in our view, over the long term are those countries that are able to sustain high rates of innovation. For middle-income countries, [they are] those countries that are able to adopt the technologies that are developed in the high-income countries. While this is a bad year for the technology sector, we're putting our bets squarely on the recovery of the technology sector over the medium term and that sector continuing to be a fuel of growth.

We're also putting our bets on the continuation of the process of globalization. I think this is a safe bet, although one has to be rather nervous right now with the higher costs of trade, the difficulties of moving people around, the difficulties of crossing borders, the higher insurance costs, all of the undermining of the improved fabric of globalized production that comes in a period of conflict. We're betting, and hoping of course, that the conflict remains narrowly focused on breaking the terrorist networks and doesn't turn into a wider war. If it were to go to that horrible alternative, all bets would really be off about the process of globalization and international trade. But we're putting our bets on our indexes that very clearly [show] a continuation of the now ten- to twenty-year process of intensive globalization.

We believe that, particularly the United States has not been nearly enough of a leader in trying to work with the poorer countries ...
—Michael Porter

When we put these pieces together, therefore, for the medium to long term, we ranked very high the countries that are demonstrating a capacity for sustained innovation. We look at the underlying factors of that innovation, which we measure, for example, as the rate of patenting new inventions. We find that high levels of tertiary education, high investments in research and development, and a solid platform of information and communications technology are all essential.

The result of that is the Scandinavian countries, which are extraordinary users of the information and communications technologies and very heavy investors in research and development, scored uniformly high. So did the United States. And a number of other countries, of course, are notable, like Ireland and the U.K., very much being part of the technology wave. Interestingly, what I think we're arguing in the end is that innovation and commitments to research and development and high levels of tertiary education can, to an important extent, although not entirely, overcome more traditional macroeconomic barriers, like very heavy rates of taxation.

Professor Michael Porter, Director of the Institute for Strategy and Competitiveness at Harvard Business School:

I'd like to focus though, just to be brief here, on really some of the main findings on the microeconomic and corporate side of the equation, which is my particular responsibility here. I think that I would characterize what we found this year sort of as follows. I think, number one, what we found is that there's a very important moment here in the world economy and it's extremely important that policy makers and corporate leaders don't over react. There's a great tendency in periods like this to do things that are really stupid and to make bad choices to deal with a short-term situation that proved to hamper your prospects in the long term. I think we are in a period such as that, both in governments and in the corporate sector.

Both Jeff and I believe strongly that we are in a process now which seems mostly to be a cyclical process, not a structural process. It's a process that our survey data suggests and our short-term flash survey data suggests is not likely to be [a] deep and stunning change, but rather a more moderate change in terms of the effect on investment and demand and other key attributes that companies care about. So it's very important that everybody keeps their head about them and don't do anything stupid.

On the corporate side, I think the implications that grow out of our thinking suggests that this is a moment when we are going into a recession where financial results are down, where expectations are relatively low. From the corporate point of view, it's very important for managers to see this period not just as a problem, but also as an opportunity. In this era of low expectations, in this era where results are going to be bad anyway, this is the moment, we believe, that it's very important to kind of rediscover, and revisit, and refocus on strategy. Any company that's making across-the-board cuts in cost is really missing a tremendous opportunity to use this period to really get it right strategically, to focus on those parts of its business where it has a real advantage, to kind of shed some of the barnacles that were created during the Internet experiment and the excessive efforts to grow that many companies felt compelled to pursue over the last four or five years. We've been through a period where really companies were not very focused, were chasing some trends, were doing anything they could to get the top line growth. We think now is the time to really refocus on strategy and refocus on what companies' advantages are.

So I guess the theme from the corporate side is we are in an economic downturn, it doesn't seem to be a deep structural change in the economy. Don't overreact, refocus on strategy. This is the moment where you can do some of those things that perhaps would be difficult to do two or three years ago when the markets were expecting you to, with machinelike precision, to show steady increases in your numbers. Let's now be honest with ourselves about what our true profitability is and stop playing games with restructuring charges and other needs.

On the policy maker side, focusing on the microeconomic part of the economy, I think [there are] a couple of very important implications. Number one, it's clear from what we found in this report that when countries are trying to improve their economies and reform their economies, there needs to be a combination of both macroeconomic reforms and what I would call microeconomic reforms. Macroeconomic reforms are familiar now. They're government budget changes. They're currency-management issues.

The microeconomic reforms have to do with really getting the micro institutions and rules in the economy right. Instituting strong antitrust policy, opening up competition, improving the efficiency by which markets work. What we find is that countries that focus only on the macro reforms don't actually do well in the end. Their prosperity really doesn't come. You need to do both together. You can't just kind of do the grand sweeping macro reform. You've got to do the hard, gritty work of kind of reforming all the nitty-gritty institutions in the economy that stand in the way of productivity and competition. We see in many countries the price of failure to really deal with microeconomic reforms. Countries like Argentina and Korea and others, which are really, really struggling, even though they were once viewed as stars.

Now the second key implication we find here is that there is no one-size-fits-all approach to economic reform in countries. It depends really on where you are in your competitiveness development process. The major theme in this year's report is that there are some fundamental transitions that countries go through as they go from poor to wealthy. Depending on where you are, your priorities are different. And there's a tendency in governments to kind of pursue the fad of the day, in terms of what kind of economic reform is the "correct economic reform." What we find is that you need to really have a very tailored approach to reform, which reflects where the country is in its competitive development.

Another point I would end on, and this is something I know Jeffrey Sachs cares deeply about, is the need for the advanced economies to really get serious about the process of trying to help the developing and poorer economies actually become part of the global economy and prosper and improve their economic prosperity. We believe that, in particular, the United States has not been nearly enough of a leader in trying to work with the poorer countries in restoring their economic growth and improving prosperity for their citizens. The consequences of this, I think, are perhaps somewhere in the background of what we see now in a difficult international, political, and security situation. Countries that aren't prospering, citizens that see no economic opportunity, simply breed both political backlash to the whole process of globalization and security issues.

So we believe now is the moment for the European Union, and the United States, Japan, and other, more advanced countries to redouble their efforts with a new level of focus and urgency to the process of economic reform in the—and assistance in—the developing world. That will require new efforts to strengthen and expand the global trading system. This may be the time, as we argue in our introduction, to really make a new WTO round begin. Because that would be a very important statement about the bet that the world of nations is making about the future of the economy.

Additonal Resources: Introduction (PDF format) | Executive Summary (PDF format)

Jeffrey Sachs is director of the Center for International Development at Harvard University.