The World Economic Forum publishes The Global Competitiveness Report every year and its 2014-2015 edition just came out this week. The report “assesses the competitive landscape of 144 economies, providing insight into the drivers of their productivity and prosperity”. It’s a treasure trove of information and the full report is 565 pages long, but the main release is The Global Competitive Index (GCI) which can be found at this link. These reports give a great overview of the global economic landscape, and we employ similar reports from other NGOs in our research and tools, including the Investment Safety Rankings we released last month.
We dug into the report and came away with three main ways frontier market investors can use the 2014-2015 Global Competitiveness Report.
#1: Identifying Economies With Growth Potential Based on Rankings
Developed economies top the GCI rankings, but which frontier market countries posted relatively strong results? The US placing 3rd is nothing to write home about, but Rwanda ranked 62nd is unexpectedly strong given a GDP per capita of under $1500 and the triple-digit rankings of many of its neighbours.
To identify the countries that are the most competitive given their stage of development, we graphed each country’s ranking versus its GDP per capita on a PPP basis. The results are below:
As expected, there is a strong inverse correlation between GCI Rank and GDP per capita. By using a simple exponential line of best fit for this data, we used the line’s formula to come up with a quick way of calculating the expected GDP per capita for each country based on their ranking. Countries that undershoot this expected GDP per capita the most could also have the most potential for future growth given how competitive they are.
Here are the Top 20 Growth Potential Countries:
By focusing on countries with GDP per capita under $9000, we get 9 countries of interest: Indonesia, Costa Rica, Philippines, Rwanda, Colombia, Vietnam, India, Jordan, and Kenya.
#2: Using GCI’s Stages of Development to Define Frontier Markets
While the GCI judges countries on 12 main “pillars”, it also recognizes that the impact of each pillar varies according to the stage of development in that country. Countries are separated into 5 stages of development depending on two criteria: GDP per capita and dependency on natural resources. Stage 1 countries are considered to be “Factor-driven”, Stage 2 countries are “Efficiency-driven”, with Stage 3 countries considered “Innovation-driven and countries in between considered to be in transition.
The categorization of countries can be seen in the picture below, and they are an easy way to define the maturity of a market. Stage 3 countries are Developed Markets, while countries in transition between Stage 2 to 3 are Emerging Markets. Stage 2 countries are a mix of Emerging and Frontier markets. But both Stage 1 and economies in transition from Stage 1 to 2 are comprised of countries that are usually considered Frontier Markets.
These stages of development are a decent answer to the question, “What are Frontier Markets?”, and underscore the importance of GDP per capita in defining frontier markets. The GCI uses the following thresholds for determining stages of development: less than $2000 for Stage 1, $3000-8999 for Stage 2, greater than $17,000 for Stage 3, and anything in between for the transition stages. They use nominal GDP per capita.
#3: Identifying the Biggest Improvers (and Regressors)
The average change in ranking from 2013 to 2014 was 4.85 places. While a one year move is not enough to establish a trend, it is still worth keeping tabs on the biggest movers on the rankings. Listed below are the top 10 improvers and regressors in the rankings:
The 2014-2015 Global Competitiveness Report and its Index are great resources for frontier market investors. We highly encourage readers to look into the country specific information, particularly the biggest concerns in each country negatively impacting competitiveness.