It's a centuries-old debate: how do some nations attain long-term economic growth and an ever higher standard of living while others don't? What determines whether people in your part of the planet live in McMansions, mobile homes or mud huts? In the 18th century, proto-economist Adam Smith pointed to the transformative effect of the division of labor. In the 19th, David Ricardo highlighted the benefits of trade. In the 20th, Harvard University's Michael Porter made the case for industry clusters. Geography, physical capital, technology, worker education--they've all taken a turn as the supposed silver bullet.
In that tradition, the World Economic Forum (WEF) each year handicaps the economic-development race. The Global Competitiveness Report tallies 113 factors that contribute to an economy's competitiveness--a buzzword that roughly boils down to how well a country is positioned to squeeze efficiency out of its businesses and attract companies and investment from abroad. Components of the resulting Global Competitiveness Index range from the quality of a nation's roads to the independence of its judiciary to the incidence of tuberculosis to how easy it is to hire an engineer. Parts of the index are culled from official data; many others are drawn from a survey of 11,000 international business executives. This year TIME partners with the WEF to bring you in-depth data on 37 key countries at time.com/globalbusiness
The Global Competitiveness Index is widely watched by countries that want to ferret out weak spots and by companies deciding where to invest. "We're taking the complexity of the world economy and simplifying it," says Jennifer Blanke, a senior economist at the WEF, "so that business and government can say, 'These are the obstacles going forward. What can we do to overcome them?'" In the overall ranking, the U.S. finishes first (same as last year) out of 131 countries, thanks in part to top scores in venture-capital availability (plentiful), domestic-market size (huge) and cost of firing workers (low). The index focuses on productivity, not its collateral effects. Next are Switzerland, Denmark (see page 68 for a look at why), Sweden, Germany, Finland, Singapore, Japan, the U.K. and the Netherlands--some fairly usual suspects. Further down are some more surprising comparisons (see list at left), such as South Korea at No. 11, up from 23rd place last year.
Part of the way countries stack up results from how the WEF weights a nation's scores according to its stage of development. A fundamentals-driven economy like Egypt or Bolivia is judged more on basic requirements such as the reliability of police services and electricity supply; an efficiency-driven economy like Brazil or Latvia is gauged more by measures such as Internet access in schools and strength of investor protection; and an innovation-driven economy like France or South Korea sees more weight put on more sophisticated issues such as company R&D spending and marketing.
All that slotting has something of a leveling effect. When you've got an early-stage economy, you can make real strides by shoring up telephone service and property rights, but once you've got infrastructure and stable institutions, only innovation, such as new technologies, can keep the momentum going. Competitiveness, then, is not about absolutes but about being able to make the most of what you have.
Dig deeper into the data behind a country's ranking, and there are often surprises lurking. The U.S., for instance, grabs the No. 1 slot for 10 measures, but in certain areas it flails. It scores 69th for primary-school enrollment and 75th in ability to fend off organized crime. The U.S. does particularly poorly when it comes to macroeconomic gauges: 89th for level of government debt, 107th for savings rate. "It's a real warning sign coming out of the data," says Blanke.
The data also challenge some widespread beliefs--for instance, that high taxes stifle business. The U.S. and Switzerland, two moderately taxed countries, are at the top of the list, but so are Denmark, Sweden and Finland, where taxes are sky high. "There's always the debate about more government, less government, more taxes, less taxes," says Xavier Sala-i-Martin, the Columbia University economist who designed the index. "This suggests that is the wrong debate. We should be talking about what the government does and not its size."
Take Kenya. The sub-Saharan nation ranks abysmally on many basic measures, such as favoritism in decisions of government officials (115th) and business impact of malaria (113th), but on some more sophisticated metrics it does quite well--eighth for legal rights tied to the financial markets and 31st for quality of scientific-research institutions. Skipping the basics while nailing the more complicated stuff is a counterintuitive yet increasingly widespread trend--think of the places in Africa that leaped from no phones to cell phones, bypassing landlines--but whether a country can excel in the long run without a more stable foundation is another question.
India, ranked No. 48, has seen a bit of that hopscotching too. It is eighth in the world for quality of management schools yet 106th for quality of electricity supply. Bright minds, dim offices. The bigger story is that India trails that other unfurling economic giant: China finishes 34th overall, showing strength in areas like university-industry research collaboration (25th--see page 74) and national savings rate (7th) while remaining among the world's worst countries for things like the soundness of banks (128th). As for India, there is always discussion about the extent to which that country's bureaucratic, multistate, multiparty democracy handicaps it--a communist government like China's doesn't have to worry about building consensus for economic policies.
In general, says Sala-i-Martin, the data show that democracy in developing countries is a wash. "That doesn't mean democracy isn't desirable," he says. "It just doesn't help economic growth." As countries grow richer, though, many--like Chile, Spain and Greece--adopt democracy. "Democracy," says Sala-i-Martin, "seems to be what economists would call a luxury good." Demand for it increases as incomes rise.
But for all that the data can teach us, keep in mind that the nature of a ranking masks certain economic realities of a globalized world. The ability of countries to raise their citizens' standard of living is not a zero-sum game. Nearly 200 years ago, Ricardo gave a detailed lesson about comparative advantage: when two economies interact, they both can benefit even if one is more advanced across the board. That's why South Korea invests in North Korea, which is in some respects an economic black hole. At the end of the day, both can be winners.