Lebanon’s competitiveness: Bottoming out

A new report paints a bleak picture of the country’s business environment

(Dawn Huczek | Flickr | CC BY 2.0)

Lebanon is not in bad company for a peer group. According to the just published World Economic Forum’s Global Competitiveness Report (GCR), we are among those countries that are — and in many cases have been for quite a while — transitioning from a medium stage of development where efficiency gains drive improvements in competitiveness to an advanced one where innovativeness is the key differentiator.

In WEF terminology, this phase is called the transition stage from efficiency driven to innovation driven economies, and it is the second most advanced of the five stages in the GCR. Inconveniently, though, Lebanon is the 2014 bottom scorer in the Global Competitiveness Index (GCI) among the 24 countries in this category, with a score of 3.68 points that translates overall into rank 113 of 144 in the report’s latest edition, which was released this week.

This is not a comfortable or even hopeful placement given that most countries in this group score between 4.04 points and 4.51 points, yielding midfield rankings between positions 40 and 80 in the WEF’s list.

The negative impression of Lebanon’s state of competitiveness from being a downward outlier in this peer group is exacerbated by the fact that the country looks stressed by any GCI measure. When compared with other countries in the Middle East and North Africa, Lebanon this year came in 14th place of 17 ranked Arab MENA countries. Only Yemen, Libya and Egypt were shown as less competitive in the region, noting that Syria and Iraq were not ranked.

Adding to the damage, Lebanon dropped by 10 places this year when compared with its ranking in the 2013 GCR. But while drawing a lot of attention — news reports on the GCR release this week focused by a huge margin on positions and ranking gains or drops — these relative positions are not ultimate truths. Leading development experts raise big questions regarding the relevancy of rankings as indicators because small changes in a country’s score can cause outsized and potentially misleading leaps up or down in a ranking list.

Lebanon’s drop in this regard thus might be somewhat acceptable if the relative weakening were because nearby ranked countries improved their scores but, alas, the reality is much worse. Year on year, the drop is actually a reflection of a fall in the Lebanese score from 3.8 points in 2013. Moreover, according to both hard facts and perceptions, the 2014 drop represents a continual weakening in the country’s competitiveness.

Over the past three editions of the GCR, Lebanon dropped 200 basis points in its score (3.68 in 2014 vs. 3.88 in 2012) and lost 22 places in the global ranking. Relative to the global leader, Switzerland, Lebanon is now 2,020 basis points behind, compared with a gap of 1,840 in 2012.

Crumbling pillars

The theoretical score range of the GCI spans from 1 (lowest) to 7 (best), or 6,000 basis points, but the actual range of the scores is narrower, extending this year from 2.79 points for Guinea at the bottom to Switzerland’s 5.70 points. A country’s score is determined by a compilation of perception factors based on a proprietary survey of business leaders and hard data taken from sources such as the International Monetary Fund, UNESCO and the World Health Organization.

The overall score combines the scores reached in 12 pillars, which in turn are computed from scores in a number of fields that vary per pillar between 4 and 21. Except for the pillar measuring the macroeconomic environment (based on fiscal and credit rating data), opinion survey results contribute to all pillars and are the primary influencers in determining the scores in eight pillars.

Over the past two years, Lebanon’s score in the macroeconomic environment pillar fell from a weak 3.32 to a disastrous 2.56, making the country rank second worst in the category. Except for a reduction in inflation, the country weakened in every field of the macroeconomic environment pillar in both absolute and relative terms.

The second, survey driven, area where the country’s score dropped precipitously when compared with 2012 was institutions. As far as fields building this pillar, Lebanon is currently the country where business executives see the lowest public trust in politicians and second worst in the assessment of wastefulness in government spending. It is no comfort at all that there are still five countries in the world which scored lower in the institutions pillar.

Lebanon’s best performing pillar in 2014 is health and primary education, with a score of 6.29 and a ranking of 30th in the world, followed by higher education and training with a score of 4.39 and ranking of 67th. Individual fields where Lebanon scored far above its global position were, besides life expectancy and some disease non-prevalence fields, the survey responses on quality of math and science education, where respondents perceived Lebanon at a score that equates to place 5 in the world, quality of primary education (16), quality of management schools (17), control of international distribution (20), which is protectionism to some, and soundness of banks (27).

Notwithstanding the fact that the comparatively high perceptions of Lebanon in areas such as banking sector soundness and quality of business schools will not surprise readers of Executive, the extreme variance of opinions in ranking the quality of government spending and the quality of math education is a reminder that the perceptions of — in the Lebanese case — about 40, albeit presumably highly reputed, business leaders as a survey base calls for a healthy skepticism and scrutinizing for biases.

Addressing biases

The presence of biases is a reasonable assumption in any country, and in the context of Lebanon’s visibly and demonstrably deteriorated economic and security position when comparing the survey timings of spring 2014 and spring 2012, it can also be presumed that changed mood factors could influence survey responses on a factor such as ‘reliance on professional management’ where the assessments dropped from 3.9 in 2012 to 3.3 in 2014. Such a swing seems unlikely to be based in reality — otherwise, Lebanese business or news media would have reported waves of firings of qualified managers.

For Lebanon, questions seem warranted even on hard data. For example, the country’s ratio of female participation in the labor force is reported as one of the lowest in the world (position 138), which seems counterintuitive to statistics on high ratios of female graduates in universities, the known ratio of women to men working in the banking sector (nearly 1 to 1 in 2010), general impressions in the workplaces and even voices of outspoken women who decry a perceived counter gap in gender presence.

The challenges of data security and balancing for biases have certainly not escaped the attention of the GCR’s authors. Following audits of its surveying methodology in 2008 and 2012, the WEF has stepped up efforts to counterbalance or exclude heavily biased survey results, which in the past three years meant discounting survey results from three to four countries per year.

One country that was ranked in the top 30 in 2012 and 2013 but not covered in the 2014 GCR was Brunei Darussalam, because according to the WEF the 2014 survey of business executives in this country (and two other countries, Benin and Liberia) was “not completed to minimum requirements.” In several other countries, including Morocco, Saudi Arabia, Qatar, Jordan, the United Arab Emirates and Oman, the data quality of survey responses raised red flags in one year or another because of inexplicable large swings in responses or obvious incongruencies between survey responses and developments on the ground.

Making sense of positions

As the GCI has now reached its tenth edition, it appears to be ever clearer that the exercise of collecting survey based scores and hard data gives readings whose annual fluctuations provides a mixture of high grade entertainment values and quotable numbers for conference presentations, small talk at business dinners, economic–political debates and magazine articles.

A more important challenge now seems to be to understand how well the GCI readings chart a country’s competitiveness journey and how far the index readings can help a country in improving its competitive positioning.

In the 2014 GCR, the WEF asserts that statistics corroborate the validity of the GCI as a “sound estimate of the level of productivity” in the countries which the index has covered for the past 10 years. To this effect, the GCR cites two equations that measure bivariate relations between GCI and per capita GDP and between GCI and countries’ economic growth rates after netting out the convergence effect. Under the second statistical quest, the GCI scores of the 144 countries could be related to the net growth rates of these countries, because “the growth rate of GDP per capita of country i is a positive function of the GCI score and a negative function of time t,” in the formula used for computing the relationship, the GCR said.

The result of the computations is that the report assures that “the GCI’s estimate of the determinants of competitiveness … is validated on a statistical level.”

This validation may still not explain completely why Lebanon scores far lower on competitiveness than other countries in the peer group that is transitioning from efficiency driven to innovation driven economies and which are classified as members of this group mainly by having per capita GDP of $9,000 to $17,000, except for oil exporting countries where GDP is discounted as a differentiator.

This group includes large countries such as Brazil, Russia, Turkey, Mexico and Malaysia along with demographically mid-sized and small countries such as Poland, Uruguay, Croatia, Argentina, Barbados, Costa Rica and Mauritius. Two thirds of the 24 countries in the group are ranked between 40 and 80 in the GCI. There are four upward outliers, topped by the United Arab Emirates (12) and Malaysia (20); another four countries are laggards, and here Lebanon is the least competitive player behind Suriname (110) and Argentina (104).

Another issue deserving of consideration may be the degree to which GCI readings fluctuate. According to a very quick review of 2014 GCI results by Executive, country scores and rankings are most static in the top 20. In this group, a quarter of countries appeared in exactly the same positions as they did in 2013, 14 economies moved by between one and four positions and only one country, the United Arab Emirates at plus 7, changed its ranking by more than four spots.

In the 20 to 40 cohort, positions are still fairly stable and small movements of up to four places predominate. However, in all other cohorts of 20 from place 41 to 144, the number and intensity of fluctuations are higher — in the 81 to 100 cohort for example 13 countries moved by five or more positions up or down — and below rank 74 (Botswana) no country appeared in exactly the same position in 2014 and 2013.

But how to dig out?

In summary of the perspective offered by the GCR over the past three years, some countries, like the Philippines, Mauritius, Greece, Portugal and the United Arab Emirates, have achieved strong gains in their competitiveness and other countries have maintained their positions. Lebanon on the other hand was among a handful of countries that lost a significant number of positions over the past three years, such as Argentina (-10), India (-12), Egypt (-12) and Iran (-17).

In their write-up introducing the 2014 GCI, the GCR authors said — in a text rife with cautionary terminology such as ‘seems’ and ‘may be’ — that the report comes at a time “when the world seems to be finally emerging from the worst financial and economic crisis of the past 80 years and returning to a pre-crisis situation.”

Although the text’s following sentences suggest otherwise, this statement’s face value begs the question if we can now presume to return to normalcy or better start to ponder an impending new crisis.

But regardless of such musings, and while noting in appreciation that the WEF is currently undertaking a review of the GCI for further improvements, it seems that the most pertinent question for all providers of competitiveness gauges is how to create tools by which countries can translate the insights from their GCI scores into actual gains in competitive positions, and do so structurally rather than on levels of symptoms or appearances.

For a country such as Lebanon, whose scores in the GCI are torn between high and low and whose performance lags against regional peers and per capita income peers, knowing that we are in a hole — and being reminded of it every time the light goes off or the water stops — seems certainly less instructive than getting new and practical ideas on how to climb out.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.