MexECON Blog

Mexico Rises to 58th in WEF Competitiveness Index

In the "Global Competitiveness Index" for 2011-2012, released several weeks ago by the World Economic Forum (WEF), Mexico jumped eight places to a ranking of 58th out of the 142 countries in the sample.  Based on its score, Mexico's economic competitiveness is now just below that of countries such as Brazil, India, and Slovenia, but just above Turkey, Montenegro, and Costa Rica.  In this year's ranking, Switzerland maintained its position as the most competitive country, followed by Singapore, Sweden, Finland, and the United States.

The Global Competitiveness Index is designed to measure a country's economic competitiveness, defined as the institutions, policies, and factors that allow a country's people to become more productive, which in turn allows for higher incomes and an increased return on investment.  Each country's index score is calculated as the weighted average of several subindexes, with the weighting adjusted to reflect the country's stage of development.  The subindexes encompass a wide range of statistical data and survey responses.  For example, the base data for each country includes indicators such as the strength of its property rights, its public debt load, its rate of price inflation, and the ease of hiring and firing in the country.  The full report can be found at www.weforum.org.

In the 2011-2012 index, Mexico's best performance came in the indicators designated by the WEF as "efficiency enhancers."  Because of its huge population of almost 110 million, Mexico ranked 11th out of the 142 countries in the size of its domestic market.  Reflecting its integration with the U.S. market via the North American Free Trade Agreement (NAFTA), as well as its free-trade agreements with other countries, the country ranked 14th in the size of its available foreign markets.  It ranked 23rd in the prevalence of foreign ownership of its business firms and 24th in its rate of foreign direct investment and technology transfer.  Although much of Mexico's rise in the rankings this year came from its efforts to boost competition and ease the process of forming a business, the criteria where Mexico scored lowest in this category all related to the heavily monopolized structure of its economy and the rigidity of its labor laws.

Mexico also scored relatively well among the WEF's "innovation and sophistication factors."  The country ranked 40th in the breadth of its value chain, i.e., whether its exporting companies are concentrated at just one step in the value chain, such as extraction, or whether they also are active in steps such as product design, marketing, and logistics.  It ranked 41st in the state of its "clusters," i.e., geographic concentrations of a particular industry's companies and their suppliers, which economists believe can enhance efficiency, reduce barriers to entry, boost knowledge transfer, and otherwise encourage innovation.  However, as an example of the limits of these positives, Mexico ranked only 86th in the availability of scientists and engineers.

Mexico's performance among the indicators designated as "basic requirements" was decidedly more mixed.  On some criteria in this category, the country scored relatively well.  For example, it ranked 36th in the strength of its investor protections, 40th in its credit rating, and 49th in the quality of its business management schools.  On other criteria, however, Mexico scored quite poorly.  The country ranked 101st in the efficiency of its court system and 102nd in the burden of government regulation.  Even worse, it ranked 133rd or lower on the reliability of its police services, the business costs of crime and violence, and the prevalence of organized crime.  It is particularly telling that while Mexico ranked a relatively high 22nd for the share of its children enrolled in public education, it ranked 121st in the quality of primary education.

Comment:  As I noted when the WEF's 2010-2011 index was released last year, sometimes good investment returns come from the mere improvement in competitiveness over time, as opposed to a country's competitiveness relative to other countries at some given point.  Mexico's improvement in the 2011-2012 index therefore seems consistent with the strong outperformance of its stock market from early 2009 to summer 2011.  To make further progress and ensure good economic growth and strong investor returns in the future, the new government that takes over after the 2012 elections will need to make progress reducing crime, deregulating and de-monopolizing the economy, and improving educational institutions.  Even before that step is taken, however, Terra Nova believes it can find many good opportunities in Mexico, and it is actively seeking new companies in which to invest.

Patrick Fearon, CFA
Vice President, Fund Management

WEF Competitiveness Index 2011-2012

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