12/19/2007 01:12 pm ET Updated May 25, 2011

What is Competitiveness?

In the last post, I challenged the notion that test score for elementary and secondary students are related to the U. S. ability to compete in the global economy. In this one, I want to examine what does contribute to competitiveness. First, though, we have to take a look at the concept of competitiveness. Many people take it as a zero-sum game: If you win, I lose. Not so. The computer chip was invented in the U.S. Many other nations benefited. If some young medical student in Nigeria invents a cure for AIDS, the world, not just Nigeria, will win.

The World Economic Forum defines competitiveness as the "set of institutions, policies and factors that determine the level of productivity of a country." A competitive country is one that increases the prosperity of its own people. The WEF uses a set of 12 "pillars of competitiveness" to evaluate a nation. It is a capitalist-oriented organization, but the socialist countries of Scandinavia get high ranks. Overall, the United States ranks #1. The numbers in parentheses below are the U. S. ranks, out of 131 ranked nations for each pillar.

1. Institutions. Institutions must operate through laws that are fair, not through personal whim or through the kind of cheating we saw at WorldCom, Enron, etc. (23).

2. Infrastructure. We have long taken infrastructure for granted, but since Katrina and the collapse of that bridge in Minneapolis, we can no longer afford to be complacent. You need effective was of transporting goods and people via roads, railroads, ports, and air. You need reliable electricity and a good telecommunications system (33).

3. Macroeconomy. Our weakest link. Governments that have to pay lots of interest on debt can't be efficient because that money can't go to increase productivity. The U. S. debt, both to other nations and to its own people is huge. The trade deficit has been falling somewhat because of the falling dollar, but that kind of gain entails its own risks--if China and Japan bail out of buying bonds and such in dollars, the economy will collapse (but so will theirs)(75).

4. Health and Primary Education. As I showed in "The Worst Place to Be a Kid," the U. S. is not a particularly healthy place to grow up. And the health problems suffered by children carry over into the workplace as adults, especially for low-income workers. Primary education establishes the base for later education (34).

5. Higher Education and Training. For the WEF, this includes secondary school as well as institutions of higher education. And, as the half-life of jobs shortens, the availability of and ability to take advantage of high quality on-the-job training becomes increasingly important to both employer and employee (5).

6. Goods Market Efficiency. In a competitive nation, the most efficient firms produce goods that consumers really want (12).

7. Labor Market Efficiency. In a competitive nation, workers are allocated to their most efficient use and given incentives for high performance (1).

8. Financial Market Sophistication. A competitive market channels resources to the best entrepreneurs, not to the politically connected. It also provides risk capital and loans (11).

9. Technological Readiness. The WEF holds that differences in technology use explains much of the differences in productivity among nations. Information and communication technologies are especially important in this regard (9).

10. Business Sophistication. This reflects how well various related companies work together in networks (7).

11. Innovation. "Firms in innovative countries must design and develop cutting-edge products and processes to maintain a competitive edge. This requires an environment that is conducive to innovative activity support by both the public and private sectors" (1).

12. I left out market size because a) I'm running out of room and b) the WEF admits that it is not as well established as the other 11 (1).

Although the WEF lists the pillars separately, it emphasizes that some of them are tightly interconnected. But taking them together one can see that there is a lot more that goes into competitiveness than scores on multiple-choice math and science tests. As noted, we take for granted a lot of things that go into competitiveness, but there are places without reliable electricity, with dirt roads, with lots of people dying from tuberculosis or malaria. One third of Indians are still illiterate and only 40% of Chinese make it past 9th grade.

One might wonder how a nation can be tops and yet have ranks as low as 75. The equations that the WEF uses in its calculations are quite complicated, but it is easy to understand by analogy: If everyone on an NBA basketball team stands 6' 10" tall, none of them are in the 99th percentile (occupied by people like Yao Ming at 7' 6"). But, taken together, they in all likelihood constitute the tallest team in the league.

So the next time someone starts ranting about math and science scores dooming us to a future of mediocrity, give 'em a copy of the Global Competitiveness Report (it's only 519 pages long and costs only $99.32 at, down from $110.95).