The Determinants of National Competitiveness

Abstract

We define foundational competitiveness as the expected level of output per working-age individual that is supported by the overall quality of a country as a place to do business.The focus on output per potential worker, a broader measure of national productivity than output per current worker, reflects the dual role of workforce participation and output per worker in determining a nation's standard of living.Our framework highlights three broad and interrelated drivers of foundational competitiveness: social infrastructure and political institutions, monetary and fiscal policy, and the microeconomic environment.We estimate this framework using multiple data sets covering more than 130 countries over the 2001-2008 period.We find a positive and separate influence of each driver on output per potential worker.The microeconomic environment has a positive effect on output per potential worker even after controlling for historical legacies.Using our framework we define a new concept, global investment attractiveness, which is the cost of factor inputs relative to a country's competitiveness.This analysis reveals important insight into the economic trajectory of individual countries.Our framework also offers a novel methodology for the estimation of a theoretically grounded and empirically validated measure of national competitiveness.