Variables for sustained growth 2015 index

32 Pages·2016·3.05 MB·English

Variables for
sustained
growth 2015
index
January 2016

.
Contents

Page 1
Executive summary
Page 2
Introduction
Page 4
The VSG Index 2015 ranking
Page 6
Why the VSGs matter
Page 12
Regional performance
Page 16
Focus on institutional strength
Page 18
Focus on technology readiness
Page 19
Conclusion and how the VSGs can be used
Page 20
Appendix 1: Methodology
Page 24
Appendix 2: VSG Index performance by pillar
Executive summary
The Variables for Sustained Growth (VSG) Index was developed in order to compare the productivity
potential of different countries across a broad range of areas. It forms part of a set of models that are
used to assess countries’ long term economic growth potential.
There are numerous areas that influence countries’ productivity performance. The VSG Index aims to
capture the most significant ones, and offers policy makers and investors an insight into countries’
performance and how it compares to peers and those best in class in each category. Improvements in
areas covered by the VSGs, including transport infrastructure, education, and the strength of public
institutions, can have significant impact on future economic growth and wealth, as illustrated in this
report.
The top performances in this year’s VSG Index are dominated by Western Europe, with Singapore,
New Zealand, and Hong Kong the only non-European countries to make it into the top 10.
Productivity potential among the major developing economies in Asia ranged from relatively strong
performance in Malaysia to poor results in Afghanistan, which recorded only just over a third of
Malaysia’s Index level. Latin America saw less progress towards better productivity enablers over the
past five years than developing Asia, with the biggest improvements in the region enjoyed by Ecuador
and Costa Rica.
Our research found that of the five pillars of the VSG Index, Institutions’ strength has the greatest
influence on productivity, with government effectiveness particularly important. It is therefore not
surprising that the majority of countries that form the top 10 in this category are also among the top
overall performers in the index. Taking Nigeria as an example, our analysis suggests that strong
improvements to the strength of public institutions could see GDP per capita 31% higher by 2050.
Technology readiness, another important driver of productivity in our VSG Index, has a relatively
uneven distribution of results among the 181 countries covered by the VSG Index. It highlights how a
comparatively small group of countries has managed to leap far ahead, while a significant number of
countries are far behind, with limited internet access and only basic telecom infrastructure, making it
harder for them to catch up with more advanced economies.

1
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
Introduction
Economic theory tells us that countries’ performance, in terms of GDP growth, is driven primarily by
three factors: growth in employment (Labour), growth in capital stock, and improvements to Total
Factor Productivity (TFP). Productivity therefore has a major role to play in determining the level of
wealth that countries will attain.
Numerous factors are likely to influence productivity in each country, but for public policy makers and
investors it is important to understand how some of the major elements evolve over time and how
each country’s performance compares to its peers, in order to gain better understanding of the
economic growth potential of their country and how its future course could be improved.
The Variables for Sustained Growth (VSG) Index was developed in order to compare the productivity
potential of different countries across a broad range of areas. It forms part of a set of models that are
used to assess countries’ long term economic growth.
The VSG Index comprises 21 series, which were selected based on academic studies and business
survey results to assess countries’ productivity performance. The importance of each category in the
index, as captured by the weights used for each series, was determined by econometric analysis, as
well as by primary research.1
There is substantial amount of correlation between the individual series making up the index. This is
consistent with a balanced development path, where progress across economic infrastructure goes
hand-in hand with improvements in the institutional framework.
The VSG Index is divided into five pillars:
■ Macroeconomic stability
■ Openness to catch up in best practice
■ Infrastructure quality
■ Human capital
■ Strength of public institutions

1 See Appendix 1 for further discussion of the methodology used to create the VSG Index.
2
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
Each pillar is represented by a number of series and sub-series, which capture key areas associated
with productivity performance, as highlighted in Table 1 below:
Table 1: Components of the VSG Index
Pillars Series Sub-series
Macro stability • Government deficit
• Government debt
Open to catch up • FDI stock
• Total trade
Infrastructure • Quality of transport • Roads
• Rail
• Ports
• Air

• Technology readiness • Mobile users
• Internet users

• Secure internet server
• Financial institutions – availability of
financial services
Human capital • Education – average years of
schooling and estimated rate of return
• Life expectancy
Institutions’ • Regulatory quality
strength • Judicial independence
• Transparency of government
policymaking
• Government effectiveness

• Corruption
• Property rights
• Business rights
• Intellectual property rights
Source: KPMG Macroeconomics
The VSG Index was originally developed in 2013 by members of the KPMG macroeconomics team in
collaboration with external advisors. It covers 181 countries and tracks their performance across the
productivity drivers since 1997.
In the next section we outline the index’s overall ranking results for 2015. We then provide examples
of how improvements to productivity drivers could raise long term GDP growth. This is followed by a
discussion of the main VSG Index results by region, and a focus on the two areas with most weight in
the index; institutions’ strength and technology readiness. Detailed performance by pillar is provided
in Appendix 2.

3
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
The VSG index 2015 ranking
Rank Country Overall Rank Country Overall Rank Country Overall Rank Country Overall
score score score score
1 Luxembourg 8.4 23 Korea, South 7.0 45 Seychelles 5.5 67 Kazakhstan 4.8
2 Netherlands 8.4 24 United Arab 7.0 46 Panama 5.5 68 Botswana 4.8
Emirates
3 Switzerland 8.4 25 France 6.7 47 Uruguay 5.4 69 Romania 4.8
4 Singapore 8.4 26 Czech 6.6 48 Hungary 5.4 70 Kuwait 4.8
Republic
5 New Zealand 8.3 27 Israel 6.4 49 South Africa 5.4 71 China 4.8
6 Norway 8.3 28 Qatar 6.4 50 Costa Rica 5.4 72 Namibia 4.8
7 Finland 8.2 29 Malaysia 6.4 51 Oman 5.4 73 Saint Vincent 4.7
and the
Grenadines
8 Hong Kong 8.1 30 Slovenia 6.3 52 Macedonia 5.4 74 Azerbaijan 4.7
FYR
9 Sweden 8.1 31 Chile 6.3 53 Georgia 5.3 75 Mexico 4.7
10 Ireland 8.1 32 Latvia 6.2 54 Jordan 5.2 76 Armenia 4.7
11 Denmark 8.0 33 Cyprus 6.2 55 Trinidad and 5.2 77 Saint Lucia 4.6
Tobago
12 Germany 8.0 34 Lithuania 6.0 56 Croatia 5.1 78 Russia 4.6
13 Canada 7.9 35 Bahamas 6.0 57 Montenegro 5.1 79 Albania 4.6
14 Australia 7.9 36 Barbados 5.9 58 Belize 5.1 80 Cabo Verde 4.6
15 Iceland 7.8 37 Bahrain 5.9 59 Thailand 5.0 81 Vietnam 4.5
16 United 7.8 38 Spain 5.9 60 Bulgaria 5.0 82 Philippines 4.5
Kingdom
17 United 7.6 39 Portugal 5.7 61 Greece 5.0 83 Tunisia 4.5
States
18 Estonia 7.4 40 Slovakia 5.7 62 Italy 5.0 84 Bhutan 4.5
19 Austria 7.3 41 Mauritius 5.7 63 Turkey 5.0 85 Morocco 4.5
20 Malta 7.3 42 Saudi Arabia 5.6 64 Jamaica 5.0 86 Belarus 4.5
21 Belgium 7.2 43 Poland 5.6 65 Sri Lanka 4.9 87 Rwanda 4.5
22 Japan 7.1 44 Brunei 5.5 66 Antigua and 4.9 88 Serbia 4.4
Barbuda
89 Fiji 4.4 112 Mongolia 4.0 135 Gambia 3.5 158 Mozambique 2.8
90 Lebanon 4.4 113 Zambia 3.9 136 Ethiopia 3.4 159 Burkina Faso 2.7
91 Grenada 4.4 114 Guatemala 3.9 137 Uganda 3.4 160 Togo 2.7
92 El Salvador 4.4 115 Bolivia 3.9 138 Pakistan 3.4 161 Myanmar 2.7
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© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
93 Peru 4.3 116 Bosnia and 3.9 139 Nepal 3.4 162 Djibouti 2.7
Herzegovina
94 Dominican 4.3 117 Paraguay 3.9 140 Tanzania 3.3 163 Angola 2.6
Republic
95 Colombia 4.3 118 Gabon 3.9 141 Bangladesh 3.3 164 Comoros 2.6
96 Ecuador 4.3 119 Egypt 3.9 142 Cameroon 3.3 165 Sierra Leone 2.6
97 Samoa 4.3 120 Kyrgyzstan 3.9 143 Benin 3.3 166 Haiti 2.5
98 Honduras 4.3 121 Senegal 3.9 144 Equatorial 3.2 167 Iraq 2.5
Guinea
99 Maldives 4.3 122 Swaziland 3.8 145 Malawi 3.2 168 Niger 2.4
100 Indonesia 4.3 123 India 3.8 146 Zimbabwe 3.1 169 Syria 2.3
101 Brazil 4.2 124 Vanuatu 3.8 147 Sao Tome 3.1 170 Guinea 2.3
and Principe
102 Moldova 4.2 125 Cote d'Ivoire 3.8 148 Nigeria 3.0 171 Chad 2.3
103 Ukraine 4.1 126 Cambodia 3.8 149 Solomon 3.0 172 Burundi 2.3
Islands
104 Ghana 4.1 127 Micronesia 3.8 150 Madagascar 3.0 173 Afghanistan 2.3
105 Iran 4.1 128 Laos 3.6 151 Mali 3.0 174 Timor-Leste 2.3
106 Suriname 4.1 129 Lesotho 3.6 152 Libya 2.9 175 Yemen 2.1
107 Argentina 4.1 130 Liberia 3.6 153 Turkmenistan 2.9 176 Guinea- 2.0
Bissau
108 Tonga 4.1 131 Nicaragua 3.5 154 Congo 2.9 177 Sudan 2.0
109 Guyana 4.1 132 Uzbekistan 3.5 155 Papua New 2.8 178 Eritrea 1.9
Guinea
110 Kenya 4.1 133 Algeria 3.5 156 Venezuela 2.8 179 Congo, Dem. 1.9
Rep
111 Tajikistan 4.0 134 Kiribati 3.5 157 Mauritania 2.8 180 South Sudan 1.8
181 Central 1.8
African
Republic
Source: KPMG Macroeconomics

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© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
Why the VSGs matter
Improvements to infrastructure, governance, or the other productivity drivers captured by the VSGs
can have significant impact on countries’ future economic growth, as well as on the future income of
their people. We use our VSG Index together with our long term growth model to assess the wider
economic benefits of individual policies and broader policy objectives2.
In this section, we look at a number of examples how improvements in different areas of the VSGs
could translate into stronger economic performance. Better performance in individual areas
represented by the VSGs leads to higher GDP growth, and higher GDP per capita increases the future
value of the VSGs Index in our model.
Improvements in specific areas of the VSG Index will therefore gradually increase the performance
across other areas captured by the VSGs through the income effect. However, some direct
relationships between the series are also likely, with improvements in transport infrastructure, for
example, likely to have a direct impact on openness to trade and FDI, or more effective governance
directly impacting the quality of infrastructure. Our economic impact projections are therefore likely to
underestimate the full effects of policy changes, but they provide a good indicator of some of the
broader benefits.
Bangladesh: Better transport infrastructure
Rising wage costs in China should benefit countries in its vicinity like Bangladesh, with companies
looking to move production to lower cost locations. But the ability to attract more FDI will also depend
on the quality of essential infrastructure on offer. Despite making some progress in infrastructure
quality, Bangladesh remains significantly behind the world’s developed economies. The 2015 VSG
Index rates Bangladesh transport infrastructure at 3.52, which ranks it 111 out of 138 countries for
which data is available.
Chart 1: Effect of better transport infrastructure in Bangladesh
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
Baseline Better transport infrastructure scenario

Source: KPMG Macroeconomics

2 See ‘The global economic impact of anti-microbial resistance’, KPMG 2014, for a description of our long term growth model,
and an example how it was used together with the VSG Index to estimate the economic costs of no new antibiotics coming to
market. kpmg.com/UK/economicoutlook.
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© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
GDP growth rate
A significant improvement in transport infrastructure should lift productivity and generate stronger
economic growth. The higher income achieved thanks to improved transport infrastructure could then
have additional positive effects on other productivity drivers, via increased investment in health and
education, for example. Other impacts, generated through direct links between transport quality and
openness to catch up and other productivity drivers are also likely, but are not captured by our model.
Similarly, the financing method used to fund such infrastructure improvements may be significant, as
it may cause public finances to deteriorate, affecting the macroeconomic stability pillar, and putting
downward pressure on growth.
We used our VSG Index and our long term growth model to estimate the impact better infrastructure
could have on long term economic performance in Bangladesh. We compared our baseline scenario
for the economy with a scenario in which the transport infrastructure of Bangladesh improves to the
value of the best performer in our sample, UAE at 9.40.
An improvement of this scale would see the growth rate of real GDP in Bangladesh rise by around
0.9% per annum according to our model in the years 2020-25 (see Chart 1 above). The lift to GDP
growth is expected to slowly subside thereafter due to the catch-up mechanism, as the country
develops the pace of new growth slows down, but the overall result is still a significant improvement
to economic performance.
The effect of this change would see GDP per capita rise from US$9,844 to US$11,369 by 2050
(measured in 2014 USD).

Better transport
infrastructure scenario

Baseline scenario

US $11,369

US $9,844

Mexico: Improvements to technology readiness
Technology readiness, which assesses countries’ quality of telecommunication infrastructure together
with the level of ICT use, is an important productivity driver. It is measured in the VSG Index through
three sub-series: the number of mobile phones and internet users per 100 people, and the number of
secured internet servers.
Mexico’s latest score for technology readiness is relatively low at 1.97 in the VSG Index, compared to
the top score of 9.83 enjoyed by Luxembourg. Recent reforms to promote greater competition in the
telecom sector in the country should broaden the availability and use of ICT, allowing Mexico’s
performance in this area to reach levels more in line with its peers.
In order to gauge the potential impact further improvements could have on the economy, we looked
at a scenario where Mexico experiences a significant increase in its VSG score for technology
readiness, rising to a similar level of Luxembourg’s 9.83, which ranks highest on this measure.
7
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
As highlighted in Chart 2 below, annual GDP growth rises by an average of 0.3 percentage points
between 2020 and 2050 thanks to improved technology readiness, representing just under 8% higher
growth each year on average than without the improvement in technology readiness.
Chart 2: GDP growth under alternative technology readiness scenarios for Mexico
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
Baseline Improved telecom technology scenario

Source: KPMG Macroeconomics
Higher GDP growth rates, thanks to better technology readiness, would lift Mexico’s GDP per capita
to US$34,497 (in 2014 USD) by 2050, compared to only US$31,072 GDP per capita in our main
scenario for the country.

Improved telecom
technology scenario

Baseline scenario

US $34,497
US $31,072
8
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved
- .
GDP growth rate