KPMG launches its inaugural Variables for Sustained Growth (VSG) Index. Developed to assess countries’ long-term economic performance prospects, the index measures countries’ productivity potential to illustrate where governments should be focusing their efforts.
Ahead of the World Economic Forum at Davos, KPMG has launched its inaugural Variables for Sustained Growth (VSG) Index. Developed to assess countries’ long-term economic performance prospects, the index measures countries’ productivity potential to illustrate where governments should be focusing their efforts.
The index considers 21 areas which can have a significant impact on a country’s future economic growth and wealth, such as transport infrastructure; education and the strength of public institutions.
"The report gives leaders of countries and businesses important insights into what we all have to do together to improve economic performance. Our paper gives evidence that fixing education could boost long-term economic growth in the UK.
“There are key areas where we perform really well in the UK, such as the strength of our public institutions. We absolutely need to maintain these. And there are other factors where we can make a difference, including transport infrastructure. But for me, the most important factor for the UK is education, where our report shows that we “could do better” – ranking 65th overall.
“The economic evidence chimes with the conversations that I have had with British business leaders who want a comprehensive, long-term strategy for improving education and skills.”
Collins added: “Literacy, numeracy and broader employability skills are not at the level they need to be in the UK, and many school leavers don’t have the basic skills employers seek. Employers have also argued that the technical content of apprenticeships via the Apprenticeship Levy scheme is not at the right level. Apprenticeships are one facet of education where we need to focus on both the quality and quantity of what is being offered in order that more young people are equipped with the relevant skills.
“It is clear that the government is taking the issue seriously. It is my view that we, as business leaders, can work with government to improve education from primary level, through to tertiary, and in both vocational and academic study. For example, as a major employer, we recognise that we need to contribute through initiatives in our own industry such as the Access Accountancy apprenticeship scheme and investment in learning and development. Our aim is to attract people from all areas of society, and to make sure they are given high quality training.
“I expect education and skills to be a topic of debate close to many business and political leaders’ hearts at Davos this year. If we are to harness the transformative power of education and beat the global competition, we need to work together as a community to deliver an effective programme of education and skills development.”
1) Macroeconomic stability – including measures of government deficit and debt
2) Openness to catch up in best practice – including Foreign Direct Investment (FDI) and trade performance
3) Infrastructure quality – comprising a number of areas ranging from transport to technology and finance
4) Human capital – comprising figures around life expectancy and education
5) Strength of public institutions – including regulatory quality, government transparency and effectiveness, business rights and judicial independence
The top performers in this year’s index are dominated by Western Europe, with Singapore, New Zealand, and Hong Kong the only non-European countries to make it to the top 10. The UK made it into the top 20, but lags behind the likes of Luxembourg, which came top, Ireland (ranked 10th) and Germany (ranked 12th).
“The data shows how improvements in areas such as infrastructure and human capital can have a major impact on the future of a country’s economic growth and wealth. Comparative data we have compiled for 2015 shows emerging economies are improving their prospects to compete with the developed countries, despite lower levels of wealth. Some developing economies show relatively high growth, Malaysia and Chile, in particular, would be good examples. Policy makers can learn both from their peer group but also from developing economies.
KPMG research found that, of the five pillars, the strength of public institutions has the greatest influence on productivity potential, 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.
The UK performs well on this pillar, ranking 10th in the world and outperforming Germany which, for all other pillars, ranked higher. For the UK, the strongest subcomponents of the Institutions pillar are Regulatory Quality, Judicial Independence and the levels of Business Rights, while the weakest is the level of Transparency in Government Policymaking, highlighting the importance of policy communication. However, the intention to devolve powers to city regions could see the UK ranking improve in his area.
The UK also ranked positively on infrastructure quality coming 7th out of the 181 countries. However, the performance of the UK on Infrastructure is not uniform. The infrastructure score hides a relative weakness in transport infrastructure (a subcomponent of the pillar), where the UK ranks 20th, well behind the leader, United Arab Emirates, as well as neighbours Germany and France.
Selfin added: “The data shows us that the UK could see real benefits from investing and upgrading its transport infrastructure, and certain investments can deliver more ‘bang for buck’.
Despite this, the relative weakness in the quality of the UK’s transport infrastructure is offset by a high level of technology readiness, another important driver of productivity in the VSG Index, where the UK scores extremely highly.
Of the five pillars, the UK performs poorest in relation to the ‘openness to catch up’ pillar - measured by trade as a percentage of GDP and FDI - largely due to the relatively larger size of its economy compared to some of the top ranking countries.
Although Western Europe has dominated the top of the index since its creation, performance among economies in the region has varied, with countries such as Spain and Italy showing minimal overall improvement over the past ten years, while countries like Ireland have benefitted from a significant uplift thanks to progress in technology readiness and a strong rise in FDI stock.
Elsewhere in Europe, the turmoil in Greece has taken its toll on the country’s productivity potential, with higher government debt and slightly weaker public institutions causing its VSG Index score to stagnate since 2005.
Selfin concluded: “Numerous factors are likely to influence productivity in each country, but with growth at the top of agenda, policy makers need to ensure they make investments which maximise a country’s economic growth potential.”
A full copy of the VSG Index can be accessed here.
Notes to editors
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.
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.
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
For further information please contact:
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The VSG Index considers areas which can have a significant impact on a country’s future economic growth.
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