Opinion | For a more balanced assessment the IMD needs to refine the methodology

By Xiong Weibo and Nina Wang

Hong Kong's ranking in the latest released World Competitiveness Yearbook resents an interesting disparity. The city boasts an impressive overall ranking of 5 and a strong economic performance ranking of 11. However, its price sub-category ranking is 65, even though it has a commendable CPI inflation ranking of 5.

This stark contrast suggests potential skewing, likely influenced by high rents and their inclusion in multiple price indicators. Consequently, despite Hong Kong maintaining one of the lowest inflation rates globally, the significant influence of rent expenses pulls down its price ranking.

The potential issue arises from the methodology used to compile indicators of the Index. Overlap factors, such as apartment rent, might lead to double or even triple counting, disproportionately influencing the price and overall competitiveness scores.

Singapore, Hong Kong's main competitor in the index, exhibits a similar discrepancy. It holds the top overall ranking and a robust economic performance ranking of 3. However, its price sub-category ranking falls to 62, in contrast to its relatively better CPI inflation ranking of 29.

The disproportional influence of rents in the index is particularly detrimental to Hong Kong. Among the 20 factors in the index, prices rank the lowest for Hong Kong at 65, with the societal framework following at 30. Among the top ten overall competitiveness rankings, Hong Kong exhibits the largest discrepancy, 60, between its overall price ranking and CPI inflation ranking. For Singapore, where rents are also high and the overall price ranking is at a similar level of 62, the gap with CPI inflation ranking is much lower: 33.

It is also noteworthy that Hong Kong's CPI already emphasizes the importance of rent. Its CPI basket allocates a greater weight to rent at 36%, compared to Singapore's 22%. This means that any increase in rent has a more pronounced effect on Hong Kong's CPI inflation, exacerbating the deterioration of its overall competitiveness against Singapore.

Hong Kong's improvement in the overall competitiveness ranking this year reflects its buoyant economy and strong competitive edge. Improving Hong Kong's price ranking could significantly enhance its overall competitiveness. Even if such an improvement does not entirely close the gap with Singapore, it would better position Hong Kong to compete with other economies where rent costs are relatively low but CPI inflation is tough. Furthermore, it would be beneficial for the IMD to refine its methodology for a more balanced assessment, which will not unduly skew the competitiveness rankings of economies like Hong Kong.

The IMD World Competitiveness Index, published annually by the International Institute for Management Development (IMD), assesses the competitiveness of economies based on categories such as economic performance, government efficiency, business efficiency, and infrastructure. In the economic performance category, the prices sub-category aims to capture the cost environment of an economy using six indicators: CPI inflation, cost-of-living index, apartment rent, office rent, food costs, and gasoline prices.