The Race on Competitiveness

Every year since 1979, the World Economic Forum (WEF) has published its prestigious Global Competitiveness Report, an exhaustive comparative analysis of the strengths and weaknesses of the world’s economies. As well as measuring developments in competitiveness, the Report identifies key factors relating to economic development and the establishment of a favorable business environment.

Top of the Class

In the WEF’s 2004-2005 Report, which provides information on 104 developed and emerging economies, Finland heads the Growth Index for the third year running. Why is Finland still the most competitive economy in the world? Effective macroeconomic management and the outstanding quality of its public institutions are two important reasons. This Scandinavian country shows extremely low levels of corruption and scores highly in areas such as respect for contractual agreements and the law. In addition, its microeconomic environment is so developed that Finland’s position in the Business Competitiveness Index (second only to the U.S.) is higher than it ought to be for its per capita GDP. This can be put down to the country’s private sector, which has shown itself to be highly willing to adopt to new technologies, assuming a leading role in the creation of a culture of innovation.

The U.S. holds second place, unchanged from last year. The country is at the forefront of the technological revolution, thanks to the penetration of the Internet, the rich creativity of its scientific community and the heavy investment by U.S. companies in R&D. However, its technological supremacy is partially offset by a weaker performance in the quality of its public institutions and the stability of its macroeconomic environment. Nevertheless, the U.S. heads the Business Competitiveness Index, helped by the ready availability of venture capital, the intense competitiveness of its local businesses and the number and quality of available suppliers.

Along with Finland, the other Scandinavian countries all numbered among the top 10 most competitive economies in 2004, with Sweden in third place, Denmark in fifth, Norway in sixth and Iceland at number 10. Of these, Norway has shown the greatest improvement, moving up three places from ninth to sixth as the result of improvements in its public institutions, particularly in the area of respect for contractual agreements and the law.

Japan has broken into the top 10, rising from 21st position in 2001 to ninth this year 2004. Its position reflects a combination of factors, including a strong ongoing economic recovery process that has rekindled business confidence, and notable improvements in indicators measuring the transparency of public institutions. The increased sophistication of its financial markets and improvements in the quality of the country’s administrative services have also had an effect.

Achievements and Setbacks

The big players in the European economy, France, Germany, the United Kingdom and Italy, returned widely varying results. While the United Kingdom has seen a significant improvement in its relative position (moving up four places to number leven), France and Germany show a strong imbalance between their respective growth (Germany in 13th place, France in 27th) and business competitiveness indices (Germany 3rd, France 12th). On a business level, Germany scores top marks in operational and strategic sophistication, and its technology mark is high, meaning that the worsening of the country’s macroeconomic stability (public deficit, level of savings, expectations of recession, access to credit, effective rate of exchange) has had an effect. France is in a similar position, though its results are worsened by its insufficient advances in the area of technology.

For its part, Italy seems incapable of slowing its steady decline (falling from 26th place in 2001 to 47th this year). The country holds the lowest position of the EU-15 nations and scored even lower than some of the countries that recently
joined the organization. Its worsening situation is evident in all areas, particularly in the quality of its public institutions (e.g. the independence of the courts, favoritism in public sector decision-making and the economic cost of crime). By contrast, Estonia achieved an outstanding position (20), and has shown itself to be by far the most competitive
of the 10 countries that joined the EU in May 2004.

In spite of its current leading role in the world economy, China (46) has not registered any great change from the previous year (44), continuing to show mixed results. A stable macro-economic environment, which reflects the strength of its economic activity and an absence of imbalances, is countered by institutional weaknesses in areas such as the strength of the banking sector, administrative controls and bureaucracy, along with poor accounting and auditing standards.

In the rest of Asia, Taiwan (4) and Singapore (7) continue to lead the region with their complementary strengths. Taiwan gained an unusually high ranking in the area of technology (in 2nd place behind the U.S.), while Singapore holds the top place in terms of the quality of its macroeconomic environment, a position it has held for several years.