Friday, May 11, 2007


A few days ago I notice the release of this year's IMD World Competitiveness Yearbook announcing 2007 results of the overall ranking of countries and regions in global economic challenge. On this year's annual scoreboard, the United States remain on top of the scale in front of Singapore and Hong Kong. Among European countries, Switzerland, Luxembourg and Denmark achieved the highest score. It is nevertheless important to stress the competitive edge of the highest ranked countries in terms of economic performance and the ease of doing business. Unlike the rest of the Western counterparts, Switzerland scores very high in fiscal policy. In Switzerland, cantonal tax competition is marked by the competitive corporate tax rates, known as the lowest in the world. An important factor which determines the overall competitiveness is the dynamics of the financial sector also in terms of the practicing financial privacy laws and corporate and individual service quality besides the availability of investment as well. CreditSuisse and UBS are on the world top in this respect.

The methodology of the competitiveness contains the measurement depending on four different factors: economic performance, government policy, business efficiency and infrastructure. Each factors consists of many different criteria needed to compose the overall score of the competitiveness of a country. The breakdown of the factors details selected criteria. For example, the overall economic performance is computed by the research output of the state of domestic economy, international trade, international investment, employment and prices. On the other hand, the nature of government policy towards competitiveness depends on the stability of public finance, fiscal policy stance, institutional framework, business legislation and societal framework such as attitudes, value and competitive mentality. The business efficiency is essential to the functioning of the competitive economy. It thus depends on productivity, conditions on labor market, financing, management practices and managerial behavior such as norms, attitudes and values performed by the management of surveyed companies. Similar breakdown is also conducted in case of infrastructural factor.

I already obtained the sample report on Slovenia and Sweden. The competitive ranking of Sweden improved significantly in the last year. The largest Scandinavian country climbed from 14th place in 2006 onto 9th place in 2007. The economy scores high also in the field of business efficiency and corporate management. For example, Swedish corporations (Ikea, Ericsson) are, according to the survey, the third most efficient in the world by the perception of the international standards. There are also some particular weaknesses undermining the international competitiveness of Sweden. For instance, tax burden measured as a percentage point of the GDP is one of the highest in the world. Individual income tax rates are the second highest in Europe (after Denmark), government spending and public consumption significantly declined in the beginning of 90s when Swedish economy was hit by severe economic recession and GDP decline. Another strong weakness undermining global competitiveness of the Swedish economy is also rigid and tight structure of the labor market marred by explosive regulation and difficulty of hiring and firing workers. After computing all rankings, the report shows that Swedish competitiveness improved significantly by taking every single factor into account. In addressing competitiveness, Sweden is ought to consider the deregulation of the labor market together with improving skills of the labor force in cooperation with business sector. Regarding R&D, Sweden is one of the world best performers by the international perception of research output, university/business sector cooperation and quality of the research institutions. However, the output of innovations is measured through the prism of commerce enhancement of product and service innovations. Swedish policymakers should seriously consider the removal of the barriers hindering the commercial enhancement of innovations also in small and medium enterprises which usually fuel the innovative capacity of R&D from market niches and hidden growth potentials.

On the other hand, Slovenia, the sick man of transition lags behind the majority of European counterparts, and is being situated on 40th place. The stance of domestic economy is optimistic by the GDP growth, solid macroeconomic outlook, and high level of openness in international trade and stable prices as well.

Despite a high intensity of export activity, the export of commercial services is very low and this is not a good sign in the period when the core of value-added lies in service sector which fuels productivity and new economy. However, the competitiveness begins to shrink when we observe the long-term sustainability of public finance. Slovenia has one of the youngest pension populations with the unfunded pension liabilities approaching the double size of the current GDP. EIU and European Commission have warned Slovenia several times about the unsustainable stance of public finance, increasing the risk of public debt explosion. Expansionary and welfare-based fiscal policy is a special concern regarding the long-term competitiveness of the Slovenian economy. In Slovenia, we have the highest individual income tax rates in Central and Eastern Europe, topping 41 percent progressively.

State ownership and government intervention posses a serious threat to business activities. In Slovenia, private activities compose only 65 percent of the GDP compared to 80 percent in Hungary and Slovakia. The failure of collectivist state ownership in health care reflects a high rate of social security contributions. In Slovenia, we pay 22 percent of our gross salary directly to the government health-care fund. Another barrier to competitiveness is a very low level of labor market flexibility resulted from beneficial unemployment legislation. The efficiency of the business sector shrank once again.

Slovenia still remains the least attractive destination for foreign investors in terms of location purchase barriers and investment incentives. Consequently, the productivity in manufacturing sector is below the level of average competitive rate. Large corporations, accounting a significant part of the Slovenian economy, are mostly inefficient as perceived by international standards and dynamics outlook. Slovenian corporations also suffer from the unsustainability and international silence. Corporate boards, as well, do not supervise companies efficiently and this indicates a sign of a serious corruption involvement.

Banking sector is also a particular concern because of low service quality and tight strategic policies resulted from the defense against the infusion of investment capital as it was offered by Belgian banking and insurance group KBC. This is a sample indicators describing Slovenia's openness to foreign competition and ideas from abroad. In addition, the business and social environment is very unattractive for foreign labor force in all sectors of the economy. In a broader perspective, the failure of the Slovenia's competitiveness reflects the weaknesses emphasized by this year's IMD's World Competitiveness Yearbook. Without sound economic performance, institutional quality, privatization, tax and public finance reform and competitive mentality as well, Slovenian economy and society could simple trigger serious structural crisis and economic stagnation in the future.

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