The World Economic Forum released the global ranking of economic competitiveness. The essence of the report is to highlight the areas of competitiveness in each country in a global perspective.
The key fields reflecting the competitive advantage and strenghts of particular economy are divided into three groups which are enhanced into several sub-groups. The pillars in which competitive advantage can be achieved globally are (1) the quality of institutions, (2) the strength of infrastructure, (3) macroeconomic stability, (4) health and primary education, (5) higher education and training, (6) good market efficiency, (7) labor market efficiency, (8) financial market sophistication, (9) technological readiness, (10) market size, (11) business sophistication and (12) innovation.
Thus, the economy can be classified as driven by factors, efficiency and innovation. The gap between each phase is defined as a transition process. The question what makes country competitive is hard to be answered, depending on the input quality of economic policy and company performance, strategies and operations.
Whether the aim of economic policy to boost sustainable growth and the aim of legislature to provide first-class business environment to assure solid conditions for a globally competitive economy, the realm of competitiveness is easier to achieve.
In microeconomic terms, the performance and ability of firms to go for growth and global markets is essential as well as the value-added agenda, sophistication and innovation. Traditional economic environment in which rigidity and cost-reducing strategies dominate has been replaced by fluid strategies, risk and innovation. Less stability is not tragic and damaging.
In fact, firm's growth in a global environment is the purest reflection of instability and a disequilibria. Every day, new firms grow, old ones quit and shut down. The sophistication of the market broadly outlines the stage development of a particular economy, especially in the area of supply-chain sophistication.
Using the powerful inputs and combining the productive set of measures, leadership and strategy is what makes firms globally competitive. Nevertheless, the role of financial markets and the availibility and access to venture capital, equity and investment funds, should not be neglected.
Venture capital is the primary source of a growing firm, and the majority of start-ups are funded through venture capital. The degree of microeconomic competitiveness also depends on the ability of the firm to use its comparative advantages to the fullest in productive purposes.
Innovation is the result of entrepreneurial spirit and behavior to become a global leader in pursuing quality through cutting-edge products and services. It also outlines the degree of competitive mentality in particular country.In this respect, IT plays a tremendous role, taking the edge of comparative advantage in the age of future expectations.
The availibility of skilled and trained labor force is sometimes an essential determinant of the presenece of the firm in the market. Flexibility and deregulation, by empirical means, reduce the scope of risk which firm faces in the market penetration. Regulated and rigid labor market does anything else, but contributes to the overall rigidity and growing non-salary labor costs, reducing the ability of the firm to maximize the productivity and adjust to fluctuations.
In fact, the productivity determines the living standard, not the collective bargaining. The United States has one of the highest living standards due to relentless increases in productivity in past decades; in output per capita and working hours as well. On the other side, Europeans prefer holiday over work. Harvard economist Alberto Alesina and Francesco Giavazzi have written a powerful brief on this topic, The Future of Europe: Reform or Decline.
In macroeconomic terms, stability is ought not to be neglected. Responsible macroeconomic policy, prudent anti-inflationary monetary policy and predictive fiscal policy namely describe the three components of macroeconomic competitive advantage. The outcome is, of course, sustainable growth and dynamic responses to the economic fluctuations without government intervention and similar discretionary distortions.
To be a good economist, you have to keep an eye on three macroeconomic areas: inflation, growth and unemployment. While the inflation pressures have been nominally anchored in many countries (Canada, Sweden, UK) by the exercise of inflation targeting strategy, growth perspective dominate the question of future state and vitality of the economy. Even small, minute differences in annual or periodic growth rates, means the loss of competitive advantage in advance.
Of course, it'd be foolish to predict an unparalleled growth performance with high growth rates through and through. High and possibly robust growth rates have been observed in transition economies and also confirmed empirically. When the catch-up period is ended and GDP convergence process accomplished, the growth rate performs one of the most fundamental laws in economics - the law of diminishing return.
Estonia and Slovakia grow faster than Germany because of the ability to operate at a full capacity and the competitive advantages, and Germany grew faster than the United States when it was growing under catch-up conditions. Over time, when the real GDP per capita is higher, the growth normally slows.
In this year's report, the United States tops the overall competitiveness ranked chased by Switzerland, Denmark and Sweden. The report is availible here. Scandinavian countries performed very well. Despite an uncompetitive tax structure, the business environment deserved an A+, with deregulated product markets and high level of market liberalization, freedom to trade internationally and deregulated business environment in general.
My native country Slovenia performed poorly. It is ranked as the 39th most competitive economy in the world, performing poorly in the areas such as taxes, regulation, labor market flexibility, the structure of the workforce, working ethic, infrastructure supply and access to financing. Macroeconomic stability in Slovenia is risky as government fiscal spending has been reaching historic highs.
When center-left government seized power back in early 90s, wages in public administration and government sector have been increasing tremendously. in the first year, the wage rate increased by 40 percent and has been growing increasingly ever since in addition to widespread government ownership of large corporation, dominating the entire market through politically-managed mergers and acquisitions. Also, the center-right government has not done any better job. The fiscal expenditure grew at a brisk rate, enormously high spending remains anchored in budget deficit and general indebtedness and generous welfare system have set a high debt levied on future generations. Business rules and legislation are hostile to foreign direct investment and the regulation is rampant in this respect.
Thus, Slovenia has one of the lowest per capita shares of foreign investment in Europe and globally. Labor market, as abovementioned, is one of the most rigid in the world, including staunch hiring and firing practice and the non-salary cost pressure through which generous system of welfare, pension and social security is funded. More hours in the labor market are taxed progressively and labor relations are the most socialistic ones in Europe. I'm saying this also from personal experience, not just from the analytical, data point of view. Therefore, it is not surprising why Slovenia is one of the worst laggards in the EU.
The rankings are availible here and the country analysis can be reached here.
Rok SPRUK is an economist.
Copyright 2007 by Rok SPRUK