The Economic Competitiveness of Nations

For the fourth year running, Switzerland was named the world's most competitive economy.

For the fourth year running, Switzerland was named the world’s most competitive economy.

The World Economic Forum today released its annual Global Competitiveness Report. The report makes for interesting reading. While Switzerland and Singapore hold on to the number 1 and 2 positions respectively, the United States fell from fifth to seventh place. The top ten (with the previous year’s ranking for comparison) are as follows:

  1. Switzerland (unchanged from the 2011 report)
  2. Singapore (unchanged)
  3. Finland (up from 4th)
  4. Sweden (down from 3rd)
  5. Netherlands (up from 7th)
  6. Germany (unchanged)
  7. United States (down from 5)
  8. United Kingdom (up from 10)
  9. Hong Kong (up from 11)
  10. Japan (down from 10)

For the careful reader, several interesting questions.

First, how does one measure economic competitiveness? The World Economic Forum uses twelve pillars (each comprised of several measures) to create an index of economic competitiveness. These twelve pillars are: (1) the institutional environment, (2) infrastructure, (3) the macroeconomic environment, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labor market efficiency, (8) financial market development, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation.

Second, why does Switzerland do so well? According to the report, Switzerland continues to hold on to the first position as a result of strong performance in innovation and labor market efficiency, the sophistication of its business sector, extensive support for scientific research, close collaboration between academic and business sectors, high spending by both the public and private sector on research and development, excellent support for training both on and off the job, effective, efficient, and transparent governmental institutions, governance structures that ensure a level playing field, good infrastructure, stable and developed financial markets, and a good macroeconomic environment.

Third, why Northern and Western European states, including many states with high marginal tax rates, dominate the top positions? Finland and Sweden, ranked third and fourth on this year’s list respectively, have some of the highest tax rates in the world.  A 2012 report by the conservative Heritage Foundation measured total tax revenue as a percent of gross domestic product, effectively attempting to determine both the relative tax burden and the relative size of government in countries around the world. Their report found that Finland and Sweden had among the highest ratios in the world, ranking 8th and 4th respectively. Countries with significantly lower tax revenues (like the United States, which ranked 63rd), interesting performed less well on the World Economic Forum’s competitiveness index. Clearly, there is more to economic competitiveness than low tax rates.  

Finally, why does the position of the United States continue to decline? In 2008, the United States was ranked first, slipping to second in 2009, fourth in 2010, and fifth in 2011. According to the World Economic Forum, the falling ranking of the United States is primarily the result of perceived weakness in our political institutions, widespread mistrust of political leaders, and perceived macroeconomic instability. In particular, the report’s authors noted that recent political disputes and the threat of automatic spending cuts threaten to throw the country into recession.

What do you think: What makes a country economically competitive? Is the United States competitive globally? Why?

Note: Faculty interested in exploring this topic with their class should visit the World Economic Forum’s interactive data platform, which can be used to analyze the data in numerous ways. 

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