Markets & Companies

Global Competitiveness Index

Global Growth at Risk from Slow Reform Progress; USA Climbs Two Ranks

19.11.2014 -

Innovation, talent development and institutional strength continue to play a defining role in determining the world's most competitive economies, according to the Global Competitiveness Report 2014-2015. The annual report - issued by the World Economic Forum (WEF) - evaluates 144 economies and finds that the leading economies in the index all possess a track record in developing, accessing and utilizing available talent, as well as in making investments that boost innovation.

According to the report's Global Competitiveness Index (GCI), Switzerland tops the ranking for the sixth consecutive year. Singapore remains second; the United States improves its position for the second consecutive year, climbing two places to third; and Finland (four) and Germany (five) both drop one place compared with last year's ranking. They are followed by Japan (six), which climbs three places and Hong Kong (seven), which remains stable. Europe's open, service-based economies follow, with the Netherlands (eight) also stable and the United Kingdom (nine) going up one place. Sweden (10) rounds out the top 10 of the most competitive economies in the world.

Americas

The United States goes up in the rankings for a second year in a row on the back of improvements in a number of areas, including some aspects of the institutional framework, and more positive perceptions regarding business sophistication and innovation. As it recovers from the crisis, the U.S. can build on the many structural features that make its economy extremely productive. U.S. companies are highly sophisticated and innovative, and they are supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy - the largest in the world by far - these qualities make the U.S. very competitive. However, the macroeconomic environment remains the country's greatest area of weakness.

Latin America finds its major economies still in need of implementing reforms and engaging in productive investments to improve infrastructure, skills and innovation. Overall, the region continues to suffer from strong headwinds related to weak investments, a fall in exports and commodity prices, and tighter access to finance. Building the economic resilience of the region will depend on its capacity to strengthen the fundamentals of its economy by boosting its level of competitiveness. Chile (33) continues to lead the regional rankings ahead of Panama (48) and Costa Rica (51). Brazil drops one position and ranks 57 this year. In spite of the drop of six places, Mexico (61) has adopted important structural reforms in the past year.

Europe

In Europe, several countries that were severely hit by the economic crisis, such as Spain (35), Portugal (36) and Greece (81), have made significant strides to improve the functioning of their markets and the allocation of productive resources. At the same time, some countries that continue to face major competitiveness challenges, such as France (23) and Italy (49), appear not to have fully engaged in this process. While the divide between a highly competitive North and a lagging South and East persists, there is a new outlook on the European competitiveness divide between countries implementing reforms and those that are not.

Switzerland tops the Global Competitiveness Index again this year, keeping its first place for six years in a row. Its performance is stable since last year and remarkably consistent across the board.

Germany's small drop is the result of some concerns about institutions and infrastructure and is only partially balanced out by improvements in the country's macroeconomic environment and financial development. Moreover, Germany's education system is assessed less positively than it was in previous years. Overall, Germany weathered the global economic crisis of recent years quite well thanks at least partly to its main competitiveness strengths, which include highly sophisticated businesses and an innovation ecosystem that is conducive to high levels of R&D innovation.

BRIC Countries and Other Emerging Economies

Some of the world's largest emerging market economies continue to face difficulties in improving competitiveness. Saudi Arabia (24), Turkey (45), South Africa (56), Brazil (57), Mexico (61), India (71) and Nigeria (127) all fall in the rankings. China (28), on the contrary, goes up one position and remains the highest-ranked BRIC (Brazil, Russia, India and China) economy. Russia's weak and inefficient institutional framework remains its Achilles' heel and will require a major overhaul in order to eradicate corruption and favoritism and re-establish trust in the independence of the judiciary. Diversification of the economy will require reinforcing the very small SME (small and medium-size enterprise) sector as well as continued progress toward a stronger and more stable financial system. These challenges prevent Russia - placed at 53 this year - from taking advantage of its competitiveness strengths, which are based on a well-educated population, fairly high levels of information and communication technology use, and its solid potential for innovation.

Asia

In Asia, the competitiveness landscape remains starkly contrasted. The competitiveness dynamics in Southeast Asia are remarkable. Behind Singapore (two), the region's five largest countries (ASEAN-5) - Malaysia (20), Thailand (31), Indonesia (34), the Philippines (52) and Vietnam (68) - all progress in the rankings. Indeed, the Philippines is the most improved country overall since 2010. By comparison, South Asian nations lag behind, with only India featuring in the top half of the rankings.

The region is home to three of the 10 most competitive economies in the world: Singapore, Japan and Hong Kong. Another three economies are featured in the top 20: Taiwan (China), New Zealand and Malaysia (20), which is the best ranked of emerging and developing Asian nations. At 28, China stands some 40 places ahead of India (71), the other regional economic giant.

India's slide in the rankings began in 2009, when its economy was still growing at 8.5% (it even grew by 10.3% in 2010). Since then, the country has been struggling to achieve growth of 5%. Overall, India does best in the more complex areas of the GCI: innovation and business sophistication. In contrast, it obtains low marks in the more fundamental drivers of competitiveness, such as health and primary education. The country's health situation is indeed alarming: Infant mortality and malnutrition incidence are among the highest in the world; only 36% of the population has access to improved sanitation; and life expectancy is Asia's second shortest, after Myanmar. On a more positive note, India is on track to achieve universal primary education - although the quality of primary education remains poor, and it ranks low in higher education and training.

Middle East And Africa

Affected by geopolitical instability, the Middle East and North Africa depict a mixed picture. The United Arab Emirates takes the lead and moves up seven places to 12, ahead of Qatar (16). Their strong performances contrast starkly with countries in North Africa, where the highest placed country is Morocco (72). Ensuring structural reforms, improving the business environment, and strengthening the innovative capacity so as to enable the private sector to grow and create jobs are of key importance to the region.

Sub-Saharan Africa continues to register impressive growth rates close to 5%. Maintaining the momentum will require the region to move toward more productive activities and address the persistent competitiveness challenges. Only three sub-Saharan economies, including Mauritius (39), South Africa (56) and Rwanda (62) score in the top half of the rankings. Nigeria - now Africa's largest economy - continues its downward trend and falls by seven places to 127 this year. Overall, the biggest challenge facing the region is in addressing human and physical infrastructure issues that continue to hamper capacity and affect its ability to enter higher value-added markets. Angola - the continent's second biggest oil exporter - ranks 140 overall.

Competitiveness Through Structural Reform

"The strained global geopolitical situation, the rise of income inequality and the potential tightening of the financial conditions could put the still-tentative recovery at risk and call for structural reforms to ensure more sustainable and inclusive growth," said Klaus Schwab, founder and executive chairman of the World Economic Forum.

Xavier Sala-i-Martin, professor of economics at Columbia University, said: "Recently we have seen an end to the decoupling between emerging economies and developed countries that characterized the years following the global downturn. Now we see a new kind of decoupling, between high- and low-growth economies within both emerging and developed worlds. Here, the distinguishing feature for economies that are able to grow rapidly is their ability to attain competitiveness through structural reform."

 

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