Switzerland is now more competitive than the U.S., and China has inched up in the rankings.
The World Economic Forum released its annual report, ranking countries by their competitiveness.
On the Global Competitiveness Index, the U.S. has lost the top competitiveness spot to Switzerland in the annual ranking.
Several components comprise a country's competitiveness – including its financial system, infrastructure, educational opportunities, the skill level of its workforce, etc.
Switzerland maintained her high ranking due to a relatively stable macroeconomic environment.
America is losing her competitiveness due to the financial crisis, the global recession and macroeconomic instability.
China, which gained one spot, now ranked 29th, has been weathering the crisis comparatively well due to a major stimulus package. Nevertheless mismatched economic and social policies will place significant drags on growth in the coming year.
Switzerland: Very competitive, with a stable macroeconomic environment
Switzerland’s performance has remained relatively stable, whereas the United States has seen a weakening across a number of areas.
In spite of Switzerland's modest market size, lack of seaports, and modest higher educational system, she has significant competitive strengths, including:
- excellent capacity for innovation, ranked 2nd for its innovation capacity, with high rate of patenting (148.27 per million inhabitants) in the country, for which Switzerland ranks 7th worldwide on a per capita basis.
- a very sophisticated business culture, ranked 3rd for its business sophistication.
- high spending on R&D. Switzerland’s scientific research institutions are among the world’s best, and the strong collaboration between the academic and business sectors ensures that much of this research is translated into marketable products and processes,
- strong intellectual property protection.
- public institutions, most effective and transparent in the world (7th): an independent judiciary, a strong rule of law, and a highly accountable public sector.
- excellent infrastructure (5th)
- well-functioning goods market (5th),
- labor market that is among the most efficient in the world (2nd, just behind Singapore).
Of particular note, is her macroeconomic environment (ranked 17th). The global financial crisis has certainly weakened her macroeconomic environment, but she has maintained stability as compared to the United States and many European neighbors.
United States: Very competitive, but slipping
The United States has fallen one place to number 2, after many years at the top. The country continues to have many structural features that make its economy extremely productive and robust, but a number of growing weaknesses have negatively affected the annual US ranking.
The U.S. economy possesses a handful of excellent competitive strengths.
- highly sophisticated and innovative companies operating in very efficient factor markets.
- an excellent university system that collaborates strongly with the business sector in R&D.
- scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far.
- labor markets (3rd), characterized by the ease and affordability of hiring workers and significant wage flexibility.
- goods markets (12th), characterized by low levels of distortion.
Several areas have weakened drastically due largely to the uncertainty and reprehensible behavior exhibited in the financial sector.
- macroeconomic stability (greatest overall weakness), where it ranks 93rd, down from 66th last year. The United States has built up large macroeconomic imbalances over recent years. Repeated fiscal deficits have led to burgeoning levels of public indebtedness, which are presently being exacerbated by significant stimulus spending.
- weakening of the assessment of its financial market sophistication, dropping from 9th last year to 20th overall this year
- institutional environment could be strengthened,
- government’s ability to maintain arms-length relationships with the private sector (48th),
- perception that the government spends its resources wastefully (68th).
- measurable weakening of the assessment of auditing and reporting standards (down from 20th last year to 39th this year), perhaps not unexpected in the context of recent turmoil and scandals within the financial sector in particular.
Given the America's current excessively bipolar state – having large, flexible and innovative markets for both goods and labor, with unstable, weak, unreliable and untrustworthy financial and governmental institutions – it will be interesting to see how she will fare in 2010.
People's Republic of China: Consolidated in Top 30, Labor Market Challenges Ahead
Moving up one position since last year, China consolidates its presence in the top 30. At 29th, it outperforms the other BRIC economies by a large margin. The rapid progression is, however, not without new challenges. As the country moves up the value chain, its competitive edge must be increasingly based on efficiency improvements, not just on the use of cheap factors of production alone. This poses tremendous challenges for the country to achieve the minimum growth rate—8 percent by the government’s own estimates— necessary to prevent any rise in unemployment and avoid social unrest.
These are China's signature competitive strengths.
- high growth rates in recent years have moved China from Stage 1 to Stage 2, as measured by the GCI, in just three years.
- relatively sophisticated business environment (38th, up five)
- capacity to innovate (26th, up two).
- enviable fiscal situation allows the government to stimulate internal demand, invest in infrastructure,and pursue economic reforms.
The competitive weaknesses of the Chinese economy may be few, but they are more serious than they initially appear.
- financial market sophistication (81st)
- technological readiness (79th)
- higher education (61st), to a lesser extent.
- relative rigidity of the labor market (in part due to the new Labor Contract Law).
These weaknesses plus others will constrain Chinese economic growth over the next years. The infrastructure projects, while sometimes impressive (i.e. the comprehensive high speed rail system), are part of a finite stimulus package. When the package ends, the growth will suffer -- domestic consumption will be an insufficient substitute. Michael Pettis, one of the clearest voices on the Chinese economy, states that China's growth is unsustainable without solving its fundamental problems: export dependency, high investment rate, and wide income gaps.
In Bear Market Investments, Pettis details some of the problems with the Chinese economy, and offers his solution.
It is only because the cost of capital is artificially so low [...] that many companies are able to show profits at all. [T]he implicit interest-rate subsidy to SOEs [...] accounted for 100% of SOE profitability. If China had reasonable interest rates, in other words, (and in fact there were negative real rates for much of the recent past), SOEs would on average be value destroyers. This, by the way, is why China’s supposedly puzzling addiction to capital-intensive growth rather than labor-intensive growth – more befitting to an economy with lots of unskilled labor and very poor technology – is not so puzzling. If you artificially lower the price of a particular input, it is not surprising that producers will use more of that input than might otherwise be considered optimal. With capital practically free, capital is everyone’s favorite input in spite of incredibly low labor costs.
With the recent surge in government financed investment (and I include most bank lending in this category), it would be surprising to me if much of this year’s new investment were not of even lower quality than the older investment, with very low or even negative expected returns. If this turns out to be true, it means that the only way these investments could be viable is by effectively continuing to “tax” Chinese households to subsidize state-owned enterprises and large manufacturers. This tax of course will come mainly in the form of low wage growth and extremely low deposit rates on the savings of Chinese households.
This is why we all hope Chinese growth will become more reliant on rising consumption rather than on rising investment, much of which is certain to be unprofitable. The current path requires a large trade surplus to absorb the difference between what China consumes and what it produces, but it is not clear that foreign consumers will absorb the balance. China is trying to plug the gap by a surge in government-financed investment, but this is likely only to widen the gap in the future.
So the August data suggests that while China is growing, it is actually more reliant, not less reliant, on investment. What is worse the very poor import numbers suggest that in spite of high retail growth figures, consumption growth in China is still sluggish.
For the pessimists, then, the August numbers confirm that the stimulus package may be boosting production solely because of government-financed investment, and that a serious misallocation problem will result in more future pressure on Chinese households to foot the bill. The export numbers show that China’s external accounts continue to deteriorate, and it will take more than simply an end to the global crisis to return to the good old days.
[I]f at least part of the goal was to help China shift its unbalanced growth model to one less reliant on foreign, and especially American, consumers, it is not clear that any progress has been made. In fact to the extent that a significant share of new investment has been wasted, it may actually make future imbalances worse.
China’s response to the global crisis needs to be seen as a two-part process. The first part is to goose economic growth in response to the rapid deterioration in the external environment. The second part is to rebalance the economy away from its excess reliance on investment and foreign demand. The August data seem to confirm that China is very successfully managing the first part. Whether it has made any progress on the second part is still very much open to question.
Many of the projections made by more optimistic economists than Pettis assume that China will continue to grow for the next decades at the same 8 to 13% growth rate. They just use a straight line analysis. This is unrealistic and shortsighted. It is also false, as more frequently we learn of numbers which have been doctored (particularly in light of the 60th anniversary). There are also severe energy constraints on China's growth. It's energy comes primarily from coal and oil, and in both cases their reserves have already passed peak. They must import a greater and greater percentage of their energy needs. As this occurs they will be frequently butting heads with the U.S. and other world powers.
Because of the high savings rate, the wide income gaps, and what I perceive as a weak educational system -- a system which does not encourage critical thinking, problem solving or creativity -- I think far too many of Chinese citizens will be incapable of becoming entrepreneurs and businessman as China painfully rebalances her export driven production model to a world of customers which will increasingly save and to China-based manufacturing which is being encouraged to use factory automation like the rest of the world to increase efficiency, productivity, quality and safety. The new Labor Contract Law has made it more expensive to hire and fire workers. Whether or not it makes sense for China as a whole, automation looks increasingly attractive to manufacturers.
In addition to the problems which Pettis describes, the new labor law burdens companies, both foreign and domestic, operating in China. (Although some foreigners wonder whether China's SOE's are actually following this law.) China legal experts question whether Beijing was too quick to implement Scandinavian and Northern European style social benefits in a developing economy. In the minds of many manufacturers China's major benefit was her immense, unskilled, flexible, and inexpensive labor market.
Instead of favoring labor-intensive investment suitable for a country with lots of unskilled workers and poor technology, Beijing's policies favor irrational capital-intensive investment at the expense of labor-intensive investment. Unemployment looks sure to rise. It will be interesting to see how this plays out.
Questions
What should America do to strengthen her unstable, unreliable and weakened financial and governmental institutions?
In a developing country with a surplus of unskilled labor and poor technology, why does Beijing encourage capital-intensive growth and enforce a European style labor contract law?
What are your thoughts?
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