- The Washington Times - Sunday, May 15, 2005

Washington Times special correspondent John Zarocostas in Geneva, Switzerland, interviewed Stephan Garelli, professor at the Lausanne-based international Institute for Management Development (IMD), by telephone Friday on the findings of the institute’s “World Competitiveness Yearbook 2005,” published last week.

Question: What are the factors driving global competitiveness in the 21st century?

Answer: Well, basically we are looking at 60 economies around the world, and we definitely see that one of the factors driving competitiveness is the ability to use technology efficiently, and the ability to develop an infrastructure that supports the efficient use of technology.

Regarding infrastructure, we are not only looking at traditional infrastructure, but also education, research and development, and finally, one very interesting factor we see is the ability to ease the way of doing business.

I think we are living in a world that is more and more complex, and some of the winning nations have developed very good policies to lead business and fight complexity.

Q: Your survey ranks the top 60 economies worldwide based on 314 criteria and on a poll of more than 4,000 senior executives. What are the most salient factors?

A: Two-thirds of our criteria are hard data; namely, statistics gathered by international organizations, and also by the 60 partner institutes that are working with us on the report. The remaining third comprises responses to an opinion survey around the world.

In these parts, which are really about competitiveness, which is measured, we see really a lot of changes, mainly in economic growth. For the first time last year, we have seen that of the 60 economies that we have been looking at, 40 had a growth rate above 3 percent, which is quite significant. It was the best year since 2000. So everybody has had a relatively good year.

And we have seen also a very significant development in international investment. Flows have increased dramatically. Of course, a lot are going to Asia, to China, where the economy grew at 9.5 percent last year. But have also seen a lot of investment going to the United States — maybe because with the dollar being relatively weak, investing in the U.S. today is perceived as a very good decision, because assets are relatively cheap.

Regarding perceptions in the opinion survey, it seems that more and more, the quality of the education system seems to be at the forefront of concerns among business people — probably because in a knowledge economy, you need to have skilled people.

Q: The United States has again been ranked No. 1. What are the main factors keeping the U.S. at the top?

A: I think one of the essential competitive advantages of the U.S. is not only the ability to develop technology, but to rapidly transfer new technologies into the private sector and apply them to products and services. I think this is probably the biggest difference between the United States and Europe.

In Europe, we have a tendency to develop a lot of innovations, but keep them in research institutes or in laboratories. In the U.S., there is this unique ability to develop technology and put it very quickly into enterprise. Entrepreneurs are very often people who have invented something, and I think this is the key competitive advantage of the United States.

The second aspect is, of course, that the U.S. has wonderful mobility in terms of people. I think it’s quite impressive to see how quickly Americans move from one region to another one in the United States — and from one cluster of competitiveness to another. I think this combination of technology and mobility is really one of the key aspects explaining the success of the U.S. today.

Q: One of the world’s most dynamic economies, China’s, dropped sharply in the 2005 rankings from 24th to 31st. Would a possible revaluation of the yuan affect its competitiveness even more, or not?

A: Yes, I think the reasons why China has been slipping is that we are looking at the competitiveness of China today — with 9.5 percent GDP growth — and wondering if this is sustainable or not. … China is rapidly consuming raw materials, and we have seen the price of raw materials exploding on world markets last year because of this. Almost every raw material has been doubling in price.

A second reason, which is perhaps more disquieting, is that China has a financial system that is weaker than its manufacturing industries, and this gap between the financial sector and the industrial sector is very worrisome for quite a number of people who believe that the financial system could break down at some stage during the next few months or next few years. This is a source of concern.

Q: But the Chinese are trying to reform their financial sector and eliminate nonperforming loans from their banks. Do you think they are doing this fast enough for the financial sector to catch up?

A: They recognize the problem, which is, I think, already something positive. But looking at what’s happening in China, we realize the state continues to be very much present in the financial system. We begin to perceive that the state is really the one guaranteeing the loans that are going to China’s large companies.

So, I think it is still a system that is being kept alive by the government itself, whose financial system has not developed a life of its own. …

So, I think there is still a long way to go, simply to make sure that China is not a completely unbalanced economy with a very strongly performing manufacturing industry on one hand, and a banking and financial system that is still underdeveloped.

Q: Some very high-cost economies such as Switzerland’s are doing very well, whereas many low-cost developing economies — for example, India’s continue to slip. Why is that?

A: I think that basically, in the case of Switzerland, the reason is that the Swiss economy is very much involved in the international economy and that, of course, it benefits immensely from the rebound of the world economy last year.

And also something that we see not only in Switzerland, but also in Germany: The international part of the economy — the large, medium and small enterprises that are focusing on exports — actually have been performing very well.

The international companies have undertaken a lot of restructuring, and now we are starting to see the results.

The Nordic countries, which are expensive — for example, Sweden, Finland, Denmark, which are still performing well — one of the reasons is that these economies have recognized that they were expensive economies, that the result of being successful is that you become expensive — and they have been working not so much on the cost of doing business, but on the ease of doing business.

They said, “All right, we accept we’re expensive, but the rest of the world will never accept that we are complex.” So they have been simplifying administrative and legislative procedures, and I think the ease of doing business is becoming more and more a factor of competitiveness today.

Unfortunately, we see a lot of countries that have a relatively low-cost basis for their activities, but which are destroying their competitiveness because they are too complex and they are lacking transparency.

Q: Some of these economies you mentioned are also very high-tax economies. We’ve been hearing this debate a lot that the tax-base differential between countries affects competitiveness. Yet the Nordics are doing very well, while others with a low tax base are not doing as well. How do you explain this?

A: Well, actually we have looked at taxation and competitiveness in detail this year, especially since it has been in the forefront of the debate. We have seen countries like Australia and Germany lowering their taxes, the U.S. changing the taxation of dividends. We are seeing more and more countries adopting the flat-tax system.

There is indeed a debate, and when you look at the relationship between taxation and competitiveness, you realize there is no direct, simple relationship. As you mentioned rightly, there are countries that have been performing very well not only in terms of competitiveness, but also in terms of growth rate — these are the Nordic European countries.

On then other hand, you have countries like the United States, Australia, Ireland, which have been performing very well with a low tax base. And in the middle, you have countries like Japan and Switzerland, which also have a low tax base, but have not been performing very well in the last 10 years.

So actually, what it means is that competitiveness involves more than taxation. … If we look at the real engines of national competitiveness, I think we have to look at technology, research and development, the efficiency of management, the skill of people. We probably have to look also at the ease of doing business, the quality of the education system. All those criteria have far more impact on competitiveness than lowering taxes.

Taxation is part of the cost of doing business. It’s important, but it’s not the entire story.

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