Next week the World Economic Forum (WEF) will host its 48th annual meeting in Davos, Switzerland, drawing together a large number of leaders from governments (including President Trump), international organizations, business, academia, and civil society. The title for this year’s meeting is “Creating a Shared Future in a Fractured World.” This global networking event will generate a lot of press but is not a forum for taking action. Trump will certainly be praising his own actions to reduce corporate tax rates and excessive regulations in order to improve the ability of US firms to compete internationally.
In this note we look at the WEF’s annual publication, The Global Competitiveness Report 2017–2018, a comprehensive analysis comparing the international competitiveness of some 137 economies.[1] The definition of competitiveness used in the World Economic Forum report is “the set of institutions, policies and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the economy can achieve.” They look at some 114 indicators that are grouped under 12 headings: institutions, infrastructure, macroeconomic, environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. This is indeed a wide range of factors said to affect competitiveness. This list and the above definition make clear that the WEF’s focus is on the productivity of an economy, its ability to generate economic growth and prosperity. This is central to the ability of an economy’s firms to compete in global markets.
The Global Competitiveness Index 2017–2018 Rankings, which were published September 26, 2017, indicate that among the 137 economies analyzed, the United States has the second-most competitive economy, behind that of Switzerland. The third through tenth rankings go to Singapore, Netherlands, Germany, Hong Kong, Sweden, United Kingdom, Japan, and Finland. The economies in this top ten list are not surprising – their overall scores are close. Some other interesting rankings are Taiwan’s (15), Israel’s (16), South Korea’s (26), China’s (27), Russian Federation’s (38) and India’s (40). The lowest-ranked economies – the bottom 20 out of 137 – are Haiti, Venezuela, and eighteen Sub-Saharan African economies.
Looking at details of the Global Competitiveness Index with regard to the United States[2] reveals the depth and complexity of the analysis that produces these rankings. We find that the US ranked first in just nine areas: inflation, venture capital availability, local equity market financing, international distribution, buyer sophistication, marketing, redundancy costs, cluster development, and airline seat miles per week. The US ranked second in the broad categories of business sophistication, innovation, market size, and financial market development. It ranked third for labor market efficiency and higher education and training. The quality of primary education earned a rank of 11. The US ranked 6 in technological readiness but achieved a rank of only 39 for internet users/population. The rank of 7 for goods market efficiency was understandably kept down by the rank of 95 for the total tax rate as a percentage of profits. The rank for female participation in the labor force was also low, 56.
The US’s burden of government regulation, another priority issue for the Trump administration, ranked 12th among the 137 economies, suggesting that we are already doing relatively well in this area. That category is included under the broad heading “institutions,” for which the US has an overall ranking of 20. As investors, we find it disturbing that under the same heading, the US managed only a ranking of 31 for strength of investor protection. Also troubling are the ratings of 34 for irregular payments and bribes, 61 for business costs of crime and violence, and 57 for organized crime. Thus, for example, 56 economies have less of a problem of organized crime than the United States does. An unsurprising reading is that 86 economies have lower business costs of dealing with the threat of terrorism.
Taken as a whole, the “competitiveness” of the United States economy – that is, its productive capacity to generate growth – is very high in comparison with other economies. Of course, there continue to be areas where improvements would be desirable, some of which are noted above. The recent corporate tax cuts in the US will register as a plus in the next global ranking. But the tax rate is just one of some 115 factors that enter into the WEF’s analysis. Moreover, the ability of US firms to compete in international markets is also affected by external factors such as exchange rates and the trade measures of other countries, including those determined by international trade agreements and global trade rules. Were the United States to impose significant trade restrictions and were other countries to respond in kind, as they surely would, the domestic economy’s competitive edge would not be sufficient to prevent serious harm to the country’s exports.
Bill Witherell, Ph.D.
Chief Global Economist
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[1] Sources: The World Economic Forum, The Global Competitiveness Report 2017–2018, Geneva, September 26, 2017; available for download at http://www.weforum.org/gcr.
[2] The Global Competitiveness Report 2017–18, page 303
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