The financial market crisis that began in 2007 has resulted not only in losses in markets and for financial institutions, but also in eroding public confidence in the financial sector and among the institutions themselves across the industrialized world. In the meantime, rising prices — from education and health care to commodities and food — are having an almost unprecedented effect on emerging and developing economies.

Although the present downturn was expected to be confined mainly to the U.S., the economic turmoil has since spread to other industrialized economies and it remains unclear what the future holds for emerging markets.

Policymakers are presently struggling with ways to effectively manage the multiple shocks while preparing their economies to perform successfully in an increasingly volatile economic landscape. In an unstable global financial environment, it is more important than ever for countries to put into place the fundamentals underpinning economic growth and development.

The World Economic Forum's (WEF) Global Competitiveness Report aims to enhance the understanding of the key factors determining economic growth and explain why some countries are more successful than others in raising income levels and opportunities for their respective populations.

The WEF defines "competitiveness" as "the set of institutions, policies and factors that determine the level of productivity of a country." The productivity level, in turn, sets the sustainable prosperity level an economy can earn. This is echoed in the International Institute for Management's (IMD) World Competitiveness Yearbook, the announcement of which states, "Ultimately, the goal of competitiveness lies in the capacity of a country to manage its long-term prosperity."

The World Competitiveness Yearbook, from the Switzerland-based business school's World Competitiveness Center, ranks 55 countries based on 331 criteria, calculating its overall competitiveness scoreboard by combining four factors: economic performance; government efficiency; business efficiency; and infrastructure. The WEF uses 12 "pillars of competitiveness" to determine 134 economies' rankings: institutions; infrastructure; macroeconomic stability; health and primary education; higher education and training; goods market efficiency; labor market efficiency; financial market sophistication; technological readiness; market size; business sophistication; and (technological) innovation.

Topping the latest list of both international competitiveness rankings: the U.S.

In the WEF list, the U.S. is followed by (in order): Switzerland; Denmark; Sweden; Singapore; Finland; Germany; Netherlands; Japan; and Canada.

In the IMD list, the top 10 is rounded out by (in order): Singapore; Hong Kong; Switzerland; Luxembourg; Denmark; Australia; Canada; Sweden; and Netherlands.

The U.S. has held the position of the most competitive economy in the world for several years in the WEF rankings.

"The country is endowed with many structural features that make its economy extremely productive and that place it on a strong footing to ride out business cycle shifts and economic shocks," according to the Global Competitiveness Report. "Thus, despite rising concerns about the soundness of the banking sector and macroeconomic weaknesses, the country's many other strengths continue to make it a very productive environment."

The WEF report calls the U.S. "home to highly sophisticated and innovative companies operating in very efficient factor markets," citing "an excellent university system that collaborates strongly with the business sector in research and development (R&D)." These qualities, combined with the scale of opportunities afforded by the sheer size of the domestic economy — the largest in the world by far — "make the U.S. the most competitive economy in the world."

Yet while the U.S. also ranks first in the IMD's competitiveness rankings, the organization is less positive about the nation's future.

As highlights of the WEF report state, the U.S. "has built up large macroeconomic imbalances over recent years, with repeated fiscal deficits leading to rising and burgeoning levels of public indebtedness. This indicates that the country is not preparing financially for its future liabilities and is on the road to making interest payments that will increasingly restrict its fiscal policy freedom going into the future."

"[W]e may be seeing the U.S. in the No. 1 position for the last time!" according to an announcement of the World Competitiveness Yearbook 2008. "Singapore is closing the gap ... with the U.S. and 2008 might be the turning point where the U.S. falls from its leadership of top competitors."

Singapore, at second place on the IMD list and fifth place on the WEF list, ranks high on the strength of its institutional environment. Up two places from the prior year on the WEF list and the top-ranked Asian country on the IMD list, Singapore places among the top for the efficiency of all of its markets — goods, labor and financial — ensuring the proper allocation of these factors to their best use. Singapore also leads the world in the quality of its port and air transport facilities. Yet its overall ranking is constrained by its domestic market size, interest rate spread and government debt.

Several Asian economies besides Singapore and Japan join the WEF's top 30. The People's Republic of China, for one, continues to lead the way among large developing economies, joining the WEF's top 30. Japan, Hong Kong, the Republic of Korea and Taiwan perform strongly in the top 20. All of the BRIC economies figure in the top half of the ranking, with India, Russia and Brazil following China.

Meanwhile, Switzerland ranks in the top five of both competitiveness lists (WEF: 2nd; IMD: 4th) for its capacity for innovation and sophisticated business culture. The country is characterized by its high spending on R&D, high rate of patenting, high level of employment, weak inflation and effective, transparent public institutions, ensuring a level playing field and enhancing business confidence. "On the other hand, a high cost of living decreases the real purchasing power of its inhabitants," the IMD states. "Despite a talented workforce, the country has seen a decrease in entrepreneurship."

Finally, the Nordic members of the European Union continue to hold privileged positions in both rankings: Denmark (WEF: 3rd; IMD: 6th), Sweden (WEF: 4th; IMD: 9th) and Finland (WEF: 6th; IMD: 15th). "As in past years, the Nordic countries outperform the U.S. in a number of areas," including the macroeconomic environment (healthy budget surpluses and very low levels of public indebtedness), functioning and most transparent institutions and significant focus placed on higher education and training — which in turn has provided a highly skilled, tech-savvy and flexible workforce — the WEF highlights note.

A number of countries in the Middle East and North Africa region are in the upper half of the rankings, led by Israel, Qatar, Saudi Arabia, United Arab Emirates and Kuwait, with particular improvements noted in the Gulf States since the previous year's rankings.

"Today, it is primarily the East Asians, the Russians and the Gulf Arabs who command the global financial heights," the IMD stated in August.

These annual rankings show a frantic race among the world's top competitors, with gaps being reduced year over year. Will the U.S. run continue? How much longer will the nation remain the most competitive economy?

Resources

The Global Competitiveness Index Rankings and 2007-2008 Comparisons
The World Economic Forum, Oct. 8, 2008

The World Competitiveness Scoreboard 2008
The International Institute for Management, May 15, 2008

The Global Competitiveness Report 2008-2009
The World Economic Forum, Oct. 8, 2008

World Competitiveness Yearbook - 2008 Results
The International Institute for Management, May 15, 2008

United States Remains On Top Of Competitiveness Rankings
The World Economic Forum, Oct. 8, 2008

IMD World Competitiveness Yearbook 2008 (and Looking Back at 1989...)
The International Institute for Management, May 15, 2008

...Switzerland Remains in the League of Top Competitors...
The International Institute for Management, May 15, 2008

The Global Competitiveness Report 2008-2009: Country Profile Highlights
The World Economic Forum, Oct. 8, 2008

How Much Longer Will the U.S. Remain the Leader in World Competitiveness?
by Stéphane Garelli and Suzanne Rosselet-McCauley
The International Institute for Management, May 2008

Global Crises and the Collapse of the Doha Round - Implications for and Imperatives of Responsible Leadership
The International Institute for Management, Aug. 27, 2008