Again this year, the United States is first in the rankings of the 2008 IMD World Competitiveness Yearbook, a pioneer in ranking and analyzing how nations compete and manage their path to prosperity.
But will the United States’ run continue? In 1989, Japan seemed firmly in the No. 1 position with the U.S. in third. By 1994, however, the U.S. took over leadership, a position it has held ever since. The downfall of Japan in competitiveness bears some similarities with the present situation. Will the U.S. follow the same path?
In the 20th anniversary edition this year, we may be seeing the U.S. in the No. 1 position for the last time. Singapore is closing the gap (score of 99.3) with the U.S. and 2008 might be the turning point where the U.S. falls from its leadership of top competitors. Will the country rebound and regain its famous competitive advantages? Looking back over the 20-year history of competitiveness, we may learn some lessons from another leading country’s experience – Japan.
Toward a U.S. remake of the Japanese tragedy?
“In 1989, when we first published our ranking on competitiveness, Japan was firmly in the No. 1 position, while the U.S. was third,” said professor Stéphane Garelli, IMD. “Japan’s competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation. Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998. Does this ring a bell? The past crisis in Japan bears some resemblance with the present turmoil in the U.S. It followed a period of economic boom, real estate price follies and exuberant assets expansion. In addition, the liberalization of financial instruments took place without the appropriate regulatory environment; corporate governance was inadequate with little accountability and transparency; and the government was quickly overwhelmed by the magnitude of the crisis.
“The price? The crisis in Japan spread from the stock market to real estate and then developed into a credit crunch and finally into a major crisis of the financial system. As a consequence, no bank was too big to fail! The resulting cost of bailing out the financial system was huge: 15 percent to 20 percent of GDP over a 10-year period. Deflation spiraled down and interest rates dropped all the way to zero. The Japanese economy stagnated for a decade. Frightening … Will this happen to the U.S.? Once it starts, the logic of a financial crisis seems hardly stoppable. On the other hand, the differences between the two economic societies are quite large. Apart from a few notable successes (Canon, Toyota, etc.), by the 1990s, much of Japanese industry was in a paralyzed state. The Japanese never practiced “creative destruction”. The U.S., because of its openness, resilience and entrepreneurship, always seems to find the means to reinvent itself in ways that Japan (and much of Europe) often lacks.
“In addition, the U.S. has a few trumps in hand: the Japanese breakdown of the 1990s provides some forewarning. The Federal Reserve and the Treasury were thus quick to realize the magnitude of the risk, and will continue to take drastic action. Central banks are supplying massive liquidities to financial markets and act as lenders of last resort (e.g. in swapping mortgage-backed assets); emerging sovereign wealth funds seem to be willing to recapitalize financial institutions (such as CITI, Merrill Lynch or UBS); and the global economy is still buoyant (110 countries grew over five percent in 2007). Will it be enough? The structural deficits in the U.S. (balance of trade, budget and, as a consequence, national debt) have ultimately to be addressed otherwise the dollar will remain weak. A recession in the U.S. is a strong possibility. Will it last and will it spread? In both cases, the answer is yes. The financial sector represents 40 percent of U.S. corporate profits.
“In addition, the IMF reckons that a 1 percent fall in U.S. growth cuts European growth by 0.5 percent. Furthermore, high raw material and food prices trigger imported inflation at a time of low interest rates – pretty nasty… 2008 will be rough. In the 20 years that we have ranked and analyzed competitiveness, we have learned one thing: no nation, however competitive, is immune to a breakdown, especially when it stems from the financial sector. In the words of Benjamin Franklin: ‘even a small hole can sink a big ship.’”
What is the IMD World Competitiveness Yearbook?
The IMD World Competitiveness Yearbook is the most reputable and comprehensive report on the competitiveness of nations published since 1989. It provides several customized rankings, whether by size, by wealth, by regions, etc. as well as country competitiveness profiles and analysis. The Overall Competitiveness Scoreboard is calculated by combining four factors of competitiveness: Economic Performance, Government Efficiency, Business Efficiency and Infrastructure.
· Competitiveness of 55 economies, based on 331 criteria
· Focuses primarily on Hard data (2/3 from international, regional and national sources)
· Survey data (1/3) – from our annual WCY Executive Opinion Survey 2008
· Published annually since 1989 and updated on a regular basis on-line
· Worldwide reference point with objective benchmarking
· Reliable and up-to-date data with unique network of 52 Partner Institutes worldwide
