The top 10 most competitive economies in the world

The World Economic Forum’s Global Competitiveness Report 2012-2013 assesses the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity. The Report series remains the most comprehensive assessment of national competitiveness worldwide.

The 2012-2013 edition confirms a tendency of the last few years with the top 10 most competitive economies being dominated by a number of European nations along with the United States and three Asian economies.

Ranking: the top 10 best performing economies in the world

Switzerland retains its 1st place position again this year as a result of its continuing strong performance across the board. The country’s most notable strengths are related to innovation and labor market efficiency, where it tops the GCI rankings, as well as the sophistication of its business sector, which is ranked 2nd.

Switzerland’s scientific research institutions are among the world’s best, and the strong collaboration between its academic and business sectors, combined with high company spending on R&D, ensures that much of this research is translated into marketable products and processes reinforced by strong intellectual property protection. This robust innovative capacity is captured by its high rate of patenting per capita, for which Switzerland ranks a remarkable 2nd worldwide.

Productivity is further enhanced by a business sector that offers excellent on-the-job-training opportunities, both citizens and private companies that are proactive at adapting the latest technologies, and labor markets that balance employee protection with the interests of employers. Moreover, public institutions in Switzerland are among the most effective and transparent in the world (5th). Governance structures ensure a level playing field, enhancing business confidence; these include an independent judiciary, a strong rule of law, and a highly accountable public sector.

Competitiveness is also buttressed by excellent infrastructure (5th), well-functioning goods markets (7th), and highly developed financial markets (9th). Finally, Switzerland’s macroeconomic environment is among the most stable in the world (8th) at a time when many neighboring economies continue to struggle in this area.

While Switzerland demonstrates many competitive strengths, maintaining its innovative capacity will require boosting university enrollment rate, which continues to lag behind that of many other high-innovation countries, although this has been increasing in recent years.

Singapore retains its place at 2nd position as a result of an outstanding performance across the entire Index. The country features in the top 3 in seven of the 12 categories of the Index and appears in the top 10 of three others. Its public and private institutions are rated as the best in the world for the fifth year in a row. It also ranks 1st for the efficiency of its goods and labor markets, and places 2nd in terms of financial market development.

The country also has world-class infrastructure (2nd), with excellent roads, ports, and air transport facilities. In addition, the country’s competitiveness is reinforced by a strong focus on education, which has translated into a steady improvement in the higher education and training pillar (2nd) in recent years, thus providing individuals with the skills needed for a rapidly changing global economy.

Finland moves up one place since last year to reach 3rd position on the back of small improvements in a number of areas. Similar to other countries in the region, the country boasts well-functioning and highly transparent public institutions (2nd), topping several indicators included in this category. Its private institutions, ranked 3rd overall, are also seen to be among the best run and most ethical in the world.

Finland occupies the top position both in the health and primary education pillar as well as the higher education and training pillar, the result of a strong focus on education over recent decades. This has provided the workforce with the skills needed to adapt rapidly to a changing environment and has laid the groundwork for high levels of technological adoption and innovation. It is also one of the most innovative countries in Europe, ranking 2nd, behind only Switzerland, on the related pillar. Improving the country’s capacity to adopt the latest technologies (ranked 25th) could lead to important synergies that in turn could corroborate the country’s position as one of the world’s most innovative economies. Finland’s macroeconomic environment weakens slightly on the back of rising inflation (above 3 percent), but fares comparatively well when contrasted with other euro-area economies.

Sweden, overtaken by Finland, falls one place to 4th position. Like Switzerland, the country has been placing significant emphasis on creating the conditions for innovation-led growth. The quality of its public institutions remains first-rate, with a very high degree of efficiency, trust, and transparency. Private institutions also receive excellent marks, with firms that demonstrate excellent ethical behavior.

Nevertheless, we registered a slight but consistent deterioration in the country’s institutional framework over the past three years. Additional strengths include goods and financial markets that are very efficient, although the labor market could be more flexible (ranking 92nd on the flexibility subpillar). Combined with a strong focus on education over the years and a high level of technological readiness (1st), Sweden has developed a very sophisticated business culture (5th) and is one of the world’s leading innovators (4th). Last but not least, the country boasts a stable macroeconomic environment (13th), with a balanced budget and manageable public debt levels. These characteristics come together to make Sweden one of the most productive and competitive economies in the world.

The Netherlands continues to progress in the rankings, moving up to 5th place this year. The improvement reflects a continued strengthening of its innovative capacity as well as the heightened efficiency and stability of its financial markets. Overall, Dutch businesses are highly sophisticated (4th) and innovative (9th), and the country is rapidly and aggressively harnessing new technologies for productivity improvements (9th). Its excellent educational system (ranked 5th for health and primary education and 6th for its higher education and training) and efficient markets—especially its goods market (6th)—are highly supportive of business activity.

Although the country has registered fiscal deficits in recent years (5.0 percent of GDP in 2011), its macroeconomic environment is more stable than that of a number of other advanced economies. Last but not least, the quality of its infrastructure is among the best in the world, reflecting excellent facilities for maritime, air, and railroad transport, ranked 1st, 4th, and 9th, respectively.

Germany maintains its position at 6th place this year. The country is ranked an excellent 3rd for the quality of its infrastructure, boasting in particular first-rate facilities across all modes of transport. The goods market is quite efficient, characterized by intense local competition (8th) and low market dominance by large companies (2nd). Germany’s business sector is very sophisticated, especially when it comes to production processes and distribution channels, and German companies are among the most innovative in the world, spending heavily on R&D (4th) and displaying a high capacity for innovation (3rd)—traits that are complemented by the country’s well-developed ability to absorb the latest technologies at the firm level (16th). These attributes allow Germany to benefit greatly from its significant market size (5th), which is based on both its large domestic market and its strong exports.

On a less positive note and despite some efforts, Germany’s labor market remains rigid (119th for the labor market flexibility subpillar), where a lack of flexibility in wage determination and the high cost of firing hinder job creation, particularly during business cycle downturns. In addition, improving the quality of the educational system—where the country continues to trail its top 10 peers at 28th place—could serve as an important basis for sustained innovation-led growth. In view of continued economic difficulties in the euro area, Germany’s performance in the macroeconomic pillar remains remarkably stable, with the country even registering a reduction in the fiscal deficit to –1 percent of GDP, but concerns about potential effects of the European sovereign debt crisis are reflected in the downgrading of the country’s credit rating.

The United States continues the decline that began a few years ago, falling two more positions to take 7th place this year. Although many structural features continue to make its economy extremely productive, a number of escalating and unaddressed weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive.

On the other hand, some weaknesses in particular areas have deepened since past assessments. The business community continues to be critical toward public and private institutions (41st). In particular, its trust in politicians is not strong (54th), perhaps not surprising in light of recent political disputes that threaten to push the country back into recession through automatic spending cuts. Business leaders also remain concerned about the government’s ability to maintain arms-length relationships with the private sector (59th), and consider that the government spends its resources relatively wastefully (76th). A lack of macroeconomic stability continues to be the country’s greatest area of weakness (111th, down from 90th last year). On a more positive note, measures of financial market development continue to indicate a recovery, improving from 31st two years ago to 16th this year in that pillar, thanks to the rapid intervention that forced the deleveraging of the banking system from its toxic assets following the financial crisis.

The United Kingdom (8th) continues to make up lost ground in the rankings this year, rising by two more places and now settling firmly back in the top 10. The country improves its performance in several areas, benefitting from clear strengths such as the efficiency of its labor market (5th), in sharp contrast to the rigidity of those of many other European countries. The United Kingdom continues to have sophisticated (8th) and innovative (10th) businesses that are highly adept at harnessing the latest technologies for productivity improvements and operating in a very large market (it is ranked 6th for market size).

The financial market also continues its recovery, ranked 13th, up from 20th last year. All these characteristics are important for spurring productivity enhancements. On the other hand, the country’s macroeconomic environment (110th, down from 85th last year) represents the greatest drag on its competitiveness, with a fiscal deficit nearing 9 percent in 2011, an increase of 5 percentage points in public debt amounting to 82.5 percent of GDP in 2011 (127th) and a comparatively low national savings rate (12.9 percent of GDP in 2011, 113th).

As the second-placed Asian economy behind Singapore (2nd), Hong Kong SAR rises to 9th position while slightly improving its score. The territory’s consistently good performance is reflected in very good showing across most of the areas covered by the GCI. As in previous years, Hong Kong tops the infrastructure pillar, reflecting the outstanding quality of its facilities across all modes of transportation and its telephony and electricity infrastructure.

Moreover, the economy’s financial markets are second to none, revealing high efficiency and trustworthiness and stability of the banking sector. The dynamism and efficiency of Hong Kong’s goods market (2nd) and labor market (3rd) further contribute to the economy’s very good overall positioning. To maintain and enhance its competitiveness going forward, continued improvements in two important areas—higher education (22nd) and innovation (26th)—will be necessary. Although the quality of education in Hong Kong is good (12th), participation remains below levels found in other advanced economies (53rd). Improving educational outcomes will also help boost Hong Kong’s innovative capacity, which remains constrained by the limited availability of scientists and engineers (36th), among other things.

Japan falls one place to rank 10th this year, with a performance similar to that of last year. The country continues to enjoy a major competitive edge in business sophistication and innovation, ranking 1st and 5th, respectively, in these two pillars. Company spending on R&D remains high (2nd) and Japan benefits from the availability of many scientists and engineers buttressing a strong capacity for innovation. Indeed, in terms of innovation output, this pays off with the fifth-highest number of patents per capita.

Furthermore, companies operate at the highest end of the value chain, producing high-value-added goods and services. The country’s overall competitive performance, however, continues to be dragged down by severe macroeconomic weaknesses (124th), with the second-highest budget deficit in this year’s sample (143th). Repeated over recent years, this has led to the highest public debt levels in the entire sample (nearly 230 percent of GDP in 2011). In addition, we observe a downward assessment of labor market efficiency (from 13th two years ago to 20th place this year), with the business sector perceiving the alignment between pay and productivity, hiring and firing practices, and brain drain less favorably than in previous years.

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The Global Competitiveness Report 2012-2013 assesses the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity. The Report series remains the most comprehensive assessment of national competitiveness worldwide.