World Competitiveness - Are We on Track?
By Kevin Daley

An Update on Australia's World Competitiveness Ranking

The 1998 edition of the World Competitiveness Yearbook was recently released by Switzerland's internationally renowned Institute for Management (IMD). The Yearbook analyses and ranks the ability of a nation to provide an environment that sustains the competitiveness of enterprises. This exercise distinguishes between the competitiveness of firms and the competitiveness of countries and emphasises the fact that the competitiveness of firms depends on the political, economic, socio-cultural human and educational dimension of a country.

Country rankings are based on statistical indicators of competitiveness as recorded by international organisations and national institutes as well as the perceptions of over 4,314 business executives. In all, the calculation of the competitiveness index is based on 259 indicators mirroring their relevance to international competitiveness and grouped into 8 different factors: domestic economy, internationalisation, government, finance, infrastructure, management, science and technology, and people. It is this multi-dimensional aspect of competitiveness that is applied in the World Competitiveness Year Book to analyse 46 countries comprising, 28 OECD members and 18 newly industrialised and emerging economies.
 

Table 1 shows Australia's competitiveness position in 1998 compared to 1997 relative to the top twenty countries ranked in the IMD's index. In 1998 Australia's ranking of 15th position in the world places us behind nations such as Canada, ranked 10, Ireland (11) and New Zealand (13), but ahead of Taiwan (16), Sweden (17) and Japan (18). Because certain countries share similar structural or behavioral patterns (sometimes independently of geography), it is often more interesting to compare individual country performances within their group of reference. Apart from the US (1), Anglo-Saxon countries such as Canada (10), Ireland (11), the UK (12), New Zealand (13) and Australia (15) maintain a remarkably consistent performance, stemming from reforms that began before other nations. Ireland (11) has lived up to its name as the Tiger of Europe with an attractiveness policy that has generated phenomenal growth over the past three years (8á3% in 1997). Similarly, Australia has increased its ranking by three places and is enjoying steady growth (3á8% in 1997).
 

Table 2. Australia's World Competitiveness Ranking

Factors	1992*	1996**	1997***	1998****
Domestic Economy	17	18	22	25
Internationalisation	21	29	28	27
Government	13	13	14	9
Finance	14	15	18	14
Infastructure	11	6	8	9
Management	19	25	19	17
Science & Technology	15	21	24	21
People	13	18	14	10
Overall	20	21	18	15

* 1992 ranking is among 22 OECD countries; ** 1996 – 49 countries; *** 1997 & 1998 – 46 countries
Source, IMD 1998: 24-31.

Table 2 shows Australia's overall ranking in terms of eight factors of competitiveness since 1992. Contributing to Australia's increased international competitiveness ranking in 1998 relative to 1997 are six key areas; Government (14 to 9), Finance (18 to 14), Management (19 to 17), Science & Technology (24 to 21), People (14 to 10) and Internationalisation (28 to 27). Three of these six factors are ranked just inside the top 10 while the other three are ranked well outside, and therefore contribute significantly less weight. Factors contributing to a decline in our competitiveness were Infrastructure (falling from 8 to 9) and the Domestic Economy (falling from 22 to 25).

New Frontiers in 1998

Today countries strive to increase their attractiveness and fiercely compete with one another to create the most appealing business environment. Below are some of the major factors that companies place foremost in deciding where to locate and where government policies continue to employ greatest effort in a bid to upgrade their country's attractiveness.

Wages: In an open global economy significant differences in wage levels allow companies to 'shop around' and select the most efficient location. A comparison of hourly compensation in manufacturing (i.e. workers' wages plus supplementary benefits, in US$) reveals notable gaps within the OECD. For example, in 1997 labour costs in the US are significantly lower ($17.70 an hour) than in Germany where the average is $25 an hour. Australian workers averaged $13.95 an hour, below the UK and Canada but above Ireland and well ahead of Singapore, where the average manufacturing worker is payed $6.69 per hour. Within the Anglo-Saxon world Australian manufacturing workers are ranked in the lower quartile in terms of hourly wages paid.

Taxes: Taxation remains one of the few policy choices left in the hands of nations. Today, nations increasingly compete with tax policies. Continental Europe continues to suffer from a high taxation burden which, on average exceeds 40% of GDP. The US, the UK, Japan, Australia and Ireland have succeeded in maintaining their tax pressure between 27% and 35%. South East Asia and South America collect less than 20% of GDP in taxes. In the short term one can expect that the trend to reduce corporate taxes will be an important vehicle not only to attract multinationals but to retain those already in operation here.

Australia's taxation system is ranked as one of the poorest in the world, 39th out of a total of 46 countries. Businesses in general favour a Goods and Services Tax (GST) as they view an indirect tax as preferable to a direct tax. However, a tax package as envisaged by a GST is not by itself going to encourage overseas firms to our shores, as many continental European countries have had a GST in operation for the past decade but fail to attract multinationals on the scale that Ireland has experienced.

Currencies: Massive currency devaluation in South East Asia along with the enforcement of IMF policies will trigger a surge in low priced exports from this region and cause possible dumping problems. The Euro, which involves eleven countries of the European Union, will increase the transparency of government policies and enable companies to easily compare the internal cost structure of their operations in different markets. At this stage it is apparent that the Euro will quickly become a world reserve currency like the dollar.

Size: The emerging economies that increasingly opened their markets in the past 25 years have one common characteristic, population. Seven economies – Indonesia, the Philippines, Thailand, Vietnam, Korea, India and China – together account for more than 2.8 billion people; half of the world's population. These countries are the potential mega-markets of the future. Their attractiveness rests in the fact that volume can drive costs down and low margins are compensated by quantity.

By contrast there are countries such as Switzerland, Singapore, Austria, Belgium, Ireland, Israel and the Scandinavian countries, none of which has a population of more than 10 million. What is the future for these countries? Their success is based on excellence, uniqueness and quality. They avoided high cost structures by employing technology, education and entrepreneurship.

Finance: Finance has become a formidable referee for the competitive performance of companies and countries. The power of institutional investors is linked to the enormous amounts of funds they manage and their ability to electronically transfer enormous amounts of money from one part of the world to another faster than goods or people. In 1996 it was estimated that they managed $8,100 billion. Institutional investors exert considerable pressure to produce 'financial performance'. Underperforming managers are given the heave-ho. The effect on countries is just as significant, as was demonstrated by the recent currency crises in South East Asia.

Conclusion

Countries are increasingly adapting their environments to focus on attracting and retaining enterprises which sustain national economic growth and job creation. Managing location is the new frontier of competitiveness for 1998. Countries that strive for a policy of attractiveness and fiercely compete with one another to create the most appealing business environment are today's winners in the global competition to attract and retain business.

References

IMD (Institute of Management Development) June 1997, The World Competitiveness Yearbook 1997.

IMD (Institute of Management Development) June 1998, The World Competitiveness Yearbook 1998.

Kevin Daly is a Lecturer in Economics and Finance at the University of Western Sydney, Macarthur.

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