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The global financial crisis seemingly shifted economic power away from hard-hit Western countries such as the U.S. and Britain to cash-rich emerging economies such as India and China. But while the West is limping along today, economic power may shift back when growth resumes. Why? Among the nations of the world, developed countries still enjoy considerable advantages in fundamental economic competitiveness—whether based on the quality of their infrastructure and educational systems or the sophistication of their business laws and bureaucracy.
That's the conclusion of the 2009 World Competitiveness Yearbook, an annual report published by IMD business school in Lausanne, Switzerland. Based on a detailed analysis of economic output, government and business efficiency, skills, and infrastructure, the researchers ranked 57 of the world's economies to determine which are best placed to succeed in the 21st century economic race.
Topping the list for the 16th consecutive year, unchanged from its No. 1 ranking in the 2008 report, was the U.S.—despite a tough economic situation and rising unemployment. With its world-class higher-education system, enormous and diverse economy, and powerful infrastructure, the U.S. continues to be the world's biggest economic engine and top destination for foreign direct investment.
The U.S. shared top billing with plenty of other developed and competitive countries whose economies also are shaky these days. Among the top 20 on the list, only oil-rich Qatar, ranked 14, and China, ranked 20, can be considered emerging economies.
What makes countries like Denmark and Japan more competitive than the likes of Slovakia and Brazil? Some of the credit goes to efficient domestic policies, ranging from the level of taxation to the time required to start a business. Though many top-ranked countries have labor market protections, relatively high taxes, and sizable bureaucracies, they are nevertheless more flexible and adaptable to the rapidly evolving global economy than many emerging countries. They also usually benefit from less corruption, more stable public finances, and generally better and more widely available education.
"Countries at the top of this year's rankings are better prepared to adapt to the current turbulent [economic] times," says StÉphane Garelli, director of IMD's World Competitiveness Center. "The business communities don't fear change, and governments should be able to enact reforms quickly."
That's not to say today's leading countries will stay ahead forever. Garelli warns that creeping complacency—particularly in sustaining R&D investment and maintaining education standards—could undermine the Western world's current dominance. Government intervention in the financial sector also could hurt entrepreneurship. And emerging economies' cash reserves targeted at improving domestic infrastructure may soon allow China and India to close the gap on that score.
Yet for naysayers who forecast the declining business influence of North America and Western Europe, the IMD competitiveness reports during recent years provide for interesting reading.
Take Sweden. The Scandinavian country jumped from No. 14 in 2005 to No. 6 in this year's rankings. What gives this small state, with a population of just 9.2 million, an edge over India and its population of 1.1 billion? According to IMD's Garelli, Sweden's widespread social programs, combined with a strong education system and vibrant entrepreneurial scene, mean Sweden ranks among the top 10 countries in the world on more than half of IMD's competitiveness categories. In contrast, India, which is ranked No. 30 this year, scores high marks only for the size of its domestic economy and its low labor costs.
The competitiveness divide isn't limited to countries in different continents. Many of Asia's more developed economies, such as Hong Kong and Singapore, continue to outpace the likes of Malaysia and Thailand. Central to their success is a large domestic pool of cash-rich entrepreneurs supported by governments that remain business-friendly despite the souring of the global economy. Hong Kong, for instance, still tops IMD's rankings for international trade and investment, while Singapore remains a world-beater in smart business regulation.
Can the U.S. hold on again to its No. 1 ranking? IMD's Garelli reckons so for the foreseeable future, despite rising unemployment and government intervention in financial markets. "You can never underestimate the U.S. capacity to reinvent itself," he says.
Click here for a slide show of the top 30 countries in the 2009 rankings.
Click here to compare the 2008 rankings.
Click here to compare the 2007 rankings.
Scott is a reporter in BusinessWeek's London bureau .