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Asia Gains, U.S. Drops in Competitiveness

A lot can change in 12 months. At this time last year, Western nations dominated the annual ranking of the world's most competitive countries prepared by the IMD business school in Lausanne, Switzerland. Now, in the most recent ranking released May 19, five of the top 10 are from the Asia-Pacific region. Emerging-power China, ranked No. 18, has gained ground, even as No. 3-ranked U.S. and No. 22-ranked Britain slipped in the global pecking order.

"For the first time, we're seeing the creation of a self-sufficient economic block of developing countries," says Stéphane Garelli, director at IMD's World Competitiveness Center and co-author of the World Competitiveness Yearbook 2010. "They have money, markets, technology, and global brands that didn't exist 10 years ago."

The eastward shift isn't likely to end soon. While Europe struggles to rein in gaping budget deficits and the U.S. continues to suffer from high unemployment, most emerging economies have weathered the economic downturn better—and are now back to work. Commodity-rich nations such as Brazil and Russia are benefiting from rising prices for everything from iron ore to oil to soya beans. Such manufacturing giants as China and India are tapping into growing domestic markets, fueled by emerging middle classes eager to spend their renminbi and rupees.

"Local investors who previously would have taken their cash overseas are looking at investment opportunities at home," says IMD's Garelli. "The U.S. and Europe have to realize the investment money just isn't coming back."

World's biggest loser: Europe

The Swiss school's 2010 competitiveness yearbook will make for tough reading in the West. Based on a detailed analysis of economic output, government and business efficiency, skills, and infrastructure, the researchers ranked 58 of the world's economies to determine which are best-placed to succeed in the 21st century economic race. For the first time in 17 years, the U.S. lost the top spot, falling behind Singapore and Hong Kong, respectively. Australia, Taiwan, and Malaysia are additional Asia-Pacific countries that scored in the top 10.

The biggest loser in this year's rankings is Europe. Despite a combined gross domestic product of almost $15 trillion and a total population of nearly 500 million, only three Old World countries—Switzerland, Sweden, and Norway—broke into IMD's top 10 this year. Perennial stars Denmark, Finland, and the Netherlands dropped out of the top 10, replaced by Taiwan and Malaysia (as well as by Norway, which is outside the EU and euro zone). The continent's largest economies, Germany (No. 16), United Kingdom (No. 22), and France (No. 24), remained well outside the top 10; France alone among the three gained ground, rising four rungs. IMD attributes the Old World's relatively poor showing to high levels of government debt, a weakening infrastructure, and continued inefficiencies in European labor markets.

The U.S. may be better positioned to come back. While IMD finds grounds to criticize U.S. business regulation and government policy, the country retains two major global advantages, Garelli says. First is the sheer size of the domestic economy—far and away the world's largest; when GDP growth returns in earnest, the U.S. will be able to leverage its bulk into competitiveness gains. The U.S. also benefits from having the world's most advanced research and development capability and highest-ranked infrastructure. "We can't sell the U.S. short," Garelli says. "Once the [economic] turnaround takes hold, the country should bounce back relatively quickly."

For an introduction to the top 10 countries and others of interest in the IMD 2010 World Competitiveness Yearbook, check out our slide show.

Click here for a look at the results of IMD's 2009 competitiveness ranking.

Click here for an alternative competitiveness ranking from 2009, prepared by the World Economic Forum.

Click here for a look at the results of IMD's 2008 competitiveness study.

Scott is a correspondent in Bloomberg Businessweek's London bureau.

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