Is the U.S. Losing Its Competitive Edge?


In the World Economic Forum's global competitiveness ranking, the U.S. drops from first place to sixth thanks to its deficits and health care

Americans aren't No. 1 anymore, and their government is largely to blame. That seems to be the bottom line of a new survey of global competitiveness in which the U.S. slipped from first to sixth place, behind Switzerland, Finland, Sweden, Denmark, and Singapore.

While the U.S. excelled in such business categories as market efficiency and innovation, its score in the World Economic Forum's annual ranking was dragged down by government-related measures. Out of 125 countries, the U.S. was 40th in health care and primary education and a lowly 69th in macroeconomy, reflecting its large budget and trade deficits. In macroeconomy, the U.S. scored lower than such nations as Vietnam, Venezuela, Uganda, the Philippines, Peru, and Nigeria. (Ouch.)

The forum—a nonprofit best known for its annual conclave of the bright and famous in Davos, Switzerland—based the rankings on official data and interviews with 11,000 executives around the world. Its partners in the report were Microsoft (MSFT), FedEx (FDX), and the U.S. Agency for International Development. Last year's ranking for the U.S. was originally reported as No. 2, but that was based on a discontinued method. By the new method, the U.S. was No. 1 in 2005 but No. 6 this year.

HEALTH-CARE HANDICAP.

Was the deck stacked against the U.S.? That depends on whether you agree with the forum that the U.S. deserves big demerits for being the world's biggest debtor, running a large budget gap, and having a current account deficit amounting to a record 6.5% of gross domestic product. Nouriel Roubini, a New York University economist who worked on the rankings, said that the U.S. score was probably also hurt by the government's mishandling of Hurricane Katrina, relatively high infant mortality and low life expectancy, and the prevalence of AIDS. In a Sept. 27 press conference, Roubini said it's "a bit of a paradox" that the U.S. did well on the hard things, like innovation, but poorly on the relatively easy things, like balancing the budget.

The World Economic Forum isn't the only organization concerned about the competitiveness of U.S. health care. Craig Barrett, the former CEO and current chairman of Intel (INTC), said in a speech on Sept. 26 that the country's health-care system is "out of control," and high costs are forcing jobs offshore.

In the Forum's ranking, the U.S. could have come out lower, but it got a lift from the forum's methodology. In grading about 30 advanced economies including the U.S., the forum gave extra weight to innovation, in which the U.S. excelled, and less weight to the "basic requirements" such as fiscal responsibility, where the U.S. fell down.

EMERGING IN THE MIDDLE.

A casual observer might rank up-and-coming China and India high in competitiveness, but they fared poorly again by the forum's figuring. China fell six places to 54th, just behind Costa Rica. India did only a bit better, rising two notches to 43rd, between Italy and Kuwait. India earned high scores for innovation and sophistication of business operations, but rated poorly on infrastructure and public-sector deficit. The forum said China's performance was "highly uneven." It gave the nation high marks for macroeconomic management but poor ones for its weak banking system and public institutions such as courts.

The rankings invite plenty of argument, starting with how to define "competitiveness." The forum defines it as "factors, policies, and institutions that determine the level of productivity in a country." If productivity is the final output, then why not just measure each country's productivity directly and be done with it?

Xavier Sala-i-Martin, the Columbia University economist who revised the forum's methodology, told BusinessWeek, "I don't think we can measure productivity very well." In any case, he says, the composite score is less useful to study than the performance on individual measures—from quality of electricity supply to the availability of scientists and engineers. Says Sala-i-Martin: "The fact that the U.S. is sixth or fifth or first (overall) is not interesting to me." Whew—that's a relief.

Coy is BusinessWeek's Economics Editor.

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