Moving in the Wrong Direction: The United States and the Global Competitiveness Report

The World Economic Forum’s annual Global Competitiveness Report is the closest thing that exists to a Michelin Guide for national economies. And in a world where businesses looking to establish or expand are perfectly free to choose, say Germany over Canada or Vietnam over China, the report is a helpful cheat sheet. And its latest take on the United States would probably cost us a star.

The World Economic Forum is best known, of course, for its annual January gathering in Davos, Switzerland of the world’s economic and political elites. For those of us not invited behind the closed doors, the report offers a snapshot of what they are thinking. While the rankings are based in part on objective factors like government debt, market size or patents issued, most of the numbers that decide the rankings are derived from an annual survey of some 15,000 business executive worldwide.

The survey is not as useful as the one undertaken earlier this year by the U.S. Competitiveness Project at Harvard Business School, which looked at hundreds of actual  corporate location decisions by business executives in multinational companies. But it still offers some insights into what corporate executives believe are the best places to do business, and why. And in a world of mobile capital, that matters a lot.

What does business thinks about the United States? Less and less it seems. The United States remains among the most competitive economies in the world, and among large economies is rivaled only by Germany (6^th), the UK (8^th) and Japan (10^th). But it continues to lose ground, falling two places in this year’s report, from 5^th to 7^th overall. As recently as the 2008-09 report, the United States was at the top of the rankings, and had been for several years prior to that.

The gripes from business leaders have not changed very much over that period. In 2008, the “most problematic factors for doing business” in the United States were tax rates, tax regulations and inefficient government bureaucracy, in that order. The same three still topped the list this year, but government regulation had nudged its way to the top. Interestingly, in 2008 the next biggest concern was an “inadequately educated workforce,” probably reflecting the tight labor market prior to the financial crisis that made finding the right employee difficult. Since then, concern over workforce education has fallen by more than half, probably because high unemployment allows companies to be a lot choosier.

Drilling down a bit deeper, it’s pretty clear that business executives – at least the sort who fill out the Forum’s survey -- are not very happy with the U.S. government. Their “trust in politicians” has dropped markedly, and there is growing concern about the burden of government regulations and the wastefulness of public spending.

On both the objective and subjective measures, it is clear from the report that the biggest problems in the United States are institutional problems of one sort or another. The relationship between government and business is fraught, the quality of infrastructure is inadequate and slipping, and the macroeconomic environment is deteriorating, largely because of the government’s inability to manage its finances.

The good news is that, while there has been some slippage, the United States continues to be near the top on measures of business sophistication and innovation, which are the key drivers of success for wealthier countries that must constantly develop new and better goods and services to maintain their economic edge. As the report summary notes, “U.S. companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R & D.”

The differences among countries on the index are often extremely small, so the falling U.S. ranking could be nothing more than a temporary dip that will be righted when the economy starts to grow more strongly. But for the moment, at least, the arrow is going in the wrong direction.