Wednesday, September 5, 2012

The US and the Global Competitiveness Report

The World Economic Forum released its latest update of the Global Competiveness Report this morning.  You may have heard that the US slipped to 7th in the rankings (Switzerland is #1 followed by Singapore).  Let's take a quick look at some of the strengths and weaknesses of the US economy based on the report.  First, here are the results of a survey of businesses in which they indicate the most problematic factors for doing business:
  1. inefficient government bureaucracy, 15%
  2. tax rates, 14.1%
  3. tax regulations, 10.8%
  4. access to financing, 9.5%
The index and subsequent ranking doesn't include the survey results, but instead focuses on what's perceived as the building blocks of competitiveness relative to other nations.  What are the strengths and weaknesses of the US economy?  There are three major categories: basic requirements, efficiency enhancers, and innovation and sophistication.  The lowest ranking involves basic requirements (33rd out of 144) led by a low ranking in macroeconomic environment (111), predominantly due to debt-related issues including budget balance (140), government debt (136), and national savings (114).  The other significant weakness was total tax rate as a percent of profits (103), which is in the efficiency enhancers category.

The US fared better in the other two categories: efficiency enhancers (ranked 2nd) and innovation & sophistication (7).  Strengths in terms of efficiency enhancers included domestic market size (#1), redundancy costs (1), tertiary enrollment (2nd), and foreign market size (2).  The US was in the top 15 in every component of the innovation/sophistication category led by extent of marketing (3), university-industry collaboration (5), and availability of scientists and engineers (5).

What does the report say about how the US can enhance its competitiveness?  It seems that the private sector is doing pretty well, though there's always room for improvement.  Clearly, to no one's surprise, the area in need of most improvement involves fiscal policy in general and getting the deficit under control in particular.  Though one can debate the specifics, tax reform that eliminates deductions and lowers tax rates can help improve the ranking in terms of tax rates as a percent of profits.  Depending on how it's designed, it could also help to reduce the deficit.  Entitlement reform and other efforts to reduce the growth of government spending can help remedy the debt-related weaknesses.  Basically, the report provides further evidence that policymakers must make serious attempts to reform fiscal policy in order to enhance the competitiveness of the US economy relative to the rest of the world.