Baltics, Russia prove exceptions as most of CEE improves competitiveness

By bne IntelliNews September 9, 2009

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Most emerging European countries improved their ranking in this year's "Global Competitiveness Report" from the World Economic Forum, though the Baltic states and Russia were notable exceptions.

This year's report, which ranks 133 countries according to how competitive their economies are, comes against the backdrop of the deepest global economic slowdown in generations. "What began as a financial crisis in a handful of industrialized economies continues to spill over into the real economy, engendering massive contractions in consumer demand, rising unemployment and mounting protectionist pressures worldwide," the Forum said in the accompanying report.

At the top of this year's rankings stood Switzerland, pushing the US into the second spot that it occupied in 2008. Singapore, Sweden, Denmark, Finland, Germany, Japan, Canada and the Netherlands made up the rest of the top 10. What was most notable about the top 10 was not its constituents, which were the same as last year, but that they all showed a measurable decline in average score since last year, dropping from 5.51 out of a possible maximum score of 7 last year to 5.45 this year. "In other words, it appears that in the context of the present recession, the competitiveness performance of top-performing countries on average has declined. This implies that in many cases, countries that improve in the rankings do so by maintaining a performance across the various indicators similar to that of past years," the report said.

New kids of the bloc

Among the 12 countries that have joined the EU since 2004, most improved as EU membership and buoyant growth over past years provided an incentive and the means for conducting reforms. Of those 12, the Czech Republic was the leader in 31st position. The report notes that although the country continues to face difficulties with respect to macroeconomic stability and the quality of infrastructure, consistent improvements across all dimensions of the institutional environment, improved efficiency of markets and advances in technological readiness have contributed to this rise in the rankings.

Slovenia followed close behind in 37th spot, having improved by five places. "Slovenia benefits from world-class health and educational systems, good infrastructure and impressive innovative capacity. In addition, the country's macroeconomic stability has improved, advancing its overall competitiveness outlook," the report said.

The largest improvement among the new EU members was registered by Poland, up seven places to 46th this year. "Poland benefits from its strong educational system and large market size, and has seen measurable improvements in the quality of its public institutions, with greater confidence in the efficiency and honesty of the country's public servants," the report said. "Although the macroeconomic stability pillar has registered a significant drop in rankings this year because of the financial crisis, the years up to 2007 have seen a streamlining of fiscal and monetary policies. This, along with prudent regulation of financial markets and the large size of the domestic market, has helped Poland to weather the effects of the current global downturn and become one of the most economically stable countries in the region."

Slovakia was next in 47th place, down from 46th last year; Hungary found itself below that of the top-ranked former CIS country Azerbaijan in 51st place, though the Central European country did improve four places to 58th. Romania improved four spots to 64, while its neighbour Bulgaria occupied the same 76th place as last year.

Turkey moved up two places to 61st this year, benefiting from its large market characterized by strong competition and reasonably sophisticated business practices. "Compared with other countries, Turkey has also seen an improvement in its macroeconomic stability, although this is mainly because of other countries' weakening rather than particular improvements in Turkey's fiscal and monetary policies," the report said. "On the other hand, some more basic issues must still be tackled, such as upgrading the quality of infrastructure, especially ports and the electricity supply, improving the human resources base through better primary education and better healthcare, addressing the inefficiencies in the labour market, and reinforcing the efficiency and transparency of public institutions.

Of the Baltics, the worst affected region in the EU by the crisis, Estonia at 35th lost ground for the second year in a row, largely because of a deteriorating macroeconomic environment following the economic crisis. "Nevertheless, the country continues to be characterized by efficient institutions, well-functioning markets, and strong uptake of new technologies," the report said. Similarly, Latvia and Lithuania fell 14 and 9 places to 68th and 53rd, respectively.

Another loser this year was Russia, which dropped 12 places to 63rd, the only so-called BRIC economy (the others being Brazil, India and China) to see a decline in performance. The Forum cited Russia's main strengths as its large market size and reasonable macroeconomic stability (partly the result of windfall oil revenues, which might not prove sustainable in the longer term). However, to improve its competitiveness further, the Forum said Russia needs to tackle a number of structural weaknesses. "Of major concern are a perceived lack of government efficiency, little judicial independence in meting out justice, a lack of property rights and more general concerns about government favouritism in its dealings with the private sector. Private institutions also get poor marks, with corporate ethics in the country placing Russia 110th overall on this indicator," the report said.

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