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Europe September 9,
2009, 2:26PM EST

Developed Countries Still Top the Charts

The U.S. loses the No. 1 spot in the World Economic Forum's annual
competitiveness rankings, but advanced nations still dominate the top 20

By Mark Scott

The recession has caused much soul-searching in the Western world, as storied
companies such as Lehman Brothers have gone broke and essential industries such
as automobiles and retailing plunged into crisis. Making matters worse for
shaken business and political leaders, emerging rivals China and India have
defied the downturn and are expected to post economic growth this year, even as
the U.S. and Europe record declines.

Does this mean the developed world has permanently lost its edge? Not
according to the annual Global Competitiveness Report from Geneva's
World
Economic Forum (WEF). The study ranks 133 countries based on their business
sophistication, workforce flexibility, technological readiness, and other
economic criteria. The conclusion: The U.S. and European economies may have lost
some of their shine, but they still outperform up-and-coming rivals on most
indicators.

"In a difficult global economic environment, it's more important than ever
for countries to put strong fundamentals in place to underpin economic growth,"
WEF Executive Chairman Klaus Schwab said in a statement. With North American and
European countries still holding 13 of the top 20 spots, it's clear that local
policymakers have heeded that advice. They're joined at the top of the list by
the most advanced Asian-Pacific nations, including Singapore, Japan, Taiwan, and
Australia. (Though its methodology is different, the most recent global
competitiveness ranking from Swiss business school IMD came to largely
similar conclusions.)

Developed Economies in the Lead

Indeed, despite the exhilarating rise of the so-called BRICM
countries—Brazil, Russia, India, China, and Mexico—the world's most developed
economies still garner the lion's share of investment and confidence from
business leaders. China ranked this year at No. 29, up just one step from 2008,
while India came in at 49, Mexico 50, Brazil 56, and Russia 63.

That's not to say the new report didn't throw up some surprises. For the
first time since 2006, the U.S. lost the top spot, slipping to No. 2 behind
Switzerland. According to Xavier Sala-i-Martin, the study's co-author, the main
reason for the drop was uncertainty in the business community over future
government policy. U.S. President Barack Obama's huge stimulus package and big
bailouts for domestic industries have raised concerns the Federal government may
be overstretched. The U.S., for instance, slipped to No. 68 in the WEF's ranking
on the wastefulness of government spending.

To be sure, the U.S. still earned top ratings for innovation, domestic market
size, and business efficiency. And signs suggest that America could recover more
rapidly than many rivals once a turnaround takes hold. But the hangover from the
recession poses significant policy challenges. "The U.S. must get its macro
house rapidly in order once the crisis subsides," Sala-i-Martin writes in the
report.

Stimulus Hangovers?

The WEF offers similar advice for other developed countries hammered by the
recession. From Germany to Japan to Britain, governments have poured billions
into stimulus plans to jump-start their lagging domestic economies, racking up
huge government debt in the process. From bank bailouts to Cash-for-Clunkers
auto trade-in schemes, the programs have succeeded in staving off wider
collapse—but paying the piper will make indebted countries relatively less
competitive until they get their fiscal houses in order.

An economic downturn widely blamed on excessive financial risk-taking and
irresponsible business practices emanating from the U.S. has undoubtedly damaged
the global image of free-market capitalism. But in the end, investors and
business leaders still place their bets based on core attributes such as vibrant
domestic markets, access to capital, high-quality infrastructure, and
intellectual property protection. Emerging economies may be growing faster, but
developed countries still have an edge in competitiveness.

For a look at the top
20 countries in this year's WEF rankings, see our slide show.

Check out the results here for IMD's
global competitive countries study from May 2009.

Click here for the results of last
year's WEF global competitiveness rankings.

Scott is a reporter in BusinessWeek's London bureau.

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