Fisher Investments Editorial Staff
Capitalism

How to Succeed in Business ...

By, 09/06/2012

Wednesday, the World Economic Forum (WEF) released its annual ranking of the world’s economies (144 nations) based on competitiveness. The WEF defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country,” and the rankings are based on the WEF’s 12 “pillars of competitiveness,” including aspects like institutions, infrastructure, labor market efficiency, financial market development and macroeconomic environment, among others. From there, if a country is more productive, it will attract higher investment, which will create a virtuous cycle more likely to perpetuate its continued growth—seems pretty logical.

It’s important to note at the outset much of the results is based on surveys, which (as we’ve said before) can be rather unreliable. But when tracked consistently over a period of time, surveys can tell you something about sentiment—in this case, business leaders’ sentiment toward the environment created by the world’s various nations.

Consider Spain, which came in at 36th overall. Not too bad considering the hefty woes the country’s faced the past couple years. Among Spain’s strengths were its infrastructure facilities and high tertiary education enrollment rate, which provides it a highly educated labor force. However, among the primary detractors was Spain’s banking system, which, combined with other financial and macroeconomic challenges, has resulted in a “lack of confidence in the financial markets and the country’s ability to access affordable financing from international markets.” A timely comment, given concerns Spain’s banks continue struggling with liquidity. 

But what’s seemingly largely overlooked in discussions of Spain’s troubled banks is the fact Spain for a long time had a not-for-profit banking sector, namely in the form of its regional cajas. The cajas were originally formed to redistribute profits not to shareholders, as traditional, commercial banks do, but through social work in the community. Over time, though, they increasingly came under consolidated control—usually by either locally powerful businessmen interested in pursuing their own interests or politicians primarily interested in financing government projects.

As Spain prepared to enter the eurozone in the 1990s, the cajas sought to maintain their relative dominance in the country’s banking sector. So they increased massively their real estate exposure—which ultimately led to their current predicament as real estate values crumbled in the wake of 2008’s financial crisis. The rest of the story is likely relatively well-known.

But what’s incredibly informative is the lesson it teaches about the importance of a freely operating market—which by definition must include for-profit institutions. For without a profit motive, there’s little incentive to make prudent, promising investments. Or to make reasonable loans with bank capital. Seen in that light, it’s really little wonder Spain’s encountered recent difficulties with its banks. Though, as we’ve said many times, it seems European officials remain committed to helping the country in the interim—what remains is for Spain to make the difficult reforms necessary to fix the underlying issue(s).

Much the same can be said of other struggling eurozone nations, like Italy and Greece. Just Wednesday, Greek officials announced possible impending labor market reforms, like increasing the maximum work week to six days. An apt consideration, given the WEF ranked Greece 133rd (again, out of 144 countries) in terms of labor market efficiency and 96th overall, down six spots from last year’s ranking. As for Italy, it actually moved up a spot in the rankings to 42nd overall—a rather impressive feat given the last year’s travails—yet it remains relatively uncompetitive (127th) in terms of labor market efficiency.

All of which helps puts the US’s slide from fifth to seventh in some perspective. The primary concerns noted in the report were related to politics—though not, surprisingly, to the level of gridlock. Rather, the main sticking point was seemingly business concern tied to taxation and the government’s ability to remain arm’s length from the private sector. Seemingly rather appropriate discussion topics in an election year—and we’re no doubt in for a healthy dose of political discussion of how to address US competitiveness from any and all possible viewpoints.

The main takeaway, though, is the important role global competitiveness plays in a country’s economic health and well-being. While some will no doubt bemoan the US’s recent slip and project a dour future, the reality is, relatively speaking, the US is just fine. And the points of “concern” are well-known—and therefore eminently addressable. Much the same can be said of our brethren across the Pond. In short, it’s not so much that countries don’t know how to compete globally—it’s whether they’re willing to take the steps to get there, no matter how politically popular (or unpopular, as the case may be). 

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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