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Coming Up Fast On The Outside

Economic Trends


Nations to watch in the global race

Which nations are likely to make the most economic progress in the decade ahead? Some of the answers, according to an index devised by Union Bank of Switzerland economists, may come as a surprise. The leading candidate, says the bank, is Singapore, but the top 7 out of 40 countries ranked (Hong Kong and Taiwan are omitted because of incomplete data) include not only Japan and Asia's fastest-growing economies but also little Ireland.

To be sure, the bank notes that the U.S. is still No.1 in current economic competitiveness--measured by per capita output in purchasing power terms. And other major industrial nations remain in the front of the pack. Among the Group of Seven, the second-highest is Canada, with an estimated 83% of U.S. per capita output, followed by Japan's 82% and France's 78%.

But the most dramatic recent improvement in the past decade was posted by Singapore, where per capita income grew from 56% of the U.S. level in 1985 to 88% in 1995--surpassing Japan and most European nations. Indeed, because they have failed to keep pace with U.S. economic restructuring, a number of leading industrial nations have lost relative ground in recent years.

Looking ahead, the bank's criteria for its future competitiveness index range from high national savings and research outlays to fast export growth, stable inflation, and low government spending. By such measures, nations from East and Southeast Asia top the index (chart). In fact, if recent trends continue, the bank calculates that Singapore would soon surpass the U.S. in per capita output--as would other Asian Tigers, Japan, and even Ireland and Chile by 2010.

The caveat, adds the bank, is that "the catch-up itself will alter these trends," as the Tigers are likely to encounter higher labor costs and other problems bedeviling traditional industrial nations. Still, the fast economic progress chalked up by a number of nations and their high competitiveness ratings suggest that America's lead will inevitably dwindle.BY GENE KORETZReturn to top

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Is it the right gambit for states?

With companies becoming ever more mobile, many states have been busy cutting business taxes to enhance their business climates and promote growth. A study by economist Robert Tannenwald of the Federal Reserve Bank of Boston, however, suggests that such strategies may be misplaced.

Tannenwald notes that measuring state tax climates is no easy matter. State corporate income tax rates, for example, fail to take into account most taxes and fees paid by business, such as taxes on net worth, property, payroll, and purchases of inputs. And they don't reflect deductions and exclusions.

Giving weight to such factors, Tannenwald measured the tax competitiveness of 22 states in 1991 from the standpoint of a typical business setting up a new facility. Surprisingly, his findings indicate that several states--such as Alabama and New York--that are often regarded as high taxers, actually offered relatively favorable tax climates for business expansion.

Alabama headed the competitiveness list in part because it allows corporations to deduct federal taxes from their taxable income. New York not only offset its high income tax with a generous investment tax credit, but had relatively low property and unemployment insurance levies, and imposed no taxes on net worth or capital stock.

All in all, though, Tannenwald found only modest differences in business-tax climates among most states. Further, he found that tax climates had only a small, highly uncertain effect on expansion decisions. Thus, instead of engaging in a competitive battle to slash business taxes, many states might do better, he thinks, by enhancing the public services that businesses value.BY GENE KORETZReturn to top

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