The World's Most Competitive Countries

Half of the top 10 are European and the U.S. is still No. 1, but Asia's tigers are coming on strong

Asian economies are overtaking the U.S. and Northern Europe to become the most competitive in the world, according to an annual study by one of Europe's top business schools.

The 20th World Competitiveness Yearbook, released May 15 by IMD business school in Lausanne, Switzerland, ranks the U.S. No. 1 for the 15th straight year. But the report's author, professor Stéphane Garelli, expects Singapore to take the top spot next year. The small city-state trails the U.S. by less than seven-tenths of a point in the 2008 rankings. While it still has the world's strongest domestic economy, the U.S. is particularly vulnerable because its financial sector contributes 40% to corporate profits.

Meanwhile, Asia has proven relatively immune to the financial crisis gripping the U.S. Garelli says that Asia's roaring economies, led by China, will likely raise their competitive edge relative to the star-spangled superpower and slowing European countries this year. "Asia is discovering that it is not so much the hostage of the American economy, that it can have a life by itself," Garelli says. "They make life difficult for European countries, especially because, let's face it, Europe is suffering from the euro."

Among the top 20 economies out of the 55 ranked, those in Asia-Pacific posted the greatest gains compared with last year. Malaysia climbed four spots to No. 19, while Taiwan and Australia each jumped five places to No. 13 and No. 7, respectively. Other strong gains were made by Thailand, which rose six spots to No. 27, and the Philippines, up five to No. 40.

A Detailed Study

IMD produced the rankings using 331 criteria ranging from gross domestic product growth and unemployment to the number of Internet users and the price of local cell-phone calls. Hard data from sources such as the World Bank and U.N. comprised two-thirds of the inputs; the rest came from nearly 4,000 survey responses from executives in each country—many of them IMD alumni—regarding the availability of skilled employees, government regulation, the availability of venture capital, and other more qualitative issues.

The top 10 economies have changed little from last year (, 5/14/07). Iceland, which ranked seventh in 2007, was removed from this year's list due to its volatile economy and financial problems at the local institute that had supplied data to IMD. Hong Kong retained its third-place position, followed by the usual top performers: Switzerland, Luxembourg, and Denmark. Canada moved up two places to No. 8, while the Netherlands dropped two to No. 10. Sweden remained unchanged at No. 9.

No. 17-ranked China posted the highest annual GDP growth, 11.9%, "pulling the whole region upward," Garelli says. In contrast, U.S. GDP rose 2.2%. In turn, Asian economies are developing not only domestic markets but also regional ones. Growing investment and trade among Asian nations "is creating a very strong level of confidence in the region," Garelli says. The emerging economies of Vietnam and Kazakhstan will join the rankings before long, he adds.

A Swelling Consumer Class

The rapid growth of the middle class in emerging economies—particularly in China and India—will boost consumption in the coming years, and this, too, will likely influence their ranking. Roughly 50 million people in India are considered middle class, and this figure will probably swell to 580 million by 2030, Garelli says. Since 2000, about 600 million people around the world reached middle-class status, spending an average of $4 billion annually on brand-name products, new homes, vacations, and other indulgences.

The annual IMD survey uses different methodology and data but comes up with relatively similar findings to an annual ranking of economic competitiveness from the Geneva-based World Economic Forum. The most recent WEF ranking, in November, 2007, also found the U.S. on top, followed by a half-dozen European countries (, 11/6/07).

The WEF also produces an annual study of "tech-readiness" that assesses countries on their IT and communications infrastructure and how well they exploit it to drive growth (, 4/9/08).

See's slide show of the top dozen countries in this year's IMD competitiveness ranking.

Before it's here, it's on the Bloomberg Terminal.