Developed Countries Still Top the Charts

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.

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