Lessons from the world’s most admired economies

It was supposed to be all smiles earlier this month when Manitoba premier Greg Selinger and Winnipeg mayor Sam Katz jointly announced a deal to create 175 new jobs at Price Industries, a commercial HVAC system manufacturer in Winnipeg, by chipping in loans, funding and tax breaks to cover training and facility expansion.

But Price Industries CEO Gerry Price cast a bit of a negative note on what the politicians hoped would be a good-news day by noting that Phoenix, Ariz. is a more desirable place to do business than Winnipeg due to the U.S. city offering lower labour, heating and material costs.

That in turn set the stage for a worthwhile debate on how to make the province and the city more economically competitive.

Contrary to popular misconception, becoming more economically competitive means much more than just being the cheapest option around.

In fact, many would be surprised to learn that the latest ranking of the world’s most competitive economies, by the Swiss-based International Institute for Management Development, includes countries that are anything but cheap in the top tier: Switzerland (#2), Sweden (#5), Germany (#6), Denmark (#9) and über-expensive Norway (#10). (Canada ranked a perfectly respectable seventh; the U.S. held first place.)

How did countries with ritzy reputations like Switzerland and Sweden get to the top of the economic competitiveness rankings and still have living standards and social safety nets that are comparable to or even a bit better than Canada’s?

The answers can be found in the World Economic Forum’s Global Competitiveness Report — a document that should be mandatory reading for economic policy makers. (Especially since it’s available online for free.)

In the report, the Forum identifies 12 “pillars” that make a country competitive. Let’s start with the basic conditions for economic success:

  • Reliable institutions: Take Switzerland, which is the world’s most competitive economy according to the Forum, as an example. While Switzerland offers few bargains on anything, you can count on the government to be fair in its dealings, and on the courts to uphold the rule of law. In countries where governments and courts are at the service of the highest bidder or of those with friends in high places, and cannot be relied upon to be neutral arbiters, the only investments worth making are those you can afford to lose to the dubious crowd running the place.
  • Reliable infrastructure: Imagine the frustrations of trying to run a factory in a country where you can’t properly equip the operation because rains have washed out all the highways, ships take days to be unloaded because of poor port facilities, and the airport is unusable half the time due to power failures. Or of trying to run an e-commerce site in a country that offers nothing better than dial-up because that’s all their ancient telephone system can handle. To be a competitive economy, you need an efficient and reliable transportation network and electrical, water, sewage and communication systems that can be counted on to work.
  • Macroeconomic Stability: It’s tough to do business in a country where inflation and interest rates are astonishingly high,  or deflation is suffocating cash flow by encouraging consumers to put off spending today in expectation of a better deal tomorrow. The best way for a government to help is to keep debts and deficits low as a percentage of revenues. Sometimes this might call for controversial cost-cutting; other times it might call for equally controversial tax increases or fee impositions.
  • Health and Primary Education: Healthy people generally have longer working lives and are less likely to need to drop out of the workforce prematurely and fall back on government services; so effective basic health services are a must for a strong economy. Primary education is also vital for creating the literacy skills that an economy needs to function well and for setting children on a course toward post-secondary education. That’s why many successful countries have well-established early childhood education systems and maternal health systems — these pay off handsomely.

Once all the basic elements above are secured, the next few factors determine an economy’s growth potential:

  • Access to higher/continuous education: The world’s most enviable economies are known for their excellent universities and for strongly encouraging the young to pursue whatever type of post-secondary education makes the best use of their talents. In addition to securing a better future for the young and creating a talent pool for businesses, a good education system also strengthens technical skills and research and development abilities.
  • An efficient market for goods and services: Politicians putting caps on prices and shielding local industry from foreign competition might make for good populist politics, but it doesn’t leave the impression of the jurisdiction being a place where you can do business without having to suffer gladly fools of all political stripes. Unless a very strong case can be made to the contrary, it is better for politicians to sit on their hands than to tinker with pricing or putting limits on competition.
  • Labour market efficiency: “The best social program is a job,” it was once said, and the best alternative to a bad job is to have a better one to go to, it might be added. Unfortunately, too many countries try to protect jobs instead of people, often leading to wasteful youth unemployment, few opportunities for the inexperienced, and to too many people finding it difficult to upgrade their skills. Other forms of labour market inefficiency include discrimination against minorities that limits their career potential, and social expectations that women should not work or be ambitious.
  • Financial market development: In successful countries, it is relatively easy to find financing and start-up capital for new businesses. In poorer countries, the banking and financial systems are poorly regulated and in disarray, personal savings are the only easy source of investment capital and there is little or no collateral for loans.
  • Technological readiness: The most successful economies get rid of political barriers, such as protectionist policies, that deter companies from adopting the newest technologies. Their educational systems also develop students’ technological skills. Less successful countries tend to do things “the old way” because there’s either no reward for adopting the latest technologies, or because the financing is too difficult to arrange. They are poorer for it.
  • Market size: Some countries, such as the United States, are competitive by virtue of having a large home market. Other high-fliers, such as Switzerland and Singapore, have very small home markets but succeed nevertheless by seeking out free trade arrangements with other countries and by (usually) maintaining a positive, cosmopolitan, open-door mindset toward doing business with the outside world rather than a negative, parochial, closed-door one.

And finally, the pillars that put the most competitive economies on top:

  • Business sophistication: The world’s best economies tend to have the world’s best business schools, creating an ample talent pool; they have clusters where companies can feed off of each other’s ideas and talent (think Silicon Valley); and they are reluctant to protect industries or sectors from competition, so that they have that much more incentive to stay at the top of their game.
  • Innovation: Just about any country, even a very badly run one, can manufacture goods for export; but it takes access to talent to produce technological breakthroughs. This requires virtually all of the factors listed above: excellent universities to provide research and development and a scientific talent pool, strong rule-of-law and honest-government assurances, access to a large home market and/or large foreign ones, a literate, healthy and well-skilled population, and so on.

In some of these areas, Manitoba has made progress in recent years, such as by trying to improve the province’s abysmal education attainment standings, by trying to improve maternal health, through the establishment of a prominent business school at the University of Manitoba, by encouraging more research and development, and by gradually coming around to the idea that infrastructure is important.

Those are all low-key but nevertheless very encouraging developments.

But there is still work to be done. Manitoba (and Winnipeg) is still dogged by the perception that politicians have a difficult time resisting the urge to meddle, and that it is the sort of place where friendships can at times override meritocracy. Politicians and the public, meanwhile, have a strained relationship that makes it difficult to arrive at a consensus on how to pay the bills that need to be paid if the economy is to grow, as the recent sales tax increase controversy showed.

As noted on this blog before, government must be seen to be fair-minded to be trusted.

Improving educational attainment rates must be a priority for all levels of government, even if they can only help in small ways. Since Winnipeg and Manitoba have small populations, we don’t have the luxury of the most talented one, five or ten percent of the population still numbering  in the millions, as the United States does. To be as successful as other smaller markets such as Switzerland, Singapore or Sweden, we need to have as much of an education ethic as they have. On that, much of the rest of our growth potential rests.

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About theviewfromseven
A lone wolf and a bit of a contrarian who sometimes has something to share.

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