For once, your reporter has only good news. Israel is the new star in the world competitiveness rankings, just released by the Swiss business school IMD.
For 2005, Israel ranked 25th out of 60 countries, rising a full eight places, from 33rd a year ago. This was the largest jump in the ranking of any country in 2005. Israel now ranks close to Germany (23rd), the UK (22nd) and Japan (21st).
The main reason for the rise: Israel's strengthening economy. Israel is still 5 places below its peak ranking of 20th, in 2001, in the afterglow of the technology bubble. Chile rose 7 places, from 26th to 19th, while Korea and Switzerland each rose 6 places. The largest drop was recorded by Malaysia, which fell from 16th to 28th. China, surprisingly, also dropped 7 places, from 24th to 31st, despite its incredible 9.5% growth in 2004. According to the IMD, this is mainly because of "an extremely negative opinion survey conducted in the business community on Q1 2005. It seems that the sustainability of such a rapid expansion is being questioned, while the strains on the financial system, infra-structure and weaknesses of corporate governance are being highlighted."
The IMD World Competitiveness rankings are based on four key dimensions: economic performance, government efficiency, business efficiency and infrastructure (including science and technology). In 2004, Israel ranked dismally in the first two dimensions: 51st in economic performance (reflecting the recession), and 46th in government efficiency.
The 2005 rankings reflect strong improvement in Israel's economy, including employment. According to recent figures, Israel's unemployment rate fell to 9.1 % in the first quarter of 2005, with almost 3 % more Israelis working than in the same quarter last year. Of the 33,000 new jobs created in the quarter, half came from the public sector and from commerce (retail and wholesale) and repairs. Moreover, full-time workers rose, while part-time workers declined, suggesting the job creation was high quality, with higher wages.
Another set of rankings, done annually by A.T. Kearney together with the journal Foreign Policy, places Israel in the Global Top 20, at 17th, out of 62 countries. These rankings reflect a different set of four dimensions: economic integration (trade and foreign investment), technological connectivity (internet use, mobile phones), personal global contacts (international travel and tourism), and political engagement (membership in int. organizations, participation in global treaties).
Here, too Israel, is a "star", rising a full 5 places in the 2005 rankings compared to 2004. Only Croatia, Sri Lanka and Morocco managed a more impressive climb.
In the IMD rankings, the US is a permanent front-runner. But in the A.T. Kearney rankings, the US places only fourth, mainly due its strong technology.
Ironically, America, the nation that created globalization, now seems to be retreating from it, under the Bush Administration. On July 1-20, 1944, experts from the Allied Nations led by America's Harry Dexter White met at Bretton Woods, New Hampshire, and created the new 'rules of the game' for global markets, including the General Agreement on Tariffs and Trade (GATT), which evolved into the World Trade Organization (WTO).
Now, according to the A.T. Kearney report, America's economy is driven solely by its domestic consumption (its large and growing trade deficit cuts at least 0.5 - 1.0 percent from its economic growth rate). "The Bush Administration has acted aloof in political and diplomatic terms," notes the report, opposing the Kyoto Protocol and the International Criminal Court, and failing to sign the Basel Accord on Hazardous Wastes. "The United States looks suspiciously at many of the legal and institutional arrangements that are binding the world together," notes the report.
According to IMD Professor Stephane Garelli, who heads the World Competitiveness project, there is no clear link between taxes and competitiveness. In Europe, he notes, Luxembourg, Denmark, Finland, Norway and Sweden were among the world's most competitive countries, and had the highest economic growth rates in continental Europe, despite high tax pressure (above 40 % of GDP), while Japan and Switzerland both had weak economic growth in the past decade despite low tax pressure (27% - 30% of GDP). Sweden collects an amazing 54% of its GDP in taxes, and ranks 14th in the IMD list, while Ireland collects 31%, and ranks 12th.
Israel's direct and indirect taxes, and transfer payments, amounted to 36 % of GDP in 2004, close to the average for the OECD. It is therefore not certain that Bibi's planned tax cuts will make Israel more competitive. Lower taxes are of course an incentive to work, invest and take risk. But if lower taxes cut government infrastructure investment, including education, to avoid higher deficits, that makes Israel less competitive.
Prof. Shlomo Maital is Academic Director of TIM-Tel Aviv.
Published by Globes [online], Israel business news - www.globes.co.il - on June 2, 2005