Europe and Eurasia
Six European countries are ranked among the top 10 most competitive economies, while at the same time, many countries in Southern and Central and Eastern Europe—such as Portugal, Italy, Bulgaria, Romania, and Greece—score relatively low, ranking 36th, 49th, 54th, 59th, and 81st, respectively. This wide-ranging performance highlights the persistence of a competitiveness divide in Europe between a highly competitive Northern Europe and a less competitive Southern and Eastern Europe. A more nuanced analysis of the results also reveals that a new divide seems to be emerging among those countries whose competitiveness is currently lagging. This new divide appears to be between those economies that are adopting and implementing the reforms necessary to become more competitive—these include countries such as Greece and Portugal that are now improving in the overall rankings—and some other economies, such as France and Italy, which are not recording much progress.
Denmark improves by two positions to reach 13th place on the back of a slight rebound in the assessment of its institutions and financial markets as well as more favorable macroeconomic conditions, which together have allowed the country to close the European Commission’s formal procedure that assesses excessive deficits. Similar to its Nordic neighbors, Denmark continues to benefit a well-functioning and highly transparent institutional framework (16th). The country also continues to receive a first-rate assessment for its higher education and training system (10th), which has provided the Danish workforce with the skills needed to adapt rapidly to a changing environment and has laid the ground for high levels of technological adoption and innovation. A continued strong focus on education would allow the workforce to maintain the skill levels needed to provide the basis for sustained innovation-led growth. A marked difference from the other Nordic countries relates to labor market flexibility, where Denmark (12th) continues to distinguish itself as having one of the most efficient labor markets internationally, with flexible regulations; strong labor-employer relations; and a very high percentage of women in the labor force.
Despite the drop of one position that leads to Belgium’s 18th place in the rankings, the country has slightly improved its competitiveness score thanks to a better macroeconomic performance with a lower public deficit, which remains below 3 percent of its GDP. Furthermore, in addition to boasting an outstanding education and training system (5th)—with excellent math and science education (3rd), top-notch management schools (2nd), and a strong propensity for on-the-job training (4th)—the country benefits from a high level of technological adoption (15th) and highly sophisticated (10th) and innovative (13th) businesses that carry out their activities in a market characterized by high competition (6th) and an environment that facilitates new business creation. Notwithstanding these strengths, some concerns remain about the efficiency of Belgium’s government (64th); its regulatory burden (130th); its highly distortionary tax system (126th), which reduces incentives to work (141st); and the cost of the country’s public debt—which is close to 100 percent of GDP.
Following the completion of its EU-IMF–supported program, this year Ireland experiences a slight rebound and climbs by three places to reach the 25th position, which reflects its financial market recovery. Yet its macroeconomic situation remains difficult at a low 130th place, characterized by a high budget deficit (although down from the historic highs of four years ago) and high government debt. Despite these economic woes, the country features strong foundations for its long-run competitiveness: the functioning of its goods and labor markets, ranked 10th and 18th respectively, is solid, and its business culture is highly sophisticated and innovative (ranked 20th for both); this is buttressed by excellent technological adoption (12th). In addition, equipped with its excellent health and primary education system (8th) and strong higher education and training (17th), the country can draw on a well-educated workforce, although the high levels of emigration in recent years—particularly of its young population—suggests that fewer young people will be available in the future.
France retains its 23rd position after dropping for four consecutive years. The government has promised a “competitiveness shock” and is considering a number of business-friendly measures, including a simplification of administrative procedures, in order to revive growth and reduce the country’s stubbornly high level of unemployment. Traditionally a black spot, the situation of France’s labor market has improved markedly over the year (61st, up 10), thanks to increased flexibility, although it still remains a challenge (107th, up nine). By contrast, the fiscal situation—the second area of major concern—continues to deteriorate (82nd, down nine). The small reduction in the budget deficit is accompanied by an increase in public debt and a downgrading of France’s creditworthiness. The country retains a number of clear competitive advantages, however. Its infrastructure is still among the best in the world. France also obtains good marks for the quality and quantity of education at all levels, and it boasts a high degree of technological adoption (17th). In addition, the country’s business culture is highly professional and sophisticated (22nd). These three strengths contribute to creating a relatively conducive ecosystem for innovation (19th). However, on this dimension, France trails Germany, the United Kingdom, and the Scandinavian countries by a significant margin.
Estonia remains the best performing country in Eastern Europe and improves by three places to reach 29th overall. The country boasts a solid competitiveness profile with strong, transparent, and efficient institutions (26th); a solid macroeconomic environment (20th); and high levels of education and training (20th). Its labor market is also more efficient than in most countries in the region (11th). To further strengthen its competitiveness, Estonia should focus on strengthening innovation (30th) and business sophistication (48th) in order to ensure that product and process innovation continues to enhance the country’s productivity. Further investment in infrastructure (38th) would also be warranted, as transport infrastructure in particular is not yet up to Western European standards (58th).
Iceland moves up one place to 30th position this year, the result of an improving macroeconomic situation and an easing of financial concerns. Despite its significant difficulties in these areas in recent years, Iceland continues to benefit from a number of clear competitiveness strengths in moving toward a more sustainable economic situation. These include the country’s top-notch education system at all levels, its 10th and 13th ranks in the health and primary education and higher education and training pillars, respectively, coupled with a relatively innovative business sector (27th) that is highly adept at adopting new technologies for productivity enhancements (8th). Business activity is further supported by an efficient labor market (14th) and well-developed infrastructure (23rd).
Spain remains stable at 35th place. The important reform program the country has embarked on has resulted in curbing the high budget deficit of past years, although it remains high (128th); improving the robustness of the financial sector (85th); cutting red tape to foster entrepreneurship (99th); and enhancing flexibility (120th) in the labor market, although much remains to be addressed. However, a weakening in the perceived functioning of institutions, notably with worse scores in terms of corruption (80th) and government efficiency (105th), offsets these improvements in the GCI. Overall, as in past years, Spain continues to benefit from excellent transport infrastructure (6th), high levels of connectivity (18th), and a large share of the population that pursues higher education (8th) who—should the quality of the education system improve (88th)—could provide a skillful labor force able to contribute to the structural change the country requires. Notwithstanding these strengths and improvements in certain areas, Spain continues to suffer from poor access to loans (132nd), a rigid labor market (120th), difficulty in attracting (103rd) and retaining talent (107th), and an insufficient capacity to innovate (60th)—the result of low R&D investments (52nd) and weak university-industry collaborations (57th).
After falling in the rankings for several years, Portugal decisively inverts this trend and climbs 15 positions to reach 36th place. The ambitious reform program the country has adopted seems to have started paying off as gains appear across the board, most notably in areas related to the functioning of the goods market: Portugal now has less red tape to start a business (5th), and its labor market shows increased flexibility, although more remains to be done (119th). In addition to these improvements, the country can continue to leverage its world-class transport infrastructure (18th) and highly educated labor force (29th). At the same time, Portugal should not be complacent and should continue with a full implementation of its reform program in order to keep addressing some of its persistent macroeconomic concerns (128th) caused by high levels of deficit (107th) and public debt (138th); strengthening its financial sector (104th) so that credit can start flowing (108th); further increasing the flexibility of its labor market; and raising the quality of education (40th) and innovation capacity (37th) to support the economic transformation of the country.
The Czech Republic advances by nine places this year to attain 37th position, improving in half of the pillars and thus reversing a five-year downward trend. Institutions (76th) improve by 10 places, although from very low levels for some indicators, and major concerns remain about corruption and undue influence (with public trust in politicians ranked an extremely low 138th). The country’s economic recovery is also reflected in a sounder macroeconomic environment—the budget deficit fell below the 3 percent mark, leading to a closing of the European Commission’s excessive government procedure—and an improvement in borrowing conditions in the financial market (up to 40th in financial market efficiency). Our data also point to improvements in health and primary education, thanks to a higher primary enrollment rate, as well as gradual improvements in the labor market (62nd), albeit from low levels. More specifically, although cooperation in labor-employer relations and the flexibility of wage determination are perceived more favorably (52nd and 43rd, respectively) than in last year’s edition, regulations are rigid (121st) and the country’s capacity to attract and retain talent remains limited. Likewise, the share of women in the labor force remains comparatively low. Going forward, the Czech Republic needs to explore ways to transition to a knowledge economy in view of its stage of development: compared with other economies at the same stage, technological readiness remains low (36th) and Czech businesses—although doing comparatively well in a regional context—are less sophisticated and innovative than other economies in the European Union. The country’s competitiveness would be further enhanced by improvements to its higher education system, where the Czech Republic, at rank 35, features among the 10 lowest ranked EU economies.
Poland maintains its positioning overall and comes in at 43rd place. The improvements Poland has made in institutions, infrastructure, and education and its increased flexibility in labor market efficiency are steps in the right direction to boost the country’s competitiveness. Continued structural reforms geared toward strengthening its innovation and knowledge-driven economy will be necessary for Poland to sustain its growth going forward. The country can build on a fairly well educated population, well-developed financial markets, and a market that is by far the largest in the region. Transport infrastructure, however, despite notable improvements, remains weak (78th) by European standards. Some aspects of institutions, such as the burden of its regulations (117th), its rather inefficient legal framework for settling business disputes (118th), and difficulties in obtaining information on government decisions for business (110th) also need to be addressed on a priority basis. And as the country slowly emerges from the economic slowdown of 2012 and 2013, Poland should focus on further improving labor market efficiency and strengthening business sophistication (63rd) as well as on its business sector’s capacity for innovation (72nd). To bolster its innovative capacity, the next set of reforms should focus on reinforcing its innovation ecosystem in close collaboration with the private sector to enable a sustainable growth path for the country.
With a stable score, Italy retains 49th position, despite a deterioration in the functioning of its institutions (106th) and with a poor assessment on government efficiency (143rd), continued macroeconomic concerns that result from the large public debt, and a very rigid labor market (136th) that hinders employment creation. Overall, Italian companies—most notably small and medium-sized enterprises (SMEs)—continue to suffer from weak access to financing (139th) that, coupled with a high tax rate (134th), affects their investment capacity. In addition, as already mentioned, the labor market remains very rigid (136th) and unable to make an efficient use of the country’s talent (130th). The reform program currently being designed, if implemented properly, should help in addressing some of these weaknesses and allow Italy to leverage its competitiveness strengths, which lie in its sophisticated business community (25th) with a good potential to innovate (39th) and its large and diversified market (12th) that should allow for important economies of scale and scope.
The Russian Federation is placed at 53rd position this year with some improvements related to the efficiency of goods markets (in particular domestic competition), ICT use, and business sophistication—although this arguably reflects some positive developments that took place before the Ukraine conflict started. At the time of writing, the Russian economy continues to face many deeply rooted challenges that will have to be addressed for the country to strengthen its competitiveness. Russia’s weak and inefficient institutional framework (97th) remains its Achilles heel and will require a major overhaul in order to eradicate corruption and favoritism (92nd) and re-establish trust in the independence of the judiciary (109th). Diversification of the economy will need reinforcing the very small SME sector as well as continued progress toward a stronger and more stable financial system (110th). These challenges prevent Russia from taking advantage of its competitiveness strengths, which are based on a well-educated population, fairly high levels of ICT use (47th), and its solid potential for innovation (65th). Going forward, the reverberations of the Ukraine conflict—such as sanctions and potential disruptions to the gas trade—could affect the country’s competitiveness. These implications could be especially serious given the reliance of the education and innovation sectors on public funding, which will become more scarce than it has been in previous years and for accessing technology developed abroad.
Ukraine moves up from 84th to 76th position, arguably reflecting expectations associated with its transition to a new government following the Euromaidan protests. The conflict in the eastern part of the country and in Crimea did not affect the results of the exercise in a substantial way, because it was still localized at the time when the Survey was conducted, yet it will most likely affect the country’s competitiveness going forward. The improvements in the GCI reflect more positive perceptions of institutions and the efficiency of markets. Other improvements reflect better educational outcomes, seen in a higher primary enrollment rate and more ICT use by individuals and business. At the time of writing, restoring peace in Eastern Ukraine is undoubtedly the country’s highest priority. However, far-reaching reforms will be necessary in order to put economic growth on a sustainable footing. These include an overhaul of the institutional framework (130th), along with measures to reduce the dominance of large companies in domestic markets (129th) and to make markets more competitive (125th) and hence more efficient (112th). A strengthening of financial markets would further help stabilize the economy and enable Ukraine to better take advantage of its numerous competitiveness strengths, such as its well-educated population and its market size, which is fairly large in the European context.
The most recent addition to the EU family, Croatia, is the second best performing country in Southeastern Europe at 77th place overall. The country boasts solid infrastructure (44th), especially in roads and electricity, and benefits from relatively high levels of education and training (53rd), although the quality of its education needs to be improved (55th). Companies and individuals use ICTs fairly widely in regional comparison (40th), and the country is open to foreign trade, with low tariffs and well-functioning customs procedures. Going forward, Croatia will need to continue strengthening its institutional framework (87th) and foster the efficiency of its market for goods and services. According to business executives, domestic markets are dominated by few firms and taxation is burdensome, even if low by international comparison. The country will also need to focus on strengthening its macroeconomic environment, which remains burdened by a fairly high budget deficit. As Croatia will move into the innovation-driven stage of development in the coming years, it will need to start putting measures into place that incentivize and enable companies to innovate more. Currently, its businesses’ capacity for innovation is low according to business executives, although research institutes are assessed more favorably (53rd) and the country’s patenting rate is moderately strong (36th).
Following the recovery that started last year, Greece advances 10 spots to reach 81st place. Improvements in the functioning of its goods market (85th) with enhanced levels of competition (71st) and more flexible labor markets (although they remain rather rigid, 117th), along with a better macroeconomic performance with a sharp reduction in the budget deficit, have resulted in this more positive outlook despite its very high levels of government debt. All this suggests that the implemented reforms are starting to pay off. Notwithstanding this better performance, Greece continues to face important challenges that need to be addressed in order to continue improving its competitiveness. More precisely, the functioning of its institutions remains weak and it achieves a poor evaluation for government efficiency (129th), its financial market (130th) has not yet recovered from the recent financial crisis, there are concerns about the soundness of its banks (141st), and access to financing (136th) remains the most problematic factor for doing business in the country. Moreover, in order to support a structural change of the Greek economy so that it can move toward more productive, knowledge-based activities, it will need to boost its innovation capacity (109th). That will require improvements in the quality of its education system (111th) as well as higher investments in knowledge-generating activities, such as R&D (114th).