Taiwan, Finland, Canada and Australia have overtaken Britain in the international competitiveness league.
Britain has fallen to 18th place, scraping ahead of countries such as Chile, Malaysia and Korea, and behind Norway and Sweden as well as the more obvious candidates for global economic leadership.
The US has increased its lead this year, according to the annual World Competitiveness Report, published today by Swiss business school IMD and the World Economic Forum. Japan, toppled from the number one slot by America last year, has been pushed down to fourth place this year by Hong Kong.
There were two falls down the ratings more pronounced than Britain's. Mexico and Turkey were the biggest movers due to their respective financial crises and social unrest.
The competitiveness report makes compulsive reading. Its 800 pages contain enough detail to satisfy the most ardent student of Britain's national economic decline or America's might. But its merits are challenged by Paul Krugman, an eminent MIT economist, in the latest edition of Worldlink, the house journal of the World Economic Forum, a business network. He argues that "competitiveness" is a meaningless term. Standard economic concepts provide the tools for analysing changes in the world economy, he says.
Professor Krugman adds that the notion of competitiveness can be dangerous, fostering the rhetoric of international trade as a battle some countries must lose and some win, thereby fuelling protectionist interests.
Professor Krugman's in-house platform to criticise the report this year follows his high-profile attack on last year's rankings, when America's success in ejecting Japan from the number one slot was greeted with much fanfare. The World Economic Forum has offset his views this year with a reply from an equally eminent Harvard economist, Jeffrey Sachs. Professor Sachs argues that adding non-economic factors such as political influences, managerial talent and a country's capacity to innovate do make competitiveness a useful concept.
The US advanced its lead in the competitiveness league table this year thanks to more deregulation, cheaper labour costs and its leadership in new technologies such as computing and biotechnology.
The danger, according to the report, is that social tensions will undermine America's competitive advance. It warns that the polarisation between earnings in efficient, internationally competitive businesses and low- wage service jobs could lead to instability.
Japan's slide down the ratings is explained by its economic crisis and also by social and political tensions. In particular, the Japanese have gone from being one of the nations most satisfied about its government to one of the least happy.
According to Stephane Garelli, a professor at IMD and director of the world competi- tiveness project, competitiveness has a social as well as an economic dimension. Japan is in the midst of a social and political crisis like the one that hit the US and Europe in the late 1960s, he argues. "It is the capacity to make decisions in a society which is important. Many societies are blocked," he said.
The explanation for Britain's decline down the hit parade this year was more mundane. A weak performance in four of the eight categories that make up the overall ranking accounted for it. The countries ranked just below Britain could easily overtake it next year, Professor Garelli said.
The IMD researchers rated the British economic performance weaker due to the slowdown in growth since last year, weak investment and saving and the erosion of the country's manufacturing base during the past five years.
Professor Garelli said deregulation and improvements in efficiency had affected only a small part of the economy. Two-thirds of the economy was still inflexible and inefficient.
British management performance received a poor rating on measures such as public trust of companies (38th out of the 48 countries surveyed) and companies' sense of social responsibility. Managers had also been less successful at delivering productivity gains and cost savings than the previous year.
A third area of concern was the national infrastructure. Businesses gave the thumbs-down to urban planning and the transport system, and said levels of infrastructure investment were inadequate.
However, Britain stands out for a relatively strong lead in telecommunications and computers - particularly in comparison with other European countries. It is number seven in the number of computers per capita and number four in its share of total world-wide computing power.
Despite this technological advantage, one of Britain's biggest weaknesses is an education system that is not up to training people in the skills required by high-tech industries. Professor Garelli said: "The UK is developing the industries of the future but not the people to work in them." Britain trails in the bottom half of the league table in measures such as the percentage of young people in higher education and teacher-pupil ratios.
The report highlights the country's steadily deteriorating performance in skills, the education system and attitudes to work as the biggest threat to international competitiveness.
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