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Metal Casting Technologies : September 2005
USA 1 Netherlands 15 Hong Kong 6 Sweden 11 Singapore 2 Norway 17 Iceland 5 New Zealand 18 Canada 3 Austria 13 Finland 8 Bavaria 20 Denmark 7 Chile 26 Switzerland 14 Zhejiang 19 Australia 4 Japan 23 Luxembourg 9 United Kingdom 22 Taiwan 12 Germany 21 Ireland 10 Belgium 25 FEATURE 2005 World Competitiveness Rankings M any business and political leaders intuitively feel that lower taxes sustain competitiveness by boosting investment and personal spending. It may be true. However, the findings of the 'World Competitiveness Yearbook 2005' indicate a subtler link. The competitiveness of Luxembourg, Denmark, Finland, Norway, Sweden, and Belgium was good in 2004 -- the highest economic growth rates in continental Europe -- despite a significant overall tax pressure (above 40% of GDP). At the same time, the US, Australia, Estonia, Ireland and the Slovak Republic had remarkable growth rates while relying on much lower taxes (between 25% and 34% of GDP). Finally, Japan and Switzerland have both shown very weak economic growth over the past ten years in spite of low total tax pressure (27% and 30% respectively)! Clearly any link between taxation levels and competitiveness performance is far from evident at first glance. The first observation is that competitiveness reacts differently to the various types of taxes that are levied. A direct impact is more easily established between corporate taxation and competitiveness than with personal, social or indirect taxes. As a consequence, Northern European nations heavily tax personal income and consumption but spare corporate profits. THE 2005 WORLD COMPETITIVENESS RANKINGS THE TOP 24 (OUT OF 60) Country Region Rank 04 Country Region Rank 04 Country Region Rank 04 5 17 6 18 7 19 8 20 Rank 05 82.6 74.3 82.6 74.1 82.5 72.2 82.5 69.7 Score 05 9 21 10 22 11 23 12 24 Rank 05 82.0 68.7 80.3 68.5 78.3 67.8 77.8 67.5 Score 05 1 13 2 14 3 15 4 16 Rank 05 100.0 77.4 93.1 76.3 89.7 76.2 85.3 75.5 Score 05 The second observation is that taxes are perceived in general as fuelling excessive government spending. Here again, a direct correlation with competitiveness is hard to establish. Sweden, the Netherlands, Denmark, Finland or the UK displays high levels of government spending, in excess of 20% of the GDP, and high competitiveness performance. At the other end of the spectrum, only 11% of the GDP of Singapore and Hong Kong goes towards government spending and they also have a top competitiveness performance. It would appear that the efficiency and quality of government expenditure matter more than the size. So what? Tax policy is no substitute for competitiveness. The level and type of taxation can enhance or hinder competitiveness, but cannot create it. The real "engines" of competitiveness are science, technology, entrepreneurship, finance, logistics and education. Tax still matters in as much as it is part of the overall cost of doing business- one of the major reasons why companies relocate abroad. Thus, the real impact of taxes is on job creation or destruction. A higher cost of business can be somewhat offset by improving the ease of doing business. Thus, it would appear that as far as competitiveness is concerned, the simplicity of the tax system is just as important as the level of taxation per se. In this regard, a simpler flat tax system may be more valuable in the long run than a complex low tax regime. The IMD World Competitiveness Yearbook 2005 provides several customised rankings, whether global, by size, by wealth, by regions, etc. In the overall ranking, for example, Malaysia has fallen from 16th to 28th position, Spain 31st to 38th and China from 24th to 31st. China's surprising fall, despite an excellent economic performance, is due to 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, infrastructure and weaknesses of corporate governance are being highlighted. HIGHLIGHTS FROM 'THE WORLD COMPETITIVENESS LANDSCAPE IN 2005' 1. The uneven growth rates between Asia, the US, Latin America and Europe, (but also inside regions such as between Eastern and Western Europe) continue to create economic and political tensions. (NB: The Scores are actually indices (0 to 100) generated for the unique purpose of constructing charts and graphics.) Who's Who of Metals 2005/6 67