Augusto Lopez-Claros
04/01/2004
Why are some countries able to sustain prolonged periods of buoyant economic growth and attract foreign capital while others remain stagnant or, worse, see a steady erosion of living standards? For the last couple of decades the World Economic Forum has been trying to cast some light on this important question by producing rankings of countries according to their global competitiveness. The rankings cover more than 100 countries and are based on a comprehensive opinion survey of business executives.
The Finnish government does not intervene in ways that divert resources to unproductive ends. |
Finland’s performance is impressive in all three of the major indicators that go into our competitiveness index: the stability of the macroeconomic environment, the quality of public institutions, and the level of technological readiness. The country has been running large fiscal surpluses for several years, although it declined somewhat last year from a 5 percent surplus in 2002 and a prodigious 7 percent in 2000. Government policy is to run fiscal surpluses to create a pool of savings to finance future pension liabilities associated with the aging of the population and to take care of other unforeseen contingencies, rather than financing these needs by increasing the national debt. Indeed, both the Ministry of Finance and the Bank of Finland have called for a surplus of some 4 percent of GDP over the period 2004 to 2010.
The Finnish government does not
intervene in the economy in ways that divert resources to unproductive ends.
Funds that could have gone to maintaining military establishments, for
instance—as happens in the developing world, where defense spending exceeds
spending on education and public health combined—have gone instead to education
and human capital investment. The national budget allocates the equivalent of
6.3 percent of GDP to education and 6 percent to health, while only 1.4 percent
goes to defense.
There are important lessons any other economy can learn
from Finland’s judicious spending habits. Certainly, there are cultural factors
in this small Nordic country that make the Finns feel comfortable with notions
of social solidarity and have created a strong commitment to efficiency and
integrity. (We have an indicator that measures “judicial independence” in which
Finland also ranks number 1 in the world.)
In spite of the high scores the
United States earns for research and development spending, number of patents
approved, personal computer use and Internet penetration rates, Finland is
slightly ahead in tertiary school enrollment rates, cellular telephone use,
Internet access in schools, the quality of the legislative framework relating to
information and communications technology, university-industry research
collaboration and firm-level technology absorption. It is way ahead of the
United States in “quality of public institutions” indicators.
Although the
United States is ranked second overall, its performance is uneven. American
primacy in the area of technology is offset by a significant deterioration in
the macroeconomic stability index. The U.S. budget deficit is large enough to
place the country in 50th place among the 102 countries surveyed. With the
deficit still growing, this subpar ranking could well worsen in 2004. Granted,
it makes no sense to compare Finland’s defense spending with that of the world’s
leading hegemony but the deterioration of the fiscal situation in the United
States reflects for the most part not increases in defense or security
spending, but rather a drop in the general government revenue ratio of over 4
percentage points of GDP from 35.1 percent in 2000 to 31 percent in 2003, a
decline unprecedented in the post-World War II period. Some of the revenue
waning stems from weaknesses in the global economy, but the bulk of it is due to
tax cuts: in other words, through deliberate government policy.
 | Augusto Lopez-Claros is chief economist and director of the Global Competitiveness Program at the World Economic Forum. |