Thursday May 15, 2008 MYT 3:40:14 PM

Malaysia moves up four spots to 19th in world competitiveness

KUALA LUMPUR: Malaysia moved up four spots to 19th place this year in terms of competitiveness, according to the IMD World Competitiveness Yearbook 2008.

Malaysia scored 73.2 points out of 100 points, says the report issued Thursday. In 2007, Malaysia was ranked 23rd place with 74.1 points.

The report, which was compiled in Lausanne, Switzerland, covered 55 countries.

The United States maintained its first place in the rankings, after pushing Japan out of the top slot in 1994. Singapore and Hong Kong maintained their second and third rankings respectively while Switzerland was fourth, up two spot from sixth placing last year.

IMD's World Competitiveness Center director Professor Stéphane Garelli and deputy director Suzanne Rosselet-McCauley said despite the United States had maintained the top spot, “we may be seeing the US in the number one position for the last time!”

Below is the main points of the report on how much longer can the US remain the leader in competitiveness:

Singapore had been quickly catching up over the past couple of years and may boot the United States out of its top spot next year, closing the gap that has become infinitely smaller.

With the United States at 100, Singapore is in a close second place at 99.3 in the WCY overall ranking. This year may be the turning point where the US falls from its leadership of top competitors in the world economy.

It also raised the question whether there was a re-make of the Japanese tragedy.

In 1989, Japan was firmly in the No 1 position, while the US was in third place. Japan’s competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation.

Then things went very wrong: The stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998. Does this ring a bell?

The past crisis in Japan bears some resemblance with the present turmoil in the United States. It followed a period of economic boom, real estate price follies and exuberant assets expansion. In addition, the liberalisation of financial instruments took place without the appropriate regulatory environment; corporate governance was inadequate with little accountability and transparency; and the government was quickly overwhelmed by the magnitude of the crisis.

What was the price that was paid? The crisis in Japan spread from the stock market to real estate, then developed into a credit crunch and finally into a major crisis of the financial system. Consequently, no bank was too big to fail! The resulting cost of bailing out the financial system was huge: 15% to 20% of GDP over a 10-year period.

Deflation spiralled down and interest rates dropped all the way to zero. The Japanese economy stagnated for a decade. Frightening …. Will this happen to the United States? Once it starts, the logic of a financial crisis seems hardly stoppable.

On the other hand, the differences between the two economic societies are quite large. Apart from a few notable successes (Canon, Toyota, etc.), by the 1990s, much of Japanese industry was in a paralyzed state. The Japanese never practised “creative destruction.” The United States, because of its openness, resilience and entrepreneurship, always seems to find the means to reinvent itself in ways that Japan (and much of Europe) often lacks.

Lessons to be learned But the United States has a few trumps in hand. The Japanese breakdown of the 1990s provided some forewarning for the US Government. The Federal Reserve and the Treasury were quick to realise the magnitude of the risks and will continue to take drastic action.

Central banks are supplying massive liquidities to financial markets and are acting as lenders of last resort (e.g. in swapping mortgage-backed assets). Emerging sovereign wealth funds appear willing to recapitalize financial institutions (such as CITI, Merrill Lynch or UBS) and the global economy is still buoyant (110 countries grew over 5% in 2007).

Will it be enough? The structural deficits in the United States (balance of trade, budget and, as a consequence, national debt) will ultimately have to be addressed otherwise the dollar will remain weak.

A recession in the United States is a strong possibility. Will it last and will it spread? In both cases, the answer is probably yes. The financial sector represents 40% of US corporate profits. In addition, the International Monetary Fund reckons that a 1% fall in US growth cuts European growth by 0.5%. Furthermore, high prices of raw materials and food are triggering imported inflation at a time of low interest rates – pretty nasty… 2008 will be rough.

The downfall of Japan in competitiveness - ranking 22nd in the IMD World Competitiveness Yearbook 2008 - bears some similarities with the present situation in the United States. What are the chances of the United States following the same path?

In the 20 years that we have been researching competitiveness at IMD’s World Competitiveness Center, we have learnt one thing: no nation, however competitive, is immune to a collapse, especially when it stems from the financial sector. In the words of Benjamin Franklin: “even a small hole can sink a big ship ….”

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