IMD International


But now we should turn the page...

By Professor Stéphane Garelli - March 2013

The IMD World Competitiveness Center issued its first report on world competitiveness 25 years ago. Since then, the world economy has undergone some of its most dramatic changes ever. During the communist era, half the world was closed to globalization and run by centrally planned economies. Transport, communication and logistics lagged behind, people could not travel, standards of living were in tatters and transparency was an alien concept. Suddenly, these economies – frozen in time – joined the world of competitiveness. This was a formidable shot in the arm for the world economy, an incredible revolution, but probably a once-in-a-lifetime event. 

New players, new competitors
In 1989, when we started issuing our rankings, some countries simply did not exist as such. A dozen nations in Eastern Europe and Central Asia had not yet emerged from the Soviet Union. South Africa was plagued by apartheid. Other significant players, such as Brazil, India, the UAE and Qatar had only a fraction of the competitive clout that they have today. China, however, was in the midst of implementing its "Open Door" policy, attracting billions of dollars of foreign investments.

Exposing these countries to competitiveness really meant tapping unprecedented reserves of competitiveness that had been unused for decades. The impact was big and almost immediate. Transport and logistics became easier, cheaper and global. People, goods and capital became more mobile. And competitiveness grew more transparent and measurable internationally.

The transfer of activities – especially assembly and back-office operations – from the "West" to the "East" also meant a transfer of knowhow and technologies. As a consequence, enterprises blossomed everywhere, first operating as suppliers, then as partners, and soon as competitors in their own right. Today there are more than 1,000 companies in emerging economies with revenues above $1bn. This massive shift of industrial activities was initially driven by low labor costs. 

Tapping cheap labor
In 1989, the vast majority of countries joining the global economy had hourly labor costs between $1 and $3. China and India, at the bottom of this range, had labor costs one-twentieth of those in the west, and no strikes. This difference led to a boom in outsourcing and off-shoring. Prices of tradable goods such as cars, phones and computers fell as they became cheaper to produce "elsewhere." As a result, inflation in advanced economies almost disappeared from sight.

But while emerging economies exported and enjoyed trade surpluses, richer countries faced deindustrialization and rising structural unemployment. In the last 20 years, the US, Britain and Japan have each lost about 20% of their industry in terms of its share of GDP. Only Germany has bucked this trend with a business model that still relies on manufacturing and exports. The jobless rate in the US is now 7.7% and in Europe it is 11.9%. Figures for youth unemployment (those aged 16-24) are twice as high.

The trend is reversing, but slowly. Labor costs in China and India are rising by some 25% a year and global companies are rediscovering the virtues of a shorter and more reliable supply chain. Re-shoring is fashionable, with General Electric moving some household appliance production out of China and opening a plant in Louisville, Kentucky. But few jobs will be created by this reshoring since the new plants are likely to be highly automated. One issue remains: in a decentralized global economy, what is the country origin of a product assembled in many locations? We are evolving from a "made in somewhere" concept to a "made in the world" approach.

And the world becomes richer (well, some of it…)
Freezing labor costs in time also meant freezing incomes and living standards. Again in 1989, the ratio of living standards between emerging and advanced economies was some 1 to 50, expressed in GDP per capita. Then the virtuous circle of capitalism went to work: higher wages increased income and living standards and created high-growth economies. As a consequence, private consumption has been surging. However, it still does not represent the same proportion of GDP as in advanced economies (roughly two-thirds) and therefore the potential for further growth is still big.

Hundreds of millions have joined the global middle class while just as many are emerging from absolute poverty and will need dedicated products (such as very cheap vehicles and mobile money). Rising incomes foster a greater sense of individualism and put more pressure on private and public governance. In several emerging economies, however, the emphasis remains on personal wealth creation and not on political involvement. For the moment, therefore, these economies remain relatively stable, although environmental issues attract a higher level of activism from the population.

Fast-growing incomes, galloping consumption and high raw materials prices also trigger an endemic risk of inflation in countries such as China, Russia and India. Another underlying risk factor is the rapid expansion of personal credit, which is growing by more than 20% a year from Turkey to Asia. Rising standards of living in the past 25 years have benefited many western brands, including luxury goods, that represent prestige and personal achievement. The coming years will see more and more consumer brands from emerging economies turning from local to global. The world will discover new names and new products, and it will not be a cosy place for western brands anymore.  

Not to be seen again
Today very few countries are still closed to world competitiveness. There are some obvious candidates such as North Korea, Myanmar, Cuba and Iran. But even if they do open up fully, none of them will reshape global competitiveness like the post-1989 generation did. As the global market increasingly shifts from being a "first buy" economy to a "replacement" economy, competitiveness will develop more slowly. Growth will depend more on technological innovation and better skills than on accessing cheap factors of production in uncharted lands. This will imply more time to see results, and a new mindset. As the French writer Paul Valery put it, "the problem with our times is that the future is not what it used to be…" The last 25 years of competitiveness were exceptional, even epic. But now we should turn the page, and work on a "new normal."

Stéphane Garelli is the director of IMD's World Competitiveness Center and teaches on IMD's Orchestrating Winning Performance program.

Your next step


Related Faculty

Related information

© 2017 IMD International. All Rights Reserved.