The post-covid economic recovery is a "crucial moment to implement the foundations of future competitiveness,” according to the Chamber of Commerce. It has carried out an in-depth analysis of the evolution of Luxembourg's position in the International Institute for Management Development (IMD) and World Economic Forum (WEF) competitiveness rankings since 2010. It also analysed the latest results of these rankings, noting a decline in the rankings and offering six reasons for this drop
1. A stable overall performance, without much economic diversification
Luxembourg remains in the top 20 of the IMD competitiveness ranking. However, the country slipped from 11th place in 2010 to 12th out of 64 in 2021.
Luxembourg relies on "stable economic policies, economic and demographic dynamism, solid public finances, a good capacity of economic and political actors to adapt to change, a financial centre of international stature, strong integration in international trade and a proven attractiveness for certain activities such as patenting,” the chamber said. At the same time, "stagnating productivity, low technological specialisation, difficulties in attracting skilled labour, a delay in digital transformation compared to the leaders in digitalisation and poor results in the environmental field" are holding back its performance.
These are strengths and weaknesses already present in 2010, the Chamber of Commerce said, despite "the ambition to diversify the economy and change the competitive model.”
2. The financial centre is still competitive, despite a slight delay in fintech
The same stability applies to the financial centre. In the IMD rankings, Luxembourg’s economy moved from the 17th position in 2010 to the 12th in 2021, in regard to the amount of commercial services exports. They have increased from €53bn to €96bn. In the Global Financial Centres Index (GFCI) of September 2021, the Luxembourg financial centre is ranked 23rd in the world and 4th in the EU, behind Paris, Frankfurt and Zurich.
However, the studies note that access to finance for economic players in the grand duchy is more difficult than in 2010. And that there is a delay in the field of fintech.
3. A weak and worsening technological specialisation
The Chamber of Commerce continues to base itself on the indicators of the IMD ranking to explain that the high-tech sectors are the "great absentees" of the past decade. The Luxembourg economy is half as specialised in this area as the average country participating in the ranking. "The indicators of technological specialisation, innovation and research have an important place in the competitiveness rankings. However, performance in this area is strongly correlated with the development of medium and high-tech industries, which have historically been a weak point in the Luxembourg economy," the Chamber of Commerce said in its report.
The portion of medium and high-tech production in comparison to the added value of the industry has fallen from 22.4% to 19.9% in ten years. The amount of exports of high-tech products also fell, from 8.4% to 6.6%.
Another worrying indicator is that "private sector spending on R&D has fallen by $100m in the space of 10 years, from $530m to $428m between 2010 and 2021. Thus, this expenditure now represents only 0.60% of the GDP compared to 1.02% 10 years earlier. Luxembourg’s economy got the 36th place out of 63 countries on this indicator in 2021, compared to obtaining the 18th position in 2010.” In addition, "R&D personnel within companies [in the sector] has, again, declined from 3,390 full-time workers in 2010 to 3,200 in 2021."
Luxembourg's ranking does improve, however, in terms of support for the legal environment. The country moves up from 16th to 14th place for this IMD indicator.
4. Not really a start-up nation
In 2021, Luxembourg is apparently home to 507 start-up--21% in information technology, 20% in fintech, 8% in health and wellness technology, 7% in the creative industry and in business software, and 6% in space technology.
This ecosystem did not make it past the 43rd place of the "Global Startup Ecosystem Index Report" (GESI) in 2021. The country has dropped three places in one year. "Estonia, an economy with only 1.3 million inhabitants, is 13th in the ranking," the Chamber of Commerce said, concluding that "Luxembourg's size alone does not explain its 43rd position.” The city of Luxembourg ranks 186th in the city ranking, 24 places lower than in 2020. Esch-sur-Alzette enters the ranking in 489th position, “confirming the presence of a second start-up ecosystem in Luxembourg.”
5. The talent shortage has increased
Since 2010, Luxembourg has fallen from 29th to 48th place in the IMD rankings for the availability of skilled labour, a shortage that coexists with unemployment, as Luxembourg only places 33rd in the ranking for the unemployment rate. The economy has nevertheless seen its performance improve in terms of vocational training. Yet, the results seem insufficient in higher education, despite the development of the University of Luxembourg.
6. A lack of effort for the environment
The environment is becoming a key indicator, for which Luxembourg is only 39th in 2021. To be more specific, the country gets the 60th position on the ecological footprint, 46th in regard to renewable energy and 44th on dealing with the agreements on hazardous waste.
"The results of the 2010s are mixed for Luxembourg's competitiveness. One of the most dynamic economies in Europe, Luxembourg has been able to maintain most of its assets and initiate attempts at diversification and transition towards a more environmentally friendly and digitalised model, without, however, obtaining significant results in the competitiveness rankings. Indeed, driven by a possibly too ‘wait-and-see’ philosophy and hampered by increasing recruitment difficulties, Luxembourg has not been able to find new productivity drivers within its economy that is still dominated by finance and barely specialises in high-tech sectors,” the Chamber of Commerce said.
Both satisfied with the "solid" performance and disappointed with the stagnation, the chamber advised competitiveness players to "bring the resources invested in the transformation of Luxembourg's economic model more into line with its declared ambitions. Otherwise, the country risks being relegated to the back of the pack of competitive countries for a long time.”
This story was first published on Paperjam. It has been translated and edited for Delano.