The Swiss Institute for Management Development (IMD) every year publishes the competitiveness ranking, compiled from survey results and official data, and based on 333 different criteria.
The grand duchy dropped one place in the ranking compared to last year, from 12th to 13th place. But it still improved on its 2020 score, which had seen the country slide to 15th place. Together with Denmark, Sweden, the Netherlands, Finland, Ireland and Germany it was one of seven EU countries in the top 15.
While the resilience of Luxembourg’s economy landed the country in the top spot for economic performance, it lost points on government efficiency (13), business efficiency (20) and infrastructure (24).
“Luxembourg has a solid foundation for competitiveness,” said the Chamber of Commerce in a statement. The chamber is a partner of the IMD and helps the institute collect data for the yearbook. “Luxembourg’s economy remains among the most stable.”
Digital transition, talent
The grand duchy struggles with the digital transition. For example, high tech products accounts for only 5.6% of manufactured wares, while ICT services make up only 4.3% of services experts. This compares to 45% in Israel, which has established itself as an international tech hub.
And while the country boasts a high rate of internet users and fast connectivity, this isn’t translating into available talent. Between 2021 and 2022, Luxembourg dropped 16 places on ICT staff availability, leaving it 38th out of 63 nations in the survey.
“It is important to bear in mind an essential problem for the competitiveness of the grand duchy: the link between training/competence on the one hand and the needs of companies on the other,” the Chamber of Commerce said.
The government together with jobs centre Adem in 2020 launched the so-called Future Skills Initiative, which aimed to analyse job adverts and develop training opportunities for jobseekers to learn the skills required by the market.
In addition to attracting staff from outside, “business leaders are more concerned than in the past that the ‘brain drain’ will affect the country’s competitiveness,” the chamber said, adding that mobilising resources in the country and making Luxembourg attractive as a destination for immigrant and expat workers will be challenges for the future.
Inflation worries
“The indicator that all economists are observing at the moment is the rate of inflation,” the chamber said. “The increase in prices to levels not seen for decades will not be without consequences for the attractiveness, progress and even innovation of various economies.”
The indexation of wages--a 2.5% raise when inflation reaches a certain threshold--poses additional challenges for businesses in Luxembourg, the chamber said. The interest group has long advocated for the system to be abolished or at least limited to low-income earners.
“Cost competitiveness will gain in importance in the years to come,” the chamber said. “Luxembourg is today among the economies with the highest hourly costs in industry (55th), while unit labour costs for the economy as a while have risen by 1.27% in one year.”
The chamber of commerce has previously argued that indexation further fuels inflation, as businesses increase prices when an indexation payment has come through. “Containing the inflationary spiral and its effects is a priority in order to maintain cost competitiveness, particularly for wage costs,” it said in its statement on Wednesday.
Challenges
For 2022, the chamber said Luxembourg faces four key challenges:
1. Mitigate the effects of rising inflation rates (including the booming prices of raw materials and energy prices) on business profitability and household purchasing power.
2. Accelerate the green transition towards a sustainable and decarbonised economy via the development of ecotechnologies.
3. Move from an extensive economy to an economy characterised by more qualitative growth, based on a circular development cycle.
4. Address difficulties faced by companies to find and retain talent in the short and longer terms.