Luxembourg’s economy has never been so badly ranked since 2010 as the 15th place it occupies overall in the 2020 Institute for Management Development’s World Competitiveness Ranking. The Luxembourg Chamber of Commerce responded to the latest rankings by saying that it “is more of a decline than a real fall”, but also acknowledged that “the weaknesses of Luxembourg’s competitiveness are tending to strengthen rather than diminish”.
Notable weaknesses are the continued stagnation of productivity, the difficulty in finding talent and some delay in digital transformation. “There is no doubt that the weaknesses highlighted by this ranking are a serious warning,” the Chamber wrote in a media statement. The Chamber is particularly concerned about Luxembourg’s ranking at a time when economies are moving to a more digitalised world “where high value-added sectors, the ability to innovate and talents will make all the difference.” Luxembourg will have to build an appropriate recovery plan to support the economy, regain competitiveness and reactivate sluggish productivity, the Chamber says.
The annual rankings, now in their 32nd year, reveal a wealth of data on the performance of 63 economies across the globe.
The grand duchy still ranks no.1 in several sub categories, including country credit rating, total public expenditure on education per student, and banking sector assets. But it continues to perform poorly in terms of direct investment flows inward, collected total tax revenues, investment in telecommunications and the number of qualified engineers, according to the IMD report.
The authors have pointed to a series of challenges the grand duchy has to face in 2020:
- Implement recovery plan for Covid-19: support for economic activity, consumption, public investment, incentives for private activity, consumption, public investment, incentives for private investment and a massive health plan.
- Transition towards a growth model based on productivity gains and a sustainable management of environmental resources.
- Address companies’ rising labour costs and tax burden (compared to European and international systems).
- Improve SME support: access to funding, over-regulation, develop economic activity zones, and business succession.
- Update legislation on bankruptcy focused on granting companies a second chance.
The report also conducted an Executive Opinion Survey, where respondents were asked to select five factors that they perceived as key to the attractiveness of their economy. For Luxembourg, the top ranking factors were “policy stability & predictability”, “dynamism of the economy”, “business-friendly environment”, “skilled workforce”, and “competitive tax regime”. The least attractive factors were, in reverse order, “cost competitiveness”, “quality of corporate governance”, “effective labor relations”, “strong R&D culture” and “access to financing”.
Small countries perform well
What makes Luxembourg’s poor performance even more galling is that so-called “small economies” elsewhere were ranked highly. Singapore retained its number one position for the second year in a row, with Denmark, Switzerland, the Netherlands and Hong Kong making up the top 5. Arturo Bris, Director of the IMD World Competitiveness Center, says, “The benefit of small economies in the current crisis comes from their ability to fight a pandemic and from their economic competitiveness. In part these may be fed by the fact it is easy to find social consensus.”
Elsewhere, of Luxembourg’s neighbours Germany, ranked 17th (unchanged from 2019), Belgium placed 25th (up from 27th) and France was placed 32nd (down 1 place). The UK, meanwhile, climbed to 19th from 23rd, with the report suggesting that “one interpretation is that Brexit may have created the sentiment of a business-friendly environment in the making.”