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World: Russia, Central Europe Rising To Meet Challenges Of Competition, But Corruption Remains Threat

The latest World Competitiveness Survey says that, while the United States remains the world's most competitive country, a new breed of challengers is emerging -- mainly from Asia, but also from Russia and Central and Eastern Europe. But the survey's author cautions that lack of democracy and transparency, as well as widespread corruption, could scare away much-needed investment in the region.

Prague, 4 May 2004 (RFE/RL) -- The United States remains the world's most competitive nation, while Singapore and Canada have climbed to second and third places, respectively.

Those are the findings of the 2004 World Competitiveness Yearbook survey, published today by the noted Lausanne-based IMD business school. The survey ranks the competitiveness of 60 countries and main economic regions within countries. The rankings evaluate hundreds of criteria to measure how governments create and maintain attractive business environments.

"The companies which are originating from the U.S. or Europe feel more at ease when they are in an environment which is rather comparable to the one they have at home." -- survey director Professor Stephane Garelli
This year, the survey finds a new trend becoming more visible. Investment is moving from west to east -- not only to Asia, but also to new European Union members states from Central and Eastern Europe.

Professor Stephane Garelli, the director of the survey, told RFE/RL that the shift is being determined mainly by lower costs and the existence of qualified workforces.

"The big news, also, is in Europe -- the fact that we have now 10 countries which have just joined [the] Europe[ean Union], and those nations are very attractive in terms of investment because they have a labor cost which is significantly lower than the average European labor cost. So we are expecting to see a shift of investment going from the west to the east," Garelli said.

Most industrialized Western nations have high labor costs, with average wages of more than $20 per hour. Germany peaks at $30 per hour. In Poland and Hungary, however, the hourly wage drops below $3, or even below $2 in the Baltic states and Slovakia.

The survey ranks Estonia as Central and Eastern Europe's most competitive state, in 28th place, ahead of countries such as France, Spain, and South Korea.

Slovakia and Hungary rank 40th and 42nd, respectively, while Russia, in 50th place, comes out ahead of Italy (51). Romania, at 54, ranks ahead of Turkey (55) and Poland (57).

Garelli told RFE/RL that the rankings are the result of thorough analysis.

"The companies which are originating from the U.S. or Europe feel more at ease when they are in an environment which is rather comparable to the one they have at home." -- survey director Professor Stephane Garelli

"There are domains, such as economic performance, government efficiency, business efficiency, and infrastructure. Inside those vast domains, there are some important issues, of course -- the ability of a country to attract investment is very important; the ability of a government to have predictable legislation regarding business is, of course, important; and business efficiency. We are looking, of course, at the productivity, at the skill of the workforce, the motivation of the workforce, and, finally, at the infrastructure. We are looking at the classical infrastructure -- roads, railways -- but also technological infrastructure," Garelli said.

Among what Garelli called "soft criteria" are education levels and the quality of the environment.

In the longer run, the survey says, a new breed of local competitors will emerge, mainly in Asia, but also from Central and Eastern Europe and Russia. Such companies will not only provide manufacturing or services to Western companies, but will become competitors in their own right.

"In a first stage, I think we are going to see a lot of companies investing in Central Europe, in Central Asia, in Russia, because of the low operating costs," Garelli said. "In a second stage, we feel that -- maybe in a horizon of five to 10 years -- we are going to see some domestic local companies emerging in this region. And those companies are going to start to become competitors in their own right, with their own local brands on the world markets -- a little bit like we have seen happening with Japan about 20 to 30 years ago."

While noting the study adopts a neutral position toward the political systems of the countries surveyed, Garelli highlighted the importance of democracy and transparency as factors enhancing competitiveness.

"Most of the investment of today is coming from nations which have free democratic societies and a civil society which is operating in a rather autonomous way. So actually, the companies which are originating from the U.S. or Europe, etc., and which are operating around the world, feel more at ease when they are in an environment which is rather comparable to the one they have at home," Garelli said.

Furthermore, Garelli said, investors are interested in operating in countries where basic human rights are respected and where judicial systems can operate freely.

But Garelli warned that widespread corruption in many countries in the region presents not only ethical and political problems -- but also threatens business competitiveness.

"Business altogether is not looking necessarily to very business-friendly environments, but they really want to have one which is transparent, without any corruption, and an environment which is predictable, where you can have the rule of law, which helps you to define what will happen next year and the years after. And once these two aspects are defined, then a country can be highly attractive. So we feel really that corruption has been extremely negative, not only from an ethical point of view, but also because it brings a level of uncertainty which is preventing a lot of companies from investing in certain countries," Garelli said.