Iceland increases its global competitiveness according to the IMD World Competitiveness Yearbook 2005 and now ranks number 4 globally, following US, Hong Kong and Singapore. Last year Iceland ranked fifth. This result again puts Iceland at first place in Europe for competitiveness, outperforming the continent´s – and some of the world´s – biggest industrial nations. Finland, in sixth place overall, ranks second in Europe, followed by Denmark, Switzerland and Luxembourg.

The World Competitiveness Scoreboard 2005
Top twenty five competitive economies
2004 rankings are in brackets:

1. USA (1)
2. Hong Kong (6)
3. Singapore (2)
4. Iceland (5)
5. Canada (3)
6. Finland (8)
7. Denmark (7)
8. Switzerland (14)
9. Australia (4)
10. Luxembourg (9)
11. Taiwan (12)
13. Netherlands (15)
14. Sweden (11)
15. Norway (17)
16. New Zealand (18)
17. Austria (13)
18. Bavaria (20)
19. Chile (26)
20. Zhejiang (19)
21. Japan (23)
22. United Kingdom (22)
23. Germany (21)
24. Belgium (25)
25. Israel (33)

The real engines of competitiveness

This year the World Competitiveness Yearbook studies the link between taxes and comptitiveness but finds it hard to pinpoint any direct correlation. The link is subtler and varies according to type of tax. According to Professor Stéphane Garelli, IMD, competitiveness reacts differently to the various types of taxes that are levied. A direct impact is more easily established between corporate taxation and competitiveness than with personal, social or indirect taxes. When it comes to government expenditure in general it seems that the efficiency and quality of government expenditure matter more than the size.

“So what? Tax policy is no substitute for competitiveness. The level and type of taxation can enhance or hinder competitiveness, but cannot create it. The real “engines” of competitiveness are science, technology, entrepreneurship, finance, logistics and education,” says Professor Garelli and adds:

“Tax still matters in as much as it is part of the overall cost of doing business- one of the major reasons why companies relocate abroad. Thus, the real impact of taxes is on job creation or destruction. A higher cost of business can be somewhat offset by improving the ease of doing business. Thus, it would appear that as far as competitiveness is concerned, the simplicity of the tax system is just as important as the level of taxation per se.”

These conclusions go a long way to explain Iceland´s competitive performance over the last few years. The emphasis has been on making the tax system simpler and lowering the corporate income tax. At the same time companies involved in scientific research and development have grown stronger. International comparative studies, such as the Global Entrepreneurship Monitor, have confirmed that Iceland is one of the world´s most entrepreneurial economies with activity similar to the US. Societal, financial and technological infrastructure, education, flexibility and adaptability and governmental efficiency have been among Iceland´s strongest criteria according to WCY.

A reliable source

The World Competitiveness Yearbook (WCY), published annually without interruption since 1989, is the world’s most renowned and comprehensive annual report on the competitiveness of nations, ranking and analyzing how nations create and maintain an environment which sustains the competitiveness of enterprises. The 2005 edition features 60 national and regional economies, analyzed according to 314 criteria, grouped into four competiveness factors. The Hard data are taken from international and regional organizations and private institutes. Survey data are drawn from the Executive Opinion Survey (4,000 respondents).

IMD, an independent not-for-profit- foundation, located in Lausanne, Switzerland, ensures the WCY´s accuracy through collaboration with 57 Partner Institutes worldwide.

Please visit the IMD World Competitiveness Yearbook website for further information.
Full version with country profiles is soon to be released.