Global Pressure – Nordic Solutions?

Global Pressure – Nordic Solutions? Nordic Globalization Barometer 2011 Global Pressure – Nordic Solutions? Global Pressure- Nordic Solutions? The Nordic Globalization Barometer 2011 By Christian Ketels ANP 2011:718 © Nordic Council of Ministers, Copenhagen 2011 ISBN 978-92-893-2236-2 Print: Arco Grafisk A/S Copies: 500 Printed on environmentally friendly paper This publication can be ordered on publications are available at Printed in Denmark Nordic Council of Ministers Nordic Council Ved Stranden 18 Ved Stranden 18 DK-1061 København K DK-1061 København K Phone (+45) Phone (+45) Fax (+45) Fax (+45) Nordic co-operation Nordic co-operation is one of the world’s most extensive forms of regional collaboration, involving Denmark, Finland, Iceland, Norway, Sweden, and Faroe Islands, Greenland, and Åland. Nordic co-operation has firm traditions in politics, the economy, and culture. It plays an important role in European and international collaboration, and aims at creating a strong Nordic community in a strong Europe. Nordic co-operation seeks to safeguard Nordic and regional interests and principles in the global community. Common Nordic values help the region solidify its position as one of the world’s most innovative and competitive. Foreword 3 Foreword The global challenges related to climate, the environment, energy, welfare and the financial markets are huge and urgent. None of these challenges can be solved by one country or region alone. They require a co-ordinated approach. For the Nordic countries it is quite natural to look for joint solutions. The Nordic region has a common history, strengths, values and knowledge that support joint efforts to answer these challenges. The Nordic Prime Ministers therefore took joint action to strengthen Nordic cooperation as a tool to better meet the challenges of globalization. In Punkaharju, Finland in 2007 they stated a shared and positive attitude towards opportunities and challenges of globalisation. According to the Prime Ministers Nordic co-operation should be more focused on globalization and the opportunities stemming from it. They therefore called upon joint Nordic activities related to innovation, climate and energy, research and education, welfare and health issues – areas where the Nordic region can be successful. One of the initiatives initiated from the Nordic Prime Ministers’ joint Nordic globalisation policy is a Nordic Globalization Forum. The objective of the forum is to seek joint solutions to the challenges of globalisation. The Nordic premiers together with representatives of industry and commerce, research, politics and non-governmental organisations are taking part. The first Nordic Globalization Forum was held in Sweden in April 2008 and the second in Iceland in February 2009. On both occasions the Nordic Prime Ministers confirmed the Nordic globalization process that was started in 2007. In June 2011, the fourth Nordic Globalization Forum will take place in Finland, with the focus on how to generate more growing green companies in the Nordics. Previous years the Nordic Globalization Barometer have contributed with valuable input to the debate that took place at the Globalization Forum and the Nordic Prime Ministers wished to see an updated version in 2011. I am therefore proud to present the 2011 Globalization Barometer. The Nordic countries have been fully exposed to the recent changes in the global economy. Their solid domestic policy enabled them to deal with the crisis much better than many of their OECD peers, with Island being a special case. In the short run, the fiscal imbalances created by the economic crisis are dominant concern for a significant part of the region. But in the longer run, all Nordic countries face the question how to react when the center of gravity in the global economy moves away from Europe. The Barometer aims to inform the discussion about this complex question. Finally, I would like to give my warmest thanks to the author Christian Ketels (Harvard Business School / Stockholm School of Economics). The analysis and conclusions in the Nordic Globalization Barometer are those of the author and do not necessarily reflect the views of the Nordic Council of Ministers. However, I am convinced that the report will be a useful instrument in our future work implementing the globalization initiatives that started with the Prime Ministers summer meeting in Punkaharju. Copenhagen, 6 June 2011 Halldór Ásgrímsson Secretary General Nordic Council of Ministers 4 Content Global Pressure – Nordic Solutions? Contents Foreword ............................................................... 3 Executive Summary ................................................. 5 Chapter 1 Introduction ........................................................... 9 Chapter 2. Global Competitiveness of the Nordic countries ......... 11 2.0 Economic Climate .................................................................... 13 2.1 Economic Performance ............................................................ 16 2.2 Competitiveness ........................................................................ 20 2.3 Globalization Readiness ........................................................... 54 2.4 Overall assessment .................................................................... 63 Chapter 3. Conclusions ........................................................... 67 3.1 Key findings ................................................................................ 67 3.2 Key policy implications ............................................................. 69 References and further reading ................................ 73 Executive Summary 5 Executive Summary The 2011 Nordic Globalization Barometer is the fourth in its series, again designed to serve as input to the Nordic Globalization Forum. With the global crisis giving room to a reluctant and highly uneven recovery, the focus is turning towards the emerging shape of the post-crisis global economy. The US is struggling with long-term fiscal imbalances amidst a slow recovery. Europe is divided between quickly recovering economies led by Germany in the north and debt-struck economies in the south. The emerging economies have continued their ascendency. The Nordic economies have been fully exposed to these changes in the global economy. Their solid domestic policies enabled them to deal with the crisis much better than many of their OECD peers, with Iceland being a special case. In the short run, the fiscal imbalances created by the economic crisis are a dominant concern for a significant part of the region, Denmark and Finland in particular. In the longer run, all Nordic countries face the question of how to react when the centre of gravity in the global economy moves away from Europe. The Barometer’s framework (Ketels, 2008) aims to inform the discussion about this complex question. It is grounded in the research on competitiveness (Porter, 1990; Porter et al., 2008; Delgado et al., 2011), on growth diagnostics (Hausman et al., 2008; Rodrik, 2010; Ketels, 2011) and its policy applications (OECD, 2009a; European Council, 2010). A wide-range of data is used, with the World Economic Forum’s Global Executive Opinion data a key source (WEF, 2010). The Global Competitiveness of the Nordic countries The analysis of the current economic climate indicates that the Nordic region is now in a good position to reach a path of stability. The excuberance of sentiment visible last year has largely subsided: the end of the stimulus packages and a mix of monetary policy tightening and fiscal policy consolidation have left their mark. In a still very uncertain global environment, there are now more downward risks. The data presented in this Barometer reflects the strong recovery in economic performance that the Nordic economies have been able to achieve. GDP per capita is growing again, based on a resurgence of productivity. Labor input and labor market conditions have stabilized. Denmark showed a somewhat less benign trend, with labour input levels falling at an only moderately decreasing rate. Fiscal policies need to be tightened further in some countries but overall the region has a good chance to achieve a robust recovery without creating the seeds of a new bubble. While the determined policy response has left a clear mark in the public finances of all Nordic countries, they are in a more enviable situation than their southern European peers. Iceland remains an exception but has also managed a remarkable macroeconomic stabilization. 6 Executive Summary Global Pressure – Nordic Solutions? The competitiveness of the region has remained stable. The high level of overall competitiveness supports the high level of prosperity that the region is enjoying. The region remains slightly stronger on macro- than on microeconomic competitiveness and recovered marginal ground lost last year. Only Denmark saw its position erode overall, albeit from a high level and at a moderate rate. The Nordic region benefits from strong institutions, macroeconomic policies, sophisticated companies, advanced demand conditions, and a strong innovation infrastructure. It has improved its ranking on patenting, capital market infrastructure (especially the access to local equity markets and the soundness of banks is seen more positively than last year), and the perceived openness to foreign investment. In indicators of company sophistication, the region maintains its leading position, especially on the internationalisation of firms. The region is perceived to have lost ground on physical infrastructure, education and innovation infrastructure (here driven largely by Denmark and Norway). It also continues to have a relatively weak presence of clusters. In addition, there is a more general puzzle in competitiveness being generally higher than the level of prosperity that the Nordic countries achieve in comparison to their international peers. This could be the result of standards of living in society being higher than indicated by average income levels or an indication of specific bottlenecks that hinder the Nordic countries to take full advantage of its strengths. On globalization readiness, the role of the Nordic countries in the global economy is gradually changing. The Nordic countries are losing market share in what seems to be a structural decline. Exports are becoming less important, with services are holding up better than goods in terms of world market shares. As production in global value chains is moving to Asia, the role of the Nordic countries in the global economy is gradually changing. Source: Unpublished data from the WEF Global Executive Opinion Survey (2010), author’s analysis based on Delgado et al. (2011) Global Competitiveness Profile of the Nordics Micro Macro Business Environment Quality Context for Strategy and Rivalry Related and Supporting Industries Demand Conditions Factor Input Conditions Capital Admin Logistic. Comm. Skills Company Sophistication Social Infrastructure and Pol. Institutions Political Institutions Rule of Law Human Development Macroeconomic Policy Global Rank Significant advantage 5 5-8 9-11 12-15 15 Moderate advantage Neutral Moderate disadvantage Significant disadvantage Innov. Executive Summary 7 The Nordic countries remain very active in outward FDI, while inward flows are developing less dynamically. The share of the Nordic countries in FDI inflows dropped below the region’s share in global GDP; Finland and Sweden in particular saw inflows drop. This is more likely the reflection of changes in the global economy than of lower absolute attractiveness of the Nordic countries as a place to do business. On labor market flexibility and openness to entrepreneurship, there have been few changes according to the available indicators. The Nordic labour markets have overall been able to deal quite well with the dramatic shock of the global economic crisis. Where problems exist, they relate to the rules and regulations affecting specific groups, especially people entering the labour market, in early retirement or on sick leave, and immigrants. The Nordic countries do well on new business formation. But economic impact depends on the ability of new entrants to grow and scale-up their operations. And on this dimension the Nordic countries are still struggling (FORA, 2010). Recommendations On macroeconomic competitiveness, the short term priority is to stay the course in pursuing macroeconomic policies that support a path of sustainable growth. This requires flexibility but also the adherence to clear fiscal and monetary policy targets. Sweden seems already well on track to reach this target. Denmark and Finland, to some degree also Norway, still require more policy action to get there. Iceland remains a different case, despite the significant progress made. Longer term, the Nordic countries need to remain open to react to changes in the policy environment around them. The current heterogeneity between Euro-Zone membership, Euro-peg, and flexible exchange rate has worked so far but seems unlikely to remain stable forever. No drastic changes are needed now but there needs to be openness to evaluate alternatives for tomorrow. On microeconomic competitiveness, the short term priority is to continue efforts to improve the effectiveness and efficiency of policies in areas like education, infrastructure, innovation, and entrepreneurship. New approaches, like a more aggressive use of demand-driven innovation policies, need to be developed and implemented. Longer term, the Nordic countries need to become more strategic in targeting policies on specific bottlenecks to value creation in their economies. While there is a clear macroeconomic strategy, microeconomic policy tends to be a collection of individual programs without comprehensive view. Global competitiveness is increasingly a question of the role that a location is playing the global economy, not just of its generic capabilities. The Nordic countries’ changing pattern of globalization readiness indicates that the way existing advantages are translated into economic benefits is being transformed. The Nordic countries should aim for more clarity on the positioning that they aspire to have in the global economy. What activities do they want to be attractive locations for, and how will those activities generate value for their citizens? The answers to these questions will help to guide action priorities on competitiveness upgrading and support their integration into an overarching strategy that generates maximum benefits for Nordic citizens.