Being a small European country with snow is conducive to economic growth. More correlation than causality, no doubt, but the three countries topping the World Economic Forum's latest Global Competitiveness Report are Switzerland, Finland and Sweden--habitual winners all.

Denmark, Singapore, the US, Japan, Germany, the Netherlands and the UK round out the top ten. OK, forget the snow, size and location. Soundly run government, being business-friendly and plowing back money into innovation, education and public health are more of what really matter.

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The world's most competitive countries
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The WEF constitutes the folks who gather the great and the good to discuss the global economy on the ski slopes of Davos, Switzerland, each January. The organisation compiles its annual competitiveness rankings (there is a separate one for business competitiveness) to pinpoint why some countries are able to grow consistently while others stagnate or see an erosion of living standards.

At the bottom of the ranking of 125 industrialised and emerging countries, in worst to only slightly less bad order, are Angola, Burundi, Chad, Timor-Leste, Mozambique, Ethiopia and Zimbabwe--a gazetteer of economic blight.

No prizes for guessing why Switzerland and some Nordic nations have consistently better long-term growth prospects than some of Africa's most woeful countries. But what gives them the edge in the WEF's indexes over the US, their larger European neighbours and the East Asian tigers?

All indexes reflect their components. This year the WEF has changed its methodology to give more weight to human capital and social factors that weigh on business in a way that its chief economist, Augusto Lopez-Claros, says reflects the global economy's evolution since the index was first conceived in 2001.

Its three broad criteria--macroeconomy, institutions and technological readiness--have been expanded to nine broad measures that score a country for the quality of its institutions, infrastructure, macroeconomy, health and primary education, higher education and training, market efficiency, technological business sophistication and innovation.

Global Competitiveness Index

	2006 Rank	2005 Rank	Change
Switzerland	1	4	3
Finland	2	2	0
Sweden	3	7	4
Denmark	4	3	-1
Singapore	5	5	0
US	6	1	-5
Japan	7	10	3
Germany	8	6	-2
Netherlands	9	11	2
UK	10	9	-1
Hong Kong	11	14	3
India	43	45	2
China	54	48	-6

Source: WEF

Switzerland wins its No. 1 ranking (up from what would have been fourth last year on the new methodology) because of high scores for the quality of its institutions, efficient markets and high levels of technological innovation. The country has a well-developed infrastructure for scientific research, intellectual property protections are strong, and its companies spend generously on R&D.

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While one readily associates Switzerland with financial services, food group Nestl�, drug companies Novartis [Get Quote] and Roche and chipmaker STMicroelectronics are among the 22 nonfinancial Swiss companies on our list of the world's 2,000 largest public companies.

The US, which would have ranked at the top last year on the new methodology (although it was second on the old one), continues to score well for being business-friendly, having efficient markets, and for its world-class technology development. But the overall score was pulled down to sixth this year, by its budget and trade deficits. Any disorderly adjustment of such macroeconomic imbalances, the WEF warns, risks knocking the US further down the ranks.

Nordic countries, with Finland (second), Sweden (third) and Denmark (fourth) all among the top ten most competitive economies, have been running budget surpluses and have lower levels of public indebtedness, on average, than the rest of Europe. Prudent fiscal policies have let governments invest heavily in education, infrastructure and the maintenance of a broad array of social services.

Finland, Denmark and Iceland have the best institutions in the world (ranked 1, 2 and 3, respectively) and, together with Sweden and Norway, hold top ten ranks for health and primary education. Finland, Denmark and Sweden also occupy the top three positions for higher education and training.

A well-schooled workforce has helped Nordic companies become global powerhouses. Sixty-four companies from Nordic countries make the Forbes 2000 list of the world's biggest public companies, such as Finland's Nokia, Denmark's TDC Group, and Sweden's LM Ericsson.

The top of the Global Competitiveness Index rankings is remarkably stable, even allowing for the change in methodology. The Netherlands (up from 11th to ninth) pushed out Taiwan (eighth to 13th)--the only change in the top ten. Of the top 15, only one country, Israel, which scored highly on the education, technology and innovation criteria this year, would have been outside the top 20 last year. Good habits become self-reinforcing and self-rewarding.

But while the Nordic countries continued to fare well, Old Europe is another story. Its big economies appear to be losing their competitive edge, with Britain slipping one place to tenth, Germany falling two places to eighth, France down four places to 18th and Italy moving four places lower to 42nd.

Other losers included Russia (62nd, down from 53rd), where the private sector has serious misgivings about the independence of the judiciary and the administration of justice, the WEF says. Property rights are weak and getting weaker. Russia's ranking in this indicator during the last two years has suffered a precipitous decline, from 88th in 2004 to 114th in 2006, among the worst in the world.

China fell from 48th to 54th. Buoyant growth coupled with low inflation, one of the highest savings rates and manageable levels of public debt meant the country scored well on macroeconomic measures. But the WEF sees the largely state-controlled banking sector as a structural weakness.

China also scored poorly on penetration rates for the latest technologies and secondary and tertiary school enrollment rates. By far the most worrisome development, the WEF says, is a marked drop in the quality of China's institutions, with poor scores across all 15 institutional indicators, and spanning both public and private institutions.

India moved up two places to 43 on the list. It scored well for innovation, use of technology and rates of technology transfer. But insufficient health services and education and poor infrastructure are limiting a more equitable distribution of the benefits of India's high growth rates, the WEF finds. Meanwhile, the country's public sector deficit is one of the highest in the world.

Countries in sub-Saharan Africa dominate the bottom of the list. These are mostly places where official corruption is rife, the rule of law weak, and press freedoms and other civil liberties even weaker, while political unrest often deteriorates to the point of civil unrest or war. Capital that is the lifeblood of business does not linger in such places, assuming it has arrived in the first place.

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