NOVEMBER 2018 N° 34 PERSPECTIVES DE POLITIQUE ÉCONOMIQUE Holding up in a turbulent time Holding upinaturbulent REPORT COMPETITIVENESS 2018 NOVEMBER 2018 NOVEMBER PERSPECTIVES N° 34 DE POLITIQUE ÉCONOMIQUE 2018 COMPETITIVENESS REPORT Holding up in a turbulent time The ‘Perspectives de Politique Économique’ series includes reports, studies, research results or summaries of conferences commanded by or carried out by employees of the Ministry of the Economy or by experts of associated institutions. The opinions expressed in these publications are those of the authors and do not necessarily correspond with those of the Ministry of the Economy or the government. For any request or suggestion, please contact the Observatoire de la compétitivité of the Ministry of the Economy of the Grand Duchy of Luxembourg. Ministère de l’Économie Observatoire de la compétitivité 19-21 Boulevard Royal L-2449 Luxembourg [email protected] November 2018 ISBN : 978-2-919770-25-0 This publication can be downloaded from https://odc.gouvernement.lu © Ministère de l’Économie, Luxembourg 2018 Competitiveness Report The following persons contributed to this publication: Serge ALLEGREZZA Ministry of the Economy/STATEC Martine HILDGEN Max JENTGEN Laurent PUTZ Giulia SPALLETTI Pierre THIELEN Ministry of the Economy Chiara PERONI STATEC and the STATEC Research ASBL team 3 2018 Competitiveness Report Summary Chapter 2 The discussion on territorial competitiveness is regularly revived at the time of publication of benchmarks and international rankings. The most closely monitored annual reports include those issued by the World Economic Forum, the International Institute for Management Development (IMD), the Heritage Foundation and the European Commission. A strong correlation may be observed between these four international rankings and the national system of indicators among the Member States of the European Union (see Chapter 3). Apart from these major benchmarks released annually, a multitude of others are also published regularly or occasionally. For the large majority of rankings selected as examples in the present 2018 Report, Luxembourg ranks among the Top 10 countries in the EU. Although the final ranking often constitutes the most widely publicised element, these analyses tell a more complex story which belies the simplicity of the ranking. We must not lose sight of the limitations of such an exercise, such as the relativity of the rankings, the quality of the sources, the ‘one size fits all’ approach, etc. Despite the numerous reservations one may have in the face of territorial benchmarking, these reports deserve to be monitored, because they represent powerful communication tools. Chapter 3 Chapter 3 is dedicated to the national competitiveness scoreboard, which constitutes a central component of competitiveness analysis. Indeed, in 2003, the Tripartite Coordinating Committee of Luxembourg recognised the need for a table of indicators to take account of the national specificities of the country, so as to gain a better understanding of the competitiveness of the country, which is not possible through the simple use of international benchmarks. This scoreboard, which was drawn up by Prof. Fontagné at that time, was revised by the Economic and Social Council in 2016. The present Report contains the first annual update of this new national system of competitiveness indicators. The updated results show that the Luxembourgish performance is usually mixed in the three dimensions. More specifically, the result for the Economy dimension reveals that a slight deterioration occurred between 2016 and 2017. Nevertheless, the analysis of the Luxembourgish performance in the Social and Environmental dimensions indicates a slight improvement or stable situation compared to the 2016 results. After a detailed analysis of the indicators on the scoreboard, the ODC has calculated its traditional composite indicator based on 68 indicators. In the general ranking, Luxembourg scores in the group of high-performance countries. In the ranking by dimension, Luxembourg positions itself among the high- performance countries for the Economy and Environment dimensions, while it is placed among the top performers in the Social dimension. While Luxembourg ranks rather highly compared to the other countries of the EU in 2017, it is equally important to analyse the variations from 2016 to 2017 to determine the performance trend. These analyses show that some changes are less favourable. 4 2018 Competitiveness Report Chapter 4 The Europe 2020 strategy constitutes a central element of the EU response to the economic crisis, now a decade old. Overcoming the crisis was considered a shift towards a social, greener and more intelligent market economy. Five broad objectives were confirmed on the level of the European Union with regards to promoting employment, improving the conditions for innovation and R&D, fulfilling the objectives relating to climate change and energy issues while improving levels of education and encouraging social inclusion. Each Member State later fixed its own national targets. For some of the targets established by Luxembourg (2010), the indicators have evolved in the right direction, while for others, the situation is less favourable. In early 2018, the European Commission considered that Luxembourg was on the right track in the realm of renewables and energy efficiency, but that it would fail to meet its target for greenhouse gas emissions. The Commission has also considered that little progress had been made in terms of R&D, poverty risk reduction and employment rates. The years preceding the crisis were also characterised by macroeconomic developments creating imbalances between Member States of the EU. The Commission therefore developed a macroeconomic imbalance procedure. The Commission publishes an annual scoreboard analysing each Member State in relation to certain alert thresholds. Since 2015, the procedure has consisted of 14 main indicators. In the most recent edition (2017), the Commission noted that Luxembourg faced no imbalances, although the country did exceed certain thresholds. In the present Report, data were updated in July 2018. We may note that Luxembourg exceeded two thresholds: the consolidated private sector debt and the variation in the activity rate. The private debt indicator for Luxembourg must be interpreted with care, since most of the debt is contracted by non-financial companies. However, many businesses choose to be financed through Luxembourg not because of any direct need, but for the benefit of other associated entities located abroad (e.g. intra-group loans). The Commission considers that the reason the country surpasses the threshold so obviously is therefore related to the structure of the country, and thus constitutes no risk at this stage. 5 2018 Competitiveness Report Chapter 5 With a view to reducing Luxembourg’s pronounced dependence on the financial sector (26.5% of GDP), the Government actively promotes the development of new priority sectors according to a strategy of sectoral multi-specialisation: ICT, logistics, health sciences and technologies, eco-technologies and space technologies. Based on calculations derived from STATEC and the Trade and Companies Register (RCS) data, and bearing in mind the major methodological limitations of such an exercise, private business undertakings in these sectors represented 9.6% of the gross value added of the country in 2016, or nearly 31,000 jobs in 3,047 businesses. By far the greatest share in terms of value added (6.8%) and jobs (4.1%) was attributed to ICT, 1.7% and 0.2% of which were respectively created by the space technologies sector, and 2.4% and 3.2% by logistics. Health sciences and technologies have grown strongly, mainly where public research is concerned, while eco-technology businesses remain very limited in Luxembourg, despite the fact that the number of eco- technology user businesses has been constantly on the increase for several years. Overall, we have been seeing a positive trend, in absolute terms, in the performance of the five new priority sectors for some years now. Chapter 6 From the late 19th century on, Luxembourg was dominated by the steel industry, which still represented 30% of its economy in the 1970s. This was followed by a dramatic expansion in financial activities, representing approximately 25% of the economy today. This boom occurred at practically the same time as the decline in the steel industry. Luxembourg thus made the transition from one monolithic structure to another. Since pronounced dependence on a single activity sector is always hazardous, we need to follow Luxembourg’s level of economic diversification. Based on a consolidation of the activities into 45 branches, the economic diversification of Luxembourg in terms of value added is calculated with the help of a concentration index for the last two decades. Compared with other countries, the economy of Luxembourg is poorly diversified. While diversification was already relatively weak at the start of the period under observation, it dropped considerably by 2008, but rose slightly starting in 2009. The domination of the financial sector partly explains the situation, but the analysis reveals that the important weight of this sector cannot be the only explanation. In fact, diversification is also dropping for the rest of the economy. Two tentative explanations are offered. First, the small size of the country implies a limitation of the factors of production, resulting in