Despite the shaky underpinnings and dire economic climate, the U.S. still ranks ahead of the other nations in competitiveness, though economists see thorny challenges ahead.  On the plus side, the U.S. still brings a lot in the area of production potential, well-functioning labor markets, sophisticated businesses, academic leadership and technological innovation.  

While these are sustainable virtues, the U.S. has its work cut out to stay on top as other countries take steps to improve their competitiveness (see Fareed Zakaria’s seminal The Post American World).  Globalization is leading to the “Rise of the Rest”. This pattern has been evident to anyone involved in business dealings across markets over the last decade.   

The report had few surprises. A notable exception is that the UK slipped (from 9th last year to 12th) due to its heavy reliance on a flagging financial services sector. 

Singapore, the Scandinavian nations and Switzerland have been perennial leaders for several years. And it isn’t surprising that the Gulf nations are on the rise due to worldwide demand for hydrocarbons coupled with concerted economic reforms.

Fiinally, some sub-Saharan nations are making headway though, as a region, it still lags behind.  These economies have had 5-6% annual growth rates and relatively low inflation in recent years.  But their infrastrusctures are fragile and they may be hit hard by a global slowdown.    

The WEF report is a lagging indicator of the strengths and weaknesses of global economies.  For example, it doesn’t take into account the prospects of a global slowdown which reduces the demand for resources. 

The take away is that governments play a substantial role in shaping a nation’s long-term capacity to compete in an increasingly global and crowded world.  Good governance rules.

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Competitiveness will be further reinforced by collaboration-enabling tools including social media. Meanwhile, a critical mass of worldwide governments is creating conditions for even greater competition and openness which will drive even more cross-border collaboration.

History has shown that some markets will lag while others quicken their pace. It’s critical to understand how factors “on the ground” affect globalization.

The Oxford Handbook of Business History provides a context for understanding how flattening may unfold. The authors offer comprehensive, cross-disciplinary look at business history which they organize into four parts: Approaches and Debates; Forms of Business Organization; Functions of Enterprise; and Enterprise and Society. For those who want a a context for what’s next, it’s a companion resource to Michael Porter’s The Competitive Advantage of Nations and Ted Levitt’s work on global marketing.

Want more on this subject?  Check out the World Economic Forum’s Global Competitiveness Report (’07-’08).

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The other carriers are reeling too. The industry is acting swiftly to remove capacity – cutting routes and frequencies – in anticipation of reduced traffic in the coming months. And the U.S., industry isn’t alone.

Europe’s biggest carrier, Air France-KLM, warned of a profound “reshaping” of the global industry amid record fuel prices.  The European carriers aren’t nearly as exposed as their U.S. counterparts, but they’re certainly feeling the pain.

The International Herald Tribune notes, “With its bleak outlook for the airline industry, Air France-KLM joined American Airlines, the world’s largest carrier, which said Wednesday that it was adding fees, cutting hundreds of flights in the United States, and eliminating thousands of jobs to cope with the crisis.”

Asian carriers are reeling, too. Australian carrier Qantas hiked its fares for the second time in a month while Japan Airlines said it would increase its fuel surcharge along with its competitor, All Nippon.

Among the Middle Eastern carriers, Emirates looks to be in the best shape due to its healthy cash position. In fact, this may be their opportunity to take advantage of the worldwide economic downturn to fortify its position as a global player.

As other carriers cut back, Emirates can accelerate its plan to connect European and Asian traffic through growing Dubai hub. But this begs a question about its hungry rivals, Etihad and Qatar Airways: Can the region sustain three major carriers if there is a worldwide economic downturn?

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The forecast for airlines is gloomy and getting darker by the day. Network carriers in the U.S. are facing high costs for aircraft ownership, fuel, labor and maintenance. With rising fixed costs, no pricing power and negligible profit margins, reducing capacity to relieve pricing pressure seems to be mission imperative.  But network carriers are reluctant to reduce their inventories much further.

Due to their low credit ratings, airlines can’t borrow money at reasonable rates to invest in more fuel efficient planes and more efficient facilities.

All this means that the industry will have to consolidate – out of sheer necessity – despite the thorny challenges of integrating large, people-intensive organizations and fragmented legacy systems.

Can consolidation fix the ailing economics of the airline industry?

It’s too early to tell, but it probably won’t be enough.  In the end, new and innovative airline business models are needed to solve the industry’s deep, structural problems.

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First off, the term ‘emerging markets’ was coined in the ’80s to describe rapidly growing economies with low-to-middle per capita income. They comprise over 80% of the world’s population, representing about 20% of the world’s economies.

Countries that fall under this umbrella are incredibly diverse ranging in size from (Singapore) to massive (China and India). They’re growing at varying speeds—merely “quick” (South Africa, Mexico and Chile) to “breakneck” (China, India, and the Gulf states).  And, their fortunes are linked to those of developed economies. In fact, many economists hold that when the United States sneezes, the EMEs catch pneumonia.

Or do they? Not so much, say advocates of the “decoupling,” the notion that emerging markets are broadening and deepening to the point where they no longer depend on the mature markets for their growth.  Decoupling accounts for emerging market stocks’ overperformance these last few years.  But is decoupling really happening?

Last May, Merrill Lynch economist David Rosenberg, told the NYT’s Daniel Gross, “I find it hard to believe that the rest of the world is going to be immune to a consumer sector that’s primarily responsible for pulling in nearly $2 trillion of the world’s output.”  His take was, “Before we can say there’s a decoupling, we have to wait for a sneeze—all we’ve had is a runny nose.”

The U.S. economy sneezed (sub-prime mortgage crisis) and coughed (credit crisis). The U.S. economy is sounding more bronchial by the day.

Mr. Rosenberg, and his cohorts may have been vindicated. In January EME stocks were rocked. And, they failed to get much relief from the medicine–$145 billion stimulus package. Hong Kong’s main index dropped 5.5% — its biggest loss since Sept. 11, 2001—while India’s fell by 7.4%. Even Brazilian stocks – darlings of the EME — dropped 6.6%.

There is some degree of decoupling. While certain markets—mature and developing—are susceptible to certain market forces other markets simply aren’t because today there are lots more variables at play.  The global economy is growing up rapidly and relationships among markets are becoming more complicated.

This increasing complexity is due to the fact that resources no longer flow exclusively from mature markets to emerging regions as they had in the past. For example, both the GCC’s and Africa’s mineral resources are being hungrily devoured by China to the benefit of all three economies. This is conferring a protective effect on them which wasn’t possible in prior cycles.  Flows of knowledge and capital are becoming omni-directional and multifaceted.

So?  It’s a classic “good news, bad news” story for mature economies, like the U.S. and EU. The good news: healthier, emerging markets can continue to buy products from mature economies like U.S. and Europe, hastening their recovery.  But the bad news: the price of oil will likely remain higher, longer — despite the reduced demand for oil among mature economies.

And, let’s consider the implications for Western product-service providers who see opportunities for delivering services to some of these EMEs.

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