Smaller countries with population of less than 30 million are better placed to face the economic slowdown and benefit quicker from any recovery, indicates a ‘stress test’ conducted by the international business school IMD to supplement its annual IMD World Competitiveness Yearbook 2009.

The stress test finding, favouring small countries, goes against generally prevalent economic thinking that large economies like China and India are better placed to face economic slowdown because of the diversified nature of the economy, in which some sectors witness robust demand to mitigate the impact of a demand slowdown in other sectors.

The IMD test ranks India 13th, with a score of 68.1 on 100, and China 18th, with 64.6 points, while Denmark topped the list.

The report identified general issues facing the world economy, too. For example, St?phane Garelli, director of the IMD World Competitiveness Centre, warned that a severe drop in prices could hit specific sectors like automobiles across the globe. He predicted a rise in cross-border mergers and acquisitions, as emerging powers, their sovereign funds and some companies moved in with free cash. Garelli warned some signs of recovery could be expected during the second half of 2009, but added stronger results were due only in early 2010.

The 100 top global companies had some $600 billion in cash and this money could be used to buy back shares or acquire industrial assets and companies, he added.

Garelli indicated that with some $6,000 billion in currency reserves, emerging powers would increase their weight in international organisations, while sovereign funds with around $3,000 billion would finance infrastructure projects, buy assets abroad and finance the development of local companies and brands.

Unemployment was a worry, with the International Labor Organization anticipating a 50-million increase in world unemployment figures, and Belgium, Ireland, Russia, Spain and South Africa would be among the worst-hit. Protectionism was a real danger as a result. To pay for massive government debt, tax havens would come under attack to prevent money from escaping higher taxation, Garelli added.

He warned of high inflation accompanying the recovery, driven by excess of money supply (especially dollars) and a rapid rise in commodity prices owing to demand from emerging nations. He predicted central banks would ignore inflation so as not to impede recovery and because inflation would reduce the value of debt.

Garelli also added that companies would manage inflation by moving from cash to more tangible assets. The future-looking test, assessing the preparedness of countries to face financial crisis and improve competitiveness, focussed on exposure, readiness and resilience.

Denmark revealed strong resilience in business and government and long-established social stability.  Other smaller countries with less than 30 million inhabitants from Northern Europe and Southeast Asia fared well as “smaller economies are often more fit to adapt and rebound in difficult times,” Garelli said.

He added: “A nother explanation is that several of these nations have already undergone quite severe financial and real estate crises in the not-so-distant past and may have been more cautious in their policies.” 

Depression, defined as 10 per cent fall in GDP or 3 years’ recession, threatened Iceland and the Baltic States, while deflation loomed over Britain, Japan and Spain.

Stimulus packages, collectively valued at $5,000 billion or the cumulative Budget deficits in 2009 and 2010, would see people in the industrialised world saving money and delaying purchases while emerging-economy citizens would purchase immediately.

As 60 per cent of the world currency holdings were in dollars, the currency would survive but weaken, owing to excess dollar supply and the decision of several nations to shift for currency reference or commodity sales from the dollar to currencies like the Euro but not the Pound or Yen.

National governments would gain in power, printing money, making laws and setting taxes, while multilateral agencies like IMF, World Bank and WTO would decline, he warned.

Between 18th and 30th positions in the report were exporting nations like Taiwan (21st), Brazil (22nd), Germany (24th), Japan (26th) and Korea (29th).

The UK was 34th, France 44th, Italy 47th, Spain 50th and Russia 51st.

“The stress test shows that smaller nations, which are export-oriented, resilient and with stable socio-political environments are better-equipped to benefit immediately from the recovery,” Garelli said.

“However, only the good performance of the very large exporters such as the US, Germany, China or Japan will send a credible message to the world that the worst is over ? a change that everybody will be able to believe in,” he added.

The stress test was based on prospect of the economy for 2009. Denmark scored 100 points. Among the countries which ranked above India were Qatar, Hong Kong, Australia, Malaysia, the Netherlands and New Zealand. Austria, Chile, Canada and Luxembourg featured between India and China.

IMD said in its parallel IMD World Competitiveness Yearbook 2009 that the most competitive country was USA, besides the toppers in its stress test.

The US, among the first to enter into recession, would lead the recovery, while the last to recover would be Germany, Japan and Switzerland, owing to “structural rigidities”.

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