Ready, Set, Compete! Assessing Luxembourg’s place in the global race for competitiveness

In the fast-paced arena of the global economy, countries compete in a never-ending race for prosperity and influence, with each country striving to outpace others. The prize? Nothing less than economic supremacy and growth to outshine all others.

As Luxembourg is traditionally not considered as a powerhouse when it comes to winning comparisons (except maybe for spoken languages per capita), you might think that it doesn’t stand a chance against big global players such as the US, China, Japan, or Germany, to only name a few. 

After years of navigating the polycrisis, and with new global challenges on the horizon, one can’t wonder asking: Is Luxembourg still competing in the race for economic supremacy? This question raises two assumptions: First, that Luxembourg was once a noteworthy competitor in the race, and second, Luxembourg declined—or potentially dropped out of— the race. 

The latter assumption seems to be correct: According to the Consensus Economique IDEA 2024, more than half of 119 economic decision-makers, politicians, social partners and economists in Luxembourg agreed that the country’s economic competitiveness deteriorated over the past 10 years.

But why does this seem to be the sentiment? Can we identify the reasons for the decline? And more importantly, what should Luxembourg’s training plan be to get back on track?  

In this blog, to answer these particular questions, we bring to you the insights shared during the 17th Journée de l’Economie, which took place on 26 March 2024 at the Chamber of Commerce, Luxembourg.

First, a little warm up 

Let’s start with some key definitions. Competitiveness, as defined by Robert Z. Lawrence from Harvard University, in an economical context, is a country’s ability to sell its products in international markets while maintaining or improving its living standards. 

This not only involves the balance of exports and imports, but also the quality of life that these economic activities support and enhance.The concept goes beyond mere economic metrics to include how well a nation uses its resources, innovates, and adapts to changing global dynamics, challenging the mainstream assumption that competitivity is merely about producing high-value goods and services while optimising costs. 

So, you might ask, “What is the link between a country’s competitiveness and its population’s living standards?” Well, let’s use a counter example: Libya under Muammar Gaddafi, due to its abundance of oil, was considered an extremely wealthy country. But since the population’s living standards remained low during Gaddafi’s entire regime, the country didn’t experience any economic growth and development that was sustainable. 

Hence, sustainable economic growth and development and living standards go hand-in-hand. Raising living standards is thus not only an indicator, but also an objective and requirement of competitiveness. 

According to Michele Cincera, Professor of Economics at the Solvay Brussels School of Economics and Management, other factors contribute to a country’s competitiveness, such as its location, infrastructure and connectivity, business dynamism, market size, government policies, technological readiness and, last but not least, productivity.

Indeed, productivity underpins a nation’s ability to compete effectively in the global marketplace as it enables countries to produce more with the same or fewer resources. As highlighted during the Journée de l’Economie, Luxembourg faces challenges in maintaining productivity growth, despite its past favourable economic situation. 

A competitive economy is one whose sustained rate of productivity is able to drive growth and, consequently, income and welfare. The decline in growth and the flattening of Luxembourg’s productivity levels, as noted in recent years, signal a pressing need for action.

“Competition is a dangerous obsession” – Paul Krugman

As highlighted by Lionel Fontagné, Professor of Economics at the University of Paris I Panthéon-Sorbonne, focusing excessively on competitiveness can lead to negative outcomes.

Although we tend to believe that competing is equal to wanting to win, competitiveness isn’t a zero-sum game: The success of one country doesn’t necessarily mean the loss of another. Rather, as we mentioned, competitiveness under certain conditions can benefit all participants through increased productivity, innovation, and economic growth.

However, when countries become overly fixated on improving their competitiveness rankings and eliminate their competitors, they may adopt policies that prioritise short-term gains over long-term sustainability. This could lead to actions such as suppressing wages, deregulating industries, or engaging in unfair trade practices to gain a competitive advantage. 

Furthermore, pursuing competitiveness may undermine principles of fairness and equity. Without those principles, competitors drop out of the race. It might sound simple, but without competitors, there is no competition. Paradoxically, while we thrive to surpass our competitors, we still don’t want them to fall behind because the benefits of competition would diminish without their active participation.

There is no competition on a dead planet 

This implies the need for a fair playing field where all participants operate under the same rules and have (somewhat) equal opportunities. In this regard, Lionel Fontagné brings up an exemplary, yet perilous dilemma: Competitiveness in energy transition.

The shift towards renewable energy sources and sustainable practices is essential for mitigating climate change and ensuring the survival of our planet and its ecosystems. So far so good. But can we grow our economies while being fair and green? 

This seems rather unlikely, especially as every economic activity is creating carbon dioxide (CO2) and the decoupling of economic growth and greenhouse gas emissions has never been observed statistically on a global scale. 

As countries work towards reducing their carbon emissions and transition to renewable energy sources, disparities in environmental policies and regulations create uneven playing fields, ultimately undermining their good intentions.

This becomes clear if you examine the differences between the  European Union (EU) and the US in their regulatory frameworks, financial incentives, and market structures. While the EU promotes renewable energy deployment through subsidies, feed-in tariffs, and carbon pricing mechanisms, the US relies more heavily on market-based incentives and tax credits to stimulate investment in clean energy. 

Indeed, the EU is much more selective when it comes to granting subsidies and loans for green projects than the US, where the process is less restrictive. This gives the US a competitive advantage over the EU, where, although the taxpayer’s money is used better, the process takes longer, creating more friction.

These divergent approaches can create disparities in production costs, market access, and technological innovation, influencing the competitive landscape for businesses on both sides of the Atlantic. 

Unfortunately, a potential solution that seems simple—that is, harmonising the cost of CO2 per tonne worldwide—isn’t the solution at all. First off, there’s no organisation or institution to implement and control this price uniformity. And even if there was, what would be the right way to price carbon?

Besides, different countries have different-sized markets and investment possibilities. Also, there is the historical responsibility factor. Take India, for instance, where coal power is still widely used as a standard energy source due to a lack of economic resources and infrastructural constraints. Therefore, seeking to harmonise costs wouldn’t bridge the gap in ambitions, means, and costs, which are so divergent around the world.

The X factor of competitiveness

While there are various strategies to gain an (unfair) advantage against one’s competitors, fair and equitable competition has one true driver: Innovation. As an X factor, innovation can unexpectedly shift the outcome in favour of a company or country.

But, despite the immense potential of Research and Development (R&D) to drive progress, Luxembourg’s investment in this crucial area remains low, accounting for less than 1% of its Gross domestic product (GDP) and showing a declining trend over time, according to Michele Cincera and the Global Innovation Index 2023. 

In fact, when it comes to innovation performance, Luxembourg ranks only 21 out of 132 countries. Its ranking is adversely affected by relatively low scores in market sophistication as well as knowledge and technology outputs. 

This low level of R&D investment is attributed to the predominant focus of Luxembourg’s economic structure on the financial sector, which historically hasn’t prioritised R&D initiatives to the same extent as other industries such as biotechnology, where it plays a central role in driving advancements. 

Hence, promoting R&D activities across all sectors of the economy is crucial. Even in sectors like finance, it can lead to innovation, efficiency improvements, and ultimately contribute to overall economic growth.

As mentioned by Christophe Timmermanns from Solarcleano, innovation lies in developing projects and technologies, but also in the business model. In his opinion, as a founder of a startup, Luxembourg is indeed a supportive country in that regard. Given its small size, the country enables a strongly connected innovation ecosystem, making it sometimes easier for startups to find the right support. For example, it currently hosts 15 incubators, accelerators and innovation hubs to support the kickstart of startups.

Nonetheless, there is a need for more governmental support in the form of a roadmap for innovation that aligns with a long-, medium- and short-term strategy and a more proactive and efficient regulatory procedure, even more so as “regulation and innovation don’t have the same speed,” as Emilie Allaert from LëtzBlock stated.

Place your bets wisely

Now that we have discussed our training plan comes the question you all want to know the answer to: Is Luxembourg still in the race?

Well, the answer for us at PwC is quite simple: yes, it is. 

After years of polycrises that left the world and the playing rules in a state like never before, every racer needs to readjust to this new reality. We are fairly certain that Luxembourg will stay in this race. But that is, of course, if it continues to take one step after another.

This means the Grand Duchy needs to address its weak spots, such as the high cost of labour, the lack of affordable housing, and the above-mentioned remarkably low investment level in R&D. 

At the same time, Luxembourg should keep using its assets: A triple A rating, multilingualism and culturalism, a stable regulatory framework, political stability, a high e-governance maturity score and established data centres. Furthermore, in the light of its geopolitical situation and the energy transition, it’s imperative for Luxembourg to ensure and advocate for the playing rules to be respected, within the EU and beyond. 

Fortunately, the newly designated Luxembourg Minister of Economics, Lex Delles, announced at the Journée de l’Economie that the Ministry of Economy will prioritise competitiveness on its agenda. 

The Ministry has set out an ambitious list of objectives, including: Setting the right financial incentives, streamlining administrative procedures to attract a qualified workforce, investing in safe and sustainable modern infrastructure, supporting key technologies like artificial intelligence and quantum computing, ensuring energy security through exploring more diverse options such as hydrogen, and fostering the development of talent hubs to retain skilled individuals.

To finish this blog, we should all be reminded that none of us are sole spectators of the race. As Lex Delles stated: “Nothing is easier than criticising, it’s always better to act.” And indeed, all of us are in the relay, passing the baton to each other, and contributing to Luxembourg’s growth and competitiveness.

What we think