Denmark ranks best for business

Denmark retains its top position which it reached for the first time in 2005. This reflects the country’s strength in all ten categories analysed by the Economist Intelligence Unit, but three attributes in particular make it stand out: the pro-business policies of successive governments; a host of structural reforms that have increased labour market flexibility; and a fiscal policy that has targeted surpluses without compromising the quality of public services.

How Denmark compares
Denmark scores well across the whole range of categories for business environment rankings, which assesses the comparative attractiveness of countries as investment locations.

In a comparison with its EU neighbours, Denmark ranks first (or joint first) for seven out of the ten categories including the political and institutional environment, macroeconomic stability, policy towards private enterprise, foreign investment policy, financing and infrastructure. The country benefits from a highly effective institutional framework and a generally stable political environment.

Danish labour market model wins praise
One of the most attractive aspects of the Danish business environment is the labour market—Denmark’s "flexicurity model" has become the yardstick for reforms in other European countries.

The system combines low non-wage labour costs and few restrictions on hiring and firing with high unemployment benefits and opportunities for workers to upgrade their skills. This provides both a high degree of flexibility for employers, as well as a high level of employment and income security. Although Denmark’s overall tax burden and marginal taxes are high, this also helps to maintain a well-educated workforce, communications infrastructure and a high standard of public services.

What’s next for Denmark
Further improvements to the business environment are expected as the Liberal-Conservative coalition drive to modernise key public services, including improved access to child day-care.

Also a "globalisation fund" has been established to prepare Danish workers and businesses for greater global competition through higher spending on education, and research and development.

A "tax commission" will also meet during 2008 to propose a more comprehensive reform of the tax system. Here, the ruling coalition could have its work cut out to persuade its main parliamentary support partner, the populist Danish People’s Party, of the need to reduce high marginal tax rates, which will be imperative if Denmark is to boost labour supply.

Dwindling labour supply
If Denmark is to hold onto its number one ranking, it will need to ensure an effective response to decline of the working-age population. A serious shortage of labour supply is a major risk. Denmark’s population is growing very slowly, and an already high level of labour participation and a tendency for early retirement mean that the labour supply will be squeezed in the next decade.

Strong economic growth in recent years has delivered a record low unemployment rate (2 percent in February 2008). It may be necessary to reform the early retirement scheme, as this continues to lure people out of the jobs market when many businesses are facing difficulties recruiting staff.

6 May 2008