The Drivers of Competitiveness for the Economy of Austria - Case Study Example

Economy of Austria Introduction Austria was condensed to a small republic after its defeat in World War-I that was the center of power for the large Austro-Hungarian Empire. Austria's status remained unclear for a decade after occupation by Germany in 1938 and successive occupation by the victorious Allies in 1945. In 1955, a State Treaty was signed for the end of the occupation and recognition of Austria's independence. Austria forbade its emergence along with joining Germany. A constitutional law was declared same year which proved the country's "perpetual neutrality" as a provision for Soviet military withdrawal. In 1995, the Soviet Union collapsed and Austria entered into the European Union in 1995 that have changed the meaning of this neutrality. In 1999,as a prosperous and democratic country, Austria entered the European Union Economic and Monetary Union. Geographical location: Geographical location of a country plays a very important role in carrying out its trade and business activities. That’s why the geographical location of Austria is described here briefly in order to understand the role of its geographical location in its economy. The total area of Austria is 83,870 square kilometer. The total land is 82,444 square kilometer and water occupies 1,426 square kilometer. The land boundaries of a country also help to carryout trade with its neighbouring countries. The total area that defines its boundary is 2,562 kilometers. Border countries are Czech Republic with 362 kilometers boundary, Germany with 784 kilometers, Hungary with 366 kilometers, Italy with 430 kilometers, Liechtenstein with 35 kilometers, Slovakia with 91 kilometers, Slovenia with 330 km, and Switzerland with164 kilometers. The climate of the country is temperate, cloudy; cold winters with regular rain and some snow in lowlands and mountains, and moderate summers with intermittent showers. The Natural resources of the country include oil, coal, lignite, timber, iron ore, copper, zinc, antimony, magnesite, tungsten, graphite, salt, and hydropower. The use of land is arable land is 16.59%, permanent crops are 0.85% and others is 82.56%. Total irrigated land is 40 sq km. Economy: Austria has a highly sensitive social market economy with an elevated standard of living. Austria has well-developed industry, banking, transportation, services, and commercial facilities. Most commercial and industrial ventures in Austria are relatively small on an international scale. Starting of new business plays an important role in maintaining as well as creating a good and integrated market economy. Beide this, it looks appropriate to examine whether start-up success factors also differ in this context as the business environment differs in established and emerging market economies. Austria choosed for an exchange rate hook at a time in 1974 when the economic optimum currency area (OCA) fundamentals were not yet met. Between 1979 and 1981, it needed gratitude of the schilling relative to the D Mark to signal a hard decree and to earn trustworthiness. This hard currency option triggered off adjustment processes i.e., real wage flexibility, which ultimately made Austria part of an optimum currency area with Germany. A model demonstrates that for a small economy such as Austria an exchange rate rule constitutes a good focal point by using the theory of time consistency. As can be shown for Austria, a successful fixed exchange rate rule in the face of asymmetric shocks and restricted factor mobility requires a relatively high degree of real wage flexibility. Only a trustworthy long-term policy enables a country to fulfill the OCA-criteria. At least between smaller countries and an anchor country, therefore Austria may be viewed as an example for a fixed exchange rate system, even if an OCA criterion initially is not being met. (Defourny, Campos, 1992). According to 2008 assessment, Austria's economy is seventy percent free, which makes it the world's 30th independent and free economy. Austria is ranked sixteenth independent among the forty-one countries in the European region, putting it glowing above the regional average. Austria has world-class property security and clean government. Its excise is homogeneous at a low rate, and inflation is relatively stable for the euro currency, as a member of the European Union. In Austria, starting a business takes a comparatively short time. Foreign investors are not subject to principally strict requirements. Austria maintains very high delicate income tax rates to support a significant welfare state. Its size of government score is some 40-percentage points, which is worse than the average. Even though labor laws remain rigid, commercial regulations have been reduced slightly. Like everywhere else in the EU, hiring and firing employees is difficult, and labor market stiffness hurts overall competitiveness. Austria's government has give up control of formerly nationalized oil, gas, steel, and engineering companies and has deregulated telecommunications and electricity over the past ten years. People's Party Chancellor Wolfgang Schüssel accelerated market reform and extensively limited government intervention in the economy from 2000–2007. In May 2004, a major tax reform simplifying both wage and income taxes was performed. Corporate tax rates were reduced by nearly three to twenty five percent, giving Austria one of Western Europe's lowest corporate rates in 2005. Austria's primary trading partners are other EU member states, which account for more than eighty percent of imports and exports. Business Freedom in Austria is 80.6%. The general freedom to start, function, and shut a business is relatively well protected by Austria's national regulatory environment. An average of only twenty-eight days are taken to start a business takes as compared to the world average of forty-three days. Obtaining a business license involves less than the global average of nineteen procedures and closing a business is straightforward. The government has moved to rationalize its multifaceted and time-consuming regulatory environment. Trade Freedom in Austria is 86%. Austrian trade policy is the same as that of other members of the European Union. The common EU subjective average tariff rate was two percent in 2005. Non-tariff obstructions that are reflected in EU and Austrian policy include import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, agricultural and manufacturing subsidies, and inconsistent customs administration across EU member countries. Accordingly, an additional ten percentage points is subtracted from Austrian trade freedom score. Fiscal Freedom in Austria is 51.2%. Austria has a very high income tax rate and a low business tax rate. The peak income tax rate is fifty percent, and the peak business tax rate is twenty-five percent. Other taxes include an advertising tax, and a tax on insurance contracts and a value-added tax (VAT). Overall tax revenue in the most recent year, as a percentage of GDP remained very high i.e. 41.9 percent. (Ferdinand, Drucker, 1992) Freedom from Government in Austria is 25.3%. Total government expenditures are very high including consumption and transfer payments. Government spending was equal to 49.9 percent of GDP in 2004. With a limited deficit, Austrian government finances are better than those countries in some other euro zone economies. In Austria, monetary Freedom is 81.4%. As, Austria is a member of the euro zone. So, from 2004 to 2006, its weighted average annual rate of inflation was 1.8 percent. Relatively stable prices explain most of the monetary freedom score. As a participant in the European Union Common agricultural Policy, the government has given subsidies to agricultural production, distorting the prices of agricultural products. Government has also subsidized rail transportation and has operated some state-owned firms, utilities, and services. An additional ten percentage points is deducted from Austrian monetary freedom score to account for these policies. Investment Freedom in Austria is seventy percent. On foreign investment, there are no formal spectral or geographic restrictions. The law grants domestic and foreign capital equal treatment. Foreign investment is forbidden in arms, explosives, and industries in which the state has a monopoly like casinos, printing of banknotes, and minting of coins. The state partially privatized the postal service, following its earlier partial liberalization of telecommunications in 2006. There are restrictions for non-residents in the auditing and legal professions, transportation, and electric power generation. There are strict environmental restrictions on investment. There are no controls or requirements on current transfers, access to foreign exchange, or taking out of profits. Local authorities approve real estate transactions. Financial Freedom is up to seventy percent. There is little intervention in Austria's financial system. An independent supervisory body looks over the retirement funds, insurance, securities, and banking where oversight is also performed by the central bank. Banks offer the full range of services, and the wearing down of hurdles has led to consolidation. Foreign banks operate freely and markets set interest rates. Tax encouragements have been adopted to promote equality of investment through pension funds. Financial regulations are transparent and consistent according to international norms. The stock exchange has performed consistently better than those of other industrialized countries in recent years, which was privatized in 1999 and modest in size. Additional wealth is willingly available from elsewhere in Europe. Property Rights in Austria are about ninety percent. Private property is very secure here in Austria. The protection of private property and intellectual property is well established and effective, and contractual agreements are secure. The judiciary is independent here and there is a long-standing tradition of respect for the rule of law. Freedom from Corruption is eighty six percent. Corruption is seen at minimum level. Austria is ranked eleventh out of one hundred and sixty three countries from Transparency International's Corruption Perceptions Index for 2006. Criminal penalties are given to any person who bribes either an Austrian or foreign government official. In Austria, labor Freedom is 59.2%. Operation of the labor market is under inflexible employment regulations that could raise obstacles in employment and productivity growth. Dismissing a redundant employee is costly, and the non-salary cost of employing a worker is high. The cost of fringe benefits per employee still remains one of the highest in the whole European Union countries. Since 1 January 1995, Austria has been a member of the European Union. Austria has a well-developed market economy with a high standard of living. With exports of goods and services reaching over forty percent of GDP Austria's economy is closely integrated with other European Union member countries especially with Germany. Austria's entry into the European Union has drawn an incursion of foreign investors attracted by Austria's access to the single European market. (Laurentis, Todtling, 2007) The economy features state-of-the-art industrial and agricultural sectors. Forty seven percent of the land area being forested by timber, which is a key industry. Slow growth in Europe has held the economy to 0.7% growth in 2001, 1.4% in 2002, 0.8% in 2003, and 1.9% in 2004. Austria will need to emphasize knowledge-based sectors of the economy and will have to continue to deregulate the service sector, and encourage much greater contribution in the labor market by its aging population in order to meet increased competition from both EU and Central European countries, particularly the new EU members. Now lets look into some statistical figures of Austria in order, which makes its clear economy picture. GDP (purchasing power parity) of Austria is $322 billion according to 2007 estimate. Its GDP (official exchange rate) is $373.9 billion according to 2007 estimation. GDP - real growth rate is 3.1%, GDP per capital (PPP) is $39,300, GDP - composition by sector is: Agriculture = 1.6%, Industry=30.3%, services=68%. Austria’s Labor force is 3.566 million, labor force by occupation is: Agriculture=3%, Industry=27%, Services=70%. An estimated 150 000 Austrians are employed abroad and the foreign laborers in Austria number is 298 000. There is a strong labor movement in Austria. The Austrian Trade Union Federation (OGB) is comprised of constituent unions with a total membership of about 1.3 million i.e. about thirty-nine percent of the country's wage and salary earners. The OGB has always followed a temperate, consensus oriented wage policy. It is cooperating with industry, agriculture, and the government on a broad range of social and economic issues in order to get Austria's policy of social partnership. Like those of other west European mountainous countries, Austrian farms are small and fragmented, and production is relatively costly. Since Austria became a member of the European Union in 1995, the Austrian agricultural sector has been undergoing generous reforms under the European Union's common agricultural policy (CAP). The agricultural contribution to gross domestic product (GDP) has declined since 1950 to less than two percent, although Austrian farmers provide about eighty percent of domestic food requirements. Austria belongs to the richest countries in the EU and has achieved sustained economic growth. Austria's economy recovered again in 2004 and 2005 and grew 2.5% and 2.9%, driven by flourishing exports in response to strong world economic growth after a period of low growth of only around one percent annually during 2001-2003. Austrian real GDP grew 3.3% in 2006 and 3.4% in 2007 due to higher growth in Europe, particularly Central and Eastern Europe, and continued export growth. The burly economic growth helped in reducing Austria's unemployment rate to 4.4% in 2007. Although there are risk of downfall in Austrian’s economy, but there are predictions for the Austrian economy to grow 2.2%-2.3% in 2008 and 1.4%-1.9% in 2009. Unemployment rate in Austria is 4.4%, population below poverty line is 5.9%, household income or consumption by percentage share is lowest 10%: 3.3% highest 10%: 22.5% according to 2004 estimate. Distribution of family income Gini index is 26; inflation rate (consumer prices) is 2.2% according to 2007 estimate. Investment (gross fixed) is 20.6% of GDP, budget revenues are $177.5 billion, expenditures are $179.9 billion and Public debt is 59.1% of GDP according to 2007 estimation. (OECD, 2007) Trade with other European countries accounts for about seventy-three percent of Austrian imports and exports. Major element of Austrian economic activity is the expanding of trade and investment in the new European Union members of central and Eastern Europe that joined the EU in May 2004 and January 2007. Austrian companies have sizable investments in and continue to move labor-intensive, low-tech production to these countries. About one-half of Austria's foreign direct investment is concentrated in the countries of central, eastern, and southeastern Europe. For developing markets in central and Eastern Europe and the Balkan countries, Austria still has the potential to attract EU firms seeking convenient access. In 2007, total trade with the United States reached thirteen billion dollars. Imports from the United States are of five billion dollars, which makes Austria to share U.S. market of 3.3%. In 2007, Austrian exports to the United States were $7.9 billion, or 5.1% of total Austrian exports. Round about three hundred and fifty U.S. firms have made investments in Austria. Investment flows point towards the thing that U.S. foreign direct investment in Austria. This has reached a new record total of about $12.1 billion, which represents about ten percent of the total in Austria and moves the U.S. to the number two positions among foreign investors in Austria. Agricultural products of Austria include grains, potatoes, sugar beets, wine, fruit, dairy products, cattle, pigs, poultry; lumber. Industrial products include construction, machinery, vehicles and parts, food, metals, chemicals, lumber and wood processing, paper and paperboard, communications equipment, tourism. Industrial production growth rate is 5.7%; Electricity production is 61.02 billion kWh, Electricity consumption is 60.25 billion kWh, Electricity exported is 17.73 billion kWh, Electricity imports are 20.4 billion kWh, Oil production is 23,320 bbl/day, Oil consumption is 295,100 bbl/day, Oil – exports are 34,680 bbl/day, Oil imports are 157,500 bbl/day, Oil - proved reserves are 62 million bbl, Natural gas production is 1.57 billion cu m, Natural gas consumption is 9.217 billion cu m, Natural gas exports are 936.1 million cu m, Natural gas – imports are 9.063 billion cu m, Natural gas - proved reserves are 14.39 billion cu m according to 2007 estimation. According to an estimate made in 2007, Current account balance is $12.03 billion; Exports are $162.1 billion fob, Exports commodities are machinery and equipment, motor vehicles and parts, paper and paperboard, metal goods, chemicals, iron and steel, textiles, foodstuffs, Exports – partners are Germany 29.8%, Italy 8.8%, US 4.9%, Switzerland 4.3%, imports are $160.3 billion fob, Imports – commodities are machinery and equipment, motor vehicles, chemicals, metal goods, oil and oil products; foodstuffs and imports partners are Germany 45.5%, Italy 7.1%, Switzerland 5%, Netherlands 4.3%. According to an estimate made in 2006-2007, Economic aid donation ODA is, $1.498 billion, Reserves of foreign exchange and gold are $18.22 billion, Debt external is $752.5 billion, Stock of direct foreign investment at home is $222.9 billion, Stock of direct foreign investment abroad is $208.1 billion, Market value of publicly traded shares is $126.3 billion. The exchange rates are: euros per US dollar - 0.7345 (2007). The Austrian economy also take benefits greatly from well-built commercial relations, especially in the banking and insurance sectors, with central, eastern, and southeastern Europe. Its economy features a large service sector, a sound industrial sector, and a small, but highly developed agricultural sector. For further strengthening Austria's attractiveness as an investment location, the outgoing government has successfully pursued a comprehensive economic reform program, aimed at streamlining government and creating a more competitive business environment. However, in 2005-06, it has implemented effective pension reforms and lower taxes which has led to a small budget deficit in 2006 and 2007. Although the economy may slow in 2008 because of the strong euro, high oil prices, and problems in international financial markets but growth nevertheless reached 3.3% in both 2006 and 2007 which was boosted by strong exports. Austria will need to continue reformations, emphasizing knowledge-based sectors of the economy, and encouraging greater labor elasticity and greater labor contribution by its aging population in order to meet increased competition especially from new EU members and Central European countries. The new grand-coalition government of Austria has a wider agenda. In autumn 2006, parliamentary elections left the ruling center-right coalition, which had pushed ahead with reforms in a number of areas, without a majority. The Government has its priorities set more towards investment in growth enhancing measures while taking account of social concerns. Active labour market measures will continue to be financed at a high level, while public administration and health care are supposed to be areas with spending restraint and education, innovation, environment, social issues and infrastructure investment will receive more funds from the budget. In order to enhance prosperity, Austria must focus on further amplification of framework conditions. For helping out flexible entrepreneurs and a well-educated labour force to generate high incomes, Austria has established a top position among OECD economies through reforms. There are recommendations that aim at: 1. To make regulation in domestically oriented sectors such as services more encouraging to competition and innovation, while ensuring cost efficiency of the significant increases in spending for research and development. 2. To improve labour market participation and employment of various vulnerable groups, by reducing fiscal incentives for early retirement, providing better incentives to accept job vacancies or return to work and better education, such as older workers, low skilled, young migrants and women with small children, 3. To reap the full benefits of regional integration by moving faster to adjust regulation and infrastructure to the needs of an emerging transnational agglomeration around Vienna. 4. To strengthen the fiscal policy framework and to make the tax system more growth and employment friendly. All opportunities need to be detained in order to maintain a leading position. For a leading economy like Austria, the main principle should not be about whipping averages but rather maintaining its position among the best performing OECD countries. Austria’s relative position has regressed somewhat since mid 1990s, but later on, Austria was on a steady catching up trend with the top OECD economies. Both its labour productivity and labour utilization performance have since slowed down in relative terms. Austria’s traditional sources of strength continue to deliver although non-standard labour contracts raised various concerns. Austria’s traditional sources of strength that were instrumental in its earlier rapid catching-up have continued to deliver. The two most important of these are: 1. The medium-sized but globally driven ability of enterprises to use and further develop the most productive technologies 2. The ability of businesses and workers to agree on wage and employment conditions that preserve the economy’s competitiveness. Entry barriers contribute to weaker outcomes in competition-sheltered activities. As compared to exposed manufacturing firms, parts of the services sector are protected from competition, both at domestic as well as global level. Some key services have long remained under direct or indirect government control and under strict instruction or self-regulation in a competition-restricting manner. Limited competition has appeared to contribute to relatively low productivity of the service sector as compared with manufacturing or service sectors in some other countries. In Austria, labour market performance is good for core groups. The lower participation and employment rate of some segments of the labour force is the other source of relative weakness compared with the best performing OECD countries. Employment is much lower for older, contrasting with the high employment rates of the core labour force of prime age men and women, less skilled and non-native workers. Workers of immigrant origin have a relatively high unemployment rate while older workers have one of the lowest employment rates in the OECD area, as do unskilled workers with only compulsory education. Young workers between fifteen to twenty-four years of age have a relatively high employment rate, but their employment performance has weakened in the 2000s, whereas it has strengthened in benchmark countries. Labour force participation and employment rates are above international averages As far as the activity of women is concerned. But mothers of young children stay longer at home than in comparable countries, face weaker motivations for returning to work, and their human capital and pay levels are negatively pretentious. (Teichova, Matis, 2003) In 2006, strong investment and export demand has pushed GDP growth to 3.2% with GDP totaling US$321.9 billion. In 2006, inflation fell to an average 1.4% from 2.3% in 2005. With a labour force of 3.88 million, unemployment in 2006 totaled 4.8%. In light of these statistics, it is predicted that GDP growth is projected to slow to 3.1% to 2.6% during next two years. Mainly due to weakening labour demand and investment, although it is still expected to exceed average European Union GDP growth. Inflation rate is expected to remain below 2% due to euro appreciation and weak domestic price pressures. Unemployment is expected to fall as the new government pursues its policies to reduce unemployment by 25% over the next two to three years. As an European Union member, Austria mainly rely on its European neighbours for much of its importing needs, making Austria a more challenging market for foreign firms and exporters to penetrate. Austria's strategic location in Europe, at Eastern and Western European crossroads, and lack of arable land due to its mountainous landscape, has determined its long-established reliance upon foreign trade. Austria's principle agriculture food import sources are: Germany (42.8%), Italy (9.9%), Netherlands (8.4%), Hungary (4.4%) and France (4%). However, Austria will remain an excellent location for exporters looking to enter the Central and Eastern European markets. Opportunities for Austrian agriculture food exporters in the marketplace include products such as fish and seafood (salmon, lobster, etc.), organic products, regional and ethnic specialties (maple syrup, wine, honey, etc.), wild rice, frozen and ready-meals, and low-fat and light products. But overall, if we look at the economy of Austria, it is very impressive, progressive and provides incentives to competitive people. In future, as compared to other Western countries, it will provide much employment opportunities, trade and economic growth to competitive people. We can see the worth of labour and work in Austria, which is the key reason of the progression in Austrian economy. References: Defourny.J, Campos.JLM (1992), Economie sociale: entre économie capitaliste et économie publique = The third sector: cooperative, mutual and nonprofit organizations, De Boeck université, Ferdinand.P, Drucker.PF (1992), Managing in the Next Society, St. Martin's Press. Laurentis.PC, Todtling.F, Trippl.M (2007), Regional Knowledge Economies: Markets, Clusters and Innovation, Edward Elgar. Oecd (2007), OECD Economic Surveys: Austria - Volume 2007 Issue 15, Organisation for Economic Co-operation and Development, OECD Publishing. Teichova.A, Matis.H (2003), Nation, State, and the Economy in History, Cambridge University Press. Read More