Global Finance: Britain Is No. 1

London has officially dethroned New York as the world's top financial center, according to an index released this month by the Geneva-based World Economic Forum.

The WEF's 2009 Financial Development Index ranks 55 countries on the sophistication and stability of their financial systems and markets. The nations were evaluated according to more than 120 criteria, ranging from the favorableness of their institutional and business environments to the size of their equity and bond markets, and from their technology infrastructure and human capital to the ease of obtaining consumer and commercial loans.

Perhaps the biggest surprise in this year's study—the second release of an annual index launched in 2008—was that Britain rose to the No. 1 spot despite its economic troubles, up from No. 2 last year. Britain was buoyed by the relative strength of its financial markets, particularly in foreign exchange and derivatives, and by its world-beating insurance coverage.

The other headline news—though perhaps not as surprising—was that the U.S. fell from No. 1 in 2008 to No. 3 this year. While the country is still by far the world's wealthiest, financial instability and a noticeably weakened banking sector pulled down its scores. The No. 2-ranked country, Australia, jumped nine rungs in the rankings, thanks to its greater financial stability, low sovereign debt, and ready access to consumer credit.

Britain's elevation to No. 1 could be short-lived. The country continues to be weighed down by recession, while the U.S. reported a return to growth in gross domestic product during the third quarter of 2009. Britain's institutional environment also could weigh on its ranking next year: The government has been criticized in recent months for excessive intervention in the financial sector, and there is rising concern over increased regulation and higher tax rates, which could encourage London-based hedge funds and other financial intermediaries to move elsewhere.

Business Week October 2009

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The gdp Mirage

The third-quarter GDP figures, released on Oct. 29, showed the economy growing at a 3.5% annual pace, breaking a string of four consecutive negative quarters. The growth was driven mostly by a surge in the production of motor vehicles and other manufactured goods.

This number was greeted by many economists and journalists as confirmations that the recession is over. What's more, the rise in real GDP, combined with a sharp fall in employment in the third quarter, implies that productivity also soared during the period.

The trouble is that those GDP and productivity growth figures could be significantly overestimated—perhaps by one percentage point or even more.

That's because the official statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.

In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.

Another major trend that will affect intangible investment in the U.S.: outsourcing of R&D to China, India, and other countries. In effect, more and more of the global R&D dollar is being spent abroad, so imports of R&D are increasing. This shift in intangible investment is also not well tracked by the GDP statistics.

Business Week October 2009 Translate the text into Russian: № 7 1500 printed characters