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Wednesday, 14. November 2018  


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Stress test for regions


In recent weeks, a new concept has emerged: stress-testing business for survival in a crisis. US banks have undergone this stress test. Next year, 30 large EU insurance companies will be submitted to it too. Economists at IMD (the Institute for Management Development in Lausanne, Switzerland) recently published the results of a similar stress test conducted in 57 countries. The three countries best equipped to survive the crisis are Denmark, Singapore and Qatar. Also worth recalling from the IMD’s work is both that the outcomes of stress tests vary considerably compared to tests measuring the relative competitiveness of individual countries and that comparatively smaller economies often seem to be better sized than larger ones to adjust in tough economic times and recover.

Parameters used by IMD to develop its stress test include:

  • Economic outlook: GDP growth, inflation, unemployment, trade balance and economic resilience;
  • Government: management of public finances, legal and administrative framework, adaptability of public policy, bureaucracy, government decisions;
  • Business: ethical policies, credibility, business values and entrepreneurship;
  • Society: political instability, social cohesion, flexibility and versatility, attitudes toward globalisation and economic and social reform requirements.
It is conceivable to apply an adjusted version of this stress test to regional economies. To do this, there is a need to reckon with at least four types of parameters:

a) Regional exposure to national economic trends. Some regions may be affected more than others by national GDP and unemployment trends – both positive and negative.

b) Specific regional business features, in other words the ability of regional businesses to survive the crisis and recover, i.e.:

  • Reliance on industries hit hardest by the crisis (automotive, construction, finance, convenience goods, business services, etc.).
  • Business fragility (activity, employment, investment, domino effect of bankruptcies in the industry);
  • Business exposure to the risk factors associated with the crisis: excessive debt, failure, propensity to invest in RTDI;
  • Business robustness (order books, ability to diversify industrially or geographically, interim jobs, difficulty in securing debt, rates, morale among business leaders, financial reserves, etc.).
c) Tailored regional/local authority responses to the challenges presented by the crisis (business support, gambling on the future when it comes to infrastructure, etc.).

d) Financial capacity of the region (its ability to secure its own funding in a context of budget deficit).

While the margin for manoeuvre of regional authorities is known to be fairly restricted, decisions made in the area of business support services are likely to make the difference with other regions. Worth recalling is that while business competitiveness is measured in terms of cost, talent, service, quality, reactivity, adaptability and innovation, this needs to be true of public authorities too.

 

 

 

 



 

 


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