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Denmark will be the best place in the world to conduct business over the next five years, according to theEconomist Intelligence Unit's latest business environment rankings. Denmark retains its top ranking during 2008-12, having reached this position 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.

Denmark scores well across the whole range of categories of the business environment rankings (ten in total), 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 in the forecast period of 2008-12, including the political and institutional environment, macroeconomic stability, policy towards private enterprise, foreign investment policy, financing and infrastructure.

The EIU says that the country benefits from a highly effective institutional framework and a generally stable political environment. The ruling minority centre-right coalition, which was re-elected for a third term in November 2007, will have to work a little harder to build a stable parliament majority than it has since 2001, but Danes are well accustomed to consensus-oriented politics.

Further improvements to the business environment are expected during the coming years. The Liberal-Conservative coalition has embarked upon a drive to modernise key public services, including improved access to child day-care. Firms also stand to gain from enhancements to competition policy and a further reduction in red tape. 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. Following the reduction in the corporate tax rate in 2007, income tax cuts will be introduced in 2008-09. 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.

The EIU says that if Denmark is to hold onto its number one rank in the long term, it will need to ensure an effective response to the projected 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 (of 2% in February 2008). It will become increasingly difficult to move the remaining 55,400 unemployed off benefits and into jobs. It may be necessary to reform the early retirement scheme, as this continues to lure people out of the jobs market at a time when many businesses are facing difficulties recruiting staff. The tight labour market is already fuelling high wage growth. We expect economic conditions to slightly deteriorate during the early part of the forecast period, as economic growth is expected to slow. This should help ease tensions in the labour market, as demand for labour will be more sluggish. The government will need to ensure that it does not add to the risks of wage-price spiral by running an excessively loose fiscal policy. Otherwise, a more prolonged period of adjustment with higher unemployment would be necessary to restore Denmark's external competitiveness.

The Economist Intelligence Unit's business rankings model measures the quality and attractiveness of the business environment in the 82 countries covered by Country Forecasts using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows the Economist Intelligence Unit to use the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis. The business rankings model examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure. Each category contains a number of indicators which are assessed by the Economist Intelligence Unit for the last five years and the next five years.