Clear thinking muddied by competitiveness

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We would do better to stop talking about competitiveness. It seems only to get in the way of clear thinking.

Competitiveness is much in vogue. Last week saw the publication of not one, but two league tables of international competitiveness. Soon the government will release its own annual pronouncement on Britain’s competitiveness. The Labour Party has its own emphasis on the subject. And yet one of America’s leading trade economists, Paul Krugman, has recently argued that the term national competitiveness means nothing at all. Competitiveness is a characteristic of firms, not of countries.

The basic problem is that the word competitiveness is too vague to mean anything except what the person who uses it wants it to mean at the time. For some people, competitiveness is the economic analogue of military strength. There is a coming battle for commercial supremacy and our competitiveness is a measure of our readiness for the fray. This is the world which Sir James Goldsmith inhabits and it seems, at times, that Michael Heseltine lives there too. It is easy to see why this approach, which implies an economic requirement for strong leadership in times of peace akin to the military requirement for strong leadership in times of war, is popular with politicians and would-be politicians.

It is also a concept of competitiveness which Krugman is right to attack. The analogy between business and war is profoundly misleading, both for individual firms and for national economies. It is misleading because success in war depends on the destruction of one’s enemies – war is a process in which one side wins by destroying the other while international commerce is a process of mutual benefit. World trade is not – as Sir James Goldsmith asserts – a system in which foreigners try to trick us into giving them our money. It is a process in which we buy things abroad because we can benefit from the fact that they are cheaper there than elsewhere.

Since military success is based on the capacity to destroy, it is derived from the scale of resources you can deploy. Economic success does not. Economic success depends on successful differentiation, not on size. Six of the top ten countries in each of the two competing competitiveness leagues have less than ten million inhabitants: Switzerland and Norway demonstrate that you need not be big to be rich and Singapore and Hong Kong that you do not need to be big to grow rapidly. These martial misunderstandings lead to wholly inappropriate policies – the creation of national champions, the desire to create large and autarchic trade blocs, general protectionism and support for industries of supposed strategic importance.

The creators of these league tables seem to have something quite different in mind. For the IMD team, there is something mystical about competitiveness “World competitiveness can be seen as a series of layers, with one layer leading to another and more fundamental layer”. They tell us that it is becoming more volatile, with probability replacing the certainties of Newtonian physics. Yet after all this waffle their definition is quite precise: “competitiveness is the ability of a country to create added value and thus increase national wealth”.

The only problem with this definition is that the ability of a country to create added value and thus increase national wealth is already very well and carefully measured by official statisticians, and league tables of national income are published by many international bodies. These measurements can be improved in various ways – for example by measuring environmental value added – but it is unlikely that these would change the rankings very much, or the identities of the countries which usually come at the top – Switzerland, Norway, Germany.

Now although these countries are rich, they are by no means the fastest growing in the world. And what the other team claiming to measure competitiveness has looked at is not the level of national output but its rate of change. For the World Economic Forum, competitiveness is the ability of a country to achieve sustained high rates of growth (NOTE: rates of growth is underlined) in GDP per head. But this different definition faces the same problem. If competitiveness is the ability to achieve sustained economic growth, it would be much easier just to look at how successful countries are in achieving high rates of economic growth. And there are plenty of compilations of international economic statistics that do exactly that.

To find out what these teams really mean by competitiveness, we have to look at what they actually do rather than at what they say they do. Both the so-called indices of competitiveness are averages of a large variety of social and economic indicators. Some of these indicators are subjective, like the openness of a country’s culture to foreign influences (assumed, whatever British tabloid newspapers say, to be good). Some of them are objective, like education levels. Many of them, like the share of government in the economy (assumed bad) openness to international trade (assumed good), and respect for the rule of law (assumed good) are indicators of government policy. When it comes down to it, these indices of competitiveness are largely measures of whether the governments of the countries involved have adopted policies of which the authors of the survey approve.

There is nothing wrong with publishing indicators of that. But it is misleading rather than helpful to call it competitiveness. And it is not obvious why the opinions of the researchers of IMD or the World Economic Forum about what constitutes good government should be worth more than yours or mine. Not everyone would put Singapore and Hong Kong at the top of their lists.

We need more research on what it is that makes countries rich and what makes them grow rapidly – the kind of research which is undertaken by some other economists like Robert Barro. And we need to understand better what contributes to the creation and exploitation of national competitive advantages – and that in analysing national competitive advantages, as for the competitive advantages of firms, we need to focus on the factors that differentiate successful countries rather than the ones they have in common. But we would do better to stop talking about competitiveness. It seems only to get in the way of clear thinking.

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