The question of how countries compete

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The question, to which “The US, Finland and Singapore” is the answer, is “Which countries have policies of which the IMD and WEF most approve?” This week, John discusses national competitiveness surveys.

The television quiz Jeopardy! reverses the usual order of events. Contestants are given the answer and invited to guess the question. As when the host says “Malcolm Glazer” and the guest responds “The most important man in football today?” This way of thinking is often useful when confronted with economic or business data. The user should ask “What is the question to which this number is the answer?”

Last week the Swiss business school IMD published its annual rankings of national competitiveness. Ironically, there are two competing measures of competitiveness. Originally the IMD prepared an assessment for the World Economic Forum, but now each body produces its own. The rankings are broadly similar – the US, Finland and Singapore are highly rated in both – but there are also marked differences – IMD likes Canada but not the UK while WEF likes the UK but not Canada.

But before considering who is right, first ask “What is the question to which these numbers are the answer?” Performance measures such as gross domestic product and gross national income are well-established indicators of productivity and prosperity. International conventions allow careful comparisons of these variables between countries and over time. What do the IMD and WEF rankings tell us that conventional calculations of income, output and growth fail to record?

Interest in national competitiveness is an extension of interest in the competitiveness of companies. Competitive businesses are able to offer goods or services more attractive than those of their rivals through lower costs or better products.

But the analogy between individual businesses and national economies doesn’t quite hold. Companies that are not competitive disappear. Countries that are not competitive don’t. These nations still need to import, and their exchange rate falls until they become competitive again. Every country that trades internationally is competitive in some areas – the things it exports – and uncompetitive in others – those it imports. This principle of comparative advantage has been a foundation of economic analysis for 200 years.

The competitiveness of China is the most talked about phenomenon in the world economy today. But China’s competitiveness is in commoditised manufacture, not in aircraft or software. Perhaps because such competitiveness is the result of low labour costs rather than high productivity, China is not ranked highly by either WEF or IMD. But if competitiveness means success in international trade based on technical efficiency and product quality rather than low labour costs, Germany and Japan are highly competitive. The strength of these countries’ export industries in precision machinery means they run large trade surpluses despite strong exchange rates and high labour costs. Other German and Japanese industries are uncompetitive, but the principle of comparative advantage tells you it must be so. The more competitive you are in some industries, the less competitive in others. At this point, you will reach the same conclusion as most economists. The concept of national competitiveness is one that creates more confusion than insight.

Surveys of “competitiveness” do not measure competitive success, but how friendly the local environment is towards business – which is not necessarily the same as how successful that business is in world markets. So France and Germany, although rich countries, are reckoned not to be “competitive”; Hong Kong and Singapore do well in their rankings; and the US is rated very “competitive” despite the weak dollar. Even business friendliness is hard to measure. Italy, the least “competitive” of rich countries, has policies extremely supportive of the right kind of company. But as in Russia, which Italy just outranks, the government is selective about which businesses it supports.

And that leads to the response that should earn the prize in Jeopardy! The question to which “The US, Finland and Singapore” is the answer is “Which countries have policies of which the IMD or WEF most approve?” That is not the same question as “How successful is local business?” or “How productive is the domestic economy?” And it is misleading to describe these surveys as rankings of national or international competitiveness.

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