The European Competitiveness Report 2012 provides empirical evidence about industrial competitiveness in the post-crisis recession in Ireland and the other EU countries as well as EU’s neighbouring countries. A presentation of the report can be found here.
16 replies on “Globalisation and Industrial Competitiveness”
Irish Services Exports – Fig 1.19, p.43
Off the planet!
Ease of doing business Fig 1.22, third behind UK and Denmark
Please do not take this personally, but I despair at some of the comments in the executive summary. Both its analysis and its conclusions are imho incorrect.
The report adopts the standard ECB/EC/Germanic division of responsibility for the causes of the crisis.
“The recession began when accumulated speculative bubbles in the US
and certain EU Member States finally burst.”
So that was the cause of the recession, was it? Nothing like pejorative simplicity.
The solutions or at least some of them are not only infantile but an abdication of responsibility. In effect the EC want the rest of the world to pull Europe out of recession.
“In the future recovering exports to fast growing
economies outside the EU will certainly contribute compensating
for weaker domestic and EU demand in both groups of countries.”
Why should Europe have to depend on the rest of the world to help it out recession?
I did see one clear country difference in the presentation chart labelled,
“Import content of total exports 1995-2007”.
Note the performance of Canada. It reduced the substantially the import content of its exports, unlike most of the rest. Now there is a country that knows what it is doing.
@ David O’Donnell
My vernacular in respect of Ireland is: fairytale.
Services exports grew by €5bn in 2011 to €79bn.
Google and Microsoft accounted for most of the increase.
Google, Microsoft, Apple and Facebook would likely have accounted for about €40bn in services exports and most of it would be unrelated to economic activity in Ireland.
In 2011, Google had Irish revenues of €12.4bn and Irish payroll costs of €218m.
Dell is Ireland’s largest goods exporter despite having closed its main manufacturing centre in Limerick, in 2009!!
So claims in respect of improved competitiveness compared with other countries are relying on distorted data.
What is important is that attention be given to the current failed enterprise policy.
State support shouldn’t be dependent on short-term export potential.
High growth firms responsible for a disproportionate number of new jobs in an economy, are found in all sectors of an economy.
Ryanair, Ireland’s most successful new company of recent decades, introduced a disruptive model in an old business.
In the US between 2009 and 2011, 600 American companies, which together employ nearly 700,000 people, achieved 30% job growth (over 150,000 jobs) and 48% revenue growth, dwarfing US figures as well as companies in the Standard & Poor’s index, which had revenue per share growth of only 15.9% over the two-year period from 2009 to 2011.
Companies in energy, cleantech and natural resources led in employment growth, at 49% over the period 2009 to 2011, closely followed by technology (42%) and services (33%).
@ Joseph Ryan
Some news to make your day:
Debt crisis triggers construction boom in Germany; Eurozone construction down in September:
.. maith agat!
Re Greece: Pathetic EZ Politicos … failing to stand up to Germany placing its bleed1n elections ahead of crisis resolution and needs of abject Greek Citizenry. IMF only semi-sane member standing ….
Default vs. Delay
Dangerous Euro Zone-IMF Split Persists over Greek Debt
Euro-zone finance ministers meeting in Brussels this week have been unable to reach an agreement with the International Monetary Fund on how to ensure that Greece’s debt load comes down to manageable levels. Germany and other European countries continue to reject a new debt haircut. The standoff could become dangerous.
Mr. Samaras is getting a bit uppity today….from observer crisis blog
“Greece did what it had committed it would do . Our partners, together with the IMF, also have to do what they have taken on to do.
Any technical difficulties in finding a technical solution do not justify any negligence or delays.”
Negligence? A bit strong…
I love the wishful thinking of the FANGS. A debt restructuring is off the table as is a fiscal transfer. Keep this up and it will lead to a 100% restructuring of Greek Debt.
You have gotta love Norbert as well. A Greek default would dash our hopes too. We would wonder why we were bothering with austerity and reforms. We might end up not paying back the PNs on time. Now that would be terrible. We might also end up cutting the deficit quicker, absolute disaster.
The good news is we are not going to pay back the PNs…according to the Independent
“Mr Moran, the most senior official in the civil service, said a big step for 2013 would be “to get the banks off” the government guarantee.
The “right call is to get the banks off the guarantee and return them to profitability,” he said at a conference in Dublin.
He added that he doesn’t expect the government to have to pay the next Anglo Irish Bank promissory note instalment in March as it negotiates with European partners to ease the cost of the country’s legacy bank bailout.”
We are saved?
re: Ind quoting Secretary of Dept of Finance.
““Mr Moran, the most senior official in the civil service, said a big step for 2013 would be “to get the banks off” the government guarantee.”
“The “right call is to get the banks off the guarantee and return them to profitability,” he said at a conference in Dublin.”
It is not the right call. It is a a crazy call. This is clear evidence that the new Secretary of the Dept of Finance has no idea of what he is doing.
Does he not understand that the ELG is paid to the State? Does he not understand that he is giving away a potential profit stream that has been bought by bankrupting the country?
This is the person who within a few weeks of taking office sold the government stake in BOI at appox a 75% haircut on an investment that was barely 12 month old and lauded that deal a success, cheered on by a brainless media.
That decision was complete nuts.
This statement is even nuttier.
Can we have a cost benefit analysis on all this. Remember the calls for those cost benefit analysis!!.
Now the State is poised to throw away the banks like hot potatoes, having put €64 billion into them.
I am just stupid in looking for a cost benefit analysis? Or should we all just accept their ECB-prompted-hunch that this is the “right call”.
Can nobody shout shout stop this time?
I think Mr Moran comment presupposes a successful negotiation. however if Greece restructures 100% of it debt to EZ couterparties then there will be plenty more behind them. Remember there have been only a limited number of ways out of this crisis
1.we pay the debt back
2.it gets restructured
3.we get a fiscal transfer
5. it gets inlfated away
It has really always been a choice between some or all of 2-5.
We should know on Monday, however, I think it’s down to who blinks first…IMF or EU/ECB .
If samaras gets write offs then our guys are going to look a bit whatever.
And the crime is almost complete. Create a Ponzi scheme, bankrupt the institution while paying yourself bonuses, post all the losses to the state when things go wrong, then return a few years later and buy it all back for nothing again.
This is like the Beef Tribunal all over again, except about 100 times as expensive(And presumably about 100 times as lucrative for the people committing the fraud).
Personally, I’d rather set every bank (and banker) in the country on fire than sell them for any amount of money. I’m sure the Department of Finance would rather just sell the banks for nothing and set all our money on fire instead.
I wish to make a correction to my last post, as it gave a misleading impression of DoF policy.
Of course, I’m sure the Department would rather pay someone to take ownership of banks–and they probably will.
Krugman in Foreign Affairs 1994. More than you ever wanted to know about productivity and competitiveness. This was translated from English to Italian and backto English. Someone might be able to find the original.
ompetitiveness: An obsession dangerous
HYPOTHESIS IS WRONG
THE THRILL OF THE COMPETITION
THE DANGERS OF OBSESSION
CONSULTANT AND THE ‘BARE
Competitiveness: A Dangerous Obsession
Krugm an, Paul
Foreign Affairs, Mar / Apr 1994, 73.2; Platinum Full Text Periodic ls
Paul KRUGMAN is Professor of Economics at the Massachusetts Institute of Technology. His most recent book is “Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations” [The shop of prosperity: economic sense and nonsense in the age of declining expectations] (WW Norton).
HYPOTHESIS IS WRONG
In June 1993, Jacques Delors made a special presentation to the leaders of the nations of the European Community, which met in Copenhagen, on the growing problem of European unemployment. Economists studying the European situation were curious to know what he would say Delors, President of the European Commission. Most of them share more or less the same diagnosis of the European problem: the taxes and regulations imposed by European states from the complicated welfare have made employers reluctant to create new jobs, while the relatively generous level of subsidies Unemployment has made workers unwilling to accept that kind of low-wage employment that helps to keep unemployment comparatively low in the United States. The difficulties associated with the protection of the currency exchange system European cover the costs of German reunification have reinforced this structural problem.
It is a persuasive diagnosis, but politically explosive, and everyone wanted to see how Delors would have addressed. Would challenge European leaders saying that their efforts to pursue economic justice have produced unemployment as an unintended byproduct? He admitted that the EMS [European Monetary System European Monetary System, NdT] could be sustained only at the price of a recession and would deal with the implications of that admission for European monetary union?
Guess what ‘? Delors did not confront the problems of the welfare state or EMS. He explained that the fundamental cause of unemployment in Europe was the lack of competitiveness with the United States and Japan and that the solution was a program of investment in infrastructure and high technology.
Escape was disappointing, but not surprising. After all, the rhetoric of competitiveness – that way of thinking according to which, in the words of President Clinton, each nation is “like a big corporation competing in the global market” – has spread among opinion leaders from around the world . People who think they are sophisticated connoisseurs of the subject to give certain that the economic problem that faces every modern nation is basically to compete in the world market – the United States and Japan are competing in the same sense in which Coca-Cola competes with Pepsi – and are not aware that you could sensibly cast serious doubt on this claim. Every now and then a new best seller warns the American public of the dire consequences of losing the “race” for the 21st century (1) an entire industry of advice on competitiveness, “geo-economists” and trade management theorists came out of out in Washington. Many of these people, having diagnosed the economic problems in the same terms as Delors did with Europe, are now in heaven higher than the Clinton administration and formulate the economic and trade policy for the United States. So Delors was using a language is not only appropriate but also comfortable for him and for a wide audience of both sides of the Atlantic.
Unfortunately, his diagnosis on the evils of Europe was deeply misleading, and similar diagnoses in the United States are equally misleading. The idea that a country’s economic fortunes are mainly determined by its success on world markets is a hypothesis, not a necessary truth, and as a business practice, empirical hypothesis is flatly wrong. This is not true, namely, that the major nations of the world are with each other in a significant degree of economic competition, or that any of their major economic problems can be attributed to failures to compete on the world market. The growing obsession with an advanced nation about the international competitiveness should be seen not as a valid concern, but as a view that is maintained despite obvious evidence to the contrary. And what’s more is clearly a view that is defended tenaciously, a desire to believe, which is reflected in the amazing trend of those who preach the doctrine of competitiveness to support their thesis with creative arithmetic and fallacious.
This article is in three points. The first argues that concerns about competitiveness are, on the empirical level, almost completely unfounded. In the second, try to explain why define the problem statement as that of the international competition is nonetheless so attractive for many people. Finally, he argues that the obsession with competitiveness is not only wrong, but dangerous, and distorting domestic policies and threatening the international economic system. This last problem is clearly the most important from the point of view of public policies. Think in terms of competitiveness, directly or indirectly, leads to wrong economic policies on a wide range of issues, national and international, from health care to trade.
COMPETITION WITHOUT SENSE
Most of those who use the term “competitiveness” does so without a arrière pensée . It seems obvious to them that the analogy between a country and a corporation is reasonable, and whether the United States is competitive in the world market is no different in principle from the question of whether General Motors is competitive in the North American market for minivans.
Groped, however, define the competitiveness of a nation is in fact much more problematic than defining that of a corporation.
The red line for a corporation is literally within its boundaries: if a company can not afford to pay its workers, suppliers, bondholders, will be out of business. So when we say that a corporation is not competitive, we mean that its market position is unsustainable, or that, if it does not improve its performance, it will cease to exist. The countries you do not go out of business. They can be happy or unhappy with their economic performance, but do not have a well-defined red line. Consequently, the concept of national competitiveness is vague.
It could be assumed, naively, that the red line of a national economy consists simply its trade balance, that competitiveness can be measured on the ability of a country to sell abroad more than it buys. In theory and practice trade surplus may, however, be a sign of national weakness, while a deficit may be a sign of strength. For example, Mexico was forced to huge trade surpluses in the eighties to pay the interest on its foreign debt, as international investors refused to lend more money, had large trade deficits after 1990 when foreign investors recovered confidence and new capital began to flow. Is there anyone who wants to show Mexico as a nation extremely competitive during the time of the debt crisis, or describe what happens after 1990 as a loss in competitiveness?
Most of the authors who deal with the problem have therefore tried to define competitiveness as a combination of favorable trade performance and something else. In particular, the most popular definition of competitiveness that is now defined by the lines laid down by the book ” Who’s Bashing Whom? ” [Who is attacking whom? “] Laura D’Andrea Tyson, Chairman of the Council of Economic Advisors : competitiveness is “our ability to produce goods and services that pass the test of international competition while our citizens enjoy a standard of life together growing and sustainable. “Sounds reasonable. However, if you stop to think about it, and compare thoughts with facts, it turns out that this definition satisfies very little ear.
Consider, for a moment, what the definition would mean for an economy that is little international trade, such as the U.S. in the fifties. For such an economy, the ability to balance its trade is mainly in finding the right exchange rate. But since international trade is a small factor in the economy, the level of change has little effect on the standard of living. In an economy with very little international trade, and the increase of living standards – and thus “competitiveness” as defined Tyson – would be determined almost entirely by domestic factors, primarily on the rate of productivity growth. The growth of national productivity, period, and not productivity growth relative to other countries. In other words, for an economy with very little international trade, “competitiveness” ends up being a funny way of saying “productivity”, without having anything to do with international competition.
But things are different when trade becomes more important, as is the case for all the major economies? Of course, things could change. Suppose that a country will find that, even if its productivity is rising strongly, is able to export only if repeatedly devalued its currency by selling cheaper than its exports in world markets. His standard of living, which depends on both its purchasing power in imports from both domestically produced goods, could actually decline. In the jargon of economists, the national growth could be recovered at the expense of international trade. (2) Thus the “competitiveness” would end up eventually dull the international competition.
There is however no reason to leave this state of pure speculation: you can easily check by comparing it with the data. The deterioration of international trade has been a bugbear important for the U.S. standard of living? Or the rate of income growth [” Real income “] american has essentially continued to equal the rate of domestic productivity growth, although international trade constitute a portion of income than in the past?
To answer this question, just look the national income accounts data [” national income “] that the Department of Commerce publishes regularly in the” Survey of Current Business. ” The standard measure of economic growth in the United States is, of course, real GDP [ Real GNP ], a measure that divides the value of goods and services produced in the United States for the appropriate price indices to arrive at an estimate of net domestic [ real national output ]. The Department of Commerce publishes however also something called ” command GNP . ” This is similar to Real GNP , except that divides U.S. exports not for the price index of exports, but for the price index of imports of the United States. That is, exports are valued on the basis of what Americans can buy with the money from export sales. The “command GNP” therefore measures the volume of goods and services that the American economy can “command” – the purchasing power of the nation – rather than the volume of the product. (3) As we have seen, the “competitiveness” means something different from “productivity” if and only if the purchasing power grows significantly more slowly than the total product.
Well, here are the numbers. In the period 1959-73, a period of vigorous growth in the U.S. standard of living and a few concerns about international competition, the ” Real GNP “for man-hour grew annually of ‘1.85 percent, while the” command GNP “time grew a bit ‘faster, 1, 87 percent. From 1973 to 1990, a period of stagnation in living standards, the growth of ” command GNP “time fell to 0.65 percent. Almost all (91 percent) of this slowdown was explained by a decline in domestic productivity growth: the ” Real GNP “zone grew by only 0.73 percent.
Similar calculations for the European Community and Japan produce similar results. In any case, the percentage of growth of living standards essentially equals the percentage of domestic productivity growth, not productivity relatively to competitors, but simply domestic productivity. Although world trade is now more developed than it has ever been, the national living standards are largely determined by domestic factors rather than by competition in world markets.
How can such a thing happen in our interdependent world? Part of the answer is that the world is not as interdependent as you probably think, countries are not like the company. Even today, U.S. exports are only 10 percent of the value added in the economy (which is equal to the GNP [GDP NdT]). The United States or about 90 percent an economy that produces goods and services for itself. By contrast, even the largest company sells very little of its production to its workers, and the “export” of General Motors – its sales to people who do not work there – is that all of its sales, which are more than 2.5 times the value of the company.
The countries also do not compete with each other in the same way as companies. Coke and Pepsi are competing nearly as well: only a negligible fraction of the sales of Coca-Cola Pepsi goes to the workers, only a negligible fraction of the employees of Coca-Cola products buy Pepsi. So if Pepsi is successful, it does tend to be at the expense of Coca-Cola. But the major industrial countries, and sell products that compete with one another, they are also one of the other major suppliers of imports useful. If the European economy is fine, does not need to be at the expense of the U.S., actually, if there is one thing it is likely that a European economy that has success would help the U.S. economy by providing a wider market and selling it higher-quality goods at lower prices.
International trade also is not a zero-sum game. When productivity rises in Japan, the main result is an increase in real wages Japanese, American or European wages are in principle equally likely to rise or fall, and in fact did not seem to be affected.
It would be possible to examine this issue, but the conclusion is clear: while in principle there may be problems of competition, in practice, on the empirical level, the major nations of the world are not with each other to a significant degree of competition economy. There is always, of course, a rivalry for status and power: the countries that grow faster will grow their political role. E ‘therefore always interesting to compare countries. Claiming that Japanese growth diminishes U.S. status is very different from saying that reduces the U.S. standard of living, as the rhetoric of competitiveness instead asserts.
You can clearly take the position that the words say what we want to say that there is freedom, if one wants to use the term “competitiveness” as a poetic way of saying productivity, without really understanding that international competition c ‘enter something. Few authors, however, competitiveness accept this view. They believe that the facts tell a very different story from the one we are experiencing, as Lester Thurow wrote in his best-selling book, ” Head to Head “[Head to Head], in a world of competition made up of” wins and losses ” among the major economies. How can this belief?
One of the extraordinary and surprising features of the huge literature on competitiveness is the repeated tendency of authors very smart to engage in what can perhaps be described accurately as “careless arithmetic.” They make statements that sound like quantitative statements of measurable, but the authors do not actually data on these variables, and so you do not notice that the actual numbers contradict their claims. Or you have data that is supposed to support an assertion, but the author does not realize that his own numbers imply that what he is saying can not be true. They are always books and articles on competitiveness that the reader does not seem to realize full of compelling evidence, but which appear to anyone familiar with the data as strangely, almost mysteriously, unable to handle the numbers. A few examples illustrate this point better. Here are three cases of careless arithmetic, each in its own way interesting.
Trade deficit and loss of skilled jobs . In a recent article published in Japan, Lester Thurow explained to his audience the importance of reducing the Japanese trade surplus to the United States. U.S. real wages, he said, have fallen by six percent during the years of Reagan and Bush, and the reason was that the trade deficit in manufactured goods had forced the workers to escape from the well-paid jobs in manufacturing to move in much less paid jobs in services.
It is not an original point of view, and is widely shared. But Thurow was more concrete than the others, giving real numbers on the loss of jobs and wages. They lost a million jobs in manufacturing, he said, and work in the factories is paid 30 percent more labor services.
Both numbers deserve some doubt. The one million jobs is too high, and 30 percent of wage differential between manufacturing and services is mainly due to the different length of the working week, not a difference in the level hourly wage. We agree, however, the numbers of Thurow. These tell the story suggests?
The key point is that the total U.S. jobs are more than 100 million. Suppose that a million workers will be forced to move from manufacturing to services thus losing 30 percent of the manufacturing wage. Since these workers are less than 1 percent of the U.S. labor force, this would reduce the average wage level of U.S. less than 1/100 of 30 percent – that is, less than 0.3 percent.
This is a number that is too small to account for the 6 percent decrease in real wages, too small by a factor of 20 . To look at things in a different way, the loss of annual salary deficit induced by de-industrialization, which obviously Thurow believed to be the root of the economic difficulties of the USA, on the basis of his own numbers would be about the same as the U.S. spend on health care costs in a week.
Here is a real headache. How does it happen that an intelligent person like Thurow, writing an article that purports to provide a clear quantitative evidence of the importance of international competition in the U.S. economy, can not understand that the evidence clearly shows that he proposes are not problems he identified to be the culprits?
Sectors with high added value . Ira Magaziner and Robert Reich, two influential figures today the Clinton administration, for the first time reached a wide audience with their 1982 book, ” Minding America’s Business “[ The business in America, NdT ]. The book proposed a U.S. industrial policy, and the introduction the authors apparently provided a quantitative basis and practical for such a policy: “Our standard of living can grow only if (i) capital and labor flows increasingly towards intensive industries value added per employee, and (ii) maintain a position in those industries that is superior to that of our competitors. ”
Economists were skeptical of this idea in principle. If the goal of having the right industry consisted simply in passing in sectors with a high added value, because private markets were not already doing? (4) You may, however, release the application simply attributing the usual boundless faith of economists in the market , not perhaps Magaziner and Reich argued their case with a lot of evidence taken from the real world?
Well, ” Minding America’s Business “contains many facts. One thing that never does however, is to justify the criteria set out in the introduction. The choice of industries with high added value obviously depends on the belief of the authors that this is synonymous with high technology, but nowhere in the book provide numbers which compare the real value added per worker in different industries.
Value added per worker (USA 1988)
in thousands of dollars
It is not hard to find numbers like that. Every public library in the U.S. has a copy of the Statistical Abstract of the United States each year contains a table that has a value added and employment for the manufacturing industries of the United States.
All you need is to spend a few minutes in the library with a calculator to get a table that ranks U.S. industries by value added per worker. The table above shows selected items from pages 740-744 of the Statistical Abstract 1991. If it shows that the American industry with value added per worker are really high in areas with extremely high ratios of capital to work, such as cigarettes and petroleum refining. (The result was predictable, given that the capital-intensive industries must obtain a standard return on large investments, must charge prices with a higher margin on labor costs than do the labor-intensive industries, which implies a high value-added per worker). Among the major industries, the value added per worker tends to be high in traditional heavy manufacturing industries such as steel and cars. High-tech industries such as aerospace and electronics appear to be roughly in the middle.
This result is not surprising conventional economists. High value-added per worker occurs in areas that are highly capital-intensive, or in areas where an additional dollar of capital increases of little added value. In other words, there is no “good prize” [free lunch, free lunch, NdT] . But let’s skip over what is said about how the economy functions, and instead we see the strangeness error Magaziner and Reich. Surely they did not want to promote an industrial policy that would pay the funnel capital and jobs in the steel and automotive industries, as opposed to high-technology. How can however write an entire book devoted to the proposal to designate target industries with high added value without checking what these industries?
Labor costs . In his presentation at the Copenhagen summit, British Prime Minister John Major has shown a table indicating that the unit labor costs Europeans were growing faster than the U.S. and Japan. It concluded that European workers were autoattribuendosi an income outside of the world market. But a few weeks later Sam Brittan of the Financial Times has discovered something strange in the calculations of Major: labor costs were not normalized with the exchange rates. In international competition, of course, what matters for a U.S. firm are the costs of its foreign competitors measured in dollars, not in marks or yen. International comparisons of labor costs, such as the Bank of England publishes tables that normally are therefore always converted to a common currency. The numbers presented by Major did not contain, however, this normalization standard. And it was a good thing, for his presentation, which he did. As Brittan pointed out, the cost of European labor were not higher, in relative terms, once normalized to the transmission. This error is even more trivial than those of Thurow or Magaziner and Reich. How could John Major, backed by sophisticated statistical resources of the Treasury of the United Kingdom, present an analysis that has fallen into thin air after the more standard corrections?
These examples of arithmetic bizarrely carefree, chosen from dozens of similar cases, by people who certainly have the capacity and resources to deal with it, demands an explanation. The best working hypothesis is that in each case the author or speaker wanted to believe the hypothesis competitive to the point of not telling anyone stimulus to question, if you have used the data, it was only to support a belief predetermined, not to examine it. But because many people are apparently so anxious to define the economic problems as problems of international competition?
THE THRILL OF THE COMPETITION
The metaphor competitive – the image of countries that compete with one another in markets around the world in the same way they do the company – owes much of its charm to its apparent comprehensibility. Telling a group of businessmen that a country is like a company bigger, it means giving them the comfort to think that they are already able to understand the basics. Talk to them about economic concepts such as comparative advantage, it means asking him to learn something new. It is not surprising that many prefer a doctrine that has the advantage of an apparent sophistication without the trouble of having to think hard. The rhetoric of competitiveness has become so common, however, for three reasons deeper.
The first is that the competitive images are exciting, and the thrill sell tickets. The subtitle of the most popular best-selling book by Lester Thurow, ” Head to Head “, is” The Coming Economic Battle among Japan, Europe, USA and “the cover proclaims that” the decisive war of the century began … and USA may have already decided to lose it. ” Suppose that the subtitle had described the real situation: “The next fight in which every major economy will succeed or fail is based on his own efforts, quite apart from what others are doing.” Thurow would not have sold perhaps a tenth of the copies?
Second, the idea that U.S. economic difficulties are incardinano crucially on our failures in international competition paradoxically makes those difficulties appear to be more easily solved. The productivity of the average American worker is determined by a complex order of factors, most of which are unattainable by policies practicable public. If you can accept the fact that our problem “competitive” is really a problem of national productivity, pure and simple, they are unlikely to be optimistic about the possibility of dramatic changes. But if you are convinced that the problem is really the failures in international competition – those imports are pushing workers out of jobs with high wages, or foreign competition subsidized by the states is leading the United States out of the sectors with high added value – then the answer to the economic malaise may consist of simple things like tech support and to act tough with Japan.
Finally, many of the leaders of the world have found the competitive metaphor extremely useful as a political tool. The rhetoric of competitiveness excuses for hard choices or to avoid them. The example of Delors in Copenhagen shows the usefulness of metaphors competitive as an evasion. Delors had to say something at the European summit, to say anything that was about the real roots of European unemployment would have resulted in enormous political risks. Moving the discussion on issues essentially irrelevant but seemingly plausible as competitiveness, earning it the time to provide a better response (which provided a certain extent in December, with the White Paper on the European economy, a job that kept anyway ” competitiveness “in the title).
By contrast, the well-received presentation of the initial economic program Bill Clinton in February 1993 showed the usefulness of competitive rhetoric as a justification for policies difficult. Clinton proposed a series of painful cuts to the federal deficit and tax increases. Why? Reasons to cut the deficit are disappointingly little dramatic deficit subtracts funds that could otherwise be invested productively, and this causes a constant although small drift of U.S. economic growth. But Clinton could instead make an exciting patriotic appeal, calling the nation to act now to make the economy competitive in the global market – with the argument that would ensue dire economic consequences if the United States did not.
Many people who know that “competitiveness” is a concept largely meaningless indulge in satisfying the rhetoric competitive because they believe that it is possible for them to harness it in the service of good policies. Excessive fear of the Soviet Union in the fifties was used to justify the construction of the system of public roads and interstate expansion dellaìistruzione in mathematics and science. The unjustified fears of international competition can not be used in a similar way to justify serious efforts to reduce the budget deficit, rebuild infrastructure, and so on?
A few years ago this was a reasonable hope. Today, the obsession with competitiveness is nevertheless reached a point that has already begun to dangerously distort economic policies.
THE DANGERS OF OBSESSION
Think and speak in terms of competitiveness leads to three real dangers. First, it could lead to wasteful spending of public money to improve U.S. competitiveness .. Second, it could lead to protectionism and trade wars. Finally, and most importantly, it could lead to bad public policy on a wide range of important issues.
During the fifties, the fear of the Soviet Union prompted the U.S. government to spend money on useful things like roads and public science education.
But also led to considerable expense of more dubious things such as bomb shelters. The most obvious, though not the least worrisome danger of obsession increasing the competitiveness that is likely to lead to such a misallocation of resources. For example, recent government guidelines for research funding have emphasized the importance of supporting research that can improve the international competitiveness of the U.S.. This puts at least some bias towards inventions that can help manufacturing companies that generally compete in international markets, rather than the producers of services that generally do not. Again, most of our jobs and value added in services is now, and has been the lack of productivity in services rather than products, to be the single most important factor in the stagnation of U.S. living standards.
A much more serious risk is that the obsession with competitiveness lead to trade wars, perhaps even a global trade war.
Most of those who have preached the doctrine of competitiveness were not old-fashioned protectionists. They want their country win the game global trade, not that I shun. But what if, despite its best efforts, a country does not appear successful, or is to fail him the confidence to do so? The competitive diagnosis inevitably suggests that closing the borders is better than risk that foreigners take away jobs in high-wage sectors with high added value. As a last conclusion, the supposed report on the competitive nature of international economic relations oils the wheels of those who want political “confrontative” if not overtly protectionist.
We can already see this process in a way, in the United States and Europe. In the United States it is remarkable how quickly the sophisticated interventionist arguments advanced by Laura Tyson in his published works have given an encouragement to the naive affirmation of the U.S. Trade Representative Michael Kantor that the bilateral trade surplus of Japan was costing millions of jobs in the United States. And the rhetoric of President Clinton commercial that emphasizes the supposed creation of high-wage jobs rather than on the benefits of specialization, he left his government in a weak position when he attempted to refute the enemies of NAFTA argued that the competition from cheaper Mexican labor would destroy the U.S. manufacturing base.
But the risk perhaps more serious obsession with competitiveness is still thin and its indirect effect on the quality of economic debate and its policies. If high state representatives are strongly oriented towards a particular economic theory, their efforts inevitably end up coloring policies on all issues, even those that have nothing to do with that doctrine. And if an economic doctrine is completely and demonstrably wrong, the insistence that the discussions do own that doctrine inevitably blurs the vision and reduces the quality of the policy debate on a wide range of problems, including some that are very far away from trade policy per se.
Consider, for example, the issue of health care reform, undoubtedly the most important economic initiative of the Clinton administration, almost certainly an order of magnitude more important to the U.S. standard of living than anything else could have been done on trade policies (except if the United States would provoke a World War commercial). Since health is a problem with a few direct international flights, one would have expected that you would take out some policy distortions due to misguided concerns about competitiveness.
But the administration has put the development of the health plan in the hands of Ira Magaziner, the same Magaziner who failed so miserably his homework in supporting public intervention in industries with high added value. The previous writings and consulting Magaziner economic policy focused almost entirely on the problem of international competition, his views on how much summed up in the title of his 1990 book, ” The Silent War “[ The Silent War, NdT ]. His appointment was the result of many factors, not least of course his long personal friendship with the most important couple [ of America, NdT ]. Still, it was irrelevant that the administration committed to the ideology of competitiveness, Magaziner, who has consistently recommended that national industrial policies were based on the concepts of business strategy which he learned during his years as a consultant for the Boston Consulting Group, was considered an expert on economic policy.
You may also notice the unusual process by which it was developed health care reform. Despite the enormous size of the task force , recognized experts in health were almost completely absent, especially though not exclusively economists specialized in health care, including economists with impeccable liberal credentials as Henry Aaronn the Brookings Institution. Again, this was probably a reflection of a number of factors, among which, however, is probably not irrelevant that Magaziner, strongly committed to the ideology of competitiveness, it has in the past found the economics profession very understanding, and not was prepared to have to deal with them on any issue.
To make a hard but not entirely unjustified analogy, a government wedded to the ideology of competitiveness is also unlikely face of good economic policy as a government committed to creationism can do good science policy, even in areas that are not directly related to the theory of evolution.
CONSULTANT AND THE ‘BARE
If the obsession with competitiveness is misleading and damaging as this article argues, because there are more voices to say? The answer is a mixture of hope and fear.
From the side of hope, many sensible people have imagined that it could have the rhetoric of competitiveness in favor of economic policies desirable. Suppose you believe that the United States they need to raise the savings rate and improve the education system to raise productivity. Even knowing that the benefits of increased productivity have nothing to do with international competition, because it does not describe this as a policy to improve competitiveness if you think that you might as well widen the audience of his supporters? To caress popular prejudices in favor of a good cause, it is a temptation to which I gave myself.
About fear, it takes an economist or very brave or very unwise to say publicly that a doctrine that many, perhaps most, of the opinion leaders of the world has embraced, is flatly wrong. The biggest insult is that many of those men and women think, using the rhetoric of competitiveness, to demonstrate their sophistication in economics. This article may affect people, but you do not make many friends.
Unfortunately, those economists who hoped to appropriate the rhetoric of competitiveness for good economic policies have instead increased their credibility in favor of bad ideas. And somebody has to point out when the emperor intellectual wardrobe is not exactly what he thinks.
So let’s start telling the truth: competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous.
1) See, for some examples, Laura D’Andrea Tyson “Who’s Bashing Whom” Conflict commercial in High Technology Industries, Washington, Institute for International Economics, 1992, Lester C. Thurow “Head to Head”: The Coming Economic Battle among Japan, Europe, and America, New York: Morrow, 1992; Ira C. Magaziner and Robert B. Reich, “Minding America’s Business”: declínio and American Economic Growth, New York: Vintage Books, 1983, Ira C. Magaziner and Mark Patinkin, “The Silent War”: inside the global business battles shaping America’s future. New York: Vintage Books, 1990, Edward N. Luttwak, “The Endangered American Dream”: How to prevent the United States will become a third world country and how to win the fight geo-economic for industrial supremacy, New York: Simon and Schuster, 1993; Kevin P.Phillips, “Staying on Top “: The business case for a national industrial strategy, New York: Random House, 1984; Clyde V. Prestowitz, Jr., “Trading Places,” How we allowed Japan to go ahead, New York: Basic Books, 1988, William S. Dietrich! In the Shadow of the Rising Sun “: The political roots of American economic decline, University Park: Pennsylvania State University, 1991; Jeffrey E. Garten,” A Cold Peace “: America, Japan, Germany, and the struggle for supremacy, New York: Times Books, 1992, and Wayne Sandholtz. et al., “The Highest Stakes”: the economic foundations of the next security system, Berkeley Roundtable on the Economy International (BRIE), Oxford University Press, 1992.
2) An example may be helpful here. Suppose that a country spends 20 percent of his income in imports, and that the prices of its imports are not established in the national currency but foreign. So if the country is forced to devalue its currency – reduce its value in foreign currency – by 10 percent, this will raise the price of the basket that the country is spending 20 percent, thus raising the overall price index of 2 percent. Although domestic production has not changed, the real income of the country will be plunged so 2 percent. If the country needs to devalue repeatedly in the face of competitive pressure, the real income growth will remain constantly lagging behind the real growth in production.
It ‘important to note that the size of this delay depends not only on the amount of the devaluation, but the share of imports in spending. A devaluation of 10 percent of the dollar against the yen does not reduce the real income of the United States by 10 percent – in fact, only about reducing the real income of the United States only 0.2 percent because only about 2 percent of income is spent on American goods products in Japan.
3) In the example in the previous footnote, the devaluation would have no effect on real GNP, but the “command GNP” would have fallen two percent. The discovery that in practice the “command GNP” is increased approximately as fast as the GNP real pushes to say that events such as the hypothetical case of the note are without practical importance.
4) “Added value” has a specific meaning, the standard in the accounting of national income: the added value of a company is the dollar value of sales, less the dollar value of the contributions that buy from other companies, and as such is measured easily. Some people who use the term, probably ignore this definition and simply use “value-added” as a synonym for “desirable.”
The Krugman piece cited above by MH is quite interesting – but be prepared for some of your cherished views (opinions, views, beliefs or whatever) to be trashed. Some of mine were. Re-thinking is a hard and uncomfortable activity.
I always had (still have) a visceral moment when I hear the term ‘competitiveness’ being used. Now I know why. Its in the same category as those pesky multipliers. Cognitive Crapola!
Basically, Krugman is asserting that domestic productivity is the essential element, but this has its limits and when these limits are reached, that’s it. Now you have a political problem – which has to be externalized – in classic Orwellian-style – as ‘a lack of competitiveness’. Neat, lazy, inadequate and mendacious.
He also derides the myth about the contrast between US and European un-employment levels and wage rates – that the causal factor of higher (and persistent) European un-employments is ‘high’ entitlements. The actual cause is actually quite simple – and hence has to be wrong! The US is a federation of ‘united states’, whilst Europe is a collection of independent states who independently decided how to cope with the industrial problems (the 1860s onwards) as they experienced them. The US encountered these problems in the 1920s and 1930s and adopted their own solutions. And the two sets of solutions were (are) different. An apple is not an orange.
Domestic living standards are both correleated to, and are a causal outcome, of domestic productivity. The following quote sums it up nicely:
“It should not be suprising if many prefer a doctrine that offers the gain of apparent sophistication without the pain of hard thinking”: p39.