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Wednesday, August 09, 2006

Competitiveness

Though unintended, Adam Posen has a good follow-up to Samuelson's latest column. First, Samuelson:

Cooling Off About Keeping Up, by Robert Samuelson, RCP/WaPo: ...We are experiencing another competitiveness panic. These occur every 15 or 20 years. There's an outpouring of worried reports and articles. After Sputnik in 1957 -- the first artificial earth satellite -- we were supposedly doomed to be overtaken by the Soviet Union. In the late 1970s and 1980s, it was Germany and then Japan. Lately, China and India have been the threats. ...

One problem with these debates is that competitiveness is a vague term. What does it mean? If it means keeping the lead in every industry where we once led, we're doomed. ... Similarly, if competitiveness requires the United States to maintain its present share of the world economy, we are also probably doomed. ...

One possible "competitiveness'' definition is the ability of countries to stay ahead in developing new industries. Economists once saw land, labor and capital as the basic inputs of any economy. But they've now added "knowledge,'' as David Warsh ... shows in his engaging book "Knowledge and the Wealth of Nations.'' ... By this standard, the United States is still doing well. It's a leader in many industries -- aerospace, computers, biotechnology, investment banking and entertainment. It also leads in research and development. ...

Maybe we ought to settle on this definition: productivity. That's economists' code word for "efficiency.'' ... Higher productivity allows for new products and services, from health care to iPods. Incomes and living standards tend to move in parallel with productivity changes. In the first 25 years after World War II, productivity in the business sector grew about 3 percent a year. ... Since 1995, it's grown at about 3 percent again. If we can sustain that, we'll have an easier time meeting all the future's competing needs. ...

How to do that? Good question. Unfortunately, economists don't understand why productivity has fluctuated so much. ...

While we may not be able to explain the cyclical components of productivity growth, i.e. every bit of variation around the long-run average, we do have some idea of what makes the average increase over time (no, it's not tax cuts), and competition is a big part of the story.

I think Adam Posen would agree that a focus on productivity rather than "competitiveness" is best, and that competition is one of the keys to attaining high productivity growth. Here's his comments on competitiveness and the folly of mercantilist ideas about using competitiveness to maximize exports over imports:

A heavy burden for any economy, by Adam Posen, Commentary, Financial Times: Exports are all the rage this season. Cries for adjustment of global imbalances become disputes over who has to “shoulder the burden” of reducing their current-account surpluses; the collapse of the Doha trade talks makes every World Trade Organisation member acutely aware of barriers to their export success; and the integration of China and India into the global labour force raises “competitiveness” once again to prime status as the policy goal on politicians’ lips.

Yet export competitiveness has little beyond being fashionable to recommend it as an objective for economic policy. Like today’s again trendy platform shoes, pursuit of competitiveness gives one a temporary boost that is un­stable, untenable and, with repeated use, unhealthy. A dozen years ago Paul Krugman, the US economist, famously called competitiveness “a dangerous obsession” among US policymakers. In fact, in every decade, in all advanced economies, a focus on export competitiveness tends to erode living standards and distracts policymakers from a more beneficial emphasis on productivity.

If governments want to increase their economies’ share of global production in high-value-added sectors or, better still, create new such products and sectors, then the policy goal should be to increase competitive pressure upon an economy’s own businesses. In spite of the frequently cited examples of export-led growth for some developing countries, there is mounting evidence that the benefits to growth of countries’ engagement in trade are attributable to openness. These include: the direct benefits of importing lower prices and greater variety; the efficiency gains from challenging (rather than protecting) domestic businesses; and policy choices that contribute to a broadly liberal and market-orientated framework across the economy. Exports taken on their own, the usual narrower target of competitiveness policy, are not correlated with average per capita income growth.

A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country’s currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-a-vis trading partners, thus cutting real incomes and domestic demand; subsidising or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses.

The only constructive way to increase exports is for the total value of exports to rise as the side-effect of productivity growth...

Daniel Drezner also comments on Posen's article and the politics of Doha.

    Posted by on Wednesday, August 9, 2006 at 11:51 AM in Economics, International Trade | Permalink  TrackBack (1)  Comments (33)

          

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    » The trouble with obsessing about exports from Daniel W. Drezner

    Adam Posen has a very good column in the Financial Times today (alas, subscriber only) about the folly that is focusing on export competitiveness. The highlights: If governments want to increase their economies’ share of global production in high-value... [Read More]

    Tracked on Wednesday, August 09, 2006 at 08:01 PM


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