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What is meant by competitiveness
and how can governments influence
a country’s competitive standing?
Allan Hodge, Cheltenham Ladies’ College.
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What is
competitiveness 1?
• C When we consider a country’s competitiveness we are usually thinking of
its economic performance in relation to the outside world.
• C To be competitive we are saying that some aspects of a country’s structure
or behaviour are enabling it to gain an economic advantage over other
countries.
• C The main record of economic transactions between countries is the balance
of payments, so this tends to be the main focus into competitiveness.
• CAt its narrowest, national
competitiveness might refer
to a country’s success in
selling its goods and services
to other countries (exports)
and buying from its own firms
rather than from abroad
(imports).
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What is
competitiveness 2?
• C Trade competitiveness may lead to wider advantages such as being able
to attract growth-enhancing foreign direct investment (FDI).
• C An expanding surplus on trade is also reflationary as it boosts aggregate
demand (AD).
• C This is because net exports (X – M) are part of AD, and through export
creation (the injection X rises) or the substitution of domestic production for
imports (the leakage M) falls.
• C This creates jobs and incomes for those directly involved and, through
multiplier effects, the wider community.
• C Thus being competitive may be linked to higher growth and living
standards.
• C With respect to trade, greater competitiveness must derive from both price
and non-price factors that make a country’s goods and services more
attractive to buyers, whether at home or abroad.
Price competitiveness 1
• C There are 3 main ways a country can increase price competitiveness of its
own goods and services which are: higher productivity; a lower foreign
exchange rate; and subsidies on production.
• C Firstly, increasing productivity and productive efficiency is the only route
having long-term beneficial effects.
• C If a country is more productively efficient it can produce at lower average
cost per unit.
• C A country with consistently higher productivity will tend to have lower
relative inflation.
• C As a result it is better placed to sell its goods abroad and reduce its
imports.
• C Productivity also goes hand in hand with innovation and quality
improvements, so boosting non-price competitiveness.
Price competitiveness 2
• C The second factor is a lower exchange rate which lowers export prices in
the foreign currency, and raises import prices in the domestic currency,
thus stimulating export volumes and reducing import volumes.
• C But it may be difficult or impossible for a country to lower the value of its
currency especially with a floating exchange rate determined by market
forces.
• C A lower exchange rate is also no guarantee of a rise in the value of net
exports unless the sum of the price elasticities of demand for X and M is
greater than 1 (the Marshall-Lerner condition).
• C And, this may only happen after a time lag during which net exports may
actually fall as exporters and importers take time to respond to the new
prices (the J-Curve effect).
• C Even if the elasticities are appropriate, a country needs to pay attention to
its productivity and relative inflation rates, otherwise export
competitiveness will again be reduced.
Price competitiveness 3
• C But, a lower exchange rate, by raising import prices, contributes to a rise in
cost inflationary pressures.
• C Higher domestic costs and inflation will feed through into higher export
prices in the future making imports seem more attractive, and undoing the
effects of the falling exchange rate.
• C More fundamentally, a falling exchange rate reduces the terms of trade.
• C If export prices fall and import prices rise, a greater volume of exports has
to be given up to cover the purchase of a given volume of imports.
• C Increased ‘competitiveness’ may be won at the increased real cost of
having to give up a greater volume of goods as exports in order to get the
same volume of goods as imports.
• C If the aim of higher competitiveness is national prosperity and higher living
standards, it must be asked whether this is a price worth paying.
Price competitiveness 4
• C Giving subsidies to firms and putting tariffs on imports is the least desirable
way of increasing price competitiveness as it distorts markets and leads to
resource mis-allocation.
• C Firms may lose the incentive to become more efficient if they are getting
painless assistance from the government.
• C Markets are distorted because of the production of subsidised goods is
boosted artificially, without any basis in improvements in techniques or factor
costs.
• C Tariffs (import taxes) increase the competitiveness of domestic goods by
making imports more expensive.
• C But, as with subsidies markets are distorted and as with a falling exchange
rate, higher import prices are inflationary and reduce consumer surplus.
• C Tariffs reduce welfare, at home and abroad, and may invite retaliation.
Non-price
competitiveness
• C This refers to those features of products that make them attractive to
buyers, other than price.
• C For example, quality, innovation, reliability, product range, together with
guarantees, sales service and backup.
• C High non-price competitiveness may compensate for low price
competitiveness, i.e. quality goods will sell even at high prices.
• C But high price competitiveness is no guarantee that poor products will sell.
• CThe pursuit of product improvement
certainly represents a worthwhile goal
which will benefit both the makers and the
users of the goods and services
represented.
Competitiveness –
a broader perspective 1
• C The world Economic Forum has developed a list of the “12 Pillars of
Competitiveness” and a Global Competitiveness Index (CGI).
• C In these, different factors are important at different stages of a country’s
economic development.
• C Firstly, factor-driven economies “compete based on their factor endowments
– primarily unskilled labour and natural resources ...”
• C Secondly, efficiency-driven economies “must begin to develop more
efficient production processes and increase product quality ... driven by
higher education and training, efficient goods markets, well functioning
labour markets, developed financial markets ... and a large domestic or
foreign market.”
• C Thirdly, in innovation-driven economies “companies must compete by
producing new and different goods using the most sophisticated
production processes and by innovating new ones.”
Competitiveness –
a broader perspective 2
• C The UK is classified as one of the “innovation-driven” economies.
• C Our strengths are a flexible and efficient labour market, with ‘sophisticated
and innovative businesses that are highly adept at harnessing the latest
technologies for productivity improvements and operating in a very large
market.’
• C However, the country’s macroeconomic environment represents the greatest
drag on its competitiveness, with a fiscal deficit above 8% in 2012,
amounting to 90.3% of GDP.
• C We also have a comparative low national savings rate at 10.8% of GDP.
• C However, in 2013 the UK ranked 10th overall in the CGI out of 148
countries surveyed.