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Competitiveness and Growth
Robert Z Lawrence
Harvard Kennedy School of Government
Competitiveness and Growth
 What is Competitiveness?
 Performance in International Trade.
 Comparisons through benchmarking. How do
countries do with respect to inputs that are
the key to growth.
Is the World Economy Hostile to
Development?
 Anti-Globalizers:

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For developing countries recent period of
globalization and liberalization worse than
earlier period with more protection.
Inequality is rising everywhere as well.
 Pro-Globalizers:
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For developing countries recent period of
globalization and liberalization is better than
earlier period.
World is becoming less unequal.
Growth Experience
Miracles and Debacles.
1960-1980: Era of Import Substitution

33 Miracles: (PC income > 3% pa for ten years) From All Over the World:
Asia, Africa and Latin America -- total 357 million people

Including: Botswana, Malta,Singapore,Hong Kong,Gabon, Taiwan, Korea,
Lesotho,Trinidad,Brazil,Malaysia,Barbados,Brazil,Malaysia,Israel,Georgia,
Cote’d’Ivoire,Sychelles,Tuniisa,Ireland,Dominican,Egypt,Indonesia,Paragu
y,Mautirtius,Mexico,Panama,Keny
Debacles: No increase in income (14 countries mainly African) 69 million

1980 to 1999: Era of Globalization
26 Miracles: Mainly Asia and Caribbean (plus Chile) 2.1 billion people
Debacles. 65 Countries Many in Africa and Latin America 621 million people
Arvind Panagariya of Columbia University
How can they both be right?
 You can draw different conclusions depending on
whether you look at people or at countries.
 Early period, more countries were miracles but fewer
people, Later period 1980-1999 fewer countries many
more people – over 2 billion! Later period, though,
many more debacles
 Paradox is inequality has increased in almost every
country but actually fallen at the global level!
Inequality in 59 Developing
Countries (late 80's to 2000)
Income Growth in China: The Richest
see their incomes grow the most
But imagine there’s no country!
World income inequality is falling.
World Incom e Inequality
0.92
0.9
0.88
0.86
0.84
Series1
0.82
0.8
0.78
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
0.76
Mean Logarithmic Deviation;
From Xavier Sal-i-Martin
Explanation
 When a poor person becomes “rich” in India
or China it could increase inequality in those
countries but reduce inequality in the world
because in global terms it’s a poor person
entering the global lower middle class.
The Global System: 2000 View
 A New Economy based on Information technology
and finance
 2000 View: Globalization good for Industrial countries
but inadequate for development in Africa and Latin
America (besides China and India).
 WTO Response: Doha Development Agenda:
 Growth through higher farm prices. Cut subsidies and
reduce agricultural barriers in developed countries
US Share in World GDP :1980 to 2007
24
US Share in World GDP (ppp)
23.5
23
22.5
22
21.5
Series1
21
20.5
20
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Yet 2000 – 2008 Widespread Growth
in almost all developing countries!
De v e l opi ng Count r y Gr owt h
12.0
10.0
8.0
1997-2001
6.0
2001-2007
2008-2009
4.0
2.0
0.0
Af r i ca
M i ddl e East
Sub-Sahar an
Lati n Amer i ca
Chi na
Indi a
Asean
NIEs
Why did they grow?
 Global factors important.

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Commodity prices.
Capital flows
Competitive exchange rates.
 But also domestic drivers, reforms and new
growth processes (middle-class in China and
India).
Divergence: Expected to continue!
Grow th in Advanced and Emerging Economies
10
IMF October
2009
8
4
Advanced economies Gross domestic product, constant prices Annual
percent change
2
Emerging and developing economies Gross domestic product, constant p
Annual percent change
-2
-4
-6
20
14
20
12
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
0
19
80
Annual Percentage Change
6
Prospects
 Developed/Developing contrast.
 China/India as center of global growth.
 Impacts on commodity prices.
 The challenge of development: diffusion of best
practices and lots of room below the frontier
II: Growth and Trade
Positive Association
 Typically in miracles trade grew faster than GDP –
important both exports and imports.
 Clearly trade competitiveness was a precondition
for growth.
 And as with companies successful countries adapt to
their environment.
 Most debacles had very slow import growth. IE their
slow growth was not because they were over
whelmed by imports.
Trade and Growth: What explains the
association
 Links between growth and trade.
 Key role of investment-equipment and
imported inputs require imports.
 To pay for imports you must export.
 Links between exports and imports.
 To export you must import.
 Export promotion leads to import promotion.
 E.G. Free Trade Zones.
Converse is true too: A tax on imports is a tax
on exports.
China: Joins the WTO and Export
Growth Accelerates!
China : Ratio of Exports of G&S to GDP 1981-2007
0.45
0.4
0.35
0.3
0.25
Exports/GDP
Imports/GDP
0.2
0.15
0.1
0.05
0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002 2003 2004 2005 2006 2007
Correlation between trade and growth
need not imply causation!
 Economists try to unravel the relationships, and some do find evidence
of trade causing growth. And there are good reasons. (Comparative
advantage, scale economies, inducements to innovate)
 But problem is that others also find strong (and even more compelling
evidence of an association between “high-quality” institutions and both
trade and growth. As paper co-authored by Rodrik notes “ Institutions
Rule”
 So trade plays a key role, but domestic institutions and polices are vital
as well. Indeed high quality institutions play an important role in
promoting both trade growth
 Some obviously: Customs administration, Regulations, transportation,
 Others less obviously, Corruption, business environment, quality of the
rule of law.
Different Types of Growth
 Growth based on consumption and domestic
spending. Works temporarily but leads to
international borrowing, strong exchange rates and
eventually crisis – most recently countries in
emerging europe.
 Growth based on commodities. Can work but highly
dependent on global markets and vulberable.
 Sustainable growth. Continuous upgrading of
services and manufactured goods exports. Often
promoted by productivist (japan, korea, china,
malaysia are good example)
In addition, macroeconomic policies
are important.
Competitive exchange rates are especially
important. A subsidy to all exports, a tax on
all imports, encouraging tradable goods
investment and production. It can
compensate in part for poor institutions.
What makes a competitive currency feasible?
 High domestic saving relative to investment
 A structural fiscal surplus
 Counter-cyclical regulations on capital flows
Tax or restrict inflows in good times
 Exchange-rate regime
 Managed exchange rate regimes more likely to achieve
undervaluation than floats

Conclusion: Keys for Growth
 Macroeconomic: Fiscal discipline to ensure
competitive exchange rates.
 Microeconomic policies to improve policies
and institutions.
 Export success in diversified activities
Growth : Argentina part of the
divergence
Average Annual Growth Rates
7
6
5
4
2000-2008
2000-2008
3
2
1
0
Advanced
Developing
Argentina
… to a high-saving, high-investment model
Saving and Investment
28
Gross national savings rate (%)
Gross national investment rate (%)
26
24
22
20
18
16
14
12
10
8
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Competitive currency
Real exchange rate indices (1997=100)
140.00
Argentina
Brazil
130.00
Chile
Latin
America
China
120.00
Malaysia
Mexico
110.00
Taiw an
100.00
90.00
East
Asia
+
ARG
80.00
70.00
60.00
50.00
40.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
But problems on the Horizon
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Growing problems of credibility
 Fiscal policies
 Need to be tight enough to underpin undervalued
currency; otherwise inflationary pressure
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Relationship between business and
government.
Weak Performance Given Income
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Global Competitiveness Index
GCI 2009–2010.........................................................85 ......3.9
GCI 2008–2009 (out of 134)..................................................88 ........3.9
GCI 2007–2008 (out of 131)..................................................85 ........3.9
Basic requirements.............................................................84 ........4.1
1st pillar: Institutions .........................................................126 ........2.9
2nd pillar: Infrastructure.....................................................88 ........
3rd pillar: Macroeconomic stability..................................48 ........
4th pillar: Health and primary education .........................59 ........
Efficiency enhancers..........................................................84 .......
5th pillar: Higher education and training.........................55 ........4.2
6th pillar: Goods market efficiency.................................124 ........3.5
7th pillar: Labor market efficiency ..................................123 ........3.6
8th pillar: Financial market sophistication.....................116 ........3.4
9th pillar: Technological readiness...................................68 ........3.5
10th pillar: Market size........................................................23 ........4.9
Innovation and sophistication factors ............................76 ........3.4
11th pillar: Business sophistication..................................73 ........
12th pillar: Innovation..........................................................86 ......
Policy Responses: Four Challenges
 Global Market Environment: Support Doha
Round
 Coherent Trade Policies: They can’t all be
infants! Rules and exceptions
 Competitive Exchange Rates and Stable
Macroeconomic Policies (fiscal balance)
 Efficient and Appropriate Domestic
Institutions Rules. Rules Matter