World competitiveness rankings: What do they tell us?

The IMD World Competitiveness Rankings released this week are worth reflecting on, not so much because of the relative positioning of various countries – including Australia – but rather because of the reasoning which underpins the rankings.

The press release accompanying the rankings gives some indication of this reasoning. The first point worth noting is the potentially misleading use of the term competitiveness. When this term is used by economists it usually refers to the price competitiveness of a country’s exports and import-competing goods. And for many economists this would over time be bound up with the relative real unit labour costs across different countries.

The reasoning accompanying the IMD rankings suggest however a much looser use of the term “competitiveness”. What’s suggested is rather a view about the potential of different countries for sustained economic prosperity.

Now, price competitiveness of one’s exports and import-substitutes may be part of this, but is certainly never the whole story.

Moreover, as a number of economists over the years have noted, the world economy is not an open economy, but a closed economy. This means that one country’s improved competitiveness is at the expense of another country.

In other words, growing your economy through exports at the expense of other countries can mean exporting not just goods and services, but exporting unemployment to other countries as well.

IMD World Competitiveness Yearbook 2012

So one needs to be cautious in drawing links between competitiveness and economic prosperity – it is not a game everyone can win.

Another interesting feature of the IMD release relates to the position of the US. It is suggested that the “US remains at the centre of world competitiveness because of its unique economic power”.

Undoubtedly the element of truth in this statement is the continued hegemony of the US in the global economy.

But one could reasonably contend that this is much less to do with any superiority in competitiveness of the US in the narrow economic sense and much more to do with the continued dominant status of the US dollar as a de facto reserve currency in the international monetary system.

And this dominance – effectively emerging as far back as the end of the First World War – has continued, interestingly, while the external accounts of the US – specifically, its current account – have been deteriorating.

In fact the US current account has been deteriorating since the breakdown of the Bretton Woods era in the early 1970’s.This in turn has reflected a long-run deterioration in US trade performance. Yet this has not seemingly impeded the economic dominance of the US.

In fact, it arguably has been a reflection of its economic power and its ability to influence global demand.

As commentators on the history of the international monetary system have at times noted, the status of the US dollar in a sense means that it can afford to be somewhat less concerned about competitiveness than would be the case for most other economies.

This is in effect a manifestation of what Valéry Giscard d’Estaing, French Finance Minister between 1969 and 1974, called the “exorbitant privilege” accorded the US dollar.

Also revealing are the comments in the IMD press release regarding competitiveness in the Euro area. These seem to divide Europe competitiveness along the lines of the stronger and weaker economies – so Germany gets a guernsey for export-orientation and fiscal discipline – while countries such as Spain, Italy, and Portugal “continue to scare investors”.

The latter is probably true, as is the fact that Germany has succeeded in the Euro area. But the elephant in the room in this regard is that Germany’s success has been in part at the expense of these other Euro partners and not because its fiscal discipline or because of fiscal profligacy on the part of its partners.

Rather, Germany’s success has in part to do with its suppression of wages and hence prices growth relative to other parts of the EMU, which has increased its competitiveness within the Euro area. But as noted above, what is one country’s export is another country’s import.

So, yes, differential competitiveness may well be a significant part of the story in European Union, but it’s not clear that it is any less part of the problem than part of the solution, certainly for European Union as a whole.

The other worry I have – at least in relation to the IMD press release accompanying its rankings – is that the criteria for the rankings in part comes from a “survey of … international executives, which reveals a growing scepticism in some of the 59 economies toward globalisation and the need for economic reforms”.

It is not immediately apparent how results of such a survey precisely inform the rankings.

I’m guessing the reasoning is that scepticism about a country’s “reform agenda” has (everything else constant) a negative impact on a country’s ranking.

If that’s the case, the usefulness or worth of that influence turns entirely on what one means by “reform”.

I have the sense that it means the same-old-same-old, namely, fiscal austerity (or what, for most, except those who believe in the nonsense of “expansionary fiscal consolidation”, is akin to killing the patient in order to cure the disease) to supposedly instill confidence in the minds of private sector investors.

I suspect “reform” also means deregulating labour markets and a general race to the bottom in terms of taxation, particularly on capital.

In that case, for my money, the less of that kind of reform, the higher the ranking should be, not lower – at least if we are ranking the ability of a country to get back on a solid growth footing post GFC.

This might also give one some pause for some scepticism about the slip in the ranking of Australia to the extent it is attributable to the need for further “labour market flexibility” in this country.

This article first appeared on The Conversation.