What the Hell Does Competitiveness Mean and Why the Hell Should We Care?

Some advice: beware politicians talking about competitiveness.

In the socio-economic arena, you can find an index for this and an index for that. But the World Economic Forum‘s “Global Competitiveness Index” is one of the biggest beasts in this area.

From this index, we learn that Switzerland is the most competitive country in the world, followed by Singapore and the United States. But what does this mean? The WEF tries to help out:

We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be reached by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to grow faster over time.

We immediately run into a host of problems. For example, China comes in at 28 and India at 71 in the index rankings. Yet these two economies are exemplary examples of economies that have been growing “faster over time”. So the link between competitiveness and growth appears tenuous at best.

Indeed, I would argue that those countries who are least competitive (using the WEF‘s competitiveness metrics) may offer the best growth opportunities, since they have the most painless potential for catch-up. If you are corrupt and your institutions suck, then just by becoming a little less corrupt and by making your institutions suck just a little bit less, then you can grow an awful lot.

Then there is the word “prosperity”, which crops up an awful lot in talk of competitiveness. Unfortunately, prosperity is not the same thing as well-being or happiness. So are competitive nations happy nations? The question isn’t asked.

And what the hell does prosperity mean? In the United States,  a Council on Competitiveness was established nearly 30 years ago. Back in March 2007, the Council issued a report called “Competitiveness Index: Where America Stands“. It was rather smug as reports go, but America’s competitive prowess didn’t stop the country walking into the buzz saw of the Great Recession.

The report also included an introduction by Michael Porter, the doyen of competitiveness studies. If anyone can tighten up the purpose behind competitiveness, then surly Porter could.

The ultimate goal of competitiveness is the prosperity of a nation’s people, or per capita living standards….

….Competitiveness is not about a low-cost labour force, the largest share of exports of even the fastest economic growth. It is about creating the conditions under which companies and citizens can be the most production so that wages and returns on investment can support an attractive standard of living.

For those of a certain age (and an interest in economics and finance), Michael Porter’s book “The Competitive Advantage of Nations” was a must-read. Palgrave describes is as one of the most influential business and management books of all time. For a synopsis of his thesis, read this 1990 Harvard Business Review article here. My younger self was impressed when I first read his book. Now, less so.

For a start, the focus on competitiveness has not helped support “an attractive standard of living”. In the late 1980s, when national competitiveness studies swept into fashion, real median household income was around $52,000–almost exactly where we are now.

Of course, I frequently point out on this blog that there is a disjoint between standard of living and well-being. But the competitiveness mantra has always ignored well-being. The mantra has told us that we should keep score by looking at growth and prosperity (aka per capita incomes) alone. In short, we are admonished to remain competitive, and in so doing we must reform X, Y an Z. But, by doing this, the average Joe gets nothing in return.

Moreover, measures of competitiveness appear to have absolutely no predictive power whatsoever. In the 1990 HBR article by Porter, Japan played a staring role. Ten years later, and no apology in sight, Porter wrote a book called “Can Japan Compete?”

That book, itself, contains a call on Japan to reform its uncompetitive half (a half generally ignored 10 years earlier). And this call is still sounded regularly in the editorial pages of the Wall Street Journal, Financial Times and The Economist. Thank god they have not done it. If they had, I suggest that you would have seen a far greater decline in median incomes and a marked deterioration in well-being. It is the “uncompetitive” piece of the the economy that gives Japan its low unemployment, social coherence and overall resilience to what the world economy and nature (think earthquakes, tsunamis and typhoons) throws at it.

So to conclude, whenever you hear politicians clamour for national competitiveness, expect incoherent, ill-informed and unsupported garbage.