The competitive threat of nations just a pseudo fear among countries<\/p>\n
Arya B. Gaduh, Economist, Centre for Strategic and International Studies
\n(CSIS), Jakarta<\/p>\n
abgaduh@csis.or.id<\/p>\n
I returned recently from a conference of ASEAN economists on
\ncompetitiveness. Talk of the "China threat" loomed large --
\nhardly any discussion went by without a mention of how ASEAN
\nshould respond to China's increasing international
\ncompetitiveness.<\/p>\n
Throughout the conference, I began to worry about semantics.
\nAmong economists, the accepted use of the term "competitiveness"
\napplies to firms. "National competitiveness," on the other hand,
\nis a term that is, at best, imprecise and, at worst, misleading.
\nNations do not really compete with each other and when a country
\nincreases its "competitiveness," its supposed "rival" can
\nactually benefit.<\/p>\n
Let us see why. What we often mean by a firm's competitiveness
\nis its ability to secure market share in the market.
\nUncompetitive firms -- those unable to obtain market share --
\nwill cease to exist. Here, it is clear that one cannot simply
\napply this interpretation at a national level. No nation has ever
\nceased to exist because it is uncompetitive, in the sense of not
\nbeing able to secure market share, in the international market.<\/p>\n
Nations do not really compete because, unlike firms, economic
\ninteraction between countries is not a zero-sum game -- that is,
\none's gain does not necessarily translate into another's losses.
\nWhile Telkom's increased competitiveness (e.g., via improved
\nproductivity) will cut into Indosat's profit, the impact of
\ncheaper Chinese products on ASEAN economies is ambiguous -- in
\nall likelihood, it will be positive.<\/p>\n
Why this difference? Comparative advantage: Even if China can
\nproduce everything better than the rest of the world, it is not
\nin its best interest to produce them all. It is better off
\nfocusing on selected products in which its productivity is
\nhighest, and purchase the remainder from other countries. By
\ndoing so, everyone benefits.<\/p>\n
For many, including some very intelligent people, this idea is
\nhard to accept. But we see it every day. Just think about why an
\naccountant needs an office boy. Even if an accountant is better
\nat both running errands and accounting than her office boy, it is
\nstill not in her best interests to do everything herself. She is
\nbetter off earning money on her highest productivity job (i.e.,
\naccounting) and purchasing the (less efficient) running of
\nerrands from her office boy.<\/p>\n
Though the analogy only goes so far, the principles are clear.
\nFirst, a country will be better off doing what it is best at, not
\nwhat it does better than other countries, and purchasing the
\nrest. Second, trade benefits everyone: By producing goods with
\nthe highest productivities, countries actually optimize their
\nincome. As such, a country's increased productivity is likely to
\nbenefit its trading partners as well.<\/p>\n
So, while firms across countries compete, countries do not. In
\na sense, the term "national competitiveness" is meaningless: If
\ncountries do not compete, how can one say that a country is more
\nable to compete than others? Indeed, for me, one of the
\nconference highlights was to watch many economists, forced to
\ntalk about competitiveness, juggle the term's usage. In the end,
\nmany used it to mean either "productivity" or "firm-level
\ncompetitiveness."<\/p>\n
But why worry? Surely, such a misnomer is harmless. After all,
\nit did not prevent the aforementioned conference from drawing
\nmostly the correct conclusions.<\/p>\n
I have to admit, though, that international competitiveness
\nrhetoric is often useful when pushing for improvements in
\ndomestic policies. Yet, it is a double-edged sword. As the
\nrhetoric has seeped into the collective consciousness, it can
\nbecome a powerful tool for politicians and business lobbies to
\npromote harmful policies. China's low labor costs can suddenly be
\nused as an excuse to lower labor standards; Vietnam's low
\nelectricity costs to force the government to maintain its
\nsubsidy.<\/p>\n
If left unchecked, the rhetoric can become, in the words of
\nPrinceton economist Paul Krugman, "a dangerous obsession." The
\nfocus on competing nations diverts attention away from the most
\nimportant things. No, the ability to export into the
\ninternational market is not a country's ultimate goal; that
\nshould be the improvement of people's standard of living. That
\ndepends mostly on domestic productivity growth. To improve
\nproductivity, it is useless to lock one's view on one, or
\nseveral, of our competitor countries. We need to look inward.<\/p>\n
And here, the prescriptions are standard: Keep the economy
\nflexible, transaction costs low and property rights secure, and
\nfind ways to upgrade technology by encouraging investment in both
\nphysical and\/or human capital. To be sure, these are difficult,
\nlong-term objectives. Yet, these should be the priorities and any
\nshort-term policy should be guided by them -- not by the fear
\nthat arises from the specter of international competition.<\/p>",
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