The competitive threat of nations

Arya B. Gaduh Economist Centre for Strategic and International Studies (CSIS) Jakarta abgaduh@csis.or.id

I returned recently from a conference of ASEAN economists on competitiveness. Talk of the "China threat" loomed large -- hardly any discussion went by without a mention of how ASEAN should respond to China's increasing international competitiveness.

Throughout the conference, I began to worry about semantics. Among economists, the accepted use of the term "competitiveness" applies to firms. "National competitiveness," on the other hand, is a term that is, at best, imprecise and, at worst, misleading. Nations do not really compete with each other and when a country increases its "competitiveness," its supposed "rival" can actually benefit.

Let us see why. What we often mean by a firm's competitiveness is its ability to secure market share in the market. Uncompetitive firms -- those unable to obtain market share -- will cease to exist. Here, it is clear that one cannot simply apply this interpretation at a national level. No nation has ever ceased to exist because it is uncompetitive, in the sense of not being able to secure market share, in the international market.

Nations do not really compete because, unlike firms, economic interaction between countries is not a zero-sum game -- that is, one's gain does not necessarily translate into another's losses. While Telkom's increased competitiveness (e.g., via improved productivity) will cut into Indosat's profit, the impact of cheaper Chinese products on ASEAN economies is ambiguous -- in all likelihood, it will be positive.

Why this difference? Comparative advantage: Even if China can produce everything better than the rest of the world, it is not in its best interest to produce them all. It is better off focusing on selected products in which its productivity is highest, and purchase the remainder from other countries. By doing so, everyone benefits.

For many, including some very intelligent people, this idea is hard to accept. But we see it every day. Just think about why an accountant needs an office boy. Even if an accountant is better at both running errands and accounting than her office boy, it is still not in her best interests to do everything herself. She is better off earning money on her highest productivity job (i.e., accounting) and purchasing the (less efficient) running of errands from her office boy.

Though the analogy only goes so far, the principles are clear. First, a country will be better off doing what it is best at, not what it does better than other countries, and purchasing the rest. Second, trade benefits everyone: By producing goods with the highest productivities, countries actually optimize their income. As such, a country's increased productivity is likely to benefit its trading partners as well.

So, while firms across countries compete, countries do not. In a sense, the term "national competitiveness" is meaningless: If countries do not compete, how can one say that a country is more able to compete than others? Indeed, for me, one of the conference highlights was to watch many economists, forced to talk about competitiveness, juggle the term's usage. In the end, many used it to mean either "productivity" or "firm-level competitiveness."

But why worry? Surely, such a misnomer is harmless. After all, it did not prevent the aforementioned conference from drawing mostly the correct conclusions.

I have to admit, though, that international competitiveness rhetoric is often useful when pushing for improvements in domestic policies. Yet, it is a double-edged sword. As the rhetoric has seeped into the collective consciousness, it can become a powerful tool for politicians and business lobbies to promote harmful policies. China's low labor costs can suddenly be used as an excuse to lower labor standards; Vietnam's low electricity costs to force the government to maintain its subsidy.

If left unchecked, the rhetoric can become, in the words of Princeton economist Paul Krugman, "a dangerous obsession." The focus on competing nations diverts attention away from the most important things. No, the ability to export into the international market is not a country's ultimate goal; that should be the improvement of people's standard of living. That depends mostly on domestic productivity growth. To improve productivity, it is useless to lock one's view on one, or several, of our competitor countries. We need to look inward.

And here, the prescriptions are standard: Keep the economy flexible, transaction costs low and property rights secure, and find ways to upgrade technology by encouraging investment in both physical and/or human capital. To be sure, these are difficult, long-term objectives. Yet, these should be the priorities and any short-term policy should be guided by them -- not by the fear that arises from the specter of international competition.