The competitive threat of nations

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.