111 510 510 libonline@riphah.edu.pk Contact

A dangerous idea

Competitiveness has become a mantra of modern times. Global reports ranking countries on the ladder of competitiveness are now serious business. These rankings are taken seriously not only by the investors and business managers but the academia, researchers, policy makers and the governments also give lot of attention to such reports. The concept of competitiveness is no longer restricted to firms which traditionally competed on price, quality or cheap labour. The global competitiveness reports now talk of ‘national competitiveness’ where comparisons are drawn between the nations based on indices and parameters supposed to be the determinants of competitiveness.

The World Economic Forum (WEF) publishes its global competitiveness report every year and ranks the economies of the world on Global Competitiveness Index (GCI), composed of dozens of factors, from the extent of quality of roads to business impact of malaria. The Global Competitiveness Report of 2014-15 has done the same thing. It has ranked 144 national economies in terms of the Global Competitiveness Index. What is new for Pakistan in this report? Perhaps nothing.

Pakistan is at the 129th position among a total of 144 nations ranked against GCI. In 2013-14, Pakistan was 124th among 148 countries. Corruption, policy instability, access to finance, inadequate supply of infrastructure, inefficient government bureaucracy and inflation were identified as the most problematic factors for doing business in Pakistan by the WEF report in 2013-14. Same factors have been found to be the most problematic areas in the report of this year.

What is competiveness actually? According to the World Economic Forum, ‘national competitiveness is the set of institutions, policies and factors that determine the level of productivity of a country.’ IMD which also ranks the countries in terms of their competitiveness defines national competitiveness as “how a nation manages the totality of its resources and competencies to increase the prosperity of its people”. Do nations compete the same way as do businesses and firms? Michael Porter warns that competitiveness as used by a firm should not be confused with national competitiveness. Trade between nations is a positive-sum game, meaning all the nations trading with one another gain from international trade whereas competition between the rival firms is a zero-sum game. Pakistan may not be in competition with India the same way as Coke is in competition with Pepsi.

The scorecard or measure of the success of a firm is the market share it captures or the amount of profit it earns. On the other hand, when we look at national competitiveness, it essentially means productivity of all resources utilised by a nation. For example, a shoe factory operating in country A may gain competitiveness with shoe making factories of country B by paying low wages to its employees but low wages may not be adding to the prosperity of the people at large in the country A. So when we talk of national competitiveness, it does not merely mean increase in exports through management of exchange rate or by competing on low wages.

So economists like Paul Krugman consider the very idea of national competitiveness as highly dangerous. “The idea that a country’s economic fortunes are largely determined by its success on the world markets is a hypothesis, not necessarily a truth. And as a practical and empirical matter that hypothesis is flatly wrong. Obsession with competitiveness is not only wrong but dangerous”, wrote Paul Krugman in 1996 in one of his articles on the subject of competitiveness of nations.

The very idea of national competitiveness is thus intellectually misplaced according to standard economic thinking. The idea of competitiveness only makes sense when we apply it to firms or some specific business activities. For example, we can say that Pakistan has become more competitive in terms of sports goods and less competitive in terms of textile material but it may not be much meaningful to say, according to standard economic models and thinking, that the economy of Pakistan has as a whole become less competitive. Economists use competitiveness in entirely different meanings.

To the economists, competitiveness is purely a problem of real exchange rate or some structural maladjustments affecting medium to long –term economic performance, productivity, innovation, and skills etc. The idea of competitiveness basically comes from the business school literature, where it, according to Professor Sanjay Lall, forms the basis for a great deal of strategic analysis. Moreover, competitiveness indices are strongly biased against the developing countries.

Professor Sanjay Lall, in his paper “Competiveness indices and developing countries: an economic evaluation of the global competitiveness report”, has examined in detail the construction of the global competiveness index (GCI) and has observed severe deficiencies at several levels. “Its definitions are too broad, approach is biased, and methodology is flawed. Most of the qualitative measures are vague, redundant or wrong, and empirical and theoretical foundations are weak”.

To support his thesis, he has argued in detail that the principles of ‘Washington Consensus’ are very much visible in the approach followed by the WEF. For example, WEF indices assign uniformly high values to freer trade, strong intellectual property protection, and more liberal capital accounts across countries. It simply means that the indices ignore valid arguments for interventions by the state in all these areas despite the point that the developing countries have fledgling industrial sectors, weak capabilities, and backward institutions. More emphasis on strong intellectual property rights means higher costs of importing technology for the non-innovating countries whose economies are yet factor-driven. Similarly, premature liberalisation of capital accounts may lead to financial crisis as happened in several East Asian countries.

So, national competitiveness is not exchange rate adjustment. It is not the boosting of exports through the devaluation of currency. It is not a temporary advantage gained due to an abundance of natural resources. Devaluation of currency, cheap labour or natural resources cannot become the formulae for boosting prosperity in the long run. They may create some benefits to the economy in the short run but are no guarantee of sustainable competitiveness. Moreover, competitiveness cannot be measured simply by export growth rates or foreign exchange reserves. Competitiveness is a much wider concept and its determinants are fast changing. Primary resources are no longer considered sufficient to remain competitive. Strong local capabilities, technological competence, work discipline, competitive supplier clusters, strong support institutions, good infrastructure and well-honed administrative capabilities are some of the new tools of competitiveness.

But on the top are the skills of the workforce. The composition of Global Competitiveness Index also vindicates this assertion. Out of total twelve pillars, four pillars are directly linked to skills. These pillars are health and primary education, higher education and training, business sophistication, and innovation. Two pillars i.e. technological readiness (a measure how a country implements existing technologies to improve productivity) and labour market efficiency are indirectly linked to skills.

Thus we can say that almost 50 percent weightage of the WEF index directly or indirectly depends on the skill levels of the workforce of a country. Unfortunately, Pakistan scores very badly on these accounts. For example, Pakistan respectively sits at 129,127,132, and 114 out of the total 144 countries against health and primary education, higher education and training, labour market efficiency and technological readiness.

Education and healthcare are thus the major aspects of overall ‘social infrastructure’ required to promote productive economic activity. If large parts of the population have limited basic reading and writing skills, or health facilities are lacking, their ability to actively participate in the economy is severely limited. So the challenge before Pakistan from the angle of national competitiveness is to break out of the low-level skills trap by improving the education and skills of its workforce.

The writer is a graduate of Columbia University. Email: jamilnasir1969@gmail.com Twitter @ Jamilnasir1

Jamil Nasir, "A dangerous idea," The News. 2014-10-15.
Keywords: Economics , Economic issues , Economic aspects , Economic growth , Foreign exchange , Economic needs , International trade , National issues , Policy making , Educational policy , Economic inflation , Growth rate , Property rights , Economy-Pakistan , Bureaucracy , Corruption , Michael Porter , Prof. Sanjay Lall , Pakistan , GCI , WEF , IMD