Competitiveness and Growth

Robert Z LawrenceHarvard Kennedy School of Government

Competitiveness and Growth

What is Competitiveness?

Performance in International Trade.

Comparisons through benchmarking. How do countries do with respect to inputs that are the key to growth.

Is the World Economy Hostile to Development? Anti-Globalizers:

For developing countries recent period of globalization and liberalization worse than earlier period with more protection.

Inequality is rising everywhere as well. Pro-Globalizers:

For developing countries recent period of globalization and liberalization is better than earlier period.

World is becoming less unequal.

Growth Experience

Miracles and Debacles. 1960-1980: Era of Import Substitution

33 Miracles: (PC income > 3% pa for ten years) From All Over the World: Asia, Africa and Latin America -- total 357 million people

Including: Botswana, Malta,Singapore,Hong Kong,Gabon, Taiwan, Korea, Lesotho,Trinidad,Brazil,Malaysia,Barbados,Brazil,Malaysia,Israel,Georgia,Cote’d’Ivoire,Sychelles,Tuniisa,Ireland,Dominican,Egypt,Indonesia,Paraguy,Mautirtius,Mexico,Panama,Keny

Debacles: No increase in income (14 countries mainly African) 69 million

1980 to 1999: Era of Globalization

26 Miracles: Mainly Asia and Caribbean (plus Chile) 2.1 billion people

Debacles. 65 Countries Many in Africa and Latin America 621 million people

Arvind Panagariya of Columbia University

How can they both be right?

You can draw different conclusions depending on whether you look at people or at countries.

Early period, more countries were miracles but fewer people, Later period 1980-1999 fewer countries many more people – over 2 billion! Later period, though, many more debacles

Paradox is inequality has increased in almost every country but actually fallen at the global level!

Inequality in 59 Developing Countries (late 80's to 2000)

Income Growth in China: The Richest see their incomes grow the most

But imagine there’s no country!World income inequality is falling.

World Income Inequality

0.76

0.78

0.8

0.82

0.84

0.86

0.88

0.9

0.92

Series1

Mean Logarithmic Deviation;

From Xavier Sal-i-Martin

Explanation

When a poor person becomes “rich” in India or China it could increase inequality in those countries but reduce inequality in the world because in global terms it’s a poor person entering the global lower middle class.

The Global System: 2000 View

A New Economy based on Information technology and finance

2000 View: Globalization good for Industrial countries but inadequate for development in Africa and Latin America (besides China and India).

WTO Response: Doha Development Agenda:

Growth through higher farm prices. Cut subsidies and reduce agricultural barriers in developed countries

US Share in World GDP :1980 to 2007

US Share in World GDP (ppp)

20

20.5

21

21.5

22

22.5

23

23.5

24

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Series1

Yet 2000 – 2008 Widespread Growth in almost all developing countries!

Developing Country Growth

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Af rica

Middle East Sub-Saharan Latin America China India Asean NIEs

1997-2001

2001-2007

2008-2009

Why did they grow?

Global factors important. Commodity prices. Capital flows Competitive exchange rates.

But also domestic drivers, reforms and new growth processes (middle-class in China and India).

Divergence: Expected to continue!Growth in Advanced and Emerging Economies

-6

-4

-2

0

2

4

6

8

10

Ann

ual P

erce

ntag

e C

hang

e

Advanced economies Gross domestic product, constant prices Annualpercent change

Emerging and developing economies Gross domestic product, constant pricesAnnual percent change

IMF October 2009

Prospects

Developed/Developing contrast.

China/India as center of global growth.

Impacts on commodity prices.

The challenge of development: diffusion of best practices and lots of room below the frontier

II: Growth and TradePositive Association

Typically in miracles trade grew faster than GDP – important both exports and imports.

Clearly trade competitiveness was a precondition for growth.

And as with companies successful countries adapt to their environment.

Most debacles had very slow import growth. IE their slow growth was not because they were over whelmed by imports.

Trade and Growth: What explains the association Links between growth and trade.

Key role of investment-equipment and imported inputs require imports.

To pay for imports you must export. Links between exports and imports.

To export you must import. Export promotion leads to import promotion. E.G. Free Trade Zones.

Converse is true too: A tax on imports is a tax on exports.

China: Joins the WTO and Export Growth Accelerates!

China : Ratio of Exports of G&S to GDP 1981-2007

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Exports/GDP

Imports/GDP

Correlation between trade and growth need not imply causation! Economists try to unravel the relationships, and some do find evidence

of trade causing growth. And there are good reasons. (Comparative advantage, scale economies, inducements to innovate)

But problem is that others also find strong (and even more compelling evidence of an association between “high-quality” institutions and both trade and growth. As paper co-authored by Rodrik notes “ Institutions Rule”

So trade plays a key role, but domestic institutions and polices are vital as well. Indeed high quality institutions play an important role in promoting both trade growth

Some obviously: Customs administration, Regulations, transportation,

Others less obviously, Corruption, business environment, quality of the rule of law.

Different Types of Growth

Growth based on consumption and domestic spending. Works temporarily but leads to international borrowing, strong exchange rates and eventually crisis – most recently countries in emerging europe.

Growth based on commodities. Can work but highly dependent on global markets and vulberable.

Sustainable growth. Continuous upgrading of services and manufactured goods exports. Often promoted by productivist (japan, korea, china, malaysia are good example)

In addition, macroeconomic policies are important.

Competitive exchange rates are especially important. A subsidy to all exports, a tax on all imports, encouraging tradable goods investment and production. It can compensate in part for poor institutions.

What makes a competitive currency feasible?

High domestic saving relative to investment A structural fiscal surplus Counter-cyclical regulations on capital flows

Tax or restrict inflows in good times Exchange-rate regime

Managed exchange rate regimes more likely to achieve undervaluation than floats

Conclusion: Keys for Growth

Macroeconomic: Fiscal discipline to ensure competitive exchange rates.

Microeconomic policies to improve policies and institutions.

Export success in diversified activities

Growth : Argentina part of the divergence

Average Annual Growth Rates

0

1

2

3

4

5

6

7

Advanced Developing Argentina

2000-2008

2000-2008

… to a high-saving, high-investment model

Saving and Investment

8

10

12

14

16

18

20

22

24

26

28

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Gross national savings rate (%)

Gross national investment rate (%)

Real exchange rate indices (1997=100)

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Argentina

Brazil

Chile

China

Malaysia

Mexico

Taiw an

Competitive currency

Latin America

East Asia + ARG

But problems on the Horizon

Growing problems of credibility Fiscal policies

Need to be tight enough to underpin undervalued currency; otherwise inflationary pressure

Relationship between business and government.

Weak Performance Given Income Global Competitiveness Index GCI 2009–2010.........................................................85 ......3.9 GCI 2008–2009 (out of 134)..................................................88 ........3.9 GCI 2007–2008 (out of 131)..................................................85 ........3.9 Basic requirements.............................................................84 ........4.1 1st pillar: Institutions .........................................................126 ........2.9 2nd pillar: Infrastructure.....................................................88 ........ 3rd pillar: Macroeconomic stability..................................48 ........ 4th pillar: Health and primary education .........................59 ........ Efficiency enhancers..........................................................84 ....... 5th pillar: Higher education and training.........................55 ........4.2 6th pillar: Goods market efficiency.................................124 ........3.5 7th pillar: Labor market efficiency ..................................123 ........3.6 8th pillar: Financial market sophistication.....................116 ........3.4 9th pillar: Technological readiness...................................68 ........3.5 10th pillar: Market size........................................................23 ........4.9 Innovation and sophistication factors ............................76 ........3.4 11th pillar: Business sophistication..................................73 ........ 12th pillar: Innovation..........................................................86 ......

Policy Responses: Four Challenges

Global Market Environment: Support Doha Round

Coherent Trade Policies: They can’t all be infants! Rules and exceptions

Competitive Exchange Rates and Stable Macroeconomic Policies (fiscal balance)

Efficient and Appropriate Domestic Institutions Rules. Rules Matter