If we're going to compete in the global marketplace for ideas, we'll need better rhetoric than this

My friend Ben Ticehurst points out that a certain phrase seems to have crept into John Howard’s vocabulary lately. It seems the PM can’t stop talking about Australia’s “competitive advantage“.

While the term “competitiveness” means something when applied to firms, the analogy is misleading when applied to nations. The best case for this was made by Paul Krugman, in a 1994 piece that began:

Almost nobody — in business or government — would disagree with this statement: “Today America is part of a truly global economy. To maintain our standard of living, we must learn to compete in an ever tougher world marketplace. That’s why high productivity and product quality have become essential. We need to move the economy into high-value sectors that will generate jobs for the future. And the only way we can be competitive is if we forge a new partnership between government and business.”

The problem is: It’s baloney. In reality, there is almost nothing to our fixation with national competitiveness, or its central idea — that every country is like a giant corporation slugging it out against rivals in global markets. The U.S. and Japan are simply not competitors in the same way that, say, Ford competes with Toyota. Any country’s standard of living depends almost entirely on its own domestic economic performance, and not on how it performs relative to other countries. That’s not just my view; it’s what most economists think. 

…and concluded:

My advice is to consider a proper understanding of the real relationship between productivity and competitiveness as a kind of test of the reliability of supposed experts, in and out of government. The issues involved are not hard to sort out — we’re not talking quantum mechanics here. So if you hear someone say something along the lines of “America needs higher productivity so that it can compete in today’s global economy,” never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads I DON’T KNOW WHAT I’M TALKING ABOUT.

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18 Responses to If we're going to compete in the global marketplace for ideas, we'll need better rhetoric than this

  1. Seneca says:

    This mistake is common – usage is on a par with “anticipate” to mean “expect”. It might even have reached the point where to use it correctly might confuse people!
    Maybe the usage reflects an implicit belief that somehow or other government is responsible for running the economy (when the Reserve Bank isn’t busy managing it).

  2. phil says:

    Government-speak. Meaningless, as you say. Possibly a maladaptation of Michael Porter’s theories to national level, rather than the enterprise level at which they were originally aimed. Economic/industry development departments around Australia, and no doubt wider, grabbed Porter’s theories with both hands to arm themselves against traditional comparative advantage thinking which Treasuries always used to counter requests for funds to build/develop/transform/meddle in the economy. Hours of fun.
    The main question imho is who fed it to Howard?

  3. derrida derider says:

    It actually has some meaning if you have a fixed exchange rate- you have to maintain ‘competitiveness’ relative to the people you’re trading with if you want to maintain that particular rate. But why would you adjust your economy to maintain your exchange rate rather than adjust your exchange rate to your economy? It’s the classic error made by Winston Churchill in the 1920s.

    Under market exchange rates, of course, ‘national competitive advantage’ is a perfectly meaningless concept.

  4. mr_x_groovy says:

    To Phil, what if we are talking about commodities that sell at world prices?

  5. Patrick says:

    It is a pity that Krugman’s closing phrases seem to apply equally to him with respect of his difficulties (last time I checked which wasn’t recently) with understanding that in fact mean long-run standards of living have a hell of a lot to do with barriers to trade, as well.

    Perhaps now that we have a majority of NYT subscribers in Congress he will start turning his mind to advocating ideas such as that one, so unloved by the NYT and its readership.

  6. derrida derider says:

    mr_x_groovy, if you can’t sell your commodities at world prices then your currency will just depreciate (yes, lowering your standard of living – but that’s what we mean by domestic performance of the economy). . You’ll still sell your products – you just get less for them in your own currency.

  7. Geoff R says:

    Victorian Liberals have been using similar rhetoric and wasn’t the GST justified on the grounds (among others) that it increased the competiveness of exports.

  8. Michael Moriarty says:

    At times I seek comfort in a veil of ignorance. It warms me and comforts me. On occasions you find that you have to throw it away and expose your self to criticism.

    I know I risk wearing that flashing sign but…

    I really don’t think the comment has an application to goods and services per sae and I disagree with DD. You don’t sell you goods at a lower price at all you simply don’t sell your goods at all. I don’t even think the commentary applies to imports or exports at all. I feel it is more about global economies and its implicit impact on domestic factors.

    You have to question if Australia has a competitive advantage in call centres. Empirical evidence would suggest that we do not. The jobs have there for been exported elsewhere (well India). So India as a nation has a competitive advantage in call centres.

    Given that we are exporting jobs overseas does not Australia need to have a competitive advantage elsewhere so as to import jobs to Australia. We seem to be traditionally poor performers in the secondary markets. I would assume that these jobs are under threat in a global economy where free trade allows open competition. Australia already exports Iron Ore to Japan and then Imports a processed product.

    So at a macro level when talking about the jobs market does not one country have a competitive advantage over another. There is no doubt that many jobs don’t fall under threat from globalisation. It matter for nought if you can mine Iron ore cheaply if you don’t have iron ore. If you can’t make shoes cheaply then you will and lets face it we have no competitive advantage at all.

    It seems to me that Australia does need to have a competitive advantage. (Ok be kind in your criticisms remember I’m not an economist).

  9. Sinclair Davidson says:

    It could be worse. Costello on Insiders was talking in Phillips Curve terms.

  10. Michael Moriarty says:

    Well at least im one up there year ten econonics (1975) and Phillips was pretty much on the outer then.

  11. mr_x_groovy says:

    thanks DD – your point ‘appreciated”

  12. Christine says:

    One of my favourites on comparative v competitive advantage is out of ANU: Warr, Peter G. (1994), ‘Comparative and Competitive Advantage’, Asian Pacific Economic Literature,. 8, 2, 1–14

    If the idea of national competitive advantage is a maladaptation of Porter’s work, it’s Porter himself who did the maladapting. Drove me crazy when I first read The Competitive Advantage of Nations, or whatever his book was called, since he complained about comparative advantage being wrong, while demonstrating that he didn’t understand what comparative advantage was.

    Michael, a couple of points. First, in your call centres example, you use competitive advantage to mean something very close to what economists would call comparative advantage. Except, you seem to think it’s important for Australia to have on-shore call centres, while an economist would pretty much say good riddance, and especially let’s not subsidise the things.

    Given your next comment on iron ore and manufacturing, here’s a totally made up example, and not a great one at that. Suppose Australia has 100 people, lots of iron ore, and wants 3000 tonnes of iron products. We could either (a) have 30 people mining and 70 people producing iron products; or (b) have 100 people mining to get 10,000 tonnes, sell the iron to Japan, and buy back 3000 tonnes of iron products, with a bit left over for other things. Clearly (b) would be better. This is approximately what’s meant by comparative advantage (except I haven’t said anything about Japan’s productivity in iron ore mining or iron product production, which is necessary to talk about comparative vs absolute advantage, and thus to demonstrate that trade is still worthwhile for both countries even if one does everything better than the other – could add assumption Japan has 400 people who can produce 0 tonnes iron ore, and 10000 tonnes iron products?). First year econ textbooks have better examples, which are actually fun to work through. Going up from the two countries, two products case causes a few problems, though, I gather?

    In terms of standard of living, more productive countries are better off. This is not because they have a competitive advantage in some high tech good, but because they are more productive. One of Krugman’s points is that Japan becoming more productive does not make Australians less productive, and so does not much affect our standard of living.

    Sorry to serious tradies: this is rough stuff. For more and better, a good start would be “Pop Internationalism” and “Peddling Prosperity” by Krugman, which are quite readable. And speaking of Krugman … Patrick: huh? Do you mean you think Krugman is in favour of trade barriers?

  13. Michael Moriarty says:

    Christine,

    Actually I dont really think we need to have call centres in Australia. Having done a little more reading I think the Call centre staff should actually take up iron ore mining.

    Some times it just takes a memory jogger to put you back on track or point you in the right direction. I read an article that explained how the most uncompetitive nation can still hold a comparative advantage over the rest of the world. So that nation is still an exporter.

    Thanks for the gentle shove in the right direction I really do appreciatte it. I have to say the first paper I tried to read was by J Peter Neary that just gave me a head ache.

    Mike

  14. Leo says:

    Mark Latham used that phrase a lot in Civilising Global Capital. Still frightens me that so many people regarded him as a well-informed policy wonk.

    In fact, he asserted both that national economic management through fiscal/monetary policy was dead, replaced by ‘new growth theory’ and that competitive advantage had replaced that outdated theory, comparative advantage.

    Twit.

  15. Christine says:

    Yep, let’s all get into mining, I’ve proved it’s the place to be!

    The problem with ‘competitive advantage’ is that it does sound entirely plausible, and it takes quite a bit of effort, and possibly some headaches, to figure out what’s wrong with it.

  16. Patrick says:

    Christine: I certainly hope he is in favour of free trade. But I am under the impression that he thinks that free trade is a lot lot lot less important than, eg, who the President is (which is utterly false insofar as prosperity goes). I only hope that now that his beloved (largely anti-free trade) Democrats have some legislative responsibility, he takes the trouble to remind them that the single biggest step they could take towards greater American prosperity would be freer trade.

    Of course it would also be the single biggest step they could take towards greater global prosperity, but he can steer away from that if he thinks that might scare the firmly-rooted in zero-sum rump of the Democratic party off.

  17. Dave says:

    Hi,

    I see what your saying about comparative advantage, and the differentiation between this and competitive advantage.

    What I want to know is what industries Australia should be looking into in the future.

    Australia’s economy seems to be driven by comparative advantage in rather dated areas and we apparently are doing alright.

    However I read an opinion in a transcript of a speech which seemed interesting, see bracket (Barry Jones, AO, FAA, FARA, FTSE, MP.
    Address to the AIE Melbourne Group Annual General Meeting, Friday, 12 December 1997.)

    In several lectures I’ve been to in international business I’ve heard of a shift in production to service sectors in the US to higher value added areas from traditional manufacturing.

    One of these areas I heard discussed was in a conference regarding Americas advantages in financial services. According to this prominent economist America would be in a position to grow with production growth in Asia due to it’s ability to provide stable and efficient financial services to these areas.

    An example of the complexity of integration of world markets when you include finance as an “export”.

    What I am getting at is countries seem to be building new and more relevant advantages in todays markets. Asian tigers, China and India and diversification in the UAE are all example of countries who are succeeding in industries they were hopeless at 40 to 20 years ago.

    In terms of competitiveness where is Australia heading, have we left it too late? What geographic advantages, Human Resources advantages and Technological areas (i.e. Australia is known for biomedical research) are we suited for?

    What I’m getting at is are we allocating our resources in areas which will ensure our future prosperity? If not in what areas would we be able to expand into in value added activities?

    I heard Ricardo Semler in a conference on the gold coast talk about Australian specializing in industries which were very stupid decisions… unfortunately the large audience didn’t permit me to ask what he believed these industries were.

    As a whole who should be doing what in the world? I heard a speech in Korea University by a visiting professor Immanuel Wallerstein who introduced to me the concept of the runaway factory, I cannot explain the idea as well as he, however a website extract below demonstrates his theory well.

    This has me wondering, what is the future after China organizes it’s labor markets? What happens when production costs increase in china, toted “The Worlds Factory” as already manufacturing is shifting from previously strong production countries like Korea due to wage increases.

    So another interesting thing I think is what is the future of country advantages? We all cannot go into high value added activities as someone has to produce commodities and consumer items.

    http://revista-theomai.unq.edu.ar/numero11/artwallerstein11.htm

    “the “runaway factory” – transferring their production to zones that have “his­tor­­ically”-lower rates of remuneration. But exactly what history accounts for these historically-lower rates? The answer is rather simple – the existence of a large pool of rural labor, for whom urban, waged employment, at whatever lev­el of re­muneration, rep­re­sents a net increase in real income for the household. So, as remuneration goes up, more or less per­manently, in one area of the world-economy, it is compensated in terms of the world-eco­nomy as a whole by the ap­pearance of new cohorts of workers who will accept lower remune­ra­tion for the identical work, holding of course efficiency con­stant.

    The problem with this solution to the regularly repeated prob­lem of the owner/producers is that after 25-50 years the wor­kers in this new zone of production are able to overcome their initial urban disorienta­tion and political ignorance and proceed down the same path of class struggle as did others previously in other areas of the world. The zone in question thereupon ceases to be a zone of historic­ally-lower remuneration, or at least not to the same de­gree. Sooner or la­ter, the employers are required, in their self-interest, to flee again, relocating to yet another zone. This constant geographical shift of the zones of production has worked quite well over the centuries, but does have an Achil­les heel. The world is running out of new zones into which to relocate. This is what we mean by the deruralization of the world, which is going on apace, and at a very accelerated rate since 1945. The proportion of world population that lives in cities went from 30 to 60 percent between 1950 and 2000.(6) The capita­list world-economy should run out of such zones entirely within 25 years at the most. There are already too few. And with modern means of commu­nication, the time period for new zones to learn the lessons of how to organize has been drastically re­duced. Hence, the ability of employers to keep remuneration in check has been drastically curtailed.”

  18. Dave says:

    Sorry after re reading my message it doesn’t seem coherent.

    I’ll try to get it across more clearly…

    Barry Jones’s speech mentioned above looks at the Kyoto protocol and suggests Australia will continue to export high volume low unit value goods as we have no incentive to improve our production.

    He uses an example of the Automobile industry

    ‘The Japanese car industry? After the “oil-shock” of 1973-74, the conventional wisdom wrote it off. Japan ha, the world’s most expensive raw materials and fuel and the US had among the cheapest – a clear comparative advantage to the US. So, who won? Actually, the Japanese. The broke the rules by turning to competitive advantage, creating the world’s most fuel efficient vehicles, faster and lighter per unit of cost. The manufacturing processes were far more fuel efficient too. The US had to ask Japan to impose voluntary limitations on access to the US market.’

    One example of competitive advantage is this, with regards to finance markets the US has an absolute advantage in this area, as well as a comparative advantage (when you oversimplify the economy as manufacturing vs financial services).

    So the US goes into finance because it can produce more by letting other countries who have less opportunity cost in manufacture (also because developing countries have an absolute advantage in terms of production cost).

    Both countries increase their surplus as they are specializing in their area of comparative advantage.

    Ok this is the short term, what about the long term?

    Advantages change over time and have changed dramatically over the past decades with the development of countries in Asia. Here we see a shift from traditionally manufacturing based economies to High tech industries, biomedical, research, value added manufacturing. Singapore is a great example of how government intervention in business can be crucial in improving a nations lot.

    Similarly in Korea and Japan, intervention is seen in the development of Chaebols and Japanese holding companies, the focus of Korea on steel production and ship building etc…

    Countries such as these have through government integration with business increased their competitiveness by moving into industries they previously were unaccustomed to.

    The runaway factory problem however in the long run may change the way things operate. It seems this is an example of how labour has shifted to the tigers (for low MFG costs), then has shifted again to China, Thailand, Vietnam, Indonesia etc…

    Ricardo Semler (Of Semco) spoke of how countries sometimes get into industries they have no business in, and would be better of leaving alone. I’m guessing the Car industry may be one of these.

    In Australia, we are in the mining industry, we provide a significant proportion of the worlds Iron Ore, and coal.

    Barry Jones suggests we are in a position to lead the world in energy efficiency, other areas apparently we’ve helped to pioneer include “Semiconductors, computers, optical, medical and laboratory instruments, space research, gene shears.” Which seem to have been sold off or lost to other countries.

    He suggests Australia’s reliance on coal may be detrimental as new cleaner technologies become available, however as Kyoto protocols don’t affect us there is no incentive to reduce waste and pollution in the energy sector.

    “The result will actually harm Australia because it confirms our flight down a cul-de-sac- keep our priorities for dying industries, and reject new ones.
    We are locking ourselves into a future likely to be marked by falling prices for minerals and energy and falling world demand”

    I think Australia should look at other industries and evaluate their current position, because as times change economic policies should with them. The world is much more complex than it was in the 1800s when comparative advantage was theorized. I think it takes into account short term comparative advantages not long term ones.

    A country can have a great impact on it’s international success, if Lee Kwan Yew hadn’t intervened in Singapore it may have never retained its sovereignty from Malaysia.

    Likewise Korea without it’s partnerships with family Chaebols would not have been able to mobilize it’s capital in state sanctioned infant industries (which they are now competitive in).

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