The Myth of Competitiveness


The rhetoric of competitiveness--the view that, in the words of President Clinton, each nation is "like a big corporation competing in the global marketplace"—has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially our struggle to compete in world markets--that the United States and Japan are competitors in the same way that Coca-Cola and Pepsi are. Every few months a new bestseller warns the American public of the dire consequences of losing the "race" for the twenty-first century. A whole industry of councils on competitiveness, "geo-economists," and managed-trade theorists has sprung up in Washington. Many of these people—including health-policy guru Ira Magaziner, Council of Economic Advisors Chair Laura D' Andrea Tyson, and Labor Secretary Robert Reich--are now in the highest reaches of the Clinton Administration formulating economic and trade policy for the United States.

But the idea that a country's economic fortunes are largely determined by its success on world markets is a hypothesis, not a necessary truth; and as a practical, empirical matter, the hypothesis is flatly wrong. That is, it is simply not the case that the world's leading nations are to any important degree in economic competition with one another, or that any of their major economic problems can be attributed to failures to compete in world markets.

Trying to define the competitiveness of a nation is much more problematic than defining that of a corporation. The bottom line for a corporation is literally its bottom line: if a corporation cannot afford to pay its workers, suppliers, and bondholders, it will go out of business. Countries, however, do not go out of business. They may be happy or unhappy with their economic performance, but they have no well-defined bottom line.

One might suppose, naively, that the bottom line of a national economy is simply its trade balance, that competitiveness can be measured by the ability of a country to sell more abroad than it buys. But in both theory and practice, a trade surplus may be a sign of national weakness; a deficit, a sign of strength. For example, Mexico was forced to run up huge trade surpluses in the 1980s in order to pay the interest on its foreign debt, since international investors refused to lend it any more money; it began to run large trade deficits after 1990 as foreign investors recovered confidence and began to pour in new funds. Would anyone want to describe Mexico as a highly competitive nation during the debt-crisis era or describe what has happened since 1990 as a loss in competitiveness?

Most writers who worry about the issue at all have therefore tried to define competitiveness as the combination of favorable trade performance and some other factor. The most popular definition of competitiveness nowadays runs along the lines of the one given in Laura D' Andrea Tyson's book Who's Bashing Whom?: competitiveness is "our ability to produce goods and services that meet the test of international competition while our citizens enjoy a standard of living that is both rising and sustainable." This sounds reasonable at first. But if you think about it, and test your thoughts against the facts, you will find out that there is much less to this definition than meets the eye.

Consider, for a moment, what the definition would mean for an economy that conducted very little international trade, like the United States in the 1950s. In such an economy, the growth in living standards--and thus "competitiveness," according to Tyson's definition--would be determined almost entirely by domestic factors, primarily the rate of productivity growth. In other words, for an economy with very little international trade, "competitiveness" would turn out to be just another way of saying "productivity" and would have nothing whatsoever to do with international competition.

But Tyson might argue that this changes when trade becomes more important, as indeed it has for all major economies. Let's examine this hypothesis. Suppose that a country finds that although its productivity is steadily rising, it is forced to devalue its currency in order to sell its exports on world markets. Would it not find its standard of living, which depends on its ability to purchase imports as well as domestically produced goods, actually declining?

Well, there is no reason to leave this as a pure speculation; since the dollar has, in fact, been devalued repeatedly since 1970, this hypothesis can easily be checked against the data. Have dollar devaluations in fact been a major drag on the U.S. standard of living?

The answer is no. These successive devaluations of the dollar have reduced U.S. real income by only about 2 percent from what it would otherwise have been. The reason? Even today, U.S. exports represent only 10 percent of the GNP. That is, the U.S. economy is almost 90 percent self-contained, producing goods and services for its own use. Similar calculations for the European Community and Japan yield similar results. In each case, the growth rate of living standards essentially equals the growth rate of domestic productivity--not productivity relative to competitors but simply domestic productivity. National living standards are overwhelmingly determined by domestic factors rather than by competition for world markets.

So why are people apparently so anxious to define economic problems as issues of international competition? The competitive metaphor--the image of countries competing with one another in world markets in the same way that corporations do--derives much of its attractiveness from its seeming comprehensibility. Tell a group of businessmen that a country is like a corporation writ large, and you give them the comfort of feeling that they already understand the basics. Try to tell them about economic concepts like comparative advantage, and you are asking them to learn something new. It should not be surprising if many prefer a doctrine that offers the gain of apparent sophistication without the pain of hard thinking. The rhetoric of competitiveness has become so prevalent, however, for three deeper reasons.

First, competitive images are exciting, and thrills sell tickets. The subtitle of Lester Thurow's bestseller, Head to Head, is "The Coming Economic Battle Among Japan, Europe, and America"; the jacket proclaims that the "decisive war of the century is being waged right now . . . and we may have already decided to lose." Suppose the subtitle had described the real situation: "The coming struggle in which each big economy will succeed or fail based on its own efforts, pretty much independently of how well the others do." Would Thurow have sold a tenth as many books?

Second, the idea that U.S. economic difficulties hinge crucially on our failures in international competition makes those difficulties seem easier to solve. The productivity of the average American worker is determined by a complex array of factors, most of them out of reach of any likely government policy. So if you accept the reality that our "competitive" problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround. But if you can convince yourself that the problem is really one of failures in international competition--that imports are pushing workers out of high-wage jobs, or that subsidized foreign competition is driving the United States out of the high value-added sectors--then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology and being tough on Japan.

Finally, many of the world's leaders have found the competitive metaphor extremely useful as a political device. The rhetoric of competitiveness turns out to provide a good way either to justify hard choices or to avoid them. For example, the well-received presentation of Bill Clinton's initial economic program in February 1993 showed the usefulness of competitive rhetoric as a motivation for tough policies. Clinton used this language when he proposed a set of painful spending cuts and tax increases to reduce the federal deficit. Why? The real reasons for cutting the deficit are disappointingly undramatic: the deficit siphons off funds that might otherwise have been productively invested, and thereby exerts a steady if small drag on U.S. economic growth. But Clinton was able instead to offer a stirring patriotic appeal, calling on the nation to act now in order to make the economy competitive in the global market--with the implication that dire economic consequences would follow if we do not.

Some economists think that this sort of political payoff justifies the emphasis on competitiveness. They argue that although the rhetoric that portrays world trade as a high-stakes competition is false, it is a noble lie that helps our leaders persuade the public to do what needs to be done. But I believe that this indulgent view is not only deeply cynical but harmful.

An obsession with international competition is not the same as old-fashioned protectionism, but it can all too easily lead to the same result. If you think of world trade as a "win-lose" struggle, not the mutually beneficial web of interdependence it really is, you are inevitably going to be tempted to do whatever is necessary to win that imagined struggle--even if that means threatening to raise tariffs and provoke a trade war, as Clinton has, and being prepared to wage such a war if your bluff is called. The world trading system is still relatively open--a fact that is beneficial not only to the U.S. economy but to the global economy as well. The rise of the doctrine of competitiveness has greatly increased the risk of a breakdown in that system--a break-down that would have ramifications for years to come.

Originally published, 6.94