Competing agendas
Opening up the local market to foreign trade and investors may not be the key to true development. Ibrahim El-Issawi* describes a formula for a pro-development trade policy
The terms "competitiveness" and "national competitiveness" have become widespread among academics and journalists over the past few years. There is a tendency among specialists and non- specialists alike to attribute the economic ills of almost any country to its lack of competitiveness. National competitiveness is so broadly defined that it is often equated with comprehensive development. But what is competitiveness? How does it relate to development? And how do we gauge it?
The concept of national competitiveness appeared in the early 1980s, when the US was particularly worried about its global economic standing, fearing that others -- Japan or Europe -- may replace it as a world economic leader. In a way, the concept is linked to the economic rivalry that developed among major powers following the collapse of the socialist bloc. Moreover, the concept is related to US national security. Claims have been made to the effect that competitiveness has replaced containment of the Soviet Union as a top US priority.
One of the reasons competitiveness has gained currency is the increasing popularity of neo- liberalism. The stricter versions of neo-liberalism downplay the importance of public policy in boosting economic performance. Competitiveness does the opposite: it admits that the state has to watch, scrutinise and fine tune the economy. There is a lot of common ground between the two concepts, however. The thinking and methods of competitiveness have proceeded hand in hand with those of economic neo-liberalism. With its emphasis on high economic growth, competitiveness was perhaps a reaction both to the environmentalists, who stressed the grave consequences of economic growth for the world's natural resource base, and the critics of consumerism, who argue that per capita income tell us little of the quality of life.
National competitiveness, as a concept, was not devised for all countries. The term was coined to describe the rivalry among certain major powers, such as the US, the EU and Japan. Other countries are less part of the race than a prize for the winner. Major economies compete to expand their areas of influence. They create free trade zones and engage in partnerships in order to give their companies greater room for investment and trade. With wider markets, key economies may flourish through enhanced specialisation, division of labour, and the consequent growth of productivity and income. This, in a nutshell, is what national competitiveness is about.
The definition of national competitiveness is, interestingly enough, neither precise nor indisputable, even in the major economies that invented it. Some experts question the term's validity, arguing that competition applies to companies, not to countries, and that it does not necessarily involve increased productivity and income. Others equate "competitiveness" with "productivity". This is wrong, not least because the latter concept has a much longer track record. One may concede, however, that "competitiveness" as a notion implies a revival of the principles once advocated by the "productivity movement".
Competitiveness is often regarded as synonymous with economic and income growth. Its analysis involves a general study of economic performance, and tends to overlap -- unjustifiably -- with the analysis of economic growth and comprehensive development. Some experts associate competitiveness too closely to the increase in income. This is unwarranted, for the increase in income tells us little about the quality of life and could even be catastrophic to the environment. Critics of the latter approach argue that countries should focus on their comparative advantages, for this would lead to a better division of labour worldwide.
National competitiveness, as a concept and a policy, makes more sense when it is linked to products or industrial sectors, not to countries. The utilisation of comparative advantages is often hampered by market and institutional failures. Markets may be imperfect, institutions may be lacking, and adopting and learning new technologies may just be too costly. National competitiveness is clearly a useful tool when applied to countries competing in activities involving tradable goods and services. This competition takes place in accordance with the comparative advantages of each country (the static advantages -- or "factor endowments" -- linked to natural resources, and the dynamic advantages linked to research, learning, innovation and technological creativity).
A valid definition of national competitiveness is the country's ability to produce products that can penetrate international markets and pass the test of international competition both abroad and at home. This definition suggests, among other things, that the country in question can export, service external debts, and have enough foreign currency left to import its consumer and production-related goods and services.
National competitiveness, according to the above definition, has a comparative dimension. It assumes that there is a minimum of two sides competing. This dimension does not necessarily imply that countries are engaged in an all-out competition, with every country trying to catch up with or even surpass the rest. Competitiveness, in this sense, exists only for the few countries dwelling at or near the top of the world economy. Generally speaking, no country can surpass all other nations in all goods and services. The international market is wide and varied, and it tolerates the presence of producers operating at different levels of competence.
To assess their own competitiveness, countries need to gauge their performance against that of others. International comparisons are essential for assessing the competitive performance of the state and in formulating the state's objectives and criteria. The latter may or may not involve catching up, or surpassing, other economies. It all depends on what human, material and technological resources the country has, and how it prioritises its development objectives. Production for the local market may be the foremost objective at one stage. Exporting may be the primary target at another stage. Every country should decide what set of countries it is competing with, and in what products. This is something that experts only belatedly recognised. That is why the Global Competitiveness Reports of 2002 and 2003 distinguish between "core innovators" and "non-core innovators". And, the 2003 World Competitiveness Yearbook breaks down countries according to population, distinguishing between those under and those above 20 million people. These approaches to the question of competitiveness indicate that countries could face more than one race in competing with each other.
The whole point of international comparisons is learning. Countries should use comparative data to decide their objectives, set their criteria and improve their competitive performance. Several international agencies now produce lists detailing the comparative performance of various countries. The criteria they use is multifaceted, involving various aspects of the economy, technology, governance and strategy. Much of the criteria is redundant; some even inaccurate.
Part of the inaccuracy is inherent in the kind of data collected -- information, innovation, and entrepreneurship all defy accurate measurement. Another part is due to the use of overlapping criteria. For instance, the growth competitiveness criterion, used by the World Economic Forum report, overlaps with its additional criterion, such as the micro-economic bases of competitiveness.
As the two main international competitiveness reports -- the Global Competitiveness Report and the World Competitiveness Yearbook -- base their results on input from a very small sample of about 60 or 70 firms or business people in various counties, the margin of error cannot be ignored. Some of the questions are too general or simply vague, and some assume certain knowledge that the individuals in question may not have. Some of the criteria is related to the respondents' expectations about economic conditions, a matter hardly related to the measurement of the current competitive performance of the country in question.
To make things worse, the annual change in some indices may be due more to economic cycles or temporary domestic and international fluctuations than to structural factors. All of the above lead to inaccuracy in the resulting data and in the resulting country ratings. It would perhaps be more advisable to prepare competitiveness reports every three or five years rather than annually, so that they may portray the general trend more realistically. In general, one should approach these indices with maximum caution, ascertain their sources of information and critically examine their methodology and approach.
Many national competitiveness indicators are around, depending on broad definitions of competitiveness, which tend to overlap with development. Most, however, fall short of covering the whole spectrum of development concerns. Many cannot deal with the more complex phenomenon of sustainable and comprehensive development. For instance, the latter would require the indicators to incorporate the broad notions of emancipation and empowerment of both country and citizen. Most existing indicators, however, tend to be broader than the narrowly defined approach I recommended earlier based on performance in local and global markets.
It is advisable to work with two groups of indicators, by narrowing the criteria used in the national competitiveness index while acknowledging that it is only one of many indices tackling comprehensive development. Understanding national competitiveness should be a part of a whole, a mere attempt to delineate one aspect of comprehensive development. In other words, competitiveness indicators should be regarded as a subset of a larger set of development indicators.
Competitiveness indicators have gained currency in Arab countries, due to the encouragement, or even pressure, of international organisations. Unfortunately, development indicators are quite neglected. What would normally pass for development indicators in some Arab countries is nothing more than raw data with no comprehensive vision or strategy. Arab efforts rarely venture beyond conducting basic surveys. The Arab world, if I may suggest, needs more comprehensive and rigorous research in development indicators. Collective efforts would be particularly helpful, as regional development indicators would supply a useful tool for assessing country performance.
Analysis based on national competitiveness alone may mislead public policy in developing countries. Such analysis tends to support the neo- liberal model with its usual elements of market economy, free trade and investment, business initiatives and privatisation and small government, as well as the conventional claims that trade is the engine of growth; liberation of trade is the main passage to integration in international markets and hence to higher economic growth and reduced poverty; and foreign investment boosts competitiveness and exports and accelerates the transfer of technology to developing countries.
It has been years since developing countries began introducing liberalisation and structural adjustment policies, yet most have failed so far to make significant progress towards development. Recognising this fact, and recalling the experience of old industrial countries and newly- industrialised Asian nations, one has to conclude that production and economic growth are the engine of trade and the path to successful integration in international markets.
The liberalisation of trade, if conducted in the absence of strong local productive capabilities, may undermine the country's potential and increase its marginalisation and dependence. It is clear that, unless guided by the state, many local business communities are not in a place to lead development. The ability of foreign investment to transfer technology is hinged on the existence of local companies to absorb new technologies. Therefore, there is a need to boost local capabilities before playing host to foreign investment. Otherwise, foreign companies would monopolise high value-added activities and leave low value-added ones to local companies. It has also become clear that foreign investment does not flow freely except into countries with dynamic and high-growth economies. That is, to countries that managed to achieve high growth on their own. Although advanced countries keep encouraging developing countries to adopt liberalisation policies, their rhetoric is hardly credible, not the least because they remain protectionist when it comes to their own imports from developing countries.
Neo-liberalism can be a dangerous undertaking when applied in the increasingly inequitable context of globalisation. This is why developing countries need to retain some control over the local economy. They should open up their economies gradually and only in tandem with efforts to build up local production and export capabilities. Caution is required. The private sector cannot be trusted behind the steering wheel of the economy. Particularly in developing countries, the business community needs the enlightened interventions of the state. The state should show it the way and programme its activities in a manner conducive to comprehensive development.
Without a guiding role for the state, the private sector would be prone to either act randomly or as mere subsidiaries of multinational corporations. In either case, the danger to the domestic economy may be considerable. Developing countries are advised not to give in to the pressure of industrial countries, particularly in trade negotiations with the World Trade Organisation. They are usually asked to liberalise their economy and remove all constraints on their markets. But they have to resist these pressures, even at the risk of withdrawing from the WTO. If it comes to that, the withdrawal should be conducted collectively or be led by a group of key developing nations. At one point, such action may become inevitable. Developing countries must resist the contradictory attempt of the WTO to enforce uniform regulations on countries passing through variant growth stages. This is the only way developing countries would have the growth opportunities comparable with what industrial states had at the early stages of their development.
There is an urgent need to formulate new criteria for the assessment of competitive performance in developing countries. These countries need to know how well they are performing according to the narrow definition of competitiveness, without losing sight of the entire gamut of development indices. Moreover, they need to know in what league they are competing. They need a model of independent or self-reliant development to follow. The key characteristics of such a model are as follows:
It does not exclude market mechanisms entirely, but deals with them realistically by acknowledging the various forms of market failures. The government should remain ready to intervene through enlightened protection and subsidisation and within the framework of long-term thinking and planning.
The proposed model does not boycott international trade and foreign investment, but deals with them in a selective manner. The government should open the local market gradually and in tandem with improvements in domestic productive capacities and the enhancement of national competitive abilities. The government may restrict the importation of non-necessary goods, impose conditions on foreign investors and subsidise export programmes -- particularly because developed countries still impose restrictions on a variety of imports from the developing world.
The new development model is not hostile to the private sector. It recognises the merits and limitations of the private sector, its potential involvement in parasitic activities and its weakness before the temptations of global corporations. The state and the public sector may maintain a strong role under this model. But a country must learn from experience when it comes to formulating an enlightened public sector management or the state's approach to economic and social interventions.
It recognises that public participation in decision-making and policy monitoring, as well as in the matter of income distribution, is a safety valve against bureaucratic abuse, administrative corruption and waste.
Finally, Arab countries should cooperate on trade, joint production, scientific research, technological innovation, importation of production needs and global marketing. Large-scale Arab marketing organisations, for instance, could secure better deals on the international scene. Indicators of progress in establishing joint Arab economic endeavours is something analysts should take into account when assessing the national competitiveness of Arab states.
* The writer is an advisor at the National Planning Institute.
