Hardly anyone living in the US and Europe could escape the ceaseless flow of doom and gloom news on the current economic situations. Perhaps the situation in Europe is more precipitous as it has to deal with more than a financial crisis; it also faces political and social problems. It is therefore a crisis of an entire conceptual infrastructure that is now dissolving itself rapidly. The on-going struggle to keep Greece in the Eurozone and to prevent others from going down the same route has rendered governments to fight-fire continuously. It is not fun anymore, to expect the new covers of The Economist, who for months have been good at depicting the feeling of loss, that Europe is now suffering. Actions of the Eurozone governments insofar have focused primarily on solving the currency crisis through tougher financial discipline and the word “austerity” has been the most recurrent leitmotif of public discussions these days. A direct major consequence is that they have little efforts to spare to look at how to create growth in and for Europe. Enhancing competitiveness is still missing on the European—indeed many other countries’—economic agenda; public conversations have rarely centred on creating the conditions that can boost competitiveness, while the expectancy of a European call for action, has been waiting for Godot, to put it in a sadly recalling metaphor.
Indeed, many European countries lost in their ability to compete vis-à-vis other countries in the world between 2010 and 2011 alone. What is more worrying is while some members within the European Union (EU) remains largely globally competitive, the competitiveness of the rest are declining (Figure 1). The US is not faring any better leading to a call for action to restore its competitiveness.indeed many other countries’—economic agenda; public conversations have rarely centred on creating the conditions that can boost competitiveness, while the expectancy of a European call for action, has been waiting for Godot, to put it in a sadly recalling metaphor.
Indeed, many European countries lost in their ability to compete vis-à-vis other countries in the world between 2010 and 2011 alone. What is more worrying is while some members within the European Union (EU) remains largely globally competitive, the competitiveness of the rest are declining (Figure 1). The US is not faring any better leading to a call for action to restore its competitiveness. Lack of (focus on enhancing) competitiveness is a global epidemic.
What is so Important about Competitiveness?
Competitiveness matters because it is the key to raising the prosperity of any nation. Competitiveness depends on the productivity with which a country deploys its human, capital, political, and physical resources. It is not about how well-endowed a country is; rather it is about how productively it can best use these endowments to improve standard of living continuously.
Raising and sustaining competitiveness allows a region, like a nation, to support high wages and get attractive returns to capital invested. It helps to create a strong currency and promotes innovation to better use resources. Standards of living—and hence prosperity for a nation or society as a whole—heightens. Competitiveness does not reject free market theory. It defines depth by allowing governments and firms to act as facilitators of economic stimulus and activity, leading to a raise and upgrade of a nation’s productivity, strongly supported by intensive innovation strategies.
Unlike competition, competitiveness does not need to mean a zerosum game—restoring competitiveness in Spain or Greece should not necessarily require Germany or the Netherlands to accept deterioration in theirs. Confusing competitiveness for competition often leads governments to justify intervention to skew market outcomes in their favour. Consequently, in an attempt to become more competitive, many countries resort to harmful actions such as providing subsidies (effectively endorsing inefficiencies and more lethally, dampening the innovation central to economic growth), suppressing local wages, and devaluing their currencies (both of which are effectively selling local labour power on the cheap), all aimed at exporting ever more and all moving away from creating those conditions that garner favourably, competitiveness per se.
A recent poll tells an interesting, if not important, story. People in eight European countries were asked which country in the EU were the most hard-working. Almost in unison, all nominated Germany as the hardest working European nation (Table 1). The only exception was Greece, which named itself as the country that works the hardest. Were the Greeks disillusioned? Not necessarily since Greece is one of the countries that put in the most hours in a year (Figure 2). In contrast, the Germans were among those who worked the fewest hours. So what is happening?
The answer, of course, lies in productivity (Figure 3). Whereas Germany was charting the top, Greece was one of the least productive nations. A similar observation can be made for Korea. While it is the country that works the longest hours in the world, its labour productivity is much lower than the world average. Investing in enhancing efficiency—and consequently, proper utilisation of labour productivity—is therefore the key to producing prosperity.
If strengthening competitiveness is the key to the wealth of a nation, what has been stopping us from doing so?
Major Barriers to Enhancing Competitiveness
Insuffient Labour Movement.
Europe inevitably suffers from a lack of labour mobility given its diverse cultural backgrounds and an absence of a common language. For example, it is unlikely that a Greek would decide to uproot and move to Finland for a job. Labour mobility is a necessary condition to ensuring competitiveness as it increases labour supply and brings skillful people and talent to the countries, regions, and sectors that need them most.
Insufficient Labour Market Reform.
In Europe, many young people under 25 are being shut out of the job market (Table 2). While this can lead to social issues, a more deep-seated problem is that these countries have failed to invest in themselves. Young workers, especially those who are university-educated, are a primary source of innovation and sophistication for the economies.
Reliance on Consumption as an Economic Driver.
A big part of competitiveness problem with the US and Europe is that they have been maintaining prosperity through household consumption and domestic demand rather than through continuous investment in raising productivity and companies’ sophistication of products and processes. Consider the case of Greece. The household consumption as a percentage of its GDP has risen from 74 per cent to 77 per cent between 2004 and 2009, while investment has shrunk from 22 per cent to 17 per cent. Stronger economies such as the UK and US are 64 per cent and 71 per cent, respectively. In contrast, household consumption only accounts for 37 per cent of Singapore’s GDP. In the golden decade leading to the financial crisis in 2008, many countries spent the easily obtained capital on consuming goods and services rather than on improving their ability to better producing them. They were spending more than what they could make; they were living on running up debt on the national credit card.
Insufficient Capital to Invest in Productivity.
The debt level for Greece and Italy currently stands at 166 per cent and 121 per cent of their respective GDPs. Both of these countries have not been collecting tax revenue to the best of their abilities. At the same time, they are having increasing difficulties in borrowing money for governmental spending, let alone investing in productivity. Given the modus operandi of these countries in the past, it is not surprising to find the situation so deeply rooted into increasing binefficiency at the expense of the industrial capacity of a nation. For instance, Italy is among the world champions in developing business clusters, which could have driven the country to be an extremely competitive economy. Yet, an incapable political class has suffocated the potential of the clusters, in exchange for a paralysing amount of public debt.
This should serve as caution to Japan, which is by far the most indebted nation in the world with debt standing at 233 per cent of its GDP. Despite the fact that it can continue to borrow, it will eventually reach the limit that the lenders can absorb. In this case, Japan will have little money to invest in raising productivity and thereby maintaining competitiveness. Japan has already lost some key industries including electronics. Indeed, this problem may be further worsened by the aging population (ever expanding expenses on social security needed) and low birth rate (lower tax revenue that can be collected).
The Problem with Misinvestment
With the highest current account surplus in the world, China ought to have some capital to invest. Yet, there is an increasing worry that the capital is invested unwisely. First, much of the money was invested in state-owned enterprises (SOEs), which allegedly earn a lower rate of return than private firms, and many of them are uncompetitive. More worryingly, they started to invest in non-core businesses, especially real estate, which further fuels the property bubble. Furthermore, being state-owned, banks prefer to lend to SOEs given the implicit backing of the government, supplying the latter with yet more cheap credits.
Of course, this does not mean that mis-investment has forbidden China from improving its productivity. On the contrary, China has raised its productivity at break-neck speed—the fastest in the world in the past decade. Yet, the right kind of investment is the only way that China can continue its strong economic growth.
Restoring the Competitiveness: Is There a Real Opportunity Ahead of Us?
Even though there are so many problems with lifting competitiveness, all is not lost. Europe, cannot think that pushing Greece out will be the solution, given the interconnectedness of the trading bloc, the way that many firms have been benefiting for years. The US need to distance from the bloodiness of the presidential campaign and the ghost of socialisation, and move towards a stabilisation of the social infrastructure (the reason why so many Americans remain poor), while regulating the financial markets, after the evidence of the current flaws that govern the institutions. Asia, on the other hand, has to shift from singing the laurels of a decade long increase in GDP, to embrace a much more orchestrated strategy of real growth and prosperity. Although the symptoms are different for the three major world blocs, they all suffer from the same woe: lack of competitiveness. Given their differential maturities, the systems experience different degrees of deficiency:
In the US, we must attract new talent, new firms, inward FDI, and a reforming social welfare system, as a foundation for a new economic reconfiguration, away from bubbles.
In Europe, it is about the need of the Union to act as one, so as to push for political integration as well as to a more agile fiscal policy and a responsible monetary union, away from fragmentation.
- In Asia, with China and India leading the bloc, it is not how much it produces, but how it can generate long lasting benefits. Investment in social benefits, access to education, health and civic rights, jointly with an overarching upgrade of productivity is where Asia can truly stand up as a region independent of the purchasing power of the West.
The Only Approach That Matters.
Given the challenges encountered across all regions of the globe, the following four-step strategy provides a solution to accomplish competitiveness as the primary underpinning.
Have Less Protective Measures.
Governments should become stewards of the economic development; this would suggest that governments should lead from behind rather than in front. This process requires reinforcing governments’ position on social, fiscal, and monetary policies while refraining from strong interventions. Intervention becomes the practice rather than the policy.The government should not be in the business of esta-blishing policies as well as intervention strategies because dictating the intervention blocks and inhibits the creative process for businesses to flourish.
Embrace Microeconomic Fundamentals.
Firms need to play a central role to the development of new ideas through endeavours of research and development. This approach creates capacity development for inside out versus outside in microeconomic development. As such sustainability only occurs from inside out processes rather than external influences. Establishment of sophisticated practices, new patents, experimentation and use of technology need to be systemically available to enhance standards of living, with the benefit of lowering costs (more output for less input) and the lifting of standards of power purchasing parity.
Promote Cluster Development.
Firms need to shift their paradigm from negative com-petition to collaborative engagement. By doing so, col-laboration adds influence as a greater tool than power, which is often the outcome of uncompetitive processes. Effectually this approach redefines competitiveness as collaboration. As collaboration requires participation with others, cluster development becomes the ultimate strategy for long-term movement, economic development, and prosperity through greater partnership with all major stakeholders.
Adopt Shared Value Now.
Firms should seek to create value for the society at large and not just narrowly focus on benefiting shareholders through profit maximisation. The expansion and exten-sion of the value chain to the complexity of a chain shared by a larger number of stakeholders is the foundation of the shared value principle. Shared value is a transformational dynamic that drives the relationship of humanity with business and thus creates continual broad shoulders for broader glocal outcome.
Measure Competitiveness by Employable Workers Rather than Employed Workers.
Adopt modern indicators of prosperity to assess economic development, rather than traditional ones still anchored unsafely on GDP. Use competitiveness indices that take into account development from a multi-angular dimen-sion, rather than simplified ones. Anchor financial investments to the compliance with competitiveness pillars, rather than GDP.
While we are aware of the difficulties that some of the above suggestions can imply, we have a strong conviction that clustered competitiveness driven by collaborative processes will become the only way forward in a global economy. We have become less relational with one another, developing disownment of our shared future. The ability for the world’s governments to inspire the regional dyna-mism of clusters creating proper standards of living, and distancing financial markets speculation becomes the only manner of shifting the responsibility of our future to the real economies. Competitiveness allows all of these strategies to be implemented because its working paradigm needs to built on a strong collaborative-shared value. The whole is smarter than the sum of the parts, and we embrace it. The future can be bright if the future can speak about global competitiveness.
1.Esposito M and T Tse, 2012. “Le Strade Obbligate Dell’ Europa?”, Harvard Business Review Italia, March, pp.78-84.
2. Porter Michael E and W Rivkin Jan, 2012. “Restoring U.S. Competitiveness”, Harvard Business Review, March, pp 55-62.
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