Competitiveness and Development: Myth and Realities

Mehdi Shafaeddin

The concept of competitiveness has attracted a lot of attention by scholars, policy makers and international economic institutions in recent decades. But it suffers from some misconception when applied to developing countries. In a forthcoming book, Competitiveness and Development: Myth and Realities (Anthem Press), I have explained that developed countries have been concerned with competitiveness at the high level of development by undertaking, inter alia, technological development and upgrading of their industrial and service activities. Yet, they have been imposing competitiveness at the low level of development on developing countries. They have been doing so, by advocating neo-liberal views, e.g. through Washington Consensus, and imposing across-the-board and universal trade liberalization on developing countries through International Financial Institutions (IFIs) and WTO, and regional and bilateral trade agreements.

To explain, there are two different approaches to competitiveness: static, advocated by neo-liberals and dynamic, which is the concern of ne-developments.  The static version is cost/price led, based on the theory of static comparative advantage, and the allocative function of the market forces. This theory relies on unrealistic assumptions-such as the prevalence of perfect completion, constant return to scale, and independence of present and future costs. Further, firms are assumed to be small and strategically passive; there are no barriers to entry, no externalities, no industry specific learning etc. Accordingly, economic policy should concentrate on macro-level issues e.g. wage cost and exchange rate-despite the fact that the empirical evidence shows that the level of exchange rate can be the result of competitiveness rather than its cause-a la Kaldor paradox.

In a world where production and international trade are characterized by economies of scale, barriers to entry, imperfect competition, and are influenced by the strategic behavior of large firms; being competitive in the static sense would involve production at low value added, and employment and the loss in terms of trade.

In reality, at the firm level, competition is a dynamic process of creative destruction, in its Schumpeterian sense; firms move from equilibrium to another rather than moving towards equilibrium. Each firm has different capabilities and gaining market share alone is not its objective. There are usually other objectives such as increasing profitability, productivity and real income. Innovation and upgrading of the production structure to demand dynamic and supply dynamic activities is essential for maintaining or improving competitiveness and increasing value added. The firm is a driving force in economic activities; it takes strategic actions, shapes the market and competes with other firms also on non-price factors. It acts as a coordinating agency and interacts with other firms, market, consumers, institutions and infrastructure and international environment. It is further influenced by government activities and strategies.

At the national level competitiveness is to be an element of development and the basis for nation’s standard of living; it should contribute to growth, value added, employment and high returns to factors of production.   Competitiveness at a high level of development cannot be achieved through specialization based on static cost comparative advantage. Such specialization will lock low-income countries in production of primary commodities, and at best assembly operation making them competing at a low level of development. It requires creating supply capacity in high value-added activities, making the developed capacity efficient and continuously upgrading the industrial structure. None of these can be achieved through the operation of market forces alone. It also requires proactive and conducive government policies and strategies.

The book explains the international context and conditions under which competition takes place; highlights deficiencies in the neoclassical theory of competitiveness; surveys alternative theories and develops on a framework of analysis outlined above by expanding on the principle of dynamic comparative advantage. In doing so in addition to applying the Schumpeterian approach to competitiveness, I have benefited from theories of productive power of F. List, competitive advantage of M. Porte and M. Best and, business organization of W. Lazonick. I have also benefited, inter alia, from the Kaleckian approach to the acceleration of supply capacity and the theory of Capability Building.

Possibilities for and constraints in achieving competitiveness at the high level of development by developing countries are examined. It is emphasized that in order to be able to enhance their policy space, developing countries should appreciate their need for dynamic and flexible trade and industrial policies. To be able to pursue such policies, changes are necessary at the international rules and regulations of WTO and IFIs and in practices of developed country donors in their bilateral and regional trade agreement with developing countries. The important role of government policies and practices is illustrated, in the book, by comparing contrasting experience of China and Mexico since early 1980s, and its implications for other developing countries.