Approaches to Competitiveness: Double Standards and Hypocrisy

Mehdi Shafaeddin

There is a double standard in the way the concept of “competitiveness” is applied by governments of developed countries and the manner in which they impose it on developing countries. Developed countries aim at achieving competitiveness at a high level of development through specialization based on dynamic comparative advantage. By contrast, they advocate to, and impose on, developing countries policies that will lead to specialization based on static comparative advantage and will keep them at low level of development.

Having been concerned with the competitiveness of their countries in international markets, almost all industrial countries have established competitiveness commissions, or councils, in the offices of their presidents, or Prime Ministers. In all cases they have emphasized the need to achieve competitiveness at a high level of development with the purpose of raising the standard of living of their citizens. Further, to achieve this goal government intervention for technological development and upgrading of the industrial structure and services has been the focus of their attention.

For example, the US Presidential Commission on Industrial Competitiveness (1985), refuting the narrow approaches based on exchange rate and trade balance, advocated that competitiveness is the basis for raising a nation’s standard of living and the expansion of employment. It should contribute, it is added, to labour productivity, real wage growth, and real return on capital employed in the industry in addition to improving the position of the country in world trade. In 2006, the Bush Administration approved an extensive policy framework for technological development under the “American Competitiveness Initiative” with a Federal budget of $137b. In a speech to the United Nations’ ECOSOC in 2007, the US representative clearly defended the need for protection of technology: “…technological change is driven by protection [our italics] of [Intellectual property Rights].”

The OECD Secretariat confirms this approach to competitiveness. So does the EU in 2000 in the Lisbon European Council. Similar approaches are applied by most individual developed countries. For example, the UK Government, after confirming this approach in 1996, goes even further in its 1998 white paper on competitiveness by emphasizing the role of the government. According to the UK Prime Minister “Old fashioned state intervention did not and cannot work. But neither does naïve reliance on markets”. Their framework for achieving competitiveness at a high level of development contains a new approach to industrial policy based on four main pillars: actively seeking new ideas and knowledge, innovating new products and services, investing in the workforce, utilizing knowledge and skills to the full.

Yet developed countries have been imposing on developing countries policies for achieving competitiveness at the low level of development. They have been advocating the neo-liberal ideology, e.g. Washington Consensus, based on the theory of static comparative advantage. For example, Williamson (1992) admits that “none of ideas spawned by …development literature…plays an essential role in motivating the Washington Consensus…”. More importantly, developed countries have been imposing market-oriented approaches to competitiveness on developing countries, through the IMF, World Bank and WTO, or through regional and bilateral trade agreements. The lack of government intervention, budget cuts, across-the-board trade liberalization, absence of performance requirements from multinational firms, etc., are a few elements of such approaches.

As I have shown elsewhere (Shafaeddin, 2010), the experience of the last quarter century indicates that such an approach to competitiveness tends to lock the structure of production and trade of low-income countries in primary commodities, resource-based industries and at best assembly operation. It also creates constraints for upgrading of the industrial structure of those which already have some industrial base.

The process of industrialization requires creating production capacity, operating it efficiently, and eventually upgrading it. None of these can take place automatically through the operation of market forces alone. Not only is there a need for incentives and predictable industrial and development policies, but also policies for creating, or strengthening, a number of “Ins” – Investment, market Institutions, Infrastructure, provision of Inputs, Innovation and Information. It also requires pressure on enterprises for performance, in exchange for incentives, and management of foreign direct investment.

In a world of imperfect competition, a dynamic trade and industrial policy is essential. Schumpeter correctly stated that: “The problem that is usually being visualized is how capitalism administers existing structure, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job.” (Schumpeter, 1976:84).

5 Responses to “Approaches to Competitiveness: Double Standards and Hypocrisy”

  1. It is not surprising that the Developed world is continually seeking new ways to maintain a degree of new imperialism. To a degree it is embedded it the current global power structure. If I am surprised by something, it would be that the Developing world is not playing its cards accordingly, and increasing product price of its primary commodities and resource based industries; for example demanding high prices for coffee, cacao, sugar, etc’. This may add to the current food crises and by this open an opportunity to set new terms of global development.

  2. Corey M says:

    While I agree with some points, I find the overall argument a bit sweeping and more ideological than anything else.

    First, I don’t get why the measures for improved competitiveness that you say are undertaken in developed countries cannot be undertaken in developing countries? Nothing in the ‘rules’ of multilateral agreements and institutions prohibit e.g.’protection of intellectual property rights’. One could even say that (albeit a sweeping argument) ‘actively seeking new ideas and knowledge, innovating new products and services, investing in the workforce, utilizing knowledge and skills to the full’ is exactly what the so-called ‘new Washington Consensus’ is all about – that some institutions and support is needed for a market economy to function. And the policies that you say are needed – ‘policies for creating, or strengthening, a number of “Ins” – Investment, market Institutions, Infrastructure, provision of Inputs, Innovation and Information’ – how are developing countries prohibited from undertaking these?

    And how are developed countries requiring more from developing countries than from themselves? Looking at trade, developing countries are usually exempted from more ‘controversial’ measures and in RTAs they usually have longer liberalization phase-out periods. Of course, in relative terms, these may still be even more demanding for developing countries, but that is not the same thing.

    Finally, usually when someone refers to the ‘alternative solution’ for develoment – such as a ‘dynamic trade and industrial policy’, ‘creating production capacity’ etc – I find the words very beautiful but have no idea what they mean. It sounds like ‘the key to development is to be innovative and dynamic’ but I don’t know how constructive that is…

    Otherwise, I am on your side.

  3. Development is a state of mind, reflected in the beliefs of individuals, communities and countries. An idea and its manifestation is the key to change. I propose that the developed world will pay more for its unsustainable lifestyle. We are paying more for oil (and not because it costs more to extract it). I think that on the same bases we need to pay more for sugar, coffee, cocoa, etc’. After all, we are addicted to oil consumption, coffee, sugar… Why not reflect the real social and environmental price tag? What I would expect to see is farmers across the globe valuing their products differently, and by this shifting the power relations the a new North – South equilibrium.

  4. M.Shafaeddin says:

    Comments on Mr Corey

    1. The main reason why developing countries can not undertake the policies which are undertaken in developed countries is that they are not left with policy autonomy. Under the pressure from Intentional Financial Institutions (through Structural Adjustment and Stabilization programmes), WTO rules and regional and bilateral trade agreements most developing countries are left with little policy autonomy to do what they would like to do.

    2. You are correct that nothing in the international rules prohibits a country to protect its intellectual property right. But this in fact the problem. Technology is developed by developed countries which have both the financial resources as well as knowledge to develop them, but when they do protect them (under Intellectual Property Right Agreements) for 25 years. It can not be transferred to developing countries at all-or when it is it is done in a very high cost . Developing countries do not have the same resource sand knowledge to develop their own technology.

    3. Knowledge and innovation can be used to the full only by those who have the capacity for them-or allowed to get them transferred.

    4. Further, there is a contradictions in the international rules as well as the arguments by proponents of “Washington consensus” and other neo-liberal: developed countries can protect their infant technology, but developing countries can not protect their infant industries -even in cases they may have the technology. They may suffer from the lack of economies of scale and economies of time (experience)at early stages of development of an industries. There are too many clauses in the international rules …etc which prevent them from protecting their infant industries.

    5. Developing countries are prevented to implement many of INs because of the pressure on them to cut budget and because the policies developed countries impose on them kill the incentives to the private sector (see Shafaeddin, trade Policy at the crossroads, the recent experience of developing countries), Macmillan, 2005).
    6. Are developing countries and developed countries at the same stage of development and industrialization ? Are their requirements for industrialization and development the same? Are RTAs development friendly? Are WTO rules development friendly? Are policies of the World bank and IMF development friendly?

    7. For some ideas about how developing countries should develop in accordance with “dynamic comparative advantage” please see Shafaeddin, “Towards an alternative perspective on Trade and development”, Development and change, 2005, 36.6:1143-1162.

    The problem is that in practice they can not do it easily because of their lack of policy autonomy.

    Finally, yes I do admit that I have an ideology and do not hide it.
    I am a “developmentalist”. But is there any economist who does not have ideology? from Adam Smith to Friedman to Samuelson to Marx to Willamson who initiated “Washington consensus”…etc. Does not Mr Williamson say: “none of the ideas spawned by–development literature…plays an essential role in motivating the “Washington Consensus”!!!. In other words, he is not interested in “development”. Is not this an ideology (Williamson 1990, p.19 in Williamson (ed.) (1990, Latin American Adjustment: How Much Has happened?…).Does not professor Samuelson say “”some trade is better than no trade, but that does not necessarily imply that free trade is the optimum for any country”. yet he advocates free trade to developing countries!!.

  5. M.Shafaeddin says:

    Comments on benshalmy

    Thanks for your comment. I was a little bit confused by your first comment, but you have clarified it with your second comment. I suppose what you mean is :

    “…by increasing product prices” instead of “…and increasing product prices”.

    The problem is that except for OPEC other developing countries have little power to increase prices of their primary commodities. International commodity market is dominated by Oligopsony power of a limited number of MNCs who have full control over prices. Of course, some time they also speculate on commodity prices-but often the developing producers get little out of it because of the long-term supply contract they have with the buyers. The speculation takes place in the secondary market such as Rotherdam etc.

    There have been many suggestion for commodity agreement through UNCTAD, but developed countries always opposed it. Similarly, there have been suggestions for producers agreements (similar to OPEC), but never materialized.

    It is very likely that in the future prices of primary commodities will go up again because of the “China-India” effect. But the problem is that most poor countries are importers of food products as their food production capabilities have been damaged because of the Agricultural Policies ” of EU and USA(subsidies to food production and exports) and trade liberalization imposed on developing countries . So any gain derived through higher prices of minerals are to be paid for higher food prices. And may developing countries have no, or little, minerals to export The recent turmoil in Tunisia, Jordan and Egypt is, inter alia, partly due to recent increase in food prices.