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).