Competitiveness, who needs it?

Shock horror, the US economy has fallen from first to sixth place in the world competitiveness league! It now ranks behind Finland and Switzerland. So says the World Economic Forum, the well-heeled private Swiss foundation that organizes the annual Davos junket for the rich and famous; and it’s reported with all seriousness in the quality press.

Except that the exercise is pure business school hokum. The US economy is in trouble, but the report adds no new grounds for thinking so.

“Competitiveness” is a sensible concept for firms; if Boeing wins a contract from Air India, Airbus has lost it. Oligopolistic markets are a zero-sum game in the short run for the individual businesses. But extending the idea to countries is the fallacy of mercantilism, sunk by Adam Smith and David Ricardo two centuries ago. World trade can lift all boats, and generally does so. One can say that China and Morocco compete in the European market for cheap clothes, and Morocco does suffer from the undervalued yuan. It’s also nice to have comparative advantage, as Finland does, in a high growth sector like mobile telecoms, as this means you can probably grow faster for a while. But economies are not heroes in combat. Overall macro competitiveness doesn’t exist. Some countries are richer than others, some grow faster than others; that’s what has to be explained, by going directly to solid causal variables. “Entities are not to be multiplied without necessity”, especially intermediate ones.

The WEF people, faced with the vacuity of their main selling point, have had to look for an operational definition that justifies the grab-bag of factors in their index. From the introduction to the executive summary (my italics) :

At the World Economic Forum, we understand national competitiveness as that set of factors, policies, and institutions which determine the level of productivity of a country. Raising productivity – i.e., making better use of available factors and resources- is the driving force behind the rates of return on investment which, in turn, determine the aggregate growth rates of an economy.Thus, a more competitive economy will be one which will likely grow faster in the medium and long term.

Which is it, high levels or high growth rates of productivity? If you take the second, the trouble is there is no correlation at all between growth and “competitiveness”.

Here are the ten fastest growing countries in 2004 (UN data) :

I ran a correlation between the 2006 “competitiveness” rankings and 2004 growth rates; it was significantly negative (-0.2). (Spreadsheet on my website here.) Ideally I should have taken a longer-run average but I can’t be bothered to belabour the obvious. Fast-growing countries are poor, often hell-holes. Rich, happy countries like Switzerland (or rich, unhappy ones like the US) can’t grow fast.

The factors in the index make a bit more sense as conditions for high levels of productivity. You need good universities and lots of phone lines to sustain an advanced economy, not to get started out of poverty. Not all of the factors make sense even here. Is low infant mortality important for productivity? I suppose it reduces parental investment per surviving child, but that is hardly why the health of children should be pursued. Some elements are merely fashionable, like “business costs of terrorism” (which are negligible, lost in the noise.) The “burden of government regulation” counts as as a bad, the “strength of auditing and accounting standards” as a good. The weighting is opaque, but that’s a problem with all multifactor indexes like the UN’s human development one.

What the index really covers is businessmen’s welfare. What they want is a safe, orderly, environment with good public services and golf courses, reliable, skilled and obedient workers, honest and conservative government, and low taxes. In fact, Switzerland. The competitiveness index measures variance from Swissness. It’s in many ways an admirable country, and there are worse goals than emulating it, but objective economic advice it ain’t.