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MOEA Training Course 2011 Competitiveness of Nations

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1 MOEA Training Course 2011 Competitiveness of Nations
Charles-Henri MONTIN Senior Regulatory expert Ministry of economy and finance France French representative to OECD/RPC

2 What makes nations prosper?
A nation’s standard of living (wealth) is determined by the productivity with which it uses its human, capital, and natural resources. The appropriate definition of competitiveness is productivity. Productivity depends on the value of products and services e.g. uniqueness, quality) and the efficiency with which they are produced. It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries Productivity in a nation reflects what both domestic and foreign firms choose to do in that location (location of ownership is secondary) The productivity of all “local” industries is of fundamental importance to competitiveness, not just that of traded industries Devaluation does not make a country more “competitive”, rather it reveals a lack of fundamental competitiveness A nation’s prosperity depends on its competitiveness, which is based on the productivity with which it produces goods and services. Sound macroeconomic policies and stable political and legal institutions are necessary but not sufficient conditions to ensure a prosperous economy. Competitiveness is rooted in a nation’s microeconomic fundamentals—the sophistication of company operations and strategies and the quality of the microeconomic business environment in which companies compete. An understanding of the microeconomic foundations of competitiveness is fundamental to national economic policy.

3 What is competitiveness?
Competitiveness is the productivity with which a nation uses its human, capital, and natural resources Productivity sets the standard of living Productivity growth sets sustainable economic growth Productivity and prosperity depends on how a nation competes, not what industries it competes in Productivity in the modern global economy arises from a combination of domestic and foreign firms Relentless innovation is necessary to drive productivity growth and enable the standard of living to rise Technology, products, and organizational methods (source: Porter -2010) See also Wikipedia definition, which includes reservations on the economic validity of the concept This slide is an update of the previous Porter considerations

4 Does national competitiveness exist?
Nations compete to offer the most productive environment for business Legal framework Market efficiency The public and private sectors play different but interrelated roles in creating a productive economy

5 National Competitiveness “policy clusters”
External Competitiveness Openness to international trade Regulatory Competitiveness Attractiveness of the domestic business environment Regulation supportive of efficient markets Public sector Competitiveness Investment in infrastructure Security Education From Weymouth and Feinberg : National Competitiveness in Comparative Perspective: Evidence from Latin America The term competitiveness is widely applied as a ―catch all‖ term synonymous with investor-friendly policies and institutions. We argue that sloppy applications of the term ignore the possibilities of policy tradeoffs and varieties of institutional choices. We show that popular conceptualizations of the term describe three discernible clusters of economic policies and institutions. One identifiable cluster captures openness to international trade; a second gauges regulatory impediments to private sector competition; and a third refers to public sector investments in human capital, security, and infrastructure. We develop three unique empirical indices to operationalize these three clusters, and show that these concepts are not only theoretically but also empirically distinct. In particular, our analysis indicates that the correlation between these measures is not particularly high in a sample of Latin American countries. The larger economies in the region tend to be most competitive on the regulatory and public goods dimensions, but fall well behind smaller economies in terms of external competitiveness, broadly conceived. (…) Governments positively influence their country’s productivity by pursuing a set of laws, institutions, and regulations that promote investment and improve productive efficiency. Economists argue about which of these institutional rules are most fundamental, but there is widespread agreement that productivity improves through: openness to external and domestic sources of competition, the development of efficient and deep financial markets, and the enforcement of property rights. More recent research highlights the importance of public investments in physical infrastructure, and in human capital. Finally, it is well established that productivity increases require a firm and transparent rule of law, including a basic level of personal security. Three main clusters of policies and institutions related to competitiveness emerge: external, regulatory, and public investment. Dangers: ideological bias (“liberalisation”) lack of economic analysis Source: Weymouth and Feinberg

6 How can governments nurture competitiveness?
Establish a stable and predictable macroeconomic, political, and legal environment Improve the availability, quality, and efficiency of general purpose inputs, infrastructure, and institutions Set overall rules and incentives governing competition that encourage productivity growth Facilitate cluster development and upgrading Create an explicit, ongoing process of economic change and competitive upgrading which informs citizens and mobilizes the private sector, government at all levels, educational and other institutions, and civil society.

7 Example: the UK national competitiveness programme
Based on two principles Maintenance of macroeconomic stability to provide firms with the certainty they need to invest Micro economic reforms to remove barriers that prevent markets from functioning efficiently The “Enterprise Strategy 2008” cites 5 “enablers” of enterprise, on of which is Regulatory Framework

8 The 4 “dimensions” of competitiveness
Attractiveness vs Aggressiveness Proximity vs Globality Assets vs Processes Individual Risk Taking vs Social Cohesiveness These dimensions can combine in national/regional models: Globality + Risk Taking Proximity + Social Cohesiveness From Stéphane Garelli: Competitiveness of Nations: the fundamentals

9 Cultural and other factors
Values, which evolve as the economy becomes richer: Hard work Wealth Social Participation - Self-achievement Behavior models : “South European”: regulations, social protection “North European”: stability, social consensus, regulation “Anglo-saxon” model: deregulation, flexible labour, higher risk acceptance Technology

10 Selected golden rules of competitiveness (Garelli)
A stable and predictable regulatory environment Work on a flexible and resilient economic structure Invest in traditional and technological infrastructure Promote private savings and domestic investment Develop export- drive and attract FDI Quality, speed and transparency of admin action Maintain relation between wage levels and productivity Preserve the social fabric by reducing wage disparity Invest in education and training of work force

11 Determinants of competitiveness (Porter)
Macroeconomic competitiveness: Social infrastructure and political institutions Macroeconomic policies Microeconomic competitiveness: Quality of business environment State of development of clusters Sophistication of company operations and strategy Macroeconomic competitiveness creates the potential for high productivity but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition






17 The Irish approach Ireland’s national competitiveness is founded on certain key conditions to support a conducive and sustainable economic environment. These intermediate indicators connect the government’s policy inputs (indicators in chapter five) with improvements in sustainable growth (indicators in chapter three). This section benchmarks Ireland’s performance regarding four essential conditions:  The performance of Ireland’s businesses in terms of investment and trade,  Ireland’s productivity and innovation performance,  Ireland’s prices and costs structure, and  Labour supply

18 The Irish approach to competitiveness (“essential conditions”)
1. Business Performance Business Investment Trade 2. Productivity and Innovation 3. Prices and costs 4. Employment and Labour Supply Examines the various aspects of the economy

19 Irish competitiveness: “policy inputs”
1 Business Environment Taxation and finance Regulation and Competition Social Capital 2 Physical and Economic Infrastructure Investment in Physical Infrastructure Transport, Energy and Environmental Infrastructure Information and Communications Technology Infra. 3 Knowledge Infrastructure

20 Measuring competitiveness
Global Competitiveness Index World Bank “Doing Business”

21 The Global Competitiveness index
The WEF report examines ―the many factors enabling national economies to achieve sustained growth and long-term prosperity”. The basis of comparison in the report are the country rankings along the global competitiveness index (GCI), which measures microeconomic and macroeconomic foundations of national competitiveness, defined as ―the set of institutions, policies, and factors that determine the level of prosperity of a country.‖ (p. 4) The GCI incorporates a host of factors that influence static levels of income, as well as dynamic growth potential. Each of the 12 pillars contains a number of detailed indicators, in total 114

22 Taiwan in the GCI

23 Taiwan in the GCI

24 Problematic factors of doing business

25 Sub-indexes and pillars
The 12 pillars are grouped in 3 sub-indexes, which are weighted differently according to the stage of development Basic requirements, key for factor-driven economies (20% in innovation-driven) Efficiency enhancers, key for efficiency-driven economies (50%) Innovation and sophistication factors, key for innovation driven economies (30%)

26 Indicators Each pillar comprises a number of indicators, variable from 2 (market size) to 21 (institutions), totaling 114 in Indicators depend on availability of data, which is collected from public statistic series where information covers, as far as possible, all economies

27 Comment from GCI Assets Weaknesses:
Taiwan, China remains stable in 13th position, profile nearly unchanged Consistent performance across the pillars of the GCI, Assets innovation (9th) quality and presence of business clusters in high-end manufacturing, first-class R&D, excellent educational system, high level of technological readiness (24th) and well-developed infrastructure, with the exception of air transport (51st). Weaknesses: rigidity of labor rules (118th, deteriorating) causes inefficiency of market (33rd), public and private institutions (31st), but improving. 2012 Taiwan, China remains stable in 13th position, with its competitiveness profile essentially unchanged from last year. Taiwan displays a consistent performance across the pillars of the GCI, although it enters the top 10 in only two of them. Its prowess in innovation is undeniable. Ranked 9th in the innovation pillar, Taiwan boasts the largest number of United States Patent and Trademark Office (USPTO)–granted patents on a per capita basis, more than the United States. In addition, the quality and presence of business clusters in high-end manufacturing, along with its first-class R&D, earns Taiwan the top spot on the related indicator. The economy’s capacity for innovation is further supported by an excellent educational system, which is characterized at all levels by high enrollment rates and first rate quality. Specifically, Taiwan ranks 10th in higher education and training. The economy can also rely on a high level of technological readiness (24th) and well-developed infrastructure, with the exception of air transport (51st). Among the country’s relative weaknesses, its labor market is characterized by much rigidity (98th); the situation has been deteriorating over the past two years (it now ranks 33rd, down nine places in two years). Room for improvement also exists in public and private institutions (31st), although consistent advances have been achieved in this area since 2008. 2011 “Taiwan, China ranks 13th, one place lower than last year. Taiwan ranks among the top 20 economies in nine pillars, but its performance in three of them holds the economy back from its full competitiveness potential: institutions, financial market development, and labor market efficiency. The quality of the institutional framework continues to improve although by small increments, now standing at 35th position, up from 40th in Thanks to greater efficiency, Taiwan has improved by 19 positions in the financial market development pillar to 35th, a category where it used to place below the 50th mark. The third area of relative weakness is its labor market (34th), where the situation continues to deteriorate with respect to the flexibility. Given its many strengths, improvements in these areas would make Taiwan an even more competitive economy.”

28 Doing Business approach
. Taiwan, China

29 Taiwan’s comparative position
This slides needs updating, as the positions have changed since 2009

30 Taiwan’s current position

31 Taiwan’s assets in global competition
Highly innovative Strong intellectual property protection Entrepreneurial Flexible business culture reacts rapidly Large pool of researchers Strong science and technology education, research institutions Some deep technology clusters in closely related industries Logistics strengthened In past 10 years Strong outbound FDI Gateway to China: strongest democracy, freedom of speech of any Chinese-speaking 2010/04/08 16:52:03 Taipei, April 8 (CNA) President Ma Ying-jeou said Thursday his administration has been actively promoting the signing of a wide-reaching trade pact with China to help upgrade Taiwan's national competitiveness through participation in regional integration. Such efforts, however, have met strong objection from the opposition camp, led by the Democratic Progressive Party (DPP), as it worries that the proposed economic cooperation framework agreement (ECFA) may lead to Taiwan's overreliance on the Chinese market, Ma said while meeting with Michael Porter, a leading authority in corporate strategy.

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