Why the Competitiveness Agenda is likely to mean slower growth

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Matthew Watson, Professor of Political Economy, University of Warwick

Matthew Watson, Professor of Political Economy, University of Warwick

Update: now re-published at Naked Capitalism.

The purveyors of the modern-day Competitiveness Agenda exhibit pronounced Panglossian tendencies. They see only positive things for everyone if their advice is followed. A ‘competitive’ economy will boast high levels of growth, they say, and the whole of society will benefit when the trickle-down effects impact on their lives.

As Matthew Watson argues, however, this Panglossian scenario elevates optimism over evidence. The modern-day Competitiveness Agenda can be turned on its head in the interests of a more progressive social settlement by exploring its fundamental anti-growth dynamics.

This post has been added to our relatively new page called The Harms which outline the range of different ways in which the Competitiveness Agenda tends to hurt those countries that practise it.

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The Anti-Growth Dynamics of the Competitiveness Agenda

By Matthew Watson

The accusation comes across loud and clear whenever politicians or business people talk about ‘competitiveness’. Anyone who does not back their strategies threatens to damage the economy: forcing it to operate beneath its potential level of output leading to unnecessary pain and misery, as lower levels of production lead to higher joblessness. There is currently little political space beyond this particular equation of competitiveness and growth, where if you raise even a circumspect eyebrow in relation to the modern-day Competitiveness Agenda you are depicted as an economic devil, talking down your country’s growth opportunities.

Box: The Competitiveness Agenda

Economists can (and do) use the word ‘competitiveness’ to mean whatever they want it to mean, but for us the terms ‘competitive’ and ‘competitiveness’ in inverted commas refer to a particular meaning that we call the Competitiveness Agenda. This essentially involves special pleading for preferential treatment, on behalf of Capital and its owners, in the name of the competitiveness of the whole economy.

This agenda is underpinned by a rarely questioned assumption that transferring resources from other parts of the economy to these capital owners in the name of ‘competitiveness’ – via corporate tax cuts, wage cuts and many other mechanisms – will benefit the economy as a whole.

Read more about this here

Here at Fools’ Gold we have set ourselves the task of exploring what this alternative political space might look like. So it is necessary to tackle the question of the relationship between competitiveness — specifically, the Competitiveness Agenda — and growth. One way to do this is to run the argument through an analysis of assumptions about labour market competitiveness, which has been the subject of a previous Fools’ Gold blog post.

Today debates about labour market competitiveness are dominated – in the Anglo-Saxon economies in any case – by the search for institutional forms to help keep wage increases to a minimum. The relaxation of labour laws and the marginalisation of trade unions have seen real wages fall in many sectors of the economy over the last 40 years. This has led to lower overall production costs, and the opportunity for businesses and their owners to take more profit out of the economy. This enhanced profit-making is typically rewarded with a higher share price and a general feel-good factor surrounding the company. Pro-Competitiveness Agenda commentators will see only good news here.

Yet none of this yet gets near to answering the question of whether a strategy of repressing wage increases automatically delivers something that might be called competitiveness — and, even if it does, at what cost.

The prevailing Anglo-Saxon social settlement on jobs, employment, working hours, overtime, workplace protections, union rights, etc. is to make people work longer and harder and to stigmatise anyone who falls off the labour market ladder. This might be justified in relation to the Competitiveness Agenda, but regressive social settlements of this nature affect much more than ’competitiveness’ alone. It is also an issue of growth potentials, and here the evidence certainly isn’t pretty.
The relationship between competitiveness, very loosely defined, and growth might be rather different to the unequivocally positive correlation predicted by the sirens of the modern-day Competitiveness Agenda.

It may be that ‘competitiveness’ means lower growth.

This can be shown when looking at both supply-side and demand-side labour market factors.

The Supply Side

Will paying people less to do the same amount of work damage the productivity of the firm? Will paying fewer people the same wage but expecting them to get through more work each day have the same effect? The available evidence from the 1970s onwards is not entirely clear-cut on this question, because it is unlikely that firms will ‘downsize’, ‘right-size’ (or whatever the contemporary phrase of choice is) on its own. If they are intent on doing this then they may well go the whole hog in trying to extract as much extra profit at their workforce’s expense as possible.

“It may be that ‘competitiveness’ means lower growth.”

Firms that set their sights on reducing unit labour costs have typically done so at the same time as enhancing workplace discipline so as to make people work harder. All sorts of electronic surveillance techniques are now used to monitor workplace performance at every point in the working day. As soon as this process starts, it very quickly becomes a one-way street. Expectations of what is possible only ever seem to change to demand more, never less.

Productivity can therefore be enhanced at the same time as labour standards go down, but even in the cases where this appears to be the outcome it is usually not directly because of workers being paid less or having some of their protections removed. It is more likely linked to the broader package of workplace reforms that are introduced at the same time as the attack on labour standards.

But even if we were to accept that this happens, then further questions arise. In particular, enhancing the oversight of workers’ on-the-clock activities through additional disciplining techniques might lead to temporary productivity increases. However, this is only ever likely to be a short-term palliative, because workers who are routinely subjected to disciplining effects should be expected to very quickly become demoralised. Increases in labour standards are generally good for worker morale, but when those standards are rolled back workers are less likely to contribute to productivity advances than when they are well treated and well rewarded for their efforts.

So, there is good reason to think that dismantling existing regimes of labour protection is likely to lead to lower productivity amongst those workers, which in turn will lead to lower growth because of supply-side factors. However excited the prophets of ‘competitiveness’ might get about undermining existing labour standards, growth could very well turn out to be a casualty of their strategies.

The demand side

The same equation is also likely to arise on the back of changes to demand-side factors. If you pay someone less to do the same job, then they will have reduced personal disposable income. Equally, if you pay fewer people to produce the same level of output at existing wage rates, there will still be reduced personal disposable income in the economy as a whole.

If less money is spent on goods and services, then other firms will see a reduction in demand for their products. This is the multiplier effect described by Richard Kahn in the 1930s, where each pound in circulation in the economy is spent many times over: but in this instance it operates in reverse. Every firm that tries to gain a competitive advantage by downsizing its workers’ remuneration package to gain a cost-cutting edge may become a part of an overall death spiral, as they eat into the ability of all other firms to sell their products.

This is indeed the lesson from austerity over the last few years, in Britain as in many countries. The recession might not have led to as much job shedding as we might have expected, despite its double-dipping and even treble-dipping properties. However, all the reports from the economic front-line suggest that firms that avoided cutting the workforce to the bone also managed to extract agreements to reduce real wage increases in return. The compensating compression of wages in what were already low-wage sectors has led to people being able to spend less in a manner captured perfectly by reverse multiplier effects. Potential new sources of growth have been obliterated on the demand side, in part through ‘competitive’ wage policies, before there was even a chance that they might appear. To take just one example, the British economy has bumped along, with politicians calling for cuts in social spending and business leaders calling for cuts in wages, where all the while these supposed ‘solutions’ have been making things worse for the economy as a whole.

Both sides point in the same direction

The interesting proposition to arise from all of this is whether we need to recalibrate the usual debate so that we can ponder the implications of ’competitiveness’ and growth being in direct opposition to one another.

This is certainly a shift that all of us at Fools’ Gold endorse, because it is in this way that new, more progressive political spaces can be opened up.

Whenever we turn on our televisions or open our newspapers to find politicians and business leaders giving voice to the modern-day Competitiveness Agenda, we find them saying that labour standards are dispensable in the interests of both competitiveness and growth. The foregoing, though, suggests that this equation will not hold up under scrutiny. It shows that what is good for the owners of individual firms and their share price will often turn out to be bad for the growth of the economy as a whole. And this is true for both supply-side and demand-side reasons.

This would seem to change the debate really rather fundamentally.

And if ’competitiveness’ does mean lower growth, then one would have to wonder what the point would be of allowing oneself to be seduced by the Competitiveness Agenda in the first place.

Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and an Economic and Social Research Council Professorial Fellow.

 

 

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