Paul Krugman on Competitiveness: a Dangerous Obsession

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Paul Krugman: “Competitiveness’ would turn out to be a funny way of saying ‘productivity’ “

In 2011 the U.S. economist Paul Krugman wrote an article in  the New York Times in which he stated:

“The idea that broader economic performance is about being better than other countries at something or other — that a companycountry is like a corporation –is just wrong. I wrote about this at length a long time ago, and everything I said then still holds true.*”

Krugman was referring, most notably, to “Competitiveness: a Dangerous Obsession,” a long essay he wrote in 1994 for the U.S. publication Foreign Affairs. A lesser-known essay of his, Pop Internationalism, contains the memorable phase:

“If we can teach undergrads to wince when they hear someone talk about ‘competitiveness,’ we will have done our nation a great service.”

It’s worth noting that the competitiveness discourse in those days was quite heavily focused on trade: the competitiveness agenda seems to have expanded its reach substantially since then to include tax, labour provisions, welfare, financial regulation, and many other areas of economic life.

Jack Copley now examines Krugman’s 1994 essay. This will form part of a permanent collection of essays we’re building up, called “What is Competitiveness?”

Paul Krugman on ‘Competitiveness.’ 

Bad analogies have abounded in the years since the 2008 crisis. Two of the most pernicious have been that national economies are essentially like households or like businesses. While the first comparison has been roundly attacked, the second has been a bit harder to put to bed.

“Competitiveness is a meaningless word when applied to national economies.”

However, in his 1994 article for Foreign Affairs,  Paul Krugman took this exact same argument head on. He not only challenged the idea that nations have to compete with one another like businesses, but went as far as to argue that “competitiveness is a meaningless word when applied to national economies”. I’ll give an introduction to the main arguments of his piece, and then propose some questions that are raised of its thesis by unfolding global events.

  1. Competition is about trade – which is of limited importance.

When politicians talk about national economic competitiveness, (like UK Prime Minister David Cameron and his #globalrace), they often mean exports. Krugman accepts this premise and then sets about showing why we needn’t be too concerned about it. 

“In an economy with very little international trade, the growth in living standards… would be determined almost entirely by domestic factors, primarily the rate of productivity growth… ‘[C]ompetitiveness’ would turn out to be a funny way of saying ‘productivity’ and would have nothing to do with international competition.”

Krugman focuses on the U.S., which has a large domestic economy relative to its external trade. For economies with sizeable domestic markets, export competitiveness plays a far smaller role in determining national prosperity than politicians would have us believe. Issues of domestic economic strategy, such as productivity, are more important.

Furthermore, trade surpluses are not always a sign of health. Krugman gives the example of Mexico in the 1980s, a country forced to ensure large surpluses “to pay the interest on its foreign debt since international investors refused to lend it any more money”; Mexico then began to run large trade deficits after 1990 as foreign investors recovered confidence and poured in new funds. To find modern parallels one only has to look at the UK, where the current account has been deep in deficit for nearly all of the last 30 years without a commensurate stagnation in living standards. The case of Japan today also springs to mind, as their notorious ‘Lost Decades’ accompanied a huge surplus.

Ultimately, competition of the #globalrace variety is generally not as important as it’s made out to be, particularly for larger economies. Countries don’t need to compete like companies do – they are more self-reliant and they benefit much more from the success of others.

  1. The competitiveness myth is sexy.

Despite relying on simplifications that don’t hold much water, the idea of the nation as a business is compelling. It evokes imagery not just from the business world, but also from sports, with the whole country pulling together as a team in order to assert itself in a fierce global environment.

Krugman details numerous examples of how competitiveness jargon was used to sell unpopular policies. But even today governments around the world routinely justify tax breaks for the rich, financial deregulation, attacks on labour unions and public service cuts all in the name of gaining an advantage over other national economies.

  1. Its a dangerous myth.
“A government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good science policy.”

Krugman argues that not only is the obsession with national competitiveness fundamentally misguided, but it is also harmful. If the principle of absolute competitiveness is internalised too much, it can lead to trade wars and protectionism when political leaders feel that their countries are simply unable to compete on an even playing field. Indeed, “a government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good science policy”.

Another very real danger that Krugman doesn’t mention is the xenophobic and racist sentiments that can be roused when the rhetoric of national competition is drummed into people’s heads. In Britain, UKIP is the most proficient at this particular manoeuvre – but it has been a phenomenon associated with all the major British parties at one time or another.

Some things to ponder

Last week, UK Chancellor Osborne had the tough task of standing up in the House of Commons and trying to say something positive about the British economy. As economics blogger Michael Roberts points out, GDP growth, productivity, inflation and income growth are all below what was expected by the 2010 OBR forecast. However, with a sprinkle of “promote competition”, a dash of “competitive taxes”, and the slightly embarrassing characterisation of Britain as the “Comeback Country”, Osborne managed to shield the underlying economic weaknesses from view. In other words, Krugman’s point about the political salience of the competitiveness narrative is just as relevant today.

Yet, Krugman’s claim that Western countries are not “to any important degree in economic competition with each other”, is perhaps a little harder to digest in the current context. Amongst the most pressing issues now is the crisis of the peripheral Eurozone countries, especially Greece. One of the central causes of this crisis is Germany’s massive trade surplus and the consequent deficits of the “PIIGS”. Unable to compete with Germany’s harsh suppression of its own workers’ wage growth, many of these peripheral countries came to rely instead on cheap credit to fuel unsustainable public spending (Greece, Portugal) or housing bubbles (Ireland, Spain). Can we really say that these countries did not find themselves under real pressure to compete on exports? Or, if Krugman’s analysis only applies to “leading nations” with large domestic markets, then must 133 million Europeans (the population of the PIIGS) just accept their fate?

Another confusing point in Krugman’s analysis is why competition is limited to global export markets. Even in an economy that is totally domestically-oriented, investors can sell their equity in a company and shift their money overseas if they think they can earn more profits. For example, investors may shift their funds from a US restaurant chain to a Brazilian one if it can offer higher returns. Individual firms are in competition with every other firm, not just those that share the same consumer markets.

Regardless, Krugman’s article is still a sharp and important provocation in a contemporary world in which lazy assumptions about national competitiveness are too often left unchallenged.

Further quotes from the 1994 article:

  • “Countries are nothing at all like corporations . . . countries do not go out of business.”
  • “The rhetoric of competitiveness — the view that, in the words of President Clinton, each nation is “like a big corporation competing in the global marketplace” — has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially one of competing on world markets.”
  • “The idea that a country’s economic fortunes are largely determined by its success on world markets is a hypothesis, not a necessary truth; and as a practical, empirical matter, that hypothesis is flatly wrong.”
  • “The growing obsession in most advanced nations with international competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence. And yet it is clearly a view that people very much want to hold.”
  • “The obsession with competitiveness is not only wrong but dangerous, skewing domestic policies and threatening the international economic system.”
  • “Most people who use the term “competitiveness” do so without a second thought.”
  • “Over and over again one finds books and articles on competitiveness that seem to the unwary reader to be full of convincing evidence but that strike anyone familiar with the data as strangely, almost eerily inept in their handling of the numbers.”
  • “In each case, the growth rate of living standards essentially equals the growth rate of domestic productivity — not productivity relative to competitors, but simply domestic productivity.”

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