Competitiveness

Author: Geoff Riley Last updated: Sunday 23 September, 2012

Introduction Competitiveness is the ability of an economy to compete fairly and successfully in markets for internationally traded goods and services that allows for rising standards of living over time. Cost competitiveness differences in relative unit costs between producers reflected in prices Non-price competitiveness this encompasses technical factors such as product quality, design, reliability and performance, choice, after-sales services, marketing, branding and the availability and cost of replacement parts

Key: In highly competitive markets where prices have often converged, non-price factors are crucial
Unit labour costs (ULCs) These are the labour costs of supplying goods and services per unit of output in simple terms, how expensive it is to make something Unit labour costs are determined by The costs of employing people (wage rates, salaries, employment taxes) The productivity of those people employed

Data on unit labour costs is normally expressed in relative terms i.e. we compare unit labour costs in one country relative to another Unit labour costs will rise when wages rise faster than the annual improvement in productivity

Our chart above tracks relative unit labour costs for three countries the UK, Germany and South Korea. Note that the index has a base year of 2005 (i.e. 2005 = 100) and we can see that all three countries have experienced a fall in relative unit labour costs since then. The South Koreans have managed to achieve a significant reduction in their relative unit labour costs during the global economic crisis how might they have done this? They might have been several causes: Cuts in average wages as South Korean companies looked to make efficiencies An upward spike in productivity levels bringing unit labour costs down A depreciation (fall) in the external value of the South Korean won especially against the United States dollar (this makes South Korean products more cost competitive when expressed in a common currency i.e. the US dollar.)

This last point is important - a lower exchange rate causes the relative unit labour costs of one country compared to another to fall a depreciation is one way of boosting competitiveness at least in the short term
Our next chart shows two countries whose relative unit labour costs have increased in recent years. After joining the new European single currency in 1999, both Italy and Spain allowed their unit labour costs to rise sharply look at the divergence in the chart below between Italy, Spain and Germany (which is Europes biggest economy). This loss of competitiveness has caused macroeconomic problems for both Spain and Italy including rising unemployment arising from a worsening trade performance

All three countries share the same currency and therefore an external devaluation is not possible to restore cost competitiveness, unless one or more countries is forced out of or chooses to leave the Euro system

Key point: Relative wage costs are an important indicator of competitiveness but remember to express them per unit of out so that changes in relative productivity can be shown too.
Non-wage costs These are also important when it comes to sustaining an improvement in competitiveness in global markets. The main non-wage costs for businesses are: The costs of meeting environmental regulations Environmental taxes such as the carbon tax or the need to purchase carbon emissions permits Employment protection laws and health and safety laws Requirements to provide business pensions

Other drivers of competitiveness We can broaden the concept of competitiveness to include a much wider range of indicators that have a bearing on the ability of businesses to be successful and profitable in highly contestable global markets. You will have come across many of these when studying supply-side economics and policies.

High-technology exports (% of manufactured exports) data is for 2010 Philippines Singapore Malaysia China France Switzerland United Kingdom United States Japan Middle income Low & middle income World High income Mexico High income: OECD OECD members Hong Kong SAR, China Norway European Union Czech Republic 67.8 49.9 44.5 27.5 24.9 24.8 20.9 19.9 18.0 17.9 17.7 17.5 17.4 16.9 16.5 16.2 16.1 16.1 15.3 15.3

Germany

15.3

World Economic Forum Global Competitiveness Report This is a report published annually and is an attempt to rank countries using a group of twelve indicators. Institutions (property rights protection, trust, judicial independence, corruption) Infrastructure (transport, telephony, and energy, ports) Macroeconomic environment (including stability of key macro indicators) Health and primary education (including many of the indicators used in the HDI calculation) Higher education and training Goods market efficiency Labour market efficiency Financial markets (including stability of markets, strength of banks) Technological readiness (readiness to exploit, adapt to new technologies) Market size (linked to population size and per capita incomes) Business sophistication (quality of supply chains, industrial clusters, quality of management) Innovation

Top countries and lowly ranked countries for international competitiveness (2011-12 data) Top Ranked Countries 1 2 3 4 5 6 7 8 9 10 16 20 21 24 26 Switzerland Singapore Sweden Finland USA Germany Netherlands Denmark Japan United Kingdom Norway Australia Malaysia South Korea China 50 56 65 66 70 76 85 90 102 106 107 114 127 129 142 Lowly ranked countries South Africa India Vietnam Russian Federation Rwanda Croatia Argentina Greece Kenya Ethiopia Jamaica Ghana Nigeria Ivory Coast Chad

Source: World Economic Forum, Competitiveness Index for 2012

Competitiveness in Global Markets - Knowledge as a Public Good

For many countries wishing to sustain improved competitiveness or perhaps make progress towards being a high-income developed country, investment in high-knowledge industries is regarded as crucial but there are grounds for thinking that building these businesses is not an easy process. Many businesses might prefer to let others discover successful and commercially viable new technologies and then copy them if the patent laws are not sufficiently strong. This may hamper levels of research and development spending leading to weaker innovation in highly competitive markets. One option is to strength patent laws to protect intellectual property. Another strategy is to increase public (state) funding of scientific research. If we look back in history many well known products had their origins in state sector funding - for example GPS, smoke detectors, water filters and cordless power drills! Policies to improve international competitiveness Raising competitiveness in domestic and overseas markets is both a short, medium and long-term objective for many governments. The usual focus is on improving supply-side economic performance but keep in mind that a sufficient level of demand is needed for many supply-side policies to be most effective.

Policies to improve competitiveness must always be contextual i.e. they must suit the specific challenges and demands facing businesses in a particular country. Be prepared to evaluate the likely effectiveness of different supply-side policies. Case Study: Mobile Telecommunications, Competitiveness and Economic Development

Mobile phones and raising farm incomes

A report "Connected Agriculture" has estimated that the growing use of mobile phones in poorer countries could increase agricultural income by 88 billion within nine years. Cheap mobile phones can help to provide basic financial services such as micro-insurance, crucial agricultural information such as weather patterns and improve the reliability of supply chains and access to markets. Half of the world's undernourished people are dependent on small farms.
World Bank data shows that approximately 75% of the world's population now has mobile phones, with 5 billion of the 6 billion held in developing nations. The developing world share of the world's internet users rose to 63% in 2011. What roles can the fast-growing uptake of mobile telephony have on growth and development prospects for some of the least developed countries? What is needed for this to be sustained and fully exploited in the years ahead? M-PESA Supporting Growth and Development M-PESA is a mobile payment solution launched in March 2007 and credited with having a significant impact on economic development in Kenya. Launched in March 2007, named after Swahili for money (pesa), originally a micro finance project Operated by Safaricom (which is 40% owned by UK mobile phone business Vodafone) Less than 10% of Kenyans have access to financial services But nine out of ten adults have access to a mobile phone in Kenya By 2009 M-PESA had 6.5 million customers, more recent figure suggests 15.1 million on the system Around 20% of Kenyan GDP washes through the M-PESA system Safaricom is not allowed to make a profit on the interest and neither is the customer Interest earnings go into a charitable M-PESA foundation M-PESA has been very successful in Tanzania but has had less impact in Afghanistan and India Airtel is the main domestic rival, formerly called Zain and now owned by Indias Bharti Airtel, M-PESA used in myriad different ways - Kenyans pay school fees, collect their salaries, shop for groceries, they buy everything from drinks in beer shacks to airline tickets thanks to mobile money, sending transfers at the push of a few buttons on a mobile telephone. As per capita incomes rise, people will make savings using the system or might be able to take out loans.

Economic Growth - Development & Labour Migration

Author: Geoff Riley Last updated: Sunday 23 September, 2012
Introduction

A Global War for Talent A higher rate of global migration is desirable for four reasons: it is a source of innovation and dynamism; it responds to labour shortages; it meets the challenges posed by rapidly aging populations; and it provides an escape from poverty and persecution Ian Goldin, director of the Oxford Martin School and Professorial Fellow at Balliol College, University of Oxford
This revision note focuses on international labour migration keep in mind that large migration can happen within a country too. In China there has been rural-urban migration in the last 20 years amounting to over 150 million people. Cross-border migration from one country to another has become an increasingly important feature of our globalizing world and it raises many important economic, social and political issues About 200-million people now live in countries in which they were not born Estimates compiled in 2009 suggested 580,000 to 820,000 Chinese migrants were living in Africa. In 2012 the figure is likely around 1 million Migrant Workers as a % of a countrys total population Country Kuwait Qatar United Arab Emirates Singapore Australia Ireland United States Germany United Kingdom South Africa 2010 76.6 74.2 43.8 38.7 21.1 20.1 13.8 13.2 10.4 3.7 Country 2010

World Sub-Saharan Africa (all income levels) Least developed countries

Korea, Rep. Mexico Philippines India Brazil China Indonesia

3.1 2.1 1.4

1.1 0.6 0.5 0.4 0.4 0.1 0.1

Source: World Bank

Factors affecting the direction and scale of migration Many economic and social factors affect the rate of migration. In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation.

Differences between countries in wages and salaries on offer for equivalent jobs reflected in differences in expected incomes over a working life Access to the benefits system of host countries plus state education, housing & health care Employment opportunities vary between nations, in particular for younger workers A desire to travel, learn a new language, build new skills and qualifications and develop networks A desire to escape political repression and corruption in the country of origin especially in failing states The impact of satellite television and the internet in changing peoples expectations The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union The unwillingness of people within the domestic economy to take certain drudgefilled jobs such as porters, cleaners and petrol attendants

Economic Benefits from Cross-Border Migration Supporters of inward labour migration have argued that migration provides numerous advantages: Fresh skills: Migrants can provide complementary skills to domestic workers, which can raise theproductivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work.) A driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs. Much innovation comes from the work of teams of people who have different perspectives and experiences. Migrant networks accelerate the spread of technology. Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe. Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work and contribute to a nations GDP through a higher level of aggregate demand. Reducing skilled-labour shortages and expanding the labour supply: Migration can help to relieve labour shortages and help to control wage inflation. For example, recruitment of skilled workers from outside the European Union is important to many businesses in the UK, and evidence indicates they currently make a positive contribution to UKs GDP. Making a country attractive to FDI: Availability and quality of labour is known to be a key investment location factor for many businesses. In a global battle for talent, if a country is not successful in attracting and keeping skilled workers then FDI in highknowledge industries will eventually flow to other parts of the world. Income flows (remittances): Remittances sent home by migrants add to the gross national income of the home nations. And if these remittances boost spending in

these countries, this creates a fresh demand for the exports of other nations. According to the economist Professor Ian Goldin from Oxford University, in Latin America and the Caribbean, more than 50-million people are supported by remittances, and the numbers are even higher in Africa and Asia. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the governments finances. Supporters of allowing free movement of labour argue that labour mobility is a positive-sum gamerather than a zero-sum game. Disadvantages of inward migration On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. Some of the arguments include: Welfare costs: Increasing cost of providing public services as migrants come into a country. Worker displacement: Possible displacement effects of domestic workers Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions. Pressure on property prices: Rising demand for housing which forces up prices and rents. Benefit claims: Many immigrants find it hard to get work Who really gains? The benefits of migration are focused mainly on employers, especially those who take on illegal workers at low wages. Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market. Brain Drains Human Capital Flight Migration directly impacts the migrants, their families and their employers, and also impacts development indirectly. Development in turn impacts migration. There is no doubt that migration is a very important driver of development.

Source: World Bank, Jan 2013

Every immigrant is also an emigrant. A brain drain is a term that describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. It has been used to describe net outward migration of people from several European Union countries in recent times (notably Ireland, Greece and Spain) another phrase for this is human capital flight.

A sizeable brain drain can bring economic costs and benefits for the sending nation. One disadvantage is that countries lose out on the benefits that might have accrued from the resources used in educating people who leave. Add to this the loss of tax revenue from those who choose to live and work overseas. A sizeable loss of skilled workers (many of whom may be younger and therefore more geographically mobile) could lead to labour shortages in the sender country, putting upward pressure on wages and labour costs. Some of this income earned overseas returns to the sender country in the form of remittances and many skilled migrants often leave only for a year or two - the percentage of permanent migration inside the EU is relatively small. The benefits and costs of labour migration are hard to quantify and estimate. Much depends on The types of people who choose to migrate from one country to another. The ease with which they assimilate into a new country and whether they find regular jobs. Whether a rise in labour migration stimulates capital spending by firms and by government. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to their country of origin.