Competitiveness and Growth Robert Z Lawrence Harvard Kennedy School of Government

Competitiveness and Growth What is Competitiveness? Performance in International Trade. Comparisons through benchmarking. How do countries do with respect to inputs that are the key to growth.

Is the World Economy Hostile to Development? Anti-Globalizers: For developing countries recent period of globalization and liberalization worse than earlier period with more protection. Inequality is rising everywhere as well. Pro-Globalizers: For developing countries recent period of globalization and liberalization is better than earlier period. World is becoming less unequal.

Growth Experience Miracles and Debacles : Era of Import Substitution 33 Miracles: (PC income > 3% pa for ten years) From All Over the World: Asia, Africa and Latin America -- total 357 million people Including: Botswana, Malta,Singapore,Hong Kong,Gabon, Taiwan, Korea, Lesotho,Trinidad,Brazil,Malaysia,Barbados,Brazil,Malaysia,Israel,Georgia, Cote’d’Ivoire,Sychelles,Tuniisa,Ireland,Dominican,Egypt,Indonesia,Paragu y,Mautirtius,Mexico,Panama,Keny Debacles: No increase in income (14 countries mainly African) 69 million 1980 to 1999: Era of Globalization 26 Miracles: Mainly Asia and Caribbean (plus Chile) 2.1 billion people Debacles. 65 Countries Many in Africa and Latin America 621 million people Arvind Panagariya of Columbia University

How can they both be right? You can draw different conclusions depending on whether you look at people or at countries. Early period, more countries were miracles but fewer people, Later period fewer countries many more people – over 2 billion! Later period, though, many more debacles Paradox is inequality has increased in almost every country but actually fallen at the global level!

Inequality in 59 Developing Countries (late 80's to 2000)

Income Growth in China: The Richest see their incomes grow the most

But imagine there’s no country! World income inequality is falling. Mean Logarithmic Deviation; From Xavier Sal-i-Martin

Explanation When a poor person becomes “rich” in India or China it could increase inequality in those countries but reduce inequality in the world because in global terms it’s a poor person entering the global lower middle class.

The Global System: 2000 View A New Economy based on Information technology and finance 2000 View: Globalization good for Industrial countries but inadequate for development in Africa and Latin America (besides China and India). WTO Response: Doha Development Agenda: Growth through higher farm prices. Cut subsidies and reduce agricultural barriers in developed countries

US Share in World GDP :1980 to 2007

Yet 2000 – 2008 Widespread Growth in almost all developing countries!

Why did they grow? Global factors important. Commodity prices. Capital flows Competitive exchange rates. But also domestic drivers, reforms and new growth processes (middle-class in China and India).

Divergence: Expected to continue! IMF October 2009

Prospects Developed/Developing contrast. China/India as center of global growth. Impacts on commodity prices. The challenge of development: diffusion of best practices and lots of room below the frontier

II: Growth and Trade Positive Association Typically in miracles trade grew faster than GDP – important both exports and imports. Clearly trade competitiveness was a precondition for growth. And as with companies successful countries adapt to their environment. Most debacles had very slow import growth. IE their slow growth was not because they were over whelmed by imports.

Trade and Growth: What explains the association Links between growth and trade. Key role of investment-equipment and imported inputs require imports. To pay for imports you must export. Links between exports and imports. To export you must import. Export promotion leads to import promotion. E.G. Free Trade Zones. Converse is true too: A tax on imports is a tax on exports.

China: Joins the WTO and Export Growth Accelerates!

Correlation between trade and growth need not imply causation! Economists try to unravel the relationships, and some do find evidence of trade causing growth. And there are good reasons. (Comparative advantage, scale economies, inducements to innovate) But problem is that others also find strong (and even more compelling evidence of an association between “high-quality” institutions and both trade and growth. As paper co-authored by Rodrik notes “ Institutions Rule” So trade plays a key role, but domestic institutions and polices are vital as well. Indeed high quality institutions play an important role in promoting both trade growth Some obviously: Customs administration, Regulations, transportation, Others less obviously, Corruption, business environment, quality of the rule of law.

Different Types of Growth Growth based on consumption and domestic spending. Works temporarily but leads to international borrowing, strong exchange rates and eventually crisis – most recently countries in emerging europe. Growth based on commodities. Can work but highly dependent on global markets and vulberable. Sustainable growth. Continuous upgrading of services and manufactured goods exports. Often promoted by productivist (japan, korea, china, malaysia are good example)

In addition, macroeconomic policies are important. Competitive exchange rates are especially important. A subsidy to all exports, a tax on all imports, encouraging tradable goods investment and production. It can compensate in part for poor institutions.

What makes a competitive currency feasible? High domestic saving relative to investment A structural fiscal surplus Counter-cyclical regulations on capital flows Tax or restrict inflows in good times Exchange-rate regime Managed exchange rate regimes more likely to achieve undervaluation than floats

Conclusion: Keys for Growth Macroeconomic: Fiscal discipline to ensure competitive exchange rates. Microeconomic policies to improve policies and institutions. Export success in diversified activities

Growth : Argentina part of the divergence

… to a high-saving, high-investment model

Competitive currency Latin America East Asia + ARG

But problems on the Horizon Growing problems of credibility Fiscal policies  Need to be tight enough to underpin undervalued currency; otherwise inflationary pressure Relationship between business and government.

Weak Performance Given Income Global Competitiveness Index GCI 2009– GCI 2008–2009 (out of 134) GCI 2007–2008 (out of 131) Basic requirements st pillar: Institutions nd pillar: Infrastructure rd pillar: Macroeconomic stability th pillar: Health and primary education Efficiency enhancers th pillar: Higher education and training th pillar: Goods market efficiency th pillar: Labor market efficiency th pillar: Financial market sophistication th pillar: Technological readiness th pillar: Market size Innovation and sophistication factors th pillar: Business sophistication th pillar: Innovation

Policy Responses: Four Challenges Global Market Environment: Support Doha Round Coherent Trade Policies: They can’t all be infants! Rules and exceptions Competitive Exchange Rates and Stable Macroeconomic Policies (fiscal balance) Efficient and Appropriate Domestic Institutions Rules. Rules Matter