Competitiveness and Development: Myth and Realities - Rilegato

Shafaeddin, Mehdi

Rilegato

ISBN 10: 0857284606 ISBN 13: 9780857284600

Casa editrice: Anthem Pr, 2012

Riassunto

Almost all industrial countries have undergone strategies to maintain, or improve, competitiveness in order to improve the standard of living of their population, particularly during the last quarter-century or so. But how have they treated developing countries? ‘Competitiveness and Development’ explains how developing countries can attain competitiveness at a high level of development, examines the possibilities and constraints in achieving it, and proposes remedial measures at the national and international levels.

The author Mehdi Shafaeddin illustrates how developed countries impose restrictive policies on developing countries through international financial institutions and the WTO, as well as regional and bilateral agreements, thereby limiting their policy space for promoting dynamic comparative advantage in order to achieve competitiveness at a high level of development. Such policies, the author argues, lock developing countries that are at the early stages of development in specialization in primary commodities, or at best simple processing and assembly operations in accordance with their static comparative advantage.

To support this argument, the author critically examines the neoclassical theory of economics, which is the philosophy behind the principle of static comparative advantage as well as the policy stances of international financial institutions and the WTO. The author also reviews the historical experience of developed countries through industrialization, development and achieving competitiveness based on the principle of dynamic comparative advantage. In this context, he explains the importance of trade and industrial policies and the role of government in human resource development, innovation and technological development. To illustrate his case, the author compares the contrasting experiences of China and Mexico since the 1980s, during which time globalization has been intensified.

In ‘Competitiveness and Development’, the author explains the confusion surrounding the concept of competitiveness in the context of developing countries; proposes policies for achieving competitiveness at a high level of development; examines its possibilities and constraints; and suggests policy changes necessary at the national and international levels. Shafaeddin illustrates how developed countries impose restrictive policies on developing countries through international financial institutions and the WTO, as well as regional and bilateral agreements, which limit their policy space for promoting dynamic comparative advantage in order to achieve competitiveness at a high level of development. Ultimately, such policies lock developing countries that are at early stages of development in specialization based on static comparative advantage and competitiveness at a low level of development.

Su questo libro

Informazioni sull?autore

Mehdi Shafaeddin is a development economist with a DPhil degree from Oxford University and over 30 years of experience in teaching, research and policy advice at the national and international levels. He held the position of Head, Macroeconomic and Development Policies Branch, UNCTAD. He is currently an international consultant. Shafaeddin is the author of many articles on trade, industrialization and development policy issues in international academic journals. His latest books include ‘Trade Policy at the Crossroads: The Recent Experience of Developing Countries’ (Palgrave Macmillan, 2005).

Erik S. Reinert is Professor of Technology and Development Strategies at the Tallinn Technical University in Estonia, and is the President of the Other Canon Foundation.

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Competitiveness and Development

Myth and Realities

By Mehdi Shafaeddin

Wimbledon Publishing Company

Copyright © 2012 Mehdi Shafaeddin
All rights reserved.

ISBN: 978-0-85728-460-0

Contents

List of Tables, Figures and Boxes, xi, 
Foreword, xiii, 
Preface, xvii, 
Acknowledgements, xix, 
List of Abbreviations, xxi, 
1. Introduction: Framework of Analysis, 1, 
2. Context and Conditions of International Competition, 27, 
3. Alternative Theories of Competitiveness, 49, 
4. Firm Strategy and New Industrial Organization, 79, 
5. External Economies: Organization of Interfirm Relations, 107, 
6. Reputation and Trust: A Firm's Relations with Stakeholders and Others, 135, 
7. Innovation and Upgrading, 145, 
8. Government Policies, 175, 
9. The Experiences of China and Mexico, 207, 
10. Summary and Concluding Remarks, 259, 
Appendices, 275, 
Bibliography, 283, 
Index, 303, 

CHAPTER 1

INTRODUCTION: FRAMEWORK OF ANALYSIS

The problem that is usually being visualized is how capitalism administers existing structure, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job. (Schumpeter 1934, 84)

The issue of competitiveness has attracted a lot of attention, both at the academic and practical levels, during the last quarter-century, i.e. since the emergence of the new economic philosophy in favour of market orientation and trade liberalization. Such development has, in turn, resulted in changes in the rules of the game in business and in international trade. Some have regarded competitiveness as an important element of success in economic performance (e.g. OECD 1992); others have considered it as a misplaced concept and an obsession (e.g. Krugman 1994). The problem is that when the concept of competitiveness is applied to developing countries, it is often delinked to economic development as though competitiveness is an end per se. If this were the case one could go to the extreme in arguing that one could sell everything at zero prices on the international market!

Some proponents of the neoclassical theory of international trade do refer to the prevalence of some market failure, particularly in the case of developing countries. Nevertheless, the orthodox theoretical background to competitiveness is the pure neoclassical theory of static comparative cost advantage (CA), which is the philosophical and ideological basis of the 'Washington Consensus', activities of international financial institutions and their recommendations for economic reform and universal, across-the-board trade liberalization in developing countries. It is also the philosophy behind the GATT/WTO as a multilateral trade organization which sets rules on international trade.

According to the neoclassical theory, inherited and evolved from Adam Smith's theory of international trade, comparative advantage is rooted in resource endowment: capital, including natural resources, and labour. Material capital is the main source of specialization, division of labour and growth. The doctrine of CA, as it is applied, however, is a static theory, based on a number of unrealistic assumptions, and does not contribute to long-term development. For example it is assumed inter alia that technological knowledge is freely available in the market, and that the firm, which is a nucleus of economic activities in modern world, is atomistic and passive. This theory disregards the fact that economic development requires the upgrading of the production structure, which is a policy-induced activity requiring government intervention for specialization based on dynamic comparative advantage.

While a number of alternative theories have been developed to explain competitiveness, there is no satisfactory theoretical framework relevant to the case of developing countries. We will develop a framework of analysis based on Reinert's view on competitiveness. To him competitiveness is an element of development; it refers to activities, which, while 'being competitive' in the micro sense, also contribute to development, raising income, and contribute to the improvement in the standard of living of the population of a nation (Reinert 1995, 26). To do so, we have benefited from the views and theories of a number of economists such as F. List (1856), Kalecki (1955), Schumpeter (1934), Penrose (1959), Hirschman (1958) and Lazonick (1991), proponents of the theory of capability building, and Shafaeddin (2005c).

According to List (1856) productive power is the main source of comparative advantage, and development and mental capital (knowledge), rather than material capital, is the main source of productive power. Division of labour and accumulation of capital are the results of development. Knowledge is not given; it is to be acquired through education, science, training, discoveries, inventions, experience and division of labour. Further, according to List, knowledge is determined by social order, i.e. sociopolitical and institutional factors (Shafaeddin 2005a). List's theory is a dynamic one and, though it is an important step forward, the role of the firm in his theory is not well developed.

Kalecki (1955), like List, gives importance to sociopolitical and institutional factors in economic development. According to him, the contribution of capital accumulation to capacity building and development is limited by sociopolitical, institutional, infrastructural and other structural factors. In particular he maintains that the interest of the government might not necessarily coincide with the interest of the public at large. In other words, the government 'indifference decision curves' may diverge from the community's indifference curves (Kalecki 1971). However, he ignores the important role of the firm in his theory of capacity building and development even though in his theory of capitalist economy, designed for the case of developed countries, firms play an important role.

Schumpeter (1934) pioneered in placing the role of the firm and entrepreneurship in the centre of his theory of competitiveness and development. In his theory, a firm is active, has a strategy, and may have the knowledge and capabilities to change technology. Further, it influences not only the market but also the performance of other firms through its 'creative destruction'.

The Schumpeterian concept of firm is the centrepiece in our analysis of firm activities. Nevertheless, using elements of, and developing on, the theories of dynamic comparative advantage, productive power of F. List, competitive advantage of M. Porter, business organization of Lazonick, and the theory of capability building, we will argue that the firm is not an abstract concept. It is the main coordinator of economic activities; it has links with other firms, market, government and consumers (Shafaeddin 2005c). Furthermore, entrepreneurs not only play the coordinating role, but also perform 'creative' and 'cooperative' functions as suggested by Hirschman (1958). Moreover, like Penrose (1959), we regard a firm as a collective learning unit. According to her, firms are 'living organs', with their own specific culture, collective capabilities and specific knowledge. Therefore, knowledge is firm specific.

Finally we regard competitiveness as a means to development, not an end per se. To increase income, and the rent accrued to a firm and a country, a firm can be operated in such a way as to make it difficult for others to compete with it – that is, by creating a unique situation that cannot be replicated easily. Creating barriers to entry is often considered as a means of achieving this objective. Moreover, it is important to create value for buyers in a unique way. This can be done through a number of measures of which creating favourable reputation and unique culture is the most important one.

Let us define the concept of competitive advantage (as distinct from comparative advantage) before going further. The theory of comparative advantage, whether in its static or dynamic version, is basically concerned with the role of cost and prices in completion under restrictive assumptions – particularly the assumption of the prevalence of a competitive market. In contrast, the concept of 'competitive advantage' also takes into account the role of non-cost/price factors. Further, it deals with the issue of competitiveness of a firm or country under imperfect competition and oligopolistic market structure.

To continue, competitive advantage is a dynamic concept requiring development of knowledge, technology and organization, which can be acquired, enhanced and utilized through learning. As a dynamic concept, competitive advantage can change over time requiring upgrading, which in turn necessitates the upgrading of products, process, knowledge and organization. Achieving competitiveness is a moving target. Competitiveness is a relative concept as others also try to improve their advantage. Such changes, however, cannot take place automatically through the operation of an allocative function of market forces, which is the sphere of static comparative advantage. Competitiveness, as a dynamic concept and as a means to development, is in the sphere of the theory of dynamic comparative advantage and 'creative function' of the market. Developing the necessary capabilities in turn requires taking policy measures and actions based on strategies at the level of firm, sectors and the national economy.

Competitiveness is not an abstract concept: it occurs through the actions of a firm, located in a specific country with specific characteristics and environment, against other national as well as international firms, with a particular product or products, in a marketplace with a specific structure, under certain world economic conditions; its aim is to obtain certain development objectives at the level of firm and nation. To obtain their objectives, firms and their governments take some specific actions and pursue a strategy over time.

Therefore, to put competitiveness in its proper context, one may refer to related issues by a triple 'C': 'concepts' (theories of competitiveness); 'context' or conditions under which countries compete in international market; and the way firms and countries 'cope with', or should cope with, the issue of competitiveness in their development strategy. In each case a number of questions arise. What does competitiveness mean? Why has it attracted increasing attention during recent decades? What is the relevance of different approaches to competitiveness to the economic development of developing countries? Is the objective of competitiveness to gain market share or to raise the standard of living of the citizens of the exporting country? What does competitiveness strategy mean? How do changes in economic philosophy, liberalization of trade and foreign direct investment (FDI), rapid technological changes, and new organization of production and changes in market structure affect the competitive position of developing countries? What sort of competitive strategy is envisaged for developing countries, both at the firm and national levels, to cope with the new situation without sacrificing their sustainable growth and development?

The answer to these questions occupies the minds of policy makers in developing countries and a thorough treatment of the issues involved is beyond the scope of one volume. Nevertheless, our main purpose in this book is to provide a framework for the analysis by taking up the main question: how can competitiveness contribute to the aspiration of the people of developing countries to raising their standard of living?

In the remainder of this chapter we will clarify the main concept and develop the analytical framework applied in this study. To do so, we will start by explaining the different approaches, static and dynamic, to competitiveness as applied in the literature. Such distinction is extremely important in our analysis. This is so particularly because, while developed countries have been concerned with competitiveness at the high level of development through technological development and concomitant upgrading of their industrial structure and services, they have been imposing competitiveness at the low level of development on developing countries. This is done through advocacy of neoliberal ideology, e.g. the Washington Consensus, and is imposed on developing countries through international organizations such as the IMF (International Monetary Fund), World Bank and WTO, or through bilateral and regional trade agreements. As firms are the coordinator of economic activities at the micro-level and play the central role in competitiveness of a country, we will then take up the conceptual issues related to firms before clarifying the meaning of strategy and productivity at the level of firms and national economy as employed in the study. Finally we will introduce the theme and the plan of the study.

Approaches to Competitiveness

The literature contains two different approaches to competitiveness related, inter alia, to the assumptions made on the structure and the behaviour of firms:

1. Static in which firms are small and passive, and competition is cost and price-led.

2. Dynamic in which firms are large with an active strategy, competition is a dynamic process, in its Schumpeterian sense.

The theoretical foundations behind these approaches are different.

Static approach

The static approach to competitiveness is based on the neoclassical theory of static comparative cost advantage (CA). Accordingly, in its Heckscher-Ohlian version, the comparative advantage is determined by its factor endowment – material capital and labour. Hence, countries specialize in the production and exports of those goods in production of which their most abundant factor of production is intensively used. On the basis of such specialization therefore they compete with each other. This approach to competitiveness is a theoretical abstraction with little practical value; it is based on a number of unrealistic assumptions as follows: product market is perfectly competitive; in each industry a large number of small firms operate without having any power over market prices; constant return to scale prevails at the firm level, which implies that as inputs to the firm increase by a certain proportion its output increases by the same proportion; firms are identical at the country and international levels; firms are passive, thus they take no strategic action; there are no firm- or industry-specific learning and other specific characteristics; there are no externalities; there are no barriers to entry to the market and exit from the market is costless; the products produced by various firms in the same industry are homogeneous; firms face a fixed set of technologies which are freely available to them; present cost and prices are independent of past (future) cost and prices; experience plays no role in cost determination; perfect competition also prevails in the factor market and factors of production are fully mobile both geographically and from one industry to another; perfect market information is available on supply, demand and future prices for all products and all factors of production; thus there is no uncertainty and no risks; buyers are numerous and have no power over the market; taste is given for a set of known products; economic institutions and organizations are given and are conducive to the operation of market forces.

The theory of static CA has several important implications for competitiveness. First, since firms are passive: that is they have no strategy and they cannot influence the market, they react to the market and compete with each other through cost. There is no rivalry on prices. Secondly there is no role for innovation and entrepreneurship. Thirdly economies of scale have no role to play in cost reduction and competitiveness – except Marshallian external economies of scale, i.e. scale of the manufacturing sector as a whole, which is compatible with perfect competition. Fourthly nonprice factors play no role in competitiveness whether at the level of firm or national economy. Sixthly as products in an industry are identical, nonprice attributes of a product have no role in competitiveness. Seventhly comparative advantage, thus, competitiveness, is explained by national and macroeconomic factors such as current market-determined factor costs, i.e. wages, interest rate, price of raw materials and exchange rates. Exchange rate is crucial in attaining international competitiveness since it translates internal prices into international ones. There is also no market failure in either the product market or factor market. Therefore, this implies that economic policy should be confined to the macro-level issues related to wage cost, or at best relative unit labour cost (RULC), and exchange rate.

Critiques of the static approach

The static approach to competitiveness is, however, flawed with certain deficiencies for both theoretical and empirical reasons. In reality, outside agriculture, perfect competition is the exception, not the rule (Schumpeter 1934, 78–9). Most industrial firms are large and dominate the market; economies of scales and scope prevail at the level of firms and plants in most industries; barriers to entry do exist; technology is not freely available; products produced by different firms are not necessarily homogeneous; accumulation of production over time does affect both cost and prices through gaining experience; market information is not perfect and uncertainties and risks are rampant. Firms are different, each having its own culture, specialized skills and other specific characteristics. There are also ample sources of market failures in the product and factor markets, particularly in developing countries at early stages of their industrialization and development. Moreover, the available theoretical empirical evidence indicates that other factors than costs, prices and exchange rate are also important in competitiveness. For example technology has been regarded a powerful main source of growth and the technology gap explains 'a major part of the difference in growth performance of countries (Krugman 1986; Fagerberg 1997). Similarly Fagerberg (1988), studying 15 industrial countries for the period 1960–83, concluded that '... the main factors influencing differences in international competitiveness [gaining market share] and growth across countries are technological competitiveness and the ability to compete on delivery' (1988, 371), which to a large extent depends on creating new production capacity requiring investment. In contrast, the contribution of cost competitiveness was far less than other factors. In fact, in the particular case of Japan, while the country gained considerable market share vis-à-vis the UK and the USA during the 1960s and 1970s, at the same time its RULC increased significantly while those of the UK and USA declined.

(Continues...)

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Dettagli dell?edizione

• Editore: Anthem Pr
• Data di pubblicazione: 2012
• Lingua: Inglese
• ISBN 10: 0857284606
• ISBN 13: 9780857284600
• Rilegatura: Copertina rigida
• Numero di pagine: 318
• Contatto del produttore: non disponibile
• Persona responsabile: non disponibile