Harvard University Professor and Director of
the Center for Competitiveness
Competitiveness is defined by the productivity
with which a nation utilizes its human, capital
and natural resources. To understand competitiveness,
the starting point must be a nations underlying
sources of prosperity. A countrys standard
of living is determined by the productivity
of its economy, which is measured by the value
of goods and services produced per unit of its
resources. Productivity depends both on the
value of a nations products and services
measured by the prices they can command
in open markets and by the efficiency
with which they can be produced. Productivity
is also dependent on the ability of an economy
to mobilize its available human resources.
competitiveness, then, is measured by productivity.
Productivity allows a nation to support high
wages, attractive returns to capital, a strongcurrency
and with them, a high standard of living.
What matters most is not exports per se or
whether firms are domestic or foreign-owned,
but the nature and productivity of the business
activities taking place in a particular country.
Purely local industries also count for competitiveness,
because their productivity not only sets their
wages but also has a major influence on the
cost of doing business and the cost of living
in the country.
Matters for Competitiveness
Almost everything matters for competitiveness.
The schools matter, the roads matter, the financial
markets matter and customer sophistication matters.
These and other aspects of a nations circumstances
are deeply rooted in a nations institutions, people and culture. This makes
improving competitiveness a special challenge,
because there is no single policy or grand step
that can create competitiveness, only many improvements
in individual areas that inevitably take time
to accomplish. Improving competitiveness is
a marathon, not a sprint. How to sustain momentum
in improving competitiveness over
time is among the greatest challenges facing
Wealth at the Microeconomic Level
cornerstones for economic development have long
been considered stable institutions, sound macroeconomic
policies, market opening and privatization.
Most discussion of competitiveness and economic
development is still focused on these areas.
It is well understood that sound fiscal and
monetary policies, a trusted and efficient legal
system, a stable set of democratic institutions,
and progress on social conditions contribute
greatly to a healthy economy.
I have found that these factors are necessary for economic development, but far from sufficient. These broader conditions provide the opportunity to create wealth but do not themselves create wealth. Wealth is actually created in the microeconomic
level of the economy. Wealth can only be created by firms. The capacity for wealth creation is rooted in the sophistication of the operating practices and strategies of companies, as well as in the quality of the microeconomic business environment in which a nation’s companies compete. More than 80 percent of the variation of GDP per capita across countries is accounted
for by microeconomic fundamentals. Unless microeconomic capabilities improve, macroeconomic, political, legal, and social reforms will not bear full fruit.
Flawed View of Competitiveness
Worldwide, the most intuitive definition of
competitiveness is a countrys share of
world markets for its products. This definition
makes competitiveness a zero-sum game, because
one countrys gain comes at the expense
of others. This view of competitiveness is used
to justify intervention to skew market outcomes
in a nations favor (so-called industrial
policy). It also underpins policies intended
to provide subsidies, hold down local wages
and devalue the nations currency, all
aimed at expanding exports. In fact, it is still
often said that lower wages or devaluation make
a nation more competitive. Business
leaders are drawn to the market-share view because
these policies seem to address their immediate
this intuitive view of competitiveness is deeply
flawed, and acting on it works against national
economic progress. The need for low wages reveals
a lack of competitiveness, and holds down prosperity.
Subsidies drain national income and bias choices
away from the most productive use of the nations
resources. Devaluation results in a collective
national pay cut by discounting the products
and services sold in world markets while raising
the cost of the goods and services purchased
from abroad. Exports based on low wages or a
cheap currency, then, do not support an attractive
standard of living.
world economy is not a zero-sum game. Many nations
can improve their prosperity if they can improve
their productivity. There are unlimited human
needs to be met if productivity drives down
the cost of products and productive work supports
higher wages. Thus, the central challenge in
economic development is how to create the conditions
for rapid and sustained
productivity growth. Microeconomic competitiveness
should be the central item on the economic policy
agenda of every nation.
allows a nation to support high wages,
attractive returns to capital, a strong
currency and with them, a high
standard of living.
microeconomic capabilities improve, macroeconomic,
political, legal, and social reforms will
not bear full fruit.
The world economy is not a zero-sum game.
Many nations can improve their prosperity
if they can improve their productivity.
The central challenge in economic development
is how to create the conditions for rapid
and sustained productivity growth.