A country’s international competitiveness refers to its ability to sell its goods and services in domestic and international markets at a price an quantity that is attractive in those markets. Competitiveness may be measured in terms of price or non-price factors. The non-price factors included quality, design, reliability and availability.
Measures of international competitiveness
These measures include:
relative unit labour costs: the measurement of labour costs in one country relative to those in another country. To make international comparisons, the figures are converted into a single currency and expressed as an index number
relative productivity measures: e.g. output per worker per hour worked
composite indices: such as the global competitiveness index produced by the World Economic Forum. This is based on 12 pillars of competitiveness, as follows:
- labour market efficiency
- financial market sophistication
- macroeconomic stability
- technological readiness
- health and primary education
- market size
- higher education and training
- business sophistication
- goods market efficiency
The top 15 rankings for 2010-11 were:
- United States
- Hong Kong SAR
- United Kingdom
- Taiwan SAR
Factors influencing international competitiveness
Real exchange rate
Competitiveness is determined by a variety of factors, but one of the most important is a country’s real exchange rate, which is the nominal exchange rate adjusted for price levels between economies.
real exchange rate = nominal exchange rate x foreign price level ÷ domestic price level
It is also known as the purchasing power. There will be a depreciation in the real exchange rate if the nominal exchange rate falls or price of foreign goods rise relative to domestic prices. Therefore, a fall in the real exchange rate will cause an increase in the competitiveness of a country’s goods.
In contrast, if there is a rise in nominal exchange rate or a fall the price of foreign goods relative to the domestic price of goods, then real exchange rate will rise. This will cause a decrease in the competitiveness of a country’s goods.
Wage costs and non-wage costs
Wage costs are the most important cost of production for many industries. Consequently, if wages are higher in the UK than in China, it is likely that the prices of goods in the UK will be higher than those in China if productivity is ignored.
Non-wage costs are also significant for international competitiveness. These include:
- National insurance contributions paid by employers
- Heath and safety regulations
- Environmental regulations
- Employment protection and anti-discrimination laws
- Contributions into company pension schemes
These non-wage costs are frequently much higher in developed countries than in developing countries and so have the effect of reducing the international competitiveness of goods and services of developed countries.
- Labour productivity: usually defined as the output per worker per hour worked. In turn, this is influenced by:
- education and training: which influences the level of:
- human capital: defined as the knowledge and skills of the workforce and by:
- the amount of quality of capital equipment per worker
- research and development: in turn this may lead to technological advancement which may have dramatic effects on productivity and therefore competitiveness
- infrastructure: of the country e.g. road, rail, telecoms, power generation, water supply
- labour market flexibility: this is affected by factors such as the easer of hiring and firing workers, willingness of workers to work part-time or on flexible contracts and the strength of trade unions
Measures and policies in increase competitiveness
Firms can improve the competitiveness of their products by investing in new capital equipment with the aim of raising productivity. They could also improve their design and the quality of their products through research and development.
Governments can try to improve their competitiveness through a variety of supply-side policies, of particular relevance are the following:
- measures to increase occupational mobility such as education and training schemes
- macroeconomic stability – low and steady inflation rate, sound public finances, relatively stable exchange rate, steady economic growth
- public sector reform aimed at reducing red tape
- government expenditure to improve infrastructure
- incentives for investment such a tax breaks if companies use profits for investment rather than for dividends.
It is not correct to suggest that the UK government could devalue its currency because the pound is a floating currency. Also, since the Bank of England is independent from government, the government cannot engineer a deprecation of the pound through a reduction in interest rates because control over interest rates does not lie in government hands.
The significance of international competitiveness
A fall in international competitiveness is likely to be reflected in deterioration in the trade of goods balance in the balance of payments. In turn, this could result in an increase unemployment, especially in industries in which exports are significant. A fall in exports could have a negative multiplier effect on GDP, so causing a reduction in economic growth.