The discussion of economic growth and productivity, which we have been pursuing in these columns over the past few weeks, in one way or another, relates to issues pertaining to what may be broadly described as the competitiveness of Guyanese firms and the national economy operating internationally. In the present age of globalization and its accompanying liberalization of markets, special emphasis is laid on expanding market shares for firms, improving their profitability, and as a result the overall level of well-being in a country. Out of this preoccupation a great deal of concern has arisen over firm competitiveness and relatedly national competitiveness.
This field of inquiry, however, is rich in controversy. In my opinion much of the controversy originates from the fact that these concerns were first raised in the literature from business schools and management departments of universities concerned with corporate strategies. Economists have been skeptical to say the least, as to whether any useful analogies can be drawn from the way in which firms compete with each other, and the way in which nations compete, as the business school models suggest.
Zero-sum games vs synergies
In the typical business school approach to firm competitiveness, one firm's gain is portrayed as another firm's loss. Competition is a 'zero-sum game.' That is, firms only gain at the expense of each other. Firms compete to capture other firms (their rivals) markets. This is truly a 'winner-take-all' situation, which is reminiscent of the way we frequently describe the competitive environment of our electoral system in Guyana.
Economists, however, have a very different perspective as regards competition between nations in a freely trading environment. Here economists argue the goal of each nation is to exploit its comparative advantage. That means producing and exporting those goods and services for which it has a comparative advantage and importing those for which it has a comparative disadvantage. When countries do this, they all can in theory (and usually in practice) benefit from trading. The benefits may not actually be fairly distributed, but countries will only trade products and services if they bring additional benefit from so doing.
As a consequence international trade between nations is not, repeat not, a zero-sum gain. Winner does not take all. Indeed all can benefit from trade, even if not proportionately. Thus international trade can in principle promote the welfare of all countries. It produces in other words, synergies. Such synergies do not in fact arise where competition among firms is concerned. There, the goal is to capture the competitors' customers and in so doing make the other firms worse off. These very different perspectives have generated enormous debates and controversy in the literature on competition, which of course I cannot pretend to deal with adequately in this series.
One of our recently concluded research projects at the IDS has provided a diagnostic assessment and recommendations for improved productivity and international competitiveness in Barbados. This project was supported by the Government of Barbados and the Inter-America Development Bank (IADB). There are two other similar studies on Caricom economies of a similar nature under the auspices of the IADB. One has been done for Jamaica (A. Downes Productivity and Competitiveness in Jamaica (Jamaica, 2004)) and the other for Trinidad and Tobago (OTF Group Inc. Building the Competitive Advantages of Trinidad and Tobago, 2004). Copies can be obtained on the IADB website.
Even though economists offer the view that nations, unlike firms, do not compete in winner-take-all 'zero-sum game' situations, most would admit that the environment in which firms operate has a lot to do with their competitiveness. Thus in a stable political environment, with minimal crime, a strong and fair judiciary, good macroeconomic policy and a 'pro-business' approach to economic management, it is expected that firms will generally do better than in an economy where any or all of these conditions are lacking. Having to pay for private security, because public security is weak, adds to a firm's costs and reduces its competitiveness. Where judicial processes are weak and public administration is arbitrary and whimsical, firms will seek to leave or minimize their investments in that country. In a worst-case scenario of endemic violence, business becomes all but impossible.
Recognition of the supportive and complementary roles for government therefore allows us to portray competitiveness both at the level of the firm and the nation. Indeed we might go further and also portray it at the sectoral level, as when a number of firms operate in a particular sector and we evaluate how competitive that sector is.
Competitiveness measures
In the diagnosis of the persistent downturn in the economy since 1998, I had made reference to work by the IMF, which sought to measure the contribution of productivity/technology and all the other intangible elements to economic growth in Guyana. The 'total factor productivity' measure, as it was described, is one of several measures or indicators used to assess how competitive is the overall performance of a given economy.
One very positive development that has occurred over recent years is the growing number of worldwide annual surveys and assessments which seek to assess the business environment in countries. In our study of Barbados we utilized 19 indicators and measures of competitiveness, and of these, six are regularly provided by international organisations or multilateral agencies.
Not surprisingly many of these international surveys do not cover Guyana as a selected country. The most frequently cited Caricom countries are Jamaica and Trinidad and Tobago. Surprisingly, Barbados is also not covered as much as these two countries are. This year, however, the World Economic Forum, based in Geneva, Switzerland is making an effort to include Guyana in its Global Competitiveness Report for 2005-2006, which covers over 100 countries. For that report a survey has been conducted of executive opinion in 10 key areas: overall perception of the economy, technology, government and the public sector, public institutions, infrastructure, human resources, finance and openness, domestic competition, company operations and strategy, and environmental and social responsibility.
Next week I shall continue this discussion.
Introduction
In my previous article in this series I started to examine the issue of how to measure the competitiveness of nations. I referred to the fact that there is a controversy raging as to whether national competitiveness indicators make sense or should we be dealing with indicators pertaining to firms and enterprises. The distinction is important since it is firms that actually compete globally on a day-to-day basis for market shares, not countries. I did suggest a compromise position in which we accept that firms do compete for market shares globally, but that the national economic and business environment in which they operate has a lot to do with their effective competitiveness. This is not hard to visualise, since for example the foreign exchange rate of the national currency, which the government is responsible for would influence the competitiveness of a firm or enterprise. Similarly, if law and order breaks down firms would not be able to produce efficiently.
There are, as I pointed out, a number of indicators, which are produced annually on a global scale by various organisations. One such organisation is the World Economic Forum (WEF) and in my last article I gave an indication of the sort of data they used, which are derived from executive surveys of business opinion in various countries. As I indicated for the first time Guyana will be included in the 2005/06 survey. Other Caricom countries Jamaica and Trinidad and Tobago already appear in the annual report of the WEF.
Measuring export performance
Another useful indicator, which I shall deal with today, is variously called a 'national export map,' a 'trade performance index,' or a 'marketing positioning index.' Data in relation to this indicator are available for Guyana as a result of a recent (2004) EU funded project on Capacity Building in Support of Preparation for the Economic Partnership Agreement prepared by Dr Moses Tekere, which can be downloaded from the website.
The methodology of this indicator has been developed by the International Trade Centre (ITC) and is based on a straightforward set of measures. First, the leading exports of the country are identified based on their ranking by value. Then 30-40 products are usually selected for analysis. The analysis is designed to classify these products into four major categories.
'Champions/Winners'
One of these categories is called, 'Champions or Winners.' This refers to those products for which global demand is classed as 'dynamic' because the rate of growth of global demand for them is rising faster than the average rate of growth of world trade as a whole. Having established this, if the export of one of these products from the country in question (in this case Guyana) is increasing its share of that product on the world market, the product is classified as a 'Champion' or 'Winner.'
For Guyana the EU analysis revealed that 15 products fell into this category based on the classifications of products as stated under the standard trade codes and product labels. These include in descending order of value five types of fish products (crustaceans; fish fillets; cured/smoked fish and fishmeal; and fresh fish). There were three types of wood products (wood shaped along edges; railway sleepers; builders joinery and carpentry of wood). There were four types of textiles (T-shirts, singlets and vests; jerseys, pullovers and cardigans; and women's suits). The remaining products included motor engine parts, dentists and barbers chairs, and other furniture.
'Achievers-in-Adversity'
The second classification of products is termed: 'Achievers-in-Adversity.' Here the world market is classed as not being 'dynamic'; it is in fact 'stagnant,' in the sense that the growth of global demand for the product is below the average rate of growth of world trade. Nevertheless, the country in question (again Guyana) succeeds in enhancing its market share for the product. The analysis found that there were five products in this category, namely, gold, sugar, rice, plywood and similar woods, and live animals.
'Losers-in-Declining Sectors'
The third category is termed, 'Losers-in-Declining Sectors.' In this category the country in question (Guyana) loses its market share for products, the demand for which is stagnant globally. That is global demand for the product is growing by less than the growth of world trade. Eight (8) products fall in this category, namely, aluminium ores and concentrates; wood sawn/chipped/sliced/peeled; wood in the rough; preserved fruits; tracksuits/ski suits/swimwear; women's blouses and shirts; ethyl alcohol and other spirits; and insecticides, fungicides herbicides packaged for retail.
'Underachievers'
The fourth category is called 'Underachievers.' Here the country in question (Guyana) is losing its market share for products where the global demand is 'dynamic' and growing. This I believe is the worst competitive position for a country to be in since it is losing market share by failing to supply products whose world demand is growing dynamically. Eight types of products were identified in this category for Guyana, namely: spirits and alcoholic beverages; women's singlets, slips, briefs, pyjamas, etc; binders for joining moulds etc; packing containers, paperboard, etc; brassieres, girdles, corsets, braces, etc; waste and scrap metal; plastic tubes, pipes and hoses; and men's suits, jackets, trousers, shorts, etc.
A simple matrix can be designed to show the nature of this indicator. As with all indicators its accuracy, however, depends not only on the method of calculation but the accuracy of the data utilised. In the case of Guyana what has been used to construct the trade map is not export trade data supplied by the Bureau of Statistics or the Customs and Excise Department, but imports of products from Guyana as reported by other countries in their submission of trade data to the United Nations. This raises a number of issues, which is why it is usual to describe the situation as one in which 'mirror statistics' are used, not the actual statistics.
One obvious difficulty which this poses is that export data are calculated at the value of the exports before they are put on a vessel for export; that is 'export f-o-b or free on board.' In the case of mirror statistics the data are gathered at the value when it reaches its destination. This value includes not only the export cost, but the insurance and freight, required to get it overseas. This valuation is commonly referred to as 'imports cif.' Some arbitrary discount (in this case 10 per cent) is used to reduce the mirror statistics to the estimate of the actual value of exports. The results shown up by this exercise raise some intriguing issues, which I shall pursue next week.
Continuing our look at the competitiveness of nations, last week's article highlighted the widely utilised technique of the International Trade Centre (ITC) for classifying the exports of a country into four broad groups in order to establish their broad competitive standing. These groups are 1) "Champions" or Winners, which are products increasing market shares in dynamic and growing world-market markets, 2) "Achievers-in-Adversity", which are products that are increasing market share in markets in decline; 3) "Losers", which are products losing market share in markets in decline and 4) "Underachievers", which are products losing market share in dynamic and growing markets. Obviously failure to perform in markets that are favourable globally, as in the last category listed above, is the worst competitive position in which a country can find its exports situated.
Usually there are about 30-40 commodity groups that are selected and subjected to this sort of analysis. Usefully for us this technique was applied to Guyana's export trade under a European Union project, and I briefly reported on the results of this work in last week's article.
For Guyana 40 product groups were chosen and the export data used was gathered from import data provided by the countries that imported these goods to the United Nations trade data collection systems for the year 2001. Because as many as 40 products were covered, several of the commodities analysed had minimal export value. Thus from the "Champions" group of 15 products, only one product had significant value (crustaceans), which was US$58 million. Thirteen others had less than US$2 million each in export value.
Our major export products, gold, sugar, rice and wood products, were all classed as "Achievers-in-Adversity". This category refers to exports, which are rising in world markets that are in decline. Added to this the other significant export from Guyana, bauxite ore, was located in world markets that are in decline. The overall result for Guyana is not by any means encouraging.
This result indicates that much more attention should be paid to developing our competitiveness in what may be termed as the non-traditional exports. Good examples of these are the non-traditional agricultural exports, which are sold to the CARICOM markets and to the overseas Caribbean populations in North America and Europe.
The problems facing the traditional markets are legion. In the case of our leading export - sugar, recent developments in the WTO and the European Union (EU) arising from the Brazil, Australian and Thailand challenge to the EU sugar regime leave the future survival of the industry in grave doubt. Unfortunately, all this has unfolded on the eve as it were, of the major sugar-expansion project in Berbice.
2004 Export Performance
When the trade export performance of Guyana last year is examined closely it further illustrates the problems the economy is now facing. In 2004, total exports were valued at US$589 million. However, exports have not been growing and this total is almost the same as it was in 1997 (US$574 million), the last year before the economic slowdown (1998-2004) commenced. The largest export item was gold US$145 million, which was 25 percent of the total, and next largest was sugar US$137 million (23 percent of the total).
This latter value was also less than it was in 1997 (US$151 million). Third in value was crustaceans (US$58 million, or 10 percent). This item did show rapid growth as it rose from only US$13 million a decade ago (1994). Rice at US$53 million (or 9 percent) was another poor performing traditional product, as it was significantly down from the value of US$94 million in 1997. Timber, the other significant export (US$45 million or 8 percent) fared much better as with the establishment of Barama in 1997 substantial expansion resulted when compared to earlier years (when exports were only valued at US$8 million, a decade ago).
UNIDO:Competitiveness Performance Index
A related measure to the ITC's technique used for classifying a country's exports as a guide to its overall competitiveness has been developed by the United Nations Industrial Development Organisation's (UNIDO). This is its famous "Competitiveness Performance Index" (CPI), which is calculated from four performance indicators.
One indicator is manufacturing value added (MVA) per person in a country. Since the share of manufacturing is an indicator of the extent to which a country is industrialised, the measure of this on a per person basis is a good proxy for the level of industrialisation a country has achieved.
The second indicator is the amount of manufactured exports a country has on a per person basis.
If a country exports manufactured goods and not only primary products (agricultural or mineral) it is treated as an indicator of the development capacity of the country and its ability to perform at the international level. The presumption is that selling manufactured exports on the world market indicates an economy's capacity to be both competitive and to keep abreast of technical change.
The third indicator is called industrial intensity. For this indicator manufactures are first classified into low, medium, and high technology manufactures. Industrial intensity is measured as the share of medium and high technology products (MHT) in a country's manufacturing value added (MVA). This can range from 0 where there is none, to 1 when all manufacturing exports are in the category of medium and high technology products. The fourth and last indicator is the measure of export quality. This is obtained by dividing the share of manufactures in total exports by the share of medium and high technology products in manufactured exports.
Each of these four separate indicators is given equal "weight" as it is termed by statisticians when deriving the overall value of the Index. UNIDO has recently completed this exercise for the period 1980-2001, for 155 countries, and the results made interesting reading.
Next week I shall continue this discussion.
The indicators of competitiveness I have referred to in previous weeks have focused on national competitiveness and specifically as these are reflected in the competitiveness of a country's export sector. The International Trade Centre (ITC) index of competitiveness, which was looked at is an index of the competitiveness of trade performance. This index focuses on trade in goods and I reported the results of a study that applied this measure to Guyana's exports. Similarly, the United Nations Industrial Organisation (UNIDO) general competitiveness index focuses on trade in goods. For Guyana this concentration on trade in goods does not pose significant issues, since we hardly export any services unlike our sister states in CARICOM, which are principally exporters of services with the export of goods playing a secondary role.
Competitiveness: A new fad!
Several readers have reacted to the articles and have asked me why all this fuss about competitiveness nowadays. Let me engage this topic in today's article before I proceed further, as it seems to be a burning issue for them.
The simple answer to the question is that globalisation as a process and its companion policies of market liberalisation have raised concerns about competitiveness to the level of dogma and gospel. Behind the drive to reduce trade barriers and improve market access worldwide, opportunities are being sought for firms in rich industrialised countries to access each other's markets along with those of the rest of the world. These opportunities are considered vital to the struggle of their firms to increase market shares and raise their profitability. This drive is fuelled in large measure by rapid technical advances and innovations, which are dramatically raising productivity and fostering the interconnection of markets.
This drive to expand the sphere of competition is being pushed with such intensity that even those who recognise the positive gains to be obtained from firm, enterprise, and even country competition fear that it could reach such extremes that it becomes unhealthy competition. There is a real danger when competition is treated as a panacea for all sorts of economic problems, and I might add political and social ones as well!
Winners, losers and moral hazard
With competition there will always be situations in which there are winners and losers. In other words, there will be those who gain or receive benefits during the process of competition and those who fail or do not succeed. In some versions of the competition advocacy, it is also proposed that the losers should always be left to look after themselves. Society, and more particularly governments, should not be expected to offer any form of consolation to the losers. Indeed, if they did so they argue this would lead to the risk of what is called in economics "moral hazard".
I have used the phrase "moral hazard" several times before in this column. It originated in the insurance industry where it refers to a situation when after a person, or firm, or institution takes out insurance (let us say fire insurance) they become lax and inefficient in their efforts to ensure fire safety for the premises that are insured. The analogy therefore is that if losers in the competitive process can expect benefits whether they win or not, they will reduce their efforts to be competitive.
The gospel of competition
The notion of globalisation is nowadays so closely linked to that of competition that it is impossible to separate or disentangle these. Market liberalisation is designed to foster competition and treats this as necessary for moving the capitalist market economy forward in an efficient way. Some economists have however been insistent in their warnings about "the gospel of competition". They argue that if competition serves to widen the gaps between those who "have" and the "have-nots", then when this occurs among groups and classes within a country, or among countries within a regional or global system, society becomes unstable and runs the risk of systemic breakdown or failure. The world therefore would not be pursuing efficiency in the long run, if in the name of competition it creates such wide disparities between countries (or as some would say, leaving some countries behind) that conflict ensues to the point where the world system itself is put at risk.
The dangers of competition at all costs are in essence therefore its extremism. To pursue the multiple objectives of democratic, socially just, and environmentally sustainable societies everywhere, while respecting the need for economic efficiency and the principle of the cultural, religious and social diversity, there must be trade-offs. That is, situations when for example some reduction in efficiency is acceptable in exchange for ensuring greater social justice and cultural diversity.
Competitive markets
When competition and competitiveness are addressed in the current debates, issues pertaining to how markets operate loom very large. To the economist the ideal market is a perfectly competitive market whether goods, services, or productive factors are being sold in it. In such a market, no single seller or buyer would have the power to affect the price of what is being sold. Such markets however, are rare. Real world markets are far from competitive in this sense.
With this ideal in mind many economists are wont to see markets as benign institutions. By this I mean institutions that simply produce price signals to guide enterprises to be efficient and to guide consumers to exercise the best choice. In addition, these signals offer incentives for invention, innovation, and effort. When buyers and sellers meet in such markets they have a "community of interest" in the proper functioning of the market. In this sense therefore it can be claimed the market binds society together in the economic sphere.
When this rosy picture of markets is extended and portrayed as operating globally, global markets also remain benign institutions from which only the efficient would benefit. As a result if they are allowed to rule supreme they would promote harmony among nations, improve the well-being of all nations, and lead to a convergence of living standards and welfare around the world. In the period since the 1980s, these ideas have been largely the ruling ideas in the world economy. During that period world trade has undergone momentous changes in its structure and operation.
We shall explore some of these next week in order to highlight the context in which competitiveness has to be addressed in order to be meaningful.