Competitiveness

Author: Geoff Riley Last updated: Sunday 23 September, 2012
Introduction Competitiveness is the ability of an economy to compete fairly and successfully in markets for internationally traded goods and services that allows for rising standards of living over time. Cost competitiveness – differences in relative unit costs between producers – reflected in prices Non-price competitiveness – this encompasses technical factors such as product quality, design, reliability and performance, choice, after-sales services, marketing, branding and the availability and cost of replacement parts

Key: In highly competitive markets where prices have often converged, non-price factors are crucial
Unit labour costs (ULCs) These are the labour costs of supplying goods and services per unit of output – in simple terms, how expensive it is to make something Unit labour costs are determined by   The costs of employing people (wage rates, salaries, employment taxes) The productivity of those people employed

Data on unit labour costs is normally expressed in relative terms i.e. we compare unit labour costs in one country relative to another Unit labour costs will rise when wages rise faster than the annual improvement in productivity

Our chart above tracks relative unit labour costs for three countries – the UK.) This last point is important .e. After joining the new European single currency in 1999. Spain and Germany (which is Europe’s biggest economy). both Italy and Spain allowed their unit labour costs to rise sharply – look at the divergence in the chart below between Italy. Note that the index has a base year of 2005 (i. 2005 = 100) and we can see that all three countries have experienced a fall in relative unit labour costs since then.e. the US dollar. This loss of competitiveness has caused macroeconomic problems for both Spain and Italy including rising unemployment arising from a worsening trade performance . Germany and South Korea.a lower exchange rate causes the relative unit labour costs of one country compared to another to fall – a depreciation is one way of boosting competitiveness at least in the short term Our next chart shows two countries whose relative unit labour costs have increased in recent years. The South Korean’s have managed to achieve a significant reduction in their relative unit labour costs during the global economic crisis – how might they have done this? They might have been several causes:    Cuts in average wages as South Korean companies looked to make efficiencies An upward spike in productivity levels bringing unit labour costs down A depreciation (fall) in the external value of the South Korean won – especially against the United States dollar (this makes South Korean products more cost competitive when expressed in a common currency i.

. Non-wage costs These are also important when it comes to sustaining an improvement in competitiveness in global markets. The main non-wage costs for businesses are:     The costs of meeting environmental regulations Environmental taxes such as the carbon tax or the need to purchase carbon emissions permits Employment protection laws and health and safety laws Requirements to provide business pensions Other drivers of competitiveness We can broaden the concept of competitiveness to include a much wider range of indicators that have a bearing on the ability of businesses to be successful and profitable in highly contestable global markets. You will have come across many of these when studying supply-side economics and policies.All three countries share the same currency and therefore an external devaluation is not possible to restore cost competitiveness. unless one or more countries is forced out of or chooses to leave the Euro system Key point: Relative wage costs are an important indicator of competitiveness but remember to express them per unit of out so that changes in relative productivity can be shown too.

1 16.5 24.9 17.0 17.2 16.9 18.5 17.5 27.3 .High-technology exports (% of manufactured exports) – data is for 2010 Philippines Singapore Malaysia China France Switzerland United Kingdom United States Japan Middle income Low & middle income World High income Mexico High income: OECD OECD members Hong Kong SAR.9 19.3 15.5 16.4 16.8 20.1 15.9 24.9 16.8 49. China Norway European Union Czech Republic 67.9 44.7 17.

trust.Germany 15. ports) Macroeconomic environment (including stability of key macro indicators) Health and primary education (including many of the indicators used in the HDI calculation) Higher education and training Goods market efficiency Labour market efficiency Financial markets (including stability of markets. adapt to new technologies) Market size (linked to population size and per capita incomes) Business sophistication (quality of supply chains.3 World Economic Forum – Global Competitiveness Report This is a report published annually and is an attempt to rank countries using a group of twelve indicators. quality of management) Innovation Top countries and lowly ranked countries for international competitiveness (2011-12 data) Top Ranked Countries 1 2 3 4 5 6 7 8 9 10 16 20 21 24 26 Switzerland Singapore Sweden Finland USA Germany Netherlands Denmark Japan United Kingdom Norway Australia Malaysia South Korea China 50 56 65 66 70 76 85 90 102 106 107 114 127 129 142 Lowly ranked countries South Africa India Vietnam Russian Federation Rwanda Croatia Argentina Greece Kenya Ethiopia Jamaica Ghana Nigeria Ivory Coast Chad Source: World Economic Forum.Knowledge as a Public Good .             Institutions (property rights protection. and energy. judicial independence. corruption) Infrastructure (transport. Competitiveness Index for 2012 Competitiveness in Global Markets . telephony. strength of banks) Technological readiness (readiness to exploit. industrial clusters.

This may hamper levels of research and development spending leading to weaker innovation in highly competitive markets. If we look back in history many well known products had their origins in state sector funding . water filters and cordless power drills! Policies to improve international competitiveness Raising competitiveness in domestic and overseas markets is both a short. smoke detectors. Another strategy is to increase public (state) funding of scientific research.for example GPS. The usual focus is on improving supply-side economic performance but keep in mind that a sufficient level of demand is needed for many supply-side policies to be most effective. medium and long-term objective for many governments. One option is to strength patent laws to protect intellectual property. Many businesses might prefer to let others discover successful and commercially viable new technologies and then copy them if the patent laws are not sufficiently strong. . investment in high-knowledge industries is regarded as crucial – but there are grounds for thinking that building these businesses is not an easy process.For many countries wishing to sustain improved competitiveness or perhaps make progress towards being a high-income developed country.

Competitiveness and Economic Development . Case Study: Mobile Telecommunications. they must suit the specific challenges and demands facing businesses in a particular country.e. Be prepared to evaluate the likely effectiveness of different supply-side policies.Policies to improve competitiveness must always be contextual i.

more recent figure suggests 15. As per capita incomes rise. M-PESA used in myriad different ways . people will make savings using the system or might be able to take out loans.Kenyans pay school fees. originally a micro finance project Operated by Safaricom (which is 40% owned by UK mobile phone business Vodafone) Less than 10% of Kenyans have access to financial services But nine out of ten adults have access to a mobile phone in Kenya By 2009 M-PESA had 6. named after Swahili for money (pesa).           Launched in March 2007.1 million on the system Around 20% of Kenyan GDP washes through the M-PESA system Safaricom is not allowed to make a profit on the interest and neither is the customer Interest earnings go into a charitable M-PESA foundation M-PESA has been very successful in Tanzania but has had less impact in Afghanistan and India Airtel is the main domestic rival. . crucial agricultural information such as weather patterns and improve the reliability of supply chains and access to markets.5 million customers. World Bank data shows that approximately 75% of the world's population now has mobile phones. What roles can the fast-growing uptake of mobile telephony have on growth and development prospects for some of the least developed countries? What is needed for this to be sustained and fully exploited in the years ahead? M-PESA – Supporting Growth and Development M-PESA is a mobile payment solution launched in March 2007 and credited with having a significant impact on economic development in Kenya. sending transfers at the push of a few buttons on a mobile telephone. collect their salaries. Half of the world's undernourished people are dependent on small farms. formerly called Zain and now owned by India’s Bharti Airtel.Mobile phones and raising farm incomes A report "Connected Agriculture" has estimated that the growing use of mobile phones in poorer countries could increase agricultural income by £88 billion within nine years. shop for groceries. with 5 billion of the 6 billion held in developing nations. Cheap mobile phones can help to provide basic financial services such as micro-insurance. they buy everything from drinks in beer shacks to airline tickets thanks to mobile money. The developing world share of the world's internet users rose to 63% in 2011.

Rep.7 21.4 0. it responds to labour shortages.  Cross-border migration from one country to another has become an increasingly important feature of our globalizing world and it raises many important economic. Mexico Philippines India Brazil China Indonesia 3.1 0.7 Country 2010 World Sub-Saharan Africa (all income levels) Least developed countries Korea. In 2012 the figure is likely around 1 million Migrant Workers as a % of a country’s total population Country Kuwait Qatar United Arab Emirates Singapore Australia Ireland United States Germany United Kingdom South Africa 2010 76.4 3. and it provides an escape from poverty and persecution” Ian Goldin. it meets the challenges posed by rapidly aging populations. social and political issues   About 200-million people now live in countries in which they were not born Estimates compiled in 2009 suggested 580. University of Oxford This revision note focuses on international labour migration – keep in mind that large migration can happen within a country too.000 to 820.8 13.6 74.8 38.2 43. .1 Source: World Bank Factors affecting the direction and scale of migration Many economic and social factors affect the rate of migration.4 0.4 1.1 2.1 20. the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation.Economic Growth .1 13.1 1.Development & Labour Migration Author: Geoff Riley Last updated: Sunday 23 September. In China there has been rural-urban migration in the last 20 years amounting to over 150 million people. director of the Oxford Martin School and Professorial Fellow at Balliol College.000 Chinese migrants were living in Africa.1 0.2 10.5 0.6 0. In general. 2012 Introduction A Global War for Talent “A higher rate of global migration is desirable for four reasons: it is a source of innovation and dynamism.

and evidence indicates they currently make a positive contribution to UK’s GDP. in particular for younger workers A desire to travel.g.  Multiplier effects: New workers create new jobs.)  A driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs.  Making a country attractive to FDI: Availability and quality of labour is known to be a key investment location factor for many businesses. which can raise theproductivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work. housing & health care Employment opportunities vary between nations. Migrant networks accelerate the spread of technology. if a country is not successful in attracting and keeping skilled workers then FDI in highknowledge industries will eventually flow to other parts of the world. a mass exodus of productive workers from Zimbabwe.  Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e. there is a multiplier effect if they find work and contribute to a nation’s GDP through a higher level of aggregate demand. build new skills and qualifications and develop networks A desire to escape political repression and corruption in the country of origin especially in failing states The impact of satellite television and the internet in changing people’s expectations The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union The unwillingness of people within the domestic economy to take certain “drudgefilled” jobs such as porters. In a global battle for talent. Much innovation comes from the work of teams of people who have different perspectives and experiences. learn a new language. For example.        Differences between countries in wages and salaries on offer for equivalent jobs – reflected in differences in expected incomes over a working life Access to the benefits system of host countries plus state education.  Income flows (remittances): Remittances sent home by migrants add to the gross national income of the home nations.  Reducing skilled-labour shortages and expanding the labour supply: Migration can help to relieve labour shortages and help to control wage inflation. recruitment of skilled workers from outside the European Union is important to many businesses in the UK. And if these remittances boost spending in . cleaners and petrol attendants Economic Benefits from Cross-Border Migration Supporters of inward labour migration have argued that migration provides numerous advantages:  Fresh skills: Migrants can provide complementary skills to domestic workers.

in Latin America and the Caribbean. Worker displacement: Possible displacement effects of domestic workers Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions. Greece and Spain) another phrase for this is human capital flight. Source: World Bank. this creates a fresh demand for the exports of other nations. Disadvantages of inward migration On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. A brain drain is a term that describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. Benefit claims: Many immigrants find it hard to get work Who really gains? The benefits of migration are focused mainly on employers. and the numbers are even higher in Africa and Asia.  Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the government’s finances. and also impacts development indirectly. It has been used to describe net outward migration of people from several European Union countries in recent times (notably Ireland. Supporters of allowing free movement of labour argue that labour mobility is a positive-sum gamerather than a zero-sum game. Brain Drains – Human Capital Flight Migration directly impacts the migrants.these countries. Some of the arguments include:        Welfare costs: Increasing cost of providing public services as migrants come into a country. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market. Pressure on property prices: Rising demand for housing which forces up prices and rents. Jan 2013 Every immigrant is also an emigrant. According to the economist Professor Ian Goldin from Oxford University. Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. more than 50-million people are supported by remittances. their families and their employers. There is no doubt that migration is a very important driver of development. Development in turn impacts migration. . especially those who take on illegal workers at low wages.

putting upward pressure on wages and labour costs. The benefits and costs of labour migration are hard to quantify and estimate.A sizeable brain drain can bring economic costs and benefits for the sending nation. Whether a rise in labour migration stimulates capital spending by firms and by government. Much depends on     The types of people who choose to migrate from one country to another. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e. to gain qualifications. .the percentage of permanent migration inside the EU is relatively small. One disadvantage is that countries lose out on the benefits that might have accrued from the resources used in educating people who leave. A sizeable loss of skilled workers (many of whom may be younger and therefore more geographically mobile) could lead to labour shortages in the sender country. Some of this income earned overseas returns to the sender country in the form of remittances and many skilled migrants often leave only for a year or two . Add to this the loss of tax revenue from those who choose to live and work overseas.g. learn some English) before moving back to their country of origin. The ease with which they assimilate into a new country and whether they find regular jobs.

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