by Daniel F. Burton, Jr.
Magazine: THE WASHINGTON QUARTERLY Issue: Autumn 1994 Article excerpts. Competitiveness is a term that, for many, captures the challenges facing the U.S. economy. Yet ever since it first surfaced in the early 1980s, it has been repeatedly dismissed as wrongheaded or irrelevant and disparaged as an unwarranted critique of U.S. industry and economic policy. Early critics felt that it was wrong, even slightly unpatriotic, to entertain serious thoughts about systemic challenges to the industrial prowess of the United States. Furthermore, because competitiveness implied that government and industry should seek to work more closely together to strengthen U.S. economic performance, some equated it with a heavy-handed industrial policy that would have the government pick winners and losers in the economy. Despite these criticisms, competitiveness entered the mainstream of the U.S. economic policy debate. So much so that by the late 1980s, it was dismissed again, this time as just another Washington buzzword that would quickly go out of fashion. It did not. By the early 1990s, the White House and Congress had joined the U.S. private sector in regularly referring to competitiveness as a driving rationale for their policies. Its impact on the U.S. private sector cannot be overestimated. International competition has forced U.S. firms to conceive of their business in entirely new ways. It has led them to reassess their products, their customers, their markets, and their rivals. It has prompted them to search out new management ideas around the world and to implement them at home. It has driven them to hone their skills against the most demanding customers worldwide. And it is the major force behind efforts to streamline production, improve quality, accelerate cycletime, and rethink the innovation process. This revolution in the private sector has not been lost on government officials. With the end of the Cold War, competitiveness has emerged as a new national priority, much as containment was during the past half century. Although a lot of the attention has focused on trade, the competitiveness agenda goes much further, to such areas as technology, education, and investment. Moreover, the urgency of the issue is not limited to the United States; national centers of competitiveness are being established in countries as diverse as Canada, South Korea, Portugal, and Venezuela. Given all of this activity, it should come as no surprise that competitiveness has attracted fresh attention and criticism. Just as containment was hotly debated in the early postwar era, so is competitiveness today. The past year has witnessed two new critiques. The first surfaced in late 1993 when many voices in the media pieced together anecdotal evidence about U.S. industry's improved performance and announced that the competitiveness challenge was over; the United States had won. With the revitalization of firms from Detroit to Silicon Valley, the press confidently asserted that the problems that plagued the nation's economy during the 1980s--such as poor quality, the high cost of capital, and outdated manufacturing systems--has been overcome. Moreover, with Europe and Japan mired in recession, the United States was once again the unrivaled economic leader of the world. Unfortunately, this view mistakes progress for the endgame. Although there can be no doubt that U.S. firms have made tremendous advances, there is still a long way to go. In a Council on Competitiveness poll of U.S. chief executive officers, labor leaders, and university presidents taken in summer 1994, respondents stated by a two-to-one margin that the toughest competitiveness challenges for the United States still lay ahead. The most recent attack on competitiveness has come from Paul Krugman, a professor at the Massachusetts Institute of Technology. In the spring 1994 edition of Foreign Affairs and in his book Peddling Prosperity, Krugman states that competitiveness is an irrelevant and even dangerous concept when applied to national economies. His comments have been widely noted, in part because he helped develop the strategic trade theory that is often associated with competitiveness. Because of his reputation as one of the nation's premier young economists and the scope of his criticism, it is worthwhile to systematically review his argument. In doing so, this article will explain why competitiveness has proven to be such a resilient term and why it remains such a dynamic concept. At the outset, it should be noted that Krugman has forced economists and policymakers alike to think carefully about competitiveness in terms of both its economic validity and its policy implications. This reassessment is especially important because of the powerful impact that the competitiveness debate is having on U.S. economic policy. If U.S. policymakers are to use it as a way to assess the nation's strengths and weaknesses and fashion appropriate public policy, they must understand not only its lessons, but also its limits. Krugman, however, pushes his argument too far. Although he raises some interesting points, his conclusions--that competitiveness is a "dangerous obsession"--is not warranted. On the contrary, competitiveness is a valuable concept that can, and has, led to constructive public policy. In some ways, Krugman's argument is largely semantic. He likes the word "productivity," but not the word "competitiveness." His major complaint is that competitiveness focuses on relatively unimportant issues, like trade balances, and in doing so detracts from the biggest determinant of national economic performance, namely growth in domestic productivity. He believes that this focus is the result of faulty analysis by economists who should know better and leads to bad public policy. Yet, although international trade has received a lot of attention in the competitiveness debate, so have investment, technology, and human resources, which together constitute the building blocks of productivity. As for the charge that competitiveness leads to distorted public policy, and in particular protectionism, the record of the last decade does not support this claim. In developing his critique Krugman makes several points, three of which are especially noteworthy and deserve a thoughtful response: (1) countries are not like companies, and any comparison is misleading; (2) competitiveness is a meaningless concept that, at best, is "a poetic way of saying productivity"; and (3) public policies based on worries about competitiveness are sure to lead to trouble. Each of these is considered below. (This is an excerpt only. Article continues in issue 17:4 of the journal.)