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Asian Development Outlook 2003 : III. Competitiveness in Developing Asia
Taking Advantage of Globalization, Technology, and CompetitionDuring the last decade, competitiveness has been brought into the discussion of the search for the panacea for growth almost as if it represented a pillar of economic development, similar to trade and openness or savings. However, competitiveness is not a panacea for development for Asia's developing countries. Nevertheless, the firm-level framework developed in the Asian Development Outlook 2003 provides a pragmatic route for discussions about competitiveness by focusing on firms. The significance of competitiveness for firms and policy makers in developing Asia can be understood within the broader context of the constantly evolving environment created by the forces of globalization and technological progress, where knowledge is the most important resource. These factors have raised a whole spectrum of new challenges—and opportunities—that firms and policy makers in developing Asia should recognize. The key to success in the coming years is that governments and firms across Asia devise strategies to take full advantage of the potential benefits that globalization, technology, and competition offer. It will be necessary for them to understand what competitiveness means and how it fits in as a piece of the development process. Misconceptions of the nature and role of competitiveness in national economic development can be counterproductive. Understanding that it is firms that compete in an increasingly global market, both at home and abroad, and that the national policy environment can either constrain or improve their efforts, is critical. This part of Asian Development Outlook 2003 provides an analysis of competitiveness in developing Asia and shows how it is vital for productivity, national growth, and development. Competitiveness can be defined as a firm's ability to stay in business and achieve some desired result in terms of profit, price, rate of return, or quality of its products; and to have the capacity to exploit existing market opportunities and generate new markets. During the last decade, there has been considerable interest in identifying the factors that can improve competitiveness, which is thought by many to be an important piece of the growth and development puzzle, perhaps the latest elixir in the quest for growth. Behind this quest is a complex interaction among a number of factors—or the "drivers of change"—which are globalization, technology, and competition. These factors are raising a whole spectrum of new challenges and opportunities in an irreversible process of rapid change. The Asian financial crisis that began in 1997 has added more variables to the equation. Although it brought serious disruption to the region, it demonstrated the need for an improvement in corporate and banking governance. Those countries that have learned the lessons will experience rapid growth again, while those that have not will stagnate. Recently, the emergence of the People's Republic of China (PRC) as an economic powerhouse, particularly in manufacturing, has come to be regarded with reservation among some East and Southeast Asian countries. Governments and policy makers are especially interested in the issue of competitiveness, particularly the policies that can improve it. Governments have set up councils and competitiveness committees, have written white papers, and have organized conferences on the subject. In this way, the idea of national competitiveness has become one of the key themes in the current debate about national economic performance. Whether or not a country is seen as competitive depends on where it comes in the rankings of a variety of indicators used across countries. Unfortunately, national competitiveness has become something of a buzzword: in common parlance, competitiveness is used to cover almost any aspect of market performance and its overuse may detract from its importance. In fact, the key variable for the economic analysis of competitiveness is the growth of labor productivity since this, ultimately, is the main determinant in raising living standards. This is what competitiveness is about. In this context, many developing Asian firms and governments alike feel the need to rethink how to achieve steady rapid growth. Although firms in the Asia-Pacific region are well positioned to succeed in the coming decades, it is crucial to provide a grounded explanation of the microeconomic foundations of competitiveness and growth of labor productivity. The consideration of the East Asian experience, in particular, provides useful insights for less developed countries in the Asia-Pacific region as they devise new strategies and approaches to promote higher rates of sustainable growth. The long-run growth prospects for the Asia-Pacific region, driven by the new opportunities offered by technological advances and globalization, are very positive, provided both that sound macroeconomic policies are implemented and that the necessary reforms in the financial sector continue. The key to success in the coming years is that governments and firms across the region devise strategies to take full advantage of the potential benefits that globalization, technology, and competition offer. Governments will need to understand what competitiveness means and how it fits in the development process. Today's combination of the new industrial revolution and globalization is similar to that of the late nineteenth century when, for example, the United States emerged as a major economic power; or earlier when the United Kingdom emerged as a colonial and manufacturing power. It can also be compared with the 1960s and 1970s, when Japan emerged as a leading industrial power, and with the 1980s, which saw the fast development of the Republic of Korea (Korea). The rapid internationalization of world affairs during the last few decades has opened up many opportunities. The establishment of the World Trade Organization (WTO) has, through its policies, affected every level of economic activity. The lowering of tariffs and the dismantling of other restrictions to trade have generated intense competition and strong incentives for perceptive entrepreneurs. The result is that most domestic markets are being subjected to increased competition from foreign firms. At the same time, a collaborative world in which countries seldom make complete products from start to finish offers plenty of opportunities. World trade barriers are breaking down and economic instabilities are better understood than in the past. This way, states and markets have much room to develop a partnership to ensure growth and, above all, development, as manifested in the provision of basic needs in the fields of education and health, and, ultimately, in sustained increases in living standards. All these transformations demonstrate the need for policy makers to understand the constraints that markets place on governments and, conversely, those that governments place on markets. It is notable that these international developments are happening in a time of diminishing expectations about the effectiveness of government action (Stern 1997). The analysis begins, in the section Drivers of Change: Globalization, Technology, and Competition, with an assessment of the drivers of change—i.e., globalization, technology, and competition—and of the emergence of the PRC as a major industrial powerhouse. It stresses that competitiveness is a firm-level issue, and that any understanding of the determinants of competitiveness must begin at that level. The discussion then moves on, in National Competitiveness: A Dangerous Obsession?, to whether nations, per se, compete, in particular for shares in export markets, and whether the notion of "national competitiveness" makes sense. It is argued that nations do not compete in the way that firms do, and that the concept of national competitiveness is very elusive. The debate over whether national competitiveness has any meaning is rooted in the appropriate role and scope of government policy in enhancing firms' competitiveness. Government policies and actions can indeed greatly help firms' competitiveness; but they can also hamper it. Despite the debate surrounding the term "national competitiveness," economists use several aggregate measures that try to capture some aspects of the issue. These are summarized and discussed in the section Aggregate Measures of Competitiveness. Likewise, there have been some attempts at constructing indices of national competitiveness by aggregating several variables. However, the construction of these indices is a rather problematic exercise and their usefulness might be very limited. In the next section, Institutions, The State, and The Market: A Partnership for Development, it is argued that development requires a partnership between market and state with an appropriate division of responsibilities. The objective of this partnership is to create a competitive or well-functioning market economy, whose ultimate objectives are to raise living standards and, by implication, reduce the gap with the countries at the income and technological frontier. The production of private goods and services should be largely left to the market. Firms make the products and provide the services that consumers demand, and learn how to do business better by competing with other firms and by striving to improve their entrepreneurial capabilities. For its part, the role of government should be to enable firms to compete effectively. It can do this by ensuring a level playing field for all firms through the provision of the required institutional infrastructure, that is, the legal framework (emphasizing the importance of competition policies), macroeconomic stability, and the correction of market imperfections. The role of industrial policy, which may have been successful in the past, is greatly diminished in the context of globalization. However, there are other areas, such as education, technology, and physical infrastructure, where responsibilities can be shared between the government and private sector. The other important component of this government-private sector partnership is the development of institutions, a difficult task since they cannot be transferred easily as they are country specific and have to be developed gradually. In the following two sections, two important dynamic forces that can help firms in the Asia-Pacific region increase their competitiveness are discussed. The first is for firms to latch onto "global value chains" (GVCs), defined as the internationalization of the production process whereby firms located in different countries participate in the different stages of the process. (This is discussed in the section Global Value Chains.) GVCs offer many firms in the region an opportunity to take advantage of the potential benefits that globalization offers. Many firms in the newly industrializing economies (NIEs) of Hong Kong, China; Korea; Singapore; and Taipei,China used this approach not so long ago. The important question is why firms in some less developed countries have managed to enter GVCs but others have not, and many lessons can be learned from the firms in the NIEs that have successfully entered GVCs. The second force is education, the key production input in the knowledge society of the 21st century (assessed in the following section, Education and Skills). Knowledge, society's most important resource, has two main characteristics. First, it is a public good: many people can use it. Second, it is complementary with existing knowledge: the worth to society of an idea increases the more society already knows. This implies that investment in knowledge offers increasing returns. The objective for policy makers and firms is to identify the education and training policies and the institutions needed to respond to the economy's demands for more innovative and creative workers. The final section prior to the conclusions, Catch-Up Competitiveness: Some Lessons, discusses lessons that can be drawn from the NIEs' experience in reducing the income and technological gaps with countries at the frontier—"catching up." It looks at what the nature of competitiveness is in countries that are not at the frontier, and the role of innovation in the catching-up process. Though very important lessons can be learned, their experience cannot be replicated exactly.
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