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	Table of Contents
p. 59 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia III. Competitiveness in Developing Asia Taking Advantage of Globalization, Technology and Competition Drivers of Change: Globalization, Technology and Competition National Competitiveness: A Dangerous Obsession? Aggregate Measures of Competitiveness Institutions, The State, and The Market: A Partnership for Development Global Value Chains Education and Skills Catch-Up Competitiveness: Some Lessons Conclusions References Statistical Appendix

Asian Development Outlook 2003 : III. Competitiveness in Developing Asia

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National Competitiveness: A Dangerous Obsession?

Today, many products in supermarkets and department stores carry the label "Made in PRC." Moreover, many markets in industrial countries, such as consumer electronics, have been dominated for years by products from previously less developed countries (e.g., Korea). This has led to the question as to whether nations themselves can be considered competitive or uncompetitive, analogously to firms. In other words, is the concept of "national competitiveness" a relevant issue? It could be argued that this is because the output of a country is the summation of the production of firms located there. Some authors therefore regard as legitimate, the discussion of the concept of national competitiveness, if only as a reflection of the competitiveness of the nation's firms.

National competitiveness has been defined as the "ability of a country to produce goods and services that meet the test of international markets and simultaneously to maintain and expand the real income of its citizens."² And again: "National competitiveness refers to a country's ability to create, produce, distribute and/or service products in international trade while earning rising returns on its resources" (Buckley et al. 1988, p.177). These definitions are consistent with the term "international competitiveness," which brings to mind the idea that each nation is viewed "like a big corporation competing in the global market place" (Krugman 1996a, p.4).

It is from this perspective that commentators in some Asian countries have voiced their concern over the consequences of the rapid development of certain industries in the PRC, such as textiles and electronics, as these industries are seen as posing a threat to existing domestic industries. Moreover, this alleged competition is often seen as unfair, to the extent that the PRC benefits from low wages and hence from low unit costs. The conclusion has often been drawn that unless governments take action, perhaps through some form of protection or public policies to increase the competitiveness of the threatened industries, the PRC poses a serious menace to the prosperity of these countries. The irony is that, while the benefits of competition are widely understood and accepted by most people, it is competition from abroad that tends to cause concern among domestic firms and governments. This has led to discussion in terms of economic competition between countries, in much the same terms as competition between products, such as Coca Cola and Pepsi Cola (e.g., Thurow 1993).

However, the definition and use of the term competitiveness at the national level in this manner is far from uncontroversial, as some economists have expressed very serious reservations about its meaning as they believe the idea to be very elusive. In a series of papers, Paul Krugman (1994, 1996a, 1996b) argued that defining national competitiveness, in the specific context of trade (i.e., as export competitiveness), is a futile exercise, and is dangerous both because it implicitly proves a misunderstanding of the theory of comparative advantage and the benefits of free trade, and because it implies a mercantilist view of the world. Krugman contended that it is firms that compete for exports, not countries (although it is true that trade statistics are presented as an aggregate). National economies are not in direct competition with one another and nations do not go bankrupt in the way firms do. Krugman argued that the notion of competitiveness at the national level makes no sense, and claimed that the term was becoming, in fact, a "dangerous obsession."

While Krugman's argument has a great deal of validity, its limitations should also be appreciated. First, the conclusions of the neoclassical trade model depend on extremely restrictive and unrealistic assumptions, such as perfect competition with efficient markets, homogeneous products, universal access to technology with no learning costs, no externalities or scale economies, technically efficient firms, and, especially, fully employed resources.³ A second limitation is put forward by Lall (2000), who argues that, contrary to received trade theory, in the real world, export structures are path-dependent and difficult to change. Trade patterns are much less responsive to changing factor prices than commonly assumed. They are the outcome of a long, cumulative process of learning, agglomeration, and increasing returns; institution building; and the overall business culture. This means that the world's pattern of specialization and trade is the result of history, accidents, and past government policies. It is not only dictated by comparative advantage, which is determined by tastes, resources, and technology. Moving from a low-technology (labor-intensive) structure to a high-technology (capital- and knowledge-intensive) one is a difficult and far from straightforward process, involving many policy interventions. In Lall's view, national

The above discussion clearly indicates that the very notion of national competitiveness is controversial, and, in the final analysis, the debate over whether the term has any meaning and substance has its roots in the appropriate role and extent of government policy. Given that it is firms that compete, the real question from the national point of view is: How can government policies ensure that firms are competitive? Despite the arguments about whether or not nations compete, undoubtedly, governments play a critical role in shaping the competitive environment and behavior of firms through a variety of policies. The section Institutions, The State, and The Market: A Partnership for Development, addresses this issue.

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