Powered by Leeds Metropolitan University
Economics Resources Economics revision notesEconomics revision quizzes Popular resources on the Economics blog Resource tags for the blog RSS Feed for the blog Twitter feed for the Economics blog Teacher Email Resource Newsletter Category listing for this blog AS / A2 Economics Blog Home Page

Buy tutor2u Economics Revision Guides |  Economics Blog  |  Economics Revision Workshops | tutor2u App | Economics Revision Quizzes | Follow tutor2u and tutor2u_econ on Twitter | Join our FREE Economics Revision Classes on Zondle

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, Germany and South Korea. Note that the index has a base year of 2005 (i.e. 2005 = 100) and we can see that all three countries have experienced a fall in relative unit labour costs since then. 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.e. the US dollar.)

This last point is important - 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.

After joining the new European single currency in 1999, both Italy and Spain allowed their unit labour costs to rise sharply – look at the divergence in the chart below between Italy, Spain and Germany (which is Europe’s biggest economy).

This loss of competitiveness has caused macroeconomic problems for both Spain and Italy including rising unemployment arising from a worsening trade performance

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.

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.

High-technology exports (% of manufactured exports) – data is for 2010

Philippines

67.8

Singapore

49.9

Malaysia

44.5

China

27.5

France

24.9

Switzerland

24.8

United Kingdom

20.9

United States

19.9

Japan

18.0

Middle income

17.9

Low & middle income

17.7

World

17.5

High income

17.4

Mexico

16.9

High income: OECD

16.5

OECD members

16.2

Hong Kong SAR, China

16.1

Norway

16.1

European Union

15.3

Czech Republic

15.3

Germany

15.3

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.

  • Institutions (property rights protection, trust, judicial independence, corruption)
  • Infrastructure (transport, telephony, and energy, 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, strength of banks)
  • Technological readiness (readiness to exploit, adapt to new technologies)
  • Market size (linked to population size and per capita incomes)
  • Business sophistication (quality of supply chains, industrial clusters, quality of management)
  • Innovation

Top countries and lowly ranked countries for international competitiveness (2011-12 data)

 

Top Ranked Countries

 

Lowly ranked countries

1

Switzerland

50

South Africa

2

Singapore

56

India

3

Sweden

65

Vietnam

4

Finland

66

Russian Federation

5

USA

70

Rwanda

6

Germany

76

Croatia

7

Netherlands

85

Argentina

8

Denmark

90

Greece

9

Japan

102

Kenya

10

United Kingdom

106

Ethiopia

16

Norway

107

Jamaica

20

Australia

114

Ghana

21

Malaysia

127

Nigeria

24

South Korea

129

Ivory Coast

26

China

142

Chad

 Source: World Economic Forum, Competitiveness Index for 2012

Competitiveness in Global Markets - Knowledge as a Public Good

For many countries wishing to sustain improved competitiveness or perhaps make progress towards being a high-income developed country, investment in high-knowledge industries is regarded as crucial – but there are grounds for thinking that building these businesses is not an easy process.

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.

This may hamper levels of research and development spending leading to weaker innovation in highly competitive markets.

One option is to strength patent laws to protect intellectual property.

Another strategy is to increase public (state) funding of scientific research. If we look back in history many well known products had their origins in state sector funding - for example GPS, smoke detectors, water filters and cordless power drills!

Policies to improve international competitiveness

Raising competitiveness in domestic and overseas markets is both a short, medium and long-term objective for many governments. 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.

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

Case Study: Mobile Telecommunications, Competitiveness and Economic Development

 

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. Cheap mobile phones can help to provide basic financial services such as micro-insurance, crucial agricultural information such as weather patterns and improve the reliability of supply chains and access to markets. Half of the world's undernourished people are dependent on small farms.

World Bank data shows that approximately 75% of the world's population now has mobile phones, with 5 billion of the 6 billion held in developing nations. The developing world share of the world's internet users rose to 63% in 2011.

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.

  • Launched in March 2007, named after Swahili for money (pesa), 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 6.5 million customers, more recent figure suggests 15.1 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, formerly called Zain and now owned by India’s Bharti Airtel,

M-PESA used in myriad different ways - Kenyans pay school fees, collect their salaries, shop for groceries, they buy everything from drinks in beer shacks to airline tickets thanks to mobile money, sending transfers at the push of a few buttons on a mobile telephone. As per capita incomes rise, people will make savings using the system or might be able to take out loans.





Add your comments and share this study note:

blog comments powered by Disqus

 

Search tutor2u






Order by 


Related study notes

Buy your personal copy of our Economics revision guides

tutor2u Economics Revision Guides

Agriculture
Behavioural Economics
Network Economics
Game Theory
Business Economics
Economics of Utilities
Contestable Markets
Competitive Markets
Economies of Scale
Management Issues
Monopolistic Competition
Monopoly
Oligopoly
Price Discrimination
Competition Policy
Commodities Markets
Emerging Economies
Human Development
African Economy
South African Economy
Kenyan Economy
Development Economics
Brazil Economy
China Economy
Indian economy
Russia Economy
Cost Benefit Analysis
Cycles and Shocks
Aggregate Demand
Capital Investment
Consumer Spending
Saving
Aggregate Supply
Demography
Economic History
Economic Growth
Competitiveness
Innovation
Economics of Technology
Environmental Economics
European Economy
EU Enlargement
EU Farming and Fishing
Single Market
The Euro
Exchange Rates
Money and Finance
Monetarism
Global Economy
IMF
Balance of Payments
Credit Crunch
International Trade
Housing Economics
Government Intervention
Buffer Stocks
Government Failure
Indirect Taxes
Maximum Prices
Minimum Prices
Regulation
Subsidies
Health Economics
Inflation and Deflation
Labour Market
Trade Unions
Introductory Economics
Macroeconomic Policies
Fiscal Policy
Monetary Policy
Supply-side policies
Trade Policies
Keynesian Economics
Market Failure
Externalities
Factor Immobility
Information Failure
Merit & De-Merit Goods
Public Goods
Manufacturing Industry
Oil and Gas
OECD Economies
Australia Economy
French Economy
German Economy
Greece Economy
Ireland Economy
Japan Economy
Poland
Spain Economy
US Economy
Poverty and Inequality
Market Equilibrium and Price
Elasticity of Demand
Elasticity of Supply
Nature of Demand
Nature of Supply
Price Mechanism in Action
Price Volatility
Inter-related Markets
Standard of Living
Transport Economics
UK Economy
Regional Economics
London Economy
Recession Watch
Unemployment

 


tutor2u

Tutor2u support for students
Teaching support and resources
Search for resources on tutor2u

Law



Refine Search by Subject
A Level Economics
Business Studies
Geography Give It A Go!
History Law
IB Diploma Politics
Religious Studies Sociology

Order Search Results By


Follow tutor2u on Twitter
   
   

tutor2u Home Page | Online Store | About tutor2u | Copyright Info | Your Privacy | Terms of Use

tutor2u

Working with Our Partners

 Zondle - Games for LearningVue Cinemas | Moneypenny | Nexcess | Really Simple Systems 

Boston House | 214 High Street | Boston Spa | West Yorkshire | LS23 6AD | Tel +44 0844 800 0085 | Fax +44 01937 529236

Company Registration Number: 04489574 | VAT Reg No 816865400

tutor2u is proud to sponsor TABS Cricket Club and the Wetherby Cricket League as part of its commitment to invest in local junior sport