Author: Geoff Riley Last updated: Sunday 23 September, 2012
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.
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
Low & middle income
High income: OECD
Hong Kong SAR, China
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)
Top countries and lowly ranked countries for international competitiveness (2011-12 data)
Top Ranked Countries
Lowly ranked countries
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.