07 February 2011

Competitiveness Pitch

So the Franco-German plan for a "competitiveness pact" ran into opposition at the summit last week. The plan which is meant to cover the eurozone, includes ideas like harmonising corporate tax rates and pushing up retirement ages, which do not seem to me to have much to do with competitiveness.

Leaving aside the issue of how meaningful it is to focus on competitiveness. I thought to check whether there is any evidence that the Eurozone is failing in international competition.

The latest figures show a current accout deficit of 0.4% of GDP. Over the last 4 quarters the current account has varied between a surplus of 0.5% and a deficit of 0.9%. In other words the Eurozone is selling pretty well as much as it buys.

04 February 2011

Countries Do Compete

Ireland for example has a low rate of corporation tax in order to attract firms to set up there. Countries and regions compete for inward investment.

Imagine a Japanese car company wanted to set up a new factory to produce luxury cars for the European market. It choice of location might come down to Belgium or Slovakia. Both countries would court the Japanese investor. One of them wins and X billion Yen are invested in the lucky nation.

That is not the end of the story. Net trade is equal to the difference between domestic savings and investment:
X-M = S-I
(exports minus imports = savings minus investment)

So all else being equal, the winning country would find its trade balance falling by X billion Yen. In other words the more successful a country is in attracting inward investment, the bigger its current account deficit gets.

That is one reason why the current account does not tell you whether a country is economically successful or not. There are many reasons why the current account might be in surplus or in deficit. Conversely, being competitive in export markets need not equate to economic success.

The idea for this post arose from a discussion I had while on my quest for enlightenment on the issue of competitiveness

03 February 2011

Competitiveness Patch

According to press reports, tomorrow's EU summit will discuss a "competitiveness pact".

My questions remains: is competitiveness Europe's problem?

I don't mean: is Europe uncompetitive? As Paul Krugman argued a long time ago, countries and major economic blocs do not compete economically with each other. Companies seek competitive advantage, countries seek comparative advantage.

My question means: is chasing competitiveness the problem? Pursuing the wrong goal will lead to adopting the wrong policies, and allocating funds to the wrong places. Which is why Krugman described "competitiveness" as a dangerous obsession.