UK: Smith on Economics - A country fit for true competitors.

UK: Smith on Economics - A country fit for true competitors. - The major competitive battles, says David Smith, are fought out by corporations rather than by countries. But a nation's economic conditions can at least provide a springboard for success.

Last Updated: 31 Aug 2010

The major competitive battles, says David Smith, are fought out by corporations rather than by countries. But a nation's economic conditions can at least provide a springboard for success.

Tap into the Internet site of the Swiss-based International Institute of Management Development (IMD), or wait a little while until its annual competitiveness yearbook is produced, and you find what is, on the face of it, a stunning vindication of British economic policy. Britain, according to IMD, has leapt from 19th to 12th place in its world competitiveness league in the space of a year, taking us above Germany (down from 10th to 14th) and only one place behind Japan, which has plunged from 4th to 11th.

Relative to the top three, the US followed by Singapore and Hong Kong, Britain still has some way to go. The movement, however, is plainly in the right direction. IMD, which takes 244 separate competitiveness criteria into account, was impressed with the way Britain was soaring up the league, noting that the country 'enjoys the results of a great year, characterised by robust economic growth by European standards, and falling unemployment'.

It was also taken with 'the attractiveness of a country where labour costs are competitive', and 'the ever growing strength of Britain as a financial centre'.

UK rises as Europe falls

Seen from Switzerland, then, Britain is making all the right moves. Those white papers on competitiveness, initiated by Michael Heseltine, at first greeted sceptically, were not in vain. That flow of inward investment from the Far East, the US and the rest of Europe is telling its own story.

Low labour costs, low taxes and world-leading sectors of the economy make a happy combination.

Britain's climb up the league table also appears to be telling a powerful, and intuitively believable story about the country's competitive position vis-a-vis the rest of Europe. France, for example, has dropped from 15th to 20th place over the past five years, Italy from 27th to 35th place (there are 46 countries covered in the survey), Belgium from 12th to 23rd place. In fact, the only EU economies more competitive than Britain are the Netherlands and Denmark.

Now for the not-so-good news

This, then, is unalloyed good news. Or is it? Unfortunately, just as Britain is climbing the league, the competitiveness of a country has become less relevant. This is largely due to Paul Krugman, the controversial Massachusetts Institute of Technology (MIT) economist. He argues that, 'Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous.'

Krugman, who has won the support of many economists for this view, claims that countries, unlike companies, do not face the kind of crisis that could force them out of existence if they are uncompetitive. International trade, he argues, is not a win-lose situation but, because all benefit from an expansion of trade, it is invariably win-win. Countries can devalue or depreciate their currencies when faced with balance of payments crises, individual companies cannot. National economies are the product of decisions by multinational companies - where to expand or slim down, how much to invest, and so on.

True competitiveness, in an era of globalisation, is therefore a corporate issue, not a national one. That issue is whether Sony, Nissan, Hyundai, SmithKline Beecham, Glaxo Wellcome or Unilever are competitive wherever in the world they operate. The true leaders in world competitiveness league tables are those corporations which can build market share whether they are producing and selling in competitive or uncompetitive countries. And the truly competitive economies are those to which the profits of competitive companies are being returned.

According to Arthur Francis, director of research at the Glasgow Business School, and a follower of the Krugman line, 'It is the competitiveness of UK firms that needs improving, and not the competitiveness of the UK.

Those improvements come from transforming the way firms are organised and managed. It is primarily a management problem, and not an investment or a technological problem.' The blind alley of trying to develop strategies for national competitiveness leads, says Francis 'to blame being put on politicians, on civil servants, on bankers, on Oxbridge, on society in general, on anyone other than ourselves - or else it leads us to insist either that there isn't a problem or that we have already corrected it'.

The Japanese springboard

The proper competitive battles, it seems, are fought out by corporations. Clinically logical though this view appears to be, I wonder if it does not exclude too much. Let us take the example of Japan, for a long time at or near the top of such league tables. Japan's economic structure - a large home market, forms of corporate organisation that were well able to cope with shocks, and a skilled and hard-working labour force - provided the springboard for the country's (or rather its corporations') global success. The one would not have been possible without the other.

Or think of Britain during the 1970s, at the height of the so-called British disease. Companies faced difficult industrial relations and, because of sharply rising labour costs, problems of selling overseas.

The country's economic conditions provided exactly the opposite of that prevailing in Japan - not so much a springboard for global success as a ball and chain holding firms back. Of course, as Francis says, bad management played its part. But even the best managers in the world could have made little headway in such conditions.

The best way of viewing competitiveness, when applied to countries, is as a necessary condition for sustained economic success, by providing an environment in which firms can grow and prosper. Competitiveness is a combination of the right economic environment and successful, home-grown, global corporations.

Britain has the former but perhaps not enough, yet, of the latter.

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