Thanos Skouras, Professor Emeritus at the Athens University of Economics and Business revisits the notion of competitiveness with a view to its historical roots, draws a distinction between “essential” and “apparent” competitiveness, and applies the concepts to a discussion of Greece’s current predicament and reform programs. The full text is available in Greek, but here is a summary in English:
Despite the widespread use of the notion of a country’s competitiveness in public policy discussion and the regular compilation of an international competitiveness index by at least two separate institutions, there is a certain reluctance among academic economists in accepting the coherence and legitimacy of the concept. The reason is that it makes an odd fit with the economic theory of international trade. It is closely associated with mercantilism and, from Adam Smith onward, economics has consistently rejected mercantilism and the ‘beggar thy neighbor’ stance to which it leads, as an acceptable norm of economic policy.
It is, nevertheless, possible to salvage the competitiveness notion by distinguishing its useful integral part, which relates to comparative productivity and the intrinsic developmental potential of an economy, from its shady part, which is associated with exploitative mercantilism. For this reason, a distinction is made between ‘essential’ competitiveness and ‘apparent’ competitiveness.
‘Essential’ competitiveness is analogous to its usage in microeconomics, where it denotes firms’ relative ability to compete, and refers mainly to sales cost (including production, finance and marketing costs) but also to other elements, such as product characteristics (including quality, reputation and image), distribution networks, accessibility to markets and any other factor that contributes to a firm’s ability to achieve sustained profitability and do consistently better than its rivals.
In the case of a country, in addition to the above, it includes monetary and fiscal policy, as well as other macroeconomic policies and conditions, such as a minimum wage or incomes policy or even prospects regarding political developments, which can have an effect on the level of prices and in the financing conditions and borrowing rates. It also includes institutional elements, such as the quality and performance of the education system, the legal system, labor relations and the functioning of the labor market, market structure and the degree of monopoly, as well as any other institution that contributes to the country’s better economic performance relative to other countries sharing the same currency (or having a long‐ standing stable exchange rate).
In contrast, ‘apparent’ competitiveness refers to the ability of a country to compete in international markets with countries that do not share its currency, which depends not only on its ‘essential’ competitiveness but also, quite crucially, on the exchange rate.
A change in ‘essential’ competitiveness tends to affect the exchange rate in a way that causes the ‘apparent’ competitiveness to move in the opposite direction, so that the balance of payments is, at least roughly and over time, in equilibrium. But this is not the case among member countries within a monetary union. A change in ‘essential’ competitiveness of a member country (or a difference from the average ‘essential’ competitiveness of the union as a whole) cannot be counterbalanced by a change in its exchange rate, since the member countries of the monetary union share a common currency. Moreover, the change or difference in ‘essential’ competitiveness of a member country has generally limited effect on the union’s exchange rate vis a vis the rest of the world, since this is determined by the weighted average ‘essential’ competitiveness of the union as a whole. As a result, any change (or difference) in the ‘essential’ competitiveness of a member country within a monetary union is leveraged, in comparison to the outcome of the same change (or difference) if the country were not a member or were to leave the currency union.
An analogy from the world of competitive sports may be instructive. The handicap system used in diverse sports, such as golf or horse races, is analogous to the counterbalancing movement of the exchange rate following a change in a country’s ‘essential’ competitiveness. For example, according to horses’ relative performance in training and in previous races, they are saddled with different weights, so as to equalize the chances across all horses competing in a race. In this setting, a currency union is like grouping the horses of a stable together and assigning a single common handicap to all of them, on the basis of their average performance. Such an arrangement, would obviously grant the best performing horses of the stable an unfair advantage and, by the same token, disadvantage the worst performing ones when competing with other horses, which have been given a handicap based on their individual performance.
The leveraging of ‘essential’ competitiveness by the Eurozone may account to a considerable degree for the contrasting fortunes of the German and Greek economies. Germany had from the start a relatively high ‘essential’ competitiveness and strove to augment it, not least through an unpopular wide-ranging reform of the labor market. Irrespective of the arguable effectiveness of this reform in raising competitiveness, there is no question that Germany managed to preserve its ‘essential’ competitiveness and, with the help of its leveraging, to overcome the 2008 international financial crisis and establish herself today as the undisputed leading economic power in Europe.
In striking contrast, Greece not only joined the Eurozone with a very low ‘essential’ competitiveness but, within the first year of joining, practically the whole of her political class abandoned any effort to carry out the reforms needed to improve competitiveness. Being subject to negative leverage, ‘essential’ competitiveness further deteriorated leading to the effective bankruptcy of the Greek state in 2010. There has been so far strong resistance to the largely necessary reforms demanded by the lenders and little progress made. It should be clear, nevertheless, that a determined effort to achieve a significant increase in ‘essential’ competitiveness, which requires a radical change in mental attitude, is today imperative in order to overcome the Greek crisis and presents the only way forward for the Greek economy
Germany’s stance towards the Greek crisis offers no other alternative than the implementation of competitiveness-enhancing reforms and the Greek attempts at negotiation are futile and counterproductive. It is now quite clear that Germany does not fear and is not averse to a possible Grexit. Moreover, the protracted negotiations that Greece is intent on, only succeed in keeping Greece in a limbo state and, by causing potential investment projects to be kept on hold and capital controls to remain in place, they contribute to the further weakening of the Greek economy. At the same time, Greece’s limbo state presents a boon to the German economy, by augmenting the desirability of German bunds as a safe haven for southern Europe’s jittery capital, which is afraid of the potential domino effect of Grexit. An empirical study by a German research institute estimates that the benefit to the German state from lower borrowing costs, due to the fear of Grexit, easily exceeds the total contribution by the German Treasury to the Greek rescue. The total benefit to the German economy is even greater (though admittedly unevenly shared), if account is taken of 1) the addition to the German labor force of a considerable number of Greek medical doctors, engineers and other professionals; 2) the increase in “apparent” competitiveness, resulting from the euro’s weakening caused by the Greek crisis.
This is a useful article, and well thought out. You may be interested in a new book published by Stieglitz, titled The Euro: How a currency intended to unite Europe would up dividing it. Stieglitz is critical of the way the Euro project was implanted, the controlling role of Germany, and the ways in which it contributed to the damage to the Greek economy.