## Politicians Strive for Competitiveness

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### Definitions and framing
- Competitiveness "means different things to different people." (Michael Porter, The Competitive Advantage of Nations, 1990).
- Distinction drawn between:
  - Productivity (absolute improvements in output per worker), which "is almost always and everywhere a worthy goal."
  - Competitiveness (relative productivity compared with other countries), which implies policymakers care about comparative positions.
- Key economic insight: "A key insight from economics is that world trade is not a zero-sum game."

### Terms-of-trade effects of foreign productivity gains
- When a foreign country produces a good more efficiently:
  - Global supply of that good typically rises, reducing its price.
  - If your country is mainly an exporter of that good, lower world prices typically make your country worse off.
  - If your country is mainly an importer of that good, lower world prices typically make your country better off.
- Impact size depends on country structure:
  - Small, specialized countries can be severely affected (example: a small country specialized in a robot that becomes obsolete).
  - For large, diversified economies (examples given: the US, China, and the European Union), terms-of-trade effects from foreign productivity changes are typically small because:
    - Large economies rely less on foreign trade.
    - Trade is spread across a range of products, so productivity improvements in other countries tend to affect both import and export prices, producing modest net effects relative to domestic productivity gains.

### Domestic productivity vs. trying to affect foreign productivity
- It is typically easier for a country to affect its own productivity than to affect another country’s productivity.
- Therefore, "the focus of economic reforms in most countries should be increased productivity rather than increased competitiveness."

### Export prices, wage moderation, and exchange rates
- Strategies to raise competitiveness by reducing export prices:
  - Keep wage growth in check (in countries with widespread collective bargaining), provided businesses use savings to hold output prices down.
  - Weaken the currency (exchange rate depreciation) so foreign currency buys more domestic currency, lowering export prices in foreign-currency terms.
- Constraint at or near full employment:
  - Increased demand for exports can exceed production capacity, pushing up prices and wages and erasing competitiveness gains.
  - Policy combination suggested:
    - Currency depreciation to increase demand for exports.
    - Fiscal tightening (raising taxes or cutting spending) to reduce domestic demand for consumption and investment.
    - Result: shift employment and production toward export sectors and away from domestic consumption and investment sectors.
    - National income unchanged; national savings higher because the government would run larger fiscal surpluses (or smaller deficits); domestic consumption lower.

### Savings, investment, and the trade balance (accounting identity)
- Accounting fact: a country’s trade balance (exports minus imports) must equal the difference between its savings and investment.
  - If savings exceed domestic investment, the excess is invested abroad → trade surplus.
  - Countries can run trade deficits only if other countries are net investors in them.
  - (Discussion excludes capital income flows for simplicity, which "does not affect the key conclusions".)
- Implication for competitiveness policy:
  - If policymakers aim to increase the trade balance via "competitiveness," this requires policies that raise national savings or reduce national investment.
  - Whether that is desirable depends on whether savings and investment currently deviate from socially optimal levels due to distortions or market failures.

### Legitimate concerns and when competitiveness signals problems
- Legitimate concern example:
  - Lax financial oversight allows an influx of foreign capital driving an unsustainable credit-fueled boom in consumption and speculative investment.
  - Excess demand for domestic consumption and investment raises domestic wages and prices, undermining export competitiveness and boosting import demand → hefty trade deficit.
  - In this case, weak competitiveness (large trade deficit) reflects a serious macrofinancial imbalance that could burst and cause considerable damage.
- Opposite problem (too much competitiveness):
  - National savings too high or investment too low (or both) implies a country may be "too competitive."
  - Example: underinvestment in public infrastructure—raising public spending (higher fiscal deficit) could:
    - Boost productive capacity.
    - Increase domestic demand for investment, raising domestic wages and prices relative to other countries and reducing export competitiveness.
    - This reallocation may be necessary if returns to domestic investment exceed returns in the export sector, increasing overall productive capacity.

### Policy implication and conclusion
- Boosting competitiveness is politically attractive but:
  - Focusing on economy-wide productivity is often a more appropriate policy goal than narrowly targeting competitiveness.
  - Situations where relative price levels cause problematic trade imbalances do arise, but they are "less common than most policymakers realize" and can be difficult to identify even with standard indicators.
- Summary judgement: prioritize raising domestic productivity; address trade imbalances when they reflect underlying macroeconomic distortions (for example, unsustainable credit booms) or persistent, suboptimal savings-investment allocations.

*kevin fletcher is an assistant director in the IMF’s European Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/06/b2b.pdf_