<<<	articles
A dubious ideal Samuel Brittan: Financial Times: 02/07/04 What have the following news items in common? The first is the complaint by the British Engineering Employers' Federation that an abolition of fixed retirement ages would impair its member companies' competitiveness. The second comes from the frontier between Austria and the neighbouring German Land of Bavaria. Industry in the latter is complaining that Karl-Heinz Grasser, the free-market Austrian finance minister, is damaging German competitiveness by his low corporation tax rates and other business-friendly measures. The obvious answer is that they both refer to "competitiveness". But closer examination reveals an important difference. Competitiveness has one meaning between countries that have a fixed exchange rate against each other - or still more a common currency. It has a very different meaning - or rather no meaning - for a country that enjoys a floating rate of exchange. It so happens that I have doubts about whether statutory intervention in mutually agreed contracts is the best way to achieve more flexible retirement ages. But unfortunately British employers are using precisely the wrong argument in alleging that their competitiveness would suffer. Suppose, for instance, that some change in retirement laws did increase British costs. The effect would be to lower the exchange rate at which overseas payments balance. I know that exchange rates do not always move to balance the current account and that trade flows can be overwhelmed by capital movements. The point is that at the margin a reduction of British exports acts to lower the exchange rate compared with what it would otherwise be. Inside a fixed exchange rate or single currency area, competitiveness has slightly more meaning. As a member of the eurozone, Austria could not revalue against Germany to restore Bavarian competitiveness even if it wished to do so. Nor could Germany devalue against Austria. If Austrian costs fell relative to German ones there would, other things being equal, be a shift of output and employment towards it. That, however, is not the end of the matter. The French and German representatives of Old Europe might like to see a single corporation tax and other kinds of fiscal unification. But so far at least the European Union does not work that way. Competition in the single market now applies to tax regimes as well. The German authorities have to balance the supposed "social" advantage of a higher corporation tax against the competitive disadvantages. Nor is this a unique situation. In the US the tax regime varies from state to state, and state authorities have to balance the revenue obtained from higher local taxes against the disadvantages of deterring business investment. Of course, German businesses do not have to accept their burdens passively. They might be able to increase productivity enough to offset the Austrian fiscal advantage. Or they might persuade their workers to accept lower wage increases to save jobs. The point of local autonomy is to give the regional authorities the chance to balance the costs and benefits of different fiscal regimes. What both the British and the Austro-Bavarian examples show is the dubious nature of the competitiveness slogans that so many politicians and business leaders unthinkingly utter. Under the so-called Lisbon and Barcelona agendas, the EU has pledged to make itself the most competitive region in the world by 2010. Tony Blair never ceases to assert how competitive he wants Britain to be. The weakness of the concept is that competitiveness as a goal is a zero-sum game. The UK and Portugal can both improve their economic performance. But they cannot become more competitive against each other. Emil van Lennep, a former secretary-general of the Organisation for Economic Co-operation and Development, once asked: "Against whom could all countries become more competitive? Against the moon?" One does not have to be an international idealist to focus on the narrow nature of the competitiveness ideal. Even under a fixed exchange rate regime the pursuit of too much competitiveness becomes self-defeating. If one country becomes excessively competitive, it accumulates unnecessary foreign exchange reserves and trades on unnecessarily unfavourable terms. Most economic advisers have long since given up the fight against the competitiveness slogan. Instead they try to translate it to mean performance, hoping that their political masters will not notice. But there comes a time when such compromises cease to be effective and economists need to stand up to be counted. Competitiveness is an illegitimate transposition of a valid notion from private business competition to the sphere of economic policy. It needs to come under severe scrutiny rather than be lazily waved through.
<<<	articles
Site designed and managed by Andrew Heavens - andrewheavens@ftnetwork.com