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'Competitiveness' rears its ugly head Samuel Brittan Financial Times 31/08/07 There are many specialist terms that have descended into common speech and are used pretty indiscriminately. "Competitiveness" originally had a clear meaning but has now been taken up by politicians and business leaders as an all-purpose slogan. It is a relative concept. We cannot all be competitive against each other. I still remember Emil van Lennep, a former secretary-general of the Organisation for Economic Co-operation and Development, asking: "Against whom should the world be competitive? Against the moon?" If one needed a quick critical reaction to John Redwood's economic report to the Conservative shadow cabinet, it could have been provided by its title, "Freeing Britain to Compete" and its frequently asserted stress on competitiveness. Unfortunately this debatable concept is now too generally accepted in the political world for such repudiation to be feasible. Originally some economists and officials mentally substituted the word "performance", but now themselves talk of competitiveness, presumably thinking: if you can't beat 'em, join 'em. This includes some on Mr Redwood's team who surely should have known better. What is misleading is the transfer to whole economies of concepts relevant to individual businesses or regions. Pepsi has to be competitive with Coca-Cola. Liverpool can try to be more competitive than Manchester in a bid to be the commercial centre of the English north-west. German business has become more competitive than Italian business in terms of reducing its costs so that it can secure more orders. Here we come to the rub of the matter. The competitiveness analysis applies where there is a single currency. If we still had the mark and the lira we could leave the foreign exchange market to sort it out. The exchange rate is a safety valve which allows a country employing it to make up its own mind on its inflation goals and level of business support without worrying about the balance of payments. The vogue for competitiveness arose in a fixed exchange world. Then if UK products were too expensive, or in other ways unattractive, jobs would be cut and foreign exchange reserves might be lost by the British government, which would then have to embark on one of its notorious stop-go episodes. Edward Heath's decision in 1972 to float sterling, however reluctantly he made it, should have changed all that. Yet even the British Treasury found it difficult to adapt. Plus ça change . . . John Redwood, in the foreword to his report, instinctively takes the point and, as one would expect, emphatically repudiates any attempt by the UK to adopt the euro or to follow any kind of exchange rate target. He can see how the balance of payments can take care of itself among the different western currency blocks. But he comes back to competitiveness when dealing with the supposed threat from China and other developing countries. There is a slightly more sophisticated consideration which is sometimes advanced. Nowadays, direct trade and payments across the exchanges are dwarfed by vastly greater capital flows. So we cannot rely on the exchange rate moving to offset the cost of extra imports. As a matter of fact the disproportion is frequently exaggerated. For a large part of the movements across the exchanges are extremely short-term ones reversed within days or even hours and therefore not on all fours with trade or long-term capital movements. But I do not need to rely on this aspect. Suppose that sterling does not dip in the way required to balance trade flows, possibly because of positive confidence effects or because China and members of the Organisation of the Petroleum Exporting Countries are accumulating reserves. So much the better. For then we come near to enjoying the proverbial free lunch: increased absorption of foreign goods and services without having to sacrifice more British products to pay for them. Of course this bonus may not last, but at least time will have been gained for British producers to adjust. The world is not yet one single economy, but it is moving in that direction. The integration of nations such as China and India into it is the equivalent of multiplying several-fold the amount of unskilled labour relative to the supply of skilled labour and capital. The conventional response is to say that US and European industry needs to move continually upmarket, developing new products and processes, to maintain its position. There are limits to how far this can go. Not everyone can be retrained to undertake high- technology jobs. Moreover, is it really desirable that everyone all the time should be engaged in non-stop reskilling (misleadingly called "lifelong education"). "What is this life if, full of care, we have no time to stand and stare"? The western response should surely be to keep its own frontiers open to gain the benefits of trade but redistribute income to those who would otherwise lose out. My longtime slogan, coined before the word "globalisation" was invented, has been: "Redistribution yes, equality no."
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