Journal of International Business Studies (2006) 37, 176178

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COMMENTARY

Competitiveness in a globalised world: a commentary

Patrick Minford
Cardiff Business School, Cardiff, UK Correspondence: Professor P Minford, Office E26, Cardiff Business School, Colum Drive, Cardiff CF10 3EU, UK. Tel: 44 29 2087 5728; Fax: 44 29 2087 4419; E-mail: MinfordP@cardiff.ac.uk

Abstract Porters advocacy of competitiveness veers between liberalism and interventionism. He should come down clearly for liberalism. Journal of International Business Studies (2006) 37, 176178. doi:10.1057/palgrave.jibs.8400191
Keywords: competitiveness; economic freedom; manpower planning; microeconomic intervention

Online publication date: 9 March 2006

I enjoyed this interview, as I would have expected from these experienced authors. Michael Porters microeconomic ideas are of great interest, because they reflect a deep experience of industrial practice; I read about them with both benefit and admiration. However, this said, Porter has views that are infuriatingly hard to grapple with at the policy level. How does one make sense, for example, of Sweden as a country of high competitiveness when it enjoys the highest marginal tax rates in the developed world, and much of its domestic sector is subject to rather limited competition, with parts (e.g., liquor stores) actually government-owned and operated? Porter talks generally about free markets and competition as the key elements in competitiveness, and yet he is apparently quite comfortable with Sweden and other Scandinavian countries as exemplars of it. Porters views in these respects bottom up; good microgood macro come close to tautology. If companies are good, the economy is good: yes, but why are companies good? What is the implication for government policy? The difficulty that Porter does not face is that government policy is by definition top down. A government cannot make companies competitive by direct action individually; it must necessarily create a framework of tax, competition, regulation and so on. What should that framework be? Porter is silent, or perhaps worse self-contradictory. He seems on the face of it to suggest that government must be highly interventionist, creating clusters, encouraging best practice and so forth; and yet in the next paragraph, he says that government should not back winners, should maintain competition and should keep out of corporate affairs. I fear the answer may be that Porters work is inherently case study based, and therefore his views at the level of the economy as a system are incoherent. He knows a competitive economy when he sees it dont we all? but he actually has no theory of what makes it so.

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Let me give some specific examples from this interview of what I see as this central contradiction in Porters policy views. In answer to the question (p. 168) on the role of government in Asia, he says Governments have a crucial role to play in establishing macroeconomic stability and providing stable political, legal and social institutions. Fine; then he goes on to say that more is needed: government must be a catalyst at the microeconomic level. What does he mean, we wonder? Industrial strategy of some sort perhaps? However, he then argues against microeconomic intervention when reviewing his work on Japan with Mariko Sakakibara: the key thing in successful Japanese industries was competition, not the industrial policy perspective. So here the Porter story is, in the end, after some tantalising chat to the contrary, that government needs to ensure competition removing trade barriers, avoiding discrimination, providing antitrust enforcement, etc. Again, so far so good: apparently this intervention is simply more provision of a stable competitive environment. This is Michael Porter the economic liberal still speaking. But then we come to the discussion of the US (p. 171). Here we are told that the problem is the human resource situation. There is a lack of engineers and new people going into science and technology. Here he is effectively advocating manpower planning; he is not plain on how it would be enforced perhaps by some set of subsidies to worthy subjects, perhaps by quotas for publicly financed university places? But does he seriously believe the state or he knows better than individuals responding to market signals what they should be doing with their lives? After all, just like components, skills can be outsourced. One of the features of a modern service economy is that there is a shift in the rewards for different types of skill. To put it crudely, such an economy pays more for investment bankers than for engineers. Then further on (p. 172) we come to the UK, where Porter co-wrote a report for our Department of Trade and Industry. Areas he identified for government action included some obvious ones, such as better education and infrastructure, but he then went on to manpower planning again, and a redirection of company strategies towards an emphasis on innovation and the development and production of high value goods and services. He goes on to conclude that the UK

has recently had success because of the introduction of market based reforms during the past 25 years but now needs a new approach. If this means anything other than a sort of general government purveying of information about world trends and emerging comparative advantage, then such policies could be highly interventionist. Let me also pick up the discussion of competitiveness and the various indices of this now being offered by Porter and his sympathisers (global and business p. 174: the Global Competitiveness Report). It would seem that these are attempts to measure how well an economys industries are doing. This is not at all the same thing as whether an economy has good policies from the point of view of liberal economic principles: such an index is available worldwide as the Index of Economic Freedom, and the World Bank compiles an index of openness in the same vein. Now of course quite often the two measures will coincide, because a country with good policies will often also be successful. Indeed, if Porter the economic liberal is right, this will be the long-run tendency. But in the short run, there may well not be a coincidence; good policies may only recently have been introduced or only recently have been reversed, and their lagged effects may take many years to work through. Think, for example, of Japan, whose policies failed spectacularly in the 1980s to adjust it to a competitive environment in services: thus once its manufacturing began to be outsourced, it had no natural progression into a service-based economy, because excessive regulation and lack of competition prevented it. However, on competitiveness measures Japan would have been well ranked in its years of rapid growth; indeed, on the strength of such success we were told by many enthusiasts how good industrial policy and the main bank system were. Not so, as we now know see above. But only the index of economic freedom would have picked up Japans crucial failure. My conclusion, for all that I admire Porters microeconomic sense, is that his views about policy are at best confusing and at worst dangerous: dangerous because government involvement can easily move from apparently innocuous blather about the need for competitiveness to heavyhanded intervention in the pursuit of agendas. ve academic These agendas can range from na proposals, such as the Selective Employment Tax of the late Professor Nicholas Kaldor (designed to encourage UK manufacturing as the main source of

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productivity growth), all the way to those of strong vested interests such as unions or business lobbies in particular sectors. These create distortions, and promote rent seeking. I would very much hope that
Accepted by Nicolai Juul Foss, Departmental Editor.

Michael Porter the economic liberal would make it clear that he disavows such things and, in the process, drop his looser talk about policy in favour of liberalism pure and simple.

Journal of International Business Studies