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Tuesday, January 25, 2011

Krugman on why Trade Competitiveness is a flawed concept

From his pre-Nobel days:

COMPETITIVENESS- A DANGEROUS OBSESSION

"This article makes three points. First, it argues that concerns about competitiveness are, as an empirical matter, almost completely unfounded. Second, it tries to explain why defining the economic problem as one of international competition is nonetheless so attractive to so many people. Finally, it argues that the obsession with competitiveness is not only wrong but dangerous, skewing domestic policies and threatening the international economic system. This last issue is, of course, the most consequential from the standpoint of public policy. Thinking in terms of competitiveness leads, directly and indirectly, to bad economic policies on a wide range of issues, domestic and foreign, whether it be in health care or trade."


My many concerns with this article:

0) He has a lot of straw men - for example no one claims that devaluing your exchange rate repeatedly just to get a trade surplus will improve living standards

1) This was written in 1994, before the second wave of globalization really hit

2) The US is a very large and relatively less open economy. If you repeat the calculations for smaller economies the results will be different.

I suspect for the European Community he did the calculations for it as a whole - instead of using individual countries

3) International trade is not a zero-sum game, but it's about cutting up a bigger slice of the pie if you are a significant trader.

According to comparative advantage everyone benefits, but in a world with more than two traders, some will benefit more than others

4) Krugman gets one concept wrong - "competitiveness" should not be equivalent to "productivity".

Productivity depends on how much you work, but in the marketplace customers don't care how efficient you are (output per worker-hour) but how much you can offer (output). That's why French productivity is so high, and Singaporean so low.

The same is true for living standards

5) One reason for the European debt problems is the peripheral countries have seen unit labour costs rise higher than in Germany, so they have to finance a high trade deficit
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