Monday, July 30, 2012

Competitiveness

"Competitiveness" seems to be the watchword of the day. Much of Hollande's economic strategy is concerned with restoring French competitiveness by reducing unit labor costs. So just how bad is the situation?

The very term "competitiveness" is a contested one. Some observers, like Paul Krugman, think that it doesn't make much sense to talk about national competitiveness. A new paper (gated access) by Delgado, Ketels, Porter, and Stern begs to differ. Entitled "The Determinants of National Competitiveness," the paper constructs an index based on both macroeconomic and microeconomic factors. The authors then go on to consider labor costs relative to this competitiveness index and produce the following graph:


According to the authors' reasoning, France, as you can see, has a high "competitiveness score," which is a measure of its potential output per worker, but also a somewhat high unit labor cost compared to its potential output ranking (the point marked "France" lies above the regression line). As you can see, France looks relatively good compared to its main European competitors. Germany's residual is higher than France's; Spain, Italy, and Greece are off the charts in terms of labor cost relative to potential output. And countries like Singapore, Malaysia, China, India, and Chile are relatively attractive for investment.

So this graph more or less sums up conventional wisdom. But does it make sense? That depends on what one thinks of the index constructed by the authors, which, if you look at the details of the paper, in many ways reflects (and quantifies) conventional wisdom--or conventional neoliberal ideology, if you will. So take these findings cum grano salis. But there is food for thought here.

Duy and Krugman: Draghi Makes No Sense

Tim Duy and Paul Krugman parse Mario Draghi's speech and decide it makes no sense. Both the Fed and the ECB will make important decisions this week, so we will see if last week's market euphoria survives in the cold light of day. Initial German approval of Draghi's remarks has been walked back, as the saying goes. The Bundesbank has not moved one iota, and Schaüble sounds considerably less positive than he did at first.