JPRI Critique Vol. III No. 8: October 1996
Competitiveness and Industrial Policy: East and West
by Alice Amsden and JPRI Staff

Every year since 1979 the Global Competitiveness Report of the World Economic Forum makes a big splash in the media. The Word Economic Forum is a Swiss-based foundation underwritten by big business mainly from the leading Anglo-Saxon countries, the U.S. and the U.K. Its Report allegedly tells the world which countries are the most competitive. This gives governments in countries that are ranked low a freer license to change their policies and it gives governments in countries that are ranked high more ammunition to keep going.

Korea has consistently ranked low in the Report. Should anyone be worried about this?

The 1996 Report in particular made a huge splash because its content was revised. It was no longer prepared by an obscure Institute for Management and Development in Lausanne, Switzerland. Instead, a Harvard University professor, Jeffrey Sachs, updated the concept of competitiveness in light of criticisms articulated in Foreign Affairs two years ago by Paul Krugman, another leading Anglo-Saxon economist at Massachusetts Institute of Technology. Krugman declared that the idea of competition was "a dangerous obsession." Professor Sachs, it will be remembered, was a leading adviser to the Russian government. Russia, however, ranks last (49th) in the 1996 Report.

Sachs has tried to make the Report more "objective." He also paid heed to the opinions of international business executives on such subjects as "security of property rights" and "international experience of senior management."

Poor Korea! It still ranks pretty low--20th, to be exact. But so, too, do some of the fastest growing economies in the world. China ranks 36th, Indonesia ranks 30th. And at least Korea can feel good that it ranks higher than Germany (22nd), one of the world's most impressive economies in terms of rising living standards and sustained manufacturing excellence.

Why do fast-growing or high-paying economies get such low rankings (Japan ranked only 13th)? And what can explain the top rankings of the Anglo-Saxon countries, who do far better than expected? New Zealand ranks 3rd and the U.S. ranks 4th. The first and second billings go to those city-states that are mainly locations for Western multinationals--Singapore and Hong Kong. What exactly is going on here?

The 1996 Competitiveness Report is as much a hype as previous Reports. Its "competitiveness index" is supposed to predict future capacity for growth, not acknowledge past achievements. It does not necessarily give high rankings to countries whose actual "competitiveness," as that term is usually understood, gained them higher market shares in competitive industries, or created employment and higher wages by successfully introducing new products and processes, or insured price stability and economic expansion simultaneously by raising productivity, and so forth.

Instead, competitiveness is defined according to Anglo-Saxon theories about economic success. The more open a country's markets, the higher its ranking. And the more open its markets, the easier for the big businesses of the World Economic Forum to enter them.

That the Report is a fraud is suggested by the apparent lack of association over time between countries' rates of economic expansion, or job creation, or export growth, or rise in per capita income, and their estimated rank. The Report does not provide the results of a statistical test of rank and performance although it has been published annually for 28 years.

Korea and other countries would be wise to throw the Competitiveness Report in the garbage and ignore it. On the other hand, Korea does need to improve its competitiveness. As the composition of its industry changes, new government policies and company strategies are needed to compete effectively.

A performance-based competitiveness index is required, one that reflects the true policies that make for economic success and failure, rather than those that are advocated in college textbooks or preferred by entrenched multinational companies. If Korea took the lead in developing an empirically-grounded index, it would be doing other truly competitive--and uncompetitive--countries a big service.

ALICE H. AMSDEN is Ellen Swallow Richards Professor of Political Economy at the Massachusetts Institute of Technology. She is the author of Asia's New Giant: South Korea and Late Industrialization (Oxford, 1989), which was chosen by the New York Times for its list of the Best Books in Business and Economics. This article also appeared in the Korea Economic Daily.

For those who doubt Alice Amsden's assertion that the Global Competitiveness Report has a rather biased view of what constitutes a competitive economy, JPRI would like to call attention to two interesting news items emanating out of Asia.

In late August, Japan's Ministry of Trade and Industry announced that it would radically expand its financial support for growth industries during fiscal 1997. It will request 4.25 billion yen for fiscal 1997, as compared with 250 million yen for fiscal 1996, for programs to encourage technological development in new industries.

Among the fields it has identified for such nurturing are telecommunications and biotechnology, where it hopes to promote research partnerships among private, public, and academic sectors. Under MITI's guidance, companies can ask the ministry to finance two-thirds of the cost of commercializing promising technologies that have been developed by universities and government research institutes.

MITI will also provide small, competitive regional companies with up to two-thirds of their technology-development costs. And MITI will sponsor and help create a system whereby these small regional companies can be linked with and benefit from research being done in universities and government research institutes (see "MITI to Boost Support for Growth Industries," Japan Times, August 23, 1996).

Meanwhile, the Ministry of Trade, Industry, and Energy (MOTIE) in Korea has launched a program to foster application-specific-integrated-circuits (ASICs) and other non-memory semiconductor chip sectors. For example, it will provide educational equipment and funds when a college or university establishes a graduate school specializing in ASIC technology. Yonsei University is reportedly already planning to establish a graduate school specializing in non-memory semiconductor chips sometime in 1997.

Korea's MOTIE, in collaboration with the Korea Semiconductor Chips Association and representatives from the business and academic communities, is also working on a 10-year plan for the development of semiconductor chips. The ceilings on investment by large enterprises in small semiconductor chips equipment firms will be gradually raised from the current 10 percent to up to 20 percent.

By 1999, it is also expected that the government and private industry will have put a total of 50 billion won (approximately $61 million) into vocational training programs for semiconductor chip designers. These programs are currently underway, sponsored jointly by the Korea Advanced Institute of Science and Technology and some 43 colleges and universities (see "MOTIE Promotes Measures to Boost Non-Memory Chip Sector," Korea Economic Weekly, August 12, 1996.

Compare this to the U.S. government's reluctance to get involved in 'nurturing' new technologies, commercializing them, or training a workforce to develop or use them. A recently published study, The State of Americans: This Generation and Next, by Urie Bronfenbrenner, Peter McClelland, Elaine Wethington, Phyllis Moen and Stephen J. Ceci (Free Press, 1996), presents a large number of statistical tables that demonstrate "arguably the most important economic trend in the United States since the early 1970s has been the marked slowdown in the growth of productivity and the related slowdown in the growth of output" (p. 84).

Combine this with the fact that "evidence abounds that many American workers are seriously deficient not only in advanced skills but in basic skills, such as the ability to read and write and perform simple arithmetical calculations" and the fact that "large infusions of government funds are not likely to counteract these and other difficulties in an era of fiscal austerity" (pp. 85 and 87).

The authors are driven to a very gloomy conclusion: "American spending on nondefense research and development, as a percentage of GDP, has shown no significant change in the past two decades, while in West Germany and Japan such expenditure (as a percentage of GDP) has risen markedly. Indeed, Japan now appears to be the world's biggest spender on civilian research and development. Nor are America's lagging research expenditures likely to be dramatically reversed by large infusions of federal funds in the immediate future, given Washington's preoccupation with deficit reduction.

"The implications for this country's competitive position in a global economy are not encouraging. A number of other leading industrial nations are saving and investing at rates well above those in the United States, implying that their labor force will be working with more capital per worker than ours over time. Many of these same countries seem more successful at educating and training their workers. If they also outperform the United States in their rates of technological advance, the economic preeminence of this nation is sure to decline markedly in the not-so-distant future" (p. 88).

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