Competitiveness

• It is the increasing integration of the international economy

• The Economist has described it as the “The Death of Distance”

• Globalization has many dimensions:

• (1) Deregulation of world product, capital and labour markets increasing financial and factor mobility and trade in goods and services

• (2) Expansion of multinational activity – there are more than 60,000 trans-national companies with an estimated 800,000 affiliates

• The increased freedom and capacity of individuals and firms to undertake economic transactions with residents of other countries and operate on a global scale

What is Globalization?

UK Comparative Advantage?

• Long term (structural) trade deficit in goods – widening to over £46 billion in 2002

• UK remains a net oil exporter but this may finish by the middle of the current decade

• UK retains a comparative advantage in chemicals

• High trade deficits in semi finished and finished manufacturing (particularly low valued added products)

• Relatively stronger position in international trade in services – particularly financial services

• But weakness in travel & tourism and aviation

• Trade is well balanced with the European Union and the United States but heavy deficits with the Asian economy

UK Trade Balance in Goods

UK NET BALANCE OF TRADE IN GOODS

-21.6

-24.7

-18.7

-10.2-13.1 -13.1

-11.1 -12.0-13.7

-12.3

-21.8

-29.1

-33.1

-40.6

-46.3-50.0

-40.0

-30.0

-20.0

-10.0

0.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Office for National Statistics

£ bi

llion

Areas of comparative advantage / disadvantage

UK Balance of Trade in Goods (2002)

-14000 -12000 -10000 -8000 -6000 -4000 -2000 0 2000 4000 6000

Road Vehicles

Office Machines

Textiles

Iron & Steel

Mineral Manufacturers

Electrical Machinery

Telecomms Equipment

Power Generating Equipment

£ million

UK trade balance in services

UK NET BALANCE OF TRADE IN SERVICES

4.3 4.1

5.56.6 6.4

8.59.6

12.5 12.711.8 11.8

11.3

14.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

£ b

illi

on

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

PRODUCTIVITY

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

EXCHANGE RATE

PRODUCTIVITY

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

CAPITAL

INVESTMENT

EXCHANGE RATE

PRODUCTIVITY

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

CAPITAL

INVESTMENT

TECHNOLOGICAL

PROGRESS

EXCHANGE RATE

PRODUCTIVITY

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

INNOVATION CAPITAL

INVESTMENT

TECHNOLOGICAL

PROGRESS

EXCHANGE RATE

PRODUCTIVITY

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

INNOVATION CAPITAL

INVESTMENT

TECHNOLOGICAL

PROGRESS

EXCHANGE RATE

PRODUCTIVITY LABOUR MARKET PERFORMANCE

Sources of competitive advantage in a global economy

INTERNATIONAL COMPETITIVENESS

COMPARATIVE ADVANTAGE

UNIT LABOUR COSTS

INNOVATION CAPITAL

INVESTMENT

TECHNOLOGICAL

PROGRESS

EXCHANGE RATEENTRE-PRENEURSHIP

PRODUCTIVITY LABOUR MARKET PERFORMANCE

Sources of competitive advantage in a global economy

How Big is the Productivity Gap?

GDP per worker and per hour workedG5 comparison, 2000Index, UK=100

0

20

40

60

80

100

120

140

160

US France* Germany J apan*

GDP per w orker

GDP per hour w orked

(*GDP per hour for 1999) Source: National Statistics

UK Competitiveness Summary

• Since 1995, the standard measure of competitiveness (relative unit labour costs) has worsened by 40%

– 3/5 of this is due to the continued strength of the exchange rate

– 2/5 due to the slower productivity growth and faster growth of wages and earnings (leading to rising unit wage costs)

• Some aspects of our competitiveness have improved

– Low inflation

– Rising level of business investment

• But – it takes a tremendous amount of time for supply-side improvements to fully work their way through

• Globalisation will intensify the need for the British economy to become more competitive in price and non-price terms