The competitiveness of the U.S. economy and the need for a long-term economic strategy


Seminar Paper, 2009

25 Pages, Grade: 1,3


Excerpt

Contents

1. Executive summary

2. Introduction

3. The concept of national competitiveness

4. The current state of U.S. competitiveness
4.1 Competitive strengths of the U.S. economy
4.2 Competitive weaknesses of the U.S. economy

5. An outlook on the future state of U.S. competitiveness

6. Policy recommendations: A long-term economic strategy

7. Conclusion

8. Bibliography

9. Appendix

List of abbreviations

illustration not visible in this excerpt

List of figures

Fig. 3-1 The 12 pillars of competitiveness

Fig. 4-1 Excerpt of the ranking table of the GCI 2008-2009

Fig. 5-1 Annual percent change of real GDP growth of advanced, emerging and developing economies

1. Executive summary

Current competitive position of the USA:

Despite the actual recession and financial crisis, the USA is currently the most competitive economy in the world. Competitive strengths like innovation and business sophistication next to well-functioning markets keep the US highly productive. They outweigh the competitive weaknesses of great macroeconomic imbalances and improvable institutions. The financial market is just a part of the whole picture.

Outlook on the future competitive position of the USA:

Although the global economic landscape changed dramatically, the rise of emerging markets like China pose no general threat to U.S. competitiveness, because it is not a zero-sum game. But the superior competitive position is eroding. Forces from within the U.S. economy put the future U.S. competitiveness at great risk. Inconsistencies like a decreasing percentage of R&D-spending, the ignorance of regional industry clusters by the federal government, the low-quality education system, and ineffective regulation of markets, display piecemeal, uncoordinated policy decisions and the lack of a coherent economic strategy.

Recommendations:

The formulation and implementation of a long-term economic strategy is recommended, which addresses these inconsistencies in the short- to mid-term, the enforcement of strengths and reduction of weaknesses in the long-term. Only if the USA is governed strategically, it could sustain its current superior competitive position.

2. Introduction

In times of the current recession caused by a financial crisis, a housing bust, and energy shocks one can doubt that the United States of America will defend its position as an economic superpower in the long-term. Some voices already declare that the USA lost its competitive edge. Other factors as income inequality, a weak social security net, and an inefficient healthcare system, contribute to this vague sentiment. Despite all these national factors, the global economic environment is changing. Some of these economies – for example China – have already become leading exporters of high technology products and are no longer just sources of natural resources or low-cost, low-manufactured goods.

Additionally, in this time of crisis, Washington has focused on the immediate and the short term. It seems that more basic questions concerning the fundamental competitive position of the U.S. in the global economy are considered as not important.

This report assesses the current competitive position of the United States of America and addresses the question whether it can sustain this position in the future. Therefore it analyzes the current state of U.S. competitiveness along determinants defined by the Global Economic Forum after introducing the concept of national competitiveness. This analysis of the U.S. economy’s strengths and weaknesses allows the projection of its competitiveness in the future. Finally, policy recommendations are made, which are based on an overall long-term economic strategy.

3. The concept of national competitiveness

Generally speaking, a nation’s level of competitiveness is the extent to which it is able to provide rising prosperity to its citizens. The fundamental source of long-term prosperity is a nation’s productivity. Therefore, the concept “national competitiveness” could be defined as “the set of institutions, policies, and factors that determine the level of productivity of a country”.[1] From a dynamic perspective the level of productivity determines the rates of return obtained by investments in an economy, and because the rates of return are the fundamental drivers of the economy’s growth rates, an economy which grows faster than other economies over the medium to long run, is a more competitive economy.

With the Global Competitiveness Index (GCI) the Global Economic Forum offers a vivid operationalisation of this theoretical construct, which differentiate its many determinants into three clusters. The first cluster contains basic requirements of an economy like institutions, infrastructure, macroeconomic stability, health and primary education. The second cluster contains a set of “efficiency enhancers” like higher education and training, goods and labor market efficiency, financial markets sophistication, technological readiness and market size. The third cluster of national competitiveness includes innovation and sophistication factors. These determinants and the clusters are depicted in figure 3-1.

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Fig. 3-1: The 12 pillars of competitiveness (Porter/Schwab 2008, p. 7)

All these factors are interrelated and tend to reinforce each other. According to the World Economic Forum’s GCI, economies move through different stages of development as they grow. In each stage the competitiveness of an economy depends primarily on a different cluster of determinants: Factor driven economies maintain its competitiveness mainly by concentrating on basic requirements, efficiency-driven economies by concentrating on “efficiency enhancers”, and innovation-driven economies by focusing on business sophistication and innovation.

In order to estimate the current competitive position of the USA, the next chapter assesses the strengths and weaknesses of the U.S. economy along these determinants.

4. The current state of U.S. competitiveness

Since 1979, the World Economic Forum examines the determinants of competitiveness and publishes the rankings of individual countries within the Global Competitiveness Report (GCR) which is basically the publication of the GCI.

According to the GCI 2008-2009 the United States of America is the most competitive nation in the world and definitely an innovation-driven economy.

Regarding the key indicator of national productivity, the USA is with 45,845.5 US$ Gross Domestic Product (GDP) per capita in 2007 clearly ahead of all other countries in the world. China for example has a GDP per capita of 2,460.8 US$ and Germany of 40,415.4 US$.

Regarding the GCI 2008-2009 the USA ranks as nation first out of 134 countries with a score of 5.7, compared to China which ranks 30th with a score of 4.7, and Germany which ranks 7th with a score of 5.5. Seen from a more detailed perspective, the USA has distinctive competitive strengths but concerning some of the previous mentioned pillars the USA also has some weaknesses, which could erode the U.S. competitiveness in the long-run.

These broad figures concerning the competitive position of the USA are shown in figure 4-1. More detailed information on the U.S. GCI score can be found in the appendix (app.1).

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Fig. 4-1: Excerpt of the ranking table of the GCI 2008-2009 (Porter/Schwab 2008, p. 12)

4.1 Competitive strengths of the U.S. economy

Clear competitive strengths or advantages of the U.S. economy can primarily be found in the second and third cluster of competitiveness determinants. In these clusters the U.S. ranks first.

The third cluster contains the determinants of innovation and business sophistication – as previously mentioned in chapter 3. Since the USA is an innovation-driven economy, this is by far the most important factor to assess the U.S. competitiveness. The most important determinants are described in the following section.

In general the USA has the most innovative companies, covering top ranks as shown in the appendix (app. 2). They design and develop cutting edge products and processes to maintain a competitive edge. Apple’s revolutionary “iPod” and the internet search engine “Google” are good examples.

Furthermore, the U.S. economy provides a suitable environment for innovative activity and opportunities. It possesses the world’s highest rate of R&D-spending as shown in the appendix (app. 3). With the world`s top rated scientific research and learning institutions – shown in the appendix (app. 4) – which also strongly collaborate with industry research, the U.S. economy is in the leading position. The U.S. Economy is a collection of specialized regional economies, with each region having its own highly developed industry clusters (interconnected geographically proximate groups) like Hollywood, Boston, or Silicon Valley. These clusters are extremely successful and contribute heavily to the superior competitive position of the USA.

Another strength which belongs in the second cluster is America’s unparalleled environment for entrepreneurship and starting new companies and its vital entrepreneurial spirit. This is a key source for economic growth, employment, productivity and innovation. Along with Iceland and Hong Kong the USA leads the way in early-stage entrepreneurial activity in the high-income countries as one can see in the appendix (app. 5). The USA ranks fourth in the World Bank’s ranking of ease starting a business, which takes into account the procedures, time, cost and paid-in minimum capital for starting a business as shown in the appendix (app. 6). This is accompanied by a strong commitment to competition and free markets, a strength which is expressed by a high intensity of local competition and high effectiveness of anti-monopoly policy, which can be looked up in the GCI 2008-2009.

Beside these factors the U.S. economy supports business sophistication, innovation and entrepreneurship through efficient allocation of human and financial resources. The U.S. labor markets are known for their flexibility which is reflected in high job churn: The net number of U.S. jobs gained or lost is relatively small compared to the total number of jobs gained or lost. Workers are allocated to their most efficient use in the economy: They quickly shift from less productive sectors to more productive sectors. This is illustrated by the business employment dynamics in the appendix (app. 7). These markets are also characterized by the ease and affordability of hiring and firing workers and high wage flexibility – determinants of labor market efficiency in which the USA are ranked relatively high by the GCI 2008-2009 compared to other nations. The U.S. goods markets are characterized by a low level of distortion, a high intensity of local competition, and a large selection of goods and services at reasonable prices. Together with a high degree of customer orientation and buyer sophistication these factors contribute to a competitive advantage as documented by the GCI 2008-2009. The U.S. financial markets are very sophisticated, although the confidence in the financial sector declined significantly since the beginning of the financial crisis in 2008. Financial markets are necessary for the functioning of national economies by allocating savings and investments from within and abroad to their most productive uses, for example for investment and entrepreneurial projects. New York’s Wall Street is the world’s financial epicenter where a lot of international operating banks and financial service firms are located. Together with a high level of financing through the local equity market, strong investor protection, and high venture capital availability – as reported by the GCI 2008-2009 – these factors contribute to a high level of market sophistication. Additionally, the U.S. domestic economy is the largest in the world. Its large market size allows firms to exploit economies of scale. The GCI ranks the domestic market size first and the foreign market size second as shown in the GCI 2008-2009.

[...]


[1] Porter/Schwab (2008), p. 3

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Details

Title
The competitiveness of the U.S. economy and the need for a long-term economic strategy
College
Free University of Berlin  (John F. Kennedy Institute for North American Studies)
Course
US Economic Policy
Grade
1,3
Author
Year
2009
Pages
25
Catalog Number
V123982
ISBN (eBook)
9783640296132
File size
1275 KB
Language
English
Tags
US, USA, Strategy, Competitiveness, Cluster, Institutions, Imbalances, Macroeconomy, Financial Crisis, Recession
Quote paper
Sebastian Gerlach (Author), 2009, The competitiveness of the U.S. economy and the need for a long-term economic strategy, Munich, GRIN Verlag, https://www.grin.com/document/123982

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