The Competitiveness Cycles

Competitiveness is a redundant idea, if we ignore cyclicality.
Competitiveness is a comparative concept of the ability and performance of a firm, sub-sector or country. It’s a ranking system based on a host of parameters. The Global competitiveness report 2009-2010 from the World Economic Forum measures competitiveness based on 12 pillars.
First is the Institution pillar, which aims at quantifying the direct role played by the state in the economy of many countries. The whole structure of competitiveness stands alternated now that the world faces sovereign risk. How can you rank a country in competitiveness if it is being bailed out? Or should we ask how competitive a country is to emerge out of a sovereign risk crisis? This is a question conventional knowledge can’t answer. Another pillar is the macroeconomic stability, which again the report says could be a double-edged sword if interest rate payments and inflation rises? How competitive you are as a nation compared to others if global interest rates rise?
Market efficiency is another pillar. If markets were efficient we would know how to value them. We constantly see examples of failure to value be it the technology bust in 2000 or the ongoing credit crisis, market’s either overvalue or undervalue rarely giving the right value. How does competitiveness play in the role of inefficient markets? Can we measure it assuming markets are always mispriced and irrational? And there will always be a stage when excessive valuations will increase systemic risk endangering the whole system.
Academicians have been writing about divergences for more than three decades, disproving this efficiency. If performances are so divergent, how valuable can be the measure of competitiveness which assumes efficiency? This is the reason we cannot foresee great competitive nations ranked at the top failing miserably? How can competitive countries of today become bad examples of tomorrow? Why is competitiveness a lagging indicator and not a leading indicator? Is it not because we as humans are adept at causal explanations and fail to comprehend cyclicality or growth and decay as natural systems, which balance excesses of positivity and negativity.
The pillar of labor efficiency as a measure of competitiveness also stands challenged in the context of behavioral finance, which suggests that humans have distorted risk and return. The prospect theory not only hinders labor movement as geographical biases rule but also sees immigrant labor mobility as the reason for the crisis at home.
This is followed by the idea of business sophistication. The report calls it advanced stage of development. Lack of business sophistication helped India and many emerging economies avoid structured finance. This saved their financial systems from a credit meltdown. So the lack of business sophistication made a few countries more competitive than otherwise.
The simple idea of performance cyclicality overturns how markets look at competitiveness. The most competitive nation could be a redundant idea if we ignore cyclicality in competitiveness. Most competitive rankings are more dynamic than assumed. Moreover, a society needs a large effort to be competitive and a larger effort to remain competitive. Top competitive businesses trade off continued growth with nimbleness to adapt. And since times are always changing adaptability will make you competitive before you grow. If competitiveness signifies just growth potential, the measure is flawed.
On the other side worst competitiveness is an undervalued region will make it more driven to innovate and overcome and hence offer a large opportunity. A look at the 2008-2009 top and last 50 rankers were Switzerland, Japan at the top and India, Lithuania at the bottom. Competitiveness of a region should reflect in the stock market performance. What happened was totally different. The top rankers delivered 20% and 11% respectively for the last 12 months. While India and Lithuania delivered 91% and 46% respectively. Why such a contrary divergence yet again? The best underperformed the worst. Many of the 133 countries that the survey studied do not have stock markets. Measuring competitiveness without markets isn’t easy, the reason we looked at top 50.
There is a need to redefine competitiveness as like other research ideas, time and cyclicality influences these rankings too. It’s not hard to understand cycles of time. Euro seemed a great idea as it prevented other EU countries from gaining a competitive advantage against Germany by devaluing. Now times have changed and the same experiment needs a trillion dollar war chest.
Statisticians have looked at divergence from a historical perspective as a strong forecasting tool. What stops us from adding cyclicality to the tool box? Time cycle after all is statistical exponential distribution. Michael Porter, the father of competitive advantage recently spoke about inequalities (divergences) breaking down capitalism. According to Porter, the only way to save capitalism is by enabling residents of disadvantaged communities to prosper in the market system. Saving the underdog or the uncompetitive as a solution to save capitalism is nothing both relying on the bottom 50 to save the top 50. Porter is indirectly referring to performance cycles. Mr. Porter the bottom 50 is not here to save the top 50. The top 50 have to underperform, devalue, go austere, before they can save themselves.