Competitiveness Matters: Industry and Economic Performance in the U.S.

9. U.S. Competitiveness and Economic Growth

, CHAPTER 9 u.s. Competitiveness and Economic Growth Candace Howes In the introduction to this book, Howes and Singh (1999) argued that there are good analytical and empirical reasons for the view that relative productivity growth and the relative competitiveness ofa country's export sector matter profoundly to its overall economic performance . With so much trade based on nonprice competitiveness, the trade balance can rarely be achieved solely through exchange rate manipulation or only at great cost in terms ofemployment and real income growth. Moreover, greater productivity growth abroad, as a result of faster technical progress there, is likely to have negative consequences for productivity growth in the home economy unless corrective measures are taken to enhance the country's technological capabilities. Thus even an advanced country cannot afford to ignore its international competitive position if it wishes to improve its standard of living in the long run. Contrary to Krugman's (1994) argument, competitiveness matters. Otherwise , in a world ofwage-price inflexibility, external balance is achieved only through adjustments in a country's rate of growth relative to that of its trading partners. Furthermore, due to cumulative causation, a country that is investing and innovating at a slower rate than its competitors will fall even further behind, requiring slower and slower relative growth. Real incomes will fall, inequality will increase, and employment will stagnate. In this chapter, I argue that the United States has such a relative competitiveness problem, which, because of wage-price inflexibility and the inadequacy ofexchange rate adjustment, is manifest in a structural decline in its current account balance. Ultimately, it cannot sustain its current account balance without slowing growth. Second, I provide evidence that the maximum sustainable rate ofgrowth has declined over time, due both to a structural decline in the current account and to the relative slowing of the growth of rest-of-world demand. Trends in the income elasticities of demand provide evidence ofdeclining relative competitiveness of U.S. goods, especially nonprice competitiveness. 180 U.S. Competitiveness and Economic Growth 181 The structural decline in the balance of payments-manifest in increasingly unfavorable income elasticities of demand for imports and exports-is due specifically to: An uncompetitive manufacturing sector; A service sector that, despite its dynamism, cannot make up for the decline in manufacturing; A structural decline in net capital income flows, due largely to the financialliberalization ofworld capital markets and the uncompetitiveness of the manufacturing sector. Finally I argue that the balance of payments problem cannot be remedied by a currency depreciation because while the United States does not face wage-price rigidity quite to the degree that Europe does, it is nonetheless incapable, due to the deregulation of international capital markets, of depreciating its currency. If anything, pressures will become stronger for appreciation. While other elements of relative unit costs such as wages might improve the relative price position of US. exports, the United States is unable to increase productivity growth, in part due to its slow rate of growth. But even with regard to US. wages there is evidence that they are already stagnating at what is possibly the politically acceptable limit. In the following section I briefly discuss why declining relative competitiveness -manifested by unfavorable trends in income elasticities-acts as a constraint on growth. I then discuss how relative price adjustments could in theory remedy the problem, but in practice probably will not. Next I analyze trends in the US. current account since 1960 to illustrate the central argument that US. growth is constrained by structural deterioration in the current account that is due to an uncompetitive manufacturing sector. I then decompose trends in components ofthe current account to show that there is no magic bullet, such as service exports, that will offset negative trends in manufacturing trade. In the last section I provide a simple simulation of probable trends in the current account balance and the effect they will have on growth. Why uncompetitive exports cause a current account deficit The United States cannot for long maintain a sustainable current account balance without either slowing growth or depreciating its currency or both.1 Unfortunately, whereas in the past relative price adjustments have partially 182 Competitiveness Matters accommodated the competitiveness problem, they may no longer be able to play that role. The structural deterioration in the sustainable current account has arisen due to a number of factors. First, the United States has become less competitive relative...