National Competitiveness in Comparative Perspective: Evidence from Latin America

The term competitiveness is widely applied as a catch-all for investor-friendly policies and institutions. This article argues that sloppy applications of the term ignore the possibilities of policy tradeoffs and varieties of institutional choices. Popular conceptualizations of the term describe three discernible clusters of economic policies and institutions. One cluster captures openness to international trade; a second gauges regulatory impediments to private sector competition; a third refers to public sector investments in human capital, security, and infrastructure. This essay develops three empirical indexes to operationalize these clusters and shows that these concepts are not only theoretically but also empirically distinct. In particular, the correlation between these measures is not especially high in a sample of Latin American countries. The larger economies in the region tend to be more competitive on the regulatory and public goods dimensions but fall well behind smaller economies in terms of external competitiveness, broadly conceived. The purpose of this article is to clarify the numerous sources of national competitiveness identified in the literature and referred to in public discourse with increasing frequency.1 We argue that applications of competitiveness have developed around at least three discernible conceptual clusters. We develop three unique indices to operationalize these three clusters and show that these concepts are not only theoretically but also empirically distinct. Our analysis of Latin American countries along three dimensions of competitiveness illustrates how economic conditions lead to policy tradeoffs and varieties of institutional configurations. In particular, we show that the larger economies in the region are the most competitive on the regulatory dimension but fall well behind smaller economies in terms of external competitiveness, broadly conceived. Furthermore, resource constraints in poorer countries appear to weaken commitments to public investment. © 2011 University of Miami The most widely referenced research on the competitiveness of nations is the annual Global Competitiveness Report, produced by the World Economic Forum (WEF). The WEF report examines “the many factors enabling national economies to achieve sustained growth and long-term prosperity” (Schwab 2009, 3). The basis of comparison in the report is the country rankings along the global competitiveness index (GCI), which measures microeconomic and macroeconomic foundations of national competitiveness, defined as “the set of institutions, policies, and factors that determine the level of prosperity of a country” (Schwab 2009, 4). The GCI incorporates a host of factors that influence static levels of income, as well as dynamic growth potential. Although the rankings of national competitiveness produced by the WEF are generally well regarded (particularly in policy-oriented circles and the business media) and are credited with recognizing that microeconomic factors are important for economic development, the WEF measures have encountered criticism on theoretical and empirical grounds. In particular, Lall (2001) argues that the definitions of competitiveness are too broad and that the empirical proxies incorporate too many variables. In an influential critique, Krugman (1994) questions the usefulness of the concept of national competitiveness as a comparative inquiry, noting that the economic welfare of a nation is determined by its productivity, rather than as the outcome of some zero-sum competition among countries battling to attract private investors. With these critiques in mind, we argue that broad conceptualizations of national competitiveness and the rankings that accompany them hide more than they reveal. Indeed, this analysis points to the danger of viewing competitiveness as a one-dimensional concept, since doing so obscures the tradeoffs that confront policymakers. These tradeoffs are particularly apparent in poorer countries, where leaders are constrained by weak institutions, inefficient methods of revenue collection, and the influence of powerful international actors. A finer-grained analysis is required to capture these public policy tradeoffs. Building on the insights of Porter (1990), who argues that competitive nations provide an institutional environment conducive to growth, our study focuses its inquiry on the three discrete channels through which governments influence private sector productivity. External competitiveness captures openness to the flow of goods and services across borders. We use data on tariffs and nontariff barriers to measure this concept. Regulatory competitiveness refers to the attractiveness of the domestic business environment and the degree to which regulatory policy inhibits the efficiency of the market. We rely on several independent measures of the strength of regulatory institutions to derive our index of regulatory competitiveness. Public investment competitiveness refers to the positive investments that governments can make to 142 LATIN AMERICAN POLITICS AND SOCIETY 53: 3