Competitiveness In Context Competitiveness And Social Disparities

Competitiveness in contextCompetitiveness and socialdisparitiesA contribution toward the debateDr Jose CaballeroSenior EconomistMay 2016

Competitiveness in context - AbstractAbstractThe objective of this essay is to trace thedynamics between competitiveness andsocial disparities particularly within theIMD World Competitiveness Yearbook data.A review of the relevant academic literatureand findings in our data highlight the needfor the study of competitiveness to build amore comprehensive disparity-sensitiveconceptual framework.In this regard, we identify a need forconceptual convergence on both fronts: inthe definition of competitiveness and of thenature of social disparities. It also becomesapparent that it is fundamental to rethinkcurrent indicators or develop new ones thatimprove our assessment of disparities.2

Competitiveness in context - EssayCompetitiveness andsocial disparities:A contribution towardthe debateIt has been over 250 years since Swissborn Jean-Jacques Rousseau assessedthe foundations of social disparities in hisDiscourse on the Origin of Inequality (1992).Rousseau argues that inequalities are notnatural and that they are constructed byhuman acts (i.e., human agency). He refersto these disparities as “moral or political.”It is the evolution of society, according toRousseau, that allows for inequalities beyondnatural disparities (e.g., age and physicaldifferences). In this context, Rousseau pointsout that the advent of private property and thedivision of labor, for example, are among thebases on which social disparities emerged,leading to deep divisions in socio-economicclasses. Rousseau’s argument thus centerson progress (e.g., the institution of politicalsociety, the establishment of an economicsystem and industrialization) as the origin ofinequality.In modern society, the nature of whatconstitutes progress has evolved. We mayargue that progress is either economicdevelopment or greater competitiveness.This essay does not intend to focus on thelinkages between progress/developmentand competitiveness – we assume thatincreasing competitiveness is the pathtoward development. Rather, our focus ison the interplay between competitivenessand disparities. In what follows, it becomesobvious that there is an increasingconceptual need to strengthen the studyof competitiveness by developing a moredisparity-sensitive analytical framework.This should be a prerequisite for any searchof causality in the competitiveness/inequalitydynamics.It is important to clarify our understandingof disparities before proceeding. For thepurpose of this essay, we employ the termsinequalities and disparities interchangeably.This use, however, does not mean that weassume that inequalities and disparities areequivalent. Rather, it reflects the conceptualambiguity in the relevant literature. Socialdisparities go beyond inequalities – they referto lack of inclusion for some individuals/groups rather than to a lack of outcome (e.g.,differences in income). With this in mind, wedefine disparities as the exclusion of certainindividuals or groups of individuals frombenefiting from private and/or public goods.Rousseau’s main contribution is thatsocial inequalities are not natural; they areconstructed by human activities. In the longterm disparities become embedded in thesocio-economic and political structures.Branisa et al. (2013), for example, arguethat gender disparities have become3

Competitiveness in context - Essayinstitutionalized through social practices andlegal norms that establish specific genderroles. Disparities are then perceived of aslegitimate and thus to an extent inevitable. Itfollows, nevertheless, that if socio-economicand political disparities are human-made,then they can be ameliorated, if not reducedto insignificant levels.The UNDP’s Sustainable DevelopmentGoals (UNDP, 2015) aim at just that. Thegoals establish a framework to tackleglobal inequalities through the renewaland transformation of institutions (e.g.,“sustainable cities and communities” and“peace, justice and strong institutions”)and through increasing inclusiveness (e.g.,“good health and well-being” and “genderequality”). In the context of the IMD WorldCompetitiveness Yearbook, the linkagesbetween competitiveness and institutionaltransformation are covered by sub-factorssuch as those assessing the institutionalframework and business legislation. Thedynamics between competitiveness andsocial disparities are covered by the societalframework sub-factor and several otherindicators located under other sub-factors.For us, achieving the Goals is akin tofocusing on competitiveness as an objectiveof economic and social policy. We discussthese dynamics later in this essay.For increased conceptual clarity, we approachthe effect of social disparities from two levelsof analysis: the micro-level contemplateshow inequalities affect the members of aparticular society (i.e., individual or groups);the macro-level considers the accumulativeimpact of disparities on the economy ingeneral.4

Competitiveness in context - EssaySocial disparities:Micro-levelDisparities are multidimensional. They canbe spatial (see e.g., Kim, 2008; and Angotti,1996); for example, when investment in publicschools is largely concentrated on specificneighborhoods within a city, or when policeforces combating crime are deployed mostlyto some areas of a city. Inequalities canalso be economic; for example, preferentialaccess to credit favoring some individuals/sectors of society (see e.g., Field and Torero,2006, and Hudon, 2009). Disparities canbe political; some segments of society canexperience a limited ability to participate inthe electoral process (see e.g., Østby, 2008)due to an over-burdensome registrationprocess, for example.Disparities directly affect the well-being ofindividuals or groups, for example, throughlimited access to the health system (seee.g., Cornia and Menchini, 2007). They canalso limit the ability of individuals to engagein certain community activities—to interactmeaningfully with other members of society(see e.g., Sen, 2000). In addition, disparitiescan restrain the ability of an individual orgroup to protect their rights: for instance,situations in which minorities are treateddifferently by the judicial system (see e.g.,Hoyano, 2010). Disparities can also curtailthe social mobility of future generations,for example, low-income families can onlyminimally invest in the education and healthof their children thereby limiting theirpossibilities of achieving a higher status inthe social hierarchy (see e.g., Grusky andMacLean, 2016).To put it differently, the understanding ofthe impact of disparities on the microlevel requires the consideration of multiplesources: political, spatial, economic, racial,gender, technological, among others. Thepresence of one of these sources does notnecessarily imply that other sources areabsent. In fact, the sources of inequalities canbe mutually constitutive and/or reinforcing.For example, spatial inequalities (e.g.,investment in particular schools) can lead toan increase in unequal access to technology,resulting in the underdevelopment of specificareas of a city which in turn exacerbate notonly existing economic disparities but alsothe quality of schools located in those areas.5

Competitiveness in context - EssaySocial disparities:Macro-levelThe linkages between economic growth andinequalities have been approached from twoperspectives. First, studies assume thateconomic growth leads to inequalities (seee.g., Kuznets, 1955). Second, some analysestrace the effect of inequalities on growth.We focus on the latter relationship. Withinthis strand of the literature, Panizza (2002)finds strong evidence that the relationshipbetween inequality and growth is negative:increases in inequality are accompanied bydecreases in growth. Similarly, Alesina andRodrik (1994) find a negative and “statisticallysignificant” relationship between disparitiesin land distribution and growth, and betweenincome inequality and growth. Aghion et al.(1998) argue that the findings presented in theliterature on the negative impact of inequalityon growth are “impressively unambiguous.”They point out that the literature is underlinedby the proposition that economic inequalityaffects the level of investment in physical andhuman capital, which in the long term maylead to decreasing growth rates.Abramovitz (1986; see also Fagerberg etal., 2007) has indicated that countries thatexperience economic growth are those withstrong “social capabilities.” That is to say,“socially advanced” economies developcapabilities in terms of effectiveness ofpolitical institutions and levels of education,among other factors. Social capabilities imply,for example, that competitive economiesdepend on their members of society to be ableto produce, execute and absorb knowledge(e.g., ideas), which leads to increases ininnovation. In turn, this requires sociallyadvanced societies to be more inclusive sinceit is fundamental for their members to realizetheir potential in order to become innovationagents. In this sense, Atkinson and Marlier(2010) argue that deep disparities negativelyimpact economic growth, productivity andthe stability of society (e.g., safety andsecurity). Similarly, Witztum (1997) suggeststhat increasing inequalities lead to a dropin productivity. More specifically, Gray andJames (2007) find that gender disparities atthe firm level prevent female employees fromfully contributing to the innovative capacity offirms and thus in the long-term negativelyaffects economic competitiveness. In thiscontext, technological transformation canlead to increasing economic inequalities (seee.g., Aghion et al., 1998).Conversely, some observers indicate that adegree of inequality is necessary to achievean optimal level of efficiency in the economicsystem (see Kim, 2008). Furthermore,Dell’Anno and Amendola (2015) findevidence that in the short term, economieswith high social exclusion experience highgrowth rates. For example, economies thathave a high wage inequality may be morecompetitive in attracting investment frommultinational corporations. Seguino (2000)finds that gender inequalities based on wagesare positively linked to GDP growth. Thesefindings, however, are relevant to countrieswith a sizable share of exports produced bymanufacturing industries largely dominatedby the female workforce. In these countries,Seguino (2000) argues that gender wagedifferentials boost investment and improve6

Competitiveness in context - Essaythe productivity of that investment throughthe impact of the female labor force’s lowwages on export and technological imports.Li and Zou (1998) conclude that “incomeinequality is not harmful for growth.”7