Traditional Model: Debate

The rhetoric of competitiveness—the view that, in the words of President Clinton, each nation is "like a big corporation competing in the global marketplace"—has become pervasive. According to Krugman, competitiveness poses three dangers. First, it could result in the waste of money to enhance US. competitiveness. Second, it could lead protectionism and trade wars. Finally, it could result in bad public policy. Here are his key points and responses by others. Krugman argues that trade is not a zero-sum game, while competition between firms is a zero-sum game. Prestowitz responds that Krugman is correct in the case of trade between the United States and Costa Rica, but not between the United States and Europe. Krugman argues that a country's economic fortunes are determined not by its success on world markets, but by its domestic productiviy. Thurow responds that if the domestic economy is to succeed in productivity, it must first compete successfully in the global economy. Krugman warns that an obsession with competitiveness is dangerous and advises cathecting onto productivity. Cohen responds that an exclusive focus on productivity has some dangers. Krugman counter-responds that if the concept of competitiveness cannot be well defined, it should not be used to guide policy.The debate is highly intellectual and practical, but sometimes confusing. The knowledge of trade models discussed in Chapter 1 is useful in evaluating this debate. For example, Krugman argues that many policy makers and economists are mercantilists because they view trade as a zero-sum game. However, Krugman can also be criticized for not clearly distinguishing between competitive advantage and comparative advantage as a basis of a nation's competitiveness. There are two important issues in this debate. First, it is difficult to define competitiveness. Second, trade balance may not be a good measure for competitiveness. We need a new, comprehensive model that can effectively deal with these two issues. For this purpose, Michael Porter has provided the diamond model, which will be discussed in Chapter 3.