Wharton Fellows 1

The World Competitiveness: Paradigm Shift

Bulent Gultekin

Wharton Fellows 2

Acknowledgements:

n This presentation is based on the following sources:

“Executive Summary” and “Competitiveness of Nations” by StephaneGarelli in IMD Competitiveness Yearbook 2004, International Institute for Management Development, SwitzerlandThe Institute for Strategy and Competitiveness, Harvard Business SchoolOECD, various publicationsThe World Bank Annual ReportsVarious articles in Financial Times, The New York Times, Business Week

Wharton Fellows 3

Definition

n A field of Economic knowledge, which analyses the facts and policies that shape the ability of nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people

IMD Competitiveness Yearbook 2003

Wharton Fellows 4

n The ability of a country to achieve sustained high rates of growth in GDP per capital-World Economic Forum

n Competitiveness is the degree to which a nation can, under free trade and fair market conditions, produce goods and services which meet the tests of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long termOECD

Wharton Fellows 5

n Industrial competitiveness is the ability of a company or industry to meet challenges posed by foreign competitorsUS Department of Energy

n National competitiveness refers to a country’s ability to create, produce, redistributes and/or service products in international trade while earning rising returns on its resourcesScott and Lodge “US Competitiveness in the World Economy”

Wharton Fellows 6

n Competitiveness implies elements of productivity, efficiency and profitability. But it is not an end itself or a target. It is a powerful means to achieve rising living standards and increasing social welfare-total for achieving targets. Globally, by increasing productivity and efficiency in the context of international specialization, competitiveness provides the basis for raising peoples’ earnings in non inflationary wayCiampi Group –Report to the President of the Commission, the Prime Ministers and the Heads of States

Wharton Fellows 7

n Competitiveness is the ability to run not faster than the grizzly bear but to run faster than your fellows, friends or your competition….

Antonio Roversi

Wharton Fellows 8

From recession to anemia

n Fed’s policy of cheap creditn Rising asset pricesn Housing and construction boomn Recession in 1973 and 1981 lasted 16 monthsn Success of Fed introduced anemia to the

system

Wharton Fellows 9

Caution about technology and oil

n Technology sector is not the locomotiven Consolidations are common after the 1990s

booming technology sectorn Capital investment are picking upn Oil prices are concern but higher prices are

offset by dollar’s declinen Oil prices around $35/barrel does not

jeopardize economic recovery

Wharton Fellows 10

China now becomes a factory for the world

n China has grown on average at 8.1% over the last ten years

n Foreign investment stock is over $400 billionn Exports have grown by 17.3% per year and China is

now 4th largest exporter after Germany, US, and Japan

n China joined WTO. Tariff dropped from 46.5% in 1992 to 6.9% in 2003

n The trade to GDP of China is 44% (18% for Japan)

Wharton Fellows 11

Europe expands to the East and attempts to become cheapern On May 1st, EU expands with 10 new membersn Hourly manufacturing costs in Germany is $30n In most Northern European countries they are

around $20n Average hourly wage in

Baltic States and Slovakia: $2Poland and Hungary : $3

n Move from West to East. Ireland, Portugal and Spain will be affected the most

Wharton Fellows 12

The US deficit – how important?

n The US has the largest and the most buoyant economy in the world, it the most competitive economy and it will lead the recovery.

n GDP growth for 2003 is 3.1%n Consequence is a trade deficit of $582 billionn US firms manufacture abroad to serve domestic

marketsn Trade balance deteriorates but not the

competitiveness of a country

Wharton Fellows 13

The budget deficits are more importantn The US budget deficit is plungingn The Bush administration started with a surplus of

1.4% of GDP.n In 2003, deficit is 3.6% of GDP for the first time

foreign holdings of US treasury bonds exceed $1,000 billion

n Is this sustainable in the long run?

Wharton Fellows 14

Good news for stock markets, bad one for securityn Stock markets show signs of lifen IPO’s are backn Since 1832, during the first two years of 43 US

administrations, cumulative growth of the US stock market has been +228%,

n During the last two years, it has been +739%n Presidential election years have been always good

for the marketsn But insecurity is on the rise: Terrorism, computer

viruses etc.n 10.4 millions of unsolicited emails are sent every

minute..

Wharton Fellows 15

Japan is ticking againn Japan, the second largest economy with $4 trillion

GDP has been absent form the world economy over the last 10 years.

n It was the most competitive economy in 1980sn Japan suffered from a financial crisis, but she

missed out on new technologies (PCs, internet)n Despite problems in the banking sector, Japan

had a 2.7% growth in 2003.

Wharton Fellows 16

Russia should be on the radar screenn Russia has grown at 6% between 1999-2003n Growth is due to oil and gas exportsn Russia has 1.8 times the land of USA and it has the

largest reserves of raw materialsn Labor force is 72 million and well educatedn Russia attracts only 5% of the amount of FDI that China

attracts.n Russia has a GDP of $400 billion, as big as Bavarian But potential is there but..n Can President Putin reform the state and the economy?

Wharton Fellows 17

India is becoming a magnet for services

n India’s recent GDP growth rate is 8.1%.n Mostly in Maharashtra, Mumbai, Bengalore, New Delhi

and Accra arean India thrives on qualified English speaking engineers,

scientists with low wagesn It has become hot spot for “offshoring” of administrative

and back office operationsn Competitiveness growing in software operations,

manufacturing, entertainment and financial servicesn 2 million jobs in financial services are expected to move

to India from industrialized countries

Wharton Fellows 18

Meanwhile, the dollar remains weakn Dollar is 30% lower than its Euro rate in 2002n Japan, China and Taiwan are the largest holders

of US treasury bonds and reservesn Cheap dollar makes US assets and firms

attractive investment opportunitiesn Fed and the US treasury like low dollar for

economic expansionn Low dollar locks countries that depend on US

markets for their exportsn “The dollar is our currency but it is your problem”

(John Connolly, The Secretary of Treasury)

Wharton Fellows 19

Europe’s growth lags behindn GDP growth has been 0.9% in 2003 in Europen Germany and Netherlands sank into recession

while Britain and Spain preformed welln Cumulated budget deficits of the Euro area is

around 2.6% with some big offenders: France (-4.1%), Germany (-3.8), UK (-3.2%) and Italy (-2.5)

n The cause of Europe’s budget deficit is structural: European nations are getting marginally richer, but a lot older

Wharton Fellows 20

Europe and Wagner’s lawn Europe is confronted with a declining demographics and

ageing populationn Europe has a population of 729 million in 2000 it will

drop to 632 million in 2050n In 1950 people over 60 years and older was 12% of

population. In 2050 it will be 32%n Demographics explain why two thirds of the budgets of

European nations go to education, health and pensions.n Wagner Law: as a country becomes wealthy, the more its

social expenses increase and are difficult to reducen Europe with growth under 3% cannot afford their welfare

systems at current levels. Public debt will soar.

Wharton Fellows 21

A world of sinners: debt and deficitsn Overall pattern for developed nations is one of

massive budget deficitsn OECD countries had cumulative budget deficits of

-4.3% in 2003 compared to -1% in 2000.n If deficits are a result of countercyclical policies,

consequences can be acceptable, but in most countries they are the symptoms of societal changes where wealth creation and social expenditures do not match anymore

Wharton Fellows 22

A world of sinners: debt and deficitsn Wealthy countries may be able borrow more

because they are richer. In UK alone, real estate, housing, infrastructure have a value of $8.8 trillion. Debt often redistributes revenues to less productive uses

n Good news has been that interest rates have been lowest for the last 30 years but is it sustainable?

n Corporate debt has also increased five folds since 1980 for long term and three fold for the short term due to the easy money period of 1990s.

Wharton Fellows 23

But the rest of the world moves on

n Despite periodic recessions, the world economy continues to expand.

n The world population will go from 6.3 billion to 8.9 billion in 2050

n India, China, Pakistan, Bangladesh, Nigeria and the US will account 50% of the annual population growth.

n The US and Europe will decrease from 11.2% to 7.7% of world population by 2050.

Wharton Fellows 24

But the rest of the world moves onn The biggest development in world competitiveness is the

emergence of Asian Asia accounted 50% of world GDP in 1820. In 1950 it

dropped to 19%, but rose to 40% in 2003.n In the year Christ was born, GDP per capita of the known

world was $450.n In 1950, Africa’s GDP per capita moved to $894, India’s to

$619, and China’s to $439n In 2001, GDP per capita of Africa increased to $1,489,

India to $1,957 and China to $3,583.n Individual wealth of one-third of the world population has

increase more in 50 years than during the past 2000 years!

Wharton Fellows 25

The next new world

n In 2050 GDP of the largest economies (in billions):n China: $44,453 n USA: $35,165 n India: $27,803 n EU: $25,000 n Japan: $6,673 n Brazil: $6,064n (UK and Germany will each have $3,500 billion)

Wharton Fellows 26

New paradigm of competitivenessn In a first stage:

China, India and most Asian countries will be providers of economic inputs to American, Japanese and European enterprises.

China will become the manufacturing center of the global economy;

India will provides back office operations;Thailand third party assembling etc.

Wharton Fellows 27

New paradigm of competitivenessn In a second stage:

These nations will build up purchasing power and create a middle class, which develops and accumulates personal wealth. They will become market providers.

China is the fastest growing market in mobile telephones, for cars and steel.

India discovered consumption goods just as did Japan in 1970s and Malaysia and Singapore in 1990s

Wharton Fellows 28

New paradigm of competitivenessn In a third stage:

Asia will move to become a world competitor in its own right. Asia is creating homebred global companies and will start to export local brands.

The same pattern was followed by Japan after the War. It emerged from a nation manufacturing cheap production goods to one developing world class brands and moving up the value added ladder.

Wharton Fellows 29

…that leads to a structural change in productivityn Since the industrial revolution, manufacturing has

been the backbone of competitivenessn Importance of manufacturing in GDP has been

declining. Industrial part of US GDP is 22%, and 29% for Germany. For China, it is 52%

n World manufacturing production increased by 30% between 1995 and 2002, but the manufacturing employment shrunk by 11%. 31 million jobs were eliminated in 20 most important economies. China lost 15 million manufacturing jobs

Wharton Fellows 30

n There is not a net transfer of manufacturing jobs from one part of the world to another. There is a formidable boom in manufacturing productivity worldwide. During past decade, steel production in the US has surged from 75 to 102 million tons. American steel workers has fallen from 289,000 to 74,000 in the same period

n The world is undergoing an unprecedented explosion in productivity based on new management methods. Globalization has quickly spread the technology, productivity revolution and techniques to emerging countries.

Wharton Fellows 31

n This combination could be lethal for traditional industrialized countries and their workforce. Jobs will be lost, companies activities will move abroad.

n The trend has just began. The same paradigm now affects the service industries.

Wharton Fellows 32

In summary…n Asia, and soon Russia and Central Europe, emerge as

world competitors. They will brutally assail the competitiveness of the US and Europe as Japan did over the past decades.

n For governments, there are deficits and deficits: Some are cyclical, but many are structural. They are the result of a wealthy, ageing society that consumes more than it produces. Europe will suffer and may fail to reform itself

n World manufacturing explodes but manufacturing jobs implode. The ease of technology transfer and productivity boom spreads via globalization into low cost areas. The next paradigm shift will affect the service industry

Wharton Fellows 33

n “There are those who make it happen, those who let it happen, and those who wonder what happened!”

Late president Ronal Reagan