Are you a tiger, a cat or a dinosaur? 100 questions: how competitiveness influences your life
There are two ways to manage the competitiveness of an economy. The first is to be aggressive in international markets, which means either exporting or investing abroad. The second implies being attractive essentially for foreign investments. The obvious question: Which is the better approach?
Historically, national competitiveness has often been assimilated with an aggressive economic strategy. At the beginning of my research in the 1980s, experts told me not to over-complicate the subject because, ultimately, a competitive nation exported. This was relatively true. All the great postWorld War II economic successes— Germany, Japan and South Korea— have been based on a capacity to export. Today, these countries remain the world’s largest exporters.
The same can be said for smaller countries. Their objective is to have a current-account balance surplus, i.e. a strong contribution of foreign revenues to national wealth. This is also a way to compensate for the limited size of a domestic market. For example, Switzerland, Norway and Singapore often have a currentaccount balance of more than 12% of their GDP and their prosperity is based on international transactions.
However, since the 1970s, a new approach has emerged—that of attractiveness. An example is Ireland, which built its economic development on its ability to attract large foreign companies such as Intel, Apple and Hewlett-Packard. The policy that was implemented combined both financial and fiscal incentives (a corporate tax rate of 12.5%) with access to a young and skilled workforce. China adopted a similar approach with the creation of “special economic zones” structured to attract foreign investors. One of the most famous examples is the region of Shenzhen near Hong Kong, which has become one of the world’s main electronics workshops. Dubai is another more recent example of a country with an attractiveness policy.
The two approaches have different outcomes. Aggressiveness creates surpluses in trade balances; therefore, it positively impacts national revenue and generates foreign currency reserves. On the other
hand, attractiveness creates jobs and promotes the transfer of technology and know-how.
Dubai, for example, has established a policy by which a foreign investor will be encouraged to create a technical college or a training institute for its employees and its local suppliers.
Obviously, the best combination is to have both an attractive and an aggressive economy. Some countries have succeeded: the US, Singapore, Great Britain, France and even Switzerland. Even so, most governments show more interest in attractiveness policies because they lead to visible job creation. In contrast, a surplus in the trade balance often remains an obscure concept for the majority of the people who do not understand how it will improve their lives. This explains why nations will usually engage in a fierce competition to attract a company that wants to invest in another country: Job creation and political ambitions are the reasons...
what is the longest word?
For economic purposes, the answer must be “extraterritoriality” (in English, it is officially oultramicroscopicsilicovolcanokoniosis”—good luck ...). Of course, such a long word can only be the invention of a lawyer...
To make it simple, extraterritoriality is when a nation submits, willingly or not, to another nation’s jurisdiction. This is the case for embassies or, historically, foreign concessions in Shanghai in the 19th and early 20th centuries. In economics, extraterritoriality is increasingly a concern. Powerful nations such as the United States are regularly tempted to impose their economic legislations on other nations.
The US and Great Britain have laws forbidding trade relationships with certain countries. In addition, they also tend to demand that foreign companies apply these restrictions, or face retaliation. In the US, the “Trading with the Enemy Act” of 1917 was often used to this effect even though, since 2008, it has only affected Cuba and North Korea. It also makes it possible to impose specific embargoes on products (notably arms) or on people (visas, bank transactions, etc.). Until recently, the US had embargo measures in place against Burma, Cuba, Iran, North Korea, Syria, Sudan and Russia.
From a strictly legal point of view, the United States could only impose such measures on US companies. It gets complicated when these companies are international and have subsidiaries abroad. In law, the subsidiary of a US company has the nationality of the host country.
After the Soviet Union invasion of Afghanistan in 1980, the United States decreed embargo measures. I remember the manager of the French subsidiary of a large US supplier of pipeline components who was confronted with an impossible quandary. His US parent company demanded that he respect the embargo. The French government, however, insisted that the subsidiary, legally French, should continue its relationship with Russia. Sometimes, a manager must also be a canny diplomat...
In order to impose its law, the United States has a convincing argument: access to the US market. Recently a number of French banks were fined in the US for helping Cuba, Iran or Sudan bypass sanctions. The same applies to the banking industry in general with the application of the new FATCA law. Ultimately, if foreign banks don’t respect the new rules, they risk a hefty fine or, worse, losing their license in the United States. ■
Extraterritoriality is when a nation submits, willingly or not, to another nation’s jurisdiction. This is the case for embassies or, historically, foreign concessions in Shanghai in the 19th and early 20th centuries.