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Archived - 2. Creating Wealth: Competitiveness and Productivity

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We begin with a brief overview of the basic economic concepts that underlie the analysis necessary to deal with the issues before us. These are competition, competitiveness and productivity.

What Is Competition?

Economic competition is the contest between parties to grow and create wealth. At the firm level, the winners are those who consistently and constantly innovate, invest wisely and adapt quickly to the ever-changing social, demographic, technological, economic and political trends and forces bearing on their industry. Firms that fail to keep up do not survive. Firms that succeed provide superior returns for their investors, better jobs for their employees and the best value for their customers.

For employees, competition provides the opportunity to work for more productive, innovative companies, to earn higher wages and to pursue rewarding careers.

For customers, it means better products, lower prices, more choice and better service.

For countries, competition is the strongest spur to innovation and value creation, which leads to a higher standard of living for all.

A considerable economic literature documents the central role of innovation in driving productivity growth and the importance of competition in driving innovation.1 Greater competition is the key to increasing productivity and prosperity.

The benefits of investment and innovation are not achieved without financial cost or personal dislocation and uncertainty. These actions entail the assumption of financial risk and respond to the unceasing pressure to improve and change. It is the lure of economic gain and personal success as well as the spectre of economic loss and personal failure as a result of competition that provide the incentive to motivate these behaviours and thereby capture their benefits.

What Is Competitiveness?

While competition refers to the nature and quality of rivalry, competitiveness refers to the outcome — who wins and who loses. In any industry, the most competitive firms survive and provide the benefits of competition to their investors, employees, customers and host societies. Public policy must deal with competitiveness in developing policies designed to enhance a country's ability to achieve its primary economic goal, which is to assure a rising standard of living for its citizens.

What Is Productivity?

Productivity measures the efficiency with which the resources available to an economy, such as labour, capital and business expertise, are being used to produce goods and services. The challenge for any country is to strengthen the key determinants of productivity growth — in colloquial terms, to get "more bang for the buck." Productivity is not about working harder for less. It is about working smarter to earn more.

Working smarter in terms of labour productivity can be achieved in many ways, for example, by equipping employees with more machinery and equipment, by having employees acquire greater skills through education, training or on-the-job experience, or by adopting advanced technologies.

Overall productivity growth at the firm level is the key determinant of increases in prosperity and opportunity for the citizens of a country.2 The primary drivers of productivity growth are the investment, innovation and adaptation fostered by openness and competition. Economic research, confirmed by our Panel's experience, demonstrates that increases in productivity are not achieved without risk, stress and cost. The benefits outweigh the costs because successfully competitive firms provide better jobs, higher investor returns and more value to customers.

The Power of Productivity

William Lewis of the McKinsey Global Institute measured employee productivity in individual industries within 13 countries over more than a decade. He found that productivity varies enormously around the world and, more importantly, that differences in productivity explain virtually all of the differences in national gross domestic product per capita.

Strong competition in product markets is critical to increasing productivity and prosperity. It is just as important for wealth creation as a sound macroeconomic foundation, a flexible labour market or top-class education.3

The greater the level of competition in an economy (competitive intensity), the better off its citizens will be and the better its successful firms will be able to compete beyond the boundaries of the domestic economy. Opening an economy to the free entry of goods, services, competitors and capital increases competitive intensity in the economy and, as a result, its productivity.

It is important to recognize that it takes time to realize the benefits of the interactions between competition, competitiveness and productivity. Just as we invest for the future by educating our children today, so too must we invest now in fostering greater competition for benefits to accrue in the future. Moreover, we cannot shy away from taking the tough decisions required to enhance productivity today because the benefits will be realized tomorrow.

The foregoing is a brief and high-level summary of the conclusions of an entire field of economic research. As befits any area of academic enquiry, there is ongoing debate about the nuances of these matters. However, our Panel's experience in business is consistent with the general thrust of this research. Accordingly, we base our analysis, views and recommendations on these basic premises.