Competitiveness

In trying to explain why Mexico isn’t growing quickly, or "why it isn’t rich" as Gordon Hanson puts it in a great paper, there is much talk about economic concentration -- the monopolies and oligopolies that dominate the economy. They spread beyond just telecommunications and media – the most obvious and maligned sectors. In cement, one company alone controls almost 90% of the market. In bread, tortillas, soft drinks, hospitals, and glass production just one company controls at least 70% of the market. This doesn’t even consider those areas still under state control, such as energy and electricity. This wasn’t always the case. Looking back at the 1960s and 1970s -- when the Mexican economy was much more closed and the state more involved -- its markets were arguably more open, at least in terms of competition. At least four major firms competed in even the most concentrated sectors (granted, those not consigned to state-owned monopolies). This internal competition was at least in part behind the rising competitiveness of Mexico’s economy – as measured by total factor productivity (TFP). Mexico’s TFP, a measure of an economy’s long-term technological dynamism, rose steadily through the 1960s and 70s, comparing favorably to the United States and the so-called Asian tigers. It began to fall in the early 1980s (in conjunction with its debt crisis and economic opening). It hasn’t recovered since. Mexico's Total Factor Productivity (relative to U.S. TFP) compared to Latin America and Asian Tigers (Source: Augusto de la Torre and Ana Cusolito, "Competition and Economic Growth," The World Bank, 2009) The fact is that while Mexico’s economy opened to the world, vital sectors within it closed themselves off from competition. This isn’t to say that Mexico should try to return to protected markets - that would just make matters worse. But it does suggest that the dominance of just one or two firms across so many areas of the economy hasn’t always been a part of its past – and agreeing with the consensus out there, it shouldn’t be part of its future.

How can the United States improve its aging infrastructure to maintain its global economic competitiveness? Four experts offer their suggestions and discuss the implications of inaction.

President Obama’s State of the Union focused on spurring economic growth and innovation but fell short on deficit reduction, argues CFR’s Sebastian Mallaby. The stress on domestic over foreign policy made sense, but national security challenges loom, says CFR’s James Lindsay.

The New York Times “Room for Debate” asked seven smart experts whether the United States can compete with China on green technology. Their responses, published yesterday, are well worth reading. I worry, though, that they reflect a peculiar, and increasingly unproductive, debate. The four participants who aren’t academic economists all offer some variation on the claim that green energy can be a central driver of economic growth, and that the United States thus needs a green industrial strategy. I’ve explained on many occasions why I’m skeptical of both assertions. Green technology is important, but there isn’t compelling evidence that it will have big direct consequences for economic growth. I suspect that’s what motivated the three academic economists who were invited to contribute to all offer variations on a similar theme in response: in a free market, countries specialize in areas where they have comparative advantage; as a result, everyone wins. If China’s gaining market share in certain technologies, they argue, that’s ultimately good for all. Here’s the massive problem with that: The global economy is nowhere close to being a free market. Barriers to trade and investment abound. Governments frequently use their power to promote favored firms and discriminate against others. The current situation isn’t the consequence of the free market. Saying “the free market works” is no way to defend it. I have a new article up at Foreign Policy that comes to more mixed conclusions. The central point of my piece is that we ought to stop freaking out so much about supposed Chinese strength in clean energy. Like the academic economists in the New York Times debate, I’m sensitive to the fact that a lot of cleantech migration to China is the result of genuine comparative advantage, and thus doesn’t deserve to be demonized. But I also argue that that’s not the whole picture: in some cases, the shift is the result of anticompetitive Chinese policies that are anything but economically beneficial for the world. That’s not the sort of behavior that should be supported or ignored in the name of free market sensibilities.

Senators from manufacturing states have been among the most skeptical of cap-and-trade legislation. One would expect, then, that they’d be thrilled by the prospect of utility-only cap-and-trade, which would explicitly exclude manufacturing facilities. But not so. Here’s E&E Daily this morning: “Sen. Sherrod Brown (D-Ohio), meanwhile, stressed earlier this week that manufacturers must have the choice to opt in to a carbon pricing system and that he is working on legislation that would allow them to do that under a utility-only bill.” Why, after resisting cap-and-trade, do manufacturers suddenly want in? Utility-only cap-and-trade would, like economy-wide cap-and-trade, increase the cost of the electricity used by many manufacturers. Under previously proposed economy-wide schemes, many manufacturers would have received rebates equal to or greater than those increased costs. Under most plausible utility-only schemes, most energy-intensive manufacturers will receive substantially smaller rebates, and some (such as those who are in states where electricity prices are not heavily regulated) may receive nothing. Utility-only is thus not a free pass for manufacturers. These manufacturers are looking for “opt-in” provisions that would help cover some of their increased electricity bills. Yes, by joining the cap-and-trade system, they would see their costs increase further (because they’d pay for their own direct pollution too). But they’re looking for a deal that more than pays them for that extra cost. Hence the sudden interest in being part of the system. What does this all mean environmentally? An well-designed opt-in scheme would probably strengthen the headline target of a cap-and-trade bill. That’s because the cap would be increased only by a fraction of the emissions of any facility that decided to opt in. Imagine, for example, that a plant with 100,000 tons of annual emissions chose to join. The 2020 target would probably increase by only 83% of that, or 83,000 tons. That would force 17,000 tons of reductions under the cap, either at the manufacturing plant, or in the (already covered) utility sector. That said, to the extent that an opt-in scheme preferentially attracts those plants with the easiest potential reductions (which the most likely outcome), those reductions might be meaningless (i.e. they might be reductions that would have occurred anyhow, even without cap-and-trade). Indeed it is very possible that some of the opt-ins would actually weaken the environmental result. Imagine, for example, that the 100,000 ton plant expects its emissions to drop by 20,000 tons by 2020. It opts in to cap-and-trade and follows through with its plans. The utility-only cap is about 2 billion tons of CO2 in 2020. The opt-in expands that by 83,000 tons, to 2,000,083,000 tons. 80,000 tons of permits are used up by the manufacturing plant. That leaves 2,000,003,000 tons of permits for the utilities, which is more than they started with. As a result, the carbon price drops, and emissions are reduced by less than they would have been without the opt-in. Will this sort of thing happen? It depends entirely on how any opt-in provisions are designed. I have been skeptical of claims that badly-designed cap-and-trade could increase emissions. (Perhaps hostile is a more accurate word than skeptical.) Those claims tend to ignore economics. But a badly designed opt-in scheme could be an exception. Legislators should be careful to ensure that it isn’t.

President Barack Obama’s first State of the Union address focused heavily, as expected, on domestic economic recovery and reasserting U.S. competitiveness. Six CFR experts noted different aspects of the challenges facing Obama.