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August 15, 1993
"In Competition - It's Tough Out There, But in Key Areas America is Still No. 1"
San Jose Mercury News
By Timothy Taylor
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AMERICA STILL chants "We're No. 1" when a U.S. citizen wins Olympic gold. But in the race for global economic leadership, Americans have become uncertain, even pessimistic. Even as the U.S. economy shuffles forward, we spend a lot of time looking over our shoulders at tough competitors from Japan and Europe, not to mention up-and-comers like Mexico and Korea.

Once a year, the Council on Competitiveness publishes a "competitiveness index," which both considers U.S. economic performance over the last couple of decades, and in comparison with the other leading industrialized economies.

The Index takes a straightforward view of what determines long-term growth. Investment in capital, education, and research and development lead to increases in productivity. Productivity affects exports, and nation's ability to compete on world markets. Finally, the overall purpose of seeking competitiveness is to improve America's standard of living.

Of course, these categories are not exhaustive. Even among economic statistics, they deemphasize job creation, low inflation, reducing poverty, and the overall balance of trade. Moreover, any set of economic measurements will tend to leave out non-economic factors like how much time people have to spend with their families, the cleanliness of the environment, or whether you feel secure walking down the street at night.

But this is just one group's Competitiveness Index; it was never intended to be some encyclopedic wish-list for everything that is socially desirable. Its overall feeling, at least to me, is a combination of reassurance about the present, and concern for the future.

U.S. citizens continue to enjoy the highest standard of living in the world, at least on average. The measurements here take the size of a nation's economy, measured by gross domestic product, and divide by the number of people, to figure per capita GDP. By this measure, if the U.S. standard of living is set equal to 100, Germany is in second place at 86, while Canada and Japan lurk just behind at 85.

When you hear someone argue that the U.S. has slipped behind other nations, one of three things has usually happened:

  • They may not know what they're talking about.
  • In comparing the economies of the different countries, they may be using some idiosyncratic exchange rates. The comparison here uses so-called "purchasing power parity" exchange rates, which is standard method of comparing the actual buying power of a currency in its home country.
  • They may have confused a diminishing lead with actually being behind. As the bar chart shows, the U.S. standard of living has grown more slowly since 1972. But we aren't actually behind. Yet.

Total exports is a quirky way for a nation to measure its competitiveness. What really matters is not the total amount sold, but whether the U.S. is exporting goods and services that involve sophisticated skills and high technology. In addition, looking at exports without also considering imports is like talking with Tweedledum and ignoring Tweedledee.

That said, U.S. exports have actually done pretty well in global markets. The rate of growth in exports lags behind Japan -- no big surprise there -- but ranges ahead of other international competitors.

Interestingly enough, the world export leader in 1992 was not the U.S. ($348 billion in exports) or Japan ($334 billion), but rather Germany ($392 billion). However, European countries tend to have relatively high levels of exports and imports, because of all the trade they do with their geographic neighbors. By comparison, U.S. and Japanese exports often have to cross an ocean to find a market.

While certain Japanese industries are surely at or near the top of the world in their manufacturing productivity -- automobiles leap to mind -- when the broad average of all industries is considered, the U.S. still heads the list. The method of measurement here was to take the total production of a nation's manufacturing sector, convert into dollars using the "purchasing power parity" exchange rate, and divide by the number of manufacturing employees. On that scale, if the U.S. level of productivity is 100, then France is second and Japan a distant sixth. America's lead is decaying, however. Japanese and Italian manufacturing productivity has grown much more rapidly since 1972, although the U.S. has held its ground against other nations.

A focus on manufacturing productivity neglects the ever-increasing proportion of workers in all industrialized countries work in service industries, many of them high tech professions like engineering, finance, law, health care, and so on. Measuring productivity is much tougher in service industries. Anyone who can count can tell whether a manufacturing assembly line turns out refrigerators more quickly, but measuring the efficiency of a software design project will be a real judgement call.

No matter which dimension of investment one considers -- physical capital, research and development, or education -- the U.S. news is not encouraging.

The U.S. invested 10.6 percent of its gross domestic product in plant and equipment in 1992, a lower amount than any of its leading competitors. Germany invested 14.5 percent; Japan, 20 percent. Since 1972, the largest growth in this form of investing has been investors have been Japan and Canada have shown the strongest growth in physical investment, with the U.S. bunched with everyone else at the rear of the pack.

The intensity of civilian-oriented research and development is higher in Japan and Germany. The U.S. has spent about 1.9 percent of GDP for the last decade, while Germany ponied up 2.6 percent (in 1990), and Japan 3.1 percent. When it comes to government investment in education, the U.S. looks better on then numbers. It spent 4.5 percent of GDP in 1989, compared with 3.6 percent in Germany and 3.2 percent in Japan. But these numbers mislead, since they leave out considerable private spending in education in Germany and Japan. Few would argue that America's K-12 education system is turning out substantially better-prepared graduates than are its international competitors.

Current standard of living

U.S. 100.0
Germany 85.9
Canada 84.9
Japan 84.7
France 80.9
Italy 74.9
U.K. 68.7

Total growth in standard of living, 1972-1992

Japan 88%
Italy 66%
Germany 50%
France 48%
Canada 47%
U.K. 40%
U.S. 30%

Long-term growth in exports, 1972-1992

Japan 355%
U.S. 248%
Canada 232%
France 165%
Italy 165%
Germany 148%
U.K. 118%

Current level of manufacturing productivity

U.S. 100
France 95.5
Italy 92.6
Canada 87.4
Germany 86.7
Japan 75.3
U.K. 72.4

Total growth in manufacturing productivity, 1972-1990

Japan 132%
Italy 116%
U.S. 59%
U.K. 56%
France 49%
Canada 37%
Germany 36%

Overall growth in investment in plant and equipment, 1972-1992

Japan 194%
Canada 152%
Germany 69%
U.K. 69%
Italy 67%
U.S. 65%
France 47%

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