Over the past eight years, I have worked with a wide variety of regions, countries, states and cities on the question of how to improve competitiveness, applying the principles first set forth in The Competitive Advantage of Nations. My purpose here is to share some of the experiences I have gained from this process. Certainly, the task of promoting productivity and creating meaningful change in the public and private sectors is enormous and difficult. However, there are lessons to be learned about how to best structure and organize efforts to enhance competitiveness, wherever they may take place.

To organize my remarks, I have identified ten of the most important preconditions to improving competitiveness in a country (or geographic areas). They are most directly applicable to the case where a country is working systematically — such as through a formal project — to enhance competitiveness.

First, there must be a sense of urgency about improving competitiveness that is broadly shared. The steps required to improve competitiveness — the effort and the change — upset the status quo, shift power relationships, and create great anxiety and uncertainty for all constituencies in the economy; therefore, some powerful motivation must drive the effort, such as a serious, widely-perceived economic problem.

This was the case in New Zealand seven years ago: After thirty years of decline, New Zealand’s economic problems had reached crisis proportions, and all constituencies were ready to think differently and try something new. In Canada, substantial reform in many areas was also needed. Since the Canadians did not yet feel much pain or perceive a real threat to the post-World War II run of prosperity, it was difficult to move beyond talk to action. Today, the atmosphere in Canada is totally different, and serious change is now underway. Less radical than an economic crisis in creating a sense of urgency, but potentially as effective, is an irrevocable opening of the economy to competition.

The task for national leaders is to create a clear and compelling argument for why change is really necessary. If they can put the country on a path from which business leaders perceive no turning back, that may stimulate the urgency required. Establishing a concrete timetable to open internal and external competition, and adhering to it, helps people to change their attitudes about the rules of the game and prepare to compete more effectively. It is more important to understand, however, that a level of stability in the political and economic environment in the country is essential to real progress. Otherwise, constituencies will hedge and avoid real changes because they lack the confidence that government commitments will be met.

Second, a shared paradigm of what competitiveness is must be created. Until there is a common definition of competitiveness and an understanding of how to improve it, it is hard to get people to work together. How can this be achieved? First, multiple constituencies — business, government, labor, individuals and institutions — which impact the economy must all be brought into the process. Second, the process of education and communication cannot be understated. People must be educated about the modern economy and global competition and drawn into the process of better preparing for it. Some of the most successful efforts have been in Central America, Massachusetts and New Zealand. There, we spoke endlessly with all constituencies about competitiveness, and the media was used to help communicate the message.

Competitiveness is a lot about attitudes; it is a matter of getting people to think the right way about the problem. The diamond theory provides a holistic, useful concept which helps individuals from business, government, labor and other institutions talk constructively about improving the environment for productivity. This theory stresses that competitiveness involves more than just macroeconomic issues — deficits, stability, and so forth. Addressing these is necessary, but not sufficient. Countries must begin to understand that the long-term determinant of productivity is rooted in microeconomic conditions in the economy.

Third, the cluster-based approach has become a very powerful tool for making rapid progress. Why are clusters the focal point rather than sectors or industries? The latter tends to evoke industrial policies — targeting, interventions and subsidies — which can reduce rivalry, distort competition through subsidies, or create cartels. The cluster-based approach recognizes the reality of what determines productivity — that is, the interdependence and the joint activity among related fields. There are many externalities in competition which are outside of individual firms or industries. The cluster approach gets leaders together who really have not talked before. They learn a lot, find it stimulating and, ultimately, realize that their success has to do with how the other parts of the cluster are doing.

Fourth, social and economic policies must be integrated rather than being seen as separate, different or conflicting. Educated, safe, healthy citizens are required for a productive economy. Reducing industrial pollution eliminates waste and improves productivity in the use of resources. Leaders must communicate that these areas — which need to be in alignment — are complimentary and interdependent. For example, education should create well-rounded citizens, but it also needs to be connected to the economy. Unemployment insurance needs to be framed not as a welfare payment, but it is also a means to get back to work. The crafting of "social" policies must make them reinforcing to the true sources of sustainable prosperity.

Fifth, business and government must play different and more appropriate roles than in the past. Traditionally, business goes to government with a tin cup asking for subsidies, protective tariffs or special financing schemes. The typical government role is attempting to "direct" the economy and getting involved in allocating capital. These traditional roles need to change. In the modern economy, government has five basic roles: a) to achieve macroeconomic and political stability; b) to improve the quality of general (microeconomic) inputs and institutions, such as roads, schools and telecommunications; c) to create (microeconomic) incentives and rules of the game that stimulate productivity innovation; d) to foster and reinforce the cluster formation process; and e) to establish a positive, distinctive and challenging long-term economic vision and action program which mobilizes government, business and citizens. It cannot play these roles effectively without input from business.

What about business? It also needs to play a much more active role to achieve competitiveness than is typical in most developing economies, and not look to government. To this end, business can work together and use industry associations to address issues such as training, information and infrastructure.

Sixth, the traditional business-government dialogue must be transformed. Typically, business and government interaction occurs around episodic lobbying on specific issues; it is adversarial and, in developing countries, often paternalistic. The character of this dialogue must shift, and an ongoing consultative dialogue on competitiveness and the constraints to productivity is needed. To achieve these goals, effective business-government collaborative mechanisms — such as cluster groups and public-private competitive institutions — must be created.

In Massachusetts, we formed a governor's council on economic growth and technology, which brought together leaders in the private sector, education and government. Over a long period of time, these leaders spoke systematically about the needs of the economy. We then organized ourselves into several groups: cluster groups, functional groups that tackled issues such as tax policy, and issue groups that dealt with questions such as the effect of major shifts in Federal funding on the Massachusetts economy, with its heavy concentration of research universities and medical schools.

Another collaborative mechanism is the creation of independent think tanks or competitiveness institutes. In Central America, we have established the Latin American Center for Competitiveness and Sustainable Development. Its mission is to foster dialogue about competitiveness in individual countries and regionally, as well as to monitor progress in competitiveness and prod people to keep things moving forward.

The seventh and eighth preconditions relate to cross-fertilization through parallel efforts on the state and city levels, and through complimentary reinforcement between national and regional initiatives. Experience shows that productivity is not only affected within, but across borders. Two regional efforts illustrate the potential of coordination across countries in certain areas to improve productivity. In Central America, given each countries’ proximity, it is not efficient to view the electricity generation and distribution from a country perspective. Nations in this region have been brought together to discuss steps to enhance productivity in energy, transportation, customs, etc. A major benefit of this regional effort is that it is creating pressure on individual countries to move faster. For example, El Salvador raced ahead with initiatives to improve competitiveness; Honduras and Nicaragua are now scrambling to catch up.

Another regional effort in which I am involved is in the Middle East. There, four countries or territories — Egypt, Israel, Jordan and the Palestinian area — have created a joint national-regional effort under the auspices of the independent Center for Middle East Competitive Strategy. Each country has a national team, and a group of international experts is advising them. The national teams are doing systematic analysis of their own economies that have led, after a diagnostic phase, to cluster working groups, as well as activities in support of regional economic cooperation. This effort, in particular, is a testament to the power of regional efforts: Despite the enormous difficulties and political tensions in the region, the meetings continue to occur and participants get special permission to cross borders to attend working sessions. The governments have been very anxious to maintain this process and, to a limited extent, separate economic progress from political agendas.

The ninth precondition for economic progress is that the whole effort must have an action — not analytical — orientation. Tenth and finally, there is need for leadership in both the public and private sectors. This is a clichˇ, but as a result of the tremendous inertia built into economies and their institutions, it is really true.

Further Readings

Porter, Michael. 1998. Competitive Advantage of Nations. New York: Free Press.

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