Globalization and Competition: Red Flags from Davos

Stephen DeAngelis

September 28, 2006

A system, country, or organization can only be resilient if it is competitive. Steven Pearlstein, writing in the Washington Post, reports that the World Economic Forum believes the U.S. is becoming less competitive [“No Longer No. 1, and No Wonder,” 27 Sep 2006].

On the surface, two studies out this week seem to raise warning flags about the competitiveness of the U.S. economy. One, the annual ranking from the World Economic Forum — the elite business organization that runs the annual winter schmooze-fest in Davos, Switzerland — finds that the United States has fallen from No. 1, a position it shared with Finland for most of a decade, to an unsettling sixth place. And the National Association of Manufacturers, along with the Manufacturers Alliance, is scheduled to release an update of an earlier study today showing that the burdens of regulation, taxation, litigation and health care are even greater than they were in 2002, when the “cost gap” between U.S. companies and those of our largest trading partners was 22.4 percent.

As I noted yesterday, the political and public sentiments about corporate greed and ethics have not lessened in the years since Enron, WorldCom, and Tyco took center stage in the 2001/02 accounting scandals. That means that despite manufacturers concerns, regulation is not going away. And taxpayers, facing unprecedented national debt are not looking to ease the corporate tax burden (the article points out that “business taxes, as a percentage of anything you want to measure, are at their lowest level in decades”). In addition, workers are in no mood to pay more for or reduce healthcare coverage (Pearlstein notes that “businesses have already made tremendous strides in shifting health-care and pension costs to workers”). That leaves litigation. Trial lawyers have to date been successful fending off efforts to lower the costs of litigation by establishing, for example, award limits. Where does that leave U.S. companies trying to remain competitive in a globalized world? Pearlstein suggests “an alternative reading of the new reports suggests that the business community needs to do some serious thinking about competitiveness and economic policy.”

Let’s take the legal system, a negative in both reports. It ought to be obvious to anyone who has followed the asbestos debacle or the medical malpractice issue that litigation has become an inefficient way to police the behavior of companies, executives and service professionals. But the only realistic alternative is regulation by government, which the business community opposes. You can’t have it both ways. You can’t, for example, just tell smokers they have no recourse against tobacco companies that market products they know to be deadly if you don’t have a Food and Drug Administration with power to regulate unsafe tobacco products. You can’t tell shareholders they have no right to sue management if you oppose regulations that might give shareholders a voice in who runs the company. You can’t tell workers not to sue employers for unsafe workplaces while you’re busy neutering the Occupational Safety and Health Administration. This isn’t an economic argument so much as a political one. A totalitarian state such as China may be able to duck these kinds of trade-offs, and there is no doubt Chinese exporters are more competitive as a result. But that is not realistic for an advanced democracy whose citizens prefer to use some wealth, or forgo some economic efficiency, in exchange for safer products and workplaces and more responsive corporate governance.

The last point — that others can be more competitive by treating their citizens poorly — is an argument for strengthening global standards rather than a rational argument for reducing protections in place in the developed world. Pearlstein writes, “I assure you that no NAM member would have his children breathe Beijing’s foul air for long.” Since this is a corporate blog, I’m obviously sensitive to many of these issues. I’m also convinced that the offerings available through Enterra Solutions can help companies that adopt them become more competitive. Having said that, there are no silver bullets when it comes to performance optimization.

The business community’s fantasy is that the United States would soar to the top of the rankings if only we had Ireland’s tax regime, China’s environmental controls, Singapore’s legal system and Chile’s social-safety net. Each policy is part of a complex social and economic model that includes features that Americans, and American business, would find unacceptable. These are package deals, not individual offerings at a dim sum lunch.

Pearlstein notes that the socialized systems that characterize many of the Scandinavian countries ranking high on the competitive list (which have broad healthcare coverage but high taxes) is probably not the secret to their success.

The reason the Nordic countries score higher in the WEF study is that their governments run surpluses instead of deficits, cave in to special interests less often, operate efficiently and spend their money wisely.

Pearlstein ends his article suggesting that it is time that business and government (in a bi-partisan way) work together to help the U.S. regain its position atop the competitive ladder. That’s going to be a tough course in an election year. But Pearlstein’s point is nonetheless well made. The U.S. must pursue policies that make it more competitive and that help emerging market countries raise their labor and social service standards as well.