European Union: Competitiveness

Last Updated: 11 January 2013
Article by Steve Stivala

Enhancing productivity is ever more crucial in today's world. But how easy is it, especially when all factors are pointing in the reverse direction?

It would seem that in the midst of the ongoing economic turmoil, competitiveness takes on the form of a double edged sword. Unfortunately, the world is still experiencing the effects of the knock-out blow landed at the height of the financial and economic crisis in mid-2008, with further exacerbations brought about by a sovereign debt problem which presents a Euro-wide systemic risk. Against this backdrop, there is a glimmering hope of recovery, but subdued economic growth and conservative fiscal response are set to characterise the European economy in the near future. In this regard, enhancing competitiveness is probably one of the key factors to herald and encourage future economic and sustainable growth. On the flip side, this requires investment, both at the firm level and at the national government level, which is difficult to achieve in times of muted demand, credit squeezing, high government borrowing costs, and limits on government spending.

Competitiveness has therefore become an even more relevant area which is now embedded, more than ever, in European (and world-wide) policy-making. It is thus crucial to understand the underlying economic fundamentals of the concept and how it is measured, in order to be able to have an intelligent discussion about the subject. Unfortunately, many commentators and politicians alike still fail to grasp the basic idea of external competitiveness. We often hear statements like "Cheap labour from the Far East is destroying Western jobs", or "We need to focus on high-value added exports to create more jobs". At best, this is only half the story. At worst, this is a misguided mercantilist approach which adopts a narrow focus. Paul Krugman (1996) succinctly captures this concept in his seminal paper on competitiveness:

"While influential people have used the word 'competitiveness' to mean that countries compete just like companies, professional economists know very well that this is a poor metaphor"

Krugman, P. (1996), "Making sense of the Competitiveness Debate", Oxford Review of Economic Policy, Vol. 12, No.3.

Understanding why external competitiveness is not a zero-sum game

It is often understood that competitiveness is a mere reflection of unit labour costs and labour productivity, and that it is imperative to improve on these two indices in order to gain a competitive advantage over other countries and export our value-added abroad, thus contributing to the generation of jobs. Whilst this view is intuitively appealing (and indeed has some truth in it as most competitive indicators focus on such indices), at the heart of this concept lies a general understanding that countries compete in the same way as businesses do. By implication, this would mean that failure to have high labour productivity and low wage costs could result in less generated exports and less jobs. In essence, this is a mercantilist approach which adopts the view that international trade is solely concerned with being more 'competitive' than other countries in order to generate exports and generate jobs within the home economy. Consequently, jobs generated, say, in the Far East due to lower wage costs would displace jobs in high-wage countries. This is diametrically opposite to what basic international trade theory dictates.

First, international trade thrives on the concept of comparative advantage. Even if a country has an absolute disadvantage, relative to another country, in the production of all goods, it still pays off to trade internationally (See Box 1). The key is to look at the opportunity costs of each country in producing one good over another. In this regard, every country has a comparative advantage and every country stands to gain from trading internationally. This may seem confusing and counter-intuitive, but it is indeed the reason why countries export goods to other countries which are clearly more efficient in producing the good themselves.

Secondly, one must keep in mind that the purpose of international trade (and being competitive in the process) is not to generate as much exports as possible to foster jobs. On the contrary, the purpose is to be able to import goods and services which would have been otherwise too costly (in relative terms) to produce locally.

Lastly it is also pertinent to note that international trade is a dynamic subject with many interdependencies among the different variables. In other words, prices, wages, size of the world market and specialisation are all simultaneously determined, and therefore not static. This means that growth in productivity in one country does not necessarily translate to less jobs in another country. Even though a particular industry may not remain competitive (and jobs would be lost), the economy as a whole can still gain from trade by specialising in the good where comparative advantage exists, provided that there is flexibility in the economy to shift resources from one activity to another.

At the heart of this argument is the economic theory of stages of development, which is outlined in detail in the Global Competitiveness Report issued by the World Economic Forum. In short, this theory states that countries in the initial stages of development compete on the basis of unskilled labour and natural resource endowments. At this stage, it is important to have a business environment with all basic necessities (institutions, infrastructure, stable macro-economic environment and so on). As the country progresses and wages and productivity increase, the economy would need to adjust and focus more on enhancing the quality of products and improving the efficiency of production. In this case, competitiveness is more likely to be improved if there is an emphasis on higher education and training, better financial markets, well functioning labour markets and so on. In the third stage of development, the emphasis should fall on creating new and innovate products using the most sophisticated production processes. This is the innovation-driven stage. There is some parallelism between the theory of stages of development and the 'three-sector hypothesis' in the sense that as the economy advances, there is a movement away from manufacturing and towards the services sector. However, this may not always hold (see section on additive manufacturing and the 3rd Industrial Revolution). It is pertinent to note that according to the Global Competitiveness Index, Malta is classified as an 'Innovation-driven' economy, as shown on the following page.

Competitiveness – more than just labour costs and productivity?

Although many publications focus on labour productivity and compensation per employee to compute a statistical measure of competitiveness (such as the ULC – Unit Labour Cost), the subject of competitiveness is clearly a richer concept than what statistics imply.

In our previous issue we briefly discussed competitiveness with respect to the Maltese economy. Since the situation would not have drastically changed, below we re-produce a few salient points which emerge from the previous publication:

  • Following Malta's accession in the European Union, we argued that 'competitiveness' would need to be addressed and restored through the real channels of the economy due to the relinquishment of monetary and exchange rate policy. This means that, although local businesses and employees would be exposed to the realities of international competition, this still presents an avenue for greater market efficiency and innovation.
  • We also argued that competitive pressures tend to impact most the manufacturing sector (although the services sector is not immune to such exposure). However, this represents a migration towards economic 'tertiarisation' which is an expected and natural economic progression.
  • When considering statistical measures, we pointed out that compensation per employee was rising faster than labour productivity, which signals a deterioration of competitiveness. However, Malta still has a competitive edge relative to the EU27 since Maltese hourly labour costs are significantly below the EU27 average, whilst Maltese labour productivity levels are slightly below the EU27 levels.
  • We also noted that exchange rate fluctuations play an important part in Malta's competitiveness, particularly since around two thirds of Maltese exports are directed towards countries outside the Euro Area. Indeed, the appreciation of the Euro between 2006 and 2008 played an important part in the erosion of competitiveness whilst the opposite was experienced post 2008.
  • Lastly, we argued that the amelioration of competitiveness should be a shared objective between all social partners (although some variables are outside the control of any of the local social partners), and that enhancing competitiveness should not be solely constrained to curbing cost increases but should also encompass supply side factors such as incentivising investment. We further expound on this point below.

According to the Global Competitiveness Report, competitiveness is defined as "the set of institutions, policies, and factors that determine the level of productivity of a country". In turn, productivity is said to determine the rates of return obtained by investments, which is a key driver of economic growth. Put simply, greater productivity enhances both the level and the potential for economic growth, thus increasing the level of prosperity which can be earned by the economy.

The GCR lists no less than twelve pillars which are in some way determinants of competitiveness. These pillars, although not mutually inclusive, are important to differing degrees depending on the stage of economic development of a particular country. For instance factor-driven economies would find it worthwhile to focus on basic requirements such as the development of institutions and ensuring macro-economic stability, whilst innovation-drive economies, having already a framework of basic necessities would find it more beneficial to focus on business sophistication and research and development.

Third Industrial Revolution?

Competitiveness is a dynamic concept and the rules of the game are sometimes overhauled to such an extent that factories, processes and jobs become obsolete overnight. The first and second Industrial Revolutions saw a radical departure from traditional types of manufacturing at the time. In particular, the coal fired steam engine and proliferation of printed matter heralded the first industrial revolution, whilst the electrification of factories and the creation of the assembly line, as perfected by Henry Ford, gave rise to the second industrial revolution characterised by mass production. It is for this reason that, as wages increased in the developed world, mass production (being intrinsically labour intensive) moved to countries such as China, India and Mexico. Even today, this process of finding the most efficient method of production continues, as firms are now moving to India, Indonesia and Vietnam, since Chinese labourers demand higher pay and shorter working hours.

Some economic commentators believe that the Third Industrial Revolution is on its way. More specifically, this revolution, which is endorsed by the EU and backed by EU-wide initiatives, will once again redefine the boundaries of competitiveness. The main drivers are expected to be a revolutionary way in which renewable energy is created, transported and distributed along an "energy internet" framework. At the heart of this, it is expected that a major characteristic of the Third Industrial Revolution would be mass customisation (as opposed to mass production) which would be possible due to the convergence of different technologies, ranging from smarter production processes, more efficient automation and robotisation. This novel concept of additive manufacturing (think of 3D printers where three dimensional products are produced from a digital blue-print file) would re-invent economies of scale and alter the capital to labour ratio of many production processes. As the labour component decreases, it might induce companies to re-locate factories back to the West with a view to be closer to market and to benefit from synergies of having the designers and producers of goods in the same place. The competitiveness landscape would be changed forever.

This article was originally published in Insight 2012. Please click here to view the original document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Steve Stivala
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions