Macroeconomic Policy,
Competitiveness and Resilience
of Small States
Gordon Cordina
University of Malta
Main Points
• Competitiveness and the capacity for
endogenous growth are essential to the
resilience of small states
• Macroeconomic and growth dynamics of
small states call for special consideration
of resilience and competitiveness issues
• Available competitiveness indicators often
lack sufficient relevance for small states
Competitiveness, Growth and
Resilience
Fundamental Definitions
• Economic Vulnerability
– Exposure to exogenous shocks arising out of
inherent characteristics of an economy
• Economic Resilience
– Nurtured ability to withstand, absorb or
rebound from the negative effects of shocks
Fundamental Definitions
• Competitiveness
“the degree to which a country can, under free
and fair market conditions, produce goods and
services which meet the test of international
markets, while simultaneously maintaining and
expanding the real incomes of its people over
the long term”
OECD
A National Issue
The success of firms depends on economic
conditions within the country in which they
operate
• economic, political stability
• efficiency of resource allocation and costs
• availability of skills
• innovation synergies
• other factors
Nations Compete
Nations can be viewed to compete in
providing the best operating environment to
promote enterprise competitiveness
Thus a strategy for competitiveness at a
national level is called for, which includes
consideration of a macroeconomic policy
strategy
Models of Growth
• Less competitive economies are subject to
diminishing marginal productivity
• This implies that growth is bound to slow
down unless sustained by exogenous
shocks
• More competitive economies experience
constant or increasing marginal
productivity
• This implies that growth can be sustained
endogenously
Output
Diminishing Marginal Productivity and Resilience
Resources Used
Negative shocks have stronger effects than symmetric positive
ones. Vulnerability has adverse effects due to insufficient
resilience.
Output
Constant Marginal Productivity and Resilience
Resources Used
Symmetric shocks have symmetric effects.
Vulnerability is met by resilience.
Output
Increasing Marginal Productivity and Resilience
Resources Used
Positive shocks have stronger effects than symmetric negative
ones. Economy is sufficiently competitive and resilient to profit
from shocks.
The Incidence of Diminishing
Returns
•
•
•
•
•
•
Small scale and jurisdictions
Insufficient competitiveness
Insufficient flexibility
Inappropriate policy frameworks
Inadequate governance
etc.
Stylised Facts concerning Growth
and Macroeconomic Dynamics of
Small States
Stylised Facts
Basic Premises
•
•
•
Small states, though not a homogenous group,
are characterized by a number of common
factors which impinge on their economic
behaviour
Common characteristics are here derived as
stylised facts from literature and empirical
observation
Utilization of stylized facts as a first step
towards developing positive theories in
economics originated by Kaldor (1961)
Approach has limitations but is effective to
perform empirical and theoretical analyses
Stylised Facts
Measures of Economic Size
•
•
•
•
•
•
•
No general agreement on the definition of a ‘small’
economy
Definitions may be behavioural and quantitative
Behavioural definitions:
- price taker, limited resources and economies of scale
and scope, etc (Briguglio, 1995; 2002)
Quantitative definitions:
- population (Srinavasan, 1986), land area, total
output, share in world trade
Quantitative are more practicable than behavioral but
require cut-off value
Population is the most frequently used measure
Size here considered as a continuous function of
population rather than a discrete phenomenon
Stylised Facts Concerning Economic Growth
Figure 1: Economic Development and
Economic Size
log of per capita GDP
12.00
10.00
8.00
6.00
4.00
2.00
0.00
0.00
5.00
10.00
log of Population
15.00
Figure 2: Income Dispersion and Economic Size
Income Disperson
0.50
0.40
0.30
0.20
0.10
0.00
0.00
2.00
4.00
6.00
8.00
10.00
log of Population
12.00
14.00
16.00
Figure 3: Economic Growth and Economic Size
Average Growth (91-02)
25%
20%
15%
10%
5%
0%
-5% 0.00
2.00
4.00
6.00
8.00
10.00
-10%
log of Population
12.00
14.00
16.00
Figure 4: Growth Volatility and Economic Size
Growth Volatility
6
4
2
0
-2
0.00
2.00
4.00
6.00
8.00
10.00
-4
log of Population
12.00
14.00
16.00
Figure 5: Investment and Economic Size
Investment to GDP
50
40
30
20
10
0
0
2
4
6
8
10
log of Population
12
14
16
Investment to GDP ratio
Dispersion in
Figure 6: Investment Dispersion and Economic Size
1
0.8
0.6
0.4
0.2
0
0
2
4
6
8
10
log of Population
12
14
16
Stylised Facts Concerning Volatility in Aggregate Demand
Figure 7: Export Growth Volatility and Economic Size
4
3
Volatility
log of Export Growth
5
2
1
0
-1 0
2
4
6
8
10
-2
log of Population
12
14
16
Growth Volatility
log of Investment
8
Figure 8: Investment Growth Volatility and Economic
Size
6
4
2
0
-2
0
2
4
6
8
10
log of Population
12
14
16
Figure 9: Public Consumption Growth Volatility and
Economic Size
6
Volatility
Consumption Growth
log of Public
8
4
2
0
-2 0
5
10
-4
log of Population
15
Figure 10: Private Consumption Growth Volatility and
Economic Size
4
3
Volatility
Consumption Growth
log of Private
5
2
1
0
-1 0
5
10
-2
log of Population
15
Figure 11: Import Growth Volatility and Economic Size
8
Volatility
log of Import Growth
10
6
4
2
0
-2 0
2
4
6
8
10
log of Population
12
14
16
Stylised Facts Concerning Openness and Concentration
Figure 12: Openness to International Trade and
Economic Size
(Imports + Exports)/GDP
200
150
100
50
0
4
6
8
10
log of Population
12
14
16
Figure 13: Sectoral Concentration in Production and
Economic Size
smallest sector
sector less share of
Output share of largest
100
80
60
40
20
0
4
6
8
10
12
log of Population
14
16
Figure 14: The External Current Account and Economic
Size
30
10
Balance)/GDP
(Current Account
20
0
-10 4
-20
6
8
10
-30
-40
-50
log of Population
12
14
16
Stylised Facts Concerning Fiscal Policy
Figure 15: Government Consumption to GDP and
Economic Size
Consumption to GDP
50
Government
40
30
20
10
0
4
6
8
10
log of Population
12
14
16
Figure 16: The Fiscal Balance and Economic Size
Fiscal Balance to GDP
10
5
0
-5 4
6
8
10
-10
-15
-20
-25
log of Population
12
14
16
Stylised Facts Concerning Monetary and Exchange Rate Policy
Figure 17: Unemployment Rates and Economic Size
7
6
Unemployment Rate
Volatility
Unemployment Rate
20
Figure 18: Unemployment Rates Volatility and Economic
Size
15
5
4
3
10
2
5
1
0
0
4
6
8
10
12
14
16
4
6
8
log of Population
12
14
16
14
16
log of Population
Figure 19: Inflation Rates and Economic Size
Figure20: Inflation Rate Volatility and Economic Size
80
I n fl a ti o n R a te
V o l a ti l i ty
60
I n fl a ti o n R a te
10
60
40
40
20
20
0
-20 4
0
6
8
10
log of Population
12
14
16
4
6
8
10
log of Population
12
Macroeconomic Policies towards
Competitiveness and Resilience
Macroeconomic Stability
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•
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Pursue a counter-cyclical fiscal policy
Emphasise efficiency in expenditure and
tax collection
Re-allocate public expenditure to growthinducing activities
Maintain exchange rate stability
Set interest rates that are conducive with
financial stability while promoting
investment
Macroeconomic Stability
•
•
•
•
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Curtail unproductive employment
Promote competition and fair trading
Ensure prudential portfolio management
Curtail state induced costs including
excessive interference
Facilitate the possibilities for enterprises
to make the best use of regional trading
arrangements
International Measurement of
Competitiveness
• World Economic Forum
• Institute for Management Development
• World Bank
• Other
World Economic Forum
• Published annually since 1979
• 100 economies
• Global Competitiveness Report
1. Growth Competitiveness Index
2. Business Competitiveness Index
Growth Competitiveness Index
• Aims to measure:
– Country’s capacity to achieve sustained
economic growth
• Three sub-indices:
1. Technology
2. Public institutions
3. Macroeconomic conditions
Business Competitiveness
Index
• Aims to identify:
– Underlying microeconomic conditions
defining the current sustainable level of
productivity
Two sub-indices:
1. Sophistication with which a nation’s
firms compete: company operations
and strategy
2. Quality of the microeconomic business
environment
World Economic Forum
• Makes use primarily of survey data
• Lack of consistency in methodology used
International Institute for
Management Development
• World Competitiveness Yearbook
• Analyses the ability of nations to provide
an environment that sustains the
competitiveness of enterprises
• Produced annually since 1989
• 59 economies
International Institute for
Management Development
• 300 criteria divided into 4 categories:
1.
2.
3.
4.
Economic Performance
Government Efficiency
Business Efficiency
Infrastructure
Economic Performance
1. Domestic Economy (ex: GDP)
2. International Trade (ex: balance of trade,
exports, imports)
3. International Investment (ex: FDI)
4. Employment (ex: unemployment rate)
5. Prices (ex: inflation)
Government Efficiency
1. Public Finance (ex: budget balance)
2. Fiscal Policy (ex: tax revenues)
3. Institutional Framework (ex: exchange
rate policy, new legislation)
4. Business Legislation (ex: start up days)
5. Societal Framework (ex: serious crime)
Business Efficiency
1. Productivity (ex: labour productivity)
2. Labour market (ex: unit labour costs)
3. Finance (ex: venture capital, stock
market capitalisation)
4. Management Practices (ex: adaptability)
5. Attitudes and Values (ex: values)
Infrastructure
1. Basic Infrastructure (ex: energy
intensity)
2. Technological Infrastructure (ex:
internet)
3. Scientific Infrastructure (ex: R&D
expend)
4. Health and Environment (ex: life
expectancy)
5. Education (ex: public expenditure on
education)
International Institute for
Management Development
• Large coverage of indicators
• Only a small section is based on qualitative
data
• Fewer countries are analysed
• Includes forecasts: element of future
competitiveness
• Includes size: controllable versus uncontrollable
features of competitiveness
World Bank Competitiveness
Indicators
• 130 countries
• Assesses the state of the business
environment for a given country of
interest
World Bank Competitiveness
Indicators
• 49 indicators divided into 5 categories:
1. Overall Performance
2. Macro and Market Dynamism
3. Financial Dynamism
4. Infrastructure and Investment Climate
5. Human and Intellectual Capital
Overall Performance
• Gross National Product (GNP) per capita
• Standard Deviation of Income Distribution
Macro and Market Dynamism
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•
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Investment and Productivity Growth
Overall Trade Dimensions
Export Competitiveness
Export Structure
Trade Policy
Government Involvement in the Economy
Financial Dynamism
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•
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NPV of External Debt
Average outstanding money as % of GDP
Inflation
Credit to the Private Sector
Stock Market Capitalisation
Real Interest Rate
Infrastructure and Investment
Climate
• Information and Communication Network
• Physical Infrastructure
• Socio-Political Stability
Human and Intellectual Capital
• Human Capital (literacy rate, school
enrolment, life expectancy)
• Intellectual Capital (science graduates,
research and development expenditure,
patents)
World Bank Competitiveness
Indicators
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•
•
•
•
Indicator composition is similar to IMD
Only hard data is used
No final ranking
Large number of developing countries
Discontinued
Other competitiveness
measures
• Lisbon Agenda
• National institutions:
– USA Council of Competitiveness
Measuring the competitiveness of
small states
• These competitiveness indices are not
produced for small states
• Countries are chosen because of:
– Impact on the global economy
– Availability of comparable international
statistics
Measuring the competitiveness of
small states
• It is important to develop measures to
assess the competitiveness of small
states:
– Helps them assess their position vis-à-vis
other countries
– Helps them determine developments over
time
– Important indications for policy to engender
growth and resilience
– Can serve to attract FDI
Conclusions
• Vulnerability and resilience are relevant
concepts, especially for small states
• Resilience is associated with patterns of
growth and competitiveness
• Available indexes of competitiveness
appear to not sufficiently address issues of
small states
• In particular, more direct measurement of
resilience is called for to address policy,
investment and development questions in
small states