The World Economic Forum’s Misguided Competition: Leaving the Global “47 Percent” Behind?

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To be held next week, the annual meetings of the World Economic Forum compel one to revisit John Maynard Keynes’ observation that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.” In particular, the Forum meetings highlight the ways in which not only good ideas, but also bad ones can persist in the minds of policymakers. Indeed, a perverse significance of the Forum lies in having advanced ideas regarding “competitiveness” that have proven persistently wrong – with adverse implications for not only investment and growth, but also fairness, equality, and human security.

Since the 1970s, the World Economic Forum has shaped debate perhaps most persistently by publishing an annual Global Competitiveness Report. This Report has contained an annual Global Competitiveness Index (GCI) measuring the “growth potential” of national economies. In its most recent form, the GCI has encompassed twelve “pillars” spanning political, social, and economic concerns. Some of these indicators are admittedly beyond reproach: It is hard to dispute the importance of health care, education, or basic infrastructure. Yet, at its ideational core, the GCI rests on a supply-side view which casts reductions in wages on as a means to investment and growth. Put differently, the GCI explicitly employs an investment-driven model that accords with a Mitt Romney-styled stress on the interests of the “job creators.” For example, in its most recent Report, it defines competitiveness (somewhat awkwardly) as “the set of institutions, policies, and factors that determine the level of productivity of a country.” It then elaborates that productivity “determines the rates of return obtained by investments… which in turn are the fundamental drivers of… growth rates.” From this perspective, growth is driven not by demand, but rather by returns on investment.

This emphasis matters for the position of labor, because productivity and returns on investment can be increased most immediately by reducing labor costs. Indeed, the “seventh pillar” of the Forum’s CGI pertains to labor, advancing the view that firms must have “the flexibility to shift workers from one economic activity to another rapidly and at low cost.” In the CGI model, where firms are free to fire workers or cut wages, increased returns will thereby enable rising growth.

Yet, a key problem with this model is that neither firms nor investors are backwards-looking agents who make investment decisions based on costs. Instead, they more often make their decisions based on forward-looking shared expectations regarding demand trends. In terms of “competitiveness,” this requires not only a commitment to rising wages – or at least the provision of a minimal floor below which they cannot fall – but also some guarantees of labor rights, to provide consumers with the confidence to keep spending. Such a concern for demand is also, of course, the justification for deficit spending, as governments seek to offset consumer pessimism by cutting taxes and raising spending. Yet, the Global Competitiveness Report not only emphasizes the dangers of deficits, but does so by spotlighting concerns for inflation – which has since the late 1970s been on par with killer bees and shark attacks as a realistic threat – highlighting again Keynes’s point about ideas rather than interests driving debate!

To be sure, a demand-side case for rising wages should not obscure some need for labor market flexibility. For example, the Global Competitiveness Report correctly notes that sustained rigidity in European labor markets has kept youth unemployment frustratingly high. Yet, the GCI ultimately embodies not any balanced approach, so much as a sustained stress on labor flexibility, oriented to a downward wage trend.

Moving out of the weeds of economic theory, the Forum’s arguments regarding “competitiveness” also have broader implications for social welfare and stability. Rising economic inequality can be a key source of political strife, risking domestic upheaval and international conflict. For example, the Great Depression was an antecedent to the atrocities of World War II – and even the current Arab Spring offers no guarantees of a progressive outcome. Of course, as any Political Economist knows, economic instability does not channel directly into political strife: Historical and institutional contexts also matter. Yet, to the extent that wage repression and unemployment are unlikely to foster competitiveness or growth, they are equally unlikely to foster political stability or cohesion.

To return to Keynes, the context of the World Economic Forum may demonstrate that the challenge of promoting economic competitiveness may depend on a degree of intellectual competitiveness. As Keynes put it, one cannot construct new ideas without first “escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds” – as would ironically seem to be a challenge for those who have constructed the World Economic Forum’s notion of “competitiveness”.

Wesley Widmaier, Human Protection Hub