What is the best policy goal for growth? productivity or competitiveness?

An article in the June Finance and Development magazine from the IMF addressed the path to prosperity for economies and if the focus should be on competitiveness or productivity. The concept of competitiveness has been misunderstood particularly in the context of international trade.

Increased productivity benefits a country whether it trades or not – greater output for the same cost of inputs. Competitiveness is relative to other countries where one country might have higher productivity than another. World trade is a non-zero-sum game as global trade increases productivity worldwide and benefits everyone by allowing countries to specialise in what they produce most efficiently (comparative advantage) with lower prices. Therefore, productivity is generally the better path to prosperity for a country, and economic reforms should focus on increasing a country’s own productivity rather than competitiveness.

Impact of foreign productivity

• Whether a country’s increased productivity has a positive or negative effect on another country depends on the terms of trade.

• Country A produces a good X more efficiently and increases the global supply and thereby reducing its price

• If country B also primarily exports good X the lower price will make country B worse off as their exports are more expensive than country A.

• If country B primarily imports good X the lower world price means country B will likely be better off because imports become cheaper

This can be a problem for small countries whose products are exposed to the competition from foreign innovation. However for larger countries like the US, China, and the European Union, terms-of-trade effects from foreign productivity changes are typically small, as they rely less on foreign trade and their trade is spread across many products

Strategies to increase competitiveness.

• Make exports cheaper – keep costs cheaper and businesses use savings to hold prices down.

• Depreciate currency – countries attempt to make their currency cheaper which makes exports more competitive.

The problem with the above is if a country is near or at full employment, increased export demand could lead to inflation, eroding the competitiveness gain – see graph. To counter this, currency depreciation can be combined with fiscal tightening (e.g., raising taxes or cutting spending) to shift production towards export sectors and away from domestic consumption.

While boosting competitiveness is a popular policy objective, focusing on economy-wide productivity is often a more appropriate goal. Situations where a country’s price level relative to competitors leads to trade imbalances are less common and harder to identify than policymakers might realise

Source: R&D – IMF – June 2025

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