While narrow measures of competitiveness do provide some useful insights into imbalances in the global economy, a broader vision of competitiveness is needed if the concept is to remain useful for investors, said an industry expert.

“Narrow measures of competitiveness also have important limitations such as encouraging an overly mercantilist stance, and too much of a focus on the labour market,” explained Jeremy Lawson, chief economist, Standard Life Investments, the global investment manager.

In the latest edition of Global Perspective, Standard Life Investments examines how narrow cost driven measures of export competitiveness can provide a misleading picture of what drives national economic performance and may lead to policy errors when misused by governments. This can in turn result in economic and financial instability.

In the report Standard Life Investments identifies a number of limitations with this narrow approach and instead argue that investors are better served by methods that emphasise economy-wide productivity performance as well as balanced growth.

“In our view, a country’s competitiveness is better defined as the overall strength of domestic policy and other institutional settings and their capacity to encourage business growth and deliver healthy and widely distributed gains in productivity and living standards over time,” said Lawson.

“This type of competitiveness benefits both the country itself and its trading partners and bodes well for longer term asset performance. Consequently, investors that focus on broader indicators will have a better array of signals when deciding how to allocate their capital more effectively.

“When considered in this light, both Europe’s and Japan’s long-term challenges become much clearer. What is needed is a radical productivity agenda to raise potential growth. Trade performance is therefore just one small piece of the competitiveness puzzle,” he concluded. – TradeArabia News Service