As I noted in the preface, globalization has thrown development economics into a quagmire. Often arguments in recent growth debates are framed in the context of competitiveness (especially when the speaker or writer wants to appeal to policy makers). This is very problematic because while in the business world the term “competitiveness” has a clear meaning—a firm that is not competitive will lose market share and eventually will go out of business—its counterpart at the aggregate level (a nation) might be a “can of worms.” In this chapter, I will elaborate on some of the implications of competitiveness and globalization, particularly on the policy prescription that developing countries should adopt a liberal policy stance.

At the level of the firm, competitiveness is a question of competition among individual companies, that is, about the mechanisms that help more productive and efficient companies expand and take market share from the less productive ones, which then go out of business or become more efficient. The most effective way for policy makers to help individual firms to increase productivity is to create the conditions in each sector for fierce but fair competition among all participating firms. This means that policy makers in an economy can help speed up growth by enacting regulations that support more competition in each sector and by removing factors that obstruct competition. When government actions stand in the way of competition through policies that distort it and render it less intense, then inefficient companies are not pressured to change. Poor countries, in general, have in place much more severe market-distorting measures than developed countries have.

This usage of the term “competitiveness” is meaningful and legitimate. It requires, however, that one believe that the end result of competition, namely that uncompetitive firms will end up going out of business while the competitive ones will flourish, indeed happens and improves the welfare of society, resulting in not only a bigger national income but also higher employment. Although individual firms may become more productive by adopting less labor-intensive processes and shedding staff, the combined impact of reinvesting their larger surpluses back into the economy will be higher aggregate demand.