US economy: sharpening its competitive edge

HERE'S an economic theory for you to grapple with: ``American business is no longer competitive in world markets.'' Many respected observers say that is now the case. Others say such a statement is not based in fact. What needs to be kept in perspective in such a debate is that both sides are essentially right about their facts.

According to one view of competitiveness, the United States economy is indeed troubled compared with that of Japan, South Korea, and other countries. But according to another view, whatever problems exist are far from being fundamental to the American economy as a whole -- or, for that matter, widespread.

The issue turns, then, on what we mean by that elusive term competitiveness. Careful analysis is required. In this case, is the current US economic situation truly a case of declining competitiveness -- or is it something quite different? Lagging productivity growth

Productivity growth, in a long-term sense, has slowed -- and the slowdown is a real source of concern. When the New York Stock Exchange published its first study of lagging productivity in 1979 (five more were to follow), the term was little understood and often mistrusted. The idea of boosting productivity conjured up a vision of the sweatshop. By now many people understand that productivity simply means the amount a person can produce in a given period of time -- and that in today's economy productivity gains come largely from more modern plants and equipment, from more efficient production methods and innovative technologies, and from people working ``smarter'' rather than harder. Without an increase in productivity there can be no sustained increase in income per person.

But as worrisome as our long-term productivity slowdown is, does it mean we've lost our international competitiveness?

The answer is no -- and the reason lies in distinguishing between the level and growth rate of productivity. From 1960 to 1973, the productivity growth of such industrial countries as Canada, France, West Germany, Italy, Japan, and the United Kingdom was faster than ours. But because their productivity was growing from a much lower level, by the end of that period the US economy remained far more productive. From 1973 to 1980 the ``catch-up rate'' -- the gap between our productivity growth and that of other countries -- actually narrowed: US productivity growth declined, but most others' declined even further. The result is that while ``catch up'' has continued, the US economy remains the most productive in the world.

The point, then, is that our declining productivity growth has not seriously undermined our international competitiveness -- a conclusion that is amply confirmed in a recent Brookings Institution study, ``Can America Compete?'' There is good reason to be concerned about our slow productivity growth compared with our own past. There may even be added cause for concern about what the future will bring if our economy does not remain more productive than others. But that is very different from saying that US business has lost competitiveness in world markets. Trade deficits

Another mistake is to associate declining competitiveness with trade deficits -- the tremendous imbalance between US exports and imports. This year alone, the trade deficit will be $120 billion.

But competitiveness and international trade balances are not the same thing. We first need to analyze the reasons behind the balance-of-payments deficit before we jump to the conclusion that the deficit proves a loss of basic competitiveness. Fortunately, the Morgan Guaranty Bank has provided such an analysis in its September 1984 issue of World Financial Markets. Morgan says that most of the US trade deficit is due to three factors.

First, the strong dollar has made foreign goods relatively cheap and US goods relatively dear. Foreign investors have kept the dollar strong by pouring more than $100 billion into US securities and bank accounts. Foreigners have been attracted by our high interest rates -- which are in turn largely due to the US budget deficit.

A second reason for the US trade deficit, according to Morgan, is the faster growth of the US economy compared with economies abroad. The result is that Americans have been able to buy more than their less prosperous foreign counterparts.

Morgan says that a third reason for the trade deficit is the declining imports of Latin America, a region with burdensome international debts.

Whatever one might say about the strong dollar, the more rapidly growing US economy, and the economic problems of Latin America, they do not indicate a decline in our competitiveness. Share of world trade

In judging competitiveness, a business looks at its market share. So can a country.

A recent New York Stock Exchange study, ``US International Competitiveness: Perception and Reality,'' prepared by senior NYSE economist Mel Colchamiro, concludes that over an extended time -- between 1962 and 1982 -- US exports held their market share remarkably well. It also concludes that over this same period import penetration remained relatively stable.

There were areas of weakness, with autos, steel, and textiles most prominent. But other industries, such as aerospace, computers, and office equipment, retained and even strengthened the dominant market position of the US. What the figures do show clearly is that Europe, not the US, has been a significant loser of world market share. Best solution

The best solution for the US economy would be to apply remedies that many have been urging for a long time: reducing massive US budget deficits and creating a favorable environment for improved growth in productivity. But as far as US competitiveness is concerned, the problem is limited and not general.

William C. Freund is senior vice-president and chief economist of the New York Stock Exchange, a professor of economics, and co-author of the book ``People and Productivity.''