chapter  3
The balance of payments and national competitiveness
Pages 22

National competitiveness can be defined as the ‘ability to produce goods and services that meet the test of international competitiveness, while (the country’s) citizens enjoy a standard of living that is both rising and sustainable’ (Tyson 1992, p. 1). Thus, a competitive country is one that is able to produce tradable goods that are in sufficient demand both in home and overseas markets such that trade will be in balance without the country having to continuously depreciate its currency or to operate at a level of activity below its potential (Howes and Singh 2000). Clearly, large and persistent deficits in the country’s current account are one important indicator of structural problems with respect to the country’s relative competitiveness, though such deficits may also be caused by macroeconomic disequilibrium or inappropriate exchange rate policies. Large current account deficits often trigger balance of payments (BOP) crises for developing countries and may necessitate the use of adjustment measures such as a contraction in aggregate demand in the country in question or large exchange rate adjustments. For a developing country that is attempting to pursue high rates of economic growth, such a growth strategy could lead to widening current account deficits and effectively constrain the long-run growth rate of the economy. A higher long-run growth rate that is consistent with a sustainable BOP situation is only possible with a rapidly growing export sector. As we have argued in Chapter 1, given that agricultural commodities often face declining prices in world markets, the manufacturing sector must necessarily be the leading sector in the country’s export drive. Therefore, the key policy issue at the national level is how to increase the international competitiveness of the country’s manufacturing sector.