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A microeconomic agenda for development

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Acknowledgements Foreword Overview: Promoting Freedom, Security and Opportunity Chapter 1: Promoting Democratic Governance Chapter 2: Driving Economic Growth Chapter 3: Improving People's Health Chapter 4: Mitigating and Managing Conflict Chapter 5: Providing Humanitarian Aid Chapter 6: The Full Measure of Foreign Aid 53     Jump to Chapter 2 Sections: >> New thinking on drivers of growth >> Income inequality is declining >> More trade and investment mean faster growth >> Increasing U.S. imports through the African Growth and Opportunity Act >> A microeconomic agenda for development >> How can the U.S. support growth in developing countries >> Background papers >> References Drivers of competitiveness A central challenge in economic development is to create conditions for rapid, sustained growth in national productivity. The microeconomic foundations of productivity rest on two related elements: The sophistication of competition, reflecting the operations and strategies of domestic companies and of foreign subsidiaries based in the country. The quality of the microeconomic business environment. A country’s productivity is affected by the productivity of its companies: an economy cannot be competitive unless the companies operating in it are competitive. But the sophistication of companies is inextricably intertwined with the quality of the national business environment. More sophisticated company strategies require more highly skilled workers, better information, improving infrastructure, more advanced institutions, and stronger competitive pressure. To support rising prosperity, companies must transform their ways of competing. The advantages that a nation’s companies enjoy must shift from comparative advantages (low-cost labor or natural resources) to competitive advantages (resulting from more distinctive products made using more productive methods). Strengths in competing at earlier stages of development become weaknesses at more advanced stages. Copying of foreign technology, for example, must give way to development of indigenous technology. Yet companies often resist change because past approaches were profitable and old habits are deeply ingrained. Efforts to move to more sophisticated ways of competing require parallel changes in the microeconomic business environment. This environment is determined by four related features: the quality of factor (input) conditions, the context for firm strategy and rivalry, the quality of demand, and the presence of locally related and supporting industries (figure 2.7). page 3

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