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A microeconomic agenda for development

>> Foreign Aid in the National Interest >> >> Chapter 2
 
  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

Tuesday, 07-Jan-2003 09:10:04 EST

 
 

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.

Figure 2.7 Determinants of the microeconomic business environment. Click the image for an alternate text version. 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).

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