What factors caused the drop in the UK's Global Competitiveness Rank in 2007 - 08?
Question 3 – Callum Trounce
- One factor which may have contributed to the fall of the UK’s Global Competitive Index is productivity. The GCI is a comparison between different countries; this means that the fall UK’s productivity is relatively larger. The economic crisis can be seen as a reason to cause a drop in productivity as the crisis occurred around the same time period, making it feasible. The crisis caused firms to have profit to reinvest (or no profit at all) and so research and development will be neglected. If R & D is neglected, improving productive efficiency will become a slower process which would lead to unit costs being more expensive than foreign competitors. A higher unit cost means that exports from the UK are likely to become more expensive as firms raise their prices to cover labour costs. This means that the UK becomes less competitive globally and therefore can be seen as a contributor to the fall in GCI for the UK. This can be backed up as the BoP for the UK was at its most negative point in 2007.
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However, the economic crisis has occurred worldwide and so many other countries have been affected, such as Germany who is seen as a major exporter of motor vehicles. This means that the drop in GCI may not have been as bad as what it could have been.
The exchange rate could also have an impact. The value of the pound appreciated up until a peak in 2007. This would cause the £ to have a higher value, for example UK firms would be able to purchase more goods from Europe or USA. However UK exports become more expensive to other nations who wish to invest in nuclear energy (a UK major export) such as Japan. An increase in price of export shows a decrease in competitiveness and therefore the GCI would be expected to drop.
However, an increase in exchange rate leads to having the ability to buy in more imports. In turn this may lead to production becoming less expensive in the UK as goods such as raw materials are cheaper – consequently UK exports may become cheaper and so the effect of the exchange rate will be less impactful.
UK’s main exports are of mainly financial services and nuclear power. This may cause a drop in competitiveness as these areas are specialised and therefore come at a higher price. Not only this, but nuclear power is open to a lot of criticism in addition to more recent nuclear energy related disasters. As well as this, the UK produce services so that causes a leakage from the UK economy, making it more difficult for the UK to compete with other nations and therefore the GCI will drop.
However, the goods that the UK exports are important to growing economies as services such as the world-leading NHS and financial sector will help developing countries improve their structure.
To conclude I feel that the main contributing factors are the drop in productivity and the exchange rate 05 – 09. In addition, our exports are not required by every nation as well as being expensive which therefore drops the UK’s GCI. However the magnitude of these issues can be questioned as they are countered by other factors.