Measuring territorial competitiveness: Why we should look behind the headlines

I was surprised to read in the newspaper earlier this week the headline that the Basque Country, where I live and work, has lost competitiveness since 1999. The surprise was not so much at whether or not this is true, but at such a simple headline for something that is in reality extremely complex and difficult to measure. What does it mean for a place to have lost competitiveness?

Looking in more detail at the article in question, it became clear that what was being measured in this case was a very crude form of ‘price competitiveness’. The article was based on this study by the Flores de Lemus Institute at the University Carlos III of Madrid. It compares the evolution of inflation in Spain’s 17 autonomous communities with the evolution of inflation in Spain as a whole, and finds that price increases over the last 13 years in most regions have been marginally greater than the average. The three exceptions are the Balearic Islands, the Canary Islands and Extremadura, where price increases have been lower. So does this mean that these three regions are now more competitive and the other 15 regions less competitive than they were in 1999? My answer would be a clear ‘no’, as the concept of territorial competitiveness is far more complex than any one measure can reflect and also depends critically on what the point of reference is.

The study effectively shows that the Basque County is relatively more expensive to live in and therefore to do business in today than it was in 1999, but only when compared to Spain and only very marginally. This has some relevance if the competitors to Basque industry are located in other parts of Spain, or Basque firms can easily relocate to other parts of Spain. This is not typically the case, however, as firms are tied to their location by much more than minor cost differentials: availability of specific skills in the local workforce, proximity to other firms in related industries (supply chains, customers) and relevant research and other institutions (universities, technology centres), the overall business environment, government policy, even a sense of commitment to the place where they have based their development. In this sense it is much more relevant to consider the relative price effect with respect to the regions of Europe that are more directly in competition with the Basque Country in terms of the underlying structure of their economies. For Orkestra´s 2011 Competitiveness Report my colleagues Mikel Navarro, Susana Franco and Asier Murciego identified a group of 30 ‘reference regions’ for the Basque Country based on criteria related primarily to industrial and technological structure (see figure below).

Reference regions for the Basque Country

Source: Orkestra (2011) Competitiveness Report of the Basque Country 2011: Leading the New Complexity, Bilbao: Deusto Publications.

Among these reference regions are only two Spanish regions – Catalonia and Navarra – both of which have in fact experienced even higher relative price increases (in the case of Catalonia significantly higher) than the Basque Country according to the Flores de Lemus report. So relative to the regions in Spain that are most likely to house competitors for Basque industry, we could arrive at the opposite conclusion to the headline – Basque competitiveness has improved since 1999.

This would also be a dangerous conclusion, however, because as already suggested above the aggregate price level is only one of a very many factors that influence the competitiveness of a territory. Like any measure of competitiveness used in isolation it is therefore a bad one. Reports such as the Global Competitiveness Report of the World Economic Forum have long recognized this, and seek to bring together a wide range of factors that influence firm-level productivity in specific places. They combine these in an index, whose headline figure should also be judged very carefully as it masks a huge underlying complexity of indicators and some questionable assumptions on how to bring them together.

The approach that has been developed at Orkestra, both as part of our work in the framework of the Cluster Observatory and for bi-annual Basque Country competitiveness reports, is based on a structured and tailored analysis of a range of indicators that influence different elements of competitiveness (see figure below). The advantage of this approach is that we can distinguish between final results, intermediate results, underlying determinants, and structural fundamentals, and seek to understand the relationships between them so as to improve policy responses to competitiveness challenges.

The cluster observatory itself includes data on a wide range of indicators at each of these levels for all of Europe’s 260-odd regions (NUTS 2 level), and facilitates their mapping and comparative analysis. When looking at this data it is clear that the position and evolution of each region in terms of competitiveness depends on which elements we look at. The Basque country, for example, ranks very highly in terms of most final performance indicators (life satisfaction, GDP per capita, poverty risk), but is fairly average in terms of intermediate performance (employment, productivity, patents, exports), and paints a very mixed picture with regards competitiveness drivers (see the spider diagram below, which ranks the Basque Country among all regions and with respect to its 30 reference regions in a selection of business environment indicators).

Ranking of Basque Country in Selected Business Environment Indicators

Source: Orkestra (2011). Competitiveness Report of the Basque Country 2011: Leading the New Complexity, Bilbao: Deusto Publications

Our current research on this data is exploring the relationships between these variables to understand better which combinations of factors in different circumstances really drive territorial competitiveness and socio-economic development outcomes. These relationships are likely to be different for regions with different kinds of fundamentals: industrial structure, prescence of large cities, core or peripheral location, cultural foundations, etc.. Only by understanding this complexity can we seek to make better policy. Indeed while individual indicators and composite competitiveness indices make for eye-catching headlines, they are not very helpful in understanding what impacts policies might have in improving the situation. For that it is important to look behind the headlines and indeed not be distracted by them.

This is an extended and adapted version of a post in Spanish on the Orkestra Blog.

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