Shifting Strategies

These Articles are Abridged versions of Papers to be Delivered Today and Tomorrow at the Conference on U.S. Competitiveness, Jointly Sponsored by the New York Stock Exchange, the U.S. Senate Subcommittee on International Trade and Harvard University.

In evaluating a nation's competitive position one must examine a nation's strength in market share and profitability much as one would examine an individual company. Using these measures, France, Italy, and the United Kingdom have declined in the 1970s, but recently France has begun to develop an industrial strategy enabling it to respond to its problems in a far more effective way than the United States.

Italy's problem is compounded by the 38 changes of government in the 35 years since the war, for short-term politics crowd out any hope of a long-term strategy. But it also illustrates the problem of raising wages excessively to satisfy short-term demands without comparable increases in productivity. From 1970 to 1975 wages rose rapidly and in 1975-1976 companies could not reduce employment despite recession. The result was that by 1977 companies had excessive debt, investment dropped, the net result being that employment levels are declining because new jobs are not being created.

Britain's performance has been consistently poor since World War II. The government increased welfare payments rapidly and the government bureaucracy grew very rapidly. Companies and labor unions were not well-managed, but labor increases were at first made very rapidly. Now that companies are in such financial difficulty, the tax base so small, levels of living have not in the end kept up with other countries, and bitterness between unions groups complaining about taxes and others desiring welfare payments have made social consensus very difficult.

The French situation had not deteriorated so badly when in April 1978 they embarked on a very basic strategic change. The government of Barre and Giscard d'Estaing saw sufficient political support to enable it to take a longterm point of view. Even before then, able French bureaucrats had developed a strategy but it was more of inflating domestic demand and periodically devaluing the franc to bring French costs into line, but underinvestment in sectors involved in international trade left French industry ill-equipped for competition.

The new strategy beginning in April 1978 focuses on a stable franc. It relies on an abolition of price controls, but it rests ultimately on market discipline. The French are now determined to undertake short-term austerities necessary to increase basic investment in sectors earmarked for future growth. They have publicly identified the problem, and the Prime Minister is constantly discussing the issue and laying the groundwork for public support for the remedy. There are no painless cures, but if the French public is prepared to undertake this program of austerity, then France, for all its divisive politics, may well be joining Germany and Japan in the ranks of countries which have very successfully adapted to the requirements for a healthy economy in a new era of competition.