Competitiveness, Convergence, and International Specialization

David Dollar and Edward Wolff look at claims that a deindustrialized United States ison the road to secondrate status in the global marketplace and find them to be both unfounded andsimplistic. Their systematic and empirical investigation of the mechanisms through which countrieslike Japan and Germany have caught up with the United States in terms of productivity and standardof living will inform public debate about which government policies are likely to improve a nation'scompetitiveness.Looking at productivity convergence from the industry and subindustry level, Dollarand Wolff also examine questions of the relationship of productivity growth in individual industriesto convergence of overall productivity in developed countries, the identification of industriescrucial for aggregate productivity growth, the sources of productivity growth within industries, therelationship between international trade and productivity convergence, and whether the samemechanics of convergence are at work in developing countries.The authors' findings reveal, amongother things, that the slowness of U.S. productivity growth relative to other nations is largely dueto forces pushing for convergence of aggregate productivity levels. Although other countries havebeen catching up with the U.S., there is no evidence that they will surpass the US. or that the U.S.has deindustrialized.Perhaps most important, Dollar and Wolff find that countries catch up byraising their productivity levels in all manufacturing industries, not by large shifts of theiremployment and output from low- to high-value-added sectors. The growing similarity of advancedeconomies in terms of overall productivity masks a continued high degree of specialization inparticular industries. Today different countries are the productivity leaders in differentindustries. Accordingly, the authors recommend that public policy focus on institutions and policiesto promote innovation in general, rather than in key industries, and on free trade rather thanprotectionism.David Dollar is Senior Economist at the World Bank. Edward N. Wolff is Professor ofEconomics at New York University.