Creating Competitive Advantage 

The 19th century theory underlying free trade (developed by the classical economist, Ricardo) was that all countries could benefit by specialising in their areas of highest productivity (ie where they have comparative advantage) and trading with others. If a country had its comparative advantage in an industry which was not highly productive in absolute terms, then it would pay the price in reducing exchange rates, until its comparative advantage became an absolute advantage.

While comparative advantage used to be seen to be fixed (determined by pre-existing natural resources, capital or skills) it is now suggested that:

'National prosperity is created not inherited. It does not grow out of a country's natural endowments, its labour pool, its interest rates, or its currency value, as classical economics insists. A nation's competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantages against the world's best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home based suppliers, and demanding local customers' (Porter M., 'The Competitive Advantage of Nations', Harvard Business Review, March/ April 1990).

Some nations (initially Japan after 1868) refused to be limited by their comparative advantage in low productivity industries, as developed Western nations had assumed they would:

'Should Japan have entrusted its future according to the theory of comparative advantage to those industries characterised by intensive use of labour? Had Japan chosen to specialise in this kind of industry, it would have been almost permanently unable to break away from the Asian pattern of stagnation and poverty' (quote from a MITI official in Scott B., 'National Strategy for Stronger US Competitiveness', Harvard Business Review March / April, 1984)

Such countries (especially some of Australia's 'neighbours' in East Asia) have rapidly evolved skills and organisations appropriate to highly productive industries (eg mechanised manufacturing in the 19th century, capital intensive mass production in the 1950s and 1960s). Japan has 'exported' industries when their productivity seemed likely to decline. How this may have been achieved (and how Australia might do something similar) is suggested by the author in: Craig J., Transforming the Tortoise: A Breakthrough to Improve Australia's Place in the Economic Race (1993, Prosperity Press, PO Box 74, Nundah, Queensland).