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How to keep America competitive in the world economy

America’s economy is, without dispute, the largest and strongest in the world. The competitiveness of the American economy depends on its relative positioning with other economies of the world. So, far, the American economy has powerfully dominated the world economy and maintained top position among other economies in the world due to its adaptability and resourcefulness. There are several key factors for the American domination in the world: 1. the abundance of natural resources in America; 2. the relatively low population density of America;

3. The development of a strong domestic market in America; 4. the possession of the majority of the world’s gold; 5. American investment in foreign countries higher than foreign investment in the US; 6. The adoption of the US dollar as the international reserve currency (Rationalrevolution. net, 2003). Of these reasons some are no longer valid due to changing factors in a changing world. American currency is no longer backed by gold anymore. Yet the US economy continues to lead the world economy strongly on many counts.

According to the report titled “Competitiveness Index: Where America Stands” published by the Council on Competitiveness the American economy is still the world’s largest economy, the U. S. has grown faster between 1986 and 2005 than any major developed country and is responsible for one-third of global growth over the past 15 years . The U. S. remains the world’s largest manufacturer and is still one of the top exporters. However, as the report emphasizes, America’s position in the global economy is by no means guaranteed.

While the country’s efficient markets, sophisticated business community, technological innovation capabilities and excellent research facilities continue to contribute in making the United States a highly competitive economy, some weaknesses have recently started to corrode the competitive potential of the US economy. For decades, the United States ranked first in the world in the percentage of its GDP devoted to scientific research; today, the country is ranked lower than Japan, Korea, Israel, Sweden, and Finland.

The decline in the competitiveness of the US economy is attributed to its open-ended expenditure commitments linked to defence and homeland security, plans to reduce taxes, low savings rate, record-high current account deficits and a worsening of the US’s net debtor position, there is a non-negligible risk to both the country’s overall competitiveness and, and the lack of transparency and efficiency in its public institutions . America’s growth rate over the past two decades has been just over 3% – one whole percentage higher than that of Germany and France . Japan averaged 2. 3 percent over the same two decades.

Productivity growth in the United States has been always greater than 2. 5% for the past decade which is one point greater than the European average (Zakaria, 2006). In 1980, the United States made up 22 percent of world output while today that output has risen to 29 percent (Zakaria, 2006). The United States is in sixth place in the World Economic Forum’s Global Competitiveness Index (GCI) rankings for 2006-07, behind Switzerland, Finland and Sweden and just ahead of Japan (WEF, 2006). Switzerland, Finland and Sweden are the world’s most competitive economies according to the report.

Denmark, Singapore, the United States, Japan, Germany, the Netherlands and the United Kingdom complete the top ten list (WEF, 2006). Though the GDP for the United States in 2006 is well placed at 12. 98 trillion dollar , the United States has transformed from being the world’s largest creditor in the 1980s to world’s largest debtor in 2006. As of 2006, the gross external debt is nearly $9 trillion dollars or 64% of GDP . The U. S. economy faces strains caused by record high trade deficits and federal budget deficits collectively termed twin deficits (Scott, 2006).

Besides nearly $9 trillion in federal debt, the U. S. economy has nearly $9 trillion in mortgage debt (Freddie Mac, 2007), with another $9 trillion in corporate debt (Barisheff, 2006). The economy also faces $12 trillion in unfunded Social Security liability and an additional $32 trillion in unfunded Medicare liability (Cauchon, 2007). Economists attribute the increase in debt to the tight U. S. monetary policy, exchange rate manipulation from China’s currency peg and Japan’s large purchases of U. S. Treasuries. The most visible problem perceived in the United States economy is the lack of growth in jobs .

The middle class in the United States is seeing millions of jobs, such as those in information technology and manufacturing, sent overseas from offshore outsourcing to lower wage countries. The threat to American innovation comes from the renewed vitality of Western Europe, Japan and Korea, and the rapid growth of China and India. “We no longer have a lock on technology,” David Baltimore, a Nobel laureate and the current president of the California Institute of Technology, wrote recently in the Los Angeles Times.

“Europe is increasingly competitive, and Asia has the potential to blow us out of the water. ” Rising economies like China and India are challenging the competitive placement of the American economy in the world scenario as they are bringing in millions of new workers into the labor market, increasing focus on research programs and accumulating larger savings thereby altering the balance of existing international relations . China is already opening universities at a breathtaking clip, while Intel, Hewlett-Packard, Microsoft, and Verizon have all opened research labs there .

At the same time the American economy is plagued by a low savings rate, decrease in investments in technology and research and development, soaring fiscal deficits, rising health costs and pension liabilities, concern about the weakening dollar, insufficient Ph. Ds in the hard sciences, a faltering K through 12 school system, and, finally, a credit system that is reliant on the kindness of foreign countries. All of these factors play an important role in the competitive positioning of the United States economy among other nations.

Today, while the major strengths of the American economy are scientific innovation, labor mobility, free and large capital markets, leading technological performance, world-renowned higher-education programs, a high rate of job creation, low unemployment, abundant liquidity for investments, robust corporate profits, and strong balance sheets major risks include sharp increases in the current account deficit leading to a crash of the dollar, a budget profile that is out of control, and an outbreak of trade protectionism .

The current account deficit has already reached alarming proportions at an annual rate of $600 billion, well above 5 percent of the economy. New projections by Catherine Mann hold that the deficit would exceed $1 trillion per year by 2010 (Bergsten, 2004). In his State of the Union address President Bush reminded Americans that America’s continued economic leadership will depend on new ideas and new ways of doing things.

Based on this belief, President Bush in an attempt to bolster the competitiveness of the new economy has announced the American Competitiveness Initiative. The American Competitiveness Initiative commits $5. 9 billion in FY 2007 to increase investments in research and development, strengthen education, and encourage entrepreneurship . According to this initiative, the government promises to commit $50 billion to increase funding for research and $86 billion for research and development tax incentives.

The new initiative focuses on physical sciences and engineering and is based on the belief that advances in these areas will generate scientific and technological discoveries for decades to come. The American Competitiveness Initiative that includes a $380 million proposal to improve math, science and technological education in K-12 schools as well as a proposal to double the investment in key federal research agencies (ACI, 2006).

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