The world is increasingly becoming a more open economic forum. As a result the inexorable march in global competition continues every year. (This is Part 1 of 2)Nations are at war for jobs, economic growth and distinct, sustainable competitive advantages.As we have written before in “Bermuda’s New Normal”, one aspect in determining a nation’s base growth rate is how productive it is.For a nation to remain wealthy and/or become wealthy it must produce more and better goods and services with the base of labour that it currently has or adding more productive labour. Increasing productivity tends to enhance the standard of living for citizens.It can lead to higher real wages and make the country more competitive in the battle for economic growth. In the future, productivity advances and private sector investment will be a key to improving global economies at a time of heightened uncertainty about the global economic outlook.The analysis that follows investigates Bermuda’s competitiveness in terms of Unit Labor Costs (“ULCs”) and productivity. It is by no means an exhaustive assessment of Bermuda’s competitive position but attempts to look at these factors in relation to each other and in comparison to other regions of the world.From our analysis it appears that Bermuda needs to seriously focus on productivity growth and the control of unit labour costs or it risks becoming increasingly less competitive in the global market place.ProductivityProductivity is an economic measure of output per unit of input. It is essentially a measure of the efficiency of production and includes inputs of labour and capital compared to revenues or in a nation’s case, gross domestic product.At the national level, productivity growth raises living standards because more real income improves people’s ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs.They let an economy accomplish more with less.Capital and labour are considered scarce resources, so maximising their impact is always a core concern of modern business. Productivity enhancements generally come from new ideas or capital investment.Some examples include technology advances, such as computers and the internet, supply chain and logistics improvements, and increased skill levels within the workforce through education or training.A nation’s competitive position can be measured in a number of ways.The Organization for Economic Co-operation and Development (“OECD”) defines competitiveness as the “ability of companies, industries, regions, nations, and supranational regions to generate, while being and remaining exposed to international competition, relatively high factor income and factor employment levels on a sustainable basis” (Hatzichronologou, 1996).The European Commission uses the following definition: “a sustained rise in the standards of living of a nation or region and as low a level of involuntary unemployment as possible” (European Commission, 2009).Productivity is measured and tracked by many economists as a clue for predicting future levels of GDP growth.The productivity measure commonly reported through the media is based on the ratio of GDP to total hours worked in the economy during a specified period.The change or growth in this value can give us a sense of the shifting competitive position visa-vie other countries. For example, if productivity growth in the United States is greater than Bermuda’s over a given period, it could be argued that the US is becoming more competitive versus Bermuda and may be a more attractive nation to invest in.In the past fifteen years of statistical data available (1996-2011) Bermuda’s annualised productivity growth averaged roughly 1.3% per annum, slightly less than that of the G7 average of 1.7%.While annual volatility is less important than long-term trends, in recent years, productivity has begun to decline.Coming out of the recent global downturn, the G7 economies registered productivity growth of 1.9% (2009-2011), while Bermuda has advanced at 1.4%.From 2007, or the recent economic peak, to 2011 the G7 nations have seen resilient productivity growth of 1.1% annually while Bermuda has actually suffered a negative 0.7% per annum drop.Over the past 10 years Bermuda’s productivity per annum has been relatively flat at a 0.3% annualised rate.Two less obvious aspects have likely lead to Bermuda’s recent stagnation in productivity: the law of diminishing returns and a credit bubble.If you give a farmer a tractor to till the land it will make a huge difference.Give him/her another tractor and the increase in productivity will be less than the first. Just like taking two aspirins for a headache may be better than one, taking four is not likely to increase the desired result (in this case it may have negative side effects).This is what economists call the “law of diminishing returns”. Investing so much in one industry or sector may yield huge gains at first but then eventually the productive boost it provides for a nation’s economy diminishes with subsequent investment. Prior surges in productivity appear to be associated with waves of new insurance company incorporations post 9-11 and the Katrina/Rita/William hurricane disasters.Subsequent investment and capital deployment in insurance seems to be contributing to an ever growing level of capital which is diluting future returns. Another even starker example is in the commercial real estate sector.The first new high-rise buildings offered immense value and were filled almost immediately. Huge investment soon followed which has now led to significant excess capacity in Bermuda’s commercial real estate market and subsequently much lower productive returns.Credit or debt is essentially a loan on the future.By using leverage an individual, corporation or nation essentially consumes now at the expense of the future.They are buying something now with borrowed money that they would not have been able to buy until they saved the corresponding value.In essence leverage can enhance productivity in the short run by boosting capital investment.Unfortunately extensive credit growth can be followed by a period of deleveraging that actually reduces productive investment.Bermuda’s recent credit surge has created an environment of deleveraging which has subsequent negative ramifications on future capital investment and productivity enhancement.From 1998 to 2011, private credit as measured by loans and advances held at the combined balance sheet of Bermudian banks and deposit companies, rose from $2.8 billion to $9.2 billion or from about 91% of GDP to 166% of GDP.In 2012 advances and loans have fallen some $381 million, only the second decline in the 15 years of data that we have.