Can monopolistic competition save Eastern European private sectors?

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Amid a global recession caused by the COVID-19 pandemic, it is evident that some economies will suffer more than others. The failure of emerging economies to cope with the economic impact of the virus boosts debates on economic theory. Unfortunately in times of economic hardship government intervention is commonly pushed to cover up the economic imperfections of the markets which in most cases predate the crisis. The current market volatility seen in the graph below will cause major industry disruptions and commodity price crashes.

Bar graph of global GDP falling due to COVID-19 outbreak
Sources: OECD, IMF and national sources for GDP, JP Morgan Chase/IHS Market for PMI 202 Q2 PMI is the average over April & May

The stagnant low-income economies of Eastern EU members have seen most government regulations and interventions from all countries in the block. The health crisis has marked a significant increase in the jobless rate and has deteriorated wage dynamics. This has delivered significant blows to consumer spending, resulting in a major decrease in domestic production, thus leading to an even lower foreign and local investment flow. The fragmented competing forces of Eastern European markets will spiral downwards with a disrupted supply & demand curve which would force further government involvement.

Source: European Commision

How does government intervention affect industries?

Instead of focusing on the few short-term positives, an emphasis will be put on long term effects of government interference. In times of economic contraction governments usually implement protectionist policies. Authorities establish tariffs to limit the market penetration of foreign competition. Governments also give away tax deductions and subsidies to struggling domestic businesses.

The result of such government involvement in the private sector causes discrepancies between offered prices and actual production costs. Market imperfections complicate further due to the altercating of the natural flow macroeconomic dynamics which always corrects itself by getting rid of economic weaknesses through bankrupcies.

All of the above prevents markets and industries to naturally adapt and innovate in order to overcome economic uncertainty. Capitalism has never produced a single private monopoly that has proved to be neverending thanks to the battle between competition. On the other hand, public monopolies have shown to crush almost every incentive for improvement and have contributed to the appearance of dependant industries and communities. In its part, private free-market competition has always satisfied the constantly growing and everchanging consumer needs of society.

The stagnant economy of Eastern EU

Unlike the West, the Eastern EU regions have failed to produce a solid number of major economic private entities that dominate consumer markets. This inability fits the picture of the generally low performing economy and demographics of the region. The tragic population decline has resulted in a limited workforce struggling with inefficiency in production slowed by a major absence of skilled labor.

Eastern European governments as a whole are not successful in modernizing public education in accordance with the latest industry standards. Additionally, increased work mobility has toppled production capability due to large portions of quality eastern European labor relocating in the north and western EU regions. This share numbers more than 10 million people.

The absence of monopolistic competition brings an ultra fragmented supply chain of goods and services that contributes to an, even more, suffering economy in periods of recession. Small & medium size private organizations struggle to reorganize production cycles in such economic hardship. They just don’t have the resource to adapt to economic irregularities like major corporations.

The majority of industries of Eastern EU regional economies are filled up by private entities impotent of economic and market power. In other words, their powerlessness to raise prices in volatile economic conditions causes bankruptcy and industry failure. By most economists, the absence of big corporations would be seen as the greatest indicator of domestic market failure. This perception derives from the economic theory stating that every successful start-up private entity will inevitably transform into a major private corporation if it truly satisfies the consumer needs.

The effects of populism on economic theory

Nowadays large scale corporations such as Google, Apple, Microsoft, and Amazon are often demonized by individuals. Surprisingly even though modern academia is all in freedom for themselves, they are openly against the freedom of big corporations & actively appeal for the subjugation of the private sector. The morality arguments used to vilify big corporations could be easily dismantled with the following fact: There is no private entity that has risen without societal support through satisfying its consumer needs & wants.

Inadequate public outrage and in part political correctness have misled people into forgetting that free markets always act in the best interest of the consumer and any imperfections and bad practices are again corrected by private sectors. The public must be reminded that private enterprises whether being called companies (in the U.S), co-ops/corporations (in the UK) société (in FR) terminologically all resemble the cooperation between individuals with a common economic incentive. Business goals can not differ from consumer expectations. Both in periods of decline or economic growth, the biggest beneficiaries from the free markets are not big corporations but the average consumer and the common worker.

A rocky path filled with economic uncertainty

The possible emergence of competitive monopolies in Eastern European EU members may be the only realistic option for their economies to become competitive. The strengthened capability of bigger enterprises to achieve innovation would result in lowered domestic prices & increased consumer spending. Such organizations establish industries filled with more skilled and efficient working groups that help the overall national labor capability.

The notions of economics must be infused in the public perception. There must be a consensus around focusing not on public or private spending but on production. Production contributes to the improvement & variety of products & services. Spending capability is merely a secondary factor based on the value placed by the consumer. Possibly if there was such market competition in certain crucial industries the economic impact of COVID-19 could have been minimized leading to more positive hypotheticals in regards to Eastern Europe’s economic future.

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Author: Zlatin Kurshumov, published in Chicago Illinois.

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