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Comments by Mr. Georgi Stoeff, Managing Partner, Industry Watch Group
 
Competitive pressure, Barriers, and Growth
Georgi Stoeff
Managing Partner, Industry Watch

Not long ago I was presented with the results of a business survey in Bulgaria conducted by a well established agency. The main message of the survey results may be summarized in something like this one: “Business environment has deteriorated since the number of companies that face stronger competitive pressure than before have increased.”

That absurd statement is a result of a fairly wide-spread misunderstanding of the role of an entrepreneur in a society as well as of the meaning of the competition as a mechanism of social interaction.

Here, macroeconomic theory (or more correctly, political economy) might help in a way. First, in a world where knowledge is not concentrated in a single mind or in a group of people, we need competition for it is a “discovery procedure” to find the best use of the society’s limited resources.

Secondly, industries where competitive pressure is stronger seem to outperform the rest in terms of productivity dynamics. It is true that it is a process normally associated with higher turnover of jobs and companies (thus making those markets seemingly more “uncertain” than others). Still, there is an abundance of empirical evidence that the fastest growing industries are characterized by the strongest competitive pressure.

Competitive pressure and innovative activity (which lead to technological improvement and productivity growth) are the two sides of the same coin. We may go even further suggesting that we use the same measure for both processes (I proposed once to use the jobs turnover in an industry as a quantitative measure).

This theoretical framework has strong implications for the economic policy. Both entry and exit barriers may hinder the process of “creative destruction” – the Schumpeter’s term is now fashionably called “market selection” by the mainstream economics. Both administrative regimes to enter an industry and subsidies to keep the losers there have the same negative impact on prospects to growth and prosperity.

The process of market selection may work only in an environment where the reward of the market is protected for those who dare to experiment with new combinations of resources (new technologies). This implies a system of well defined and protected property rights and quick and reliable enforcement of contracts.

In both areas of economic policy conductive for prosperity – reducing admin barriers and protecting property – Bulgaria has still a long way to go. Major challenges for the next parliament and cabinet remain:

  • reform of the judicial system; in the current system the attorney general has virtually an unlimited power to intervene into market competition;
  • apply the recently adopted law on reducing administrative regimes; the law has reduced the number of admin regimes to 39, however in order to remove an existing regime a change in the concrete law that introduces the regime in needed;
  • redirect the focus of the competition protection administration from the private companies to state bodies discretionarily intervening into market competition.
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