Economic Policy Review ISSN 1313 - 0544

Barriers to Enter the Market as a Measure Against the Crisis – What a Madness?

Author: Adriana Mladenova / 28.05.2009
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The management of the Executive Agency "Automobile Administration" presented this week the conclusions from an analysis of the state of the international automotive transport of goods. The main conclusion is the following: the effect of the crisis on the international transport is manifested mainly in over supply of transportation possibilities, exceeding significantly the demand, as well as a reduction of the prices for transportation. The reduced demand and the lower prices directly endanger the financial stability of the Bulgarian carriers.

On the basis of the conclusions and the data from the report the Ministry of Transportation send a notification to the EC about the desire of Bulgaria to apply the mechanisms, stipulated in article 4 of Regulation No. 3916/90, about the initiation of the procedure to announce a crisis in the automotive transportation of goods. According to art. 4 from the Regulation, if after a consultation with the Commission is concluded that there is a crisis, it may make a decision to undertake measures to prevent further increase of the capacity supply to the affected market by limiting the activity of the existing carriers and limiting the access to the market of new carriers. The fact is that no other country member of the EU had asked the Commission to apply the mechanisms of the Regulation nor for the period of 18 years, since this Regulation was passed, has such request been ever send to the EC.

The intervention of the state on the market and the creation of barriers to entry of new payers would be the fastest and the surest road toward a crisis in that sector. In the analysis there is not even an attempt to justify the conclusion on the basis of the stated facts. The reduction of the volume of sales, revenue, etc. is a stimulus the less effective players to leave this market and only the most competitive to remain. If the revenues and the profits of a given branch are falling, than there is no need a state body or a regulator to intervene and to decry, in which to state states that new companies must not enter that market.  If there are still such companies it is apparent that they are more effective and flexible and could handle the current economic situation relatively better than some of its competitors. Indeed must we, because of the crisis, stop the development of innovations and the competition between the players on the market?  

It is an elementary economic law that the over supply is a result of obstacles to the free market, regulations and the enforcement of minimal prices, not from the action of the free market forces and the competition. On the other hand, the decline of the prices, which is bad for the transportation companies, is good for the customers of this service. How the state employees do measure which group deserves "support"? The fact is that when the government yields to the requests of some small organized group that leads to ever-growing all sorts of demands from different sectors and lobbyists.

The global crisis on the other hand is a manifestation of the existence of misbalances in the real sector.  The state office workers have got neither the knowledge nor the commercial sense, nor the interest to make proper business decisions and to direct the scares resources of the economy in the appropriated market niches. Through their interventions the misbalances could only become greater and to lead to new problems.  

There are many examples, which prove how harmful and inefficient could be the decisions of the state, when it intervenes in the real sector of the economy and is limiting the free entry to the market. At the end of the day the people are those who pay for these mistakes - either as taxpayers, consumers, workers or entrepreneurs.  

In the middle of the previous century the aviation sector in the US was strictly regulated - the prices of the interstate flights were determined by a special committee, which objective was that the carriers compete according to the quality of services not according to price. These regulations lead to semi-full planes and many complaints from the passengers exactly about the quality of the services. After deregulation of the market in 1978 the prices are reduced significantly (by approximately 30%), the customers increased and not least - safety was improved and complains have been reduced significantly. Because, the air lines had stimuli to compete and develop freely and at the end of the day, although the prices were lower, their profits were increased.

When the emblematic company Apple met serious difficulties and was facing bankruptcy its managing director and founder Steve Jobs was getting for several years a salary of $1 per year, but he was not looking for assistance from the state, he did not expect a government employee "from above" to help him. Thanks to his own initiative and drive he succeeded to develop Apple and to make it the company which is today, exactly because he was following the market signals. And such examples are plenty...

The Institute for Market Economics published in May 2008 its recommendations to the responsible institutions about the development of the transportation branch. The occasion then again were the requests by the transportation companies for intervention of the government on the market, reimbursement of the excise tax on the fuel and putting restrictions on the registration of new companies. Although the global financial crisis is intensifying, our position from that time has not changed. Because the good economic policy, which is based on given principles and rules specified in advance, does not change, even if the situation is before election.

Not only that we should not limit the access to new companies, but quite the opposite - the unnecessary regulations of the sector must be removed by abolishing the very bureaucratic regimes, easier and more efficient operation by the administration and reduction of the administrative taxes and last but not least - effective application of the legal requirements with the objective to limit disloyal competition.