Classical Economics relies on Monopoly models, Oligopoly models, and Perfect Competition. Their predictive power and accuracy are up for discussion, but they do help (especially economics students) to illustrate and explain macroeconomic behavior. During a recent stay in Zambia, I observed the consequences of lacking alternatives for economic actors.
A basic assumption to the model of Perfect Competition is that a firm will exit the market in the long-run, if losses occur. Instead of taking these losses, the firm will use its resources for more profitable activities. This seems obvious as a company will be unable to pay its bills and eventually will have to claim bankruptcy. But what if economic alternatives are not available? Industries are crowded out from within, spreading potential profits to a large amount of people, leaving only very little profit for entrepreneurs or even producing losses for the whole industry. Consequently, it prevents capital accumulation, entrepreneurial incentive, and potentially economic, social, and political growth. Providing employment in order to “uncrowd” these industries might help to create growth by creating entrepreneurial incentives and allowing capital accumulation. I encountered two striking examples of such crowded industries during a stay in Zambia, which I will describe below.
One example of a crowded “industry” was public transport in Lusaka, mainly consisting of small buses, which go on a certain route but leave the station whenever the bus is full. At every bus station, there were therefore a couple of people, which pull people looking for transport into a specific bus in turn for a small amount of money, which the bus driver hands to these people, whenever the bus is full and before the bus leaves the station. It was striking that the people pulling people into certain buses did not make a difference. The bus arriving first, was mostly the bus leaving first, as customers always chose the first bus in line because it was usually the first bus to leave. Also, people getting on the buses did not have a choice between different kinds of transport. The next probable alternative would have been a taxi, which would have cost them ten times the amount of a taxi. Thus, the advertisers did not add any economic value, whatsoever. But because of lacking employment opportunities, people crowd around the few economic activities that exist, reducing the revenue of the public transport actors significantly. According to the 2013 Afrobarometer Survey, unemployment “topped the list of the most important problems facing Zambia that the government should address” (The World Bank, 2013, Zambia Economic Brief, page 13).
The second example is more straight forward: the subcontracting industry in the construction sector. With little economic alternatives, there are plenty of Zambian contractors, who supply labor to foreign companies. Because the firms are dependent upon the foreign projects, they will undercut competitors even if it means to incur losses. The alternative would be to not have any work at all, so the best option is to get work, and create a cash flow, which will bury the financial deficits, in hope for a more profitable future. It goes without saying that this method is not sustainable. But again, because the owner of the contracting firms do not see any economic alternatives, they are stuck in an unprofitable industry. This is the case where an overcrowded industry leads to losses even in the long run, because exit from the industry is cost-less in accounting terms, but would mean the loss of all economic activity, which is a high cost after all.
The lack of economic alternatives, therefore, changes perfect competition in the long-run, creating industry wide losses or reducing profits significantly, which again, has impact on economic growth. Offering employment in order to uncrowd certain industries might help a country, such as Zambia, to grow national entrepreneurs, allow capital accumulation, and grow the economy in the long-run.
But as always, this is just a very limited idea in a much bigger problem.
Most of the information here stems from research for a bachelor project. If you would like to know more about the data or my findings, feel free to contact me via the comment section.