Open economic systems that function well are built upon dynamic and competitive markets. The notion of a “competitive” economy lies, as it always has, at the heart of the transition process and is the first of six desirable qualities of a market economy identified in the updated concept.
It represents a core characteristic underpinning the move from a state-driven, top-down mechanism to one which is more flexible and responsive to market signals.
A competitive market economy has, first, market structures ensuring competition among firms, with any given market having both enough players and rules making it easy to enter and exit.
Second, firms have the capacity to generate added value by producing more or innovating.
Third, firms have incentives to compete and advance, based on private-sector participation, management and ownership and, with public entities, on governance that ensures commercially sound decision-making.
Many other factors may sometimes be associated with “competitiveness” (the World Economic Forum’s Global Competitiveness Index identifies more than 100 variables). Our definition, importantly, is closely tailored to the qualities of a market economy as a decision-making system.
One positive sign is dynamic economic structures that promote competition and diversification, widen choice, improve goods and services and provide fair prices. This is achieved through supporting new enterprises, especially small and medium-sized enterprises (SMEs); reducing burdens on businesses; strengthening value chains; avoiding inappropriate protection against international competition; and ensuring effective competition policy regimes and appropriate arrangements for insolvencies and corporate restructurings.
Second comes a focus on adding value, whether through plentiful labour, playing a role in global value chains or the sophisticated use of new technologies, innovative products or skilled workers.
Channelling finance effectively to entrepreneurs willing to take risks and develop firms’ capacity to add value complements this picture. Productivity improvements and exploiting the knowledge economy are crucial in moving towards advanced economy status. Adoption of best available technology, product and process innovation, improving business standards and upgrading skills all contribute to raising competitiveness.
Finally, the role of commercialisation and bringing private-sector disciplines to market behaviours is invaluable. While private ownership has progressed considerably in the EBRD region over the past two decades, many areas remain dominated by state-owned or state-influenced enterprises.
More generally, equity often remains in short supply and a risk-taking culture is present only in relatively isolated pockets. Yet these breathe life into a successful market economy. Since the financial crisis, restructuring companies for greater efficiency has become a precondition for restarting growth. In regulated areas such as municipal utilities, where the goal is high quality public service provision, market-oriented disciplines and incentives, such as movement towards cost-reflective tariffs, are vital to improve efficiency.
Many of the EBRD’s investment operations will support the “competitive” transition quality, which remains the basis for private sector development and central to our transition mandate.