Bankruptcy and company closures were among the unwanted side effects of the worldwide quarantine policies to combat COVID-19. These effects were particularly severe in small countries with less access to credit. Where credit is available, companies can finance periods of low turnover with bank credit, survive the downturn in the economic cycle, and repay their debts during an expansionary phase of the cycle.
In countries where there is little or no credit, companies depend almost entirely on self-financing. So, without prior savings, they are unlikely to survive long periods of low turnover, such as a quarantine that lasts several months.
The latter case describes the Argentine reality. It is estimated that, since the beginning of the quarantine in mid-March 2020, approximately 60,000 companies have closed. This figure is not insignificant, as it represents 10% of the total number of companies in force, according to the latest available data from 2017.
Failure of enterprises not only negative affects employment and poverty, but it also directly harms consumers and smaller producers (within that select group of quarantine survivors). It can be assumed, without loss of generality, that the smallest businesses are the ones most affected by the drop in turnover and poor access to credit. Since larger companies are able to offer more for collateral, they have greater access to credit, both locally and internationally. In turn, larger companies have higher levels of liquidity from which to generate their own reserves for self-financing. Given this unequal access to resources, the first companies to fail are the smaller ones.
But what happens when a company fails? Markets exist independently of companies, so when a company disappears, the consumers that company once supplied become divided among the surviving companies. This means that each surviving company increases its market share. Additionally, one could assume the larger companies are the ones most prepared to absorb this new clientele, and therefore appropriate most of the new clients, increasing their market share more than the smaller companies operating in that market.
Figure 1. Enterprise failure increases surviving companies’ market share.
This process ends with more concentrated markets, fewer companies with higher market shares, and serves to disproportionately benefit larger companies. Both consumers and small producers become hostage to large companies with greater market power, which ultimately becomes monopolistic.
The strategy of using quarantine measures to combat COVID have not only resulted in historic levels of unemployment and poverty, but, from an economic perspective, both Argentina and possibly the rest of the world face the danger of big businesses claiming unprecedented shares of market power. This disproportionality could come at the expense of small businesses as well as general social well-being.
Monopoly flickr photo by John-Morgan shared under a Creative Commons (BY) license