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The Return of Microeconomics

The Return of Microeconomics The international edition of Professor Cezar Mereuta’s paramount work

The recent launch of the English version of the seminal study “Some Microeconomic Landmarks of the Transition Process in Romania” by Prof. Cezar Mereuță is an important step in the process of exposing the notable work of Romanian scholars to their peers abroad.

The initial Romanian edition appeared in 2015 and crowned 17 years of research into the structure of 1,009 markets between 1995 and 2012. His work is not only a peerless assessment of the developmental history of the Romanian economy post-transition, but a valuable work of microeconomics in its own right.

The work is not only a peerless assessment of the developmental history of the Romanian economy post-transition, but a valuable work of microeconomics in its own right.

This achievement comes at a time of maximum breadth of influence for Macroeconomic analysis, especially in the realm of public discourse, where policies are justified to voters on the basis of Macroeconomics-derived arguments. Microeconomics has its own contribution to make to informed policymaking, but is also uniquely useful to in-depth analyses of dynamic periods in a country’s history.

 

Prof. Mereuță utilized an interdisciplinary approach, employing nodal analysis, first developed by Paul Dimo in 1968 for energy system analysis, along with a strict adherence to taxonomical principles to dispel the errors and confusions which have plagued prior studies of this type. These stem from the utilization of the National Economic Activities Classification (CAEN), which is an important administrative tool for fiscal and regulatory purposes, but which hinders category based analyses. As a result, the author amalgamated three CAEN codes to represent the car manufacturing industry, two for chemical industry, two for transport and so on.

Nodal analysis is useful because it focuses on those companies making up over 80% of the analyzed market, acting as vital competitors who determine, to an overwhelming extent, the economic performance on any particular market to be analyzed.

Nodal analysis is useful because it focuses on those companies making up over 80% of the analyzed market, acting as vital competitors who determine, to an overwhelming extent, the economic performance on any particular market to be analyzed.

While the studies extract varied and interesting results from the data analyzed, some notable main points emerge which can be very informative even to laymen. Firstly, 90% of companies have a lower revenue than the average of the market, of which 93% are what Romanian legislation describes as microcompanies. This polarization is a persistent feature of the Romanian economy, which is divided between a few champions claiming a market for themselves and engaging in real competition with each others and many smaller entities on the margins eking out a precarious existence with little to cushion them in the eventuality of a market downturn, a market shock or a regulatory change on the margins.

Two new economic indicators were proposed, one for measuring economic concentration and one for market distortion, which enable the author to highlight key sectorial performances with applicability for targeted development of fields of the Romanian economy which may produce companies with perspectives of competitiveness in international markets.

90% of companies have a lower revenue than the average of the market, of which 93% are what Romanian legislation describes as microcompanies. This polarization is a persistent feature of the Romanian economy.

The author walks in the steps of Vilfredo Pareto, best known for his 80-20 principle, which states that, generally, 80% of effects are attributable to 20% of the causes. In the economic analysis of the book, 80% of the revenue of a particular market is down to 10% of its actors, which the author calls a “power decile”. The lowest power decile of an analyzed market was 36.8%.

What was interesting was that other indicators aside from revenue, like net profit, net loss, reserves, asset value, debt, also respected the same levels of concentration of the revenue distribution, which makes nodal analysis a valid choice for multicriteria analyses.

Utilizing Onicescu’s “informational energy” concept, normally used to express uncertainty or randomness in a probability system, the author shows that the nodal companies of any given market surpass 98% of the total informational energy, and establishes a link between this energy and the market share of the leader and the number of other nodal companies that is 97% correlated.

Another result is the ultimate validation of the relevance of the various Top 100 Companies lists published in countless countries each year, to the overall economic health. In the Romanian case, these companies account for over 90% of the informational energy in the system as a measure of variation.

80% of the revenue of a particular market is down to 10% of its actors, which the author calls a “power decile”.

15 years of Top 100 Romanian Companies lists validate this insight and give a general account of the yearly economic performance, the type of growth which was registered and the volatility of international markets as recorded in the behavior of local branches of multinational companies. These relationships are especially telling during the maximum period of Romania’s exposure to the Great Recession in 2009-2011.

Nodal analysis also gives us significant insight into the processes that birthed the severe regional inequality within Romania, into the qualitative changes in the growth dynamic of the Romanian economy and in the contribution of foreign companies to the national economy, which is always a subject of significant political visibility, which is about a third.

15 years of Top 100 Romanian Companies lists validate this insight and give a general account of the yearly economic performance, the type of growth which was registered and the volatility of international markets.

“Some Microeconomic Landmarks of the Transition Process in Romania” not only explores a formative period for the Romanian economy in significant detail, but develops new tools and approaches for applications in other instances. The emphasis on micro as opposed to macro is a growing trend in Economics, which is looking for the tools to chart the excesses of the recent generation of policymakers, in which Wall Street (finance) ended up devouring Main Street (the real economy) and unleashing populist rebellions in the West.

 

(Illustration by Alec Monopoly)

 
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OEconomica No. 1, 2016