Saturday, 28 April 2012

Some suffer the ultimate price

The crisis in the Eurozone has exacted the ultimate price for failure as a large number of small business owners have taken their own lives.  Recession in Italy, Greece, and elsewhere has battered the prospects of local businesses, and as a result, suicide rates have seen a dramatic increase with 400 owners of small businesses committing suicide in Italy in 2009 and 2010.  The suicides have become a big political issue in Italy where critics blame the reforms of the prime minister Mario Monti.

Suicides would seem a strange topic for an economist to write on but there are economic issues in play that would affect the choice of whether someone takes their own life.  One of these is the laws on bankruptcy.  Bankruptcy is a legal status of a person or business that cannot repay the money that it owes to others.  The laws regarding bankruptcy vary considerably depending on the culture of different countries. 

There are significant differences in the ease of bankruptcy procedures.  It is not a good idea to allow individuals and companies to run up a large amount of debt and then get away with not paying it back.  But, there are adverse effects for the economy if people are saddled with large amounts of debt from bad business decisions.  Not only do the individuals themselves suffer but money and time is spent on ventures that are not giving any return to their owners which are often referred to as zombie firms – kept alive despite being close to death.  Also, other entrepreneurs who may be thinking of setting up a business will not do so if they think the price of failure is high.  Small businesses play an important part in the economy and can grow into large companies with Google and Facebook as recent examples of this. 

The different approaches depend on the culture of a country.  In the US with its gung-ho approach to business, business failures are almost seen as a badge of honour and an important part of eventually being successful.  As such, the law allows for a simpler processing of bankruptcy so that individuals can move on and apply their energies elsewhere.  However, in Europe, there is a stigma against such failures and bankruptcies are a drawn out and costly process.  And Europe and its citizens suffer as a result.  So much so that some are even willing to take their own lives rather than deal with the consequences.   

And it is not only rules on bankruptcy but there are a whole range of other laws where bureaucracy can get in the way of business.  A lot can depend on how business is viewed in different countries.  Different cultural views can be reinforced through the laws and can have real effects on the lives of people – sometimes to a profound effect.

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