Acton Institute Powerblog

How ‘economic development’ funds harm economic development

Entrepreneurs face a daunting task anywhere in the world. But in the European Union, a unique obstacle blocks the path to increasing production and furthering human flourishing. “EU funding is closing European businesses,” writes Marcin Rzegocki in a new essay for Religion & Liberty Transatlantic.

The EU Structural Funds program redistributes funds from wealthier nations to poorer EU member states. The program is intended to spur economic growth and dynamism by giving entrepreneurs start-up money and expertise. Instead, the good intentions of the EU have inflicted real harm through short-sightedness and central planning. Rzegocki writes:

Ironically, the worst casualties of the EU program have been their intended beneficiaries: entrepreneurs in Central and Eastern Europe. It is an open secret among Polish economists that the EU structural funds intended to support start-ups in Poland have caused the extinction of entire sectors of the Polish economy. How did this come about? The unintended consequences should have been apparent from the outset.

In brief, EU benefits allowed preferred firms to sell their products at less than market price.

Since this artificially interfered with the price structure, competitors in the same sector of the same territory could not compete against the EU-subsidized firms. In the end, many declared bankruptcy.

But their loss was not to be their rivals’ gain. When the period of EU support ended, the managers had not learned how to do business under normal market conditions. They could not operate without the protection and guidance of the state and eventually, the new businesses went bankrupt as well. Economists observed this pattern in the research and development sectors in northwestern Poland, but the problem is systematic. The same mechanisms are at work in other regions that “benefit” from similar European programs.

This self-defeating outcome is but one of the problems with this EU funding program that Rzegocki outlines in detail. EU funding, he notes, fuels cronyism. It increases member states’ national debt, through a process that will be all-too-familiar to American advocates of federalism. More chillingly, the funds subtly transform the character of the nation’s voters, as Tocqueville warned in Democracy in America.

“Catholic social teaching has addressed these concerns with warnings and prescriptions that Brussels would do well to take to heart,” Rzegocki writes before detailing that teaching.

The EU Structural Funds program proves that praiseworthy design cannot substitute for effective execution, government intervention cannot simulate the free market, and human ingenuity is not always in sync with the wisdom of the Creator.

You can read his full article here.

(Photo credit: Reuben G. Brewer.  This photo has been cropped and modified for size. CC BY-SA 3.0.)

Rev. Ben Johnson

Rev. Ben Johnson is Executive Editor of the Acton Institute's flagship journal Religion & Liberty and edits its transatlantic website.