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Barriers to the development of competition

January 28, 2021

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Мадина Кабдуалиева, Максат Турсынов, Нурбек Есетов

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The development of competition in the country should enter a new stage. As President Tokayev noted at an enlarged meeting of the Government, the issues of developing competition will be a priority in the activities of the state apparatus. The head of state set two primary tasks: the development of a draft law aimed at solving competition problems, and the analysis of markets with the presence of state (single operators) and private monopolies. It should be noted that in Kazakhstan there were previously laws aimed at the development of competition (1991-2001, 2001-2006, 2007-2008, 2008-2016), and the Entrepreneurial Code, which entered into force in 2016 canceled the law in force at that time. And now, 5 years later, the issue of a new competition law is on the agenda again. The CRC team, together with AZRK, analyzed the situation with competition and invites you to familiarize yourself with our findings. The competition policy adopted by the state should ensure competition among entities without limiting economic well-being. The choice of a particular competition policy largely depends on the barriers in the market. Some of them make it difficult for new entities to enter the market, others create unequal conditions for their competition. By the nature of origin, barriers are divided into 2 types: 1. arising from overregulation of the state, 2. arising from unfair private sector practices. The second type of barriers is the manifestation of collusion, takeovers and mergers among individuals, which are vigilantly monitored by the antitrust authorities. Case in point: US government litigation against Facebook, which used its dominant position in the social media market to take over Instagram and WhatsApp. The phenomena of collusion and takeover are also characteristic of the Kazakhstani space, on a smaller scale and more often in other sectors of the economy. Work in this direction has been carried out by the competent authorities and their departments throughout the years of independence and is in the center of their attention. Meanwhile, an analysis of international and regional sources and OECD recommendations indicates that the top priority in building a competitive environment in developing countries (including Kazakhstan) is to remove barriers caused by direct excessive government intervention. These include restricting access to "core capacity", pricing distortions, and selective patronage (favoritism). “Key capacities” are assets that are necessary for running a business, and their replacement or duplication is not economically feasible. In other words, without such assets, an entity is not able to produce a product or provide a service to a consumer. Examples of “key capacities” are cable ducts, railways, access roads, airports, etc. Elements of the production process (for example, quartzite in the manufacture of glass) also fall into this category. The inaccessibility of "key capacities" can not only prevent new entities from entering the market, but also disrupt entire established production chains, which ultimately will negatively affect the final consumer, as well as entities of adjacent markets. The concept of “key capacities” is interpreted differently in countries and associations, and also relies heavily on the type of legal systems. In the Republic of Kazakhstan, there is no fixed concept of "key capacities", which indicates the primary need for the definition and approaches to their assessment. As President Tokayev noted, the future law should regulate access to "key capacities." Distortion of pricing is a fairly typical practice for the Republic of Kazakhstan. Price regulation takes place in markets with a natural monopoly, socially significant markets, etc. Recently, price control has also been observed in competitive markets. The essence of the distortion lies in the establishment of maximum or minimum prices for goods and services. The most striking example of the consequences of price regulation is the shortage of goods during the Soviet era, when the production of goods lost all economic sense, since the established prices were always below the equilibrium level in the market. Another consequence is the unfair distribution of the price burden among consumer groups. Consumer groups are often individuals and legal entities, and it is obvious that the costs of the population are shifted to business. However, this can not only increase the price of manufactured goods and services, but also have a negative impact on the competitiveness of the entity in the domestic and foreign markets. Selective patronage or favoritism manifests itself on the part of the state in creating special conditions for certain entities, expressed through release from obligations, granting additional rights or benefits, etc. In this case, favorites can be both state (single operators) and private companies. The most common tools are tax incentives, investment preferences, exemption from customs duties, etc. The logical result of the barrier is not only the presence of monopolists or dominant firms in the markets, but also rather deeper consequences, namely, a decrease in the motivation of companies to reduce costs and introduce innovations. which leads to their inefficiency. The listed barriers have a primary role, a kind of "basis", while mergers and acquisitions act as a "superstructure". Thus, the principles and approaches laid down in the draft law on the development of competition should primarily be aimed at eliminating the above regulatory barriers.

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