Bank System Liberalization and competition policy
Category: Bank Management
The main role of markets is to allocate inputs and outputs to their efficient use. The system of markets can however only fulfil this function if prices emerge through the interaction of demand and supply and not according to political objectives. Otherwise, prices do not provide the information firms and household need to make their decisions in an efficient way. Hence, the multitude of price regulations and the protection of domestic markets of a CPE must be abolished, and domestic relative prices must converge to world market prices.
Moreover, it must be prevented that firms abuse their market power. In former CPE’s, many sectors were monopolistically organized, due to the industrialization and specialization strategy of the socialist block. These monopolies must either be regulated or it must be assured that new firms can enter into the market.
As of today, most prices have been liberalized in Russia (exceptions are rents, electricity, water). On the free market, prices are sometimes even higher than the world market level; there exist, however, parallel markets that provide highly subsidised goods to privileged consumers, for instance war veterans, handicapped persons and pensioners, which constitutes some (inefficient) substitution for a well-functioning welfare system.
In regard to competition policy, much remains to be done. Firms collude with branch ministries or, if these were abolished, with their successors in order to insulate themselves from interventions that are undertaken in order to reduce their market power. Monitoring institutions such as the Anti Monopoly Committee in Russia remain weak. The recent nomination of Mr. Nemzew as responsible minister for the regulation of monopolies is a good sign for a more active competition policy of the Russian Government. In other countries of the CIS, government and firms are still interwoven to a large extent. In this respect, privatization policies and institution building are of specific importance.