institutional building and the development of specialized skills. Countries that have made more, but still mixed, progress in implementing competition policy--largely the industrialized economies such as the EU and US--have given emphasis to (i) actively dismantling excessive horizontal and vertical dominance; (ii) preventing anti-competitive mergers through the implementation of clearly defined and widely publicized merger guidelines; (iii) establishing credible, sizable criminal sanctions against collusion and price fixing; and (iv) significantly reducing policy-induced impediments to new entry. They also have (v) rules-based competition policy agencies with effective implementation authority, resources, and welltrained staff. 14 With respect to promotion of SMEs, as a general rule there is no economic rationale for policy to favor a particular business ownership form or size. At a minimum, a policy of neutrality is called for. This in itself would suggest a reorientation of the policy regime to reduce the bias against SMEs and eliminate the regulatory and institutional barriers to entry in the Russian economy. On the other hand, in Russia (as in other transition economies), where market failures are pronounced, SMEs generate, perhaps uniquely, positive externalities that can address these market failures. As noted earlier, by dint of their size and their ability to fill easily market niches, SMEs offer a source of flexibility in business development. This is needed especially in the process of transition where experimentation is critical. Evidence from other countries suggests that whereas initially SMEs tend to occupy the retail sector, over time SMEs have become significant players in manufacturing. Because SMEs represent employment outlets for a rational downsizing of the public sector they add to stabilization. Finally, growth in the SME sector is characterized less in terms of expansion of incumbent firms (which is typical for growth in the large-firm sector) and more in terms of _de novo_ entry and the introduction of new products and processes. It is on these grounds that a regime to financially promote SME development can be justified. However, such a regime should have not only _limited objectives_ and be _transitory,_ but it also should be seen as _a supplement_ to policies that eliminate regulatory and institutional barriers to entry. International experience is replete with examples that small business promotional programs often lead to the creation of new bureaucracies that survive years beyond their useful lives.

# 3. **Policy Recommendations**

# **Policies Toward Incumbents**

**_Make Structurally Dominant Markets Contestable for_** _New_ **_Entrants._** Despite progress in recent years, Russia still faces the challenge of designing a robust enforcement regime to deal with horizontal and vertical structural market imperfections among incumbent industrial firms. Rather than devoting scarce economic and political resources for direct regulatory oversight of day-to-day pricing conduct of "dominant" firms in the manufacturing sector, the immediate focus should be on eliminating regulatory and institutional barriers to entry for new competitors (specific actions are outlined below). In short, creating contestable market conditions should be the first line of offense in compelling competitive performnance, not the creation of more elaborate regulatory pricing schemes. MAPSE's "dominant" firm registry and related regulations on profit margins and output should be abandoned immediately. Moreover, in reducing administrative and institutional barriers to entry, priority attention and resources should be directed toward those markets where there is already significant structural dominance; other markets can be dealt with subsequently. In addition, reduction of entry barriers must be focused not only on creating favorable conditions for new competitors domiciled _within_ a regional market, but also on creating such conditions so that potential competitors based in _other_ geographic markets can sell or invest in the regional market in question. This is critical to neutralize the regional segmentation of markets. It means that stronger enforcement authority must be realized at the _federal_ level to deal with the anti-competitive practices of local governments.

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