ANOTHER FACET OF DIGITALIZATION: ACCELERATING TRANSACTIONS AND ECONOMIC GROWTH

	Kuanysh ZHAIKOV CEO Desht
	Nurlan MURATBEK Analyst

When discussing digitalization, the focus often centers on everyday conveniences, high rankings in international indices, and efforts to digitize various sectors. However, there are other, less-discussed effects that pertain to fundamental shifts in small and medium-sized enterprises (SMEs). A full understanding of these effects requires turning to the framework of new institutional economics.

If we break down GDP to its core, it essentially becomes a vast number of transactions – exchanges of rights. The most vivid examples of B2C transactions include buying bread at a store, ordering a taxi, or calling a carpenter to your home. However, transactions also occur within businesses, such as signing an employment contract or leasing premises. The entire economy consists of long, complex, and intertwined chains of such transactions.

Institutional economists, like Nobel laureate Douglass North, argue that the speed and efficiency of transactions directly influence citizens' incomes. The rationale is straightforward: income represents a flow of money and resources acquired over a specific period (e.g., monthly salary, annual profit). While we often focus on output (product quantity, value-added) over fixed timeframes when discussing productivity, we tend to overlook the importance of speed.

Simultaneously, the world is becoming more complex. Creating modern products and services necessitates daily interactions with various individuals on numerous issues. This requires seamless cooperation among millions to avoid hindering transaction speeds.

The large amount of information that needs to be processed, combined with constant interaction with strangers (as opposed to relatives, neighbors, and friends) creates uncertainties – and therefore risks. First of all, our rationality is limited. Our brains are not supercomputers; we cannot instantly scan the environment and calculate every possible future event.

Secondly, we are not angels; opportunism is inherent to us – the desire to benefit at the expense of others. A car seller hides its true condition. An employee exaggerates their qualifications to earn a higher salary. Cunning, deception, and information concealment can be profitable – this fact further increases uncertainty and complicates transactions even more.

In environments of high uncertainty, inaction often appears to be the safer choice, causing economies to remain in primitive states. To overcome this, individuals would need to invest significant personal time – scrutinizing counterparties, consulting acquaintances, meticulously drafting contract terms, and so forth. Altogether, these efforts consume vast amounts of human-hours, reducing the time available for living and focusing on core activities.

These costs are known as transaction costs and are divided into three categories: measurement, negotiation, and enforcement.

Measurement costs are expenses incurred in gathering information about the market – prices, quality, other characteristics, suppliers, their reputations, terms, and so forth. The more specific or expensive the product or service, the more information is needed, and the longer the process takes.

Negotiation costs refer to the expenses involved in defining the terms and deadlines, rights and obligations in case of unforeseen changes, and other characteristics of the exchange. This also includes costs of persuasion, incentivizing, and building trust. Complex transactions may require an entire team of specialized experts (appraisers, lawyers, auditors, etc.).

Enforcement costs are those incurred after the contract is signed, to ensure full compliance and to protect property rights.

To overcome these costs, individuals and businesses allocate financial resources. Entire sectors – such as trade, finance, real estate, and professional services – are built around managing these expenses. Administrative and managerial personnel within companies exist precisely to handle this, as do state institutions like courts and police, which are funded by taxpayers.

In Kazakhstan, transaction costs are even higher. The fundamental challenges of exchange are compounded by local conditions. First, the country has the world’s lowest population density relative to arable land. Settlements and cities are separated by vast distances, which affects not only transportation but also the frequency and quality of business interactions. Second, Kazakhstan’s ethnolinguistic composition is diverse and regionally concentrated.

These factors drastically reduce the probability of mutual trade and exchange in any form. The national economy fragments into a collection of isolated “wells.” This phenomenon can be described as a sluggish market, characterized by a limited number of buyers and suppliers – even for basic goods. The small size of these markets prevents the realization of economies of scale, leading to low specialization and productivity. The indirect consequences include suppressed local incomes and a narrow consumer basket.

However, digitalization and the emergence of digital platforms have fundamentally reshaped this landscape. This has significantly lowered transaction costs for Kazakhstani citizens:

• Measurement: Automated search systems now aggregate comprehensive information on prices, products, services, suppliers, and their terms and reputations across the country. Filter tools allow users to quickly adapt search criteria to their preferences. There is no longer a need to restrict oneself to local options or spend an entire day shopping.

• Negotiation: Some platforms allow for the instant conclusion of standardized, impersonal contracts with pre-set parameters (price, timelines, suppliers, terms). For certain standard services (e.g., taxis), both the price and the provider are automatically selected by the system.

• Enforcement: “Super platforms” can ensure the full execution of agreements. Suppliers are assured of client solvency through real-time card verification and prepayment. Customers, in turn, rely on platforms’ vetting mechanisms. Rating and review systems serve as informal enforcement tools, discouraging opportunism by impacting future transactions. Most critically, exclusion from the platform – far more damaging than a court ruling – acts as a powerful deterrent against bad behavior.

Furthermore, by enabling impersonal transactions, digital platforms help unify Kazakhstan’s diverse landscape into cohesive, efficient markets, allowing suppliers from different regions to compete on equal footing. A buyer in Almaty can seamlessly order goods from a seller in Kostanay or Turkestan regions without concern for nationality, religion, or language. This leads to several important effects:

• Nationwide price convergence, with prices tending toward the lower bound;

• Market-based incentives, encouraging the organic growth of efficient enterprises from the ground up;

• Access to larger demand volumes, enabling sellers to reach order sizes that would have been unthinkable within the limits of their local markets.

The importance and depth of these processes remain underappreciated – particularly by government institutions. In recent years, interest in digital platforms has grown rapidly. Yet this has often translated into blunt regulatory actions that, with a single stroke of the pen, exclude millions from the formal economy. Many of these initiatives run counter to the strategic goals set by the President, such as increasing household incomes and fostering small and medium-sized enterprises (SMEs).

Regulators tend to treat these sectors as conventional, mature markets. But this overlooks the platform-specific nature of their assets – a core principle in competition policy under institutional economics. Oliver Williamson, recipient of the 2009 Nobel Prize in Economics, explored this concept in depth.

Consider, for instance, the broad user base. A large and active audience that leaves reviews and ratings (a form of measurement) is essential for building reputation systems (a mechanism of enforcement). Without sufficient user participation, information becomes scarce, and suppliers have little incentive to maintain quality – since they do not fear negative reviews or exclusion from the platform. If switching to another platform becomes easy and costless, overall quality and market efficiency decline.

Another example of a platform-specific asset is specialized human capital. Building such services requires effective collaboration among diverse talents and the cultivation of a distinct corporate culture. The loss of key individuals or teams with unique knowledge can severely undermine operational efficiency. In environments with weak institutions – particularly where intellectual property rights are poorly protected – companies are forced to make continuous and excessive investments to safeguard their ecosystem and sustain growth. This is why, across both developed and developing countries, digital platforms tend to be dominated by large-scale players.

In Kazakhstan, digital platforms have already become the “exoskeleton” of the economy, especially in major urban centers. They enable a high volume of transactions to take place – even in the absence of strong institutional infrastructure, such as reliable courts. In the West, such conditions only became possible after centuries of institutional development, often through war, revolution, and complex political processes. Fortunately, in the 21st century, small and medium-sized enterprises (SMEs) have access to faster and far less painful pathways. The critical task is not to shoot ourselves in the foot.