Lead Author: Pedro Rodriguez June 2005 Kazakhstan has made substantial progress in its economic transition and faces a potentially bright future thanks to its oil wealth. The challenge is to increase the country’s competitiveness and expand the benefits of growth, while avoiding the economic and social risks typically associated with oil wealth. The theme of the report is how to exploit the strengths of the Kazakhstan economy in the new oil environment, while avoiding the pitfalls that oil income typically brings. The report addresses six areas of action that must be developed and prioritized in order to spend oil revenues effectively. These include economic policy, human capital, infrastructure, public sector institutions, sectoral policies, and innovation and research and development. Several recommended next steps are provided to assist the Kazakh government in staying competitive.
1. Context: A Taste of the Future
After an economic downturn due to the collapse of the Soviet Union, the Government of Kazakhstan focused on attracting investment in mineral and energy resources and moved toward a market economy. Stability has been achieved, and financial indicators are strong, but Kazakhstan still faces many development obstacles. Its manufacturing base remains weak, and certain health and social indicators are poor, which could lead to a decrease in labor productivity.
Kazakhstan strives to catch up to the newest EU member states in per capita income, but it must overcome several impediments to competitiveness. Kazakhstan has had an impressive savings rate since 2001, but the investment ratio, which determines future growth, is about 60% of the EU8 countries’. A lack of diversification is also evident in light of the stagnation of non-extractive exports since 2001. Economic volatility is still high compared to the EU8, but lower than Russia’s and Ukraine’s. Labor productivity trends are also not encouraging. Kazakhstan must also overcome its geographic isolation and improve its transport infrastructure. In order to catch up to the EU8, Kazakhstan must outperform Russia and Ukraine and reverse its negative economic trends.
This chapter is divided into three parts. First, it addresses the current policy context. The Government of Kazakhstan has launched several long-term social, economic, and infrastructure plans, but it has yet to specifically deal with how the oil windfall will be spent and how to increase competitiveness in non-oil sectors. Next, it discusses the benefits and risks associated with oil windfalls. Oil is often a mixed blessing, because the associated capital inflows and fiscal revenues complicate fiscal, monetary, and financial sector policies—and often weaken public policies and institutions. Finally, the report describes the necessary structural reform agenda for competitiveness, which to succeed should include telecommunications reform and the case of local content for the oil and gas sector. These cases are good examples of how to improve efficiency in non-oil sectors, and they are also important to the overall agenda of the government.
