Report No. 78206-KZ Kazakhstan Country Economic Memorandum BEYOND OIL: Kazakhstan's path to greater prosperity through diversifying (IN Two VOLUMES) VOLUME II: MAIN REPORT June 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank iv Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying ACRONYMS AND ABBREVIATIONS ANMR Agency of the Republic of Kazakhstan on NPLs Non-performing Loans Regulation of Natural Monopolies NTBs Non-tariff Barriers ANS Adjusted Net Savings NTMs Non-tariff Measures ASIRK Agency for Statistics of the Republic of OECD Organization for Economic Co-operation Kazakhstan and Development BEEPS Business Environment and Enterprise OLS Ordinary Least Squares Performance OTRI Overall Trade Restrictiveness Index CIS Commonwealth of Independent States PIRLS Progress in Reading Literacy Study DB Doing Business PISA Program for International Student EAP Europe and in East Asia and the Pacific Assessment EBRD European Bank for Reconstruction and PPL Public Procurement Law Development PPP Purchasing Power Parity ECA Europe and Central Asia RCA Revealed Comparative Advantage ECU Eurasian Customs Union SITC Standard International Trade Classification EU European Union SMEs Small and Medium Enterprises EXPY Export Sophistication SOEs State Owned Enterprises FDI Foreign Direct Investment SPS Sanitary and Phyto-sanitary FSU Former Soviet Union SPV Special Purpose Vehicles FTAs Free Trade Agreements TBTs Technical Barriers to Trade GAC Government & Anticorruption TIMSS Trends in International Mathematics and GCR Global Corruption Report Science Study GDP Gross Domestic Product TTRI The Trade Tariff Restrictiveness Index GoRK Government of the Republic of Kazakhstan TTRI Tariff Restrictiveness Index ICT Information and Communication UNCITRAL United Nations Commission on Technologies International Trade Law IEMP Index of Export Market Penetration UNCTAD United Nations Conference On Trade and IPO Initial Public Offering Development ISA International Standards on Auditing UNESCO United Nations Educational, Scientific and LAC Latin American and Caribbean Cultural Organization LITS Life in Transition Survey USA United States of America MENA Middle East and North Africa USD United States Dollars MFN Most Favoured Nation VET Vocational Education and Training MFOs Microfinance Organizations WB World Bank MICs Middle-income Countries WDI World Development Indicators MINT Ministry of Industry and New Technologies WEF World Economic Forum MNCs World Bank, Multi-National Corporations WGI World Governance Indicators MOES Ministry of Education and Science WTO World Trade Organization NALCD National Agency for Local Content Development V KAZAKHSTAN - GOVERNMENT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 1, 2013) Currency Unit Tenge US$l.oo = 151 Tenge WEIGHTS AND MEASURES Metric System Vice President: Philippe H. Le Houerou Country Director: Saroj Kumar Jha Sector Director: Yvonne Tsikata Sector Manager: Ivailo Izvorski Country Manager: Sebnem Akkaya Task Team Leader: Francisco Galrao Carneiro vi Beyond Oil: Kazakhstans Path to Greater Prosperity Through Diversifying Acknowledgements ........................................................................ xi Executive Summary ...................................................................... xii Chapter 1: Why Diversification is Important for Development ...................................... Introduction........ .............................................................. 1 How Rich and Abundant is Kazakhstan in Natural Resources?..................................2 How Well has this Wealth Been Used?... ................................................ 6 How can Kazakhstan Become a More Developed Economy ..................................... 14 Chapter 2: Oil Wealth, Volatility and Macroeconomic Management ................................. 17 Introduction ..................................................................... 17 Have Kazakhstan's Exports Become More Concentrated? ..................................... 18 How Does Dependence on Natural Resource Exports Affect Macroeconomic Volatility?................ 23 What are the Potential Welfare Gains from Various Fiscal Rules? ............................... 26 What are the Lessons for the Future? ... .................................................. 31 Chapter 3: Gaps and Opportunities for Human Capital Development..... .......................... 32 Introduction.. ................................................................... 32 Where Are the jobs in Kazakhstan? ..................................................... 32 Do Kazakh Workers Have the Skills Demanded by the Market?....... .......................... 36 What Will Need to Change to Reduce the Mismatch in the Labor Market?......................... 41 Chapter 4: The Institutions that Matter for Diversification ..... .................................. 44 Introduction ..................................................................... 44 Does Kazakhstan Have a Strong Governance and Regulatory Environment? ....................... 45 Are Market Institutions Well Developed in Kazakhstan?..... .................................. 50 What Will Need to Change to Strengthen Kazakhstan's Institutions? ............................. 59 Chapter 5: Options to Increase Competitiveness in the Short Term................................. Introduction........ ............................................................. 61 Where Are Kazakhstan's Comparative Advantages?.........................................61 Has Kazakhstan Faced Excessive Trade Barriers?...........................................69 How Could Better Logistics Help? ........................................................ 74 When Can Industrial Policy Be Useful? .................................................. 75 What Can Be Done in the Short Term to Help Diversification? .................................. 77 References.........................................................................96 vii LIST OF TABLES Table 1.1: W here is the Wealth of Kazakhstan?..................................................... 3 Table l.2: Natural Capital Per Capita in Eurasia and Other Regions, 2005. - - -- --................................ 3 Table 1.3: Capital Stock Per Capita in Eurasia and Other Regions ...................................... 4 Table 1-4: Changing W ealth Per Capita...........................................................4 Table 1-5: Kazakhstan's Undiversified Export Product Structure, 2010. ....................................... 14 Table 2.1: Structure of Kazakhstan's Exports ...................................................... 20 Table 2.2: Average Prody by Lall (2000) Classification............................................... 21 Table 2-3: Determinants of Export Concentration and GDP Growth Volatility, 1980-2005. ..................... 23 Table 2.4: The Impact of an Increase in Export Concentration on Macroeconomic Volatility ................ 24 Table 2.5: Main Destinations for Kazakhstan's Top Ten Export Products, 2oo8-lo ............................ 27 Table 2.6: Estimated Welfare Gains From Different Types of Fiscal Rules ............................... 28 Table 4.1: Selected Indices of Institutional Quality, 2012.............................................46 Table 4.2: W orld justice Project: Open Government ................................................ 48 Table 4-3: Percentage of Respondents Satisfied with Public Services...................................49 Table 4-4: DB Enforcing Contracts, 2013. .......................................................... 51 Table 4-5: Time and Costs of Various Stages of Enforcing Contracts, 2013............................... 51 Table 4.6: DB Resolving Insolvency, 2013.-.........................................................52 Table 4.7: DB Starting A Business, 2013- .......................................................... 55 Table 4.8: Doing Business Dealing with Construction Permits, 2013 -.-..--................................... 55 Table 5.1: Trade Tariff Restrictiveness Index and Overall Trade Restrictiveness Index ...................... 70 Table 5.2: Export W eighted Average Tariffs........................................................71 LIST OF FIGURES Figure 1.1: Endowments and Policy Objectives that Matter for Development and Diversification.............. 1 Figure 1.2: Eurasia is the Most Abundant Region in Natural Resources .............................. 2 Figure 1.3: Eurasia Converts the Smaller Share of Resource Rents Into Revenues ....................... 2 Figure 1.4: Index of Growth: Total Wealth, Population, Per Capita Wealth (1995, 2000, 2005, 2008) ........... 4 Figure 1.5: Gross National Saving and Adjusted Net Saving as Percent of GNI in Kazakhstan, 2010 ............ 5 Figure 1.6: Adjusted Net Saving ................................................................. 5 Figure 1.7: Subsoil Asset Resource Rents by Region, as Percent of GDP ................................. 6 Figure 1.8: As Oil Wealth Grows Kazakhstan Experiences a Steady Decline in Poverty Rates.................. 6 Figure 1.9: O il is Well that Ends Well ............................................................. 7 Figure 1.1o: Riding the Com m odity Boom .......................................................... 7 Figure 1.11: Favorable Term s of Trade Benefitted Kazakhstan...........................................7 Figure 1.12: A Spectacular Increase in the Size of the Economy ....................................... 8 Figure 1.13: Kazakhstan Became an Upper-Middle Income Country in Less than 10 Years....................8 Figure 1.14: Kazakhstan May Attain a High-Income Status by 2016 Assuming Stable Oil Prices ............... 8 Figure 1.15: Even If Oil Prices Drop Sharply and Stay Low, Kazakhstan's GNI is Expected to Grow............. 8 Figure 1.16: Trend in Output Per Worker for Kazakhstan and Comparators, 2000-10. ........................ 9 Figure 1.17: Regional Output Per Worker in 2011 and Rate of Growth During 2000-11 ....................... 9 Figure 1.18: Employment Ratios for Kazakhstan and Comparators, 2000-10 ................................... 9 viii Beyond Oil: Kazakhstans Path to Greater Prosperity Through Diversifying Figure 1.19: Headcount Poverty Rates for Kazakhstan and Comparators (2001 and 2009) .................. 10 Figure 1.20: Shared Prosperity Indicator for Selected Countries in the Europe and Central Asia Region........ lo Figure 1.21: Growth Incidence Curve, 2002-09 ..................................................... 11 Figure 1.22: Changes in Poverty and GDP Per Capita ........................................... 11 Figure 1.23: Decomposition of Income Poverty Gains by the Components of Welfare Aggregate ............. 11 Figure 1.24: Employment, Real Wage Growth Rates and Gini, 2001-11 .................................. 11 Figure 1.25: Share of the Population with Income Below the Subsistence Minimum and Gross Regional Output Per Capita in 2011 ............................................... 12 Figure 1.26: Employment Types Across Consumption Per Capita Quintiles in the 4 th Quarter of 2009........ 12 Figure 1.27: Employment Growth Rates Between 2000 and 2011 and the Wage Ratio to the Country Mean..... 13 Figure 1.28: Life Expectancy by Gender 2000 and 2010, Ages ..................................... 13 Figure 1.29: Mortality Rate, Under-5 Per 1,ooo Live Births in 2000 and 2011 ............................. 13 Figure 1.3o: Addiction to Oil ..... .......................................................... 14 Figure 1.31: Rising Share of Oil, Gas and Mining in the Economy Evolution of Economic Structure ........... 16 Figure 2.1: Kazakhstan Exports Have Grown Faster than World Exports .............................. 18 Figure 2.2: Kazakhstan Export Composition Excluding Oil, 1996-2010 .................................. 18 Figure 2.3: Kazakhstan Export Composition, 1996-2010.............................................. 19 Figure 2.4: EXPY Evolution in Former Soviet Republics and Among Selected Resource-Rich Countries ........ 21 Figure 2.5: Export Concentration in Kazakhstan and Selected Resource-Rich Economies ................. 21 Figure 2.6: (Root) Herfindahl Index Against Prediction ......................................... 22 Figure 2.7: Share of Top Five Products Against Prediction ....................................... 22 Figure 2.8: Export-Revenue Concentration and Terms of Trade Volatility ... .......................... 23 Figure 2.9: Number of Export Destinations Kazakhstan and Comparators ........................... 24 Figure 2.10: Share of Top Five Export Destinations Kazakhstan and Comparators ...................... 24 Figure 2.11: Steady Progress in Kazakhstan's Export Market Penetration ............................. 25 Figure 2.12: Russia's Export Market Penetration Suffered a Setback with the Global Crisis ................. 25 Figure 2.13: Decomposition of Kazakhstan's Exports by Type of Product and Market Destination ............ 25 Figure 2.14: Kazakhstan's Export Orientation ................................................ 26 Figure 3.1: Employment by Economic Activities, 2011. ................................................. 32 Figure 3.2: Employment Growth Rates Between 2000 and 2011 and the Wage Ratio to the Country Mean ..... 33 Figure 3-3: Occupational Profile of Employment in 2000 and 2011 ..................................... 33 Figure 3-4: Percent of Employment Per Sector - Male/Female and Urban ............................ 34 Figure 3-5: Kazakhstan's Demographic Window of Opportunity ................................... 34 Figure 3.6: International Comparison of Labor Productivity in Kazakhstan............................ 35 Figure 3-7: Competitiveness and Different Stages of Development ....... .......................... 35 Figure 3.8: Gross School Pre-Primary Enrollment in 2000 and 2009. ...... ................................ 36 Figure 3-9: Tertiary Enrollment in 2000 and 2009...................................................36 Figure 3.10: Share of Enrollment Among 16-17 Year Children by Consumption Per Capita Quintiles in 2009 ... 36 Figure 3.11: Share of Enrollment Among 16-17 Year Children by Residence ............................ 37 Figure 3.12: Students in Kazakhstan Underperformed in PISA Tests Compared to Their Peers ............... 38 Figure 3.13: The Average Reading Score is Relatively Poor in Kazakhstan ............................. 38 Figure 3.14: Structure of the Labor Force in Kazakhstan by Level of Education and Place of Residence, 2001 and 2011 ..................................................... 39 IX Figure 3.15: Index of Labor Shortages and Surpluses by Education Attainment in 2002 and 2010 ............ 39 Figure 3.16: Percent of Firms Reporting a Given "Basic" Skill to Be Important/Very Important for Specialist/Skilled Workers in Kazakhstan ...... .................................. 40 Figure 3.17: Structure of Total Employment in Kazakhstan by Sector and Level of Education, 2007-11 ......... .41 Figure 3.18: Net job Creation and Number of Graduates in Kazakhstan by Sector, 2010 .................... 42 Figure 3.19: Share of Public Spending on Education in 2000 and 2009 ............................... 42 Figure 4.1: Kazakhstan's Governance Indicators Have Shown Improvements Since 1996................... 46 Figure 4.2: Regulatory Enforcement Gap Versus OECD Average, 2012 .................................. 47 Figure 4-3: Prevalence of Corruption in Different Branches of Government ........................... 47 Figure 4-4: Satisfaction with Quality of Various Public Services and Unofficial Payment .................. 49 Figure 4-5: Selected Indicators of Institutional Quality for Kazakhstan and Comparators, 2012 .............. 50 Figure 4.6: Kazakhstan is on the Top Third on Ease of Doing Business, But it Could Do Better .............. 53 Figure 4.7: Quality of Competition Policy - Kazakhstan and Comparators, 2010 .......................... 54 Figure 4.8: Credit to the Private Sector ..... .................................................. 57 Figure 4-9: Proportion of Firms Identifying Access to Finance as a Major Constraint for Growth ............. 57 Figure 4.1o: Total Credit Growth and Loans to SM Es ................................................ 57 Figure 4.11: Problem Loans are Well Provisioned But Constrain Banks' Lending Expansion ................. 58 Figure 5.1: Product Space Representation ofTotal Global Trade ....................................... 62 Figure 5.2: Kazakhstan's Com petitive Exports, 1996-2010 ............................................ 63 Figure 5-3: Classics, Emerging Champions, Disappearances, and Marginals ............................. 66 Figure 5-4: "Marginals" at One Standard Deviation Above Average Density .............................. 66 Figure 5-5: The Endowments that Matter for Eurasia: Human Capital, Financial Development and Rule Of Law 68 Figure 5.6: The Endowments that Do Not Matter for Diversification: Kazakhstan, Natural Resources & Land 68 Figure 5-7: The Endowments that Matter the Most for Kazakhstan ................................. 69 LIST OF BOXES Box 1.1: The Main Features of the Paradox of Plenty ........................................... 15 Box 3.1: What is the PISA and What Does it Measure?. ......................................... 38 Box 3.2: Selected Strategic Goals Outlined by the Government in the Sphere of Education and Labor Force Development to be Achieved by 2020 . ....................................... 43 Box 5.1: Defining Classics, Emerging Champions, Disappearances and Marginals......................64 Box 5.2: The OECD Sector Competitiveness Engagement in Kazakhstan ............................ 67 Box 5.3: Two Weights and Two Measures ................................................... 73 Box 5.4: Examples of Self-Discovery ....... .................................................. 76 LIST OF ANNEXES Annex 1: Product Space Concepts ........................................................ 79 Annex 2: Chile Product Space 1984-2010.... ...................................................... 81 Annex 3:Australia Product Space 1984-2010 ........................................................ 82 Annex 4: Russia Product Space 1999-10 .......................................................... 83 Annex 5: Clusters in the Product Space .................................................... 84 Annex 6: RCA Evolution for Selected Products ............................................... 91 x Beyond Oil: Kazakhstans Path to Greater Prosperity Through Diversifying ACKNOWLEDGEMENTS This report was written by a team led by Francisco Carneiro, Lead Economist, Europe and Central Asia Region at the World Bank. Daniel Lederman, Lead Economist and Deputy Chief Economist, Latin America and the Caribbean Region, provided insightful advice on the concept and structure of the report and contributed substantive inputs at various stages. The team is grateful to the Government of Kazakhstan for its support to this work since its early stages. The high- level brainstorming on economic diversification held in Astana on April 16, 2013 with senior Kazakh authorities provided useful insights. The team also benefited immensely from early interactions and guidance received from Yerbol Orynbayev, Deputy Prime Minister; Kairat Kalimbetov, Deputy Prime Minister; Madina Abylkassymova, Vice-Minister of Economic Development and Trade; government officials from the Ministry of Finance, Ministry of Labor and Social Protection, the National Bank of Kazakhstan; and representatives from the Economic Research Institute. The team also met with the private sector and civil society organizations in Astana and Almaty at differ- ent stages and thanks them for their time and thoughtful views on the scope of this work. The report uses the analytical framework of the World Bank's Flagship report on growth and diversification in Eur- asia. The team benefited immensely from insightful discussions with Indermit Gill, Chief Economist, Europe and Central Asia Region at the World Bank and his team, in particular Kazi Matin, Ivailo Izvorski, and Willem van Eeghen who were kind enough to brainstorm with the core team on different stages of preparation. The team is grateful to the Macroeconomics and Growth Research Group (DECMG), the International Trade Research Depart- ment (PRMTR), and the Economic Policy and Debt Department (PRMED) for their support during the preparation of this report. The core team included Dorsati Madani, Ilyas Sarsenov, Evgenij Najdov, Sarosh Sattar, Igor Kheyfetz, Esther Naikal, Samuel Maimbo, Aziz Atamanov, William Battaile, Ervin Dervisevic, Havard Halland, Rinaldo Pietrantonio, Jose Molinas and Emanuel Salinas. Professor Eduardo Engel (Yale University and National Bureau for Economic Research - NBER) and Constantino Hevia (DECMG) prepared background papers on optimal fiscal rules and resource administration. Alain D'Hoore and Enrique Blanco Armas were the peer reviewers and provided useful guidance to the team. Naotaka Sugawara prepared several of the figures used in the text. Sarah Nankya Babirye provided superb editorial assistance. Gulmira Akshatyrova and Xeniya Novozhilova, from the Astana country office, and Oxana Shmidt from the Almaty country office supported the team during the several missions associ- ated with this task. The work was carried out under the overall supervision of Ivailo Izvorski, Sector Manager, Poverty Reduction and Economic Management Sector Unit: Macro Economics 1 (ECSP1) and Yvonne Tsikata, Sector Director, Poverty Reduction and Economic Management Sector Unit (ECSPE). Saroj Kumar Jha, Country Director for Central Asia, and Sebnem Akkaya, Country Manager for Kazakhstan provided guidance and supported the team. Xi EXECUTIVE SUMMARY Kazakhstan aspires to become one of the world's 30 endowments. Endowments are classified as: (a) most developed economies by 2050. The government's endowments that the country already has, such as recently announced 2050 Strategy outlines how the natural capital; and (b) endowments that can be cre- country plans to refine its long-term socio-economic ated and further developed, such as: physical capital; strategy to achieve this goal. The focus is on laying the human capital; and institutional capital. The outcome basis for the accelerated diversification ofthe economy of the structural transformation of the economy through industrialization and infrastructure develop- should be diversification in the form of a larger and ment, including enhancing human capital to drive more diverse basket of products, and more diversified innovation and economic efficiency. Horizontal poli- services produced for domestic consumption and for cies to improve the overall business environment are a export to a more diverse pool oftrade partners. In line core part of that strategy. The government is also with this approach, the objective of policy should be focused on several vertical policies, as articulated in to reduce volatility in the economy, promote produc- the Industrial Acceleration Plan 2010-14. Like many tivity growth and harness employment creation. other successful resource-rich countries, Kazakhstan has a real chance of fulfilling its ambitious objective, Further structural transformation and economic devel- but there are many perils ahead. This report addresses opment in Kazakhstan will require greater focus on the some of the main questions that are likely to confront endowments in which the country is less abundant. In the authorities in the pursuit ofthe country's aspiration this context, the report looks at the challenges that (see Spotlight at the end ofthis Executive Summary). have affected the quality and provision of human capi- tal as well as the existing gaps and opportunities for The wealthiest countries in the world have enjoyed improvements in the quality of institutions in rising living standards and many of them have Kazakhstan.Andwhilediversifyingtheseendowments, increased their levels of wealth and prosperity on the especially within existing institutions, is a long-term back of natural resource abundance. The United States, proposition, this report argues that there are "quick Canada, and Norway are examples ofcountries that are wins" for Kazakhstan. For example, fixing the educa- well endowed with natural resources and that have tion system, improving the business environment fur- used this abundance well to create other forms of capi- ther, giving people more economic freedom, enabling tal. However, this successful pattern is not the norm innovative finance through the development of non- and there are many other examples of countries that bank financial institutions, and creating better accep- started with sizable endowments of natural resources tance of the idea that "business failure" is not an eco- and have not become more developed or diversified nomic disaster but rather a market signal about while many others have fallen prey of the middle- allocative efficiency. income trap. What are the main determinants of these opposing trajectories? More often than not, the suc- If Kazakhstan makes good use ofthe right policy levers, cessful countries were those that used their endow- it could become a model of economic development and ments more efficiently and focused their policies on diversification in Eurasia. The Eurasian region' is blessed reducing volatility, enhancing productivity, and creat- with natural resources, but it could do better at convert ing the conditions for employment growth. ing resource rents into resource revenues. Sub-soil assets per capita in Eurasia are at least three times as This report adopts the analytical framework used in the Eurasia Flagship Report. The framework looks into options that could be explored to help authorities 1 Eurasia covers the countries that used to be part of the Soviet think about diversification across three dimensions: Union excluding the Baltics (Estonia, Latvia and Lithuania): diversificationAzerbaijan, Kazakhstan, (the resource-rich in the Turkmenistan Russia, countries and Uzbekistan group) plus Armenia, Belarus, tion of economic partners; and diversification of Georgia, Kyrgyz Republic, Moldova, Tajikistan and Ukraine (the countries in the group that do not export hydrocarbons). xii Beyond Oi: Kazakhstan's Path Greaier Prosperiby Torough Diversifying do high as those found in the Latin America Region, and WHY DIVERSIFICATION IS IMPORTANT at least two times larger than in the Middle East and FOR DEVELOPMENT North Africa Region. However, in spite of all that abun- dance, the wealthiest countries in Eurasia (including Kazakhstan is rich in natural resources but it has not Kazakhstan) have a weaker track record of converting yet accumulated as much wealth as the richest coun- their natural capital into other forms of capital when tries in the world. Kazakhstan's total wealth in 2008 compared with those two regions. was estimated at US$1,177 billion. This is by all means a sizable amount, but Kazakhstan still has a long way This report is structured in five chapters that outline to catch up with the richest countries in the world. the weaknesses and strengths of the Kazakh economy Its total wealth per capita at US$75,112 is lower and the pressure points that will need to be addressed than the average for upper middle-income countries to put the country on a path of increased prosperity. (US$105,000 per capita) as well as Europe and Central Each of the chapters discusses issues that will be rele- Asia (US$11o,ooo per capita). In addition, Kazakhstan vant for Kazakhstan's plans to become a more devel- has not been successful in converting its natural capi- oped and more diversified economy: tal into other forms of capital, which is a warning sign mChapter 1, Why Diversification is Important for Develop- that may f iazahstneweal ebdd in ment, discusses how rich and abundant Kazakhstan is ts on-renwableaalrsourcs th e e in natural resources, how well this wealth has been th challenge ftivel managing the and re used, and how important it is to focus on the policies the rsren ts forainem n oe diversification. rn hi eorernsfrivsmnsi te fr and development that matter forthatmater dvelomen anddivrsifcaton,forms of capital, such as education or infrastructure. m Chapter 2, Oil Wealth, Volatility and Macroeconomic Having benefitted from a favorable external environ- Management, focuses on the options that Kazakhstan ment, high oil prices, and fast productivity growth, could explore to manage volatility arising from export Kazakhstan has experienced steady economic growth concentration. In doing so, the chapter assesses and outstanding poverty reduction over the last ten whether resource dependence leads to macroeco- W . i nomic volatility, whether nomi Kazakhstan has wheherKazkhsan voatiity ben able hs been ble national ihipoigtrso yas prices of oil, the size of rd n iigitr the Kazakh economy to avoid volatility, and what macro-policy solutions outgrew that of its peers in the region and contributed are available to Kazakhstan. to bringing the country into the group ofupper middle- . Chapter 3, Gaps and Opportunities for Human Capital income countries in a period often years. At the same Development, looks at the structure of employment time, the share ofthe population living in poverty (as in Kazakhstan and assesses whether Kazakh workers y g y have the skills demanded by the market. Addition- rected, US$2.5 per capita per day) fell from 41 percent ally, it will look at what needs to change to reduce the 2001 to 4 percent in 2009. Under the assumption that mismatch in the labor market. the external demand for oil and other commodities pro- duced by Kazakhstan will remain strong and oil prices m Chapter 4, The Institutions that Matter for Diversifica- are not disrupted by other unexpected economic or tion, analyzes the quality of the regulatory and gover- political factors, its current income per capita level may nance environment, how well market institutions double by 2020. This would place Kazakhstan among have developed, and what changes will be necessary the select group of countries with high-income status. to strengthen the quality of institutions. to srenthe thequaityof istiutins.If Kazakhstan has been successful in promoting pro- m Chapter 5, Options to Increase Competitiveness in the poor growth why should it be concerned with diversi- Short Term, uses the product space analysis to assess fication? In many resource-rich countries, an obvious where Kazakhstan's comparative advantages are. It concern is whatthe sources ofgrowth will be when oil then discusses whether the country has faced exces- runs out. A resource-rich economy that has diversi- sive trade barriers, whether there is a role for indus- fied its economic structure, its products and partners, trial policy, and what could be done in the short term and has become less reliant on its most abundant to help diversification, endowment is also less sensitive to macroeconomic shocks transmitted via large fluctuations in commod- ity prices. In addition, with resource-extraction being highly capital-intensive, diversification creates addi- tional sources of employment for the labor force. Indeed, recent research finds a positive association Exective Summary xii between rising economic diversification and rising suggests that this sequence of effects is statistically per capita income for countries that have per capita meaningful both across countries and for Kazakhstan. income of up to US$20,ooo. Beyond that level, econ- In this context, the use of fiscal rules for managing omies tend to re-concentrate though high-income the volatility ofoil export revenues becomes an impor- countries do not reach concentration levels usually tant tool for policy making. found in low-income countries. If oil export revenues were stable, fiscal rules would be The path to increased wealth, prosperity and diversifi- unnecessary. Indeed, when economies discover or cation in Kazakhstan will be paved with policy options begin to exploit oil reserves, in such a scenario it would that strengthen fiscal discipline, harness the skills of be optimal for society as a whole to increase domestic its labor force, and reshape the institutions that regu- consumption and reduce the share of investment in late the activities of public and private agents. Looking GDP. The main reason is that such discoveries would forward, Kazakhstan's development objective of join- entail that an economy has become richer and thus the ing the rank of the top 30 most developed countries by incentive to save would be reduced. That is, in techni- 2050 will require a continued steady hand at macroeco- cal terms, inter-temporal consumption (a proxy for nomic management to avoid volatility associated with national welfare) would be maximized by consuming oil dependence, substantial improvements in the area more today. The problem for policymakers is that such of governance and transparency, a more business- a world does not exist, and saving too little today to friendly regulatory environment, concerted efforts to fund current consumption can be both risky from a improve the quality of education outcomes, and debt management viewpoint and from the viewpoint of increasing attention to social policies in order to national welfare when volatility ofconsumption directly improve the living standards of the Kazakh citizens. reduces household welfare and macroeconomic vola- tility hampers private investment. OIL WEALTH, VOLATILITY AND One important conclusion ofthis report is that the best MACROECONOMIC MANAGEMENT fiscal rules are those that explicitly include an element Kazakhstan's exports have increased sharply since of counter-cyclicality. An optimized fiscal rule could independence, but the country has exported more of bring savings of close to 25 percent of gross domestic the same to old partners. The value of Kazakhstan's product (GDP) over the next 25-year period to l tan. total exports has increased from US$6 billion in 1996rule would be difficultto implement in s an bili n ic1996 tota exp9 blort naincreased infrom US$6 practice due to the need to rely on num erous econom ic to US$49 billion in 2010 (in constant 2005 Prices), aaeeswiemkndcsosaotwa od more than an eightfold increase. Non-oil exports have p g an incrase ne prouct invalu hae ben aded with current oil revenues. The results of a number of increased in value and new products have been added eooercsmltossgetta iperl to the export basket, but oil exports have grown faster. eon the stn pemaent-income rac As a result Kazakhstan has experienced increasing with anexitclaueafo perodsnofisevee p-c export concentration even compared to other resource dependent countries. In addition, the larger contribu- downturns could yield similar benefits as the optimal tion to export growth is accounted for by exports of old (and extremely complex) rule. An additional advantage products to old markets; that is, there has not been pp p f poduts ad prtnrs.the fiscal authority to tap the oil fund in situations of muchsevere muchdivrsiicaton recessions (which this report defines as a drop Dependence on oil is associated with export concen- in private income by 30 percent) that are transitory. tration and terms of trade volatility, which can bring The fiscal rule forthe national oil fund as currently con- about domestic macroeconomic volatility. Net exports stituted has been able to deal with transitory shocks. of natural resources are usually associated with macro- As discussed in the World Bank report entitled Oil economic volatility, but this does not happen in a Rules: Kazakhstan's policy options in a downturn, even in linear way. The transmission channel is multifaceted and involves volatility in a country's terms of trade. a theial se ofa "meld oe EUothe size That is, net exports of natural resources (oil, in par- the liely run hock culd be moot un ticular) are associated ticuar)areassciatd with wth export concentration, xpot cocenraton, thcurnrleInheogrrn,hemsiprat factor for the government is to ensure the efficiency of which can then lead to volatility in terms of trade. investment expenditures since even modest success in Volatility in terms of trade can then cause domestic macroeconomic instability. The available evidence th at o il o ree e e es n r xiv Beyond Oil: Iazaho Path Greafer Prosperioy Tprough Diversifying oo The main recommendations2 to deal with transitory Such a rule would retain the base amount at a level shocks within the framework of the current fiscal rule consistent with current GDP, oil revenue and fund total can be summed up as follows: holdings (e.g. US$9.2 billion p.a.) but would allow an increased amount (e.g. 15 percent) in the event that m First, consider revisiting the US$8 billion base amount that GDP growth falls below a specified level. The two year has been in effect since the inception of the rule, but has limit is in effect an "escape from the escape clause." not been reevaluated since that time. If we apply the Other mechanisms could be envisioned but the idea is growth rate of non-oil GDP to this amount we would to avoid triggering an escape clause in a repeated adjust the base amount to approximately US$11 billion.3 sequential fashion. This should preserve the non-distortionary characteris- tics of the original US$8 billion fixed amount while allowing for the greater absorptive capacity of the now- GAPS AND OPPORTUNITIES FOR HUMAN larger domestic economy. For the future, it should be CAPITAL DEVELOPMENT noted that periodic adjustment of the base might be Each year, more than 300,000 workers enter the labor desirable but it would be counter-productive to do it on force in Kazakhstan, but the young often lack adequate a frequent basis since this would cause transfer skills. The 2009 round of the Program for International amounts to fluctuate up and down with transitory Student Assessment (PISA) showed that Kazakhstan's cycles. This is the opposite result from that which students (15 years old in grade seven or higher) per- inspired this study in the first place. In principle, the formed worse than their eers in different countries. goal would be to use trend growth in non-oil GDP, Kazakh students did something measure the knowledge and skills that they have learned periods oftime-at least four to five years if not longer, and practiced at school when confronted with situations a Second, confirm the current fixed rule for the NFRK and challenges for which that knowledge might be rele- but add two limiting factors for implementing any vant. Students in the country's Kazakh-speaking schools 15 percent deviation: scored significantly below those attending Russian- speaking schools on the PISA reading assessment. The Specify the size of the shock that would trigger observed performance gap between the two groups such a deviation; and averaged 5 points on the PISA exam scale, which is equivalent to more than one year of schooling. As Impose a time limitation for how long such addi- human capital is one of the endowments that matters tional transfers could be used (e.g., two years). the most in Kazakhstan, these two shortcomings are * Finally, implement "automatic stabilizers" to the extent serious challenges to the diversification of the economy. possible. That is, use the structure of the tax code (by Limited evidence from Kazakhstan-and more compel- doing such things as making taxes conditional on ling evidence from other countries-suggest that income or profits) and the structure of expenditure higher-order analytical skills and "soft" skills are programs (by doing such things as making poverty increasingly in demand from employers in an economy or other assistance programs conditional on income that is aiming to move toward higher value-added pro- or employment status) to make countercyclical rev- duction. The government's present emphasis on enue and expenditure changes as automatic as pos- improving student performance on international sible. Such arrangements function quite well in assessments that measure basic literacy and numeracy higher income economies and can naturally be skills does not fully address the need to prioritize and expected to develop in Kazakhstan as its average per track progress along various dimensions of non-cogni- capita income rises through time. tive and behavioral skills (some of which are already identified as important in the government's education 2 These are the same recommendations advanced in World Bank stte, thelauthoritiill nd to asses sa (2013), Oil Rules: Kazakhstan's Policy Options in a Downturn, tify the o tis aar nee es or then- Washington, DC. 3 This figure is achieved by deflating Kazakh government figures for try's economic development. In this perspective, it is non-oil GDP by the government estimates ofCPI over the 2008-12 important to highlight the fact that high quality educa- period and applying the real growth rate from these figures over tion is a lifelong proposition. Children who have access this period to the US$8 billion base transfer amount. The result is to quality early educational programs have higher cog- a new total ofUS$11.1 billion. Non-oil GDP is chosen because this is the relevant comparison in terms ofthe discussion above about avoiding the distortionary effects of mineral revenue on the school, in addition to higher school completion rates. domestic economy. Exective Summary xv Modernization of the economy and economic diversi- m improve teacher effectiveness and focus on teacher fication will require a highly skilled labor force and policies, including teacher training ( and in- productivity and job creation in the non-oil sector. service), teacher pay and incentives to attract the According to the World Economic Forum's classifica- most qualified; tion of different stages of development, Kazakhstan's GDP per capita at US$11,ooo places the country in m Provide in-service support to schools and teachers the group of economies that are transitioning from an and equip them with innovative and effective tools efficiency-driven stage of development to an innova- for curriculum development; tion-driven stage of development (see Figure 37) Continue phasing-in Per Capita Financing (PCF) as it The relevant question, however, is whether Kazakhstan has the potential to reform education systems has in fact the typical characteristics that are usually through enhanced efficiency, equity, transparency, found in an efficiency-driven economy, namely good and accountabilit higher education and training, goods market effi- ciency, and labor market efficiency, to name a few. The m Deepen school autonomy and accountability so that evidence so far indicates that there has been employ- schools can redefine their incentive structure to ment growth in occupations that require a higher create better conditions for learning and teaching; degree of labor force qualification. and create accountability mechanisms through com- There are worrisome symptoms of a skills mismatch in the complaints voiced by Kazakhstan's employers. A accountability; two-pronged approach could be used to better align m Improve monitoring and evaluation systems to den- education needs with market needs. This would tify gaps and respond on time to student and school involve: (a) improving access to labor market informa- needs. tion to facilitate the matching of skills and needs; and (b) encouraging closer collaboration between educa- A two-pronged approach could be used to better align tional/research institutions and private sector firms in secondary education needs with market needs. This order to foster sector-specific research and human would involve the following: capacity building. In addition to improving the quality of graduates' skills, the quantity of graduates should m Improve access to labor market information to facili- be aligned with xvi realistic Beyond Oineeds of the economy. Kazakh- Kservice),'stethher tate the matching paya of skills and needs; and andrincentivesortohaDtvraciftie stan's vocational and higher education institutions m Encourage closer collaboration between educa- currently train more skilled specialists in some sectors (such as agriculture) than the labor market demands. tonao/research andriat c aim The Technical and Vocational Education (TVE) can be to f r - ie can p improved on two main fronts: (i) enhance the rele- vance ofTVE curriculum content and upgrade the qual- ification system to better match labor market demand THE INSTITUTIONS THAT MATTER FOR in Kazakhstan; and (ii) consider deferring early track- DIVERSIFICATION ing from secondary to post-secondary. This report postulates that the institutions that matter Managing the flow of students into higher education is for diversification are those used by the government to also important. The stated goal of bringing the share of manage volatility,those that are put in place to regulate workers with higher education degrees to 50 percent by the business environment, and those that are respon- 2020-from 30 percent in 2010-should be consid- sible for and that affect the provision of public services. ered carefully in line with projected economic demand. In the context ofa resource-rich country, a volatile mac- If not done carefully, the expansion of higher education roeconomic environment introduces uncertainty in the could have a negative impact on the quality of gradu- economy that can be responsible for several problems. ates and can potentially exacerbate the mismatches In the presence of volatility, the government faces currently emerging in Kazakhstan's labor market. uncertainty about how much revenue stemming from the resource sector will be available to finance invest- Focusing more on the following priorities can advance ments and the provision of public services. In particu- the quality and relevance of the education system: lar, private agents and investors in particular also ipve planning i to more efficiently address per- become not decide increasingly to start newwary of taking businesses or risks and may undertake sig- m Improve en viroe(pt polieivd including teacation and in nificant new investments. The quality of public service sional and merit-based civil service. The legal frame- delivery is important in this context because it affects work has been overhauled over the last decade and the functioning of markets, the speed of economic implementation arrangements strengthened. Despite transactions, and even the competitiveness of a nation. this, there appears to be a disconnect between the A court system that does not work well may affect the legal framework and the actual implementation enforceability of contracts, the application ofthe rule of arrangements. Some of the areas that need further the law, and the respect to property rights. An educa- attention include the introduction of clear criteria for tion system that does not prepare students well for a merit-based competition, career progression and competitive market will limit that market's capacity to remuneration for administrative positions as well as innovate. Under these conditions, the prospects for loopholes allowing non-competitive selection. Civil the development of the non-resource sector of the servants are not protected from political influence and economy become more limited while economic policy whistleblowing is discouraged. As the public sector is a making becomes increasingly complex. major employer in Kazakhstan it should set the exam- ple and put in place rules and regulation that reward While there have been improvements in the quality and merit. A workforce that is not well motivated because it coverage of regulatory institutions, there are gaps to be does not feel its efforts are recognized and rewarded overcome in implementing regulations effectively and will not be very productive. This is particularly worn- without discrimination. The available evidence shows some in a country where the role of the state of the that there is a regulatory enforcement gap vis-d-vis the economy remains important. Organization for Economic Cooperation and Develop- ment (OECD) countries. For Kazakhstan, the gap is the While trust in political institutions is high, satisfaction lowest on effective enforcement of regulation, but it is with institutions with which citizens are more likely to strikingly high for due process in administrative pro- interact on a daily basis-such as public health ser- ceedings. This suggests that respect for the rule of the vices and the courts-is mixed. Kazakhstan ranks in law is not guaranteed. Fifty percent of respondents in a the bottom third of ECA countries in the satisfaction of recent survey (Ernst & Young, 2012) felt that the level its citizens with public service delivery. In fact, satisfac- of legal and regulatory transparency and predictability tion with public service delivery ranges from a low of is insufficient, with the main areas of concern being 27 percent in the courts, to 40 percent in traffic police, inconsistency in the interpretation of laws and selec- to a high of 69 percent in primary and secondary edu- tive application thereof, over-regulation and onerous cation. The reported prevalence of unofficial payments local content requirements, perceived corruption and made to receive these public services correlates nega- an insufficiently independent court system. tively with the satisfaction about the public service received. While this negative correlation is insufficient Corruption remains an important concern and is a to establish causality, it appears sensible to admit that bigger problem in Kazakhstan than incomparator coun- reduction in corruption could improve the quality of tries. According to the World Justice Project, corruption services and strengthen trust in institutions. is much more prevalent in Kazakhstan than in OECD countries with the legislative and judicial branches being Kazakhstan's institutions have improved since inde- the most affected. A significantly higher percentage of pendence, but their performance remains mixed. The companies indicate that informal gifts are requested or country has developed an extensive regulatory frame- expected at various stages of the business cycle in work, which it now needs to implement fully, and is Kazakhstan than in the OECD countries. The prevalence making slow progress in the quality of regulatory insti- of corruption is confirmed by the poor ranking of tutions. The country has progressed markedly in the Kazakhstan on the Transparency International Corrup- indicators captured by Doing Business indicators and tion Perception Index (ranked 133 out of 176 countries). the quality of the business environment has improved This is also supported by the Worldwide Governance substantially. In fact the country is well ranked in most Indicators Control of Corruption, where the country is indices that measure strength of market institutions in ranked only in the 15th percentile, and the 2012-13 World Central Asia. However, major constraints such as Economic Forum Global Competitiveness Report (WEF- market contestability, the major role ofthe government GCR), where corruption appears as the second most in the economy, and an under-developed financial problematic factor for doing business. sector affect the growth of the private sector. Its politi- cal institutions are seen as stable and reliable, but cor- Despite some progress, Kazakhstan is yet to make sig- ruption and excessive government intervention in the nificant advances towards institutionalizing a profes- economy remain an important concern. Exective Summary xvi To achieve the level of institutional strength observed for registration and licensing), and reduce clogged in more developed economies, additional progress will court dockets by moving certain disputes to admin- be needed to improve the effectiveness of existing leg- istrative resolution mechanisms. (ii) The Ministry of islation. When compared to more advanced econo- justice needs to improve the quality and responsive- mies, Kazakhstan's institutions still lag significantly ness of its services. This can be done through behind. In several areas, the available evidence and the improved operational effectiveness in areas such as perception of key stakeholders is that Kazakhstan's enforcement of judicial decision and improvement legal and regulatory frameworks have evolved substan- in information systems and M&E. (iii) Strengthened tially. However, there are considerable gaps between judicial professionalism and quality is key to the suc- what the laws say and what the practice is, that is, there cess of the reform program. To achieve this, the is a substantial margin to improve the effectiveness of Supreme Court and the judiciary will need to under- existing laws and regulations. One such example take a number of reforms, including simplification relates to the anti-corruption legislation that is quite and streamlining of court procedures to eliminate extensive but not very effective. delays in case processing and improvement access to justice. (iv judicial training needs to be profes- Six Ways to Improve the Efficiency sionalized. It should include an institutional and func- of Institutions tional assessment of the Institute of justice and the subsequent preparation of a costed and sequenced 1. Adopt a more proactive approach to business environ- Medium Term Training and Infrastructure Needs ment reforms: Kazakhstan has experienced a great Assessment action plan. The modernization of the improvement in indicators such as Doing Business training curriculum for judges and judicial staff with over the past five years, with its overall position attention to specialized training such as new criminal improving from 89 to 49 in the global ranking of ease and economic legislation is also necessary. of doing business. These impressive results highlight the commitment of authorities to business environ- 3. Make room for the private sector and encourage ment reform, and the decisiveness of these efforts. To competition. There are several sectors and products a large extent, the definition of the reform priorities in which Kazakhstan has an inherent comparative has been guided by those areas in which Kazakhstan advantage, yet, the private sector has not moved in ranked lower than its peers in global indicators. This that direction. Two plausible reasons for this are: (1) first generation of business environment reforms pro- not enough incentive for competition; and (2) the vides a solid foundation for a conducive business heavy footprint of the state in the economy. For environment, but it is not enough. Priority areas that example, while the country is ranked in the top third should deserve the attention ofthe authorities include: in the Doing Business indicators, competition policy (a) guide future reforms by a close and consistent and market orientation are seen as weak and incipi- Public-Private Dialogue (PPD) that creates well-struc- ent. There are several restrictions to market entry in tured communication channels for enterprises of all a number of sectors keeping significant parts of the sizes and industries-this process should not be economy inaccessible to the private sector. On the bound to areas covered in global indicators such as other hand, the importance of the public sector in Doing Business; (b) reform laws and regulations to the economy remains high and many activities that address the specific obstacles faced by enterprises in are undertaken by private sector companies in other different sectors; and (c) place major emphasis on countries, such as transport and storage of oil and adequate implementation and evaluation of reforms. gas, water and sewer systems, and the management Even though there is no formal assessment, the gap of airports, are considered strategic in Kazakhstan between laws and practice is significant and varies and remain under the responsibility of the state. widely across the country. widey arossthecounry.4. Make the public sector more efficient, or make it 2. Respect the rule ofthe law and improve the quality of smaller. The most effective response to a market fail- service delivery. Four main areas should be consid- ure is not necessarily government provision. Interna- ered when designing reforms to improve the quality tional experience shows that it is better to let the pri- and effectiveness of service delivery. (i) It is neces- vatesectorinwhilethegovernmentsetsthestandards sary to improve and implement key elements of the and regulates. In this context, it may be advisable for legal framework. This can help the development and Kazakhstan to reassess the strategic areas and implementation of key laws to reduce the role of the monopolies that exist with a view of reducing the state in private sector functioning, promote self-reg- footprint of the state in the economy. At the same ulation in the private sector (through codes and laws time, there is a need to improve efficiency, in particu- xviii Beyond Oil: Iazahe Path Greater Prosperity Tqrough Diversifying eo lar in public procurement where existing legislation also gaps in terms of insulating public administra- seems appropriate but does not cover a significant tion staff from political pressures and influence. part of the public sector (e.g., government holdings Such separation exists in other countries and is and state owned enterprises, SOEs). encouraged in order to separate the professional 5. Get the financial sector in order. The financial sector in Kazakhstan is still suffering the hangover of the 2008-09 crisis. The country's level of non-perform- OPTIONS TO INCREASE COMPETITIVENESS ing loans (NPLs) is one of the highest in the world. IN THE SHORT TERM The lack of a concrete resolution can impact the per- Results from product space analysis can be used to formance of the economy and the prospects for frame a dialogue between the government and the pri- diversification. There should also be more proactive vate sector. Sectors identified as having emerging steps to strengthen the country's payment system through improvements in the legal and regulatory comaate adana out e on of e iig framework, better awareness by consumers and irnadseladaimleth.Hovr,hefc businesses about payment busiesss srvics, reductions abut services, aymet educion inin that thesethe private sector has not successfully taken up products suggests that there might be important the cost and tax disincentives for the use of elec- bottlenecks and barriers that need to be removed first. tronic services, improvements in the capacity of ser- This perception is also corroborated by the high exper- vice providers to market their payment services, and imentation and low survival rates of new exports. The strengthening of payment system infrastructure. analysis also shows that the concentration ofKazakhstan's Reforms to modernize and reform the retail payment existing products is in the periphery of the product system will benefit small and micro enterprises as well as households that wellas tht lack access oushols lck to banking and cces tobaningand sae ihfwpout that it would nte"oe.Ti be relatively difficult mle and risky to shift into other financial services. They will enhance competi- these more sophisticated, high-tech and better- tion in the payment services industry and allow the connected roducts iven the high degree ofcompeti- entry of innovative approaches to meet the transac- p g g g tion service needs of the economy as a whole. If suc- tene in wold mae e essaivs cessful, reforms in that area will also strengthen the ent inte eometth uea financial management in the public sector by facili- tating electronic delivery and collection of govern- Tapping into the competitiveness potential of new ment payments. Kazakhstan should also consider products with a higher technological content will the use of instruments such as factoring, leasing and require substantive upgrading of the country's physi- microfinance to help SMEs finance their assets and cal, human and institutional capital. Kazakhstan's obtain faster access to working capital. Getting these exports have a much larger gap in terms oftheir human three instruments right would go a long way in capital content when matched with the imports from increasing the depth and coverage of the financial different comparator countries. The emerging mes- sector. sage from this analysis is therefore that diversification 6.Commit to efficiency, reward excellence. Kazakhstan across both products and markets in the Iong-term will needs to make faster progress towards institution- eow ent In aon dynamica and ih alizing a professional and merit-based civil service. The importance ofa highly qualified and motivated country markets (in the European Union, East Asia, cadre ualified and the Pacific) import goods that are exported inten- cadre of chivitrvns cant beppovrempaesze sively by countries with relatively strong general institu- Many of the institutions that support markets are provided by the public sector. The ability of the tional settings, high financial development, and high state to provide these institutions is therefore an capital over labor ratios. Without addressing these important determinant of how well individuals gaps, current efforts to diversify the economy will yield behave in markets and how well markets function. limited results. In Kazakhstan, there is a lack of clear criteria for Optimization of the transit regime will be critical to merit-based competition, career progression and reduce logistics costs. Kazakhstan's exports are pro- remuneration for administrative positions, and jected to increase by 50 percent by 2020, which will there are loopholes allowing non-competitive selec- require additional freight capacity service on the main tion. This encourages inefficiency and corruption export routes to Russia, China and South Korea, hurtingthe credibility ofathe public sector. There are Europe, and Central Asia. Trade among neighboring Exective Summary xx countries is also expected to increase by about the new markets, it will need to adopt a more multilateral same amount, creating the possibility of substantial trade policy stance. transit traffic through Kazakhstan. The government recognizes that investment alone would not achieve Industrial policy can be a useful instrument to help the objectives implicit in the 2050 Strategy and it is diversification in the short-term, but it needs to be ready to introduce policy measures and non-infrastruc- used wisely. If sector-specific policies are to be used ture investment. For example, in terms of services, the they need to promote productivity and not serve as a strategy calls for the simplification of custom activities shield for stagnant sectors. Badly designed and imple- and border management procedures in view ofthe cre- mented vertical policies can work against the diversifi- ation of the Customs Union, Single Economic Space cation that they are intended to encourage. As a matter and accession to the World Trade Organization. The of principle, companies need in the medium and long various agencies involved are also asked to reach inter- term to be able to pass the test of international com- national standards (e.g., safety, speed, modernization petitiveness. In this context, specific studies that look of the aircraft fleet, among others). at the barriers to the development of sectors with potential for growth, can provide valuable insights into Following the ongoing effort focused on physical what could be the focus of useful horizontal policies. upgrade of the transport corridors the Government One example is the recent OECD report, which identi- should improve the operation and maintenance of the fied obstacles and opportunities to promoting: (i) infrastructure. The government should also foster the access to finance in the agribusiness sector; (ii) FDI emergence of a client-oriented culture, ensuring that promotion in the agribusiness value chain; and (iii) the expectations of the transport industry are met in CT sector development through PPP. term of quality of service, deregulation of tariffs, and access to infrastructure, for example. While supporting The use of smart industrial policies could correct dis- the modernization of international transport corridor tortions in the economy and generate positive exter- and associated services, the government should not nalities. A smart industrial policy would attempt to cor- forget to distribute the dividends of increased trade rect an economy-wide market failure that prevents the traffic: the current gap in quality of inter-city public private sector from producing a good for which the transport and rural accessibility should also be country has an inherent comparative advantage. In addressed. doing so, it would be wise to promote self-discovery and experimentation based on existing capabilities. Increased multilateralism could also help Kazakhstan This is important because the process of finding out reach new markets. The lack of competitiveness of which of the many potential products can be profitably local products, the ineffective use ofthe country's most produced could generate information about produc- critical endowments (human capital and institutions), tion technology and markets available for that specific and an underdeveloped business environment are all product and thereby benefit many other potential pro- internal reasons that might explain why Kazakhstan ducers. Finally, the best outcome a smart industrial has not diversified enough its products and services, policy could have is to raise the country's returns to and its trading partners. The lack of a broader multilat- schooling and making private agents invest more in eral trade policy is the external part of this story. The education. Placing greater emphasis on how the new evidence discussed in this report shows that Kazakhstan product is produced rather than on which type of prod- has placed a higher emphasis on intra-regional trade uct on which to focus could facilitate this effort. arrangements, for political or historical reasons, and that this has limited, to a certain extent, its exposure to the rest of the world. As the country aspires to reach xx Beyond Oilt Path o Greaaer Prosperiny Tnrough Diversifying nazae tpu Spotlight E.i: The Main Questions and Answers Addressed in this Report How rich and abundant is Kazakhstan is rich in natural resources but it has not yet accumulated as much wealth as the richest countries in the Kazakhstan is on natural resources? world. How well has this wealth been On the back of natural resource abundance, poverty has been halved in a decade and the country has moved fast from low used? income levels at independence to become an upper-middle income country today. In the absence of major shocks, Kazakhstan can achieve high-income status by the end of this decade. How can Kazakhstan become a The path to increased wealth, prosperity and diversification in Kazakhstan will be paved with policy options that more developed economy? strengthen fiscal discipline, harness the skills of its labor force, and reshape the institutions that regulate the activities of public and private agents. Chpe 2: Oil Dies-cto , an oatlt Have Kazakhstan's exports Kazakhstan has over time increased the number of products that it exports, but oil exports have grown faster and many become more concentrated? new export products do not survive long enough. There has been, therefore, growing export concentration and depen- dence on oil. How does dependence on natural Dependence on natural resource exports can create volatility in terms of trade which in turn can transmit volatility to the resource exports affect macroeco- rest of the economy. Kazakhstan is susceptible to these transmission channels but has avoided them with prudent fiscal nomic volatility? policy management. What are the potential welfare An optimal fiscal rule could bring savings of close to 25 percent of GDP over the next 25-year period but would be difficult gains from various fiscal rules? to implement in. A simpler rule with an exit clause for periods of severe private-sector downturns could yield similar benefits. What are the lessons for the Besides prudent macroeconomic management, Kazakhstan could diversify its export basket by solving private-sector market future? failures that have thus far hampered its ability to produce and export new products to new markets. Where are the jobs in Mining and oil are the drivers of growth, but employ very few people. Manufacturing also generates little employment. Kazakhstan? Most jobs are in the services sector while the public sector plays an important role as employer. Do Kazakh workers have the skills Each year, more than 300,000 workers enter the labor force in Kazakhstan, but young workers often lack adequate levels demanded by the market? of basic skills despite having formal credentials from the country's education system. What will need to change to reduce Addressing mismatches between the supply and demand for labor is a priority. This will require a better understanding of the mismatch in the labor market? the skills that are necessary for the country's economic development and efforts to align the quantity of graduates to the needs of the economy. Does Kazakhstan have a strong Kazakhstan's institutions have improved since independence but their performance remains mixed. There are many good governance and regulatory environ- laws, but they are not always implemented. Corruption is a recurrent problem. ment? Are market institutions well The country is well ranked in most indices that measure the strength of market institutions. However, major constraints developed in Kazakhstan? such as market contestability, the major role of the government in the economy, and an under-developed financial sector affect the growth of the private sector. What will need to change to Greater efforts will be required to: (i) respect the rule of law to improve the quality of service delivery; (ii) make room for strengthen Kazakhstan's the private sector and encourage competition; (iii) make the public sector more efficient or make it smaller; (iv) get the institutions? financial sector in order; and (v) commit to efficiency and reward excellence in the public sector. Where are Kazakhstan's compara- Kazakhstan has comparative advantages on products with low technological content, such as mining, iron and steel, and tive advantages? animal leather. Has Kazakhstan faced excessive Important trade partners for Kazakhstan like China, Korea, Japan and the EU impose higher levels of tariff protection for trade barriers? food products. Kazakhstan faces more difficulties in reaching new markets due to the lack of competitiveness of its non-oil exports. How could better logistics help? With exports projected to increase by 50 percent by 2020, additional freight capacity service on the main export routes to Russia, China and South Korea, Europe and Central Asia will require much improved transport corridors. When can industrial policy be Sector-specific policies need to promote productivity, and not serve as a shield for stagnant sectors. However, such useful? policies can be highly detrimental if they generate entrenched interests among the beneficiary firms that end up making such arrangements permanent. What can be done to help In the long run, improvements in education, productivity and institutions will be necessary for diversification. As an diversification? intermediate step, however, increased multilateralism beyond the Central Asia region will help, but it would be equally important to undertake reforms to reduce non-tariff barriers and reduce the costs of trading across borders. Sources: Chapters 1-5 Executive Summary xxi xxii Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying CHAPTER 1 WHY DIVERSIFICATION IS IMPORTANT FOR DEVELOPMENT INTRODUCTION natural resources, the endowments that matter the most for Kazakhstan are its human, physical, and insti- Kazakhstan has transitioned from lower middle- tutional capitals (see Figure 1.1). income to upper-middle income status in less than two decades. In 1992, right after declaring its independence If Kazakhstan uses well the right policy levers, it could from the former Soviet Union, Kazakhstan's GDP per becomeamodelofeconomicdevelopmentanddiversi- capita stood at US$1,515 (in current USD). Today, as fication for the whole Eurasian region. The Eurasian the country celebrates 21 years as an independent region is blessed with natural resources but it could do nation, GDP per capita is seven times larger, estimated much better to convert resource rents into resource at US$12,000. With this impressive performance, Kazakh- revenues. Sub-soil assets per capita in Eurasia are at stan has moved rapidly into the group of upper-middle least three times as high as those found in the Latin income countries. With conservative future economic America Region and at least two times larger than in growth rates estimated to remain on average at 5 percent the Middle-East and North Africa Region (Figure 1.2), per year over the next few years, Kazakhstan will soon but in spite of all this abundance, the wealthiest coun- join the group of high-income countries, but will this tries in Eurasia, including Kazakhstan, have a lower be enough to make Kazakhstan achieve the level of track record in converting resource rents to resource economic development that the wealthiest economies revenues, when compared with those two regions on the planet enjoy today? (Figure 1.3). For a country that wants to become more developed, the policies that matter are those that can As diversification is an outcome of economic develop- help the economy to become more stable, more pro- ment, this report postulates that it should not be the ductive, and that support and not hinder employment explicit objective of policy. Instead of focusing deliber- creation. Kazakhstan is a country in Central Asia that ately on promoting diversification, government policy has had the right approach in these three areas-macro- should have as its main objectives reducing volatility in economic management has been responsible and has the economy, enhancing productivity and creating the avoided volatility, productivity has grown rapidly in the conditions for employment creation. The extent to which economy, and the share of wage employment has risen these policies turn out to be successful will depend on over time. If it focuses more on making the most effi- howwell the countrycreates the favorable conditions for cient use ofits endowments it could become a model the diversification of the endowments that matter the of wealth, prosperity and diversification for the whole most. As a country that is already well endowed with region. Figure i.n: Endowments and policy objectives that matter for development and diversification A Employment Human Capitalfoakta rits Institutional Capital 1 The endowments that maaer The objectives of policy fhy Diversification is Importan for Development Figure 1.2: Eurasia is the most abundant region in HOW RICH AND ABUNDANT IS natural resources KAZAKHSTAN IN NATURAL RESOURCES? (Sub-soil assets, per capita, by region, in thousands of 2005 US dollars) A country might be growing fast but may not become 20 -more developed if it does not use its endowments well. At the heart ofthe issue of determining whether growth in a country is sustainable, is the issue of accumulation 15 -of wealth. It is wealth-broadly defined to include the endowments that a country can dispose ofto promote 10-growth, such as manufactured capital, natural capital, human and social capital-that underlies the genera- tion of national income, gross domestic product (GDP) 5 -has conventionally been used to assess economic per- formance, measuring economic growth from one year oto the next. But GDP does not take into account depre- (Rsc rciation and depletion of wealth, and therefore does c4r not provide an indication of whether growth is sustain- ~z~' ~ q~ %Oable: an economy could appear to be growing in the near term by running down its assets. Assessments of Source: World Bank staff calculations based on World Bank (01. economic performance should therefore be based on Note: Due to data availability, Turkmenistan is excluded from Euai. both measures of annual growth (such as GDP) and Sub-soil assets include oil, gas, and minerals, measures of the comprehensive wealth of a country, which indicate whether that growth is sustainable in Figure 1.3: Eurasia converts the smaller share of the long term. resource rents into revenues (Resource revenues, as a percentage of resource rents, 2oo6-io) A Long Way to the Top 80 - 70 -yet accumulated as much wealth as the richest coun- 6o tries in the world. In the 199os, the World Bank began l l cosrcigagoaiatbs oopeesv 40 are growing sustainably. Comprehensive wealth, the 30 20 50 sum of produced capital, natural capital,5 intangible capital (human and social capital), and net foreign 10 financial assets, was estimated for all countries for four years: 1995, 2000, and 2005, and most recently for 0p e l hi r w m or p ros ero u andu di er if e eco no my .e nt ss s w et e t e for the year 2008 is presented in Table 1. Kazakhstan's ~~ total wealth in 2008 was estimated at US$1,177 billion. This is by all means a sizable amount, but Kazakhstan Source: World Bank staff calculations, still has a long way to catch up with the richest coun- tries in the world. Its total wealth per capita at US$75,112 Thisreprt Kazkhsan an ecoe a ho iscsse n lower than is countries the average (US$105,000 for upper-middle-income per capita) and Europe and Cen- oped008.oTheycomprehensiveswealth estimateoforiKazakhsta wealthier, more prosperous and diversified economy. tral Asia (US$1 a,0h0 per capita). This first chapter is structured in three sections that describe the distinguishing features of Kazakhstan in terms of its natural resource wealth and abundance,g how well the country has used its wealth, and what it 4 Net Domestic Product and Net National Income account for needs to do to become a less dependent and more devel- h depreciation of manufactured capital, but not depletion or oped economy. It concludes with a briefoutline ofthe degradation ofnatural capital. questions that the subsequent four chapters of the he etodata constraints, measures of natural capital atpresent are report will address. limited to subsoil assets, agricultural lands (crop lands and grazing lands), forests, and protected areas. 2 Beyond OiK: Path to Greaker Prosperiiy Trrough Diversifying aKazakhstan's Table 1.1: Where is the wealth of Kazakhstan? Table 1.2: Natural capital per capita in Eurasia and other regions, 2005 (inthousands of constant 2005 US) Total Wealth Produced Capital Natural Capital* 1,177 457 872 75,112 29,157 55,602 39 74Russian - mE.. Intangible Capital -96 -6,094 -8Federation 31.3 7.1 1.0 23.2 Net Foreign Assets -56 -3,552 -5 Kazakhstan 23.9 3.6 3.1 17.2 (*Natural Capital) Azerbaijan 11.7 2.5 0.0 9.2 CropUzbekistan 7.7 2.3 0.0 5.4 Ukraine 6.9 4.9 o.6 1.4 Belarus 6.o 5.2 0.0 o.8 Moldova 4.1 4.1 0.0 0.0 Georgia 3.3 3.2 0.0 0.1 Armenia 3.1 3.0 0.1 0.0 Kyrgyz30 2. 0. 01 Republic3. 2. 00 01 Tajikistan 1.8 1.7 0.0 0.0 Crop, Pasture Land, Forest U Energy Turkmenistan 1.0 1.0 0.0 0.0 Protected Areas 0 Minerals Source: Authors' calculations based on World Bank data. _______________________________ Eurasia 20.2 5.4 o.8 14.0 Natural endowments are sizable and there has been Kuwait 213.1 1.1 0.0 121.0 impressive progress in increasing physical capital per Norway 110.2 10.5 0.0 99.7 capita, but the gap with the wealthiest countries is still Saudi Arabia 97.0 10.4 0.0 88.6 large. Table 1.2 shows how countries of the Eurasia Australia 40.0 19.7 10.7 9.7 region fare in natural capital per capita and how they Canada 36.9 24.3 1.1 11.5 compare to other countries. Kazakhstan is the third wealthiest country in terms of natural capital and oil Chile 18.9 9.3 9.3 0.3 and natural gas in Eurasia, but it is far from the per Brazil 15.0 12.7 0.9 1.5 capita levels observed in other resource-rich countries United States 13.8 10.3 0.5 3.0 like Kuwait, Norway or Saudi Arabia. In terms of physical Malaysia 12.7 2.6 0.0 10.1 capital, the story is similar. As per Table 1.3, Kazakhstan has made considerable progress in increasing its level of physical capital per capita over the last ten years Korea, Rep. 2.6 2.6 0.0 0.0 from US$6,8oo in 2000 to US$13,100 in 2010. The Singapore 0.0 0.0 0.0 0.0 country is now the fourth wealthiest in Eurasia in per capita physical capital terms, but it is still far from the Source: World Bank (2011), The Changing Wealth of Nations, levels observed in developed countries. For example, Washington, DC. Norway, Australia and the US had a stock of physical Note: Capital stock is computed by the perpetual inventory method capital per capita that was well in excess of US$00,ooo (with depreciation rate Of5 %)with data over the period Of 995-2010. in 2010. n Diversification 3y is Importan for Development 3 Table 1.3: Capital stock per capita in Eurasia and Over the 13 years between 1995 and 2008, Kazakhstan's other regions total wealth increased by about 8 percent and per (In thousands of constant 2005 US$) capita wealth by 9 percent (see Figure 1.4), outpacing stagnant population trends. After a drop in 2000, wealth increased rapidly from 2000 to 2008. However, Russian Federation 13-5 14.3 17.2 the growth of the different components ofwealth was Turkmenistan 12.2 11.4 16.8 quite uneven, with some assets declining and others increasing significantly (Table 1.4). A big cause of con- Belarus 7.6 8.7 14.0 cern is not only the decline in produced capital over Kazakhstan 6.8 8.4 13.1 this period but also the declining value of intangible Ukraine 5.6 6.o 6.9 capital which highlights the need for Kazakhstan to Armenia 2.5 3.4 57 invest in physical, social and human capital. Azerbaijan 2.6 4.3 5.6 Adjusted net savings, which is another way of measur- Georgia 3-5 4.3 4.9 ing a country's wealth, is significantly lower in Kazakhstan Moldova 2.5 2.7 3.4 than in comparator countries. Wealth changes through Uzbekistanthe process of savings and investment, so it is instruc- Uzbeista i. i.8 2.2 tive to examine national savings over this period. Kyrgyz Republic 1.2 1.2 1.5 National accounts provide an incomplete picture ofsav- Tajikistan 0.9 0.9 1.0 ings because they measure gross savings and deprecia- Eurasia ____________________________ 9.3 9.8 12.1 tion of produced capital, but do not record changes in the stocks of human and natural capital. To provide a more complete measure of savings, the World Bank has Norway 169.6 176.4 191.3 Australia 117.5 123.6 135.8 Figure 1.4: Eurasia is the most abundant region in United States 114.3 119.9 122.7 natural resources Germany 116.8 116.7 120.1 Canada 90.8 96.5 105.1 Singapore 112.9 110.1 105.0 Korea, Rep. 87.2 87.6 90.8 Kuwait 44.6 44.4 58.9 o.8 Saudi Arabia 27.6 25-9 30.4 o 6 Malaysia 32.5 27.1 24.5 1995 2000 2005 2008 - Population Per Capita Total Wealth Chile 19.6 20.2 23.5 Wealth Brazil Brazl 15.0 1.0 14.1 1.1 14.8 4.8 Source: Authors' calculations based on World Bank data. Source: World Bank (2011), The Changing Wealth of Nations, Washington, DC. Note: Capital stock is computed by the perpetual inventory method Table 1.4: Changing wealth per capita (with depreciation rate of 5%) with data overthe period of 1995-2010. (2008 US dollars) Progress will Require Transformation Natural capital is by far the most important component of wealth in Kazakhstan (74 percent), almost double -U. Total Wealth 54,281 . . 75,112 3.0 the value of produced capital (39 percent). Intangible capital, which is calculated as a residual oftotal wealth minus its other components has not been increasing. Natural Capital 23,055 55,602 10.9 This wealth composition is not on parwith what is usu- Intangible Capital 908 -6,094 -59.3 ally found for countries with the same level of income Net Foreign Assets -2,792 -3,552 -2.1 as Kazakhstan's or the other countries in the region where natural capital represents about 26 percent of Note: Data not available for Kazakhstan's produced capital and total wealth and intangible capital about 55 percent. intangible capital in 1995. Source: Authors' calculations based on World Bank data. 4 Beyond Oil: Path Greaier Prosperiry Tfrough Diversifyi2g eo wKazakhstan's Figure 1.5: Gross national saving and adjusted net saving as percent of GNI in Kazakhstan, 2010 35 - 30 - 25 - 20 - 15 10 0 .5 -10 -15 -20 - -25 gross consumption net education mineral net forest CO2 adjusted national- of fixed = national + eduain enertgy miea 0 netfret saving capital saving expenditure depletion depletion depletion damage san Source: World Bank, World Development Indicators. developed an indicator called Adjusted Net Savings Figure 1.6: Adjusted net saving (ANS). Figure 1.5 shows how ANS is calculated, starting with Gross Savings, which was about 31 percent of Kazakhstan, Upper Middle Income Countries, Gross National Income (GNI) for Kazakhstan in 2010, Europeand Central Asia (1995-2010) and subtracting depreciation of produced capital 20 (-13 percent), which results in Net National Savings at 15 18 percent ofGNL Adding investments in human capital 10 (measured as expenditures on education, 4 percent), 5 s and subtracting depletion of energy (-22 percent), min- 0 0 erals (-2 percent), net forest depletion (-o percent), 0 995 2000 2005 2010 and damages due to CO emissions (-1 percent) results in adjusted net savings of negative 2 percent of GN . At that level, Kazakhstan's ANS is significantly lower than 12 other European and Central Asian countries. While -20 Kazakhstan has a higher rate of gross saving compared -25 to other ECA countries, its energy depletion is so large that adjusted saving becomes negative. Moreover, Kazakhstan and comparator resource-rich countries (1995-2010) Kazakhstan's ANS has been consistently negative for the past 15 years, from 1995 to 2010 (as shown in 30 Figure 1.6) and has remained below the average of 25 both upper-middle-income countries and European 20 - and Central Asian countries as well as other resource- 10 rich countries such as Australia, Norway, and Chile. 0 Most importantly, a negative ANS implies that the 0 0 952000 2005 210 country is running down its capital stocks and is not 8 using its endowments in a sustainable way. -10 Kazakhstan's natural wealth has generated sizable -20 rents that need to be managed well to contribute to the -25 development and diversification of the economy. For Malaysia Chile resource-rich countries such as Kazakhstan, it is also Indonesia - Kazakhstan useful to consider the economic rents generated by Norway these natural resources, which are the revenues above Source: World Bank, World Development Indicators. the cost of extraction. By estimating resource rents, a country can better understand its potential in recover- ing the rents for investments in new capital. As shown minerals) as a share of GDP were consistently higher in Figure 1.7, during the period from 1990 to 2010, than the averages in other regions around the world. Kazakhstans rents from subsoil assets (energy and Kazakhstan also experienced a large increase in its Kahy Diversification is Importan for Development 5 Figure 1.7: Subsoil asset resource rents by region, as Figure 1.8: As oil wealth grows Kazakhstan percent of GDP experiences a steady decline in poverty rates 50% Poverty headcount ratio 40% 20 30% 15 0 o 20% 10- 10o% 0. 5 0%0 - Kazakhstan - Sub-Sahara Africa 2007 2oo8 2009 2010 2011 2012 Middle East& North Africa - Latin America & m Urban poverty Rural poverty Total poverty Europe & Central Asia Caribbean Source: Statistical Agency of Kazakhstan. Source: ASRK subsoil asset rents in the 2000's, averaging around Figure i.9: Oil is well that ends well 40 percent of GDP. These trends indicate the opportu- nity for the country to capture these rents and trans- form them into other forms of capital. While Kazakhstan has sizeable natural assets, progress and development will require transformation of these 2.5 resources into other forms of capital. Kazakhstan's 2.0 total wealth has increased considerably over the past 15 years which is very good news. The bad news is that 1.5 the negligible value of intangible capital and the persis- 0 1.0 tently negative trend of ANS are warning signs that future growth may not be sustainable if these trends 0.5 are not reversed. With the vast majority of Kazakhstan's 0.0 wealth embedded in its non-renewable natural resources, 0 0 0 0 0 the country faces the challenge of effectively managing P these commodities and recovering their resource rents m off-shore On-shore for investments in other forms of capital, such as edu- Source: Statistical Agency ofKazakhstan. cation or infrastructure. By doing so, Kazakhstan can transform its natural wealth into investments that will Kazakhstan is the ninth largest country in the world contribute to the development of an even wealthier with a land area equal to that of Western Europe, but and more diversified economy. has one of the lowest population densities globally. It is also the largest landlocked country. Strategically, it HOW WELL HAS THIS WEALTH BEEN USED? links the huge and fast growing markets of China and South Asia with Russia and Western Europe by road, This section ofthe chapter describes the recent perfor- rail and ports on an internal sea, the Caspian. Proven mance of Kazakhstan in terms of output growth and oil reserves are the ninth largest in the world; hydrocar- development outcomes. One of its main messages is bon output is the equivalent of nearly a quarter ofGDP that the country carries increasing global weight due to and accounts for over two-thirds of exports. In con- the abundance of its natural wealth. Over the past stant 2011 dollars, GDP per capita rose from US$5,255 20 years, the country has become one of the major in 2000 to US$12,000 in 2012 and poverty incidence global players in the oil industry, but this abundance fell from 46 percent to below 4 percent over the same has led to dependence. This dependence poses risks to period (Figure 1.8). To some extent, these facts suggest macroeconomic management and creates challenges that natural wealth can be associated with significant for the diversification of the economy. reductions in poverty. 6 Beyond Oil: Kazakhstan's Path to Greater Prosperity ThroOgh Diversifyiiog The country has also consolidated its position as a Figure mo: Riding the commodity boom major global player in the oil industry. With nearly Crude oil price, average spot, real 2005 US dollars per barrel, 40 billion barrels of oil in reserves and an estimated 1990-2012 2 percent of global production, Kazakhstan is among 100 the 20 largest oil producers.' Exports of primary com- modities make up approximately 45 percent ofGDP, of which oil and refined oil products make up about 60 70 percent. With significant new discoveries in recent years, most notably the development of the Kashagan 40 oil field, oil production is expected to increase at least 20 for the next 15 years or so and will remain important over the medium and long term (see Figure 1.9). 0 9 01 (o 0 0t oot 0 (o lb 0 Outstanding Performance Since Independence Source: World Bank Commodity Price Data (updated on March 5,2013) Fueled by favorable external conditions, the size of the Kazakh economy has consistently grown since inde- Figure m.i: Favorable terms oftrade benefitted pendence. Kazakhstan benefitted from a favorable Kazakhstan external economic environment in the most part ofthe past decade which enabled it to expand its exports of natural resources, mostly oil, and grow at a very fast 150 pace. With improving terms of trade and rising interna- tional prices of oil, the size ofthe Kazakh economy out- 120 grew that of its peers in the region and contributed to bringing the country to the group of upper middle- 90 income countries in a period often years (see Figures 1.10-1.13). Under the assumption that the external 6o demand for oil and other commodities produced by Kazakhstan will remain strong and oil prices are not 30 disrupted by other unexpected economic or political ') 0') P P factors, its current income per capita level may double by 2020 placing Kazakhstan among the select group of Brazil Russian Federation countries with high-income status (Figures 1.14 and 1.15). China Achieving high-income status will be easier than sus- Source: ME World Economic Outlook (October2012) taining it without a diversified economy that provides employment to the country's growing population of Productivity Grew Faster in Oil-Rich Regions about 17 million. As argued in the World Bank's Country Partnership Strategy for FY12-17, additional structural Kazakhstan experienced rapid growth in labor produc- reforms will be required in this transition to a new tivity over the last decade outpacing the performance stage of development. For example, the role of the ofthe BRICs. Figure i.i6 shows the evolution of output state will have to be redefined to permit a vigorous pri- per capita for Kazakhstan and comparator countries vate sector to develop, governance will need to be overthe period 2000-10. The performance of Kazakhstan strengthened to allow greater accountability to civil is illustrated by the yellow and the blue lines showing society, and public investments will need to be made in that both total and non-oil output per worker grew by high pay-off areas: human capital and infrastructure. 6 and 7 percent per annum, respectively, compared to less than 1 percent per annum, for example, for OECD countries (purple line). Kazakhstan's labor productivity growth also outpaced that of the BRICs (Brazil, Russia, IIndia, and China) and was higher than that observed in countries with a similar level of income in 2000 (blue line) and in 2010 (orange line). 6 See IMF (2011), "Oil Wealth and Development: What Does This Mean for K(azakhstan?" Chapter III in Republic of Kazakhstan: Selected Issues, IMF Country Report No. 11/151, Washington, D.C. Why Diversification is Important for Development 7i Figure 1.12: A spectacular increase in the size of Figure 1.i4: Kazakhstan may attain a high-income the economy status by 2016 assuming stable oil prices Gross domestic product at current us prices over the last 20 years Kazakhstan's Atlas GNI Per Capita Development Prospects (baseline) u 200 20K 150 15K U 100 10K 50 0 0 5K 0 0l co) I 1f1 02005 2007 2009 2011 2013 2015 2017 Azerbaijan Turkmenistan Upper-middle Income Ceiling Kazakhstan - Uzbekistan Kazakhstan's Income per Capita Source: World Bank staff calculations. Upper-middle Income Floor-level Source: World Bank staff estimates and projections. Figure 1.13: Kazakhstan became an upper-middle income country in less than io years Figure 1.15: Even if oil prices drop sharply and stay 60K low, Kazakhstan's GNI is expected to grow v~50K Kazakhstan's Atlas GNI Per Capita Development Prospects (low-case) 40K 0 020K S20 2 20 0 00 0 C 5K 0 0 : XL 0\ D 1rdctvtywshihr1n1h %02005 2010 2015 2020 .1,lao Fiur 0 2000 2011 i Upper-middle income ceiling Kazakhstan's income per capita Source: World Bank staffcalculations. Upper-middle income floor-level Productivity growth was faster in oil extracting regions was fuele by which benefited from large fixed investments. As per adult population is active in the labor market. Accord- Figure 17, labor productivity was higher in the oil ing to data from ASRK, the employment ratio to work- extracting regions (red circle) than in the other regions. countrce:aWdrld ing age population (ages 15 andmpro.ePtions. Banksstaffeestimates and older) increased from The highest productivity growth was observed in the 57.6 percent in 2000 to 67.8 percent in 2011 while the oil-extracting region of Atyrau where regional output level ofunemployment was halved from 12.8 percent to per worker was 4 times higher than the average for the percent over the same period. International com- country and r times higher than in Zhambyl. Produc- parisons of employment ratios show that azakhstan tivity growth in oil extracting regions was fueled by outperforms OECD countries both in what regards large capital investments associated with oil-extraction general employment ratios and gaps in employment activities, but this good performance was not accom- opportunities between men and women (Figure 18). panied by significant employment creation. Oil extract- ing regions accounted only for 18 percent of total Poverty Declined Fast - But Mostly in employment while attracting 45 percent of total fixed Urban Areas capital investment in 2011. High labor force participation and employment rates of The favorable external economic environment, high oil men and women contributed positively to total output prices, and fast productivity growth contributed to an growth inthe country. A high proportion of Kazakhstan's outstanding reduction in poverty in less than ten years. 8 Beyond Oil lKazakhstan's Path to Greater Prosperity Through Diversifying The share of the population living in poverty (as mea- countries in the region shows significant progress. The sured by the PPP-corrected US$2.5 per capita per day) shared prosperity indicator is measured by the growth fell from 41 percent in 2001 to 4 percent in 2009. This rate ofconsumption percapita ofthe bottom 40 percent low level of poverty is indicative that there has been ofthe population. In Kazakhstan, the average consump- progress in sharing some of the benefits of economic tion growth for all households was about 7 percent, development with vulnerable groups. while the growth rate of consumption per capita of the bottom 40 percent was about 11 percent during 2001- A comparison of Kazakhstan's performance inthe World 2009. Only Moldova outperformed Kazakhstan in that Bank's indicator of shared prosperity against other regard, but it experienced much higher overall growth of consumption per capita (see Figure 1.20). Figure 1.16: Trend in output per worker for Kazakhstan and comparators, 2000-10 However, when using a higher poverty line (at the PPP- corrected US$5 per capita per day) that is more appro- 200 priate for countries with a higher level of income per -~ capita, some 42 percent of Kazakhstan's population 0 ~0 150are still living in poverty. The number of vulnerable ao0 50 people in the country is dependent upon the definition ao of the poverty line. For example, if the poverty line is 0 00 100 increased to IPPIP-corrected US$6 a day, the poverty Q) ratio would increase from 42 percent to 58 percent. There has been progress however, in reducing the 50 2000 2002 2004 2006 2008 2010 number of people in this poverty group too since they declined from 79 percent in 2001 to 42 percent in - Kazakhstan - BRIC 2009. While, this is indeed a substantial improvement, Kaz nonoil Group 1 other countries in the CIS have made faster progress than OECD Group 2 Kazakhstan. For example, only about 10 percent of the Source: World Bank calculations based on WDI. population in Russia, Belarus and Ukraine lives below Note: Group 1 and Group 2 refers to countries whose GDP per US$5 per day while the average of the ECA Region is capita in US dollars was within 20 percent oflKazakhstan's in 2000 20 percent (see Figure 1.19). and 201o respectively; that is, Kazakhstan's comparators at two different points in time. "BRIC" refers to the unweighted average of While growth has been pro-poor, poverty responded Brazil, Russian Federation, India, and China. more to non-oil growth. The growth in consumption per capita was higher for the lower quintiles compared to upper quintiles indicating that economic growth Figure 1.17: Regional output per worker in 2011 and benefited the less affluent more (see Figure 1.21). There rate of growth during 2000-11 15 250 Figure 1.18: Employment ratios for Kazakhstan and comparators, 2000-10 12 200 07 9 150 6 160 3 6 So 0 3- 3 0 0 00 -fi 20 o~~'' 40 ~0 5 010 H egonl 0ututpe0wrkr nteg01 (ls 0 Regional output per worker in 2011, mnI. tenge (lhs) Rate of growth of regional output per worker in 2001 price, % (rbs) Kazakhstan OECD Hungary Poland Singapore Malaysia Russia Source: ASRK, WB staff calculations. U 2000 2010 Note: Regional output per worker was deflated to be in 2001 prices Source: WDI, WB staff calculations. for all regions. tWthy Diversification is Importan for Development 9 is a strong correlation between economic growth and the Gini coeffcient observed in Mangishtau, and the high- decline in poverty on an annual basis during 2001-09 est in North Kazakhstan. as seen in Figure 1.22. The sensitivity of poverty reduc- tion is strongest to changes in non-oil growth rather Despite all the progress, there remain substantive than total growth as seen by their respective average regional disparities in the concentration of poverty coefficients of elasticity of 4 percent and across the county. The share of people with income -0.1 percent.7 This reflects the fact that non-oil growth below the subsistence minimum varied widely across is shared by a higher portion of the low income groups regions, from 1.7 percent in Astana to over 10 percent in the short-term most likely through labor market in South Kazakhstan and Mangishtau. High poverty channels. However, poverty reduction had an uneven rates are observed in both non-oil and oil-rich regions path in rural and urban areas as rural poverty was (red circle in Figure 1.25) which have the largest gross almost 4 times higher than urban poverty in 2011. regional product per capita. For instance, though both According to the UNDP and the Government of the Mangishtau and South Kazakhstan had high concen- Republic of Kazakhstan (2010), persistent higher pov- trations of poverty in 2011, the output per worker in erty in rural areas can be explained by larger families oil-rich Mangishtau was 7 times higher than in South with more children, poor infrastructure and access to Kazakhstan. This is likely a reflection that the oil sector markets, and lack of human and financial resources of works as an enclave as it is capital intensive, does not local governments, generate many jobs and does not create significant Expanding employment and higher real wages seem to Figure 1.19: Headcount poverty rates for Kazakhstan be the main driving forces behind the sharp poverty and comparators (2001 and 2009) reduction. The main contributors to economic growth 8o were labor intensive construction and services sectors. E These sectors were also the main contributors top lw employment growth during the last decade. The type of ( 0 employment also changed from self-employment hh4e (42 percent in 2001 to 33 percent in 2011) to formal t wage employment. This shift in the employment com- ol20 position was accompanied by better wages, which grew in real terms by a factor f2. 5 between 2001 and o 2001 2009 2001 2009 2001 2009 2001 2009 2001 2009 2011. All of these elements have contributed to the Kazakhstan ECA RuSsia Belarus Ukraine remarkable poverty reduction in Kazakhstan during last ten years. This is confirmed by the evidence presented * Poverty Headcount Ration at $ 2.5 a day (PPP) in Figure 1.23, which shows that the largest contributor Poverty Headcount Ration at $ a day (PPP) to lower poverty was income from wages (responsible Source: World Development Indicators. for 29 percentage points of this reduction). As incomes grew and poverty declined, inequality in Figure 1.20: Shared Prosperity Indicator for selected Kazakhstan also fell significantly during 2001-9. countries in the Europe and Central Asia Region Inequality, as measured by the Gini coefficient, fell 15 from 0.37 to 0.29 during 2001-2011- a level that is compared to the most egalitarian societies in the world 12 (Figure 1.24). The dynamics behind the decrease in inequality is best explained by the higher growth in consumption ofthe poorsinfc a hsa Ka fel relative to the als nl top quintile duin (as 2ool-9.0 discussed above and seen in Figure 1.20). Neverthe- 0 less, as with poverty rates, there is strong variation across oblasts in terms of inequality-with the lowest 7 This elasticity is calculated as the negative ratio between changes in poverty the rate ofgrowth in GDP per capita with and without Consumption Growth of Bottom 40% oil rents. The reported coefficients hf are averages for elasticity Consumption Nrowth ofTotal Population 2002-2011. The negative elasticity of poverty to total GDP per capita is driven by strong poverty reduction in 2008 under nega Source: World Bank staffestimates based on the POVCALNET tive growth of GDP per capita. expenditure data as ofApril 2013. lo Beyond Ois Kazakhstan's Path to Greater Prosperity Trogh Diversifying Figure 1.21: Growth incidence curve, 2002-09 Figure 1.23: Decomposition of income poverty gains (In percent) by the components of welfare aggregate 00200 Decomposition: poverty based on PPP-corrected US$2.5 poverty line, Period 2001-2008 160 kj 120 08 S 80a 4o 40 0~ £ Q U5U £ Q, 00 20 40 60 80 100 Q 0 U 015 Expenditure percentiles -20 Source: World Bank staff calculations based on ECAPOV data. S-25 Note: Consumption is in PPP-corrected US dollars in 2005 prices. U of of other social agricultural Figure 1.22: Changes in poverty and GDP per capita adults employed wage income sssistance pensions income 15 0 Source: WB staff calculations based on ECAPOV data and 'adecomp' Stata module by Azevedo, Joao Pedro, Minh Cong Nguyen, and 12 12 Vivian e Sanfelice, 2012. "ADECOMP: Stata module to estimate 10-3 0 Shapley Decomposition by Components of a Welfare Measure, 4 Q) "Statistical Software Components S457562, Boston College Depart- S9 M ment of Economics. -6 cu Notes: results are robust if consumption based poverty is used. 6o o-9 2 0 Figure 1.24: Employment, real wage growth rates and 2002 2004 2oo6 2 8 2010 2 U C25 0.35 -3 -15 0 v20 Growth rate ofGDP per capita, % (excluding oil) 0.25 Population below subsistence 01 i1502 Source: World Bank staff calculations based on ASRK and WDI data. 1 0.15 Note: GDP per capita PPP is in constant 2005 US dollars. GDP per 0.10 capita without oil is calculated by subtracting oil rents share from 0.05 GDP per capita. 0 o.oo .5 economic spillover effects in the regions where oil is s sh extracted. Employment growth rates, % Real wage growth rates, % Changes in the labor market have led to an increase of Source: ASeRK. wage employment in detriment of self-employment. Overall, employment shifted from self-employment pations were more frequently found in the poorest (42 percent in 2001 to 33 percent in 2011) to wage quintiles in 2009. For example, 19 percent of those employment (58 percent in 2001 to 67 percent in 2011). found in the poorest bottom quintile engaged into self- These changes are consistent with the modernization employment in comparison to 15 percent in the wealth- of the Kmazakh economy and reflect its strong growth iest quintile in rural areas. In urban areas, 13 percent of over the last decade. Reducing the share of self- the poorest were self-employed against only 7 percent employment in K(azakhstan has been a welcome among the wealthiest. The expansion of highly paid development because being hired in farms and work- occupations as managers, specialists, and skilled indus- ing for individuals are associated with higher poverty trial workers and the contraction of low paid occupa- (Figure 1.26). This is not a surprising result since typi- tions, such as skilled agricultural and manual workers cally these occupations do not require high skills and between 2000 and 2011 is also likely to have contributed as a consequence are not likely to yield high remunera- positively to poverty reduction (Figure 1.27). tions. Regardless of the place of residence, these occu- Whny Diversification is Important for Development ii Figure 1.25: Share of the population with income Figure 1.26: Employment types across consumption below the subsistence minimum and gross regional per capita quintiles in the 4 th quarter of 2oo9 output per capita in 2ol (In percent) 12 8K b Urban areas E lo 8 1 5KoflUl 6 3K 4K 4 SS 04K 20 bD Bottom II Ill IV Top a Public Enterprise * Hired in farms Private Enterprise Employer a Hired by Individuals N Self-employment n % of population below subsistence level Rural areas Regional gross output per capita, thousand tenge 100 Source: ASRK. Living Standards Have Improved, But Only 60 Moderately Despite rapid economic growth, living standards 40 improved only moderately in Kazakhstan. Life expec- 20 tancy increased from 66 years in 2000 to 68 in 2010 but remains one of the lowest among comparator 0 countries. Kazakhstan's life expectancy is comparable to Russia's but is 11years less than the average life expec- * Public Enterprise * Hired infarms Private Enterprise Employer tancy in the OECD countries, for example (Figure 1.28). 0 Hired by Individuals I Self-employment According to the ASRK, the regional variation in life expectancy is substantial. The most prosperous areas such as Almaty and Astana had life expectancies of 73 economic groups (Figure 1.29). According to the most and 72 years, respectively, while both Akmola and recent results of the Multiple Indicators Cluster Survey North Kazakhstan achieved 67 years. Also, Kazakhstan (MICS) in 2010, child mortality rates averaged 27 per has a very large gender gap in life expectancy. Accord- 1000 kids among the wealthiest quintiles of the popu- ing to the WDI, males were expected to live 64 years lation, and 400 among the poorest quintile. Infant while female life expectancy was 73 years in 2010. The mortality increased from i6 per l000 live births among gap is about 10 years which is much larger than what motherwith highereducation to 30 per 1000 live births was observed in OECD countries in 2010 (five years). among mothers with secondary education.8 According There has been progress in reducing under-five child o m NItio as oSRv in0rra areaang and maternal mortality rates, but these still remain high. According to the WDI and WHO, both under-five children of mothers with lover levels of education, and maternal mortality rates are high in Kazakhstan among ethnic Kazakh and among the poor households. even though there has been a substantial reduction in their levels over the last ten years. For example, mater- nal death rates declined from 62 to 23 per 100,000 live births from 2000 to 2010, but this was still more than three times higher than the average in EU countries. The same pattern is observed with under-5 mortality, 8 http://www.inform.kz/eng/article/2495031. Full results are not which also shows significant variation across social- available yet. 12 Beyond Oil: Kazakhstan's Path to Greater Prosperity ThRrough Diversifying Figure 1.27: Employment growth rates between 2000 Figure 1.29: Mortality rate, under-5 per i,ooo live and 2011 and the wage ratio to the Country mean births in 2000 and 2011 6 6 50 cu 4 4 -, 40 2 2 0 -c 0 -- 8 2 -60 - 3 G ofempom n rt b w 2000011 (LH ASRK,' authoe:ASRK'WBcsafcclcataonns Sore Growth 2 01 atdbirth vtlt in aggegae eanditresopuli Kf haaspo maeref icywhasorem aindd pu napThe opdnitao Figur.28:dife expetarli by geder, 2000 al 0~~ Motlhvegrwnvey exprt wage as ad av hlpd thestoutyavrgebdet heecn-voatliy callnesng havenbenratiuaeon oud ls ecorae ext solld hot-er cpialf50s ~ at omy~~~~~~ ~ ~ihtecmoiybo qal n adacin 40go olmtti oaiiycudrsl napo ~ Kazakhlya the~~~~~~ ftels ge ~ ratio tounga ead,tecmiaino nry veraigoe ylia buge,lnanresigianetrtinufsxorsiaon 30odhloeayplc tne S0 RFiource:sf isig inerntio al ol pico highr ol prducionand an eonitres, und irer-P er, liovec the secondxces Source: ldlcoaetosncof hS of calculation.decreanastogftuefhe(zkhcnmy ASRK, authoaff onhei allwedKazkhsan o icrese ts il xpots nd ol- The Kazakhsatrtan hnary Polan Sain arMlaysiatRussiae s OED Gro oil products and I ntmaia oioil-den econ ie, allowednKe t incom decline, i ios do bled ad livin stan per cpita ofhesmaint ofuce ASRK featurenrease the WBccestfclulyavdtio.e o vt iyo oltliy aeps lectfilois reeveBos As)deIftTh econoe wp revee thaveghrown0vbrse onscurrentaandhutlredoileproduc ree oatiiy Thi chaenes eal l eaonron omyontsuggestethatlitfistlikely Abndnc aneDpedeceanspivae, crei,ate r toeremaindinythatmsam budet, ansiceaswing concerationoeports beenmanfesed b aninceasig dpenenceon il, vtilit calnge mae itelfespeial prfisen atcthedtaly asdcyclias radabe scrley e Hungae Poi SnpergaprMlyi howeer,depndece i maifetithefor a ofasg- oicl dcs,land. Kakrsing s ha areapit notpre- lof t h d oi gscor insthe dards stablw. slies Kazahstn hdite sucpeo hs gownmor anmoedpenenton Diff ar comprondt nifiantshae o oi reenus i th goern ent s ntualesandrsky tructuren f d th conoy cremang furtheerndinentoives, ltg over pall oiladepen-h exprt have grow vrfatadhvhepdheco- oliity coldalso fenourage othshprorttr cistvalws ficapliyhs vratiordnt The shorar of eoilen rev ofthe the second dcade,ethe(comination.of.cycicaltmonetarypolicyrstance last hal prodctio andomi hihe oiltiit interntiona oiirie risingen alwdKazakhstan to iuncareoanSnaoeMlasaRsi itsef oiexorsadpo-Teiay aois hliave ben aretyiclly atntivre- declned incme er cpit douledand ivigstn- dicle uDiisucesul avoidundb the prolm osoltiity dad saw0 a 01 slgtipoeetchssceshs Isoeion hasmacla ansvd mple n fiscal rvatha beenmanfestd b an ncrasin deendece noi, aben repted whlaic is arat veryiportnturs contribuo howeer,dneendennc dieine form ofasgrtiscae dicplines Kaakhtanhasg asoailgoodfis nifcan shre f ol rveuesin heovenmet's maagemnty and con rot ove the praastedecde with oil Asdisussd arler n tischaterKaaksta's owads intm n Diricon s secpors. EorhDeveopmet 1 public spending stable at about 22 percent of GDP and export ofoil and oil-related products. Kazakhstan's top the non-oil deficit averaging about 3 percent of GDP. five export products represent 77 percent of the total This performance is particularly notable in light of the export basket, compared to 68 percent in Russia and fact that Kazakhstan experienced markedly increased 21 percent in Ukraine. The Hirschman-Herfindahl oil revenues during the period but largely avoided the l also shows low diversification, as does a simple fiscal pitfalls that have plagued so many oil exporting sum of the total number of products exported (see countries. However, after the tax reform of 2008 and Table 1.5). In addition, location and market size are a the crisis in 2008-9 the non-oil deficit widened to more disadvantage to Kazakhstan and the share of oil and than 10 percent of GDP and was financed by oil reve- gas in the structure of output remains sizable (see nue saved in the National Fund. In essence, the fund Figure 1.31). was being used in a countercyclical manner, though on an ad-hoc basis in the absence of any rules geared to Table 1.5: Kazakhstan's Undiversified Export Product such eventualities. Structure -2010 In spite of the success with rising income per capita levels, declining poverty, and improved fiscal disci- Share oftop 5 products 77 68 21 pline, Kazakhstan still faces the challenge of diversify- in export basket ing its economy. In many competitiveness and diversi- (percent) fication indices, Kazakhstan appears as an economy Hirschman-Herfindhal 0.49 0.32 0.11 whose export basket is highly concentrated on the Index (o diversified; = 1= concentrated) Figure 1.3o: Addiction to oil Total number of 1776 4524 3805 Share (in percent) ofthe oil revenue in the government budget- Products Exported Kazakhstan- WoEi-ii Source: Mirror imports reported to UN Comtrade. 6 Further progress in the direction that Kazakhstan 50 aspires to move to will requre e a different economic Sdevelopment model. The stylized facts reviewed so far S40 tell a success story of a country that has started from a 0 very low base and, blessed by its resource abundance, joined the group of upper-middle income countries within a decade. The prosperity obtained on the back of its oil abundance was accompanied H0scma-Hrfndal 0-90-3 by sizable reduc- 01 02006 2007 2008 2009 2010 2011 2012 tions in poverty and improvements in the living stan- m Oil revenue saved dards of the K(azakh citizens. This is not doubt a suc- Oil revenue spent cess story, but one that is continuously evolving. The next chapter in that story is about how Kazakhstan can Oil and non-oil revenues and expenditures as a share ofGDP - trnionoahgerlvlficmendpseiy current values and projections to 2020 and become a more developed economy. 30 25 HOW CAN KAZAKHSTAN BECOME A 20 MORE DEVELOPED ECONOMY? 0 15 If Kazakhstan has been successful in promoting pro- Q) poor growth why should it bother to diversify its econ- omy? In many resource-rich countries, an obvious con- 0 9 The Herfindahl-Hirschman index is a commonly accepted mea- Psure ofmarket concentration. it is calculated by squaringthe mar- ket share ofeach firm competing in a market, and then summing SOnil revenue Oi-evene savendin the resulting numbers. The HH1 number can range from close to zero to 10,000. The closer a market is to being a monopoly, the Source: Ministry of Finance ofKazakhstan; and WB staffestimates. higherthe market's concentration (and the lowerits competition). 14 Beyond Oil (azahla' Path to Greater Prosperity Through Diversifying Box 1.1: The Main Features of the Paradox of Plenty Four principal contributors to the Paradox of Plenty have been identified. Two of these are technical - the so-called "Dutch Disease", and oil revenue volatility. Two are more political in nature -weak governance and the lack of and/or failure to develop the institutional capacity required to the challenges of resource wealth. Dutch Disease. Coined by The Economist, this "disease" is named for the problems experienced by the Netherlands following the discovery and initial exploitation of vast reserves of natural gas in 1959. Large- scale revenue inflows from oil exports put upward pressure on the exchange rate. They also lead to a significant expansion in domestic demand relative to the country's ability to supply that demand. The demand expansion comes from the budget and public sector and, where oil revenues get into the domes- tic banking sector, from credit expansion. The demand expansion in turn increases the price of non-traded goods, causing a further appreciation of the real exchange rate. The combination of these two impacts results in an often dramatic decline in the competitiveness of non-oil exports, a shift in domestic resources away from those sectors to the non-traded goods sectors, and erosion of diversity and balance in the domestic economy. Evidence ofthe Dutch disease has been identified in almost all countries where petro- leum exports play a major economic role. However, it is unclear whether the retrenchment of the non-oil tradable sector is a growth disease; it could ifthe growth ofthe sector produces positive externalities that are greater than the externalities provided by the oil sector via the prudent use of oil revenues. Oil Revenue Volatility. The oil industry is notorious for its cyclical behavior. This may be due to the uncer- tain pace of oil discovery and development. At a global level, however, the cyclical character ofthe industry is more often attributable to the volatility of oil prices, which respond to lumpy increases in discoveries, exploration and production, as well as cyclical fluctuations in global demand for energy. Volatility makes economic management difficult in itself, especially if price swings are unpredictable. Difficulties are com- pounded by the positive correlation commonly observed between revenues received and expenditures. Volatility in revenues, associated with volatility in aggregate expenditure, public and private, creates real exchange rate volatility. This volatility makes profits in the tradable sector unstable and private investment risky, creating further disincentives towards investment in non-oil sectors. Governance. Good governance is widely recognized as critical for addressing the Paradox of Plenty. Good governance is variously defined, but it is clearly multi-dimensional and should include, among other things: clear and stable laws and regulations; rule of law; a high level of competence in government; fiscal, budgetary and monetary discipline; public-private sector balance in the economy; an open dialogue between government and civil society; and a high degree of transparency. Unfortunately, oil-rich develop- ing countries do not score well against these governance indicators. Weak governance in many countries probably pre-dated oil development and made it difficult to manage oil wealth from the outset. However, a range of arguments and evidence suggests that the arrival of significant oil wealth can itself undermine governance creating a vicious circle. Institutional Capacity. Related to the governance issue, oil revenues often exceed an oil-rich country's capac- ity to manage them effectively, or to ensure their efficient investment. The result is often macroeconomic mismanagement and waste on a major scale. In addition to straining, or even overwhelming, existing insti- tutional capacity, oil wealth may actually erode incentives to invest in creating an effective civil service. Gov- ernment decision makers may feel little need for a skilled administrative team to handle oil revenues when so much money appears to flow so easily from a very concentrated source. More insidiously, those benefit- ing most from oil may perceive an effective, efficient and watchful civil service as a threat to the benefits they enjoy. As suggested above, adequate institutional capacity is really a component of good governance. It is commonly singled out for discussion, however, because of its special importance. For skeptical views on the Paradox of Plenty, see Lederman and Maloney (2007, 2008, 2012); Alexeev and Conrad (2009); and Brunnschweiler (2oo8). Source: Authors. Why Diversification is Important for Development 15 Figure 1.31: Rising share of oil, gas and mining inthe Libya, Iraq, Kuwait and Qatar have even had negative economy evolution of economic structure growth over the last few decades." (Percent value added) 8o Although each of the successful resource-rich coun- o70 tries has followed its own path to economic diversifica- Constructionas realiestea M n a macroeconomic favorable c 40 tusinessgenhwe stabilitl, 030 ronment, and the right set of trade policies has long 50 20 m igs ndmiin Agrinddnaiclngulturet, oe recogni- been recognized. There is however increasing omo te tion that good macroeconomic policies and a fertile 0 -business environment, while fundamental, are in many cases not sufficient. Economic diversification fre- quently implies catching up with established competi- w Oil & gas and mining Agriculture o tors that have decades of institutional experience, Construction and real estate e Manufacturing and utilities developed and nurtured adequate stocks of physical Source: Statistical Agency ofKazakhstan; World Bank staff estimates. and human capital, are well informed about global market opportunities, and have highly developed inter- cern is about what will be the sources of growth when national supply chains and marketing networks. oil runs out. A diversified economy is also less sensi- tive to macroeconomic shocks transmitted via large The path to increased wealth, prosperity and diversifi- fluctuations in commodity prices. In addition, with cation in Kazakhstan will be paved with policy options resource-extraction being highly capital-intensive, that help avoid macroeconomic volatility, harness the diversification creates additional sources of employ- skills of its labor force, and reshape the institutions ment for the labor force. New sources of employment that regulate the activities ofpublic and private agents. will become available as a result of increasing labor As Kazakhstan undergoes transition to a higher level of reallocation of factors in the economy from less pro- economic development it will want to avoid macroeco- ductive to more productive activities. Indeed, recent nomic volatility associated with oil dependence, create research finds a positive association between rising market incentives for the development of a vibrant diversification and rising per capita income for countries non-oil sector, make substantial improvements in the which have per capita income of up to US$20,000.re area of governance and transparency to attract and Beyond that level, economies tend to re-concentrate retain productive investment, invest in human capital though high-income countries do not reach concentra- development and infrastructure to enhance productiv- tion levels usually found in low income countries. ity growth and competitiveness, and pay increasing attention to social policies in order to improve the Recent history provides examples of resource-rich living standards of the Kazakh citizens. These are the countries that have used their resource wealth to share issues that will be discussed in more depth in the sub- prosperity. Those were the countries that managed to sequent chapters. remain resource-rich and yet developed their institu- tions with clear benefits that reached across the resource sector oftheir economies. On the other hand, there are also plenty of examples of countries that have become increasingly dependent on the export ofextrac- tives. Those are the resource-rich and institutional- poor countries that kept the resource wealth as a source of rents and failed to build linkages between the resource and non-resource sectors. In this latter group, many resource exporters such as Iran, Venezuela, 1a See Imbs, J.and R.Wacziarg (2003), "Stages of Diversifhuation", m der Ploeg (2011), 'Natural Resources: Curses or Bless- See F.van The American Economic Review, 93(1):63-86. ing? journal of Economic Literature, 49(2): 366-420. 16 Beyond OiT: Path Greaper Prosperiiy Twrough Diversifyipgeo hKazakhstan's CHAPTER 2 OIL WEALTH, VOLATILITY AND MACROECONOMIC MANAGEMENT INTRODUCTION uses data on the time series behavior of GDP, public oil revenues, and targeting of social expenditures Dependence on natural resource exports, especially (transfers and pensions, not including educational or mining and oil-related products can bring export con- health expenditures). It compares the potential national centration. It is relatively well known that commodity welfare gains relative to a balanced-budget rule for a export booms are often associated with the so-called complex optimal fiscal rule, as well as for simpler and Dutch disease whereby real exchange rate appreciation more practical fiscal rules (such as Friedman's perma- brings about a contraction in the size oftradable indus- nent income rule), and associated permutations (e.g., tries outside ofthe commodity sector. As mentioned in allowing for changes in the rule during severe down- the first chapter, one potential consequence of export turns). The welfare gains are estimated via simulations concentration is terms of trade volatility. Furthermore, of a structural model with heterogeneous agents, rep- if oil exports are associated with export concentration resenting households with different initial levels of and concomitant terms of trade volatility, it is also income and thus with different marginal utilities of likely that this external volatility can be transformed income. Thus, the analysis goes well beyond the stan- into domestic macroeconomic volatility. This chapter dard approaches that focus purely on the gains from will review empirical evidence showing the empirical reducing aggregate fluctuatn magnitude of this effect by statistically examining the correlation between net exports (per worker) of mining This chapter also estimates the extent of pass-through and petroleum products and export concentration. from external terms of trade volatility into the volatility of GDP per capita. The evidence discussed herein In the presence of volatility, fiscal rules become an implies that terms of trade volatility feed domestic vol- important tool for policy makers and their use could atility, but net exports of natural resources do not have potentially lead to large welfare gains. Building on an independent effect on domestic volatility beyond innovative work carried out for the case of Brazil by their effect through export concentration and terms of Engel and Neilson (2011), this chapter also explores trade volatility. The available estimates suggest that the role of fiscal policy over the business cycle from a this sequence of effects is statistically meaningful both normative perspective, for a government with a highly across countries and for Kazakhstan specifically. volatile and exogenous revenue source. In particular, the analysis focuses on what could be the potential More specifically, this chapter addresses three ques- welfare gains from implementing various fiscal rules to tions. First, whether export concentration has increased smooth the volatility of private consumption, given a in Kazakhstan; second, how does dependence on natu- particular pro-poor targeting efficacy of social trans- ral-resource exports can affect domestic volatility; and fers.12 More specifically, there are key issues that deter- third, where do the gains from fiscal rules that could mine the gains from using a portion of oil revenues for avoid macroeconomic volatility come from. The rest of savings to be used for providing relief to poor house- the chapter is divided into four sections, each one holds during downturns. These are determined by the focused on the aforementioned questions. The first targeting of social transfers (national welfare gains rise section presents stylized facts about the increasing with the precision of the targeting on poor house- export concentration in Kazakhstan. The second sec- holds), and the correlation between the non-oil busi- tion presents empirical estimates of the link between ness cycle and the oil-revenue cycle (the gains decline net exports of mining and oil-related products and with the correlation between the two). The analysis 13 In fact, in Engel and Neilson (2011), the model economy is not 12 See Engel, Eduardo and Christopher Neilson (2011), 'Fiscal Rules driven by Keynesian gaps between aggregate demand and poten- as Social Insurance: Managingthe Pre-Sal Oil Windfalls in Brazil", tial output. it is driven purely by fluctuations in household con- The World Bank, unpublished manuscript. sumption. Oiw Wealth, Volatility and Macroeconomic Management 17 macroeconomic volatility. The final section turns our and "other" high technology goods (HT2) such as attention to the analysis ofthe welfare gains associated radioactive chemicals increased from 2 percent to 10 with various types of fiscal rules. percent. Figure 2.3 shows how oil-related exports have grown much faster over the same period to become HAVE KAZAKHSTAN'S EXPORTS BECOME the largest share of Kazakhstan's total exports. MORE CONCENTRATED? Figure 2.2. Kazakhstan export composition excluding Kazakhstan's exports have increased sharply over the oil, 19962010 last decade. The value of Kazakhstan's total exports has Non-Oil Exports 1996-98, $12.6 Billion increased from US$6 billion in 1996 to US$ 4 9 billion in (conSt. 2005 US dollars) 2010 (in constant 2005 prices), more than an eightfold increase. Over the last decade, the value of Kazakhstan's exports per capita grew by almost 20 percent annually to reach a level close to US$5,ooo per capita just before the global economic crisis in 2008. They dropped during the crisis but have recovered since then and by 2010 at US$4,ooo per capita they were 50 percent higher than the global average (Figure 2.1). Non-oil exports have increased in value and new prod- ucts have been added to the export basket. There has been a noteworthy increase in the value oftotal non-oil meal o T exports. Figure 2.2 shows the evolution of the compo- ih sition of exports excluding oil, which have increased from US$13 billion in 1996-98 to US$ 54 billion in 2008- ,ett. - -d, lo (constant 2005 USD prices). Primary products have oxides, also decreased from 56 percent to 37 percent, and non- &peroxides MA agricultural resource-based manufactured goods (RB2) have remained stable as a share of non-oil exports, Non-Oil Exports 2oog-2oi2o, $538 Billion going from 16 percent to 18 percent in 1996-98 and (const. 2005 US dollars) 2o8-l, respectively. In the same period, "other" low technology goods (LT2) increased from 1 percent to 6 agglomerateWhea 0 ha o or _ percent of non-oil exports, medium technology pro- cessing (MT2) increased from 9 percent to 15 percent, Figure Kazakhstan exports have grown faster than F.il: world exports (export per capita in US dollars, Kazakhstan and world exports, Non-Oi Exprt 2008--20120 .5.ilo 1995-2010) 16o 5000 2 U l 4000 & ore R meslin meal 000iron ST rorfour ST Other "" 2000 Copper non- W ferrobase h b o e tn 1000 0 Primary Products E Low-Tech 2: Other Resource-Based Medium-Tech : Automotive Manufactures 1: Agro-Based ElMedium-Tech 2: Processing 01995 2000 2005 2010 Resource-Based Medium-Tech 3: Engineering Manufactures : Other iHi-ro e i: Electronics and Electrical World exports per capita (US dollars) Low-Tech : Textile, Hi-Tech 2: Other KAZ exports per capita (US dollars) Garments and Footware Special Transactions Source: World Development Indicators Source: Authors' calculations using UN-Comtradle data. 8 Beyond Oil: Kazakhstan's Path Ko Greater Prosperi y Torough Diversifyig In spite of the growth of non-oil exports, oil remains Figure 2.3: Kazakhstan export composition, the main export commodity and its share in the export 1996-2oio basket has risen steadily. The share of oil in total Exports 1996-1998, $17.8 Billion exports has increased from 17 percent in 1995 to more than 6o percent in the period 2005-10. The rise in the oil share has been partly due to an increase in the volume of oil exports - from 14.5 million metric tons in 1996, to 67 million metric tons in 2010. The major part of the increase in the oil share was due to the rise in oil prices in the past 5-6 years. The income-earning potential of oil has increased by 30 percent over the last 15 years and has benefitted Kazakhstan. Table 2.1 shows the top lo exports by value share over time, including their income-earning poten- tial.14The major rise in the value of the income-earning potential (PRODY) for oil is noteworthy. This increase in the value of PRODY, followed by an increase in the volume of exports has driven export and income growth in Kazakhstan over the past decade. However, while the PRODY for oil is above the average value of US$13,o83 &metallicoxide w t [ over all products for 2008-10, all other products among a .. id.e asee Ic the top 10 exports are well below average.15 Moreover, almost all top exports in 2008-2010 are resource-based, Exports 2008-2010, $151 Billion and resource-based products generally have below-aver- (constant 2005 international $) age PRODYs, as can be seen from Table 2.2. The income earning potential of Kazakhstan's exports has also increased steadily over the last 15 years. Figure 2.4 shows the trend in the income potential of national export baskets for Kazakhstan and comparator coun- tries. Oil is by far the largest share ofexports in Kazakhstan, and the rise in the income potential ofoil is reflected in the increased value of Kazakhstan's export basket mea- sured by the EXPY measure. We can also see that the value ofKazakhstan's EXPY has increased significantly, but so have EXPY values for other resource-rich econo- mies. This rise in EXPY is due to both a rise in PRODY of commodities and a rise of exports of selected countries. 0 wrgo ght copper~ &R toeu a cope a ~L e 14 PRODY and EXPY capture the income-earning potential and so- phistication of any particular product as well as the country's ex- 0 Primary Products ELow-Tech 2: Other port basket as a whole. The income-earning potential ofa product, Resource-Based Medium-Tech 1: Automotive PRODY, is calculated as a weighted average of the income per Manufactures 1: Agro-Based Medium-Tech 2: Processing capita of the countries that export that product. The weights are Resource-Based Medium-Tech 3: Engineering the ratios of the share of the commodity in the country's overall Manufactures 2: Other EHi-Tech i: Electronics and Electrical export basket and aggregated value-shares across all countries Low-Tech 1: Textile, Hi-Tech 2: Other exporting the good. This is also known as the variation of the in- Garments and Footware Special Transactions dex of Revealed Comparative Advantage (RCA). The sophistica- tion of a country's exports, EXPY, represents the income level as- Source: Authors' calculations using UN-Comtrade data. sociated with a country's export basket, and it is calculated as a weighted average (where the weight is the share of the product in the country's export basket) of PRODYs of the products exported by the country. 15 Summary statistics for all products are given in Annex bai. Oi nrealth, Volatglity an Macroeconomic Management 19 Table 2.1: Structure of Kazakhstan's Exports PP Crude petroleum 0.25 0.31 0.33 10,774 PP Unwrought copper & copper alloys 0.11 0.12 0.12 4,982 PP Anthracite o.o8 0.07 0.07 3,584 PP Unmilled durum wheat o.o6 o.o8 o.o6 5,370 MT2 Ferro-alloys 0.04 0.04 0.05 3,411 PP Unwrought zinc & alloys 0.03 0.04 0.04 7,598 RB2 Inorganic bases & metallic oxides, 0.03 0.03 0.03 8,575 hydroxides & peroxides ST Gold, non-monetary O 0.02 0.03 4,506 RB2 Waste of unwrought cermets & base metals 0.01 0.02 0.02 2,452 PP Unwrought silver 0 0.01 0.02 9,560 PP Crude petroleum 0.53 0.55 0.58 13,397 PP Unwrought copper & copper alloys o.o6 0.05 0.05 5,758 MT2 Ferro-alloys 0.04 0.03 0.04 3,700 PP Petroleum gases 0.02 0.02 0.03 7,898 PP Other wheat & meslin, unmilled 0.03 0.04 0.02 8,977 RB2 Agglomerated iron ore 0.01 0.01 0.02 9,032 LT2 Other worked iron/steel sheets 0.02 0.02 0.02 16,725 LT2 Iron/steel <3mm tick sheets 0.03 0.02 0.01 12,938 RB2 Aluminum ore 0.02 0.01 0.01 5,023 PP Other coal 0.02 0.02 0.01 12,063 PP Crude petroleum 0.63 0.62 o.68 13,921 HT2 Radioactive chemical elements 0.02 0.04 0.04 3,158 PP Unwrought copper & copper alloys 0.04 0.03 0.04 5,650 MT2 Ferro-alloys 0.04 0.03 0.03 4,891 PP Petroleum gases 0.02 0.03 0.03 10,214 RB2 Not agglomerated iron ore 0.01 0.01 0.02 9,594 ST Gold, non-monetary 0.01 0.02 0.02 5,464 PP Unwrought zinc & alloys 0.01 0.01 0.01 9,196 RB2 Copper 0.01 0.01 0.01 5,381 RB1 Wheat or meslin meal or flour 0.01 0.01 0.01 8,698 Source: Authors' calculations using UN-Comtrade data and World Bank Development Indicators. 20 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying Table 2.2: Average PRODY by Lall (2000) Classification As oil exports have increased faster than non-oil exports, Kazakhstan has experienced growing export Averageconcentration even compared to other resource depen- PRODYdent countries. Figure 2.5 shows the evolution of the 2008 2009 2010HefnalIdx(Iofeprcoctainfr PP 9,247 9,072 9,569 Kazakhstan, some former Soviet republics and some RBeconomies. Kazakhstan's natural com- RB2in oil has led to an increase in exotconcentration from 0.09 in 1996, to 0.46 in LTperiod, Russian export concentra- LT2tion increased from 0.07 to 0.23, while Chile and Aus- MTi 15,717 14,769 18,516 tralia managed to keep export concentration in 2010 at MT2 15,510 14,639 14,536 lower levels Of 0.17 and 0.1, respectively. Thus, even MT3 16,312 14,442 16,o88 relative to other resource-rich economies, export con- HTas HT1 6,56 15,13 1,311 centration in Kazakhstan is high, although not as high Azerbaijan or Algeria (Figure 25). HT2 17,007 17,436 17,948 ST 11,113 11,481 13,194 A comparison of diversification performances among countries with similar natural resource endowments, Source: Author's calculations using UN-Comtrade data, similar levels of economic development, and similar Figure 2.4: EXPY evolution in former Soviet republics Figure 2.5: Export concentration in Kazakhstan and and among selected resource-rich countries selected resource-rich economies (Herfindahl Index - (1995 to 2010) 20K 1.0 15K .8 x 10K -4 5K 5 7- .2 0 0 1980 1990 2000 2010 1996 2000 2005 2010 K hKazakhstan soChile f Kazakhstan - Russia Norway r Ukraine uAlgeria Azerbaijan Malaysia Austrailia Uzbekistan Turkmenistan 16K .8 14K 12K .6 10K X8K 6K 4K 0 0 1996 2000 2005 2010 1980 1990 2000 2010 Kazakhstan Russia Kazakhstan is- Chile Ukraine Azerbaijan Norway l Algeria Turkmenistan AUzbekistan o Malaysia Austrailia Source: PRMED calculations using UN-Comtrade data. Source: PRMED calculations using UN-Comtrade data. Oi lvealth, Volatlity an Macroeconomic Management 21 sizes confirms that Kazakhstan's exports have become to be a key correlate of terms of trade volatility. Figure more concentrated. Analysis conducted by Varela 2.8 illustrates the relationship between merchandise (2013) using data for 171 countries over the period export-revenue concentration and terms of trade vola- 2000-11 shows that while resource abundance is asso- tility. The positive correlation between these variables ciated with more concentrated export structures, the appears to be strong, although it does not hold in the level of development and the size of the labor force are previous comparison between LAC net exporters of associated with more diversification. 6 Figures 2.6 and energy and mining versus the overall sample ofcoun- 2.7 show the actual concentration indices (root of tries from the region. Herfindahl lndex17, share of the top 5 products in total exports, and log of count of exported products) against Figure 2.6: (Root) Herfindahl Index against prediction the predicted concentration indices that emerge from 1 the econometric models estimated by Varela (2013). 18 The 45-degree lines in each figure plot the locus along which the actual level of diversification of a given coun- T try matches the predicted one based on the model. For .5 example, both for the Herfindahl and the share of the O top 5 products, Kazakhstan along with Russia and G other resource-rich countries are well above the M 45-degree line, suggesting that their export structures are substantially more concentrated than predicted by -.2 .2 .4 .6 .8 1.0 the models. Predicted Concentration Index Further data analysis reveals that the main determi- All Countries 0 Countries in ECA Region nants of export concentration across countries are eco- nomic size, the initial level of development (measured Source: Varela (2013a) by GDP per capita) and net exports of mining and oil- related products, with export concentration appearing relaed wih rodcts eportconentatin apeaing Figure 2.7: Share of top five products against prediction 16 The relationships are statistically significant at 5 percent, and the t models explain 31.7, 42.7 and 81 percent ofthe variance ofthe root 0 of the Herfindah| Index, the Share of the top 5 products, and the 2 log count of exported products respectively. .5 17 The Herfindahl Index measures the concentration ofexport shares IG held by a particular product (destination) in a given export profile, O and varies from zero (no concentration) to one (full concentra- tion). The count of export products is the count of different HS-6 categories that contain exports of at least loo,ooo USD, and the 0 share of the top 5 export products measures the sum of export revenue obtained from the largest 5 export products as a portion P Sa in T Prouct of total export value in a given year. 18 Varela (2013) estimates a model linking diversification indicators All Countries 0 Countries in ECA Region (the Herfindahl Index, the count ofexport products, and the share - Fitted Values of the top 5 products in total export revenue) with an indicator of resource abundance (net exports of natural resources per capita, Source: Varela (2013a). as defined above), the level of economic development as mea- sured by the log ofGDP per capita, and the size ofthe labor force, as in equation (1): D,= Bo+B, NXR,+B2logGDPpc+B logLabForce+E. (i) where Di is the diversification indicator (for the Herfindahl the author considers the average of the square root of the Herfindahl Index of export concentration for country i over the period 2000- ii, for the count of products, he uses the logarithm of the average count of products exported by country i over the period 2000-11, and for the share of the top 5 products, he takes its average over the period 2000-11), NXR is the average of net exports of minerals and natural resources of country 'i' over the period 2000-11, log- GDPpc is the average of the logarithm of per capita GDP in con- stant dollars of 2000, over the period 2000-11, logLabForce is the average ofthe logarithm ofthe size ofthe labor force of country i over the period 2000-11. 22 Beyond Oih Path to Greater Prosperity Terough Diversifyircg rKazakhstan's Figure 2.8: Export-revenue concentration and terms of Table 2.3: Determinants of Export Concentration trade volatility and GDP Growth Volatility, 1980-2005 (3SLS estimates) -4 *IRN -3 *RWA Q) ONIC SDN *Z,ZEt B .2 *YUG -GEO IH *BGD CIV CMJGNB KGHA *K .com MRT U"COM 0 1 * CAFV *BEN0 . .*MLI *BWA -MDA. GI Export concentration035* o 0 OKM YEM(0.000) 0 *YEM DIIWZ * *DjI *TKM 0 .2 0 2.4 4 .6 .6 .8 . 1.0 10 Net exports of energy and 0.040** 0.004 -0.003 Export-Revenue Concentration (Roofof Herfindahl) mining per worker (0.000) (0.170) (0.154) Source: Lederman and Maloney (2012, Figure 7.2). Net exports of agriculture per -0.036* -0.000 -0.002 worker (0.022) (0.941) (0.456) HOW DOES DEPENDENCE ON NATURAL Laborforce (log, initial) -0-058** 0.015** -0-005** RESOURCE EXPORTS AFFECT (0.000) (0.000) (0.000) MACROECONOMIC VOLATILITY? GDP per capita (log, initial) .o65** (0.000) Econometric evidence suggests that poor, small and GeographictradeoverGDP -0.002* mineral-abundant countries tend to have high levels of (0.030) export concentration. Table 2.3 presents econometric Terms-of-trade volatility 0.310** estimates provided by Lederman and Maloney (2012, (0.000) Chapter 7) from a cross-section of countries with data Observations 101 101 101 from 1980-2005, which simultaneously explore the Pseudo R-squared 0.541 0.505 0.295 determinants of merchandise export-revenue concen- F-stat (p-value) o.ooo 0.000 0.000 tration, terms of trade volatility, and GDP-per-capita Adj. R-squared/First Stage 0.519 0.309 0.257 growth volatility. The model of export concentration suggests that it is positively correlated with net exports Source: Lederman and Maloney (2012, Table 7.2). of energy and mining commodities, but negatively cor- Notes: and * represent statistical significant at the 1 and 5 percent related with net exports of agricultural products. In levels respectively Cross-equation error correlations are assumed to addition, concentration appears to fall with the size of be unstructured. All explanatory variables, except the dependent vari- a country's labor force and its level of development (as ables (export concentration, terms of trade volatility, and GDP-per- I capita growth volatility) are assumed to be exogenous. "Geographic in Acemoglu and Zilibotti 1997). trade over GDP" is from Frankel and Romer (1999) and it lathe share oftrade over GDP ofeach country that isdlue to geographic location of Regarding the determinants ofterms oftrade volatility, the country. Export concentration is measured by the root ofthe Her- it is noteworthy that net exports of mining have no findahi index computed with data on exports at the 4 digit level ofthe effect after controlling for export concentration. Asa SITC Rev 2 classification. Volatility is measured by the standard devia- tion of the annual growth rate of each variable during 1980-2005. The result, mining exports appear to have only an indirect "first-stage" estimates are not reported. P-values appear inside paren- effect on terms of trade volatility via their effect on con- theses and correspond to standard errors adjusted for degrees offree- centration. Similarly, net exports of natural resources dom due to finite-sample assumptions. "Initial" means that the obser- seem to have no direct effect on GDP-per-capita volatility. vation is from 1980; the results correspond to cross-sectional estimates for 1980-2005. Intercepts are not reported. The existing estimates ofthe effects ofexport concentra- tion on volatility suggest that they are economically index ofexport-revenue concentration. It is worth noting important for Kazakhstan. Table 2-4 provides computa- that duringthis period oftime, oil exporters experienced, tions of what the results reported by Lederman and on average, an increase of3O in the export concentration Maloney (2012) imply for Kazakhstan and other index, and thus a simulation with the l0 percent increase Eurasian economies. The first column lists the average is not outlandish. By multiplying the l0 percent increase concentration index for each country during 1996-11, with the relevant coefficients, it is calculated that Kazakhstan and the second includes the 10 percent of that level. The could have experienced an increase of i.6 percentage exercise is essentially about using the regression coeffi- points in the volatility of its terms oftrade due purely to cients presented in Table 2.2 above to compute the the increase in export concentration. Although only sug- effect ofa 10 percent increase in the root ofthe Hefinlahl gestive, this exercise does imply that export concentra- Oia Wealth, Volatility an Macroeconomic Management 23 tion can be an important determinant of external volatil- resulted in an increase in the number ofexport destina- ity. In addition, for the case of Kazakhstan, this increase tions (Figures 2.9 and 2.10). After the crisis, however, in terms of trade volatility could have been associated when global demand for oil and commodities slowed with an increase in the volatility ofGDP growth ofaround down significantly resource-rich countries such as 0.5 percentage points. Russia and Uzbekistan, along with Kazakhstan have seen a decrease in the number of markets served by its Table 2.4: The Impact of an Increase in Export exports (Figure 2.11). Contrary to what happened in Concentration on Macroeconomic Volatility most other resource-rich countries of the region, (In percent except where otherwise indicated) Kazakhstan did not see an increase in the share of its top five export destinations over the same period FA (Figure 2.12). During the commodity price boom period, Kazakhstan N .4 improved its export market penetration. Varella (2013 b) 0 Ch has calculated the Index of Export Market Penetration Gerga .25 0 E2 .1 02 Georgi 0.59 0.2 0. *91 .215 Russia 05 0.3 0 .6 03 Sine epndnc o epotsofoi podct adth r uKzssiaand zbkisan,alongwtKzkstnhv Fiuee.:deberfaxortioiatosnaaksa Uzbkhstan 0.464 0.046 1.63 0.51 124 armeian 0.35 0.033 i.i8 0.3 ndcmartr Turbaeitan 0.692 0.069 2.44 0.765ubro Dsiain centra) thazkhta .183 ot 064 020 90 did notran seeeden anr increas int theroshreofit economtop fivelty expor6 detnainsoe the same o periodscton grwtnvatly/o voltiit)0 0.030 coffcint are statisticallyr significan atoprene.6 Figure 2-4o4 Share ofbe topfvDxpestinations Kyryztes:*bEsitcoefcetfo Sine deiondn on epr Table0.02 (o8 of oil pout an 0.26lteprtcn other improve its expor marketd penetration.io Vaela(01b hasd calculate th0ne.o2x ot aktPe erto Uenoi stabilitt.n gRowtha voatltyTT3oatlty8 Thi in the 0.360 top icoofn1.26cint the na- si0.39ttisicGo o6 inres B Source: Turknifian5 rieoC Kazakhstan tns bS ~ by Mariad 0ercen imit ~ ~ 0ee .06D ~ aomaj Diviiato .3 ~ llenge ~ Paiva ~ ~ o2.9 for 07 (IMP foriesfe 200 (uares 1111tstaeprnrI i h is 0607 2 )A 21 rh Z isov KAZaksa and othe reouc-rc co R LCOKZMAUntRie half~~ ~ ~ ~~ i the ECA region Thede 2o-20IEMP is and inicto of diversi-f020-20 21021 Kazakh*Estiatjusefet fTe glaol on o cis Source: Varela (2013b). Taiingsouecn 0 ring 0bout sbtial external exports of ol anFigure 2.9:xpNumberoofxpexportedestinationsVreKazakhstan Kazakhsnta as dipercent lveie itsurd tre wSn t frsure AMont es suc Ma s 24 eyndOil Kzahstn' Pth o reterPrsprit Trogh ivrsf nd o p rtr Notresourcstmaedeficient mTe1oTnoaii yrexpoicn- Sorethel (o3) Kazakhstan andtn igeen cor growt wit ofresolasdcade, butng i halfng sante acrens ae number o 20marti0s volti exoetspor the t twehat sva andrar opict oae trhlen encedi con (Fiur 2 t happeo mTreHsure-den 2sot t eoD iesficains of othorn uroce-rei coutrriee o t cetraeon Kaskistan Thuan ed with Partner* stiae imts itestan de,nbutit ftere so ot windl re th h maco o o3 02ffcin 11111be2.(D maaemPartnoers ord idal.Fsaue fication that combines information about the product and Figure 2.11: Steady progress in Kazakhstan's export market dimension. It measures the number of market- market penetration product combinations served by exporters in country 'i' as a proportion of the number of potential market-product flows.'9 For a given range of products that a country exports, this index will be higher for countries serving a large proportion of the number of markets around the world that import the product. Similarly, for a given range of destinations a country serves, the index will be higher for countries that export a larger variety of products. Fig- ures 2.11 and 2.12 show the IEMP for Kazakhstan and Russia over the last 10 years and suggest that both have diversified the number of their trade partners over this 0.000 0.005 0.010 0.015 0.020 0.025 period. While Russia has an average IEMP of o.io, which IEMP KAZ means that the country has served about 10 percent ofthe potential market-product flows available in world mar- U 2000-01 0 2004-05 02008-09 kets, Kazakhstan exhibits IEMP scores well below 5 per- 2002-03 E 2006-07 2010-11 cent. While it would be desirable to have a higher IEMP, a Source: Varella (2013b). low score suggests that Kazakhstan has a greater poten- tial for diversification than larger economies. It is also Figure 2.12: Steady progress in Kazakhstan's export worth noticing that the global economic downturn in market penetration 2008/09 seems to have contributed to reversing trends of export market penetration. Kazakhstan has exported more ofthe same to old markets. Figure 2.13 shows the decomposition of Kazakhstan's export growth over the period 2000-10 into net growth of old products in old markets, extinction of products, introduction of new products in new markets, intro- duction of new products in old markets, and export growth via old products sold in new markets. The larger contribution to export growth is accounted for by growth of exports of old products in old markets, and to a lesser extent, old products in new markets. This is IEMP RUS consistent with earlier findings that there has not been * 2000-01 0 2004-05 02008-09 enough export diversification. The bars showing a 2002-03 I 2006-07 2010-11 declining trend in the growth of exports of old products Source: Varella (2013b). in new markets also confirm that Kazakhstan has diver- sified somewhat its trade partners, but that this has had a declining impact on export growth, especially in Figure 2.13:dc sn ofrkatakestan the second half of the last decade. Another interesting byotpe of duct a t estnat fact is that there has been a growing rate of extinction of products which probably demonstrates higher 1.5 "experimentation." 20 i 1.2 0.9 19 Formally, for exporter 'j', for whom lij is the set of products (i) in 0. which positive exports are observed, Yij=i if Xijk>o; and Zik=l for 0 Mik>o, else Zik=o, where Xijk is the value of exports of product i -0.3 from exporter j to importer k, and Mik is the value of imports of -o.6 4 product i by importer k. The IEMP -- Z 2 E g E ~E 2 2oA higher experimentation rate for Kazakhstan's exports has also 0 0 0 been found in a recent report concluded by the World Bank enti- tied "Taking Advantage of Trade and Openness for Development" U 2000-2010 2006-2005 02006-2010 - see World Bank (2012), p.10. Source: Varella (21 3 xb). Oim aealth, Volatklity an Macroeconomic Management 25 Kazakhstan's non-oil exports to most of its major trade tration as the top three destinations accounted for partners havegrown overtime. When exploring Kazakhstan's more than 8o percent of all product exports. In the export performance along the intensive margin, it is also case of petroleum oils and coal, the top export destina- possible to compute the annual average growth of non-oil tion accounted for more than 65 percent of exports. and gas exports to the top lo destinations in 2005 over Russia, Norway and Libya were among Kazakhstan's the period 2005-10, and compare these with the annual main competitors for petroleum oils exports to the average growth of exports of the world to the same desti- European Union, while South Africa and Norway were nations. The two rates are plotted together in Figure 2.14. main competitors for ferro-alloys in 2010. The size of the bubbles reflects the share of the export value to that destination on total exports in 2005, to give a There Has Been Growing Experimentation, sense ofthe importance ofeach destination for Kazakhstan. but Survival Rates Remain Low As it can be seen from Figure 2.15, Kazakhstan's non-oil exports to most of its major trade partners have grown In spite of growing experimentation, survival rates over the period 2005-10 with the exception of those going were low across the board. The evidence presented in to Russia and to Iran. In particular, exports to its largest World Bank (2012, p.10) suggests thatthe survival rate trade partner, China, have grown at an annual rate close by the end of the decade was 79 percent for existing to 20 percent, higher than that ofworld's exports to China products, but only 27 percent for new products. The over the same period, meaning that the country gained experimentation rate, or the share of potential addi- market share in the Chinese market. Similarly, Kazakh- tional products in a broad product category, that stan exporters also gained market share in the USA, Japa- appeared in the export basket at one time or another nese, Turkish and Italian markets. was high, particularly in metals, textiles, and manufac- tured goods. Survival rates were low across the board, Figure 2.14: Kazakhstan's export orientation while the highest survival rates were observed for some KAZ: Growth Orientation of Markets Top io Markets foods, chemicals, minerals, and some electrical/manu- 07o .4factured products. Survival rates were low in textiles, o6, O USA OruR OCN some apparel, wood based products, animal-based 6.3 OWN products, and a number of manufactured o TAO OKORproducts, but also surprisingly in metals. These low .2 .2 ITA0DEU QDE OKOR survival rates, or mortality, appear to offset the contri- OUSbution of experimentation to the net growth of exports in Kazakhstan and hint at the existence of difficulties in o.1 (~s U < G either the business environment in Kazakhstan, the < O 0 ORNcompetitiveness OIRN level of Kazakh exports, protectionist 0 .2 .4 .6 .8 1.0 practices against Kazakhstan or a combination of all of WLD: CAGR of Exports 05-1o(%) these factors. A more detailed analysis of these factors Source: Varela (2t13hb) is presented in Chapters 4 and a. There is a high degree of market concentration, espe- WHAT ARE THE POTENTIAL WELFARE cially for Kazakhstan's main export products. China GAINS FROM VARIOUS FISCAL RULES? was either the most important or second most impor- tant destination for six ofthe top ten export products of If oil export revenues were stable, fiscal rules would be Kazakhstan in2008-10. Table2.5 shows the main mar- unnecessary. Indeed, in a scenario where economies kets for the top ten exports of Kazakhstan in 2008-10. discover or begin to exploit oil reserves, it would be Most of these products showed a high level ofconcen- optimal for society as a whole to increase domestic consumption and reduce the share of investment in GDP. The main reason is that such discoveries would 21 The diagonal red line indicates the points in which the growth that entail lw the economy has become richer and thus Kazakhstan's exports to a particular destination matches the the incentive to save would be reduced. That is, in tech- growth ofthe world exports to that destination. Points above the nical terms, inter-temporal consumption (a proxy for red line mean that Kazakhstan's exports have grown faster than national welfare) would be maximized by consuming the world's exports to that specidc destination, implying that in that market, has gained market share over the period, anazakhstan with the reverse observed for points below the red line. 26 Beyond Oia Path Grearer ProsperiSy Trrough Diversifyilg cKazakhstan's po Table 2.5: Main Destinations for Kazakhstan's Top Ten Export Products, 2008-10 (In percent, unless otherwise indicated) mu~ Dependency ratio (20-64) 50 ''Source: Author's calculations based on data from UN (2011). 400 303 *Male Female output per worker (oil and non-oil) in 2010 was about 200 US$8,ooo, which is still substantially lower than in 6o comparator countries. The red bar in Figure 3.6 shows 10 50 d non-oil output per worker at about US$14,00o in 2010, iwhich is also below average when contrasted to cor- parator countries. Kazakhstan's non-oil output per 30 worker is about 15 percent below the average non-oil 20 output per worker for the ECA region, and 25 percent below the average productivity for the Latin American d e and Caribbean region. S Modernization of the economy and economic diversii- cation will require a highly skilled labor force and omproductivity and job creation in the non-oil sector. iAccording to the World Economic Forum's classifica- tion of different stages of development, Kazakhstan's GDP per capita at US$ii,ooo places the country in the Male Female group of economies that are transitioning from an b Source: World Bank staff calculations based on data from the efficiency-driven stage of development to an innova- Agency ofStatistics ofthe Republic of Kazakhstan and the 2009 tion-driven stage of development (see Figure 3.7). The Labor Force Survey. relevant question, however, is whether Kazakhstan has in fact the typical characteristics that are usually found this demographic advantage will narrow in the coming in an efficiency-driven economy, namely good higher decades due to the natural aging of the population and education and training, goods market efficiency, and longer life spans. In fact, K(azakhstan's dependency labor market efficiency, to quote a few. The evidence so ratio (calculated as the number of non-working age far indicates that there has been employment growth population divided by the working-age population in occupations that require a higher degree of labor between the ages 20 and 64) will be at its lowest level force qualification. The next section assesses the skills in 2013 (Figure 3.r). mix available in the labor market and whether there nare any market imperfections that could hamper the dahug producstiviy's faves over sthlelat growntiit country's modernization plans and limit its ability to dieadloe, Kaahanscoproctivitres. aehstilea- move to the group of high-income and innovation- driven economies. has experienced fast productivity growth over the last 10 years both in the oil and non-oil sectors ofathe econ- omy. The green bar in Figure 3.6 shows that total 34 Beyond Oi: Path realer Prosperity Tarongh Diversifyisig cKazakhstao's po Figure 3.6: International comparison of labor productivity in Kazakhstan 35K F)30K N 25K S20K 15K o 10K (A 0 1 J m GDP per capita (current US$) Output per worker Source: WDI, WB staff calculations. Note: The green bar in Figure 6 refers to total output per worker (oil and non-oil); the red bar refers to non-oil output per worker. "MENA All" refers to all countries in the Middle East and North Africa; "EAP All" refers to all countries in the East Asia and Pacific region. "LAC All" refers to all countries in Latin America and the Caribbean. Figure 3-7: Competitiveness and different stages of development STAGES OF DEVELOPMENT GDP per capita (US$) <2,000 2,000-2,999 3,000-8,999 9,000-17,000 >17,000 thresholds* Weight for basic requirements 6o 40-60 40 20-40 20 subindex (in %) Weight for efficiency enhancers subindex (in %) 35 35-50 50 50 50 Weight for innovation and sophistication factors subindex 5 5-10 10 10-30 30 (in%) Basic requirements " Institutions Key for " Infrastructure factor-driven " Macroeconomic environment economies " Health and primary education Efficiency enhancers a Higher education and training a Goods market efficiency " Labor market efficiency Ue . . " Financial market development a Technological readiness a Market size Innovation and sophistication factors Keyfor a Business sophistication innovation-driven " Innovation economies Source: World Economic Forum, The Global Competitiveness Report 2011-2012. Gaps and Opportunities for Human Capital Deve opment 35 DO KAZAKH WORKERS HAVE THE SKILLS Figure 3.8: Gross school pre-primary enrollment in DEMANDED BY THE MARKET? 2000 and 2009 (In percent) Kazakhstan has made progress in improving pre- 100 primary enrollment over the last decade. According to the World Bank's World Development Indicators, pre- 80 primary enrollment in Kazakhstan more than doubled 6o over the last 10 years increasing from 20 percent in 2000 to 47 percent in 2011. This achievement has two 40 main benefits. First, early childhood education gives children a head start on skill development, school read- iness, and future education success. Second, better 0 access to childcare services may contribute positively to women's employment (World Bank, 2011, p. 297). b0 Notwithstanding this impressive progress, it is still lags behind other comparator countries (Figure 3.8). 2000 2009 The gap was also large between Kazakhstan and the Source: WDL neighboring Russian Federation where pre-primary enrollment was almost 90 percent in 2009. Further- more, regional variation in access to early childhood Figure 3.9: Tertiary enrollment in 2000 and 2009 education is large in Kazakhstan's oblasts. For example, (In percent) in 2010 pre-primary enrollment varied between 90 percent 8o in Kostanai and 18 percent in South Kazakhstan. 70 6o Tertiary enrollment has remained low. Gross enrollment 50 in primary and secondary education in Kazakhstan was loo percent in 2011, slightly higher than the average for OECD countries and much higher than enrollment 20 rates in Malaysia and Russia, for example. Enrollment 10 in tertiary education expanded from 28 percent in 2000 to 41 percent in 2011, but this is still low in comparison0 to other countries with similar levels of economic IRO development. International comparisons based on data from the WDI for 2000 and 2009, for example, * 2000 2009 suggest that tertiary enrollment in Kazakhstan was Source: WDL similar to that observed in Malaysia, but much lower than in OECD countries and in Russia. Though acquisi- tion of more education at the tertiary level is indeed Figure 3.10: Share ofenrollment among 16-17 year beneficial from the perspective of having a larger pool children by consumption per capita quintiles in 2009 of higher skilled workers, there are certain factors to be (In percent) aware of. For example, a rapid increase in tertiary school 100 students requires close oversight in order to prevent the deterioration in the quality of education-whether 8o in terms of larger class size or hiring new teachers without the necessary qualifications or experience. 6o There are important disparities in enrollment in educa- 40 tion institutions across residence and welfare status affecting children graduating from basic secondary 20 school. School enrollment fluctuates around 100 percent 0 Bo for children aged 7-15. However, for children i6 years Bto 1 11 I o and older, enrollment among the poor drops (Figure 3.10). 0 No Study * Secondary Vocational By the age of i8, enrollment among children from 8-39Grades i University poorer households stands at 58 percent while enroll- ( Basic Vocational ment among children from richer households stands Source: ASRK, WB staff calculations. 36 Beyond Oil IKazakhstan's Path to Greater Prosperity Thsrough Diversifying at 89 percent. Rural enrollment also lags behind urban professional lyceums.25 Thousands more entered the enrollment when children graduate from basic general labor force with general secondary education or less. secondary school. Further analysis of enrolment across Among young workers aged 16-24 who are not enrolled consumption per capita quintiles shows no significant in school, approximately 41 percent enter the labor difference in the share of children enrolled in second- market with general secondary education or less, ary school. However, poor children aged 16-17 are more 36 percent complete vocational secondary education likely to quit studying completely, while children from and 23 percent possess higher education degrees.21 richer households enroll in secondary vocational schools (Figure 3.11). For example, 12 percent among In international terms, Kazakhstan fares poorly when it the poorest are not studying in comparison to only comes to providing adequately trained workers to the 3 percent among the richest households. Moreover, labor market. The new entrants to the labor market 29 percent of children from the richest households often lack adequate levels of basic skills when entering enroll in secondary vocational schools in comparison the labor force despite having formal credentials from to only 14 percent among the poorest. the country's education system. In 2009, Kazakhstan participated for the first time in the Program for Inter- Figure 3.11: Share of enrollment among 16-17 year national Student Assessment (PISA), which assesses children by residence functionality of students in mathematics, reading and (In percent) science. The PISA results suggested that Kazakhstan 8o students underperformed on these assessments com- pared to their peers in other income comparator coun- 70 tries (Figure 3.12). In particular, students underper- 6o formed compared to other countries at similar levels of 50 development, scoring an average Of 40 exam points lower on the PISA reading scale-equivalent to about 70 40 one year of schooling-than the level predicted by the 30 country's GDP per capita (Figure 3.13). Box 3.1 explains 120 what the PISA scores measure and how to interpret 0 There are, however, two bright spots on Kazakhstan's ~ record ofcognitive skill provision, as measured through ~0 ~0 , ~international student assessments. The first is the 00 aspect of gender differences. In the PISA 2009 round m Urban Rural of assessments, Kazakhstan's 15-year-old girls scored Source: ASRK, WB staff calculations. significantly better than boys on the reading portion of the assessment and slightly better than-though not There are also important differences between rural and statistically differently from-boys on the mathematics urban areas. Children aged 16-17 in rural areas are and science assessments. In math in particular, more likely to finish all 11 grades (general secondary), K(azakhstan's gender-balanced performance stood in but are less likely to continue their education, after stark contrast to most of the comparator countries and graduating from general secondary. Urban children are the OECD, where girls typically underperformed in more likely to choose basic and secondary vocational relation to boys. education which can generate higher returns in the The second bright spot is the possible improvement of future. This may indicate limited access opportunities Kazakhstan's performance over time in these interna- for rural children to enter secondary vocational system. tional benchmarking exercises. The recently released 2011 results ofthe Trends in International Mathematics The Quality of Education Needs Attention Each year over 300,000 new workers enter the Kazakh labor force. In 2011, 16o,ooo students graduated from public and private universities. Another 184,000 com- pleted vocational secondary education in colleges and _________________________ 25 ASRK. 26 H BS 2009. Gaps and Opportunities for Human Capital Development 37 Figure 3.12: Students in Kazakhstan underperformed Figure 3.13: The average reading score is relatively in PISA tests compared to their peers poor in Kazakhstan (PISA Results in Selected Countries) (PISA Reading Results Worldwide, 2009 mean performance) 70 550* * 60 60 ~POL*IESTA 4 E ~ 500 LVAU.- 50 -REM s -20o450 *SRlRU C 0) 40Q) - 0 *#ROM 400 1o 20 0I 0 I030 I Illit 0a AZE 20K 40K 60K 80K 10 011 q 2008 GDP per capita, PPP (current international $) Source: Sondergaard and Murthi (2012). m Mathematics Reading EScience Note: The best-fit line represents a regression ofcountries' predicted Source: Program for International Student Assessment (2009), and PISA scores based solely on GDP per capita. The horizonati line rep- Walker (2011). resents the OECD mean reading score on the assessment. Note: Malaysia's students were assessed in 2010 as part ofthe PISA 2009 Plus round of assessments. BOX 3-1: What is the PISA and What Does it Measure? The Program for International Student Assessment (PISA) was designed and developed by the Organisation for Economic Co-operation and Development (OECD) in the late 19905 as an ongoing, periodic international comparative study of certain student characteristics and proficiencies. PISA surveys take place every three years. The first survey took place during 2000. The survey is designed to generate indicators of aspects of educational performance, so that the participating countries have access to high-quality and reliable mea- sures of outcomes of aspects of their educational systems. PISA is an age-based survey, assessing 15-year-old students in school in grade 7 or higher. These students are approaching the end of compulsory schooling in most participating countries, which makes this a suit- able age-group at which to target an assessment of the extent to which students are prepared for the daily challenges of modern societies. To do this, PISA takes a 'literacy' perspective that focuses on the extent to which students can use the knowledge and skills they have learned and practiced at school when confronted with situations and challenges for which that knowledge may be relevant. That is, it assesses the extent to which students can use their reading skills to understand and interpret various kinds of written material that they are likely to meet as they negotiate their daily lives; the extent to which students can use their mathe- matical knowledge and skills to solve various kinds of mathematics-related challenges and problems they are likely to meet; and the extent to which students can use their scientific knowledge and skills to under- stand, interpret and resolve various kinds of scientific situations and challenges. PISA also allows for the assessment of additional cross-curricular competencies from time to time as par- ticipating countries see fit. For example, in the 2003 survey cycle, an assessment of general problem-solving competencies was included. Further, the PISA survey collects information from students on various aspects of their home, family and school background; and information from schools about various aspects of orga- nization and educational provision in schools. This information is collected to facilitate a detailed study of factors within and between countries that are associated with varying levels of reading, mathematical and scientific literacy among the 15-year-old students of each country. The resulting analyses are of interest to policy makers in participating countries seeking to better understand the relationships between performance and a variety of background factors, the connections to various national education policy settings, and the responsiveness of outcomes to changes in policy settings. Source: Adapted from Turner, Ross (2006), PISA-The Program for International Student Assessment -An OverviewArticle forthe Australian Consortium for Social and Political Research Incorporated 38 Beyond Oil lKazakhstan's Path to Greater Prosperity Thsrough Diversifying 7 and Science Study (TIMSS)1 indicate that Kazakhstan's Figure 3.14: Structure of the labor force in Kazakhstan students performed closer to-though still lagged by level of education and place of residence, 2001 slightly behind-their peers in comparator countries and 2011 than they did in PISA 2009. The results were particu- (In percent) larly encouraging for Kazakhstan's fourth-graders, who Urban areas scored significantly higher than their counterparts in 100 Poland on the TIMSS 2011 mathematics assessment. However, it is not possible to draw conclusions about 8o trends in performance across different types of assess- ments. Policymakers should therefore keep a close eye 6o on the forthcoming results of the PISA 2012 round, which will for the first time allow Kazakhstan to exam- ine its performance over time in a comparable manner. 20 There is a Skills Mismatch in the Labor MarketKazakhstan The labor force with higher education expanded both l High Vocational School in rural and urban areas, but it grew faster in urban Rural areas areas. The number of workers with vocational educa- 100 tion expanded only in rural areas, and remained impor- tant in urban areas whereas the share ofthe laborUforce 8o with secondary school education contracted both in rural and urban areas. As a result of these changes, 60 workers with higher and vocational education accounted for equal shares of the labor force in urban 40 areas: 42 percent each. The remaining 6 percent of 20 the urban labor force had secondary school education 20 or below in 2011. In rural areas, workers with secondary 0 school education account rural and for the largest Attainment urdnuareion share of the ofnt2002chandes010 2001 2011 labor force while those with vocational education rep- 0 High Vocational School resent 32 percent of the total (Figure 3.14). Source: ASRK, as cited in Atamanov and Sattar (212b). There is excess demand for workers with higher and vocational education, and excess supply of workers Fgr .5 ne flbrsotgsadsrlssb with general secondary school education and below. By ir 3. aine of labo age a s es comparing the structure of employment and unem- ployment by education level, one can identify' the types -5 of occupation that were more avidly demanded in the labor market. Figure 3.15 shows that workers with higher and vocational education were in greatest demand in 2010, when compared to those with basic secondary and general secondary education. Interest- -3Shortage 0 il ingly, workers with basic vocational skills are in higher o 0 shortage than workers with higher education. In fact, 211 for men a basic vocational degree was highly valued in Hh cil Sh the labor market in 2010, while higher education 5 A ctdiAam degrees were in demand for both men and women secondary secondary vocational aocational E 2002 2010 27 Forthe Past 20 years, TIMSS (Trends in International Mathematics Fure: Index f laosh and Science Study) has measured trends in mathematics anda ta tion science achievement at the fourth and eighth grades. Kazakhstan Note: The index is calculated as (e/u-i), where e and u are respec- orst participated in the quadrennial assessment in 2007. However, tively employment and unemployment shares of a given occupa tion gup. Positive values ofindex indicate shortages ofparticular its first internationally comparable assessment of fourth and occuponal group, while negative values indicate a surplus. eighth graders took place in 2011. Caps and Opportvutes for Human Capita Development 39 Over the period 2002-10 there was a substantial reduction Figure 3.16: Percent of firms reporting a given "basic" in the shortage of workers with secondary vocational skill to be important/very important for specialist/ and higher education. The shortage slightly increased skilled workers in Kazakhstan for the workers with basic vocational education. Ability to work independent Time management skills The pattern of labor shortage is not similar across Literac genders. Female workers with higher education were in Russian language skill Communication skills greater demand than men in 2002, but by 2010 labor Analytical thinking shortages for workers with higher education equalized Problem solving skill across genders (Figure 3.15). Interestingly, during the Customer relations skill Writing skills same period, the labor shortage for men with basic Mathematics (calculation) vocational skills outpaced labor shortages for female Computer skills workers, and was much higher in 2010. Telephone conversation Kazakh language skills Management skills In international terms, Kazakhstan fares poorly when it English language skills comes to providing adequately trained workers to the 0% 20% 40% 6o% 8o% loo% labor market. Among 30 countries in Eastern Europe Source: vaschenko (2008). and Central Asia, only Russia and Belarus have larger shares of firms who consider worker skills a "major" or (the most demanded occupation) is the insufficient a "very severe" constraint to firm growth.28 Half of quality of local training, which was cited by 63 percent Kazakhstan's firms fall into this category, compared to of employers. Lastly, while fewer than 50 percent of only 14 percent across the OECD. Moreover, while Kazakh employers provide opportunities for worker Kazakhstan's employers viewworker skills with concern, training or retraining, the likelihood of receiving train- they train their employees with less frequency than ing tends to increase along with the level of skill (spe- firms in other countries that face skills mismatches. cialists receive training in more than 40 percent ofsur- Despite the fact that 51 percent of Kazakh employers veyed firms).30 consider skills a major constraint, only 41 percent pro- vide formal training. Meanwhile, firms in Russia Even though the share of firms providing formal (52 percent), Poland (61 percent), and Malaysia employment for permanent employees in Kazakhstan (50 percent) are more likely to report offering formal was comparable to the ECA average in 2008, the training. percentage of trained employees was still lower in While most employers place a high value on skills andpercent training, they do not necessarily fund it.29 Firms place pazakhtin 2008, pariso n t rcnt in high requirements in terms of formal educational qual- FSU an 36 peren in ca. Fo nonprctin ifications for the workers they expect to hire-when hiring specialists and managers, more than two-thirds employees, the share of trained workers was even of all employers prefer candidates to have higher edu- FSUe an 26 percent in a ountries. cation degrees. For most other positions, vocational or specialized secondary education is preferred-a gen- The key question for Kazakhstan is whether the coun- eral secondary school diploma is not enough. When try's education sector is producing the right kinds of asked to rate skills on the basis of importance for their workers for an evolving economy. From 2007-11, the specialists, a sample of 5oo employers placed the abil- country's labor force added almost 550,000 net jobs ity to work independently at the top ofthe list, followed that were filled by graduates of higher education insti- by time management skills. Communication, analytical tutions. Another 390,000 net jobs went to workers thinking, problem solving, and customer relations with vocational secondary degrees, while those with were also important to at least three-quarters of all general secondary education or less faced a net loss of employers (Figure 3.16). The main reason given for 265,000 jobs. Not surprisingly, the vast majority (81 why firms find it difficult to fill vacancies for specialists percent) ofjobs gained by those with university degrees were in the service sectors. Among vocational educa- ______________________________________ tion graduates, 69 percent of the net job gains were in 28 Sondergaard and Murthi (2012). 29 lvaschenko (2008) is based on a skills and labor demand survey conducted in 2008 to shed more light on the specific worker skills 30 Please consult Asses for a more complete list of key results from this being sought by Kazakh employers, survey. 4o Beyond Oil: Kazakhstan's Path to Greaser Prosperiwy Torough Diversifying services and a further 24 percent in industry and con- Figure 3.17: Structure oftotal employment in struction. The losses for those without specialized Kazakhstan by sector and level ofeducation, 2007-11 degrees came mainly in agriculture (Figure 3.17). All levels ofeducation Higher education graduates now make up 43 percent 10,000 of the workforce in services, the fastest growing sector, I compared to 38 percent four years earlier, and 31 per- cent of the workforce as a whole (versus 26 percent in E 6,0oo 2007). These gains-as well as the modest gains made by vocational graduates-have come at the expense of those who receive no specialized vocational training at 2,000 the secondary or post-secondary level. In spite ofcontinued employment growth, the education 2007 2008 2009 2010 2011 system produces more graduates in some sectors than * Agriculture Industry Construction 0 Services what can be absorbed by the labor market. Although there has been no net job creation in agriculture in Higher education recent years, Kazakhstan's vocational education institu- 3,000 tions continue to produce thousands of agriculture spe- cialists. Industrial and construction-related specializa- tions also receive more VET graduates each year than the number of jobs created by the Kazakh economy. Only in some parts of the service industry does the job creation keep up with the annual number of graduates E 1,000 i (Figure 3.18).31 However, as discussed above, although 0 large quantities of graduates enter the respective sectors 2007 2008 2009 2010 2011 each year, they may still lack the appropriate quality and * Agriculture Industry Construction 0 Services mix of skills demanded by employers. Vocational secondary education WHAT WILL NEED TO CHANGE TO REDUCE 3,000 THE MISMATCH IN THE LABOR MARKET? 2,500 £2,000 Education is among the top priorities in Kazakhstan, but the share of public spending on education in GDP 0 500 is still much lower than the average for OECD coun- E 1,000 tries. Kazakhstan declares importance of education in 500 strategic documents and invests resources in its acces- E sibility and modernization. Significant efforts were 2007 2008 2009 2010 2011 made in improving the system of education over the * Agriculture Industry Construction 0 Services last 10 years, Kazakhstan was ranked fourth in 2008 on UNESCO's "Education for All Development Index" General secondary education or less reflecting near universal levels of primary education, 4,000 adult literacy, and gender parity (UNESCO, 2011). Nonetheless, international comparisons based on the 3,000 World Development Indicators (WDI), demonstrates that the share of public spending on education at close 0 2,000 0-- to 3 percent of GDP in 2009 was still lower than in E OECD countries, Malaysia, and the Russian Federation 1,000 (Figure 3.19). 2007 2008 2009 2010 2011 mAgriculture Industry Construction 0 Services 31 Because many vocational graduates choose to continue their studies in higher education institutions, it is not possible to calculate the exact labor market absorption levels for Kazakh graduates with the data currently available. Caps and Opportunites for Human Capita Development 41 Figure 3.18: Net job creation and number of graduates ing the quality of skills possessed by graduates at each in Kazakhstan by sector, 2010 level of the education system. In view of the education outcomes discussed in the preceding sections of this Net jobs created chapter, these are appropriate goals to be pursued. However, a number of gaps remain between the stated VET u objectives outlined above and the policy needs for - achieving the country's long-term development aspira- tions. First, a thorough understanding is needed of the HE graduates Iskills that are necessary for the country's economic development, although this is arguably a challenge in a o 50 100 150 200 250 transition economy. Limited evidence from Kazakhstan- Thousands and more compelling evidence from elsewhere-sug- E Agriculture Industry and Construction Services gest that higher-order analytical skills and "soft" skills are increasingly in demand from employers in an econ- Source: Author's calculations based on data from ASRI( and MOES. omy that is moving toward higher value-added produc- tion. The government's present emphasis on improv- ing student performance on international assessments, Figure 3.19: Share of public spending on education in which measure basic literacy and numeracy skills (such 2ooo and 2009 as PISA, TIMSS, an PIRLS), does not fully address the (In percent of GDP) need to prioritize and track progress along various 6 dimensions of non-cognitive and behavioral skills. This 5 is despite the fact that some of the skills are already 6 identified as important in the government's education 4 5 strategy, including creativity and critical thinking. Both o sets of capacities are important for a country's eco- o nomic growth and an individual's job performance, yet the two are typically measured and addressed in differ- ent ways.35 The determination of which skills are important should 200 20 Rllinked closely to a thorough understanding of cur- 0 rent and future labor market needs. As discussed skl dabove, there are growing mismatches between the frskills of current graduates and the demands of the S2 olabor market. Information needs to be gathered to Source: Author's calculations based on data from ASRK and MOES. identify the skills that are important to employers, and the existing competencies of the adult work force. Government Strategic Objectives Through this exercise, it will be possible to gain a better understanding of the current skills gap. Building this The main policy objectives of the Government of the knowledge base through skill measurement studies Republic of Kazakhstan (GoRK) focus appropriately on that can inform education and training policies is a skills development. These include the "Strategic Plan complementary step to aligning government policy for Development of the Republic of Kazakhstan until with the country's development needs. 2020,l32 the "State Program on Development of Educa- tion of the Republic of Kazakhstan for 2011-20,"33 and Moreover, in addition to improving the quality ofgradu- the "Employment Program 2020",3c among others. ates' skills, the quantity of graduates should be aligned One key direction ofthe Strategic Plan, entitled "Invest- with realistic needs ofthe economy. As discussed above, ing in the Future," sets out a number of goals to be Kazakhstan's vocational and higher education institu- achieved by the country's education system and labor tions currently train more skilled specialists in some force by 2020 (Box 3.2). These goals focus on enhanc- sectors (such as agriculture) than the labor market demands. The stated goal of bringing the share ofwork- ers with higher education degrees to 50 percent by 33 GoRK (201ob). 34 GoRK (2011). 35 World Bank (2012a). 42 Beyond Oit Path Greaeer Prosperiay Tnorough Diversifyieg rKazakhstan's ro Box 3.2: Selected Strategic Goals Outlined by the Government in the Sphere of Education and Labor Force Development to be Achieved by 2020 m General secondary schools will provide academic knowledge and develop the skills for promoting the formation of an educated, ethical, critical thinking, physically and spiritually developed citizen, seeking self-development and creativity. m Pupils of Kazakhstan's general secondary schools will achieve high results in international comparative assessments, such as PISA, TIMSS, PIRLS. m High quality of the knowledge and skills of technical and vocational education graduates will be recog- nized by employers. m The quality of higher education in Kazakhstan will correspond to the best global practices in the educa- tion sector. m The graduates of domestic higher education institutions will be in demand by employers. m The share of highly skilled workers in the working population will increase to 50 percent. Source: GoRK (201oa). 2020-from 30 percent in 20lo-should be considered m Deepen school autonomy and accountability. carefully in line with projected economic demand. Schools can redefine their incentive structure to create better conditions for learning and teaching, The authorities could consider a number of policy and create accountability mechanisms through com- options that could have a positive impact on the quality of munity participation for school autonomy and education in Kazakhstan. These include the following: accountability. * Improve planning to address more efficiently per- m Improve monitoring and evaluation systems to den- ceived gaps in the education environment. tify gaps and respond on time to student and school * Improve teacher effectiveness and focus on teacher needs. policies, including teacher training (pre- and in-ser- m Put in place a well-articulated Early Childhood Devel- vice), teacher pay and incentives to attract the most opment (ECD) program for children from 0-3 years qualified. with emphasis on most vulnerable groups. mProvide in-service support to schools and teachers, m Build job-relevant skills by offering training and ter- equipping them with innovative and effective tools tiary education, as well as and promoting improve- for curriculum development. ments in technical and vocational education in order * Continue with wih Per Capita Fnaning pasig-inPerCapta mCotine phasing-in Financing to advance the relevance of its curriculum and match itolarden. (PCF), as it has the potential to reform education systems through enhanced efficiency, equity, trans- parency, and accountability. Gaps and Opportunites for Human Capita Development 43 CHAPTER 4 THE INSTITUTIONS THAT MATTER FOR DIVERSIFICATION INTRODUCTION This report postulates that the institutions that matter for diversification are those used by the government to A large empirical literature suggests that differences in manage volatility, those that are put in place to regulate the quality of institutions are responsible for divergent the business environment, and those that are responsible growth paths of successful and non-successful for and that affect the provision of public services. As dis- resource-rich countries. Institutions range from unwrit- cussed in Chapters 1 and 2, in the context of a resource- ten customs and traditions to complex legal codes that rich country, a volatile macroeconomic environment regulate the behavior and interaction of firms and indi- introduces uncertainty in the economy that can be viduals among themselves and with the government. responsible for several problems. In the presence ofvola- A summary of the literature on growth and resource tility, the government faces uncertainty about how much dependence indicates that the quality of institutions is revenue stemming from the resource sector will be avail- an important factor that helps to explain why some, able to finance investments and the provision of public but not all resource-rich countries suffer with the so- services. Private agents and investors in particular, also called "resource curse." In line with this thought, natu- become increasingly wary oftaking risks and may decide ral resource dependence only affects growth perfor- to not start new businesses or undertake significant new mance negatively in countries with inferior institutions investments. The quality of public service delivery is (Gelb, 2012). important in this context, as it affects the functioning of Reprt,the markets, the speed of economic transactions, and even According to the Accodin World Deelomen tothe 002Word 2002 Development Report, the institutions that are important for diversification need t orktwell ma affectote enforeabiliyeoftcotracts 6 to be efficient, flexible, and inclusive.3 Efficient institu- t a o n of the rle the law,candlth r ctst tions ensure the necessary flow of information to the market, as well as secure property rights and the property rights. An education system that does not pre- enforceabilitypare students well for a competitive market will limit the is too little or too much competition (monopolies versus lack of intellectual property rights and safe- pects for the development of the non-resource sector of guards). The notion of flexible institutions is associ- pol m become inresily comle. ated with the fact that there is no single institutional form that is a clear choice to replicate. The form and ThischapterdiscusseswhyitisimportantforKazakhstan function of institutions is defined by a set of conditions to keep the focus on the institutions that matter for within and outside a country during a specific period of diversification. As Chapter 2 discussed at length issues time. When these conditions change, institutions need related to volatility management, this chapter focuses to change too. For instance, a country may need a on the institutions that affect the functioning of the privatization agency for a few years, but not forever. markets, the behavior of economic agents, and the Inclusive institutions are those that have economic provision of public service delivery. First, it looks into institutions that encourage innovation and invest- the quality of the regulatory and governance environ- ment. They provide secure property rights and elimi- ment in Kazakhstan. Governance and regulatory insti- nate significant entry barriers. They create a level play- tutions are important because they lay the foundation ing field so that the majority, or ideally all, ofthe citizens for a rules-based economy. Second, it examines of a given nation can take part in economic activity whether market institutions are well developed in (Acemoglu and Robinson, 2012). Kazakhstan. In this section, the analysis focuses on the institutions that affect the behavior of agents and that influence the functioning of markets. Third, the focus turned ais to what will need to change to strengthen the 36 SeeWorld Bank (2002). institutions that matter for diversification in Kazakhstan. 44 Beyond Oilt Path Greaaer Prosperiiy Tarough Diversifying tazayts uo DOES KAZAKHSTAN HAVE A STRONG age technological development and adaptation; and GOVERNANCE AND REGULATORY innovation and skills upgrades. ENVIRONMENT? Malaysia and Indonesia diversified away from petro- Inclusive institutions play a fundamental role in sup- leum and into low-level manufacturing sectors. Again, port of sustainable growth and the development of a macroeconomic prudence was the bedrock of both nation. Inclusive political institutions mean a broad countries' success story. Both countries used currency distribution of power and limits to that power, such depreciation, moved towards an open trade regime, as transparent and fair elections. Fundamentally, invested in infrastructure, and targeted support to inclusive and pluralistic institutions create incentives manufacturing through a variety ofschemes and incen- for everyone to invest in the future. These institutions tives. The two countries ensured an important fraction increase the probability of sustained growth for a ofthe resource rents filtered through the rural commu- country by allowing free expression, innovation and nities by expanding infrastructure and support ofagri- competition. On the other hand, if institutions are cultural modernization. As the economies moved up extractive (i.e. protecting the political and economic the production ladder in the 198os from low -level to power of a small elite that takes income from a major- high-tech manufacturing, both governments empha- ity) growth will eventually falter and the nation will fail sized education, technical and technological learning as innovation and new entry into markets are discour- and exchange relations with universities in developed aged to protect the benefits of a few (Acemoglu and countries (Gelb, 2012). Robinson, 2012). This section reviews the factors that are associated Resource-rich economies with strong institutions have with regulatory institutions in Kazakhstan. From a reg- a larger range of potential options for diversification ulatory perspective, institutions need to be functional than those with weak institutions. Many of the indus- so that they can facilitate the interaction of economic trialized economies, including the United States, ini- agents in the marketplace. In what follows, the perfor- tially built their growth on the exploitation of natural mance of Kazakhstan is considered on three different resources. In more recent times, countries like Norway aspects: (i) the rule of law and the regulatory institu- and Chile have successfully pursued broad-based tions; (ii) corruption and transparency; and (iii) civil growth while developing or maintaining a high share of service and service delivery. oil or minerals in exports. Malaysia and Indonesia used macroeconomic prudency and upgrading of techno- Regulatory Institutions logical systems to sustainably diversify and grow. Norway and Chile diversified their economies within the instnl r atory frork. Thee2011eWorldide commodities sectors and benefited from functional say- GovernaceIniators orleof law and rlatory ings/stabilization funds that helped stabilize the macro- qua re as improee omaredltoth economic environment. The two states were centralized sufficiently to exert safety and security for the past four early 2000S (Figure 4.1). Institutions that are deemed decades, though Chile experienced serious political tiar o e Te ectly inre insutn upheavals in 1973 and with the fall of President Augusto refos Th aewebdge coded theue-on- Pinochet. However, both countries were also recognized mtrowh an e uret elnte exam- as having a capable technocracy to run the government. pes oscc inieofintituti arength- In addition, each country strengthened institutions to eing.sThes efotae leain ito l imrong support academic and educational developments, enment effectveess, to can bepdo.Tb research and development within specific sectors and throughout the economy. Inthe case of Norway, this was mance an sel ea of insitutoa partially done through tax incentives for research and qal.e ae onfs thauKazakh institutiona development. Joint ventures and cooperative agree- pefring ell innterms of providinstility and ments were encouraged, leading to FDI and knowledge perform poorly o indi taieas v transfer. This means that their business environment s aspesoh rl o law. was attractive enough for FDI. In the case of Chile, the government adopted the following policies to improve While there have been improvements in terms of the access to finance for small and medium enterprises quality and coverage of regulatory institutions, there (SMEs); public private partnerships, and various other are gaps to be overcome in implementing regulations institutions; supportprograms and incentives to encour- Te Institutions That Mawter forDiversfication 45 Table 4.i: Selected Indices of Institutional Quality, 2012 OECD average = loo MMMMMMMM Heritage Foundation - Property rights 26 52 32 65 100 92 74 27 Heritage Foundation -Corruption 51 42 31 64 100 92 71 30 WGI-Ruleoflaw 54 49 45 68 100 97 84 35 WGI - Control of corruption 49 40 38 69 100 94 76 34 WGI- Political stability / No violence 56 73 51 49 100 102 99 62 WJP- Limited government powers 47 46 41 62 100 99 87 45 WJP- Absence of corruption 68 50 51 72 100 97 83 41 WJP-Crime 96 91 6o 78 100 101 99 97 WJP- Regulatory enforcement 58 62 64 78 100 97 84 63 Source: Heritage Foundation Index of Economic Freedom, Worldwide Governance Indicators and World justice Project Rule of Law Index. Figure 4.i: Kazakhstan's governance indicators have shown improvements since 1996 Government effectiveness and regulatory quality have Rule of law has improved considerably in the second half of the improved steadily 2000s but remains at a relatively low level 50 35 30 40 Of 25 30 Q) (U 20 202 20 15 10 10 wo o 0 c4 - ;- 61 0 r, 00 CY 0 woo0c 0 N m' tJ " r., 00 0C 0 c0 CY 0000 000 0 0 0 co 00oooO 0 0000 0 ,0 0 00 , 0C 0C 00 000N0 0 00 - Government Effectiveness Regulatory Quality - Rule of Law Kazakhstan's political stability index was good up to 2009, Control of corruption is ranked very low and has not but improvements are needed on voice and accountability improved recently 8o 25 70 60 20 ( 50 Q) S5 15 (U 40 QCO u u 0- 30l 20 10 5 '0 00 0 C') m~ "t 61' CC r 00 MC 0 'o 00 0 N~ mC t r,C 00 CCC MC M 0 00 0 0 0 00 0 CC MCC 0 0000 00 00 - Political Stability Voice and Accountability - Control of Corruption Source: Worldwide Governance Indicators - 1996-2011. 46 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying Figure 4.2: Regulatory enforcement gap versus OECD average, 2012 Government does not expropriate without adequate compensation Due process in administrative proceedings Administrative proceedings conducte without unreasonable delay Government regulations applied withough improper influence Government regulations effectively enforced Regulatory Enforcement -o.8 -0.7 -o.6 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 N RUS KAZ CHN Source: World justice Project: Corruption and transparency. effectively and without discrimination. Figure 4.2 OECD countries. The prevalence of corruption is con- below shows the regulatory enforcement gap vis- -vis firmed by the low ranking of Kazakhstan on the 2012 the OECD countries. For Kazakhstan, the gap is the Transparency International Corruption Perception Index lowest on effective enforcement of regulation, but is (ranked 133 Out Of 176 countries) in addition to other strikingly high for due process in administrative pro- global indicators such as the 2012 Worldwide Cover- ceedings. This suggests that respect for the rule of the nance Indicators Control of Corruption, and the 2012-13 law is not guaranteed. Fifty percent of respondents in a World Economic Forum Global Competitiveness Indica- recent survey on Kazakhstan (Ernst & Young, 2012) felt tors (WEF-GCR) where corruption is listed as the second that the level of legal and regulatory transparency and most problematic factor for doing business in Kazakh- predictability is insufficient, with the main areas of con- stan. As shown in Figure 43, the performance ofKazakh- cern being: inconsistency in the interpretation of laws stan is inferior to that of comparator countries. and their selective application; over-regulation and onerous local content requirements; perceived corrup- The framework for transparent government operations tion; and an insufficiently independent court system. is evolving gradually. More transparency and consulta- According to the EBRD, Kazakhstan scores above 6o tion is an important way for strengthening institutional (out of loo) on extensiveness of the commercial legal performance. Providing more information to stake- framework (i.e. quality of the laws in place); however, holders (both citizens and other levels of government) the score is only 40 on effectiveness (the actual imple- reduces the opportunities for corruption, introduces mentation of the laws).37 more accountability, and improves the quality of regu- lation. Kazakhstan is ranked in the top third (out of Corruption and Transparency Figure 4.3: Prevalence ofcorruption in different branches of govern ment Corruption remains an important concern and is a (Kazakhstan and Comparators - 2012) bigger problem in Kazakhstan than in OECD countries. tsecutive branch According to the 2012 World Justice Project, corruption is much more prevalent in Kazakhstan than OECD countries with the legislative and judicial branches being the most affected. The country ranks 5oth com- pared to OECD's average of loo. A significantly higher Legislative branch judicial branch percentage of companies in Kazakhstan indicate that informal gifts are requested or expected at various stages of the business cycle in Kazakhstan than in the CHIN RUS Police and military 37 legal framework assessment - Kazakhstan, 37 EBRD - Commercial ____ KAZ available at: http://www.ebrd.com/pages/sector/legal/what/ CouOntry.sEhtml Source: World justice Project. TTe I nstitutons That Mater forDiversication 4 Table 4.2: World justice Project: Open Government Indicator mmmm Open Government 0.42 0.36 0.41 0.46 0.70 0.67 0.57 0.39 Laws are publicized 0.69 0.57 0.46 0.56 0.69 o.66 0.59 0.48 The Laws are stable 0.50 0.20 0.50 0.64 0.75 0.70 0.57 0.37 Right to petition and public participation 0.23 0.37 0.33 0.28 o.68 0.67 0.55 0.38 Official information is available 0.27 0.29 0.35 0.37 0.69 o.66 0.57 0.31 Source: World Justice Project Report 2012. Where zero is the lowest and 1 is the highest score achievable. 144 countries) on the transparency of government pol- civil servants is being reduced, and clear guidelines icymaking indicator of the World Economic Forum's have been set out for hiring the Corps A civil servants. Global Competitiveness Index. According to the 2012 This is to encourage transparent, merit-based selec- World Justice Project, Kazakhstan scores around the tion and to reduce potential political influence ped- average compared to neighboring countries on Open dling in the civil service. Finally, the annual perfor- Government, but significantly below practices observed mance appraisal is being introduced to the in high income economies of the OECD and the EU administrative civil servants. (Table 4.2).3 Civil Sev e Service Delivery Deli Civil Service and Service Delivery While trust in political institutions ishigh, satisfaction with institutions with which citizens are more likely to State Administration and Civil Service interact on a daily basis - such as public health ser- The government has recently taken important steps to ran the cout i th mid ofa cties establish a new model of civil service based on meri- reardsto ic se deliry (bE .) at- tocracy. In March 2013, new amendments to the legis- lation on the civil service came into effect. The amend- isfaction with public service delivery ranges from a low ments provide for financing ofthe Corps A, and include Of 27 percent in the courts, to 40 percent in traffic annual performance appraisal of administrative civil police, to a high of 69 percent in primary and second- servants among other measures. The new model aims ary education.39 The reported prevalence of unofficial to achieve five objectives: (i) strengthen the principles payments to receive these public services, correlates of meritocracy in selection and promotion of human negatively with the satisfaction about the public service resources (HR); (ii) create a managerial Corps (called received (Figure 4.4). The percent of respondents Corps A); (iii) introduce elements of anti-corruption reporting unofficial payments as always or usually nec- into the civil service framework including a code of essary was 7 percent in services related to unemploy- conduct, standards of ethics, and other elements of euc reducing corruption in the system; (iv) improve mech- ation, 13 percent for the courts, and a high of anisms of HR management; and (v) increase the status 21 percent to the traffic polc While these negative of HR services. Written tests for civil service appoint- correlations are insufficient to establish causality, it is ment ments have been hae ben ompueried computerized o minimize mnipla- mnimie manipula- reasonable to argue that reduction in unofficial pay- to metcoliprv th quiyofsvcsan tion, interview processes and procedures have been tightened up, and committees are used to assure that strengthen trust in institutions. selection of candidates is objective. The authorities have been putting increasing emphasis These efforts are contributing to reduce the role of g patronage in the civil service. Civil servants with finan- towards service delivery and increased accountability. cial assets need to place these in trusts when taking For example, the new budget methodology envisages a office and a vetting of civil servants with respect to the observance of anti-corruption legislation for certain position is being proposed. The number of political 39 Life in Transition, 2011 (survey date 2010), Chapter 3 (governance and public service delivery), Table 3.1. Chapter 3 (governance 4aLife in Transition, 2011 (survey date 2010), 38 www.worldjusticeproject.org/rule-of-law-index. and public service delivery), Table 3.2. 48 Beyond Oii Path Greader Prosperi-y Tsrough DiversifyihgnKazakhstan's ao Table 4.3: Percentage of Respondents Satisfied With Public Services Health 57.0 65.1 54.0 58.0 79.0 Primary / secondary education 65.8 76.7 69.o 75.0 72.0 Traffic police 35.0 50.5 40.0 41.0 39.0 Official documents 50.5 72.6 50.0 68.o 75.0 Vocational education 58-5 76.0 62.0 79.0 72.0 Social security 46.5 58.6 50.0 74.0 38.o Unemployment benefits 34.8 57.4 43.0 59.0 55.0 Civil courts 22.5 45.4 27.0 51.0 49.0 Source: EBRD Life in Transition Survey 2010. Figure 4-4: Satisfaction with quality of various public services and unofficial payment Traffic police Official documents 50 40 40 +35 30 30 025 0- 020 20 20 O 0 415 10 . . +~f~10 tKAZ 0 * *0 0 20 40 6o 8o 30 50 70 90 110 Satisfaction Satisfaction Civil courts Education 35 60 30 50 25 0 0 40 20 ~15 , 2330 0 0 10* .10W 00 0A 0 20 40 60 8o 40 50 60 70 80 90 Satisfaction Satisfaction Source: World Bank staff own calculations. version of performance program based budgeting to These reforms build on an administratively de-concen- improve its service delivery to the population. Also, the trated structure of government, in which subnational authorities are launching a reform of the public audit levels of the administration already play an important system to improve the efficiency and transparency of role in the delivery of public services. These responsi- the budget. The reform is expected to transform Public bilities include primary and secondary education, pri- Financial Control to Public Audit System by updating mary and some secondary health care, regional and the law on audits, modernizing the methodology, local road construction and maintenance and a wide scope, functions, and responsibilities related to the range of housing and communal services, including audit system. The new system will include both inter- water supply, heating, gas, and electricity distribution. nal and external audits. Much of the recurrent expenditures of subnational Tre institutons That Mater forDiverscation 49 administrations are financed through a system of petition policy, which together define the framework of assigned taxes and budget subventions. These entities competition in the economy; and (c) the role ofthe gov- are financed through a well-established taxation and ement in the economy, including procurement, taxa- redistribution process. 4' The government is also work- tion, access to finance and state support programs. This ing to improve management of targeted development section reviews the performance of Kazakhstan with funds through decentralization. Work is underway on a respect to these characteristics and compares it to both framework of subnational financial management and good practice and the experience of other countries. In administrative systems to give more responsibility to reviewing Kazakhstan's performance to implement rule the local government, and a draft law is in develop- of law for market functions, we define the rule of law as ment. Furthermore, some steps have already been including: (i) definition and protection of property rights; taken to increase the role of the private sector in the (ii) enforcement of these rights (creditors' rights and financing and provision of housing and urban utilities, bankruptcy protection); and (iii) establishment ofa level but the public sector will still play a role in the provi- playingfield for all market participants (corporate gover- sion of affordable housing. nance and protection of foreign investors). This section highlighted a regulatory institutional infra- structure that is still in transition. There have been Institutions that Affect Market Performance clear efforts to strengthen institutions and reform the Markets develop and private businesses flourish when civil service with the aim of increasing the efficiency of the behavior of those who govern is not arbitrary. Clear public service delivery. However, there are several areas where further progress is needed, especially in refer- rules a levepayinifi eoragelcompetion ence to the effective implementation ofmarkets which thrive with the appearance and disap- extensive regulatory framework. The next section will focus on the quality of the institutions that affect most pre o o pr ieExessive ransation cost sthefameworkt o petitioiednWp-olicythcogte e icl directlyplete definition of and enforcement of contracts and property rights, and barriers to entry for new market ARE MARKET INSTITUTIONS WELL participants limit opportunities and discourage new secina eviews hseroranc Rofi Kaahturkeyt DEVELOPED IN KAZAKHSTAN? investments. Kazakhstan has done well in a number of areas that are important for the functioning of markets, Markets in a modern prosperous economy rely on trust. but there is significant margin for improvement in Market transactions generally involve private agents and others (see Figure 4.5). This section will review the require trust between market participants. However, recent experience on a number of areas where prog- market participants must have assurances that their ress has been made and where more could be done. rights will be protected in cases when trust is breached. Consequently, markets need to be underpinned by trust Figure 4.5: Selected indicators of institutional quality in the government and institutions play a critical role in for Kazakhstan and comparatorS-2012 that respect. Institutions channel information about market conditions, goods and participants (credit and WJP-Regulatory firm registries, accounting and disclosure policies, and Enforcement media). They also define and enforce property rights and contracts (judiciary and social networks). Finally, they W facilitate or restrict competition in markets (market entry, licensing, and regulation). Growth requires a set of key characteristics that institu- tions could meet regardless of their form and establish- corruption corruption ment. These include: (a) the rule ofthe law as applied to market institutions; (b) market contestability and com- Government powers No violence 41 Oblasts (as well as the cities ofAstana and Almaty) are assigned oo per.T cent of personal income and payroll taxes collected within their territories. Source: Worldwide Governance Indicators Rayons and cities ofgoblast subordination are assigned ioo percent ofthe property tax and certain excise taxes, Variations in revenues (per capita) among jurisdictions are equalized, to an extent, through a system ofobudget subventions and withdrawals. 5o Beyond Oil: KIzakhstan's Path Grester Prosperity TArough DiversifyMeg no Property Rights (Kee-Hong Bae, 2009). Kazakhstan scores well on the 2013 Doing Business (DB) Enforcing Contracts indica- Key legislation in Kazakhstan prescribes well defined tor, and is ranked 2 8' lut of 185 countries (Table 4.4). and sound property rights. The Constitution guaran- The procedure for enforcing contracts has more steps tees property rights and these principles are included but the system is effcient in terms of times and costs. in key laws and regulations. Kazakhstani and foreign The relative time efficiency of the court system is also individuals may establish and operate businesses in confirmed by other studies, including the WEF-GCR most sectors and acquire, register, use and sell most where Kazakhstan is ranked 67 th on efficiency of legal assets. Land ownership by private entities is allowed; framework in settling disputes. A thorough assessment however, only 0.9 percent of agriculture land has been reveals room for further improvement in contract privatized, and some restrictions continue to exist on enforcement. Kazakhstan has a relatively efficient filing the ability of foreigners to own agriculture land. In and service, and trial and judgment systems; however, it addition, the legal framework in general protects intel- has an exceptionally long enforcement period. Similarly, lectual property rights; however, some aspects need to while costs associated with court use and attorneys are be strengthened and implementation arrangements similar to those observed in comparator countries, the effectively enforced as the country is ranked low ( 9 2 nd enforcement costs appear to be high (Table 45). out of 144 countries) on the WEF-GCR intellectual property rights indicator. Considerable progress has been made in aligning arbi- tration practices in Kazakhstan with international prac- Enforcement of Contracts tice. Arbitration in Kazakhstan is governed by the Law Efficient enforcement of contract is a critical character- th Awoiteatio nal Commecarbitration Mos istic of well-functioning institutions. Poor contract cmecal Istean general bro t og enforcement is related to lower amounts of credit, shorter maturities, and higher interest rate spreads. Table 4.4: DBn Enforcing Contracts, 2013 Enforcing Contracts Rank 39 46 49 28 11 19 Procedures (number) 32 32 32 37 36 37 Time (days) 504 538 577 370 270 4o6 Cost (percent ofrclaim) 21 21 23 22 13 11 Source: Doing BusinesS 2013. Table 4c5: Time and Costs of Various Stages of Enforcing Contracts, 2013 Time (days) 370 420 685 394 406 425 270 Filing and service 15 30 6o 29 21 30 30 and judgment Trial 135 290 480 310 195 320 i6o Enforcement ofjudgment 220 100 145 55 190 75 8 Cost (percent ofaclaim) 22 24.9 19 14.4 11.1 22.3 13.4 Attorney cost (percent ofclaim) 8.5 12 12 6.6 7.6 9 10 Court cost (percent ofclaim) 3.5 3 5 5.4 2.3 12.3 3.4 Enforcement Cost (percent ofclaim) 10 9.9 2 2.4 1.2 1 0 Procedures (number) 37 36 33 30 37 35 35 Source: Doing BusinesS 2013. Tte Lnstitutons That Mater forDiversifcation 5] Table 4.6: DB Resolving Insolvency, 2013 Indicator- Resolving Insolvency Rank 30 36 56 55 53 82 Cost (% of estate) 9 10 12 15 9 22 Recovery rate (cents on the dollar) 68 63 46 43 43 36 Time (years) 1.8 2.0 2.8 1.5 2.0 1.7 Source: Doing Business 2013. arbitration.42 The Almaty Specialized Interdistrict Eco- Over the last two years, the government has imple- nomic Court has jurisdiction to enforce arbitration mented an ambitious and comprehensive plan for awards. On average, it takes around five weeks to reforming the insolvency legislation. In 2011, the insol- enforce an arbitration award rendered in Kazakhstan, vency manager's license was abolished, qualification from filing an application to a writ of execution attach- requirements were improved, and the single register of ing assets (assuming there is no appeal), and five insolvency managers was created. In 2012, Kazakhstan weeks for a foreign award. Foreign arbitration awards adopted a new law establishing appropriate conditions are recognized on the basis of reciprocity and courts for businesses for resolving insolvency using court and have authority to review them (World Bank, 2011). In out-of-court instruments. The law introduced impor- spite of progress in arbitration practices, courts are tant improvements including clear separation of bank- still perceived as a constraint to doing businesses. The ruptcy and rehabilitation procedures, new streamlined enforcement of contracts depends on the existence of out-of-court rehabilitation procedure, improving effi- fair and efficient courts. Furthermore, research shows ciency of standard rehabilitation procedure, strength- that a functioning legal system is of critical importance ening creditors' right (including secured ones), and in determining the size of the informal sector. (Era decreasing administrative barriers. Dabla-NorriS, 2008). The LITS confirms these findings: trust in the courts is significantly below Western Europe A new Law on Rehabilitation and Bankruptcy is being averages and is not improving. reviewed by the Parliament. The law envisages further improvement of current insolvency system by: introduc- Bankruptcy ing mandatory financial status data collection through a temporary insolvency manager before court decision; Compared internationally, Kazakhstan ranks well on increasing personal liability of debtor's managers for resolving bankruptcy. However, in general, resolving compliance with bankruptcy legislation; strengthening insolvency is not efficient globally, even less so in creditors' rights in terms of increasing transparency, developing countries. Developing countries have repli- fairness, and influence of creditors meeting and com- cated models from developed economies without due mittee; transferring management rights to creditors in regard for their capacity. As a result, middle-income determining bankruptcy procedures and timelines; and countries nearly always fail to save a viable firm, despite eliminating existing legal norms on determining credi- being efficient in terms of time and cost of dealing with tors' priority. Kazakhstan could consider simpler mecha- insolvency (DjankOV, 2008). This is also the case in nisms such as foreclosures which are processes with Kazakhstan. The Kazakh system is time-efficient (1.5 limited court oversight and automatic transfer ofassets years compared to the 1.8 years in OECD countries) tocreditors.Theauthoritiesarelookingaheadtodevelop and costs do not appear excessive. However, the recov- appropriate capacity for the implementation of the new ery rate is on the low side (though improving) suggest- insolvency legal framework. ing that substantial value is lost during the process (see Table 4.6). Corporate Governance Kazakhstan has recently put emphasis on improving its position on the Doing Business Protecting Investors 42 Exceptions include cases related to real estate in Kazakhstan, indicator (Figure 4.6). However, it is important to note disputes involving interests of the state or state enterprises, that the DB indicator measures the degree of protec- disputes arising from contracts with monopolistic entities or those dominating the market, intra-company and shareholder tion for minority shareholders in a joint-stock company disputes, and those related to transportation agreements or and as such does not give a full picture ofthe corporate bankruptcy. 52 Beyond OiO Path Greater Prosperiyy Ttrough Diversifying vKazakhstan's lo Figure 4.6: Kazakhstan is on the top third on ease of doing business, but it could do better Ease of Doing Business - 2013 Starting a Business - 2013 120 120 100 100 8o 80 6o 6o 40 Norway Australia Malaysia 40 United KazakhstanFRuessian -utai Unidrab ahtnNra aasaFR t 20 120 nitd NorwyKaakhtanRussan Astraia alasia Australia United Kazakhstan Norway Malaysia Russian rabFederation Arab Federation Emirates Emirates 900 Protecting Investors -2013 Enforcing Contracts -2013 150 120 12010 0 06 2 0 60 1000 Norway Malaysia Kazakhstan Australia Russian United Norway Russian Australia Kazakhstan Malaysia United Federation Arab Federation Arab Emirates Emirates 400 Getting Credit - 2013 Getting Electricity - 2013 120 80 70 100 60 60 40 40... 20 3:- 10 fff I Malaysia Australia Norway Kazakyistan United Russian United Norway Malaysia Australia Kazakhstan Russian Arab Federation Arab Federation Emirates Emirates 50 50 Dealing with Construction Permits -2013 Trading Across Borders -2013 200 200 150 150 10 0 1 00 0 0Australia United Norway Malaysia Kasakhstan Russian United Malaysia Norway Australia Russian Kazakhstan Arab Federation Arab Federation Emirates Emirates Source: The World Bank Doing Business Indicators, 2013 The Institutions That Matter forDiversifcation 53 governance situation in the country. The Company Law Figure 4.7: Quality ofcompetition policy - of Kazakhstan provides a broad measure of direct Kazakhstan and comparatorS-2010 voting rights by international standards. Furthermore, EBRD Index of Competition Policy recently introduced improvements include introduc- 4.0 tion of manager's personal liability for related party transactions (an unintended consequence of this appears to be that qualified managers are discouraged from applying); ability of shareholders to file an action as well as compulsory market valuation for larger n transactions. There has been progress in accounting and auditing. The legal framework prescribes the use of International 0.0 Financial Reporting Standards (lFRS) in joint-stock 4x e companies, banks and other financial institutions and companies with "significant public interest." Similarly, auditing practices are governed by the International Source: EBRD Transition Indicator of competition Policy, 2010. Standards on Auditing (ISA), and the Law on Audit pre- scribes a relatively detailed list of entities subject to tions to its functions as a number of activities (licens- compulsory audits. The Chamber of Auditors of the ing, metering, quality standards etc.) remain within the Republic of Kazakhstan and the Chamber of Profes- jurisdiction of various ministries and government sional Accountants and Auditors serve as the national agencies. self-regulating bodies in audit and accounting. In order to strengthen disclosure policies, the government introduced a Depository of Financial Report. However, Reforms over the last years have reduced costs and there is a shortage of qualified accountants and audi- streamlined procedures for new businesses registra- tors, and the institutions in charge need to invest tion, facilitating market entry. Kazakhstan ranks 25th further on capacity building to effectively regulate the on the 2013 Doing Business indicators on Starting a profession and control preparation of reports, in accor- Business (Figure 4.7) and business registration does dance with international standards. not appear as a serious constraint to doing business in any survey of the private sector. The number of days Market Contestability and Competition Policy required to register a limited liability company is only slightly higher than in peer countries, and the number Competition Forces and Competition Policy of procedures is around the average, while Kazakhstan Competition policies need to be strengthened. Kazakh- outperforms peers on the costs of registration (Table 4.7). stan scores a two (on a scale from 1 to 4-3) on the 2010 However, market entry restrictions continue to exist in EBRD Transition Indicator of Competition Policy. In a number of key sectors keeping significant parts ofthe comparison, ECA averages 2.6 and new EU-members economy inaccessible to the private sector. Restric- average 3.4 on the same scale (Figure 4-7). On the tions on ownership exist in the mining and transport WEF-GCR's question on intensity of local competition, sectors based on national security considerations, as the country ranks 11 3 th out of 144 countries; it ranks well as in other sectors covered by the Law on Natural 83rd on market dominance and 1o4 th on client orienta- Monopolies. In addition to these restrictions, any tion of companies. This pattern is indicative of an transaction involving assets in industries deemed as economy which is still relatively closed in a number of "strategic" requires prior approval from the Kazakh sectors. Government. 3 Furthermore, there are limitations on The authority and capacity to efficiently regulate mar- kets is evolving. The Agency of the Republic of Kazakh- stan on Regulation of Natural Monopolies (ANMR) is in charge of tariff setting and ensuring that market 43The Civil Code specifies that such strategic objects include trunk power is not abused among all natural monopolies. oil pipelines, railway networks, international airports, and entities and aminitratvelythat directly or indirectly own such assets. An exhaustive list is The Agency is not financially and administratively inde- provided in the List ofStrategicObjects (June 30,2oo8),approved pendent from the government, and this creates limita- by the government ofthe Republic of Ilihtn. This approval is required for both foreign and domestic investors. 54 Beyond Oii Path to Greaqer Prosperiuy Tarough Diversifying nKazakhstan's Table 4-7: DB Starting a Business, 2013 Indicator- Starting a Business 6o 73 77 25 101 151 Rank 5 6 5 6 8 13 Procedures (number) 11 14 15 19 18 33 Time (days) 5 5 4 1 2 2 Cost (% of income per capita) 12 13 17 0 1 86 Paid-in capital (% of income/capita) 3.5 3 5 5.4 2.3 12.3 Source: Doing Business 2013. Table 4.8: Doing Business Dealing with Construction Permits, 2013 Indicator Dealing with Construction Permits Rank 56 66 85 155 178 181 Procedures (number) 14 14 20 32 42 28 Time (days) 143 181 189 189 344 270 Cost (percent of income per capita) 88 98 57 104 129 375 Source: Doing Business 2013. Bank, 2011), and air-transport and pensions funds ing efforts in streamlining related procedures and (OECD, 2012). Foreign bank and insurance companies introducing modern standards such as Eurocodes; can enter the market, though only as subsidiaries as however, this process is difficult due to lags in the branching is still not permitted. reform implementation caused by lack ofcoordination with different stakeholders involved in construction Licenses and Permits as Barriers to Market Entry business, technical readiness ofthe industry and mad- Business licensing and permits are a significant con- equate capacity and qualifications of manpower. straintto doing business in Kazakhstan. Out of 55 countries Furthermore, the product quality infrastructure creates surveyed by the OECD FDI regulatory restrictiveness a significant burden over business activity. Institutions index in 2012, Kazakhstan has the 15th most restrictive involved in quality assurance should be well governed, regime, reflecting burdensome procedures in dealing independent, and transparent. They should not have with licenses and permits, but also complex local con- conflicts of interest and should adequately represent tent rules (see section on Competition policy). This will all the stakeholders in the system. In this regard, gain even more importance in the future, if the econ- Kazakhstan's institutions still face many challenges omy is to diversify, as Kazakhstan producers would with conflict of interest implications. For instance, the need to certify that their products meet international Kazakhstan national standards body both sets stan- standards. dards and assesses conformity, which is a conflict of The country scores especially poorly on the Doing Business Dealing with Construction permits indicator reviews," but members of the committees are largely due to the excessive number of procedures. An y international comparison is presented in Figure 4.6 The authorities have recently launched reforms to and Table 4.8. The government introduced new build- address the licensing and permit processes. After two ing regulations in 2009 and a risk-based approach for broad license guillotine exercises and a number of permit approvals to decrease the onerous nature of business inspection freezes, a new concept ofdevelop- attaining construction permits; however, the process Ing regulatory state regulatory policy was accepted in still remains difficult. The government is also continu- Tre institutons That Mater forDiversfcation 55 2013.44The new approaches will decrease license and In Kazakhstan, the public procurement law and its permits types significantly. In addition, the use of tech- application are not comprehensive. Kazakhstan scored nical regulations as an alternative to permits, the devel- 68 out of 100 on the EBRD'S 2011 LITS. Some of the opment of self-regulation, and the development of strong characteristics ofthe system are: (i) open tender action plans to bring business inspections in line with is the default option; (i) sufficient time is allowed for best international practice are planned to be imple- bid preparation; and (iii) the existence of standardized mented by 2014. Also, the authorities are launching a templates for documents, contracts and terms and reform process to move from mandatory to voluntary conditions etc. However, a significant part ofthe public certification, which would facilitate trade and reduce sector is not covered by the Public Procurement Law business costs. (PPL). This includes the government holdings and SOEs which account for a sizeable part of the econo- The Role of the Government in the Economy: My.45 These organizations determine procurement Procurement,rules on their own. Their exclusion from the scope of axaionand Procremnt, cces toFinnce regulation of the law is a serious drawback and may Procurement lead to inefficiencies. The procurement law needs to be updated to incorporate all public entities. Fair and efficient public procurement ensures an ade- quate level playing field. The primary objective of public The legal framework provides for preferential treat- procurement is to secure the best value for money for ment of domestic suppliers. This is operationalized in purchases by the public sector. However, its implica- practice through a rebate on domestically produced tions go well beyond the value for money; a fair and goods and services. This acts to stifle price and quality efficient procurement process in the public sector gen- competition, and reduces the chances that the govern- erates equal opportunities for all economic agents and ment will truly get value for its money in its expendi- promotes productivity gains through competition. At tures. Local content requirements, both for purchases the same time, perceptions about the fairness of the and labor affect a considerable part of the economy, public procurement critically influence the confidence including state-owned companies. The local content in the government. Both of these are critical for countries rules require that at least 90 percent of technical staff like Kazakhstan. While procurement policies are gener- and 70 percent of company executives need to be ally country-specific, guidelines on good international Kazaka In addition, the target for purchases of practice can be found in: i) Government Procurement Kazakh-produced goods is 50 percent of total pur- Agreement of the World Trade Organization (WTO); ii) chases and for services 90 percent.41 As part of efforts European Union (EU) directives; iii) United Nations to support domestic production, public companies are Commission on International Trade Law (UNCITRAL) also required to purchase the entire output of domes- and iv) World Bank procurement regulations. tic producers and extend them financial and other types of support. However, a recent World Bank study At a minimum, good international practice recom- (World Bank, 2011) found that local suppliers in the mends three characteristics to a modern procurement railways equipment sector have been unable to meet law. First, the country should have a comprehensive the quantity and quality standards. Indeed, in a study law that would force all public entities to take part in of value chains in the oil industry undertaken by the the procurement process. Second, preferential treat- World Bank, Multi-National Corporations (MNCs) ment of domestic producers is discouraged to ensure reported that local content rules pose a serious prob- competition and value for money for public expendi- em for their operations. This is because insurance tures. Finally, an independent body should be created policies (essential totheiroperation) require the MNCs to develop a transparent public procurement system to acquire inputs from internationally certified suppli- and regulate the public procurement issues in the country. 45 Article 4 of the Law contains 58 various exemptions from the scope of its regulation, some ofwhich are unjustified and do not comply with international standards and best practice. Furthermore, Article 1 of the Law in the definition of procuring organizations excludes national management holdings, national 44The concept envisages introduction of clear risk based holdings, national management companies, national companies categorization of business activities aiming regulation of only and legal entities affiliated with them. those that bear potential risks. The regulated activities then will be 46 These targets could be modified in industries where there is further categorized based on the level of identified risks and clearly no ability of Kazakh companies to supply sufficient goods assigned proper authorization instruments based on good and services; however, the negotiations to secure these international practice. exemptions are difficult. 56 Beyond Oic Path to GreaHer Prosperiay Tsrough Diversifyipg oKazakhstan's ers, while most local potential suppliers lacked the Figure 4.8: Credit to the private sector ability to meet such international standards. In light of (Percent ofGDP) the existing constraints on the supply of goods and 200 their quality the authorities should consider develop- ing a "local capabilities study". 150 Taxation 100 According to the Doing Business Paying Taxes indica- tor, Kazakhstan has made strong progress in adopting a business friendly approach to taxation. Kazakhstan is 50 the leader in the broader region and ranks 17th in the World in the 2013 DB report (Figure 4.6), reflecting 0 both a relatively low overall tax burden and an improv- 0 J y e J J ( ing tax administration. In line with good international practice, a large tax-payers office has been established and there is electronic filing of tax records. Current e e efforts are aimed at reducing compliance costs by re- engineering and automating processes to reduce con- Source: World Bank WDI. tact between taxpayers and officials. In mid-2012, Kazakhstan joined the OECD Global Forum on Trans- parency and Exchange of Information for Tax Purposes Figure 4.9: Proportion of firms identifying access to which should contribute to improvements in tax finance as a major constraint for growth administration in the country going forward. However, 40 the respondents to a recent Ernst and Young survey 35 (Ernst & Young, 2012) have suggested that the com- 30 plex tax administration system diminishes the positive 25 effect of the competitive tax rates. 20 Access to Finance 15 10 Access to finance in Kazakhstan is not commensurate with the needs of a thriving and diversified economy. 01 1 Creclit to the private sector in Kazakhstan (measured ZP,'_ 60g eQ§ O0 as percent of GDP) is well below that in middle and high-income economies. Despite robust growth prior to the financial crisis, credit to the private sector has almost halved since 2009. As a result, insufficient financing is identified as a critical obstacle to private sector growth (see Figures 4.8-4.10). Figure 4.1o: Total credit growth and loans to SMES The ability ofthe financial sector in Kazakhstan to meet 80 25 the demand from private enterprises is limited by the 70 deep challenges faced by the commercial banks. Even 6o though present liquidity provision is adequate in the 50 20 banking sector, in reality the banks' ability and willing- 40 ness to provide credit has been curtailed after the 30 15 crisis. First, the post-crisis limited access to interna- 20 tional capital markets reduces banks' ability to provide 1 credit in local market, especially in long maturities. 0 10 Second, the overhang of non-performing loans has put a strain on banks' financial stability and increased their risk aversion. Non-performing loans (NPLs) remain L t otal bank loans high at 37 percent of total loans as of the end of 2012 compared to 35 percent at the end Of 2011 (Figure 4.11). Source: Staff calculation with data from National Statistics Agency and NBIK. Tre nstitutons That Mater forDiversfication 57 Figure 4.n1: Problem loans are well provisioned but tion (much lower than that observed in many middle constrain banks' lending expansion income countries - MICs), and an aggregate loan port- Banks' Non-Performing Loans and Provisions folio Of 0.3 percent of credit to the private sector4l. The 40 40 overall profitability of the sector is negative. MFOs in 353 Kazakhstan cannot raise deposits (given the lack of iiiiiiIP~ ~strong oversight this is probably appropriate) and rely 30 30 on bank loans for their financing and limited govern- 252- etfnig As Of 211, Kazakhstan wsthe only 20 20 country in the ECA region with an and (U 15 15 15 unsupervised microfinance sector. Adequate legal, reg- O_ ulatory, and supervisory frameworks are required to 10 10 facilitate the consolidation of the MFO sector. o o 0 8 Kazakhstan's payment landscape is under-developed 2008 2009 2010 2011 2012 in absolute terms and relative to other middle-income m Non-performing loans Provisions economies. The per capita usage of non-cash retail payments in Kazakhstan, at 10.3 per year, is a third of Source: National Bank of Kazakhstan. the average middle-income economy. This reflects a combination of factors. First, card penetration is low, While NPLs in the banking sector are well provisioned with only o.6 cards per active adult. Second, usage of (93 percent of total) they keep 1/3 of banks' loan portfo- those cards is even lower with only 50 percent of cards lio idle (i.e., not available for the economy). Further- actively used. Third, salary payment cards dominate more, the authorities have been providing support to the card market, accounting for 93 percent of cards the banking sector through interventions, restructur- held. The vast majority of recipients of salary card pay- ings, and extensive liquidity provision, but reforms need ment fully cash out their cards as soon as the funds are to bear fruit in the near future for the sector to recover.4 7 available. This contributes to both the low rate of active card usage and the domination of ATM withdrawals in Enhancing access to finance will require development card transactions byvalue. Fourth, payment functional- of complementary financial intermediaries and instru- ity, which is common in other middle-income countries ments that target underserved market segments. is not available in Kazakhstan. A prime example is in Microfinance can be an important source of financing the area of bank account debits. In 81 percent ofupper- to new and small enterprises and individual entrepre- middle and 61 percent of lower-middle income coun- neurs; however, the sector is currently fragmented and tries, firms and households can directly debit their unsustainable in Kazakhstan. While there are more bank accounts to make payments via prior paper than 1,000 microfinance organizations (MFOs), they authorization, or phone and internet authorization. have a limited and decreasing level of penetration, with This service is not available in Kazakhstan. an estimated client base of o.6 percent of the popula- Leasing and factoring can be effective tools in helping ______________________________________ enterprises access credit. Leasing is an effective mech- 47 The authorities have been providing support to the banking anism to finance fixed asset replacement in the manu- sector through interventions, restructurings, and extensive facturing and service sectors. According to current liquidity provision, but reforms need to bear fruit in the near estimates by the IFC, approximately 6o-8o percent of future for the sector to recover. To address the NPL issue, the all manufacturing equipment in Kazakhstan is in need regulator established a national and private asset management of replacement to be able to compete in the world companies and provided additional incentives for NPL write-offs. As far as the strategy for resolving NPLs and releasing their market. The legal framework (Law on Financial Leas- provisions is concerned, the National Bank of Kazakhstan is ing, Civil Code, Tax Code and Code of Litigation Proce- following its initial strategy of setting up: (i) a national asset dures) for leasing in Kazakhstan is generally conducive management company: the Problem Loans Fund was established for development of leasing. However, with 85 percent in April 2012 and started buying problem loans (with a discount) from banks on a pilot basis; and (ii) private bank-specific asset management companies: four banks have already set up special was adversely affected by the 2009 financial crisis. purpose vehicles (SPVs) for this purpose and are expected to start Improved legal and regulatory framework governing transferring bad loans to their respective SPVs. As part of the leasing activities, including the necessary credit infra- required incentives for NPL write-off, the authorities came up with the following new initiatives: (a)extended tax exemptions for NPL structure such as credit registries, can help improve write-offs until the end of 2013; (b) imposed a ceiling for NPLs (over 90 days overdue) at 20 percent of a loan portfolio in 2013 and 15percent in 2014. 48 Based on data from MIX Market and WB W mI. 58 Beyond OiK: Path to Greater Prosperity Tdroegh Diversifying aKazakhstan's credit access. Policy adjustment may be required to straints that are not necessarily captured in perception allow leasing companies to access funding as well as indices such as the Doing Business and others. expansion of public support to leasing operations Second, the feedback from this dialogue would provide beyond agriculture on market terms. valuable information to define reforms to address bot- tlenecks, which if removed could have wide-ranging At the institutional level, improved credit information, implications (in the spirit of horizontal policies dis- consumer protection and financial literacy mecha- cussed in the next chapter). Finally, putting in place nisms and institutions are prerequisites for sound risk monitoring and evaluation mechanisms to assess management and financial stability. These attributes whether reforms are yielding the expected results will increase awareness of alternative financing instru- allow that corrective measures are taken without delay. ments, enhance the fairness of services provided to borrowers and help the average person understand the risks and rewards of accessing and using financial Respect the Rule of Law to Improve the products. In the Kazakhstan context, this will require Quality of Service Delivery establishing new agencies for overseeing and enforc- To achieve the level of institutional strength observed ing consumer protection, ensuring a competitive finan- in more developed economies, additional progress will cial and payment services market, and establishment be needed to improve the effectiveness of existing leg- of industry associations and consumer associations. islation. In several areas, the available evidence and the perception of key stakeholders is that Kazakhstan's WHAT WILL NEED TO CHANGE TO legal and regulatory frameworks have evolved substan- STRENGTHEN KAZAKHSTAN'S tially. However, there is room to improve the effective- INSTITUTIONS? ness of existing laws and regulations. One such exam- ple is concerned with the anti-corruption legislation, Kazakhstan's institutions have improved since indepen- which is extensive but not effective. dence, but their perFormance remains mixed. There has been progress in developing an extensive regulatory As proposed inthe World Bank's justice Sector Institutional framework, but not so much in terms of implementa- Strengthening Project, critical reforms could have a tion. The country has progressed markedly in the indica- significant impact on the quality of regulatory institu- tors captured by Doing Business indicators, and the tions in Kazakhstan. These include measures to quality of the business environment has improved sub- strengthen institutional capacity to improve and imple- stantially. In fact, Kazakhstan iswell ranked in most indices ment key elements of the legal framework. The follow- that measure strength of market institutions in Central ing measures could contribute to this objective: techni- Asia. However, major constraints such as market con- cal support and training for key institutions with the testability, and an under-developed financial sector objective of developing and implementing laws to affect the growth of the private sector. Corruption and reduce the role of the state in the economy; promoting excessive government intervention in the economy self-regulation in the private sector (through codes and remain an important concern, but the framework for laws for registration and licensing); reducing clogged transparent government operations is evolving gradually. court dockets through the removal of certain disputes to administrative resolution mechanisms; improving Adoptthe quality and responsiveness of judicial services; Business EnvironmenteAproh simplifying and streamlining court procedures to elim- Refrmsnate Busiess nvirnmen delays in case processing and improve access to Kazakhstan has made progress in implementing first justice; expand access to information on functioning of generation business environment reforms, and it is courts; and automate case management. time to move on to a more proactive appraoch. New priority areas that should deserve the attention of the Make Room for the Private Sector and authorities include (a) the need to consult more with Encourage Competition the private sector on obstacles and constraints faced by businesses; (b) use the feedback from these consul- Opening the economy up to further private sector tations to design more targeted reforms; and (c) moni- activity and fostering competition will help strengthen tor the efficacy of these reforms. The benefits of this institutions and support economic growth and diversi- approach to reforms would be multiple. First, estab- fication. One of the key messages of the World Bank's lishing a well-structured Public-Private Dialogue (PPD) World Development Report on Building Institutions for would enable identification of sector-specific con- Markets is that competition at all levels - among juris- Tr e nstitutons That Matter forDiverslfcation 59 dictions (e.g., oblasts), firms in product markets, and The financial sector has a limited ability to offer afford- individuals - does much for institutional change. In able electronic payment services to enterprises and their open societies, firms competing in product markets, customers.A detailed assessment of Kazakhstan's retail forced to increase efficiency, have the incentive to lobby payment landscape conducted by the World-Bank and policymakers to implement institutional changes that Visa in 2011, identified the need for action on the legal lower their costs. For firms competing in international and regulatory front, consumer and business knowledge markets, competition can produce demand for better of payment services, cost and tax disincentives for use institutions, such as accounting standards. jurisdic- of electronic services, capacity of service providers to tional competition also fosters institutional evolution. market their payment services, and payment system Competition between foreign firms operating in a infrastructure. Reforms to modernize the retail payment country creates the demand for appropriate corporate system will benefit small and micro enterprises, as well laws. In the United States, competition between states as households, which lack access to banking and other to attract business has led to institutional evolution of financial services. They will enhance competition in the different forms in different states. For example, per- paymentservices industryand allowtheentryofinnova- sonal bankruptcy and corporate laws vary across the tive approaches to meet the transaction service needs of states, and education systems vary across districts. the economy as a whole. The measure will also strengthen the financial management in the public Make the Public Sector More Efficient, or sector by facilitating electronic delivery and collection of Make it Smaller government payments. The osteffctie The most effective response tto a repone failure isnot arke falur a market is not Kazakhstan should consider the use of instruments such necssailygovrnentproisin.International necessarily government provision. Itrainlexperi- epr- as factoring, leasing to help SMVEs finance their assets ence shows that it is better to let the private sector in and obtain faster access to working capital. For leasing to while the government sets the standards and regulates. work, it would be necessaryto improve the legal and regu- In this context, it may be advisable for Kazakhstan to igthr doi byondeagritreithe ae tor- reassess the strategic areas and monopolies that exist with a view to reduce the footprint of the state in the ing, it will be necessary to introduce commercial credit economy. At the same time, there is a need to improveto efficiency, in particular in public procurement. Good tingesirmnts righ go uld al wati international practice recommends three characteristics to a modern procurement law. The country should have increasing the depth and coverage ofthe financial sector. comprehensive law that would force all public entities to take part in the procurement process (including govern- Commit to Efficiency and Reward Excellence ment holdings and SOEs). Also, preferential treatment of domestic producers is discouraged to ensure compe- Kazakhstan needs to make faster progress towards tition and value for money for public expenditures. institutionalizing a professional and merit-based civil Finally, an independent body should be created to service. The government is working to put into place develop a transparent public procurement system and the requisites for an efficient and merit-based public regulate the public procurement issues in the country. service system. The importance of a highly qualified and motivated cadre of civil servants cannot be over- Get the Financial Sector in Orderemphasized. Many of the institutions that support Get he inacian Odermarkets Secor are provided by the public sector. The ability of the state to provide these institutions is therefore The NPL issues that have affected the financial sector an important determinant of how well individuals since the 2008 crisis need to be resolved. This will con- behave in markets and how well markets function. A tribute to the sustainability and growth of the microfi- successful provision of these institutions depends on nance sector if accompanied by consolidation and enhanced oversight. Adequate legal, regulatory and th ualit a interyno emwhoaeesponsible supervisory frameworks are required to facilitate the con- not have the required skills to do their work or are not solidation of the MFO sector. A new microfinance law on motivated because they feel they are not being microfinance organizations which came into effect at the rewarded adequately for the job they do, the quality of end of 2012 creates licensing requirements and regula- institutions will suffer and with it the quality of public tion by the NBK. While oversight and consolidation ofthe sector are necessary, it will be important to ensure that the new regulatory framework is not overly restrictive. 6s Beyond Oiye Path Greaber Prosperily Tbrough Diversifying lo wazaibc CHAPTER 5 OPTIONS TO INCREASE COM PETITIVEN ESS IN TH E SHORT TERM INTRODUCTION WHERE ARE KAZAKHSTAN'S COMPARATIVE ADVANTAGES? The government's recently announced 2050 Strategy outlines how the country would refine its long-term This section looks for potential areas of competitive- socio-economic strategy to join the group of the top 30 ness based on Kazakhstan's existing capabilities, using most developed countries by 2050. This will require a the product space framework. The product space is a structural transformation of the Kazak economy to network representation of the "relatedness" of prod- substantially new production areas. The previous chap- ucts or similarity in the inputs required for production ters underscored that this structural transformation is including everything from particular skills, institutional dependent on sizeable investments in human and and infrastructural requirements, to technological sim- institutional capital. These investments have a long ilarity, among other factors.51 A map reflecting total term horizon, and it is imperative that the authorities trade worldwide is shown in Figure 5.1. The map shows start now to move in this direction. that the product space is very heterogeneous. Most complex products with the largest number of connec- This chapter aims to inform the Government's more tions are located in the center or core of the network, near term options for diversification, as they also invest including machinery, metal products, chemicals and in longer term structural transformation of the econ- capital intensive goods. There are also many products omy. Current government efforts are focused on laying in the peripherythat are only weakly connected to other the basis for an accelerated diversification of the econ- products. For example, petroleum products, fishing omy through industrialization and infrastructure devel- and animal agriculture are in the periphery, with more opment, including enhancing human capital to drive limited overlap of capabilities with other products. innovation and economic efficiency. Horizontal poli- These areas are more specialized and involve greater cies to improve the overall business environment are a effort to diversify into other areas of specialization. core part of current policy efforts. The government is also focusing on several vertical policies, as articulated The product space analysis can demonstrate a coun- in the Industrial Acceleration Plan 2010-14, including try's production structure and can be used to frame a support for agro-industrial and light industry sectors. dialogue between government and the private sector This chapter provides insights into diversification in on bottlenecks to extensive margin growth. This can products and partners to inform these policies. The include a focus on sub-sectors or clusters of products chapter is structured as follows. In the second section, near currently competitive goods, and the identifica- it uses the product space approach to examine current capabilities and changes in competitiveness to identify potential new areas of production.49 The third section 50 In the product space, products are deemed to be close to each considers how to expand market opportunities by look- other iftheir production requires similar capabilities and similar ing at protectionism against its exports in international inputs. The product space is used to explore these similarities and markets. The fourth section discusses when industrial relatedness between different products. Two products will be behelful sctio sus u by poliiescoud Thefinl close to each other, and require similar capabilities, if countries policieswhich export product i tend to also export product j. To measure asking what could be done in the short term to help the inter-relatedness of different products, one can compute a diversification in Kazakhstan. probability that a country exports one product with a revealed comparative advantage index greater than one (RCA>i) given that it also exports some other product with an RCA>i. Thus, two products will be close to each other, and require similar capabili- ties, if countries which export product i tend to also export prod- 49The analysis presented in this chapter based on the product space uct i with RCA>1. Hence, ifs country exports a large number of approach was carried out by Bill Battaile and Ervin Dervisevic goods which are close (high proximity) to product i, there is a from the World Bank's Economic Policy and Debt Department greater probability that the country will be able to be competitive (PRMVED). See Battaile and Dervisevic (2013). in exports ofi. Options to Increase Competitveness in the Short Term Figure 5.i: Product space representation of total global trade PRODUCT SPACE Oil Leather Fruits FishingResource-Based 1 Ol Vegetable Oils Rource-Based 2 Vegetables e e a e Low-Tech 1 0 Forest Products Milk *. -Cereal Medium-Tech 1 -~~ 0 as Medium Tech 2 Garments * . i ~ ~40" ~ Mining * * 9. . * * Iron/Steel * e * H * g, * ** * .0. .* Vehicles .* * Textiles 01 Electronics Machinery Animal Agriculture Chemicals Source: Authors' own calculations, based on Lall (2000) and Hausmann and Hidalgo (2007). Note: The global product space is represented by a network with 775 nodes and 1525 links, where nodes represent products classified by SITC 2 4-dligit classification and size is proportional to the volume of trade in a given product. tion of constraints to broader growth in these "related" products to old markets meaning that there has been goods that use similar capabilities. It can also include limited diversification of products and partners. In an ex-post examination of clusters of products that what follows, the report uses the well-established prod- have lost competitiveness, not to argue for interven- uct space methodology to identify sectors and prod- tionist support but to provide insight into low survival ucts where Kazakhstan has an inherent comparative rates. The government may use the discussion to focus advantage.5' on possible actions that can benefit the maximum number of high potential products/sectors. These Kazakhstan in the Product Space polies-post exaneate more horizontal befiutes policies could acossffeetsc a be the preferred rt iepridp968ad20-0roducts approach to public support for individual competitive Static product space maps for Kazakhstan show a exports, as public support that is too targeted can be sharp decrease in competitively exported products, distortion ary. especially more sophisticated and capital-intensive The results from this analysis can inform horizontal . Figure 5.2 shows a traditional representation of iKazakhstan's exports in the product space, for the sep- tors. As discussed previously, Kazakhstan's exports exarted cm peitive are6 makd inoredlandPreoden-s p p y have increased considerably over the last decade, con- tributing to the country's overall growth performance tified as those with revealed comparative advantage and economic development. Nevertheless, this strong export growth performance was mostly characterized by the fact that Kazakhstan exported more ofthe same 51 Some ofthe key concepts used inthe product space approach are included in Annexs. 62 Beyond Oi: cKazakhstan's Path Prosperioy Through eo Diversifying xreaper Figure 5.2: Kazakhstan's competitive exports, 1996-2010 KAZAKHSTAN 1996-1998 Oil Leather Fruits Fishing %o Vegetable Oils Vegetables 0 a Forest Products Milk o Cereal Garments I . Mining Iron/Steel , - * e Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals Source: Authors' own calculations using UN-Comtrade data. (RCA) greater than one (i.e., with RCA>1). Compari- Figure 5.3 provides a closer look at changes in com- son of these two product space maps shows a petitiveness over time. The map also shows a clear decrease in the number of competitively manufac- indication ofthe current export structure, with a preva- tured products over time. This decrease occurs in lence of primary products and resource-based agricul- many parts of the network, but most significantly in tural or other products. There are a limited number of the core of the network, including machinery and medium or high-tech products, which reveals the lack other capital intensive goods. This is consistent with of sophistication of Kazakhstan's export basket. Using increased export concentration over time. We can see each product's value of revealed comparative advan- a similar pattern occurring in Russia (see product tage over time, Kazakhstan's exports can be divided space maps in Annex IV).52 into four categories: "classics," "emerging champi- ons", "disappearances" and "marginals" (see Box 5.1 for a definition ofthese product categories). "Classics" 52 In contrast, the product space maps for Chile and Australia show that and "emerging were these countries have managed to maintain competitiveness despite their reliance on natural resources. Chile and Australia are medium sized exported in the most recent time period, while "disap- countries with relatively small populations that are rich in hydrocarbon pearances" and "marginals" were not. "Emerging products. Product space maps for these countries (see Annex IV) showthat champions" have recently gained competitiveness they were able to maintain a competitive edge in several sectors and to expand into some new products, despite their heavy reliance on mineral while "disappearances" have recently lost it. From deposits - copper and copper alloys represent 50 percent of Chile's export Figure 5.3 and Table 5.1, it is easy to see the high value, while iron and coal represented 40 percent of Australian exports in 2 00 2 number Fr e 3v. lacross most hagei cm- Options to Increase Competitveness in the Short Term 63 Figure 5.2: Kazakhstan's competitive exports, 1996-2010 (continued) KAZAKHSTAN 2008-2010 Oil Leather Fruits Fishing a Vegetable Oils Vegetables Forest Products Milk Cereal Garments - m - *Mining Iron/Steel Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals Source: Authors' own calculations using UN-Comtrade data. Box 5.i: Defining Classics, Emerging Champions, Disappearances and Marginals " "Classics are products with demonstrated competitiveness over time where it would be less risky to invest. " "Emerging champions" are products in which Kazakhstan has increased its comparative advantage in global markets. " "Disappearances" are products that were competitive in the past, but have lost that competitiveness more recently. " "Marginals" are products in which Kazakhstan had a low comparative advantage in the past and the current comparative advantage remains low. 64 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying egories, where competitiveness has been lost in the located products. Large volumes oftrade would indicate most recent time period. However, apart from oil which large international markets, while high strategic value is the dominant classic export with sustained competi- indicates possibilities for better diversification in the tiveness, some groups of products have either main- medium- to long-term. Figure 5.4 shows these sectors, tained their competitiveness, or appear as "emerging weighted by world trade and strategic value. champions." This includes mostly oil-based or metals- based products, but also some agricultural products Several sectors emerge as delivering promising gains such as wheat and animal skins. in terms of both strategic value and large markets. Interestingly, the crude petroleum and the natural gas The growing number of disappearances may be an sectors have the highest value in world trade, but they indication of unaddressed barriers to private sector also attract the lowest strategic value obtained from development. In the absence of a high revealed com- the "marginals" in that sector, and are not suggested parative advantage, it may be riskier to invest in this from this approach. Among the sectors with highest type of products as their declining competitiveness densities, there are several that appear to have both may reflect weakening capabilities and severe obsta- high value in terms ofworld market and strategic value. cles to their production at an efficient scale such as, for Those five sectors are: example, lack of adequate technology, unavailability of skilled labor, excessive regulatory barriers, increasing m Manufacture of paper and paper products competition in global markets. m Manufacture of industrial chemicals Optionsfor Diversification into New Products m Manufacture of wood and cork products, except fur- niture The product space analysis can help identify new prod- m Manufacture of transport equipment ucts near currently competitive exports, but further domestic market information is needed to guide spe- m Iron and steel basic industries cific policies. As mentioned, the product space analysis An alternative approach isto identify clusters of products should be matched with locally rich context to inform near currently competitive exports, and consider govern- possible areas for diversification support. In this way, ment-defined criteria to guide a discussion with relevant the following areas are only an entry point for a discus- private sector actors (e.g., product complexity, lower vola- sion with the private sector. This discussion should be tility, higher laborcontent). A particular product's proxim- as broad as possible to avoid "picking winners" and ity to existing areas of comparative advantage is one of adding distortions to the economy. From the perspec- the clearest signals of future potential. By looking at the tive of extensive growth, the most relevant category of "marginals" with the highest densities, one can note that new products to consider is the "marginals," that is the there many that are close to products and clusters of products yet to develop into competitive exports. While products with RCA>1. Hence, another useful approach is these products never developed an RCA that would to look at clusters ofKazakhstan's "classics" and "emerg- show their strength and potential for growth, some of ing champions," and "marginals" that are close. Annex V the "marginals" may have potential to grow if the provides further detail on the particular products in these underlying business environment and regulatory clusters and possible filters for government and the pri- framework are adequate and inviting to prospective vate sectorto consider. Additional variables include prod- investors. This is especially the case of "marginals" uct complexity and trade volatility. Country-specific data that are already exported, albeit at a low level. on labor intensities was not available, but could be an One strategy isto look at new products that are close to si n "emerin chmpions currently competitive exports and that offer income potential, strategic linkages to more sophisticated prod- m Oil, ferro-alloys, and unprocessed aluminum. ucts and large market opportunities. This strategy con- m Lead, zinc, manganese, etc. siders only those new products or "marginals" that are income-enhancing, and that are close to Kazakhstan's m Copper and other non-ferrous metals. current location in the product space. Grouping these m Metal and non-metal mining (asbestos, coal, sul- products into sectors, they can be sorted in terms of phurs). their market potential, measured by the volume ofworld trade in these products. They can also be sorted in terms of strategic value, indicating their potential for further m Cereal grains (wheat, barley, meslin). movement in the product space to more centrally o Animal skins and leathers, fruits, vegetable oils. Options to Increase Competitiveness in the Short Term 65 Figure 5-3: Classics, emerging champions, disappearances, and marginals KAZAKHSTAN PRODUCT SPACE 1996-2010 Oil Leather Fruits Fishing Vegetable Oils Vegetables p . * * m * Forest Products me7 Garments . . Cereal Iron/Steel . . Mining Textiles . . Vehicles Electronics Di es MarginalsElcrnc Animal Agriculture Chemicals Machinery Source: Authors' own calculations using UN-Comtrade data. Figure 5-4: "Marginals" at one standard deviation above average density Weighted by Strategic Value Weighted byWorld Trade a Manufacture of paper andpaper products a Manufacture of paper andpaper products Manufacture of industrial chemicals Manufacture of industrial chemicals Agriculture andlivestock production Agriculture and livestock production Manufacture ofwood andcork products, except furniture Manufacture oftrood and cork products, except furniture a Manufacture of transport equipment c Manufacture of transport equipment Iron and steelbasicindustries Iron andsteel basic industries Logging Logging Beverage industries Beverage industries * Manufacture of other chemical products * Manufacture of other chemical products a Non-ferrous metalbasicindustries a Non-ferrous metal basic industries manufacturing Food Food manufacturing Manufacture of textiles Manufacture oftextiles Other Mining Other Mining * CrudePetroleum andNatural Gas Production * CrudePetroleum and Natural Gas Production Source: PRMED calculations using UN-COMTRADE data. Kazakhstan's marginals, dropped those with PRODYl, and Ubiquity of the Cproduct as the number of countries that export the Country j will be competitive in exporting good i if product with RCA>l: RCAji>l, which means that the share of product i in Ni country j exports will be higher than the share of the 1j,o= Mji (Diversification) same good worldwide. PRO DY: ~N PROY:ki, N* Mji (Ubiquity) 0 =~ To capture the income-earning potential of any particu- lar product and sophistication of products, Hausmann where i denotes a product, j denotes a country, and et al. (2007) introduce concepts of PRODY and EXPY. Income-earning potential of a product, PRODY, is cal- a method of iterations, authors compute relative posi- culated as a weighted average ofthe income per capita tions of each country and product, compared to other of the countries that export the given product. Weights countries and products. are ratios of the share of the commodity i in the coun- tries overall export baskets and aggregated value- The method of iterations calculates iteratively the aver- shares across all countries exporting the good: age value of the measure computed in the preceding Xc iteration, starting with a measure of a country's diversi- PRDY 1 xi DPC fication and a product's ubiquity. Every succeeding PRODY iteration takes into account the information from the xi 1 previous iteration. These are given by: The denominator in the RCA equation is not the same Ni as the denominator in the PRODY weights. In RCA, the Mikin- denominator is the share of productj in world trade, kj,0 while in the PRODY computation, denominator is a sum of product i shares across countries. EXPY: k ki, = Fjo Z Mjikj,n-Ii Nj Sophistication of country exports, EXPY, represents the income level associated with a country's export basket, where n corresponds to a number of iterations. Last and it is calculated as a weighted average of PRODYs of two equations are computed until rankings of coun- the products exported by the country, where the weights tries and products stop changing between iterations. are the shares of the products in the country's export In this paper, we used kj,16 to measure economic com- basket: plexity, and ki, 7 to measure product complexity. 79 Proximities of Products Open Forest is calculated as the weighted average of the PRODY's of all potential (currently non-exported) To measure the inter-relatedness of different products, exports of a country, where the weights are country Hausmann et al. (2007) compute a probability that a densities in these products. Therefore, value of "Open country exports one product with a Revealed Compara- Forest" depends on a country's ease of diversification tive Advantage (RCA)>1 given that it exports some into unexported products - and a country that exports other product with an RCA>1. Thus, two products will products in the core of the product space will have be close to each other, and require similar capabilities, higher densities for unexported products, and thus if countries which export product i tend to also export higher value of the open forest: product j with RCA>l, and vice versa:

i | RCAj > i), P(RCAj > i | RCAi> i)) open-forestj densityji * (I -xjd * PRODYi which provides "proximity" as a numerical measure of relatedness of products i and j. where xi=o for products i with RCAi, and xi=i other- wise. Country Densities in Products The probability of a country being able to export prod- Strategic Value of Unexported Products uct i with RCA>1 is measured as a weighted sum of The strategic value of every good that is not currently proximities of product i and all other products in coun- exported with comparative advantage can be measured try's export basket that are exported with RCA>i. using Open Forest. This is done by calculating what Hence, if a country exports large number of goods would happen to open forest ifa country started export- which are close (high proximity) to product i, there is a ing that good with comparative advantage. Ifa product large probability that country will be able to be com- is closely connected to a wide range of other valuable petitive in exports of i. Probability w of exporting prod- products not currently exported, it would result in a uct i by a country j is measured by density of product i: large increase in Open Forest, and therefore have high iRCAistrategic value because it would greatly expand coun- XWRC=(P- try's options for successful diversification. We need to emphasize that density w of product i in Trade Volatility country j can interpreted as the "ease" of diversifica- tionuntoy prcanitrte i ste"as"oivriia Volatility of product i is given relative to the volatility of tionthe world trade. It is computed as a ratio of standard deviation of the growth rate of the trade in producti Open Forest and standard deviation ofthe growth rate oftotal world Measurestrade. Therefore, trade volatility provides a measure of measures of dhensitcan bfte udty oin ane poveral how volatile is the trade in product i when compared to measure of the location of the country in the product total world trade. space, and this indicator would measure the connect- edness of existing export basket to the rest ofthe prod- Trade volatility is computed for the period 1996-2010. uct space. Open forest provides a measure of the (expected) value of the goods that a country could potentially export (among the products that it currently does not export with comparative advantage). 8o Beyond OiF Path Greaeer Prosperiay Torofgh DiversifyingoKazartt ro AN NEX 2: CH ILE PRODUCT SPACE 1984-2o1o CH L 1984-1986 Oil Leather Fruits Fishing Vegetable Oils Vegetables a * Forest Products Milk Cereal Garments JI Mining Iron/Steel Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals CH L 2oo8-2010 Oil Leather Fruits Fishing Vegetable Oils Vegetables a m N. . Forest Products Milk Cereal * Garments + * Mining Iron/Steel Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals 81 ANNEX 3: AUSTRALIA PRODUCT SPACE 1984-2o1o AUS 1984-1986 Oil Leather Fruits Fishing Vegetable Oils Vegetables * E Forest Products U. Milk m . . Cereal Garments aMin Mining Iron/Steel . no m Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals AUS 2008-2010 Oil Leather Fruits Fishing Vegetable Oils Vegetables . 0 . Forest Products Milk m -- EnCereal Garments a Mining Iron/Steel - E Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals 82 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying ANNEX 4: RUSSIA PRODUCT SPACE 1999-2o1o AUS 1996-1998 Oil Leather Fruits Fishing - Vegetable Oils ...- VegetahlesU * .gt b e Forest Products Milk Cereal Garments * Mni. * ** . *m 5 Lt aMining Iron/Steel a-. Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals RUS 2008-2010 Oil Leather Fruits Fishing Vegetable Oils Vegetables U Forest Products t Milk Cereal Garments Miin a . Ua a Mining Iron/Steel . Vehicles Textiles Electronics Machinery Animal Agriculture Chemicals 83 AN NEX 5: CLUSTERS IN TH E PRODUCT SPACE The first cluster to consider is the cluster around oil. The products that are within the oil cluster are listed in Table A.1, while the Figure showing this cluster appears at the end ofthis Annex.59 We can see that liquified hydrocarbons have the highest PRODY and density, while worked aluminium and lubricating petroleum have high strategic value above the average for "marginals" of US$12,700. Table A.i: Oil, Ferro-Alloys and Aluminum Cluster 3413 Liquified hydrocarbons PP 0.133 5,043 $21,932 753 2.16 $0 $437,271 0.oo% 0.76% 5621 Nitrogenous fertilizers MT2 0.089 10,216 $13,675 628 2.55 $287 $22,115 0.01% 0.04% 6842 Worked aluminium & PP 0.054 16,142 $15,990 320 1.31 $3,219 $506 o.o6% o.oo% aluminium alloys RB2 $54 o.oo% o.oo% oils n.e.s. petroleum 3345Lubricating 0.037 17,749 $16,997 14 2.22 $126 Source: PRMED calculations using UN-Corntrade data. The second cluster is copper and other non-ferrous metals. In this group, the option may be to expand the existing exports, as this group is at the far periphery of the product space. "Marginals" of this cluster do not have high PRODY, but the strategic value of sunflower seeds, for example, is above the average, as seen in Table A.2. Table A.2: Oil, Ferro-Alloys and Aluminum Cluster 542 Dried or shelled legumes PP o.o81 8,627 $2,273 739 0.94 $136 $3,652 0.00% 0.01% 2224 Sunflower seeds PP o.o66 13,380 $8,666 535 1.70 $135 $1,594 0.oo% 0.oo% Source: PRMED calculations using UN-Comtrade data. The next cluster is the group around non-ferrous metals, lead, zinc, manganese, and silver. In this case, it would be beneficial to expand existing exports, and to move into neighboring products which may also provide an oppor- tunity to move closer to the core of the product space. As seen in Table A.3, several products in this cluster have both above average PRODY and strategic value. 59 A graphical representation of the product space clusters covered in Tables A.1-1.7 can be found at the end of Annex 5. 84 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying Table A.3: Lead, Zinc, Manganese, etc. i.IiE*IEEE* 2874 Lead ore RB2 0.092 10,111 $5,697 654 2.31 $0 $10,173 0.oo% 0.02% 6415 Paper& paperboard in RB1 0.050 16,728 $19,028 181 o.86 $0 $2,081 o.oo% o.oo% rolls or sheets 5722 Initiating devices MT2 o.o66 12,685 $13,481 554 1.16 $1 $1,520 0.00% 0.00% 6863 Worked zinc & alloys PP 0.037 13,977 $18,999 451 2.48 $28 $503 0.oo% 0.oo% 6417 Rolls/sheets of creped RBi 0.055 15,758 $11,802 395 0.71 $40 $376 o.oo% o.oo% paper 5721 Prepared explosives MT2 0.079 11,906 $10,371 622 i.o6 $145 $230 0.00% 0.00% 2772Other natural abra- PP 0.059 12,983 $10,269 360 1.50 $19 $2 0.00% 0.00% sives 6411 Newsprint RB1 0.o64 13,026 $21,862 167 0.91 $213 $0 0.00% 0.00% 2517Chemical wood pulp, RBi 0.073 11,379 $16,167 446 1.79 $0 $o 0.oo% 0.oo% soda or sulphate 2518 Chemical wood pulp, RB1 0.064 14,094 $15,630 327 1.22 $0 $o 0.00% 0.00% sulphite Source: PRMED calculations using UN-Corntrade data. As Kazakhstan is rich in resources, another cluster isagain resource-based, with products of metal and non-metals mining (Table A.4). In this case, moving into "marginals" within the cluster may be a possible option. A first step in looking at this important cluster could be to look for constraints in the existing production of products such as aircrafts, track-laying tractors and unwrought nickel and nickel alloys. Table A.4: Metals and Non-Metal Mining 7924Aircrafts of more than HT2 0.072 8,179 $15,111 256 1.65 $0 $241,193 0.oo% 0.36% 15 tons 7223 Track-laying tractors MT3 0.057 11,220 $15,208 402 i.6o $0 $834 0.oo% 0.oo% 6831 Unwrought nickel & PP 0.111 6,143 $9,557 447 3.10 $2,215 $291 0.04% 0.oo% nickel alloys 2872 Nickel RB2 o.116 4,278 $3,800 714 3.97 $551 $43 0.01% 0.oo% 2876 Tin RB2 0.129 3,289 $1,526 771 4-32 $0 $1 0.00% 0.00% Source: PRMED calculations using UN-Corntrade data. One cluster closest to the core, and which has been developing in recent years, is iron and steel industries. Further development of capabilities in iron and steel industries, and related products may be an option for diversification. Table A.5 provides an overview of products close to the existing Kazakhstan's exports in this sector. 85 The cluster of animal skins and leathers, fruits, and vegetable oils, also provides significant opportunity for expan- sion of existing exports, and diversification into new products, though in general these products are not especially complex nor associated with high income potential (i.e., below average PRODYs). Table A.6 has a detailed list of the "marginals" near existing products in this cluster that are currently exported competitively. Table A.5: Iron and Steel E PRODUCTEh 6745 Iron/steel 3-4-75mm LT2 0.067 16,464 $13,384 6o 1.78 $360 $57,486 o.oi% o.io% tick sheets 6744 Iron/steel >=4.75mm tick sheets LT2 0.058 15,919 $13,781 139 2.65 $0 $48,087 0.oo% 0.08% 3232 coal & semi-coke of Coke RB2 0.084 11,036 $9,832 479 4.76 $1,827 $30,849 0.04% 0.05% 6911 Iron/steel structures LT2 0.054 16,137 $14,609 298 1.30 $3,662 $9,752 0.07% 0.02% 5542 Organic surface-active MT2 0.043 18,104 $17,909 291 0.63 $537 $9,291 0.01% 0.02% agents n.e.s. 6794 Iron/steel rough LT2 0.049 17,081 $12,244 226 1.46 $o $9,186 o.oo% 0.02% castings 6732 Iron/steel rods LT2 o.o61 13,998 $13,377 511 2.33 $6,276 $8,494 0.12% 0.02% 6733 Iron/steel shapes LT2 o.o61 14,547 $41,474 413 2.26 $3,192 $6,347 o.o6% o.oi% 6421 Paper packing LT2 0.049 15,415 $io,618 422 0.62 $1,653 $4,514 0.03% 0.01% containers 6731 Iron/steel wire rod LT2 0.53 16,690 $12,686 247 2.31 $528 $1,785 0.01% 0.oo% 6712 Pig & cast iron MT2 0.127 5,383 $7,960 541 3.47 $1,905 $1,640 0.04% 0.oo% 6996 Miscellaneous of base metal articles LT2 0.045 18,518 $15,564 202 0.97 $1,288 $1,529 0.03% 0.oo% 7932 Ships & boats MT3 0.052 7,999 $6,366 427 1.03 $2,062 $1,503 0.05% 0.oo% Metal foundry 7371 equipment & parts MT3 0.053 15,936 $19,353 178 1.62 $236 $908 0.oo% 0.oo% n.e.s. 6953 Other handtools LT2 0.034 17,455 $14,414 90 0.96 $501 $622 0.01% 0.00% 6724 Iron/steel bars MT2 o.o68 12,784 $9,557 437 3.86 $223 $221 0.00% 0.00% 6770 Not insulated iron/ LT2 0.054 15,962 $17,535 335 1.78 $6o $96 o.oo% o.oo% steel wire 6932 Barbed wire LT2 o.o61 12,141 $9,747 665 1.40 $2 $59 0.oo% 0.oo% 6351 Wood boxes RB1 0.054 17,178 $19,950 293 0.94 $182 $52 0.00% 0.00% 5622 Phosphatic fertilizers MT2 0.065 10,042 $6,271 646 4.01 $661 $20 0.01% 0.00% 5113 Halogenated erivatives of hydrocarbons RB2 0.048 13,271 $22,344 229 1.45 $27 $4 0.oo% 0.oo% Ships & boats for MT3 0.078 9,175 $3,551 644 3.74 $1 $0 0.oo% 0.oo% breaking up Source: PRMED calculations using UN-Corntrade data. 86 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying Table A.6: ANimal Skins And Leathers, Fruits, Vegetable Oils * mim u min m uuu 813 Oilcake PP 0.071 10,233 $8,406 627 1.68 $49 $34,599 o.oo% o.o6% 4236 Sunflower seed oil RB1 0.074 12,558 $8,162 576 2.04 $1,091 $17,688 0.02% 0.03% 575 Grapes & raisins PP 0.074 11,349 $6,043 662 o.6o $274 $1,677 0.01% 0.oo% 2224 Sunflower seeds PP o.o66 13,380 $8,666 535 1.70 $135 $1,594 0.oo% 0.oo% 2222 Soya bean PP 0.076 5,618 $8,325 689 2.16 $3 $1,143 0.oo% 0.oo% 440 Unmilled maize PP 0.075 10,815 $9,407 623 1.82 $2,108 $1,038 0.04% 0.oo% 574 Fresh apples PP o.o63 14,027 $10,357 496 i.o6 $1,346 $987 0.03% 0.oo% 2239Meals and flours from oil PP o.o66 11,333 $4,601 564 2.67 $o $664 0.oo% 0.oo% seeds 2922Natural gums, resins, lacs PP 0.071 7,296 $1,096 764 1.31 $7 $559 0.oo% 0.oo% & balsams 4232 Soya bean oil RB1 0.o63 10,950 $11,552 613 2.23 $1 $471 0.oo% 0.oo% 1121 Wine RBi o.o62 10,870 $14,410 549 0.85 $1,189 $279 0.02% 0.00% PP $13,994 536 1.68 $435 0.01% 0.00% 541Fresh sweet potatoes, or chilled 0.057 12,929 $127 excluding potatoes 616 Honey RBi 0.073 10,855 $7,016 673 1.83 $102 $76 o.oo% o.oo% Leather of other hides or 6116 skins LTi 0.o69 8,915 $1,975 741 1.36 $27 $49 0.oo% 0.oo% skins 571Fresh or dried oranges and PP 0.070 10,206 $9,817 66o 0.77 $52 $24 0.oo% 0.oo% m&arines 2221 Green groundnuts PP 0.074 8,797 $3,817 740 1.29 $15 $15 0.oo% 0.oo% Dried or evaporated 561 vegetables, excluding RBi o.o65 13,033 $8,742 579 0.76 $22 $15 0.oo% 0.oo% leguminous 751 Pepper PP o.o68 8,725 $5,120 733 1.42 $1 $3 0.00% 0.00% 2117 Raw sheep skin with wool PP 0.084 6,642 $3,867 765 1.99 $0 $3 0.oo% 0.oo% 572 Fresh or dried citrus n.e.s. PP o.o64 10,717 $10,959 626 1.15 $0 $1 0.oo% 0.oo% 742 Mate PP 0.075 3,186 $10,507 678 1.68 $o $o 0.oo% 0.oo% 2223 Cotton seeds PP 0.082 7,097 $7,410 744 1.10 $o $o 0.oo% 0.oo% 2225 Sesame seeds PP o.o8o 5,058 $1,182 772 1.98 $o $o 0.oo% 0.oo% 2654 Agave fibers RBi 0.077 2,620 $1,248 760 2.35 $o $o o.oo% 0.oo% 4234 Peanut oil RBi 0.o56 6,935 $2,002 596 2.03 $o $o 0.00% 0.00% 6113 Calf leather LTi 0.040 5,286 $5,939 710 11.27 $783 $0 0.02% 0.00% Source: PRMED calculations using UN-Corntrade data. And finally, the cluster of cereal grains presents another opportunity for diversification, primarily within the cluster. Products in this cluster may not be very close to the core, but some of them have relatively high income-enhancing potential and above average strategic value. (Table A-7). 87 Table A.7: Cereal Grains unroasted malt, $12,655 0.02% including& $13,719 482 Roasted RB1 0.070 13,565 350 1.81 $1,657 0.03% flour 422 Semi or wholly milled rice PP 0.065 8,285 $4,965 732 1.85 $o $5,178 0.oo% 0.01% Unmilled buckwheat, millet PP 0.084 9,443 $4613 686 2.36 $1,327 $980 0.03% 0.oo% 45 & other cereals n.e.s. 6611 Lime RB2 0.062 14,017 $8,770 502 1.44 $118 $389 o.oo% o.oo% 811 Green or dry hay PP 0.072 9,697 $17,824 602 1.31 $230 $14 0.oo% 0.oo% 576 Figs PP 0.057 8,282 $1,570 471 0.69 $o $o o.oo% 0.oo% 2685 Coarse animal hair PP o.o63 9,350 $3,192 676 2.05 $3 $o 0.00% 0.oo% Source: PRMED calculations using UN-Comtrade data. Figure A.i: Oil, Ferro-Alloys, And Unprocessed Aluminum Cm_ Fuel oils, n.e.s. Liquified hydrocarbons Kerosene and other medium oils Nitrogenous fertilizers (not including gas oils) Gasoline (motor spirit) Lubricating petroleum and other light oils is n.e.s. Inorganic bases and metalli o s, hydroxides and peroxides Unwrought alumin aluminium alloys WPetroleu men n.e.s Worked aluminium and aluminium alloys Fer& ys Acyclic alcohols and derivatives Figure A.2: Lead, Zinc, Manganese, etc. Iron and E powders Worked wood ofconiferous Agglomerated iron ore Chemical wood pulp, soda or sulphate Maro ese Safety glass nitiating devices Not agglomerated iron ore Other natural abrasives Rolls/sheets of kraft paper Aluminium ore Chemical wood pulp, sulphite Newsprint Farming and forestry hand tools Unwro silver Paper and paperboard in rolls or sheets Prepared explosives Printing and writing paper in rolls or sheets Worked zinc and allo s Unwrougho and alloys Lead ore nwrough and alloys Metallic oxides ofzin , lead chromium etc. Railway track and vehicle parts n.e.s. 88 Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying Figure A.3: Copper and Other Non-Ferrous Metals Dried or shelled legumes Other non-o ase metals W Copper Unwrought opper alloys Waste of unwroug*ts and base metals Sunflower seeds Cheo ents Figure A.4: Metal and Non-Metal Mining (Asbestos, Coal, Sulphurs) Tin Other pumps for lin d liquid elevators Aircrafts of more than 15tons Tin OtheJhurs Nickel Other coal Track-laying tractors Unwrought nickel and nickel alloys Ann ite Radioactive al elements Petroleum gases Roasted iron pyrites Unroasted iron pyrites Figure A.5: Cereal Grains (Wheat, Barley, Meslin) Green or dry hay Roasted and unroasted malt, including flour Unmilled buckwheat, millet and other cereals n.e.s. Un rley Figs Lime Cotton seed oil Other wheat and meslin, unmilled Semi or wholly milled rice Unmillen wheat Unprepared ric U husk or husked Coarse animal hair 89 Figure A.6: Iron and steel Natural calcium pho ates and aluminium Iron/steel * h castings Worked aluminiu aluminium alloys Non-metal inorganic a nd oxnen compounds hosphoanc rt s smet alts and peroxysalts Paperpac ontainers Iron/steel rail c i uction materials e p rs Inorganic acids metallic salts and peroxyBtsdwrAtilso pupne. wire ysrIbd Articles of @ pulp sn.s Pig an Ost iron Iron/st ctures Inorgaremical Organic surfac e agents n.e.s. pr s & Non-domesticre ts and parts sn.s Asbestors a cements Not insulate nsteel mire >3001t capa metal tanks Mineral tar pitch N Ion/see wire /steel coi Coke and s*o ke of coal Parts of rotatino ric plants n.e.s. Irn osIo/steel coils __ Other worked iron/steel sheets Iron/steel 3-4 m tick sheets Special flo structuP0n/steel buT9 0xes Iron/st irro Iron1t eets Base metal ii rs sanitary ware n.e.s. Engine motors WOps tIro steel <3mm tick sheets Miscellaneous * s of base metal Ship ats Shp teel tinned sheets MelaEfmn Ships and boaefor breaking up d eri el of shoa s Me m e.s.I ills Halogenated derive s ofhydrocarbons Ro Unworke0ast glass Centrifugal parts n.e.s. he ools Unworked dravoor blown glass Parts ofiers n.e.s. Metal cask f king goods Figure A.7: Animal Skins and Leathers, Fruits, Vegetable Oils Raw goat skins Sesaoseeds Natural gums, reo , lacs and balsams Raw sheep sl&ithout wool Sheep and lamb leather Calfo her Pea* oil Bovine and equine leather Leather of o ides or skins Rumsheep w it wo Freshor chilled potato* luding sweet potatoes W rt Green dnuts Fresh or do itrus n.e.s. Cotton inters Fresh or dried o and mandarines Grape0 aisins Frew l ied or evaporated veg* s, excluding leguminous Po r Quartz metal family Sunfl*eed oil Meals and flolrom oil seeds soy* ai ICott4eeds Wheat or meslin meal or flour Vegetal s n.e.s. Sunfloseeds o S 0Unn s aize Agavebers NBte go Beyond Oil: Kazakhstan's Path to Greater Prosperity Through Diversifying ANNEX 6: RCA EVOLUTION FOR SELECTED PRODUCTS Table A.8: m PRODUCT DESCRIPTION 7921 Helicopters 2.9 1.13 0.52 o.6o 1.56 Classics 6841 Unwrought aluminium & aluminium alloys 1.03 1.01 0.47 0.14 1.45 Classics 5225 Inorganic bases & metallic oxides 28.16 9.42 0.11 0.12 1.26 Classics 812 Bran, sharps & other cereal residues 4.23 0.45 0.10 1.13 1.90 Classics 2742 Unroasted iron pyrites 0.00 0.00 0.00 0.00 10.39 Emerging 3415 Coal & water gases 0.00 0.00 0.00 0.00 1.16 Emerging 2234 Licensed 0.00 0.00 0.00 0.21 3.46 Emerging 2814 Roasted iron pyrites - Gypsum, plasters, lime- 0.00 6.73 1o.16 o.o6 1.22 Emerging stone & calcareous stone 2732 Stone 1.19 1.13 1.39 1.22 o.8o Disappearances 5233 Compounds of precious metals 9.33 4.81 2.29 2.18 0.98 Disappearances 5239 Inorganic chemical products 7.96 1.64 2.24 1.35 0.97 Disappearances 2786 Metal waste 6.58 1.05 0.46 1.28 0.89 Disappearances 5249 Other radioactive materials 9.18 5-58 1.10 1.14 0.73 Disappearances 7491 Roller bearings 2.28 o.66 1.07 1.15 0.50 Disappearances 6512 Wool yarn or animal hair 0.18 0.02 0.02 3.19 0.91 Marginals 1211 Unstripped tobacco 0.00 3.07 3.07 2.19 0.13 Marginals 7938 Special floating structures 0.12 0.14 o.66 1.8o 0.03 Marginals 612 Refined sugar o.oo o.16 2.80 1.43 0.09 Marginals 6999 Other base metal manufactures, n.e.s 0.00 1.62 1.16 1.42 0.48 Marginals 3413 Liquified hydrocarbons 0.00 0.23 1.28 1.25 0.74 Marginals 6745 Iron/steel 3 - 4.75mm thick sheets 0.07 0.90 1.57 1.o6 0.92 Marginals 6744 Iron/steel>=4.75mm thick sheets 0.00 2.73 3.48 0.92 0.35 Marginals 2239 Meals and flours from oil seeds O.OO 2.20 3.25 0.87 0.12 Marginals 2634 Cotton 0.96 0.00 6.67 0.78 0.00 Marginals 2890 Ores and precious metals 0.01 0.20 2.07 0.69 0.40 Marginals 5622 Phosphoric fertilizers 0.97 0.36 2.45 0.54 0.00 Marginals 2682 Degreased sheep or lambs wool 0.00 0.64 1.75 0.48 0.59 Marginals 2111 Raw bovine & equine hides 0.00 1.77 2.09 0.43 0.11 Marginals 7931 Warships 0.00 4.50 2.15 0.34 0.01 Marginals 7223 Track-laying tractors 0.00 4.11 0.63 0.21 0.12 Marginals 5721 Prepared explosives 0.30 3-36 2.77 o.o6 o.o6 Marginals 688o Depleted uranium & waste n.e.s 0.00 7.74 0.oo 0.00 0.00 Marginals 6113 Calf leather 0.87 0-53 18.86 0.00 0.00 Marginals 2232 Palm nuts & kernels 0.05 11.54 0.00 0.00 0.00 Marginals 91 0< 0 0o 00~~~ 0< 4 0 0 0 0 6 ~ 0 0 <<0 0< < 1 «4 < 0 0 <4 <-0< 00 r < 00 « 0 0 0 « 0 00 0 0 0 0 00 0 0 00 0 «00 «4 «4 0 00 0 0 o0 o t t oroo o .0 2 x o o N o o o o ä 0 S H - - - 0 0 0 o o o g696 0ý q'0 00 0 00 90 0< «"0 0 0 0 I L oD 0o 0 - j6 00 I o d 0 o 0 F W 0 o- U, N- o 0 3 - 0 0 - 0 - o < o o o o - v N - o-- « o- or o o < 0 0 00 N ' o 0 - « m 00 - - o ID 00 00 (Ssn) 00 00 0 < 0 - D g-g6-966L 0 00 0 0 D 00 oo 0 '< < - - '- ~~~00o (OO,) 0 0 06 -«os 0 « o = D cý Ee - 2< 0 u < u 0 N< v E' <0 0 o -9- e o< '- -- 0 on --- ' 0 u bL bL bD bJ) W< 0< -u3 un 9 f cw -- -- . =fl u0 c>l 00 W 3 CN :D w< Un 1) !D -ton 0 :D n0< ' 0 1) Uu W< N- ) ca~I = 0 0 5l f 0 G' flNf <0>0 0 0 "D0 0 0< ) N 00 - 'j -D 0<0 -o Ko 0< ö_ ONOD N< 0 0 N< EIO 00 p<< 00 ID ID m0 N N 2 D 00<4 ~ 0~ 0 N <2 9 0 ID 00 -2Byn i:KzlhtnsPt oGrae rseiyTruhDvriyn E . . . 22E . . 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