Report No. 78206-KZ 78206 Kazakhstan Cc>untry Economic Memorandum BE'YOND OIL: Kazakhstan's path to greater prosperity through diversifying (IN Two VoLUMEs) VOLUME 1: OVERVIEW june 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank -~-,--- © 2013 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Report No. 78206-KZ Kazakhstan Country Economic Memorandum BICYOND OIL: Ka::akhstan 's path to greater prosperity through diversifying VOLUME 1: OVERVIEW June 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank © 2013 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Contents Acknowledgments iv Overview Why Diversification Is Important for Development 4 Oil Wealth, Volatility, and Macroeconomic Management 9 Gaps and Opportunities for Human Capital Development 13 The Institutions that Matter for Diversification 19 Options to Increase Competitiveness in the Short Term 24 Notes 29 References 30 iii Acknowledgments This report was written by a team led by Fran- stages of preparation. The team is grateful to the cisco Carneiro, Lead Economist, Europe and Macroeconomics and Growth Research Group Central Asia Region at the World Bank. Daniel (DECMG), the International Trade Research Lederman, Lead Economist and Deputy Chief Department (PRMTR), and the Economic Economist, Latin America and the Caribbean Policy and Debt Department (PRMED) for their Region, provided insightful advice on the con- support during the preparation of this report. cept and structure of the report and contrib- The core team included Dorsati Madani, uted substantive inputs at various stages. Ilyas Sarsenov, Evgenij Najdov, Esther The team is grateful to the government of Naikal, Sarosh Sattar, Igor Kheyfetz, Samuel Kazakhstan for its support to this work since its Maimbo, Aziz Atamanov, William Battaile, early stages. The high-level brainstorming on Ervin Dervisevic, Havard Halland, Rinaldo economic diversification held in Astana on April Pietrantonio, Jose Molinas, and Emanuel 16, 2013, with senior Kazakh authorities pro- Salinas. Prof. Eduardo Engel (Yale University vided useful insights. The team also benefited and National Bureau for Economic Research) immensely from early interactions and guidance and Constantino Hevia (DECMG) prepared received from Yerbol Orynbayev, Deputy Prime background papers on optimal fiscal rules and Minister; Kairat Kalimbetov, Deputy Prime Min- resource administration. Alain D'Hoore and ister; Madina Abylkassymova, Vice-Minister of Enrique Blanco Armas were the peer reviewers Economic Development and Trade; government and provided useful guidance to the team. officials from the Ministry of Finance, Min- Naotaka Sugawara prepared several of the istry of Labor and Social Protection, and the figures used in the text. Sarah Nankya Babirye National Bank of Kazakhstan; and representa- provided superb editorial assistance. Gulmira tives from the Economic Research Institute. The Akshatyrova and Xeniya Novozhilova, from team also met with the private sector and civil the Astana country office, and Oxana Shmidt, society organizations in Almaty and Astana at from the Almaty country office, supported the different stages and thanks them for their time team during the several missions associated and thoughtful views on the scope of this work. with this task. The work was carried out under The report uses the analytical framework of the overall supervision of Ivailo Izvorski, Sector the World Bank's Flagship Report on growth and Manager, Poverty Reduction and Economic diversification in Eurasia. The team benefited Management Sector Unit: Macro Economics 1 immensely from very insightful discussions with (ECSP1), and Yvonne Tsikata, Sector Director, Indermit Gill, Chief Economist, Europe and Poverty Reduction and Economic Management Central Asia Region at the World Bank, and his Sector Unit (ECSPE). Saroj Kumar Jha, team, in particular Kazi Matin, Ivailo Izvorski, Country Director for Central Asia, and Sebnem and Willem van Eeghen, who were kind enough Akkaya, Country Manager for Kazakhstan, to brainstorm with the core team on different provided guidance and supported the team. iv Overview to hrcome one of thr world'> determinants of these divergent trajectories? 30 most economies l;y 2050. The gov- More often than not, the successful countries ernment's recently announced 2050 Strat- used their endowments more efficiently and egy outlines how the country would refine its focused their policies on reducing volatility, long-term socioeconomic strategy to achieve enhancing productivity, and creating the con- this goal. The focus is on laying the basis for ditions for employment growth. the accelerated diversification of the economy through industrialization and infrastructure This an used til 1 development-and by enhancing human io t(Ju/i capital to drive innovation and economic effi- ciency. Horizontal policies to improve the overall business environment are a core part of that strategy. The government is also focused on several vertical policies, as articulated in Endowments are classified as endow- the Industrial Acceleration Plan 2010-14. Like ments that the country already has, such as many other successful resource-rich countries, natural capital, and endowments that can be Kazakhstan has a real chance of fulfilling its created and further developed, such as physi- ambitious objective, but many perils lie ahead. cal, human, and institutional capital. Diversifi- This report addresses some of the main ques- cation of a larger and more diverse basket of tions likely to confront the authorities in the products and services-for domestic consump- pursuit of the country's aspiration (see spot- tion and for exporting to a more diverse pool light 1). of trade partners-should be the outcome of the structural transformation that the econ- The tonrlrl:s· -u/rYdihie.'Jf tn"JJ'nJrir~s ltar)t: omy will need to go through. In line with this standard\", and nwny of ihnn hmH' increased approach, the objective of policy should be to their wralth and on the lmch reduce economic volatility, promote productiv- natural resource.\. The United States, Canada, ity growth, and create employment. and Norway are well endowed with natural resources and have used this abundance to Further sirurfu.Jal and erm1.mnic create other forms of capital. But their success in Kazahh.1trm wz!l (/ is not the norm. Many other countries that less almn dan.! endm.umn11s. In started with sizable natural resource endow- this context, this report looks at the quality and ments have not become more developed or provision of human capital and the gaps and diversified. And still others have fallen prey to opportunities for improving the quality of insti- the middle-income trap. What are the main tutions. While diversifying these endowments, BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING especially institutions, is a long-term proposi- The region is blessed with natural resources, tion, this report argues that there can be some but it could do much to better convert resource quick wins. Consider fixing the education sys- rents into resource revenues. Subsoil assets per tem, or improving the business environment capita in Eurasia are at least three times higher further, or giving people more economic free- than in Latin America and at least two times dom, or enabling innovative finance through higher than in the Middle East and North nonbank financial institutions, or even accept- Africa. 2 Despite that abundance, the wealthi- ing the idea that a "business failure" is not an est countries in Eurasia, including Kazakh- economic disaster but a market signal about stan, have a weaker track record in converting 2 allocative efficiency. their natural capital into other forms of capi- tal. Table l outlines the reform priorities for If K.aw!dts!an uses the level~\· it Kazakhstan over the medium and long term. anrl beam1e a nwdd of rm- Spotlight l sums up the main questions and nontzt in Eumsia. answers-that each chapter discusses. fi1~ What should the reform priorities be? ·· Strengths Shortcomings Resource wealth Resource wealth can be an important source of revenues and financing for development. It can be a source of macroeconomic volatility, create Dutch disease, and offer few links to the rest of the economy. Macroeconomic management Macroeconomic management has been prudent and consistent; there are clear rules for the Excessive reliance on oil revenues can lead to management of oil revenues. macroeconomic imbalances; recent changes in the fiscal rule governing the oil fund create expectations of future relaxation of fiscal discipline; the level of nonperforming loans is one of the world's highest. Trade Exports have increased significantly since independence; there has been Oil exports have -risen faster than non oil exports leading to growing some diversification and experimentation; there are several emerging export concentration; while there has been experimentation with new champions wh·ere Kazakhstan has recently become competitive and also exports, survival rates remain low. promising new opportunities. labor Economic growth has generated a substantial Kazakhstan spends relatively little on education (3% of GOP); the quality of education is perceived number of jobs; employment and real wage as low; there is a perception that the workforce lacks adequate skills. growth have led to substantial poverty reduction; there has been a reduction in self- employment in favor of wage employment over the last decade. ·-----~~~---~~~- Institutions Kazakhstan ranks 49th Corruption is perceived as high and anticorruption institutions as ineffective; there are limits on property ownership by in the 20 I3 Doing foreigners and enforcement of contracts; credit availability to the private sector is seen as limited. Business survey; there have been recent efforts to improve governance institutions; taxes are perceived as low. Source: Authors. n questions and answers addressed in this report Questions Answers Why divmification is important for development How rich and abundant Kazakhstan is on natural resources? Kazakhstan is rich in natural resources, but it has not yet accumulated as much as the richest countries in world. How well t1as this wealth been used? On the back of natural resource abundance, poverty has been halved in a decade, and the country has moved fast from low incomes at independence to 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 Kazakhstan can become a more developed economy? The path to increased wealth, prosperity, and diversification in Kazakhstan will be 3 paved with policy options that strengthen fiscal discipline, harness the skills of its labor force, and reshape the institutions that regulate the activities of public and Oil, diversification, and volatility Have Kaza\hstan's exports become more concentrated? Kazakhstan has increased the number of products that it exports, but oil exports have grown laster, and many new export products do not survive long enough. There has thus been a growing export concentration and dependence on oil. How does dependence on natural resource exports affect Dependence on natural resource exports can create volatility in trade, which macroeconomic volatility? can transmit volatility to the rest of the economy. Kazakhstan is susceptible to these transmission channels but has avoided them with prudent fiscal policy What are the potential welfare gains from various fiscal rules? An optimal fiscal rule could bring savings of close to 25 percent of GOP over the next 25 years but would be difficult to implement. Asimpler rule with an exit clause for of severe sector downturns could similar benefits. What are the lessons for the future? Beyond prudent macroeconomic management, Kazakhstan could diversify its export basket by solving private sector market failures that have thus far hampered its ability to produce and export new products to new markets. Human caJitallor diversification Where are the jobs in Kazakhstan? Mining and oil, the drivers of growth, employ very few people. Manufacturing also generates little employment. Most jobs are in the service sector; the public sector. is also an important employer. Do Kazakh workers have the skills demanded by the market1 Each year, more than 300,000 workers enter the labor force in Kazakhstan, but young workers often lack adequate basic skills despite having formal credentials from the education What will need to change to reduce the mismatch in the labor Addressing mismatches between the supply and demand for labor is a priority. market? This will require understanding the exact skills necessary for the country's economic development and aligning the quantity of graduates to the needs of the economy. The institutions that matter for diversification Does Kazakhstan have a strong governance and regulatory Kazakhstan's institutions have improved since independence but their performanc-e environment1 remains mixed. There are many good laws, but they are not always implemented. Corruption is a recurring problem. Are market institutions well developed in Kazakhstan? ···;:h;;o-u~;;y-;;·~;jj;-a~fed-~-~ ;;:;~st indices of the strength of market institutions. However, major constraints such as market contestability, the major role of the government in the economy, and an underdeveloped financial sector hold back sector What will need to change to strengthen Kazakhstan's institutions? Greater efforts will be required to respect the rule of law to improve the quality of service delivery; make room for the private sector and encourage competition; make the public sector more efficient or smaller; get the financial sector in order; and commit to efficiency and reward excellence in the public sector. Options tc increase competitiveness in the short term Where arP Kazakhstan's comparative.advantages? Kazakhstan has comparative advantages in products with low technological content, such as mining, iron and steel, and ani_m_al_l_ea_t_he_r.______ Has Kazakhstan faced excessive trade barriers? Important trade partners like China, the EU, Japan, and the Republic of Korea impose higher tariff protection for food products. Kazakhstan faces more difficulties to reach new markets due to the Jack of competitiveness of its nonoil How could better logistics help? With exports projected to increase by 50 percent by 2020, and additional freight capacity service on the main export routes to the Russian Federation, China, and Korea, Europe and Central Asia will require much improved transport corridors. When can industrial policy be useful? lector-specific policies need to promote productivity and not shield stagnant sectors. But such policies can be highly detrimental if they entrench interests ~~~~~----····---~~~~~-~ ······---~-~--------~--------~--~ong the _ben~fi~i~rr__fi_rrrrs~d up mak_irrg such arrangements perman~n_l: __ What can be done to help diversification? In the long run, improvements in education, productivity, and institutions will be necessary for diversification. As an intermediate step, however, increased multilateralism beyond Central Asia will help, but it would be equally important to undertake reforms to reduce nontariff barriers and reduce the costs of trading across borders. Why Diversification Is Important for Development Kauthhstan in naiLm.rl li'.lourms. lmi ii has noi stocks well m excess of $100,000 per capita yet uccumulaial much ;:ueulih as ihr W111lr/'s· rirf!n·t in 2010. wuntries. Kazakhstan's total wealth in 2008 was estimated at $1,177 billion. Sizable, but Kazakh- stan still has a long way to catch the world's richest countries. Its total wealth per capita at $75,112 is lower than the average for upper middle-income countries ($105,000 per capita) With improving terms of trade and rising oil and Europe and Central Asia ($110,000 per prices, the Kazakh economy outgrew those of capita). In addition, the country has not been its peers in the region and brought the country very successful in converting its natural capital to the group of upper middle-income countries. in.to other forms of capital, a warning sign that The share of the population living in poverty growth may falter if the oil runs out. With the (as measured by the PPP-corrected $2.50 per vast majority of Kazakhstan's wealth embed- capita a day) fell from 41 percent 2001 to 4 per- ded in its nonrenewable natural resources, the cent in 2009. If the external demand for oil country faces the challenge of managing them and other commodities remains strong and oil effectively and recovering their resource rents prices are not disrupted by other unexpected for investments in other forms of capital, such economic or political factors, Kazakhstan's cur- as education and infrastructure. rent income per capita could double by 2020, placing it among the high-income countries. ()}i Hfrnld Brmh\ inriz· ,vhrru.J.)' wide. Kazakhstan is the third wealthiest coun- The shared prosperity indicator is the growth try in natural capital and oil and natural gas in of consumption per capita of the bottom Eurasia, but it is far from the per capita levels 40 percent of the population. In Kazakhstan, observed in other resource-rich countries like the average consumption growth for all house- Kuwait, Norway, and Saudi Arabia (table 2). For holds was about 7 percent over 2001-09, while physical capital, the story is not very different. that of the bottom 40 percent was about 11 per- Kazakhstan increased its physical capital per cent. Only Moldova did better among Europe capita from $6,800 in 2000 to $13,100 in 2010 and Central Asian countries (figure 1). (table 3). It is now the fourth wealthiest in Eur- asia in per capita physical capital, but it is still Cn!iulh ha> been and far from the developed countries. For example, mr1re lo nunuil a strong cor- Norway, Australia, and the United States had relation between economic growth and the 4 ---~~---~~-~~~~ ----~ ~~~~~~~~~~-~---~-~-~----~~----~-~----~~~-------- - 11!111 ~ ~ _1 Natural capital per capita in Eurasian countries and other selected countries, 2005 2 (thousandl of 2005 US$) Natural capital land and forest Coal and minerals Oil and natural gas Russian Federation 31.3 7.1 1.0 23.2 Kazakhstar 23.9 3.6 3.1 17.2 11.7 2.5 0.0 7.7 2.3 0.0 5.4 ··---------·-· Ukraine 6.9 4.9 0.6 1.4 Belarus 6.0 5.2 0.0 0.8 5 4.1 4.1 0.0 0.0 3.3 3.2 0.0 0.1 Armenia 3.1 3.0 0.1 0.0 Kyrgyz Republic . 3.0 2.9 0.0 0.1 1.8 1.7 0.0 0.0 Turkmenistan 1.0 1.0 0.0 0.0 Eurasia 20.2 5.4 0.8 14.0 Comparators Kuwait 213.1 1.1 0.0 121.0 Norway 110.2 10.5 0.0 99.7 Saudi Arabia 97.0 10.4 0.0 88.6 ·---~~ Australia 40.0 19.7 10.7 9.7 Canada 24.3 1.1 11.5 Chile 18.9 9.3 9.3 0.3 Brazil 15.0 12.7 0.9 1.5 ~--··----·--------- ---------------- United States 10.3 0.5 3.0 12.7 2.6 0.0 10.1 5.7 5.2 0.1 0.4 2.6 2.6 0.0 0.0 0.0 0.0 0.0 Source: World llank (2011). decline in poverty during 2001-09 (figure 2). diversifies its economic structure, its products, The sensitivity of poverty reduction is strongest and its partners-and that becomes less reliant to changes in nonoil growth rather than total on its most abundant endowment-is also less growth, as seen in their respective elasticities of sensitive to macroeconomic shocks transmit- 4 percent and -0.1 percent. 3 This reflects the ted through large fluctuations in commodity fact that nonoil growth is shared by a higher prices. And with resource extraction highly portion of the low-income groups in the short capital-intensive, diversification creates addi- term, most likely through labor market chan- tional sources of employment for the labor nels. But rural poverty was almost four times force. Indeed, recent research finds a positive higher than urban poverty in 2011. Persistent association between rising economic diversifi- higher poverty in rural areas can be explained cation and rising per capita income for coun- by larger families with more children, poor tries with per capita income of up to $20,000. infrastructure and access to markets, and a Beyond that level, economies tend to recon- lack of human and financial resources in local centrate, though high-income countries do not governments. 4 reach the concentrations usually found in low- income countries. if Kawhhs!an has should it be mncr:mcd f{aalhhstan has gmwn more rwd uwn on resource-rich countries, an obvious concern oiL Kazakhstan's exports have grown very fast is what the sources of growth will be when and have helped the economy to grow equally oil runs out. A resource-rich economy that fast. With the commodity boom in the second BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING 3 (thousands of 2005 US$) 2000 2005 2010 Russian federation 13.5 14.3 17.2 Turkmenistan 12.2 11.4 16.8 Belarus 7.6 8.7 14.0 Kazakhstan 6.8 8.4 13.1 Ukraine 5.6 6.0 6.9 6 Armenia 2.5 3.4 5.7 2.6 4.3 5.6 3.5 4.3 4.9 Moldova 2.5 2.7 3.4 Uzbekistan 1.8 1.8 2.2 Kyrgyz Republic 1.2 1.2 1.5 0.9 0.9 LO Eurasia 9.3 9.8 12.1 Comparators 169.6 176.4 191.3 Australia 117.5 123.6 135.8 --~~----~--~----- ----------~----------~--------~----------- United States 114.3 119.9 122.7 116.8 116.7 120.1 90.8 96.5 105.1 112.9 110.1 105.0 87.2 87.6 90.8 Kuwait 44.6 44.4 5t9 Saudi Arabia 27.6 25.9 30.4 32.5 27.1 24.5 Chile 19.6 20.2 23.5 Brazil 15.0 14.1 14.8 Note: Capital stock is computed by the perpetual inventory method (with depreciation rate of 5 percent) with data for 1995-2010. Source: World Bank (20 II). ,. Consumption growth of bottom 40% * Consumption growth of total population 12.5 10.0. ~ L- 7.5 ..c ~ 2t>() 5.0 0 ~ 2.5 a:. 0.0 !I) -2.5 c c c >.. "' .,. ~ .!:!.. c 2 ~ ·c "' ·~ ·c "' ·c " ·~ '0 c >- "' ·c "' ·~ "' :e 0 '0 .c .p e "' a; ;g " a:: "' E ...J " E "' ::> i: F E' 0"' lL "' .0 0 " 0 L:: -"' "' N " N 5 "' ~ N >.. to 0 a:: 4: -£ ::; u 0.. "' ·c 0 <( " CJ "' 1 <( q '0 30 "' '- -;;; +' B 20 0 ~ "' ..c V) 10 0 2006 2007 2008 2009 2010 2011 2012 Oil and nonoil revenues and expenditures as a share of GOP, projections to 2020 "' Nonoil revenue ,. Oil revenue spent Oil revenue saved - Government spending 50 40 g 0.. 30 0 l? 0 20 "' '- "' ..c (/) 10 Source: World Bank staff estimates based on Ministry of Finance of Kazal< """' ~ B ~ 0.0 a.> 0.. -0.5 Old products Fall of Extinction New products New products Old products in old markets old products of products in new markets in old· markets in new markets in old markets Source: World Bank staff estimates based on Comtrade and World Development Indicators data. Volatility in terms of trade can then cause discover or begin to exploit oil reserves, it domestic macroeconomic volatility. Evidence would be optimal for society to consume suggests that this sequence of effects is statis- more and reduce the share of investment in tically meaningful both across countries and GDP. The economy has become richt;r, so for Kazakhstan. In this context, the use of the incentive to save would be reduced. The fiscal rules for managing the volatility of oil problem for policymakers is that such a world export revenues becomes an important tool for does not exist. Saving too little today to fund policymaki ng. current consumption can be both risky from a debt management view and from a national Jf ml iUF re sfrtMe, welfare view. The volatility of consumption Hwu!d br: unneu•ssor_)'. Indeed, when economies directly reduces household welfare, and macroeconomic volatility hampers private Norway, applying the bird-in-hand rule over investment. the life of the extraction cycle implies higher saving and lower transfers to the budget in the inr:lude a11 dement of earlier years because the principle driving this An optimal fiscal rule could rule is the uncertainty about future revenues. bring savings of close to 25 percent of GDP Such an approach is appropriate for mature over the next 25 years. But it would be dif- producers with large accumulated financial ficult to implement because of the need to reserves and an extraction cycle close to the rely on numerous economic parameters while end. Current projections for Kazakhstan II deciding what to do with current oil revenues. show that the annual transfers from the oil Econometric simulations suggest that a simple fund to the budget are expected to surpass its rule based on a standard permanent-income investment income only by 2025. So, adopting approach-with an exit clause for periods of this type of rule in Kazakhstan could reduce severe private sector downturns-could yield the nominal amount transferred to the budget benefits similar to the optimal (and extremely significantly until at least 2025. complex) rule. An additional advantage is that it could provide discretion to the fiscal author- ru!t' milh an drwsc ity to tap the oil fund in severe transitory reces- sions (a 30 percent drop in private income). 7 That is, a fixed rule with clear criteria to allow for a deviation from the f(azalih>ian\ ;··ule ;.uell other fixed amount t~ be transferred to the budget of nde1. Several criteria can assess the every year for a limited period (the escape robustness of a given fiscal rule, and this report clause) performs as well as an optimal and considers those ofKopits and Symansky (1998) very complex rule. The countercyclical policy to test how well the current rules in Kazakhstan stance adopted to cushion the effects of the perform. These criteria include several aspects 2008-09 economic crisis was a de facto imple- that would be expected in any fiscal rule, but mentation of such a rule. For the future, this the most important is that fiscal rules should approach could be codified-specifying the be simple and transparent for reasons of threshold for triggering an escape clause and credibility and enforceability. Kazakhstan does the number of years for such an alternative well on both criteria (and in many others). regime to remain in effect before assuming that the shock is chronic rather than transitory. in Chile rmd ln n::tot!'l!Jterulaiion.\' !o drtd differences do not, however, mean that the 1hncks ruithiu the runcnl rule. Kazakh rule is inferior. Chile's fiscal policy is • First, consider revisiting the $8 billion base anchored on a structural balance target that amount that has been in effect since the depends on the long-term price of copper inception of the rule in 2010 and that has while Norway's follows a complex structural not been reevaluated since that time. Apply- deficit rule that depends on the non oil deficit. ing the growth of nonoil GDP would adjust While these rules have desirable properties in the base to about $ll billion. That should theory, they are very hard to implement and preserve the nondistortionary character- not entirely transparent. And if they are too istics of the original $8 billion base while difficult to implement, they can undermine allowing for the greater absorptive capac- the credibility of the government in financial ity of the now-larger domestic economy. markets. Simple, effective, and transparent, the For the future, periodic adjustment of the Kazakh rule has dealt with transitory shocks in base might be desirable. In principle, the a satisfactory way. goal would be to use trend growth in nonoil GDP, something that could be calculated bird-in-!um.d rule would not he a only over longer periods-four to five years, tltr Kazairh rule eilhr'i: As 1n if not longer. BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING • Second, confirm the current fixed rule but the structure of the tax code (by doing add two limiting factors for implementing such things as making taxes conditional any 15 percent deviation. One factor is to on income or profits) and the structure specify the size of the shock that would trigger of expenditure programs (by doing such such a deviation, and the other is to impose a things as making poverty or other assis- time limitation on how long such additional tance programs conditional on income or transfers could be used (say, two years). employment status) to make countercyclical • Third, implement "automatic stabiliz- revenue and expenditure changes as auto- ers" to the extent possible. That is, use matic as possible. Gaps and Opportunities for Human Capital Development Economic >hilled education system. In 2009, Kazakhstan par- labor and job creation in lfw ticipated for the first time in the Programme n1mm:t sector. According to the World Economic for International Student Assessment (PISA) Forum's classification of different stages of that assesses functionality of students in math- development, Kazakhstan's GDP per capita ematics, reading, and science. The PISA results of $11,000 places the country in the group of suggested that Kazakhstan students under- economies transitioning from an efficiency- performed on these assessments compared driven stage of development to an innovation- with their peers in other income comparator driven stage of development (figure 7). The countries (figure 8). In particular, students relevant question, however, is whether Kazakh- underperformed compared with other coun- stan has the characteristics typical of an effi- tries at similar levels of development, scoring ciency-driven economy: good higher education an average of 40 exam points lower on the PISA and training, efficient goods markets, efficient reading scale-equivalent to about one year labor markets, to name a few. of schooling-than the level predicted by the country's GDP per capita (figure 9). 300, {)f){) new ;uorkers enter the Kazakh In 2011, 160,000 students graduated from public and private universi- ties. Another 184,000 completed vocational secondary education in colleges and profes- The first is the aspect of gender differences. In sionallyceums.8 Thousands more entered the the PISA 2009 round of assessments, Kazakh- labor force with general secondary education stan's 15-year-old girls scored significantly bet- or less. Among young workers ages 16-24 not ter than boys on the reading portion of the enrolled in school, about 41 percent enter the assessment and slightly better than-though labor market with general secondary education not statistically differently from-boys on the or below, 36 percent with vocational secondary mathematics and science assessments. In math education, and 23 percent with higher educa- in particular, Kazakhstan's gender-balanced tion degrees. performance stood in stark contrast to most of the comparator countries and the Organisation fn international for Economic Co-operation and Development ;·ultn1. it comes to (OECD), where girls typically underperformed to !he labor nwrktl. The new entrants to the in relation to boys. labor market often lack adequate levels of basic skills when entering the labor force despite '['' . rt.f! SP(OlUi having formal credentials from the country's 13 BEYOND Oll~KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING 7 (percent, unless otherwise indicated) Stage 1: Transition from Stage 2: Transition from Stage 3: factor-driven stage I to stage 2 efficiency-driven stage 2 ro stage 3 innovation-driven GOP per capita thresholds <$2,000 $2,000-$2,999 $3,000-$8,999 $9,000-$17,000 >$17,000 Weight for basic requirements subindex 60 40-60 40 20-40 20 Weight for efficiency enhancers subindex 3S 3S-SO so so so !4 factors subindex S-10 10 10-30 30 Basic requirements Stage I • Institutions Key for • Infrastructure factor-driven • Macroeconomic environment economies • Health and primary education Efficiency enhancers • Higher education and training Stage 2 Goods market efficeincy Key for • Labor market efficiency efficiency-driven • Financial market development economies • Technological readiness • Market size Innovation and sophistication factors Stage 3 Key for • Business sophistication innovation-driven economies Source: World Economic Forum (lOll). 8 ., Mathematics ,. Reading "' Science 75 0 Kazakhstan Malaysia Russian OECD Hungary Poland Singapqre Federation Note: Malaysia's students were assessed in 1010 as part of the PI SA 1009 Plus round of assessments. Source: World Bank staff estimates based on data from OECD (1010) and Walker (lOll). 9 550 .. e e Poland Estonia e 500 ·t~a ~~~&~'l. · · .,.~ .........-~ Q) u c · · · · · · · · · · · · · · · · · · .'! 0 Turkey eCqeatlf ec Rep. "' E .e "L1 1a Slovak Rep. " '- Ser~la 8 .g 450 Russian _federation Q) Bulgaria a. 08 e ~Romania c • • a Montenegro "' E Q) 400 0 e ®Kazakhstan a- Albania 15 0 0 • Azerbaijan N 350 " Kyrgyz Rep. 300 0 25,000 50.000 75,000 100,000 2008 GDP per capita, PPP (current international$) Note: The best-lit line represents a regression of countries' predicted PISA scores based solely on GOP per capita. The dotted line represents the OECD mean reading score. Source: Sondergaard and Murthi (lOll). i nlcnuciion ai lwnch exncise>. The results of the PISA 2012 round, which will for recently released 2011 results of the Trends in the first time allow Kazakhstan to examine International Mathematics and Science Study its performance over time in a comparable (TIMSS) indicate that Kazakhstan's students manner. performed closer to-though still slightly behind-their peers in comparator countries than they did in PISA 2009. 9 The results were and oor:afioual edura/ii;!l and particularly encouraging for Kazakhstan's zutFthers zoi!h tdur:ation and fourth graders, who scored significantly bdmu. Workers with basic vocational skills are higher than their counterparts in Poland on in higher shortage than workers with higher the TIMSS 20J 1 mathematics assessment. education (figure 10). In fact, for men a basic However, it is not possible to draw conclusions vocational degree was highly valued in the about trends in performance across different labor market in 2010, while higher education types of assessments. Policymakers should degrees were in demand for both men and therefore keep a close eye on the forthcoming women Over 2002-10, there was a substantial "'2002 .. 2010 0.5 Shortage A 0.0 X - 6 0 0. 2.S 0. E E w w 0.0 0 1007 1008 1009 1010 lOll 1007 1008 1009 2010 lOll Vocational and secondary education General secondary education or below Services ill Construction Services Construction "'Industry " Agriculture "' Industry " Agriculture 4 ~ ~ c c ~ 2 § ]. w .s w c c: 2 "' E >- " E >- 0 0 0. 0. E E w w (I 0 1007 1008 1009 1010 lOll 2007 1008 1009 1010 lOll Source: World E.ank staff estimates based on ASRK data. not done carefully, the expansion of higher the Republic of Kazakhstan until 2020, 13 the education can impair the quality of graduates State Program on Development of Education and exacerbate the mismatches in the of the Republic of Kazakhstan for 2011-20, 14 labor market. The tertiary education gross and the Employment Program 2020, 15 among enrollment rate in Kazakhstan in 2010 was others. The Strategic Plan, "Investing in the 24.8 percent, lower than the 40 percent for Future," sets out goals for the education system Russia and the 31 percent for OECD countries. and labor force by 2020-enhancing the qual- While this would indicate room to expand, ity of skills possessed by graduates at each level access to higher education institutions should of education (box 1). not become an entitlement. stated and the r!r···,.,,.,,.,w,,u These objectives are First, a thorough 1. stated in the Strategic Plan for Development of understanding is needed of the skills required !\ 1 !< ~; ~ ~. 11'\ 0' ';: '%'S""'~#'jf} '"~ ~X \ ~~ ' ~ "' '"""' < """-" £;:;; ; "' * ~I;' ~ strategic goal~.:fpr,;~auca~iPQ''anlflatioti'J;cu~ce, de:Veloement 6~":''29!0 ,,<~ •·. · .:.. .·• General secondary schools will provide academic knowledge and develop the skills for promoting the formation of an educated, ethical, critically thinking, and physically and spiritually developed citizen, seeking self-development and creativity. Pupils in general secondary schools will achieve high results on international comparative assessments, such as PISA, TIMSS, and the Progress in International Reading Literacy Study. High-quality knowledge and skills of technical and vocational education graduates will be recognized by employers. • The quality of higher education in Kazakhstan will correspond to the best global practices. The graduates of domestic higher education institutions will be in demand by employers. • The share of highly skilled workers in the working population will increase to 50 percent. Source: GoRK (lOIOa). BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING for the country's economic development. • Provide in-service support to schools and Rapidly expanding the domestic pool of teachers, equipping them with innova- highly trained specialists, while simultane- tive and effective tools for curriculum ously increasing reliance on foreign labor development. (including the lower skill categories)-also • Continue with phasing-in per capita financ- envisioned by the Strategic Plan-has risks. ing as it has the potential to reform educa- To counter these risks, in-depth studies of tion systems through enhanced efficiency, the labor market demand in the medium and equity, transparency, and accountability. long terms should be considered. Informa- • Deepen school autonomy and accountabil- !8 tion needs to be gathered to identify which ity so that schools can redefine their incen- skills are important to employers and where tive structure to create better conditions for the skill gaps exist. Building this knowledge learning and teaching; create accountability base through skill measurement studies that mechanisms through community participa- can inform education and training policies is tion for school autonomy and accountability. critical to aligning government policy with the • Improve monitoring and evaluation systems country's development needs. to identify gaps and respond on time to stu- dent and school needs. 'Jhe authorities rmdd wnsidcr se;;nal • Put in place a well-articulated early child- lo hood development program for children • Improve planning to address more effi- ages 0-3 years, emphasizing the most vul- ciently perceived gaps in the education nerable groups. environment. • Build job-relevant skills by offering train- • Improve teacher effectiveness and focus on ing and tertiary education and promoting teacher policies, including teacher training improvements in technical and vocational (pre- and in-service), teacher pay, and incen- education to improve the relevance of its tives to attract the mos(qualified. curriculum and match it to labor demand. The Institutions that Matter for Diversification Thc institutions that ma!ir:r content requirements, perceived corruption, the !m.1inns enuironment, and an insufficiently independent court system. and seruit:t:s, The government faces uncertainty of how much revenue will be avail- conr:ern and a able to finance investments and provide public f \,1• £~ 'i Regyla.~pr:M enfp~i::ement gap witH QECD avetcage, rs~.w •. :··· · • E • , ··r~;}; '"· ;'w'( 12 China ,. Kazakhstan ,. Russian Federation Regulatory enforcement Government regulations effectively enforced Government regulations applied without improper influence Administrative proceedings conducted 10 without unreasonable delay Due process in administrative proceedings The government does not eXpropriate without adequate compensation -0.8 -0.6 -0.4 -0.2 0.0 Note: Data are calculated from the formula [(Country score- OECD average score) I OECD average score], based on a score of 0 to I, with I the highest possible score. Source: World Justice Project: Corruption and transparency. -China -Kazakhstan -Russian Federation -Turkey HF-Proper·ty rights WJP-Crime WGI-Rule of law WJP-Absence of corruption WGI-Control of corruption WJP-Limited government powers Source: World Bank staff estimates based on Heritage Foundation (HF), Worldwide Governance Indicators (WGI), and World Justice Project (WJP). opportunities and discourage new investments. strengthened and implementation arrange- Kazakhstan has done well in several areas ments effectively enforced. The country ranks important for the functioning of markets, but 92 on the 2012-13 WEF-GCR intellectual prop- it. has room for improvement in others. erty rights indicator. and sound guarantees !o e.;!abfiyh 11 mode! property rights, and this principle is included In March 2013, new amendments in key laws and regulations. Kazakh and for- to the legislation on the civil service came into eign individuals may establish and operate effect. The amendments provide financing businesses in most sectors and acquire, regis- for the Corps A and include annual perfor- ter, use, and sell most assets. Land ownership mance appraisal of administrative civil servants by private entities is allowed, but only 0.9 per- among other measures. The new model aims cent of agriculture land has been privatized, to achieve five objectives: strengthen the prin- and some restrictions continue on the ability ciples of meritocracy in selection and promo- of foreigners to own agriculture land. The tion of human resources; create a managerial legal framework generally protects intellectual Corps (called Corps A); introduce elements of property rights, but some aspects need to be anticorruption into the civil service framework including a code of conduct, standards of eth- corporate governance situation m a country. ics, and other elements of reducing corruption The Company Law of Kazakhstan provides a in the system; improve mechanisms of human broad measure of direct voting rights by inter- resource management; and increase the status national standards. Further, recent improve- of human resource services. Written tests for ments include the introduction of manager's civil service appointments have been comput- personal liability for related party transac- erized to mirlimize manipulation. Interview tions (an unintended consequence of this is processes and procedures have been tightened that qualified managers are discouraged from up. And committees are used to ensure that applying), ability of shareholders to file an 21 the selection of candidates is objective. action, and compulsory market valuation for larger transactions. lo reducr !he roh the civil snviu:. Civil servants with .1et:Lor is siill ihe financial assets need to place them in trusts rri1is. Reported capital adequacy when taking office, and a vetting of civil appears healthy and bank liquidity is ample, servants on observance of anticorruption but the industry still has depressed profits legislation for certain position is being due to the lack of business opportunities for proposed. The number of political civil banks and the modest recovery in the ·nonoil servants is be[ng r\Cduced, and clear guidelines economy. Nonperforming loans remain high have been set out for hiring the Corps A civil at 37 percent of total loans (figure 14). They servants. Th [s is to encourage transparent, are well provisioned (93 percent of total) but merit-based selection and to reduce political keep a third of bank loan portfolios idle and influence peddling in the civil service. Finally, not working for the economy. The authorities the annual performance appraisal is being have been supporting the banking sector introduced to administrative civil servants. through interventions, restructurings, and extensive liquidity provision, but reforms need to bear fruit in the near future for the sector to recover.l 6 Kazakhstan ranks in the bottom third of Europe and Central Asian countries in the satisfaction of its citizens with public service Krr~a !dt 1I ail Juts delivery-from a low of 27 percent in the courts, to 40 percent in traffic police, to a yco.J\} high of 69 percent in primary and secondary ·'19 iii education. The reported prevalence of These impressive results highlight the commit- unofficial payments to receive public services ment of authorities to business environment correlates negatively with the satisfaction reform and the decisiveness of these efforts. about the public service received. While To a large extent, the definition of the reform these negative correlations are insufficient to priorities has been guided by those areas in establish causality, reducing corruption could which Kazakhstan ranked lower than its peers improve the quality of services and strengthen in global indicators. This first generation of the trust in institutions. business environment reforms provides a solid foundation for a conducive business envi- l{n_:z..afthslan. hrt.s ronment, but it is not enough. Priority areas that deserve the attention of the authorities indirrilor. But note that the Doing Business include: guiding future reforms by a close and indicator measures the degree of protection consistent Public-Private Dialogue that cre- for minority shareholders in a joint-stock com- ates well-structured communication channels pany and does not give a full picture of the for enterprises of all sizes and industries-this BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING 0 ~ ~{~~;-" '* J•i,~;;:; .~t~ 1 ' r;"N "'::' l·'r ~,d 0 ~~~0 :~~~~ '" d' ~~ Jl'l' ~ ,-" } __, f':~ 11 ~ ,,,1 ~~~Im!:i? t;,:!J. • Rllofllem ~oaris are well pro¥isioneCI 6ut'constrairi flan!(s'. lenCiin'g exeansion 'c • ', .:::::""w •..· :t;;; 14 ., Nonperforming loans - Provisions 40 30 20 10 0 January January January January January December 2008 2009 2010 2011 2012 2012 Source: National Bank of Kazakhstan. process should not be bound to areas covered of reforms, including simplifying and stream- in global indicators such as Doing Business; lining court procedures to eliminate delays in reforming laws and regulations to address the case processing and improve access to justice. specific obstacles facing enterprises in differ- Fourth, judicial training needs to be profes- ent sectors; and emphasizing adequate imple- sionalized. It should include an institutional mentation and evaluation of reforms. Even and functional assessment of the Institute of though there is no formal assessment, the gap Justice and the subsequent preparation of a between laws and practice is significant and costed and sequenced Medium Term Training varies widely across the country. and Infrastructure Needs Assessment action plan. It is also necessary to modernize training curriculum for judges and judicial staff with attention to specialized training such as new criminal and economic legislation. mu! First, it is necessary to improve and implement key elements of the legal frame- work. This can help develop and implement key laws to reduce the role of the state in private sector functioning, promote self-regulation in Yet the private sector has not moved in the private sector (through codes and laws for that direction. Two plausible reasons for that registration and licensing), and reduce clogged are not enough incentive for competition, and court dockets by moving certain disputes to the heavy footprint of the state in the economy. administrative resolution mechanisms. Second, For example, while the country is ranked in the Ministry of Justice needs to improve the the top third in the Doing Business indicators, quality and responsiveness of its services. This competition policy and market orientation are can be done by improving operational effec- seen as weak and incipient. There are several tiveness in such areas as enforcement ofjudi- restrictions to market entry in a number of cial decision and improvement in information sectors keeping significant parts of the econ- systems and monitoring and evaluation. Third, omy inaccessible to the private sector. But the strengthened judicial professionalism and importance of the public sector in the economy quality is key to the success of the reform pro- remains high, and many private activities com- gram. To achieve this, the Supreme Court and panies in other countries, such as transport the judiciary will need to undertake a number and storage of oil, gas, water, and sewer systems and management of airports, are considered enterprises as well as households that lack strategic in Kazakhstan and remain under the access to banking and other financial services. responsibility of the state. They will enhance competition in the payment services industry and allow the entry of innova- tive approaches to meet the transaction service needs of the economy as a whole. If successful, reforms in that area will also strengthen the financial management in the public sector by facilitating electronic delivery and collection of experience shows that it is better to let the pri- government payments. Kazakhstan should also vate sector in while the government sets the consider using factoring, leasing, and micro- standards and regulates. In that context, it may finance to help small and medium-size enter- be advisable for Kazakhstan to reassess the prises finance assets and obtain faster access strategic areas and monopolies that exist with to working capital. Getting these instruments a view to reducing the footprint of the state in right would go far in increasing the depth and the economy. At the same time, there is a need ·coverage of the financial sector. to improve efficiency, particularly in public procurement where existing legislation seems appropriate but does not cover a significant part of the public sector (for example, govern- ment holdings and state-owned enterprises). .\1,r<1iu. The importance of a highly qualified and motivated cadre of civil servants cannot be overemphasized. Many of the institutions that The support markets are provided by the public of the 2008--09 The level sector. The ability of the state to provide these of nonperfonning loans in the country is one institutions is thus an important determinant of the world's highest. The lack of a concrete of how well individuals behave in markets and resolution can hinder the performance of the how well markets function. In Kazakhstan, economy and the prospects for diversifica- there is a lack of clear criteria for merit-based tion. There should also be more active steps competition, career progression, and remu- to strengthen the country's payment system by neration for administrative positions, as well as improving the legal and regulatory framework, loopholes allowing noncompetitive selection. raising awareness by consumers and businesses This encourages inefficiency and corruption, about payment services, reducing the cost and hurting public sector credibility. There are tax disincentives for the use of electronic ser- also gaps in terms of insulating public admin- vices, improving the capacity of service pro- istration staff from political pressures and viders to rnarket their payment services, and influence. Such a separation exists in other strengthening payment system infrastructure. countries and is encouraged in order to sepa- Reforms to modernize and reform the retail rate professional civil servants from political payment system will benefit small and micro staff. Options to Increase Competitiveness in the Short Term ProdtHL ({ Using each product's revealed comparative srr:Lor. Sectors with advantage over time, Kazakhstan's exports emerging comparative advantage outside oil can be divided into four categories: "classics," include mining, iron and steel, and animal "emerging champions," "disappearances," and leather. But because the private sector has not "marginals" (box 2). Classics and emerging taken up these products, important bottlenecks champions were competitively exported in the and barriers may need to be removed first. This most recent time period, while disappearances is corroborated by the high experimentation and marginals were not. Emerging champions and low survival rates of new exports. The con- have recently gained competitiveness while dis- centration of Kazakhstan's existing products appearances have recently lost it. It is easy to is in the periphery of the product space, with see the high number of disappearances across few products in the "core." This implies that it most product categories, where competitiveness would be difficult and risky to shift into more has been lost in the most recent time period. sophist.icated, high-tech, and better connected But apart from oil, the dominant classic export products without investments in endowments with sustained competitiveness, some groups of that would make the Kazakh exports more products have either maintained their competi- competitive. tiveness or appear as emerging champions. This includes mostly oil-based or metals-based prod- ucts but also some agricultural products such as wheat and animal skins. /Jl71'S. Product space maps show a decline in the number of competitively manufactured prod- ucts over time (figure 15). The decline occurs In the absence of a high revealed comparative in many parts of the network, but most sig- advantage, it may be riskier to invest in this type nificantly in the core of the network including of products. The declining competitiveness may machinery and other capital-intensive goods, reflect weakening capabilities and severe obsta- consistent with increasing export concentra- cles to production at an efficient scale-such as tion over time. The pattern is similar in Russia. lack of adequate technology, unavailability of skilled labor, excessive regulatory barriers, and rising competition in global markets. The limited number of medium- or high-tech products reveals the lack of sophisti- cation in Kazakhstan's export basket (figure 16). 24 ' '" '"'""'- \::. " y; "" ~ tan's comp~titive"exports, 1996;9s ana rl008-IO ' , ' , , : :, 15 1996-98 Vegetable oils 25 Electronics 2008-10 Oil Fishing Vegetable oils Vegetables Iron and steel Electronics Note: Products exported competitively are marked in red and are identified as those with a revealed comparative advantage of greater than L Source: World Bank staff estimates based on Comtrade data. BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING - - - --------------------- -- -~~ ·--------------------- 16 1996-2010 Fishing Vegetable oils Vegetables 26 ...Garments Iron and steel Textiles Electronics Source: World Bank staff estimates based on Com trade data. 2 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 recently. Marginals are products in which Kazakhstan had a low comparative advantage in the past and that remains low. This strat- egy considers new products or "marginals" that are income-enhancing and that are close to Kazakhstan's current location in the product exports have a much space only. Grouping these products into sec- larger gap in their human capital content when tors, they can be sorted for their market poten- matched with the imports from comparator tial, measured by the volume of world trade in countries. The emerging message is that diver- these products. They can also be sorted in terms sification across both products and markets in of strategic value, indicating their potential for the long term will depend on how well Kazakh- further movement i-n the product space to more stan can harness its endowments. In addition, centrally located products. Large volumes of dynamic and rich-country markets in the EU trade would indicate large international mar- and East Asia import goods that are exported kets, while high strategic value indicates possi- intensively by countries with relatively strong bilities for better diversification in the medium general institutional settings, high financial to long term. development, and high capital to labor ratios. "\1\Tithout addressing these gaps, current efforts very satisfied with a strong commitment from to diversify the economy will yield limited key government agencies like the Customs results. Control Committee. But the organization of supply chains and clearance procedures still Gnat a m u{ti!aierulism could Kautlchstrm depends on a multitude of private bonded rarrh ;u:;u murheis. The lack of competitiveness "warehouses." Another limiting factor is the of local products, the ineffective use of dependence on international and national the country's most critical endowments transit. Given the country's size, geographi- (human capital and institutions), and an cal position, and landlocked .status, it depends underdeveloped business environment are on transit through third countries, and its all internal reasons that might explain why imports are preferably cleared (about 93 per- Kazakhstan has not diversified its products cent) after transiting through different coun- and services or its trading partners. The lack tries. Optimizing the transit regime is thus of a broader multilateral trade policy is the critical to reducing logistics costs and encour- external part of this story. Evidence shows that aging transit through Kazakhstan. The transit Kazakhstan has placed a greater emphasis on regime under the Customs Union of Belarus, intraregional trade arrangements, for political Kazakhstan, and Russia is much more com- or historical reasons, limiting its exposure to plex and less friendly than the one in place for the rest of the world. As the country aspires decades in the EU. to reach new markets, it will need to adopt a more multila::eral trade policy. (}.}[:"/ cnJ?strai'l! 1.'/wim in Ka~ahhsirm. Transit is operated over long dis- China, and Crntml Asia. Trade tances, generally with many transport provid- among neighboring countries is also expected ers. Borders, especially with China, disrupt to increase by about the same amount, creat- the supply chains. Further, the legacy design ing the possibility of substantial transit traf- of the supply chain from the breakup of the fic through Kazakhstan. The 2050 Strategy Soviet Union implies separate interventions, aims to develop Kazakhstan as the preferred such as customs brokers, and the obligation of Central Asian trade, logistics, and business going through a bonded warehouse. So supply hub. The objective to double the capacity for chains are especially fragmented and vulner- transit traffic by 2020 remains very ambitious. able. Shippers and consignees have limited The main focus is upgrading the infrastruc- control on the supply chain, including trac- ture along the main transit corridors (at an ing goods in transit (reflected in the World estimated cost of $8 billion for the Western Bank's Logistics Performance Index scores). Europe-"\1\Testern China road corridor alone). Fragmentation can happen because there are But the government recognizes that invest- many interventions in the supply chain. For ment alone would not achieve the objectives example, independent controls (roads and cus- in the 2050 Strategy, and it is ready to intro- toms in Kazakhstan and third countries) and duce policy measures and investments beyond trade clearance procedures are operational infrastructure. For services, the strategy calls constraints that prevent providers from achiev- for simplifying custom activities and border ing high service quality. management procedures in view of the cre- ation of the Customs Union, Single Economic facilitation Space, and accession to the World Trade Organization. The various agencies involved are also asked to reach international stan- dards for safety, speed, and modernization of the aircraft fleet, among others. BEYOND OIL-KAZAKHSTAN'S PATH TO GREATER PROGRESS THROUGH DIVERSIFYING lnd-usLJ·ia1 ridon, ihr: y/z(Jrf !enn. hul and mainlenaru:e. The government should also specific policies are to be used, they need to foster a client-oriented culture, ensuring that promote productivity and not shield stagnant the expectations of the transport industry are sectors. Badly designed and implemented ver- met for quality of service, deregulation of tar- tical policies can work against the diversifica- iffs, and access to infrastructure. While sup- tion they intended to encourage. As a matter porting the modernization of international of principle, companies need, in the medium transport corridor and associated services, the and long term, to pass the test of international 28 government should not forget to distribute the competitiveness. In that context, specific stud- dividends of increased trade traffic; the gap in ies look at the barriers to the development of quality of intercity public transport and rural sectors with potential for growth. The recent accessibility should also be addressed. OECD report identified obstacles and oppor- tunities to promoting access to finance in the li is nol wha! a agribusiness sector, foreign direct investment ten. Countries that develop their export in the agribusiness value chain, and informa- basket toward increased similarity with the tion and communication technology develop- export basket of high-income countries grow ment through public-private partnership. 20 more rapidlyP In this sense, countries may Such studies can provide valuable insights for "become what they export," converging to the the foc1_1s of useful horizontal policies. incomes of their competitors. Others contend that the type of good matters less than the Sm.art indus/Jial could correct dislorlious in way that the good is produced. 18 If a country the ecmtmJn and A produces a high-quality class of good, or pro- smart industrial policy would attempt to cor- duces at the technology frontier, it will cap- rect an economy wide market failure that pre- ture more technological spillovers and higher vents the private sector from producing a good value added than if it produced a lower qual- for which the country has an inherent compar- ity of the same good, or at a lower level of ative advantage. It ·would be wise to promote productivity. Identical goods can thus be pro- self-discovery and experimentation based on duced with very different levels of productiv- existing capabilities. This is important because ity, quality, and technical sophistication. For the process of finding out which of the many example, when Korea produces computers, potential products can be profitably produced it uses frontier technology, which generates could generate information about technology high levels of technological knowledge. Mex- and markets available for that product and ico also produces computer components, but benefit many other producers. Finally, the best at a lower technological level where advanced outcome for smart industrial policy is to raise technological learning is less likely. Whil'e the country's returns to schooling and making "picking winners" is risky, there are argu- private agents invest more in education. This ments for subsidizing exports that may raise could be done by placing greater emphasis on the country's returns to schooling and make how the new product is produced rather than private agents invest more in education. 1'l on which type of product is to be produced. Notes 1. See World Bank (2013a). 11. Please see annex 1 for a more complete list 2. Eurasia covers the countries that used to of key results from this survey. be part of the Soviet Union excluding the 12. Because many vocational graduates choose Baltics (Estonia, Latvia, and Lithuania): to continue their studies in higher educa- Azerbaijan, Kazakhstan, Russia, Turkmeni- tion institutions, it is not possible to cal- stan, and Uzbekistan (the resource-rich culate the exact labor market absorption countries in the group) plus Armenia, levels for Kazakh graduates with the data Belarus, Georgia, the Kyrgyz Republic, currently available. Moldova, Tajikistan, and Ukraine (the 13. GoRK (2010a). countries in the group that do not export 14. GoRK (2010b). hydrocarbons). 15. GoRK (2011). 3. This elasticity is calculated as the nega- 16. As discussed in World Bank (2013c), to tive ratio between changes in poverty the address the nonperforming loan (NPLs), rate of growth in GDP per capita with and the regulator established a national and without oil rents. The reported coefficients private asset management companies and of elasticity are averages for 2002-11. The provided additional incentives for NPL negative elasticity of poverty to total GDP write-offs. For resolving NPLs and releas- per capita is driven by strong poverty ing their provisions, the National Bank of reduction in 2008 under negative growth Kazakhstan is following its initial strategy of GDP per capita. of setting up a national asset management 4. GoRK (2010b). company (the Problem Loans Fund was 5. A higher experimentation rate for Kazakh- established in April2012 and started buying stan's exports has also been found in problem loans [with a discount] from banks \;\TorJd Bank (2012). on a pilot basis) and private bank-specific 6. World Bank (2012). asset management companies (four banks 7. The discussion here draws on \Vorld Bank have already set up special purpose vehicles (20l3b). [SPVs] for this purpose and are expected to 8. ASRK. start transferring bad loans to their respec- 9. For the past 20 years, TIMSS has measured tive SPVs). As part of the required incen- trends in mathematics and science achieve- tives for NPL write-off, the authorities came ment at grades 4 and 8. Kazakhstan first up with two new initiatives: extended tax participated in the quadrennial assess- exemptions for NPL write-offs until the end ment in 2007. However, its first interna- of 2013 and imposed ceilings for NPLs (over tionally comparable assessment of fourth 90 days overdue) at 20 percent of a loan and eighth graders took place in 2011. portfolio in 2013 and 15 percent in 2014. 10. Ivaschenko (2008) is based on a skills and 17. Hausmann and others (2012). labor demand survey conducted in 2008 18. Lederman and Maloney (2012). to shed more light on the specific worker 19. Lederman and Maloney (2012). skills being sought by Kazakh employers. 20. OECD (2013). References ASRK (Agency of Statistics of the Republic of OECD, 2010. "PISA 2009 Results: What Students Kazakhstan), various years. Various data Know ai1d Can Do-Student Performance accessed through ASRK website (http:/ I in Reading, Mathematics and Science" www.stat.kz/). (Volume· I). Available online at: http:/ I Ernst and Young, 2012. Bridging the Perception dx.doi.org/1 0.1787 /9789264091450-en. Gap. Attractiveness Survey. Kazakhstan. - - - , 2013. Promoting Investment in Kazakh- GoRK (Government of the Republic of stan's Agribusiness Value Chain, Private Kazakhstan), 2010a. "Strategic Plan for Sector Development Policy Handbook, Development of the Republic of Kazakhstan OECD, Paris. until 2020." Decree No. 922 of the President Sondergaard, Lars, and Mamta Murthi, of the Republic of Kazakhstan (February 1, 2012. Skills, Not Just Diplomas: Managing 2010). Education for Results in Eastern Europe and - - - , 2010b. "State Program on Development Central Asia. Washington, DC: World Bank. of Education of the Republic of Kazakhstan Walker, Maurice, 2011. "PISA 2009 Plus Results: for 2011-2020." Decree No. 1118 of the Performance of 15-year-olds in reading, President of the Republic of Kazakhstan mathematics and science for 10 additional (December 7, 2010). participants." Australian Council for Educa- - - - , 2011. "Employment Program 2020." tional Research. Available online at: https:/ I Resolution No. 316 of the Government of m ypisa.a cer. ed u. au/ images/ mypisadoc/ the Republic of Kazakhstan (March 31, acer _pi sa% 202009% 2B% 20in ternational. 2011). pdf. Hausmann, Ricardo, Bailey Klinger, and Jose World Bank, 2011. The Changing Wealth Lopez-Calix, 2012. "Export Diversification of Nations: Measuring Sustainable in Algeria" in Lopez-Calix, .Jose, Peter Development in the New Millennium. Walkenhorst and Ndiarne Diop (eds) Trade Washington, DC. ComjJetitiveness of the Middle East and North - - - , 2012. Skills, Not Just Diplomas: Africa. Washington, DC: World Bank. Managing Education for Results in Eastern Ivaschenko, 0., 2008. "The Survey of Skills/ Europe ancl Central Asia. Washington, DC. Labor Demand and Job Vacancies in - - - , 2013a. Diversified Development: Kazakhstan: Main Findings." Washington, Making the Most of Natural Resources in DC: V\'orld Bank. PowerPoint presentation Eurasia. Washington, DC. (March 2008). - - - , 2013b. Oil Rules: Kazakhstan's Policy Kopits, George, and Steven A. Symansky, Options in a Downturn. Washington, DC. 1998. Fiscal Policy Rules. Washington, DC: - - - , 2013c. "Kazakhstan: On the Crest of the International Monetary Fund. Oil Wave." Kazakhstan Economic Update, Lederman, Daniel, and William F. Maloney, Spring 2013. Washington, DC. 2012. Does What You Export Matter? In World Economic Forum, 2012. Global Search of Empirical Guidance for Industrial Economic Competitiveness: wvvw.weforum. Policies. Washington, DC: World Bank. org/issues/ global-competitiveness, 2012-13.