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Maxat Mukhanov. About the current economic situation

A sharp change in the parameters of the global economy and foreign economic situation in 2015-2016 seriously actualized the need for an adequate response and the development of practical measures aimed to neutralize negative scenarios for developing countries, especially for those that are rich in natural resources.

Thus, Saudi Arabia has announced “Saudi Arabia’s Vision 2030”, the ambitious plan of economic reforms, according to which the country will diversify its economy by 2030. Among the key measures – the rapid development of the private sector, improvement of the business environment and the state apparatus, the support of non-oil exports and the development of the National Investment Fund to about $1.9 trillion.

At the same time, world practice indicates the absence of an example of the deep economic and structural changes in a relatively short period.

For example, such developed resource countries as Norway, Canada, and Australia gradually increased their economic potential and improved their competitiveness, expanding the nomenclature and geography of their export.

Even in the successful countries of Southeast Asia, which showed “economic miracle” in the last half century, based on the model of catching-up development, the period of economic transformation took 4 to 5 decades. This was largely due to the need to develop a high-quality institutional systems and the market model of the economy, creating a sustainable basis for the long-term development of any country.

Taking into account international practices, Kazakhstan originally emphasized on the use of its competitive advantages in the form of natural resources and geographical location with the parallel formation of the market-oriented development model.

In the last decade, Kazakhstan’s rapid economic growth was largely supported by abundant natural resources, especially by hydrocarbon reserves. Part of the revenues from the extractive sector was directed to the development of the domestic economy, human development, diversification and innovation.

However, the development of processing industries and agricultural business was restrained, primarily due to the limited inflows of FDI in non-primary sector of the economy, efficiency of economic incentives, lack of technological transfer, lack of competence and professional personnel.

Too rapid growth in government revenue and expenditure in the context of high oil prices due to the growing transfer from the National Fund has created risks to macroeconomic stability, increasing the participation of the state in the economy.  At the same time the increase of expenditures insufficiently correlated with the economic growth rate.

By the mid-2000s, Kazakhstan was rightfully recognized as a leader in reforms and an example for the development of individual sectors of the economy, especially the banking sector, energy, MMC. Subsequently, the reforms in the sectors of the economy to a large extent have been replaced by a budget stimulation and state initiatives. At the same time many sectors of the economy were receiving direct or indirect “recharge”, eroding the focus of the state policy – support in some cases were received either by outdated or premature productions.

The sharp decline in global prices and demand for oil and metals in recent years had a negative impact on the income of country and population, labor market, macroeconomic and financial parameters, as well as a number of other related sectors, including the services, transport and trade sectors.

Today, Kazakhstan faces a complex challenge of stabilizing the situation and modernizing the economic system by strengthening the competitiveness in a difficult period of the global economy. There are also consequences of negative impact of the global financial crisis of 2008-2009, which hit the domestic banking sector and the real estate market the most.

In this regard, ensuring the dynamic growth will take some time, major restoration work and comprehensive reform of the economic conditions.

As the international experience shows, it is impossible to radically change the structure of the economy and to create the high-quality institutional environment of a typical developed country in a decade or two. In order for this to happen, long-term system economic reforms, significant inflow of investments and new technologies, as well as the accelerated development of infrastructure and human resources support are required. Even more time is needed for changes in the cultural and mental behavior and modernization of traditional values of society.

It is a well-known fact that there is no universal formula for successful development. However, the international experience allows to discover the key principles and approaches that can have a positive impact on the economic prospects, use the best practices and tools.


Within this material general logic steps and priority directions for restoration of macroeconomic balance and creation of conditions for the subsequent growth are provided.

First, obviously, to ensure the economic growth, it is first necessary to stabilize the country’s macroeconomic unit by recovering the budget system, balancing the monetary and fiscal policies, improving economic policy instruments.

Today, one of the limiting factors for the growth of investment activity is monetary instability and lack of confidence in the financial system, which causes business risks, external debt burden and vulnerability to the exchange rate fluctuations.

Therefore, along with the decrease in inflation, measures for currency stability and long-term stability of the exchange rate, the expansion of tenge liquidity and the reduction of market interest rate are necessary.

The transition to market-based pricing of the exchange rate in 2016 contributed to the improvement of the balance of payments, the relative increase in the competitiveness of domestic goods and services, the reduction in prices of labor and, accordingly, domestic goods and services. Thus, certain incentives for the development of manufacturing industries, agriculture and the development of processing industries appeared.

It is becoming important to direct additional resources to the stimulation of economy and measures aimed to increase the budget efficiency and financial discipline. Improving the efficiency of the budget itself has a certain potential for stimulating economic activity through the redistribution of existing resources from less efficient to more efficient directions.

The growth of budget efficiency would have also been contributed by the professional economic expertise of the social and economic effect of investments in various industries and sectors of economy. Such calculations for each chain of added value or each direction of the budget policy will allow to build clear priorities with the gained direct or multiplicative effect, taken into account. Such approach will allow to strengthen the investment orientation and socio-economic effect of the state budget in general and state institutes of development.

Balancing the budget solely by the sharp decline in development budget, the reduction of consumption, and saving can negatively affect the prospects for economic growth. Considering the needs for development, along with the massive attraction of private investments, in the nearest future it will be necessary to find sources of growth, perhaps temporary sources, which subsequently will be impractical to use, to give an initial impulse.

Undoubtedly, the growth of the revenue part will contribute to a gradual reduction of the shadow economy through successive reforms and transition to modern formats of fiscal, payment and trading systems.

In general, the key challenge in this block should be more efficient allocation of resources and capital, and creation of macroeconomic conditions for an overflow of business activity in sectors with a high share of added value.

An important result of the recovery of macroeconomic unit should be recovery of the investment and credit rating of the country, and the trust in the country’s national economy by domestic and foreign investors. This would indicate a healthy nature of the economy that does not require additional artificial incentives.

Second, the increase in business and economic activity, the development of small and medium-sized businesses in the country would be complicated without the restoration and strengthening of the financial system of the country.

Most of the loan portfolio of banks are short-term consumer loans, trade and real estate loans. Other sectors are actually engaged in the redistribution of this rent. While the processing sector and agricultural industry suffer from investment deficit.

New technologies (block chain) and new operation formats pose serious challenges to the banking sector. In this context, there is a task of restoring the financial sector, which was characterized in the mid-2000s in the form of developed banking sector on the new modern principles of activities, serious improvement of quality of service, new financial instruments and corporate management.

Perhaps it makes sense to rethink the regulation financial sector support for the purpose of creating incentives for financing real manufacturing non- primary sector with clear binding to export on the basis of the investment banking development, new financial instruments and perhaps financial institutions, such as Islamic banking instruments, financial engineering, etc.

It is reasonable to study the question of reducing the requirements for issuers. Because there are mostly qualified (professional) investors at the trading floor, it makes sense to rebalance the separation of risks between the exchange and investors. The investor himself must be responsible for making investment decisions, and issuers must carry out better and more aggressive presale preparation.

The liberalization and deregulation of sectors, and transition to self-regulation may raise a serious question on financial and property responsibility in case of damage causing. The insurance market can and must offer financial instruments, which allow to guarantee the resulting damage risks.

Third, it is important to focus on clear economic priorities, involving the gradual complication of economic activity. The experience of such countries as Canada, Australia, South Korea and China shows the need for the consistent development of the economic complexity of added value. These countries gradually increased the degree of technological complexity of their products, strengthening their economic specialization on global markets and diversifying their economy structure. China, and earlier – South Korea, after 20-30 years of experience in the production of consumer goods, equipment, machines, electronic equipment, and after the accumulation of a critical mass of economic, scientific, technological and business potential in general, has begun to create a priority basis for the production of innovative products and high-tech sectors and for formation of a more knowledge-intensive industries.

Therefore, economic growth can be achieved at first mainly due to the development of relatively simple, but high-quality types of domestic production, especially of consumer goods, food products, textiles, building materials and construction equipment, chemicals, electronic items or simple industrial equipment. At the same time the export orientation of such productions should be of a highest importance.

The manufacturing sector is still the most important part of the economy of any country. It is precisely the manufacturing sector that is a key consumer and shaper of demand for innovations and technologies. Therefore, developed countries have embarked on a way of reindustrialization and de-offshorization with development of modern industrial production on the basis of the third and the fourth industrial revolutions.

The marketing-oriented state support and export discipline are the foundation for building a strong manufacturing sector, related trading service sectors, and subsequent transition to an “economy of knowledge” that is driven by innovations. It is confirmed by successful examples of Japan, South Korea, Taiwan and Singapore and less successful examples of Malaysia and Indonesia.

The algorithm of movement can lie through gradual transition from resource- intensive and energy-intensive productions (oil extraction and processing, metallurgy, mineral raw materials and primary processing products, etc.), to regional processing (petrochemistry, metal, food and beverage industries, chemical fertilizers and products) and then through the manufacturing of innovative products for regional markets (fine and special chemicals, transport machinery, electrical machinery, equipment and household appliances, etc.) to the production of global innovative products for global markets.

Currently, most of the domestic industry belongs to the first type of production with a small amount of competitive enterprises in the regional processing. In the medium term the accented development of the regional processing is advisable.

Despite the attractiveness of the slogans of the transition to the economy of knowledge and innovation development, this transition is not possible without prior accumulation and Absorption of knowledge, skills and competences. For instance, a simple production of new materials is impossible without competence in the production of metals, polymers and plastics, basic chemical products.

It is impossible to develop the robotics and flexible manufacturing systems without competences in assembly productions and engineering. Digitalization of production is a tool that helps increase efficiency of many processes through change in production technologies and business models, but for its development skills of product manufacturing in the current technology are required. And the list could continue. Otherwise, it can lead to the development of premature productions and inefficient use of resources.

Large-scale adoption of technologies requires careful coordination among the various economic agents, advanced scientific and special institutions of adoption and transfer. From this point of view it is possible to direct attention to the acquisition of licenses and a know-how prospective engineering decisions, as South Korea did, or to the acquisition of competences, as it was in Singapore.

It would be a possible solution to enter into such value chains, rather than to attract and out off already finished productions, where increase in the Kazakhstan content can become problematic due to objective conditions.

More capital-intensive productions (metallurgy, petrochemical industry, machine building) are difficult to establish without significant state support. Their development will require major technical, technological, marketing, and economic expertise, or involvement of TNCs (Transnational Corporations) with their own markets and technologies.

Fourth, sustainable growth will be contributed by transition to the investment model of growth.

Kazakhstan has been a leader in attracting investments into the economy of the region, both in absolute value and per capita. However, as it was noted above, economic growth in the country was based on the use of natural growth factors (natural resources, rent, and transit) and preferential state support.

The key factor of the accelerated development, which is the high level of savings and investments, remained at an insufficient level. While in the strategy project “Kazakhstan 2050: On the way to a modern inclusive society”, the required level of capital investments amounts to about 30-35% of GDP for the use of “window of opportunities” throughout this period.

This would allow Kazakhstan to move from the factor-driven growth model (natural resources, a rent, mediation) to the investment-driven model. The level of investments in Kazakhstan higher than 25% was during the period from 2001 to 2009. However, investments were mainly directed to the mining sector and real estate. Thus, the share of state investments at the expense of budgets of all levels historically amounted to 18-22% of the overall size of investments.

Kazakhstan showed record numbers on the attraction of FDI, but their direction only confirms the rule: Transnational corporations go and invest only in ventures with an excess of resources, guaranteed sales or large competitive market. In order to attract TNCs, it is necessary to create for them better conditions than in other countries. And it’s impossible to achieve that just by the investment climate, special economic zones, etc. Purpose-focused efforts on the attraction of TNCs through creating preferential treatments and perhaps co-investment will be necessary. Best examples are Israel that attracted Intel and has been keeping it since 1975, and Intel coming to Costa Rica.

In general, in addition to legislation, infrastructure and benefits, important, if not paramount, is the presence of strong and modern national companies who are able to operate in the new environment, practice modern business solutions and management, being themselves an important factor in attracting investments. Such corporate leaders become conductors and recipients of investments and technologies, form the request for industrialization and innovation, interact with TNCs and represent the economic potential of the country.

The investment priorities are also important in this matter.

The first direction, which is probably accepted by all economists, is the creation of public goods: roads and railways, long-distance power lines, ICT infrastructure, housing infrastructure and water treatment plants, in other words, investments in infrastructural framework of the country.

Such investments, in addition to direct infusion of money into economy, also provide an indirect effect through the increase of economic value cheaper transportation, better communication between regions of the country, increase of soil fertility, increase in the quality of life, and so on. It also provides a multiplicative effect on the development of other sectors: construction, metallurgy, energy and employment.

The state program “Nurly Zhol – Path to the Future” creates a certain investment flow to enter a certain level. This program could be extended with new housing development tools, infrastructure unit, and ICT communication within the framework of digital Kazakhstan.

Building strong domestic private infrastructure companies, the transition to the public-private partnership principles, and implementation of international standards and technologies of the infrastructure development could seriously increase the quality and efficiency of infrastructure projects.

Investments in social infrastructure, in both “solid”, in the form of new schools, hospitals, universities, and especially “soft”, which includes the creation of high-quality educational content, systems of provision of education and health services of the international level, the accumulation of intellectual and scientific capital. In other words, investments in human capital, although their effect is usually achieved in the longer term (at least 15-20 years).

The third important direction, nowadays usually supported by the states, is the investments in new technologies and innovations. Currently, the private sector is not active in this area, and demand for new technologies is still weak due to the insufficient development of the industry and the real sector as a whole. Therefore, at this stage it is important to emphasize on the transfer of technologies, know-how, licenses and engineering decisions to the existing sectors of economy – agriculture, processing, transport and energy (alternative and renewable).

Fifth, strategically important direction, even in difficult times, is the creation of the foundations of the economy of knowledge.

The key role in this process belongs to the system of education and science. The success of such countries as South Korea, Singapore, Finland and, nowadays, China is largely due to the progress in the development of educational system, especially in the higher education. The majority of universities of these countries moved to the British-American model; copying their model and opening joint universities became the hallmark of these countries.

For the purpose of integration into the world scientific and educational space, these universities moved to teaching in English, compulsory trainings in the best universities of the world, publications in international rating journals. Scientific and technical platforms and laboratories of the large companies of these countries are quite often located on the territory of these universities.

In this regard, it is important to continue the development of the universities with the purpose of entering them in the world rankings. The reform of the universities on the basis of their transition to international practice of functioning, substantial change in the structure of disciplines and teaching methods, and teaching personnel, becomes the most important element in building a knowledge-based economy of the future. While implementing this, it is also important to more closely integrate the existing free economic zones, industrial zones and techno parks with universities and scientific centers of the country.

The best examples of secondary education systems are the systems of Finland and South Korea, who created models of high-quality education for all.

The role of talented people, bearers of knowledge and ideas dramatically increases. Talented people are attracted by an environment that is able to develop their intelligence, increase a career potential and give good compensation. They blossom in the atmosphere of healthy rivalry and regular self-improvement. It is important to create such an atmosphere.

In the future, the competition for talents will only intensify.  It is real for Kazakhstan to become the regional center for their attraction. We are already a point of attraction for migration from the countries of Central Asia, now it is important to change the quality of migrants and to expand the area of migration.

For today, a significant part of the population is engaged in poor productive service sectors and individual entrepreneurship. At the same time another significant part of small and medium businesses operates in the informal sector.

In the medium term the growth of the productivity of labor can be achieved through the transfer of workforce resources from less productive to more productive sectors of economy both in industries and in other productive sectors and spheres, and also through the stimulation of the flow of population from rural to urban areas. That will create a more steady and optimum base of the middle class in the country. In this regard, performance improvement in each industry, including a service sector and trade is necessary.

Sixth, the decisive role in the forthcoming period of change in the economic situation and high-quality implementations of reforms will belong to the state apparatus.

Most countries that have achieved success and broke into the “first” world adhered to the approach of mentality development, based on German economic school, recognizing the possibility of a temporary state protection or intervention.

Successful countries of Southeast Asia at an initial stage compensated the underdevelopment of market institutions with state support. However, the state in these countries sought to neutralize market’s failures, instead of replacing it. Their main focus was on private sector, corporate leaders, investment attraction and new technologies.

The institutional environment of these countries was gradually formed on the basis of imports of foreign practices and the use of their specific behavior models. The greater quality of the institutional environment improved, the more practical were the methods of state influence on economic processes and hence on the efficiency of economic policy.

In this regard it is important to continue the modernization of the public service on the principles of meritocracy and accountability with gradual reduction in the long-term involvement of the public sector to its main functions: national security, defense, public safety, social protection of the vulnerable, and the protection of competition and equal rights.

Seventh, the development of business and private sector.

Development of an entrepreneurship and private sector is determined by the key direction of development of Kazakhstan economy.

The private sector and entrepreneurship in many countries is considered as a serious and powerful factor of economic growth.

In this regard during the forthcoming period it is reasonable to put key emphasis on a radical change of approaches to the development of entrepreneurship. The priority should be to improve its competitiveness and business competencies. New modern companies offer not products but solutions and values. Enterprises should realize that nowadays the client is a king, and not the manufacturer as it was earlier.

Some countries of Southeast Asia used the model of “carrot and stick” in business, where competition and access to international markets, stimulation of innovations and better corporate management were the stick. In this context, the creation of a competitive environment, increase in their transparency, reduction of the number of monopolies and oligopolies are becoming an important element and factor of improvement of sectors of the economy and business environment.

The popularization of business and decrease in information asymmetry plays a major role in world practice. And that is not what Kazakhstan state bodies that promote and inform about the measures of state support currently provide. In developed countries it is businessmen themselves who are engaged in promotion, as it expands the supplier base, allows to build trusting relationships and find new partners. Therefore the importance is given to such systems as networking, crowdsourcing (collective intelligence), Big Date (collection of information on customers and their behavior), etc. In the end, the private sector creates new markets and new customers for itself. In Kazakhstan entrepreneurship is mainly promoted by local and some central state bodies, but it looks more like promotion and advertisement of their own work. Which does not always make entrepreneurship an attractive kind of occupation.

In some countries the government provides small and medium business with free accounting. It allows to implement financial control, increases financial discipline, reduces business costs for maintenance, increases employment, makes entrepreneurship more attractive, and increases the tax collection.

The development of entrepreneurship would be also promoted by actively attracting government to the development and implementation of various programs. It should be noted that Kazakhstan has become a source of noticeable multiplicative effect on regional development. Thus, the implementation of housing construction and infrastructure programs created demand for labor resources, construction materials, technical equipment and engineering solutions of neighboring countries, especially Central Asia, China, Turkey and Russia.

The involvement of local business communities and entrepreneurs in the development of industry programs will allow to create demand for domestic production and increase the share of Kazakhstan’s content if it is complied with high quality standards and best corporate practices from the domestic business.

The number of modern companies will also increase through various initiatives for the development of start-up companies. Their support and development are concern not only of the government, but also of private companies on the basis of the principles of public-private partnership.

Eighth, large cities and megalopolises can become future drivers of growth of the domestic economy.

The city became the main place and factor of modern economic growth for creating service sectors and the economy of knowledge. Transition from the prevailing industrial specialization of cities to service and intellectual specialization becomes a serious challenge for both urban residents and especially rural ones that had more agrarian skills and competences.

It is necessary to admit that under current circumstances it is impossible to create high-quality conditions for access to public goods in all localities – cities and villages due to our distances and concentration of population. It can become quite expensive and costly undertaking that will require significant investment and subsequent maintenance. A possible solution is to more actively encourage population to relocate from villages to large cities. To do this the advancing development of urban infrastructure, first of all housing and social, development of processing industry and related service sectors for creating workplaces in agglomerations and megalopolises is necessary.

Quality of life and income in urban areas is 2-3 times higher than in rural areas, transition to urban quality of life will significantly change living standards of population in general. Therefore, it is important not just to encourage population to move from villages to cities, but also to provide rural residents with opportunities to acquire professional competences and income level of city residents. The Employment Program – 2020 should correspond to these tasks.

The concentration of population will allow to accumulate markets and create new sectors of economy and modern service. Due to limited resources and population, it is advisable for Kazakhstan to create 2-3 megalopolises, which will be able to compete with megalopolises of east part of the Russian Federation (Siberia and Ural), western China (Xinjiang), Central Asia and the Caucasus (Tashkent, Baku).

Given the geo-economic specifics of Kazakhstan and the presence of large neighbors, it is important to decide on the future resettlement of the population, taking into consideration mechanisms of development of the border territories that do not limit natural process of an urbanization.

Furthermore, given the experience of such countries as South Korea, China and developed countries, it is important to determine the format of development and prospects of large villages and small towns that have potential for a long-term growth.

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