Regions and Countries

	Table of Contents
p. 2 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. The Asian Development Bank's Development Experience IV. The Asian Development Bank's Strategy V. The Asian Development Bank's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program Update 2004-2006: Kazakhstan

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I. Current Development Trends and Issues

A. Economic Growth

1. Changing Dynamics of Growth. Kazakhstan’s economic circumstances have changed fundamentally since 1996 when the present country operational strategy (COS) was prepared. In contrast to acute macroeconomic imbalances and a declining economy then (Figure 1), in the past three years Kazakhstan has enjoyed robust macroeconomic health and economic growth of nearly 12% per annum (Appendix 1, Table A1.1).¹

2. The oil sector led the economic transformation helped by tight macroeconomic management and early progress in structural reforms. The doubling of oil production and five-fold increase in oil exports since 1996 transformed the crumbling transition economy into a dynamic, rapidly growing one (Figure 2). Given the anticipated increases in oil production and pipeline capacities, the medium- and long-term economic outlook appears extremely favorable. The Government projects that the gross domestic product (GDP) will grow by 7–9% per annum during 2004–2006 if oil prices remain at $21–25 per barrel. GDP growth will be flat if oil prices collapse to $12–13 per barrel.²

3. Non-inclusive Growth. Economic growth since 2000 has been narrowly-based and bypassed much of the rural population. Sustained low rural investment (Figure 3) and degradation of social and economic infrastructure inflicted severe hardships on rural areas during the transition.

4. Non-oil private sector investment has been low (Figure 3).3 Policy reforms were expected to create incentives for the private sector. However, institutional and behavioral constraints and poor quality of infrastructure kept business confidence low, exacerbating resource diversion from the non-oil traded goods sector to the booming oil sector. Consequently, non-extractive exports stagnated during 2000–2002 (Figure 2). Increase in domestic consumption did fuel modest non-oil sector growth, but given the small internal market, the real boost for manufacturing and agriculture will come from exports.

5. Macroeconomic Management. The sharp deterioration of the economy in 1998 and 1999 due to the Russian crisis, bad weather, and low international oil prices left the country in shock. Despite equally sharp economic improvements from 2000 onward, macroeconomic management has been extremely cautious. Increases in fiscal revenues from the oil sector, helped by favorable international prices, did not lead to a spending boom. Public investment was kept low at 1.5–3.5% of GDP. The Government budget was in surplus in 2000 and 2001 and its size is projected to increase in 2003.

6. The monetary policy focused on controlling inflation and preventing a real appreciation of the tenge. Consumer price inflation has been brought to single-digit levels—compared to the double- and triple-digit rates of the mid-1990s—and the tenge was allowed to depreciate modestly over the past three years. Managing inflation and the exchange rate was an uphill task given the inflows of oil export receipts. Interventions in the foreign exchange market and sterilization of foreign currency purchases by the National Bank of Kazakhstan (the central bank) were the key instruments of monetary policy. Sustainability of the policy of managing inflation and the exchange rate is in doubt. With the projected increases in oil export receipts, appreciation of the tenge in the medium term cannot be ruled out. The lasting solution to the potential loss of export competitiveness will be sustained increases in productivity.

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B. Poverty

7. Growth-poverty nexus. While economic growth undeniably reduces income poverty, in Kazakhstan this link is weak as resource extraction drives growth processes. Removing constraints on the growth of non-oil sectors would strengthen the growth-poverty nexus. The incidence of poverty by headcount⁴ has declined in response to the recent spurt in economic growth (Appendix 1, Table A1.2). Since 1996, poverty declined by nearly 8 percentage points. In 2002 27.0% of the population was poor. Hardcore poverty⁵ has been less responsive to economic growth, declining by 1.4 percentage points since 1997 (the earliest available estimate). During the high-growth years of 2000 and 2001, the hardcore poverty was nearly unchanged.

8. Economic growth has not benefited the poor more than the nonpoor. Income inequality indicators do not show a consistent trend although the general picture points to increasing inequality. In 2000 and 2001 income inequality worsened. Growth elasticity of poverty is another measure of pro-poor growth. By this measure recent growth has not been pro-poor.⁶ Growth is not broad-based as evident from the wide regional disparities in poverty incidence and much higher poverty in rural than urban areas. Southern Kazakhstan is substantially poorer than the north. Rural areas are in acute poverty. Every rural family in oil-rich Mangistau region is poor.

9. Employment statistics also highlight the emerging disconnect between growth and poverty (Figure 4). While overall unemployment has declined to 9.4% of the labor force, by sector the numbers are disturbing. Despite the increasing share of industry in GDP, employment in the sector has been declining, with the opposite trend in agriculture. The rural population has coped by turning to subsistence production—approximately 2 million out of the 3 million self-employed in 2001 were small subsistence farmers—but cannot utilize full potential of the vast lands ¹⁰ available because of lack of agricultural inputs and poor access to markets and finance. Given the large number of self-employed (about one third of total employment), the statistics mask the true magnitude of unemployment. However, the growing employment in SMEs is laudable.

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C. Progress in Achieving Millennium Development Goals

10. The difficulties Kazakhstan faces in achieving millennium development goals (MDGs) highlights the challenges of tackling poverty despite the country’s rising economic status.¹¹ The scorching pace of growth during the past three years has not only made the challenges more visible but also raised the expectations about the Government’s ability to handle these challenges. In 2002 the United Nations Development Programme (UNDP) comprehensively assessed Kazakhstan’s standing on MDGs (Appendix 1, Table A1.3) and came to some startling conclusions for a country with a per capita income of above $1,500 (Box 3).¹²

11. Health status is important to define poverty risk. All MDG public health targets are unlikely to be achieved. Despite substantial policy reforms, the health status of Kazakhs is highly unsatisfactory. Life expectancy, and infant and maternal mortality indicators do not reflect the country’s economic status. Morbidity indicators are worsening. HIV/AIDS,¹³ although nominally not prevalent, are spreading rapidly throughout all regions.¹⁴ The target of increasing access to safe drinking water is at considerable risk. The supply of drinking water has been declining by 3–5% annually. The infrastructure to make the water available is in serious disrepair, particularly in rural areas. A recent ADB study¹⁵ identified the key reasons for the poor water supply system: (i) inefficiency of operation, including high water losses; (ii) high operation and maintenance (O&M) costs; (iii) insufficient resource allocation; and (iv) ineffective management of the systems.

12. According to government estimates, primary education enrolment is nearly universal. The gender difference is insignificant, although male enrolment is marginally higher. The real challenge is sustaining this achievement. Public financing of education sector as a proportion of GDP is about half the 6% allocation of a higher GDP base in 1990.¹⁷ Preschool and technical and vocational education bore the main brunt of the transition and the ensuing decline in public spending. In the first decade of transition, over 80% preschools were shut down so that only 2.5% of 3–7 year-old children in rural areas are able to avail of preschool education. Similarly, the number of technical and vocational education institutions declined from 457 to 285, with about 60% decline in enrolment. Distances to schools for rural communities have vastly increased.

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D. Political Environment

13. Since independence not so long ago, Kazakhstan has become politically stable and made considerable progress in implementing a complex political and economic agenda. The country has set the governance—political and economic—system on firm constitutional and legal foundations, aiming to become a democratic state with a market economy. The Government’s policy—economics first, politics later—is to introduce democracy gradually. The President and national parliament are elected through a nationwide ballot. An independent civil society is gradually developing, although cases have been reported recently of the Government suppressing freedom of press. Peaceful relations with neighbors, participation in key supranational bodies and international conventions, and rapid disarmament after independence are evidence of Kazakhstan’s intent to remain a responsible member of the international community.

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E. Governance

14. The government machinery has been restructured to set the governance system on new constitutional and legal foundations. Some resulting serious challenges must be overcome to make a decisive break from the pre-independence governance structure. The need to improve administrative and fiscal relations between different layers of government administration is an example of such a challenge. Local government’s autonomy, while guaranteed by the country’s constitution, is still not in sight. At the national government level, well-defined responsibilities and coordination structures binding different layers of government are only slowly evolving. The overlap is considerable between the president’s Administration, prime minister’s chancellery, ministries, and legislature. Policy coordination and strategic planning have major weaknesses. The rule of law is not yet firmly entrenched and the Government intends to amend laws and strengthen the judicial system to improve law enforcement. The Government pledges to overhaul the civil service. Civil service and administrative reforms and improvement of public expenditure and revenue management are vital to enhance transparency of public servants and institutions. Transparent government institutions will foster participation of civil-society institutions in tackling corruption. The internal and external payment system has progressed at an impressive pace, and monetary and financial sector management is already highly professional. The new tax code and customs codes should be made administratively consistent (Appendix 3).

15. Corruption is serious. Surveys show that households, enterprises, and public officials perceive corruption as widespread and part of everyday life,¹⁸ especially in customs and tax agencies, the police, courts, and social service delivery agencies. Strengthening these agencies institutionally and improving auditing systems are central to improving accountability of public services. Outcomes of social services must be monitored to improve their delivery. In 1998 Kazakhstan introduced the anticorruption law, which established a high-level anticorruption commission. In 2002 Kazakhstan endorsed the Anticorruption Action Plan for Asia and Pacific sponsored by ADB and Organisation of Economic Co-operation and Development (OECD). The Government has set out concrete anticorruption measures through the state program for fighting corruption (2001–2005). These steps must be forcefully implemented.

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F. Private Sector

16. Estimates place 60–65% of the economy in private hands, including about 20–30% in the informal sector. These numbers overestimate the extent of the share of the competitive private sector, as the Government considers an entity private as long as some part of its equity is owned by a non-state entity. Twenty super-large companies, many of which are formally or informally government controlled, produce most formal sector output. Agriculture, finance, construction, and trade are the most privatized sectors (Appendix 3).

17. During the past three years while foreign direct investment has, on average, exceeded 10% of GDP, but the bulk of investment was in the oil sector and largely based on bilateral deals with the Government. Despite economic reforms and macroeconomic stability, significant hurdles remain to attracting foreign direct investment based on competitive markets: institutional and behavioral constraints; poor quality of infrastructure;¹⁹ scarcity of long-term capital; and lack of skilled labor (particularly in business, accounting, and finance).

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G. Environment

18. The Aral Sea disaster and increasing contamination of the Caspian Sea are the primary threats to biodiversity. Land degradation—arable land has shrunk by half since independence— is widespread and worsening mainly due to inappropriate agricultural practices. Dry lands and deserts comprise nearly 66% of the country’s territory. Transboundary water pollution and management problems have increasingly become a trigger of conflict with adjacent countries that supply nearly 45% of Kazakhstan’s water needs. Accelerating urbanization is increasing automobile emissions, toxic and solid wastes, and municipal wastewater (Appendix 1, Table A1.4). The government report issued at the World Summit on Sustainable Development in September 2002 identifies, besides poverty reduction, the following as critical for sustainable development: (i) conserving biodiversity, (ii) combating desertification, (iii) using freshwater resources rationally, and (iv) controlling air pollution and global warming (Appendix 3).

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H. Regional Cooperation

19. Much of Kazakhstan’s growth potential exists in the border areas.²⁰ The central geographic core, with few exceptions, is of little economic use. Kazakhstan is huge, sparsely populated, and landlocked, with a small, geographically segmented market. Improving regional trade links and developing transit corridors are thus considered key elements of the development strategy to diversify the economic base. As the economy of Kazakhstan is huge relative to its southern Central Asian neighbors, cooperative arrangements would help them (particularly the Kyrgyz Republic and Tajikistan) achieve the MDGs. The fragility of existing arrangements was evident from the closure of Kazakh-Uzbek border in early 2003. Corruption among customs services and protectionist policies by subnational governments have acted as non-tariff barriers to intra-regional trade.

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I. Gender²¹

21. Traditionally, women were subordinate to men. The communist ideology, however, declared men and women equal. Thus, women played a significant role in the economic development of Kazakhstan as well as Kazakh Soviet Socialist Republic. The critical socio-economic changes of the transition have had a major impact on women’s labor and incomes. With the massive retrenchments in the public sector, men have been better positioned to move into the private sector as they can work longer hours because they do not do as much housework as women. Despite equal access to education, women often receive lower wages²² for the same type of work and have trouble breaking into male-dominated activities. Women suffered more from the decline in social and health services. At least 30% of women (and 70% in some areas) are estimated to be anemic due to poor nutrition. However, women have been better able to deal with the pressures of transition. On average, women live 18% longer than men. ADB will support gender equity by mainstreaming gender considerations throughout its operations, including lending and technical assistance (Appendix 3). The revised gender assessment²³ being prepared will suggest ways to improve on the existing strategy (Appendix 3).

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