1. Introduction
The private sector survey that formed the starting point of this report allowed the OECD to identify three key issues facing firms in Kazakhstan. Whilst progress has been made in many areas of the business climate, firms continue to face challenges with digital infrastructure and skills, operational aspects of the business environment such as trade facilitation and contract enforcement, and regulatory restrictions on investment in certain areas of the economy. This chapter introduces the context for the survey and the high-level insights that emerge from it.
Kazakhstan is the largest economy in Central Asia. Since independence, economic growth has been primarily fuelled by the extraction and export of a narrow range of commodities – principally hydrocarbons and other minerals – that the country has in abundance. The country’s extractive sectors remain crucial to growth and a key driver of investment. Nevertheless, these sectors contribute relatively little in terms of direct job creation and the rents they have generated are concentrated among a few, primarily state-owned, firms. These sectors will remain economically important in the years ahead, but their ability to form the cornerstone of a sustainable and inclusive model of growth has proven limited.
Kazakhstan emerged on a relatively strong footing following the COVID-19 crisis, and as of spring 2023 the impact of Russia’s war in Ukraine has been muted. The economy grew by 2.5% in 2022, down from 4.3% the previous year, with the slowdown largely attributable to temporary disruptions to oil production. The ability of the country to weather recent economic shocks is testament both to the sizeable buffers and prudent policy measures of the Kazakh authorities, as well as the agility with which they responded to business and societal needs during a period of significant disruption. Nevertheless, the growth outlook is uncertain, with social unrest in January 2022, the continuation of Russia’s war in Ukraine and the potential for further sanctions on Russia to affect Kazakhstan’s trade, accelerating domestic inflation and tighter global financial conditions all contributing to a challenging short-to-medium term context.
The resilience of Kazakhstan’s economy continues to be hampered by a relatively underdeveloped private sector (World Bank, 2021[1]). Addressing the issues that prevent the private sector from investing, hiring, and growing will be key to improving the resilience of the country in the years ahead. It will also be key to the success of Kazakhstan in navigating the twin transitions of digitalisation and decarbonisation. This report presents a number of insights on key business climate issues that have been drawn from a survey of foreign firms active in Kazakhstan. Using recent OECD analysis on these selected issues, the report aims to support policy makers in Kazakhstan to effectively the most pressing questions facing the business community in the country.
1.1.1. The unrealised potential of private sector development in Kazakhstan
Private sector development is a long-standing, but only partially fulfilled ambition of successive governments in Kazakhstan. Despite being a major component of socio-economic development documents and plans such as the “100 Concrete Steps” programme and the “Kazakhstan 2050 Strategy”, the significant potential of the non-oil private sector remains unrealised. While there has been a notable growth in services since independence and their concomitant contribution to growth and employment, many service sector firms and jobs are in non-tradable activities such as construction and retail, which are characterised by low productivity and where business is linked to the redistribution – often from the state – of revenues from the extractive sector.
The government has made significant progress in lowering the cost of doing business, and Kazakhstan is now significantly more business friendly than in the past (EBRD, 2019[2]). In recent years, reforms to simplify business registration and licensing, the introduction of new, clearer business legislation, reforms to the tax code and investment regulation, the development of special economic zones and new institutions for domestic capital markets are among the many ways in which the authorities have made Kazakhstan an increasingly business-friendly location. Much of this has been supported by concerted effort to use digital tools to improve government service delivery and increase transparency, with government digitalisation being an area where Kazakhstan has made significant advances. In 2019, for instance, obtaining an electrical connection was twice as fast in Kazakhstan than in Europe and Central Asia, thus testifying to efficient access to physical infrastructure that represents a major cost of doing business. Similarly, the obtention of permits and licenses was faster in the country that in Europe or Central Asia.
Nevertheless, that the private sector remains relatively underdeveloped is reflective of a number of prevailing weaknesses in the business climate (IMF, 2021[3]). The development of private enterprise remains impeded by a number of policy and governance issues. Many of these relate to the role of the state in the economy, issues around competition and the speed of pro-market reforms, access to finance, corruption, infrastructure, and skills. In numerous areas, the significant de jure improvement to the business environment has not been accompanied by reliable implementation.
What constitutes a strong “business climate” is in reality a complex interconnection of numerous different policy areas. Responsibility for the design and implementation of these different areas, as well as defining the rationale for intervention in different areas, is therefore spread across a large number of government institutions and bodies. One of the major challenges for Kazakhstan is therefore ensuring that those responsible for these various policy areas – competition, fiscal, investment, education, environment, labour – are well coordinated and aligned. Weaknesses in one, such as competition, can undermine the most determined of efforts in others.
1.1.2. The push for net zero: an addition rationale for diversification
The extractive sectors of Kazakhstan’s economy remain vital for the government’s revenue base and sustaining the fiscal buffers that shielded the country from the worst of the COVID shock. Nevertheless, as a model for long-term economic development, such heavy reliance on extractive sectors is fundamentally fragile and unsustainable. Global commodity price fluctuations make Kazakhstan’s economy vulnerable to external shocks, typified by the 2008-09 global financial crisis and its impact on international oil demand, the 2014-15 commodity price crash, and more recently the disruptive – with variegated impact channels – experience of the COVID-19 pandemic and Russia’s war of aggression in Ukraine on global production, demand, and supply chains.
Diminishing returns to growth from the extractive sector in a global context of decarbonisation redoubles the importance of diversification. The ability of Kazakhstan’s extractive sectors to fuel growth is diminishing. Resource extraction as a driver of growth has begun to run out of steam. In the longer-term, and perhaps of greater significance, the global sustainability transition will erode the competitiveness of Kazakhstan’s major industries. The international push towards net zero emissions codified in the Paris Agreement on Climate – to which Kazakhstan is a signatory, and committed to achieving carbon neutrality by 2060 – may make many of the country’s key drivers of growth obsolete or untenable in the longer term.
The global push for more sustainable and less carbon intensive modes of economic production and organisation is changing what government and society expect from private enterprise. No longer does the rationale for policy support stop at job creation and productivity; firms must also become engines of the sustainability transition, investing in the technologies, knowledge and infrastructure needed to address climate challenges.
1.1.3. Drawing on a private sector survey, this report presents areas for policy action
The content of the report is guided by a survey of international – primarily European – firms operating in Kazakhstan. The survey was an opportunity to gauge business sentiment among a small cohort of international firms of the type that the government is actively seeking to attract to the country. The concerns, observations and positive appraisals gathered through the survey largely dovetail with the OECD’s own analysis on business climate issues in Kazakhstan.
The survey was small but focused. It targeted 27 foreign firms active in Kazakhstan, the majority of which are entirely or partly owned by entities based in the European Union, as well as four foreign chambers of commerce or trade representation offices. The survey presented an opportunity to gather bottom-up, firm-level perceptions on policy issues relating to the business climate and private-sector development in Kazakhstan. The survey insights are largely congruent with previous OECD work on business climate issues in Kazakhstan and reinforce the need for policy change. The report sheds light on three issues that were raised by survey respondents:
1. Kazakhstan has made significant progress in digitalising public service delivery and the public sector more broadly, but the extent of digital uptake in the private sector remains low. Ensuring that firms have the infrastructure and skills necessary to take advantage of the digital transformation is crucial to their long-term competitiveness. Significant progress is needed to provide the private sector with the quality digital and connectivity infrastructure and skills that firms need to make the most of digitalisation.
2. The government has markedly lowered the fixed costs of doing business through regulatory simplification and improvements to government services such as licensing and registration. Nevertheless, there remains a significant number of challenges in the de facto operational environment for private firms, particularly with issues around trade facilitation and contract enforcement.
3. There have been notable efforts to improve the investment attractiveness of Kazakhstan, but competition and transparency issues undermine efforts to bring new investment, particularly in non-extractive sectors. That a number of the most pressing policy issues facing foreign investors and businesses are not issues of investment policy per se, but more structural matters of competition and transparency speak to the need for, inter alia, a more holistic, whole-of-government approach to supporting private sector development.
Taken together, these results provide important context for the OECD’s ongoing work to support the improvement of the business climate in Kazakhstan and help to corroborate and validate the emphasis placed by the OECD on a number of priority areas for reform for the authorities. This includes the importance of improving both the hard and soft infrastructure needed for trade within Kazakhstan and with its regional neighbours; the importance of tackling inveterately difficult issues around competition and regulatory enforcement; and the importance of investments in the infrastructure and skills necessary to enable firms to not just be objects of the digital and green transitions, but to be active agents in these structural changes and to benefit from them.
Responses to the survey also suggest that firms are aware of the opportunities and challenges of the sustainability transition. A significant plurality report that they are actively adopting new technologies and operations to reduce their carbon footprints and support the government’s stated climate change and sustainability ambitions. At the same time, a majority of firms report that policy support for the green transition remains insufficient, and call for greater investment in sustainable infrastructure, better environmental standards, and stronger financial incentives for the adoption of greener practices within firms.
1.1.4. The structure of the report
In Chapter 2, the report proceeds with an introduction to key aspects of the economic context for private sector development in Kazakhstan. The chapter introduces recent trends in growth, investment, trade and productivity, while also giving an overview of the broader progress with important aspects of the government’s policy agenda, notably in diversification. Chapter 3 then introduces the survey that informs the remainder of the report. The final three chapters of the report each pick up and expand upon the three policy areas issues that outlined above.
Chapter 4 begins with an overview of private sector digitalisation, building upon firm responses that called for further development of the digital and connectivity infrastructure necessary for success in a digital context, and provides an overview of issues relating to digital skills. Chapter 5 expands upon two issues in the operational environment that were highlighted by firms in the survey: policies to support trade facilitation, and contract enforcement. This chapter introduces insights from the OECD Trade Facilitation indicators and draws upon recent OECD work on the legal environment for business in Kazakhstan. Chapter 6 concludes the report with an overview of recent reforms to support foreign direct investment in Kazakhstan and highlights a number of areas where regulatory and competition barriers may still act as impediments to achieving the government’s agenda of attracting higher levels of quality foreign direct investment.
References
[2] EBRD (2019), Enteprise Surveys: Kazakhstan 2019 Country Profile, EBRD/World Bank Group, https://www.enterprisesurveys.org/content/dam/enterprisesurveys/documents/country-profiles/Kazakhstan-2019.pdf.
[8] EBRD (2017), Kazakhstan diagnostic paper: Assessing progress and challenges in developing a sustainable market economy, EBRD, https://www.ebrd.com/publications/country-diagnostics.
[3] IMF (2021), Kazakhstan Staff Concluding Statement of the 2021 Article IV Mission, https://www.imf.org/en/News/Articles/2021/11/17/kazakhstan-staff-concluding-statement-of-the-2021-article-iv-mission (accessed on 18 May 2022).
[4] OECD (2022), Weathering Economic Storms in Central Asia, OECD Publishing, https://www.oecd.org/publications/weathering-economic-storms-in-central-asia-83348924-en.htm.
[5] OECD (2021), Beyond COVID-19: Prospects for Economic Recovery in Central Asia, OECD Publishing, Paris, https://www.oecd.org/eurasia/Beyond_COVID%2019_Central%20Asia.pdf.
[6] OECD (2021), Improving the Legal Environment for Business and Investment in Central Asia, OECD Publishing, Paris, https://www.oecd.org/eurasia/Improving-LEB-CA-ENG%2020%20April.pdf.
[1] World Bank (2021), Economic Recovery During Challenging Times: Kazakhstan Economic Update Winter 2021/2022, World Bank, DC, https://documents1.worldbank.org/curated/en/566741640158785669/pdf/Kazakhstan-Economic-Update-Economic-Recovery-during-Challenging-Times.pdf.
[7] World Bank (2018), Kazakhstan - Systemtic Country Diagnostic: A New Growth Model for Building a Secure Middle Class, World Bank, DC, http://documents.worldbank.org/curated/en/801771549867544115/Kazakhstan-Systematic-Country-Diagnostic-A-New-Growth-Model-for-Building-a-Secure-Middle-Class.