1. Setting the scene
Since 2018, Kazakhstan has undertaken substantial efforts to advance the digital transformation. Despite ambitious programmes and initiatives, digital uptake within the private sector, and among the smallest firms especially remains below potential. While the internet has become widely accessible across the country and e-government services have developed rapidly, supporting firms’ digital uptake requires addressing remaining gaps in digital framework conditions. This chapter discusses the broader context supporting reforms for the digitalisation of the private sector in the country. It concludes by describing three main barriers in the digital framework conditions: internet quality and connectivity, competition and investments in the telecom sector, and adequacy of the regulatory and policy framework for firms in the digital age. Each dimension is discussed individually and accompanied by policy recommendations in the following parts of this report.
Continued reform efforts resulted in robust economic growth, making Kazakhstan the wealthiest country in Central Asia
Kazakhstan experienced growth from 2000 to 2022, largely driven by large FDI inflows into the primary sector, after the transition recession of the 1990s. Real gross domestic product (GDP) remained positive, except in 2020, and grew at an average annual rate of 6% in 2000-21 (IMF, 2022[1]). However, the trend rate of growth is declining, as growth recovered to levels below pre-slowdown levels following the Great Recession in 2008, the drop in global commodity prices in 2014-15 and the first year of the COVID-19 pandemic (Figure 1.1).
Source: (IMF, 2022[1])
Nonetheless, GDP per capita in current USD has risen by 12.2% since 2000, making it the highest across Central Asia (IMF, 2022[1]). After a contraction in real GDP of 2.6% in 2020, economic growth resumed in 2021 thanks to continued fiscal expansion, strong consumer credit growth, and reduced COVID-19 restrictions (World Bank, 2022[2]; OECD, 2021[3]). If growth was forecast to accelerate in 2022 and 2023, supported by higher oil prices, fiscal stimulus and sustained recovery of private consumption, significant downside risks remain due to COVID-19 infections and the twin effects of the war in Ukraine and the international sanctions imposed on Russia (EBRD, 2022[4]; IMF, 2022[5]). Vulnerabilities could emerge from supply chain disruptions, and risks of secondary sanctions effects, given Kazakhstan’s significant trade, investment, and migration linkages to Russia (World Bank, 2022[2]; EBRD, 2022[6]; OECD, 2022[7]).
Over the past two decades the government has made incremental progress toward its goal of diversifying the country’s economy by improving its investment climate, raising the competitiveness of non-extractive sectors, limiting the role played by state-owned enterprises (SOEs), and levelling the playing field for the private sector (OECD, 2017[8]; OECD, 2020[9]). However, much remains to be done and recent performance highlights the need for steps to strengthen productivity growth and private-sector development, in particular. The government’s commitment to sustained reforms will be key for the economy to weather the current uncertain times. The expected relaunch of the privatisation programme, halted due to the COVID-19 crisis, is an encouraging sign, supported by the recent creation of an independent competition agency and efforts to improve the governance of state-owned enterprises (IMF, 2021[10]).
The private sector remains underdeveloped, particularly the SME sector
Hydrocarbon and mineral resources remain the backbone of Kazakhstan’s economy, as demonstrated by the persistently high share of net FDI inflow to the extraction sector, which received around 70% of total inflows between 2016 and 2020 (Central Bank of Kazakhstan, 2022[11]). If Kazakhstan’s regional development strategy has given positive results in enabling the realisation of agglomeration benefits and raising productivity in non-extractive sectors in the regions of Almaty and Nur-Sultan, growth outside these two agglomerations is still driven mainly by resource extraction (OECD, 2020[12]). The share of fossil fuels and the energy sector has remained stable at around 72% of goods exports since 2013 (OEC, 2022[13]), and generated 17% to Kazakh GDP in 2019 (IMF, 2022[14]). Adding mineral products, metals, and chemicals, these have represented about 90% of exports over the past decade (Figure 1.2).
Source: (Observatory of Economic Complexity, 2022[15])
This economic concentration leaves Kazakhstan vulnerable to commodity price shocks, while it also contributes to (as well as reflects) the persistent underdevelopment of the private sector, in particular of SMEs (OECD, 2021[3]). While the SME share in GDP increased from 20.6% in 2010 to 31.7% in 2019, the increase in SME employment has been more moderate, from 29.9% in 2010-2013 to 36.9% in 2014-2019, which remains below regional peers such as Azerbaijan, where SMEs accounted for 43.7% of employment in 2019 (OECD, 2020[9]).
Source: (National Statistics Bureau, 2022[16]); (DAMU, 2020[17])
Government efforts to develop the services sector, where SMEs represent a large share of businesses, have resulted in a 6.5% growth of the sector’s share of value added between 2015 and 2019, the largest increase of all sectors. However, services still represent only about 11% of total exports (ADB, 2021[18]), and labour productivity growth has been on a downward trend since the early 2000s (Figure 1.4 ), reflecting the relatively low contribution of the manufacturing and services sectors to output growth. The COVID-19 pandemic also had a substantial negative impact on the sector, and SMEs (EY, 2020[19]), with estimates suggesting that about 300,000 SMEs stopped working nation-wide in 2020, while in Almaty alone, 80% of entrepreneurs suspended their activities that same year, especially in the trade, tourism, and catering sectors (OECD, 2020[20]).
Source: (Bureau of National Statistics, 2022[21])
Digitalising SMEs can make Kazakhstan’s economy more resilient
Digitalisation can support the country’s diversification agenda, by supporting private-sector growth and competitiveness. In particular, it can help small firms overcome size-related structural disadvantages and improve their growth and innovation performance, as digital technologies enable small firms to reach a wider customer base and to grow without massive investments in tangible assets. SMEs are an important source of employment and have the potential to contribute to value-added growth through innovation and by playing a key role in large firms’ supply chains. However, they seem to not yet fully benefit from the gains digitalisation can offer. Recent OECD research shows that lagging digital uptake of SMEs is strongly associated with gaps in productivity, scaling up, innovation and growth, which contribute to inequalities among firms, and, in turn, among people and places. Closing the SME digital gap can improve productivity performance and help reduce place-based inequalities, but it requires policy makers to support firms’ digital transformation (OECD, n.d.[22]).
Improving the framework conditions for digitalisation of the private sector can advance Kazakhstan’s long-term diversification and growth agenda. During the first year of the COVID-19 pandemic, many Kazakh firms moved their business operations online, which helped dampen the negative effect on the economy (World Bank, 2022[23]; OECD, 2021[3]). However, the country’s digital infrastructure came under severe strain over that period, while the regulatory environment and processes of public agencies presented significant impediments to business operations and the delivery of e-government services, as recognised by the president in April 2020 (OECD, 2020[20]; Government of Kazakhstan, 2020[24]). Addressing infrastructure access and quality issues, as well as regulatory barriers, could also help Kazakhstan attract and retain IT firms looking to relocate as a result of Russia’s large-scale aggression in Ukraine and the international sanctions on Russia and Belarus. The relocation of successful IT firms might trigger technological and knowledge spill-over effects.
The digital transformation of the private sector can support other dimensions of the longer-term reform agenda
Kazakhstan could leverage the digital solutions implemented during the pandemic to build a coherent approach to digitalisation underpinning its other reforms. In particular, policy-makers should ensure that digital service delivery addresses existing short-term infrastructure issues and absorptive capacity, and that the regulatory framework supports the private sector’s digital transformation. Looking at the future, digitalisation can further support reform in three major areas to reinforce long-term growth and regional integration: trade connectivity, the green transition, and the legal environment for business. These priorities are aligned with the Roadmap for Recovery agreed during the 2020 EU-Central Asia Dialogue on Partnership for Prosperity and the EU-Central Asia Economic Forum in 2021 (European Commission, 2021[25]).
First, digitalisation can support connectivity through trade facilitation reforms such as greater regulatory alignment, simplified customs procedures and regional co-operation, and can help Kazakhstan’s private sector and export-oriented firms realise their potential (OECD, 2021[3]). This is all the more important at a time when the isolation of Russia provides further impetus to the need for Kazakhstan to integrate its supply chains and logistics with other regional partners (OECD, 2022[7]).
Second, digitalisation can support further improvements to the legal environment for business and investment, especially for SMEs, for which reliable implementation of regulations and greater automation of business procedures are essential for growth. Despite reforms covering issues such as intellectual property, licensing, permits, and firm creation, Kazakhstan’s ranking in the OECD Regulatory Restrictiveness Index remains significantly higher than the OECD average, while the OECD Product Market Regulation Indicators show the country’s regulatory stance to be less friendly to competition than most economies covered (OECD, 2021[3]; OECD, 2022[26]).
Finally, despite its ambitious national and international commitments to carbon neutrality, Kazakhstan, along with Turkmenistan, produces more than twice as much CO2 per PPP dollar of GDP as the OECD average. The carbon intensity of GDP has fallen by 80% since the mid-1990s, but progress in recent years has slowed and Kazakhstan must accelerate decarbonisation to meet its international commitments and domestic reform targets. Indeed, if CO2 per PPP dollar of GDP has fallen from 0.66 in 2012 to 0.42 in 2019, it remains above the level of upper-middle income countries (0.46 in 2012 and 0.36 in 2019) and high income countries (0.19 in 2019) (World Bank, 2022[27]). Digitalisation can help mobilise private investment in the transition to a greener growth model and help the country reach carbon neutrality by 2060 (OECD, 2021[3]).
The focus in recent years has been on digital infrastructure and e-government services
Since the launch of “Informational Kazakhstan 2020” programme in 2013, the government has made digitalisation a priority in its diversification agenda (Government of Kazakhstan, 2017[28]). This first digital strategy focused on the development of ICT infrastructure and online public administration systems to facilitate business activity (egov.kz, 2021[29]) and has been successful in developing country-wide connectivity. As a follow-up, the five-year “Digital Kazakhstan” initiative, launched in 2017, aimed at increasing the private sector’s use of digital tools to support economic growth through targeted programmes in the agricultural, energy, transport, and e-commerce sectors (see Box 1 and 2) (Digital Kazakhstan, 2022[30]). The initiative also developed additional sub-programmes, targeting digital innovation (launch of the Astana Hub International Technology Park in 2018) and cybersecurity (“Cybershield Kazakhstan”). In early 2022, the government launched “Digital Era Lifestyle” (DigitEL), its third five-year digitalisation programme, with a focus on quality and safe internet, using ICT businesses as a growth lever, and further digitalising the services sector (Republic of Kazakhstan, 2022[31]). DigitEL targets include an ICT share of GDP of 5%, compared to 4% in 2020, and the strategy anticipates greater involvement of the private sector, as over 70% of the programme is to be funded through private investments.
Kazakhstan’s digital competitiveness has improved. For instance, it moved to 32nd place in 2021 compared to 38th in 2018 in IMD’s Digital Competitiveness Ranking (IMD, 2022[32]), reflecting a change in e-government practices, business models, and society faster than other economies of the region. In particular, Kazakhstan performs well in the UN e-Participation and Online Service Indexes for human capital and e-government, while the infrastructure index highlights remaining bottlenecks (Figure 1.5 ) (UN, 2020[33]). The digital economy has also been on the rise, even if numbers remain modest: ICT services represented 7.9% of all services rendered by SMEs in 2020, compared to only 3.3% in 2015, and ICT-related services grew almost five times more than non-ICT services over the same period (Bureau of National Statistics, 2022[34]). This growth is also reflected in a highly dynamic and productive SME landscape. Since 2015, the number of specialised SMEs has increased almost twice as fast as non-ICT SMEs (respectively 117.9% and 59.8%), even if their share in the economy remains small, increasing from 5.2% to 6.9% of all SMEs since 2015 (Bureau of National Statistics, 2022[35]).
Source: (UN, 2020[33])
Remaining gaps in the legal and operational framework conditions are impeding the digital transformation of firms in Kazakhstan
However, outside the ICT sector, the digital uptake of firms, especially the use of digital tools and services, remains very limited. The issue is most acute for SMEs, which face higher barriers to their digital uptake than their larger counterparts do. Weaknesses in digital framework conditions, in particular in relation to access to quality digital infrastructure, adaptation capacity to changing regulatory frameworks, and management of digital security and privacy issues are part of the explanation.
Barrier 1: Connectivity and infrastructure gap
While Kazakhstan’s efforts to develop its digital infrastructure have translated into widely accessible and affordable internet, quality and rural coverage remain issues. Although broadband internet latency and speed have improved each year since 2017, bandwidth capacity decreased in 2019 and has stalled since (EIU, 2022[36]). In addition, small firms in Kazakhstan mainly use mobile internet, whose quality in terms of speed has declined in recent years, contributing to a persistently low uptake of digital technologies by firms and wide regional disparities to the detriment of rural and small urban areas.
Barrier 2: Competition and FDI attraction in the telecommunications sector
In Kazakhstan, quality and coverage issues in digital infrastructure are closely related to high infrastructure rollout costs due to low population density and long distances. Addressing the connectivity gap for rural areas and developing future-generation infrastructure with higher network density needs will require additional investments the sector currently lacks. Persistently high regulatory and economic barriers in the telecom sector indeed seem to favour low levels of competition and result in both domestic and foreign investment levels below expectations. The regulatory environment also favours incumbents and restricts foreign investment, which reduces the sector’s attractiveness to both domestic and foreign investors (OECD, 2022[26]; US Department of State, 2021[37]).
Barrier 3: Digital regulatory framework and digital security
In Kazakhstan, efforts to adapt the legal and policy framework for firms, in particular in relation to personal data and trust standards, have begun. However, the pace of change and simplification of the regulatory environment remain too slow not to create additional barriers for firms, especially because of frequent and partial amendments to legislation. In addition, despite recent cyber security policies, such as the 2015 informatisation law and the Cybershield Kazakhstan programme (Government of Kazakhstan, 2015[38]; Government of Kazakhstan, 2022[39]), the digital culture of businesses remains low and only a few private sector-led digital security management initiatives exist. At the same time, cyber security threats have been on the rise in recent years and firms remain poorly equipped to manage them (CABAR, 2019[40]). This is particularly detrimental to the digital uptake of small firms.
Improved digital infrastructure, competition in the telecom sector, and protection against digital risks can support the digital transformation of firms in Kazakhstan
This peer-review is aimed at identifying ways to address the remaining gaps in the framework conditions for the digital uptake of firms in Kazakhstan following on from the 2018-22 Digital Kazakhstan Strategy, with a focus on three dimensions: (i) addressing the remaining digital connectivity gaps across the country; (ii) improving competition and attracting investment in the telecom sector; and (iii) strengthening digital security and data protection for firms. In co-operation with the government of Kazakhstan, the private sector, and other international organisations, the OECD identified barriers to progress along these dimensions and developed policy recommendations to strengthen the framework conditions for the digital uptake of firms in Kazakhstan.
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