Executive summary
Kazakhstan is the largest economy in Central Asia and a key hub for regional trade and investment. Since emerging from the transition recession in 1996, Kazakhstan has experienced real GDP growth of 5% per annum, while labour productivity and investment have also grown substantially, particularly in the first decade of the 2000s. The main driver of the country’s strong economic performance has been and remains the extraction and export of its vast natural resources. Kazakhstan’s economy is also highly internationalised, and it has been the country’s openness to foreign investment and technology, as well as its engagement with the international trade architecture through institutions like the World Trade Organisation (WTO), that has allowed it to develop sophisticated industries so quickly in these sectors.
Nevertheless, Kazakhstan’s socio-economic resilience is challenged by limited private-sector development. Extractives-fuelled growth has led to a concentration of economic output that is non-inclusive and vulnerable to external shocks. Extractives-driven growth has failed to drive the development of a private, dynamic non-resource tradable sector – and may in some respects have impeded it. Investment and the most productive jobs are concentrated in a handful of sectors that generate relatively little employment, in which SMEs play only a minor role, and which are vulnerable to changes in global demand for hydrocarbons. In the longer-term, the global push for net zero emissions, to which Kazakhstan is committed, may drastically reduce the competitiveness of the country’s main growth drivers.
The key to further socio-economic development and resilience lies in the development of a robust and diversified private sector. To achieve this, the government must address the policy issues that have hitherto stymied private sector development, while also looking forward to the changing needs of firms in a rapidly transforming global context.
The OECD surveyed a selection of foreign-owned private firms in Kazakhstan to gauge business sentiment with respect to the government’s ongoing reform process and to help identify opportunities and challenges in the business climate. The survey was small but focussed, targeting European firms active in Kazakhstan, as well as a number of business and trade organisations. Respondents were asked to highlight reform progress and challenges, to highlight policy issues they considered priorities for action, to give their views on the impact of Russia’s war in Ukraine and the global pandemic on doing business in Kazakhstan, and to share their thoughts on government policies to support the private sector in the context of the digital and green transitions.
Three overarching conclusions emerge from survey responses. They largely dovetail with prior OECD assessments of the business climate in Kazakhstan. First, firms noted that while the government has made significant progress in digitalising public service delivery, private sector digitalisation remains hampered by underinvestment in infrastructure and skills. Secondly, respondents praised government efforts to simplify the operational environment for firms, particularly the simplification of licensing and permitting processes, but also highlighted lingering issues around trade facilitation and contract enforcement. Thirdly, firms agreed that Kazakhstan had significantly increased the statutory openness of the economy but nevertheless highlighted challenges linked to competition and transparency that may act as de facto barriers to investment.
Survey respondents underscored their enthusiasm for digital opportunities in Kazakhstan. Some 80% reported that digitalisation was creating new opportunities for them in the country, and a significant majority of them reported that they already were using advanced digital tools. Firms were also positive on the use of digitalisation to improve public service delivery, lowering the time and cost involved for firms in interacting with public bodies. However, firms also noted that infrastructure and skills shortages were holding back the digital transformation.
There is a need for greater investment in the connectivity and digital infrastructure necessary for the digital transformation, as well as a regulatory environment that can support the digital transition. Kazakhstan has made significant progress providing firms and citizens with affordable access to broadband infrastructure, but challenges remain in improving the quality of that infrastructure. Regulatory issues may also slow the digital transition, for example through the impact of competition-related challenges on investment in the highly regulated telecommunications sector. A related issue is the low level of investment in information and communication technologies, which accounted for only 1.98% of total investment in 2019, significantly below the OECD average of 11.4%.
Survey respondents were largely positive about the progress of numerous reforms to improve the operational environment for firms. Respondents overwhelmingly reported that many aspects of the regulatory and policy environment were conducive to doing business, with only 6% of respondents reporting that the business environment overall was unfriendly. Firms were positive about progress in a number of areas that affected day-to-day operations, particularly the simplification of registration and licensing requirements. A large majority also felt that the government had made progress over the past five years in implementing reforms to support the private sector.
Trade facilitation and contract enforcement nevertheless emerged as challenges for firms, which may have consequences for their ability to contribute to the government’s diversification agenda. Kazakhstan has long recognised the importance of reforms to support trade facilitation, making it easier for local SMEs to trade internationally and compete abroad. While the country’s performance in the OECD Trade Facilitation Indicators (TFIs) suggests that Kazakhstan has made progress in improving its trade facilitation framework, there remains a significant gap with the OECD average which targeted policy action could help narrow. A majority of firms also noted the importance of reforms to support contract enforcement. While Kazakhstan now has a clear legal framework for contract enforcement and dispute resolution, alleviating firms’ concerns about the reliability of implementation and the transparency of decisions will be important for the government’s ability to attract high-quality investment.
Policies to support foreign investors were among the most positively assessed by survey respondents. Flagship projects such as the Astana International Financial Centre and the creation of special economic zones were among the top three policies rated as very useful by respondents, whilst a plurality of respondents were also positive about the establishment of public private dialogue platforms such as the Foreign Investors’ Council. This positive assessment of investor-related reforms comes in the context of a relatively open statutory regime for FDI, as reflected in Kazakhstan’s good performance in the OECD FDI Regulatory Restrictiveness Index. Given the importance the government attaches to its investment attraction agenda, it is encouraging that a number of its interventions have been well received by those investors already operating in the country.
Nevertheless, actual levels of foreign investment remain low, particularly outside the primary sector. If the overall statutory regime for FDI is relatively open, there are nevertheless a number of regulatory restrictions – particularly in services trade, but also in certain network sectors – that may impede investment. Similarly, whilst the government is pushing ahead with pro-competition reform agenda, challenges with the implementation of policies to support the development of a level playing field between public and private firms may act as de facto barriers for both domestic and foreign investors.
Kazakhstan has the potential to sustain strong growth over the longer term, but achieving this end will require further structural reforms to facilitate structural transformation and the shift to a more sustainable, diversified and inclusive growth model. There are both daunting challenges and enormous opportunities ahead, particularly those linked to the green and digital transitions. The authorities have committed themselves to a wide range of needed structural reforms – not only those addressed by the present survey – and also to continued macroeconomic discipline. Implementing many of these reforms is likely to prove far more difficult than designing and adopting them, however, and will place great demands on the political will and administrative capacities of the state. If the government is able to deliver on its reform commitments, it can lay the foundations for a better future for its citizens.