International economic management
In the conditions of expanding processes of globalization, the economic development and the competitiveness for the prosperity of nations is the priority for many governments in the world today. The competitiveness of a nation is a powerful analytical and political tool, which evaluates current economic, political and social situation and the way that countries form their future. Nowadays, country's competitiveness is one of the well-known concepts which does not only cover economic indicators, but also assesses the economic implications which are important for stable development, such as the quality of institutions and infrastructure, the level of public health and education, expansion of information technology and innovations, and effectiveness of market relations. Greater awareness of the relevance of question about improving the competitiveness of countries served as an input in the way of measuring national competitiveness. Thereby, few methods of measurement were revealed, one of them - the Global Competitiveness Index which is being published by the World Economic Forum annually since 1979. Using this tool, governments have a greater possibility to identify threats and weaknesses in the development of their countries and thereby work towards strengthening and improving national competitiveness. By achieving high level of economic development and desirable competitiveness, countries will promote cooperation globally and, this in turn will be an instrument for international solidarity and preservation of peace around the world.
At the moment of obtaining its independence, Kazakhstan had a promising future in terms of strong fundamentals as a middle-income country well gifted with human capital, large territory and abundant natural resources. In the medium term, however, the country has faced many difficulties, majority of which will be covered in this essay. Serious efforts have been made by the government of Kazakhstan in recent years to address questions about amplification of the competitiveness and economic effectiveness of the country, because it is very important for any country to be able to compete in a global market. Nevertheless, Kazakhstan's economy is still heavily dominated by mining oil, gas and metals, which directly accounts for 30 percent of GDP, nearly 80 percent of industrial output, and more than 80 percent of exports. A general structure of investments distribution proves dominance of oil and gas sector; almost half of the total investments are concentrated in the manufacturing industry. This illustrates the importance of diversification of the economy and deviation from the raw material economy to knowledge based economy. The competitiveness of the nation is also increasingly determined by how well government directs and develops the creative talent and energy of the people. Therefore, quality of education and health services must remain number one priority.
The main purpose of this essay is a detailed analysis of the economic development of Kazakhstan during 19 years of its independence, as well as investigating the strategic goals for future growth that were set up by the government. Furthermore, this essay formulates recommendations for the effective development of economic, political and social spheres of the country. Based on this analysis, it concludes by assessing the possibility of achieving the goal that is set up for Kazakhstan - to become one of the 50 most competitive countries in the world by the year 2020.
History, Definitions and Measurement of Competitiveness
Today we live in a global world, where states are competing in producing goods and services in order to be more developed and more successful. Back in 1817 David Ricardo developed Adam Smith's idea about a comparative advantage of nations, stating that “the total output will be increased if people and nations engage in those activities for which their advantages over others are the largest or their disadvantages are the smallest”. After the mid 1970s with the development of technology, telecommunications and expanding of open market economy, the internationalization took place and the idea about international competitiveness has emerged globally. That is when the new concept of a state format has been introduced - a competition state. An attempt to define the competitiveness of a state is much more difficult than defining that of a corporation. If corporation is not able to pay its workers, suppliers, and bondholders, it would have to go out of business. Therefore, when speaking about a corporation being uncompetitive, we suggest that its situation on the market is unsustainable and that unless it improves its performance, it will simply stop existing. However, countries do not just go out of business. They are either happy or not happy with their economic performance, but they have no definite bottom line (P. Krugman, 1994). In the most general form, country's competitiveness can be defined as its ability to produce goods and services that meet the requirements of the world market in a free fair competition, implementation of which increases the prosperity of the country and its citizens.
In recent years states have faced a challenge of opening their economies and at the same time maintain peace, security and developed infrastructure. Today, states are interested in attacking local and foreign investments for activities which generate wealth. And in order to attract those investments, states have got to compete. There is no single technique for states to become competitive. A variety of policies are being recommended, but every country needs to be able to successfully adapt them to their own environment. Competitiveness strategies will be successful if there is a balance of the economic imperatives as well as social requirements of a nation formed by history, individual values and tradition (S. Garelli, 2006, p. 609).
Every year starting 1979, the Global Competitiveness Report is being published by the World Economic Forum (WEF). The WEF is an independent worldwide organization dedicated to improve states worldwide by gathering leaders in partnerships to produce global, local and business agendas. This report rates the ability of states to be able to provide prosperity to their nation, which depends on efficiency in allocating available resources. The report ranks the states of the world according to the Global Competitiveness Index (GCI) that measures the complex of institutions, rules, and factors which establish the sustainable contemporary and medium-term levels of economic prosperity. The GCI is made up of over 90 variables, two thirds of which come from the Executive Opinion Survey, and one third comes from publicly available sources, such as the International Monetary Fund, the World Bank and the United Nations. Those variables are structured into the following nine pillars, where each pillar represents an area considered to be an important determinant of competitiveness: institutions, infrastructure, macroeconomy, health and primary education, higher education and training, market efficiency, technological readiness, business sophistication and innovation.
Development of the Economy of Kazakhstan
In Kazakhstan the idea about competitiveness emerged much later than in Western countries. Before the collapse of the Soviet Union, the whole industry has been spread around fifteen countries. Post-communist transition from a government-controlled economy within the Soviet Union to a market economy has not been smooth and brought many problems. Production ties with the Commonwealth of Independent States (CIS) after the independence of Kazakhstan were severed, which lead to enormous unemployment. During years 1991 and 1995 real GDP decreased by over one-third and exports were ruined, amount of population fell from over 17 million to less than 15 million due to high emigration. Fiscal and external imbalances led to hyperinflation which occurred in 1994, and extensive debt in pensions and wages were accumulated. Livestock became a major protection for the rural population (World Bank 2004b). The government of Kazakhstan has commenced the privatization process in 1992 and until 1996 more than 85 percent of Kazakh economy has been privatized, including many major industrial enterprises.
The decline of the economy stopped in 1996 and 1997, before GDP suffered another drop in 1998 due to Russian crisis which had enormous influence on the Kazakh economy. Kazakhstan lost its price competitiveness and its exports were destructed once again. At the same time, cheap Russian goods were imported into the economy and had harmful impact on the domestic industries. There was massive downward pressure on Kazakh currency - tenge, which was pegged to US dollar and balance of payments had worsened. However, National Bank of Kazakhstan (NBK) had spent close to a billion dollars to maintain the level of tenge. That is when the moment for tough decisions and changes had come. It was no longer reasonable to remain tenge pegged; the devaluation of tenge was essential and inevitable. Reversion of the currency to a floating rate was a planned and calculated move by the NBK. In 1999 tenge lost around 40% of its value just in one month (Kasera, Katz, 2007, pp. 1-8). Weak performance in 1999 ended a decade of poor economic productivity.
Huge efforts were made by the government of Kazakhstan to attract investments into mineral and energy sectors, and to offer opportunities for its population. In 1999 the government came up with a price support scheme for wheat which was then extended to other products. This led to an effective increase in the numbers of population employed in agriculture sector, from 1.3 million in 1999 to 2.4 million in 2001 (R. Pomfret, 2007, p. 7). A dynamic recovery started in the year 2000 and has continued through 2007, which was led mainly by the oil sector. Firstly, the overall macro-economic structure was established through tough budget constraints and a fiscal policy. Secondly, opportunities for private investors, domestic as well as foreign, were rapidly created in all sectors, including strategically important ones, such as electricity generation. Finally, key government institutions were strengthened. All these was accompanied with sharp rise of oil prices from under 10 USD a barrel in the year 1998 to over 50 USD in late 2004, as well as more favourable conditions were created for transporting the oil to export markets, and new oilfield discoveries. Capital investment rose by 18% in 2006 (R. Pomfret, 2005). Growth of GDP was gradually increasing each year starting 2003, as shown in the graph 1 below.
All the factors mentioned above, led to a high and rapid economic growth and strengthen the competitiveness of Kazakhstan in the world. That was the time, when the president of the Republic of Kazakhstan Nursultan Nazarbaev has set a new and ambitious goal for Kazakhstan - to become one of the 50 most competitive countries in the world. The Kazakh government's main goal was to generate favourable environment essential to increase the country's competitiveness worldwide and to improve living standards. Different growth programs for strategic development based on the United Nations Millennium Development Goals and Targets have been adopted for the period of 2006 - 2010; they were focused on private sector development, human development, environmentally sustainable development, and regional cooperation. As part of the Government's initiative to raise the competitiveness of the economy, a variety of tax incentives were introduced to boost the non-oil economy (ADB, 2005). According to the WEF results of a survey for 2006 - 2007 Kazakhstan's competitiveness index has risen from the 61st place in 2006 to the 56th position in 2007 among the world's most competitive states.
The economic outlook remained very positive but rested heavily on continued high world commodity prices on oil and gas. Kazakhstan's gross domestic product was forecasted to grow at around 8 percent a year in 2007-2009. But the global financial crisis had a large affect on economic competitiveness of Kazakhstan, as well as of most countries in the world. The drop in international commodity prices in 2008 has hit export earnings, investment flows, and remittances.
There are three sectors in Kazakhstan's economy that were mostly affected by the crisis: construction, banking and raw materials' sectors. The construction sector is considered to be one of most affected by the crisis in Kazakhstan, where problems have emerged in summer 2007. It is worth noting that such situation was caused by fast development of building projects in previous years at the account of massive crediting by second-level Kazakh banks, which in their turn were actively attracting foreign loans. Lack of financing led to freezing most of construction projects. The banking sector of the Republic of Kazakhstan represents a large part of the commodities market of the country. Consequently, its problems are mirrored at the market as a whole. Another large position is occupied by raw materials' sector, which was experiencing hard times as well. If we look at the oil price movements in the year 2008, we can see that in July 2008 oil prices increased to a record level of 136 USD per barrel, in early October it was below 90 USD, and at the end of November the same year price of oil dropped to less than 50 dollars per barrel (U.S. Energy Information Administration, Petroleum Navigator). Unemployment increased and as a result large growth of inflation and decline of industry were taking place. Therefore, the growth of GDP has sharply declined, as well as an overall economy.
New goals - Strategic plan 2020
Government felt a need to implement processes designed to improve the sustainability of the national economy to the adverse effects of global crisis. Strategic Plan for Development of Kazakhstan till the year 2020 has been created, which identifies key directions and strategic objectives for the next decade. Main priority is concentrated on establishment of favourable environment for post-crisis development of the country and will be focused on improvement of business and investment climate, reinforcement of the financial system and enhancement of public administration's effectiveness. Plan aims to achieve qualitative economic growth and improvement of the competitiveness of Kazakhstan based on innovation in infrastructure, development of human resources and improvement of the institutional framework in order to conduct accelerated industrial and modernised development of the country. Social security, national stability and balanced foreign policy will remain among the development priorities of the country for the next decade. Estimates of country's economic growth are based on the assumption that the recovery will be slow and that that future global economic development is highly uncertain and unpredictable. All these goals were set up in order to achieve the main goal - lead Kazakhstan to become one of the world's 50 most competitive countries by the year 2020 with friendly business environment, political stability, highly developed human resources and infrastructure.
The following five key directions for growth, prosperity and security of Kazakhstan were identified, which would allow the country to become more competitive. The first direction is focused on preparing for post-crisis development, which includes procedures that will yield results in the beginning of a ten-year period. Thereby more favourable business environment can be created, as well as consolidation of the financial sector and improvement of legal system. Procedure under the second direction would include ensuring sustainable economic growth by the means of diversification. It would help to speed up diversification of Kazakhstan's economy by realising the accelerated industrialisation and infrastructure development program, which will allow shifting the economic model and moving from general, raw-material based development pattern to an industrial-innovative development. The infrastructure program will be concentrated mainly on energy, transport and telecommunications, which are essential for attracting foreign investment. The quality and quantity of human resources are major factors that establish a prosperous future of any country. Human capital is the main instrument required for innovations, social well-being and economic efficiency as a whole. That is why the third direction of the strategic plan for development of Kazakhstan till 2020 is investing in future, which includes the measures necessary to improve the quality of human capital of Kazakhstan in the long run. Under the fourth direction, government would need to improve social welfare of the nation. The measures of social protection and effective supply of housing and utilities services to the population have to be strengthened. In the outline of the fifth key direction, which concerns interethnic harmony, security and stabile international relations, steps to intensify internal stability, security and peace as well as the development of peaceful foreign policy will be taken (Decree of the President of the Republic of Kazakhstan, 2010, p. 10).
Challenges and Recommendations
Following the five directions of strategic plan for development of Kazakhstan till 2020 sounds promising and optimistic, but the road ahead requires efforts in other areas as well. In order for Kazakhstan's economy to be attractive to businesses, transaction costs associated with registration and operation of business, such as obtaining permits, licenses, certificates, accreditation, including the time and costs must be reduced. According to the World Bank Doing Business Report 2010, Kazakhstan is situated on 63rd place within 183 on the ease of doing business index. It is well known that in a country with more favourable trade environment businesses are more feasible to take an advantage of new opportunities, to develop and to innovate. One of indicators that are included in this report measures the level of ease of trading across borders, including the number of essential documents and the related time and costs. Kazakhstan ranked 182nd out of 183 countries on this indicator, which is extremely low (table 1). The more time it takes and the more costly it is to import and export goods, the more sophisticated it is for traders to be competitive on the global markets. In order to export goods from Kazakhstan 11 documents and 89 days to proceed are required. And in order to import goods to Kazakhstan 13 documents and 76 days to proceed are required (World Bank, 2009, p. 63).
Automation in the submitting and processing documents' procedure might help in solving this issue. Installation of electronic data interchange systems is an efficient way to reduce delays in the trading process. It is likely to bring more trade coming through official ways, increase customs revenues, make trade more legitimate and therefore bypass corruption.
Corruption is another big issue in Kazakhstan which creates poor business environment by undermining effectiveness and efficiency of firms, and by raising the costs and risks associated with doing business. According to Corruption Perceptions Index (CPI) 2009 published by the Transparency International, Kazakhstan is on 120th position out of 180 countries by the level of corruption. Kazakhstan's low CPI indicator signifies that corruption remains systemic, with problematic areas mainly in judiciary, customs, police, property rights and construction projects. Corruption weakens trust of investors, which is crucial for stable development of national economy. Therefore, actions against that must be taken. Government should use preventive measures rather than punishment as the basis for the system. For example, improvement of people's living standards, strict observance of laws and legitimacy, increase of officials' salaries, simplification of bureaucratic procedures should all be revised.
Within the outline of economic diversification the government of Kazakhstan should establish national innovation system based on investment in human capital. According to the United Nations Development Programme's Human Development Report, Kazakhstan is included in the group of countries with high human development index in the year 2009. However, innovation and research are still new concepts for Kazakhstan. The main problem of innovation in the state is that businesses and private sectors are not interested in the development of innovation and science. Therefore, government of Kazakhstan needs to create state incentives for private investment in this area. The government plays an important role in implementing long-term programmes, because technological innovations are associated with large costs and risks, which do not bring profits straightaway. Government can use the following tools to encourage innovation: tax benefits, advantageous investment credits, tax holidays, strengthening legal support for intellectual property and state guarantees. The science legislation and the tax code should introduce new rules that would form favourable innovation climate. Economy of the country depends very much on fluctuations of world market prices on raw materials and does not generate internal technological capital investments; it makes mostly innovation renewal by importing expensive technical equipments and machinery, mainly for raw sector. Therefore, there is a strong need for restructuring the ideology of economic innovation development on a national scale. Implementation of technological modernization of economics will improve Kazakhstan's competitiveness (Kurmanova, 2008, pp. 1-4).
Lack of democratic governance in Kazakhstan is another issue. President Nursultan Nazarbaev is the first and the only president of a country since its independence and pro-presidential party Nur Otan has a virtual monopoly of a legislative process. It might seem that Kazakhstan is not following democratic governance and therefore worsens its economic and political development by coming back to authoritative regime. But I would like to argue here, that it is tightly connected with Kazakh mentality and history. It is not possible to make a democracy in just a few years somewhere, where it has never existed. Hundreds of years of democratic traditions from Europe can not be mechanically transferred to Kazakhstan, where there is a long tradition of nomadic society, over 130 nationalities with different beliefs and religions, multiplied by seventy years of Soviet communist regime. Kazakhstan has absolutely different political history and ethnical mixture from Western countries and switching quickly to democracy might even be harmful for economic growth as well as threatening to the state's integrity. At such a crucial moment in history when the country becomes independent, the significance of the leader of a nation is very high. Therefore, it is a difficult and painful process that takes time and efforts. The concept of “delegative democracy” proposed by Guillermo O'Donnell is very helpful to reflect the dynamics of political development in Kazakhstan since independence. A delegative democracy is that type of political control where formal prerequisites of democracy are presented but whose real practices represent that of an authoritarian state. O'Donnell argues that typically lack of historical experience in democracy and socioeconomic crisis give institutional and cultural context together with practical need which all contribute to the appearance of delegative democracy in countries. Both of these features prevail in Kazakhstan (Kubicek, 1998, p. 34). But coming back to competitiveness, democracy is not an essential condition for economic development, as we can see from the examples of Chile and China. However, it usually has a positive impact on economic liberalization which improves growth performance and country's competitiveness. And the main thing is that people and government in Kazakhstan have an understanding and desire to follow the most effective and recognized by the world's traditions way of governance of the political, economic and social structures - the democracy.
Looking at graph number 3, that shows the GDP value in Kazakhstan compared with other countries with which Kazakhstan has started its development on the same level after obtaining the independence, we can see that the economy of Kazakhstan is bigger then the economies of all countries of Central Asia and Caucasus together. Graph 4 illustrates the value of GDP per capita, which is still the highest one out of 8 post-Soviet republics. Information about GDP provides with an overview of economic health of countries.
Analysing those graphs, one can see that Kazakhstan is developing well and has a good ground for sustainable development. However, we should be aware that these figures are mainly based on the availability of raw materials in countries such as Kazakhstan, Azerbaijan and Turkmenistan. In the concept of a modern economic development, states cannot fully rely on export of mineral resources. Therefore, there is a strong need to diversify the economy and deviate raw material economy to knowledge based economy.
According to the World Economic Forum, in the year 2009 Kazakhstan has reached 67th place out of 133 countries in the Global Competitiveness Index. Every year the number of participating countries in the global competitiveness survey is increasing and the method of measuring index is changing as well, which increases risk and brings challenges to achieve the goal of the government of Kazakhstan to become one of the 50 most competitive countries in the world.
While analysing the development of the economy of Kazakhstan from the collapse of the Soviet Union until today, this essay has shown that the economic development was taking upturns and downturns, as a sinusoidal curve. After obtaining its independence, economic development of Kazakhstan was heavily dependent on Russian economy, which experienced recession in the end of last century. Being able to achieve high level of economic and social development by 2007, Kazakhstan has faced the world financial crisis, which had a negative effect on its development. The main reason is that Kazakhstan is heavily dependent on the export of raw materials and is greatly integrated into the global economic environment. By looking at those factors, it is evident that the significant downturns in the economic development of Kazakhstan were based on external factors and that Kazakhstan is vulnerable to global economic trends. In 19 years of independence there were no internal crises, which would greatly affect the development of economy and social sphere and thus competitiveness. This indicates that Kazakhstan has an open market economy and current crisis proved that market plays a decisive role in the country and state regulation is gradually reducing its impact on the economic development. Government of the Republic of Kazakhstan has adopted the development strategy till 2020. Main targets are to decrease dependence of the economy on oil export and to make production the main factor of economic development by 2020, which in turn depends on the level of nation's education. Therefore, the diversification of economy and development of education, science and innovation are the key factors in the development of Kazakhstan today.
To conclude, the overall national situation in Kazakhstan is more or less stable and the gradual growth of the economy is being attained, unless negative global trends affect Kazakhstan. Therefore, if the strategic plan for development of Kazakhstan till 2020 is implemented successfully with the view on other factors, such as reducing corruption and spreading the democracy, Kazakhstan will achieve its goal in becoming one of the top 50 competitive countries in the world by the year 2020.