Kazakhstan Should Stay Focused on Progress in Global Business Rankings

Having inherited moribund economy and outdated production capacities from the Soviet Union and being generously endowed with natural resources, Kazakhstan faced a developmental conundrum: how to exploit the natural resources and at the same time avoid the detriments of the “Dutch disease”?

During the more than 20 years of independence, Kazakhstan has set a path of a dynamically developing country with solid ambitions to firmly occupy its own place in the highly competitive and ever changing global environment. The country has set a course of development for the manufacturing, automobile and petrochemical industries. National programmes have been developed aiming at attracting new technologies to various spheres of the economy. Among other prerequisites to sustainable development are financial sector development, small- and medium–sized enterprises support and administrative reforms.

Reforms in these sectors provide a basis for the competitive advantage of the domestic firms, developing internal markets and attracting foreign capital and know-how. How well has Kazakhstan done in creating favourable conditions for internal and external stakeholders?

Recent rankings provide a nuanced picture of Kazakhstan’s successes and areas for further development.  The latest Doing Business 2013 ranking of the World Bank recognised Kazakhstan as having the most improved ease of doing business across several areas of regulation, such as starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Across these indicators, Kazakhstan has entered the top 50 countries with the most favourable business conditions.  The research recorded the procedures, time and cost for a business in the construction industry to obtain all the necessary approvals to build a warehouse in Almaty, the country’s largest business city, connect it to basic utilities and register the property.

According to the report, Kazakhstan achieved particular progress in registering property and obtaining construction permits. In registering property, Kazakhstan improved by nine points rising from 27th to 18th in rank.  In obtaining construction limits, although good progress was achieved, this indicator still stands as a weak point among the indicators. Among other indicators dragging the country to low-performers are trade with related indicators such as trading across borders, time and cost to import and export. Kazakhstan does relatively good in the taxation area. The ranking estimates the administrative burden of complying with Kazakhstan’s taxes and the volume of taxes paid. According to the ranking, on average, firms make seven tax payments a year, spend 188 hours a year filing, preparing and paying taxes and pay total taxes amounting to 28.6 percent of profit. Overall Kazakhstan stands at 18 in the ranking of 189 economies on the ease of paying taxes. The figure below visualises the progress of Kazakhstan in tax administration reforms. As the figure shows, Kazakhstan is far ahead of the regional (Europe and Central Asia) average.

 

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source: http://www.doingbusiness.org/data/exploreeconomies/~/media/giawb/doing%20business/documents/profiles/country/KAZ.pdf?ver=2

The Doing Business ranking analysis of the construction industry reflects a wider state of governance in Kazakhstan. According to the World Bank’s Global governance ranking, governance consists of the traditions and institutions by which authority in a country is exercised.  This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them. In the government effectiveness indicator, Kazakhstan improved from 17th to almost 40th place in the global ranking since 2002 (with the higher number indicating the higher rank). In other indicators, including regulatory quality, rule of law and control of corruption, Kazakhstan has also made a notable shift forward.

 

Indicator Year Percentile rank

(from 0 to 100)

Government effectiveness 2002 17.07
  2007 32.52
  2012 39.71
Regulatory quality 2002 23.53
  2007 40.29
  2012 37.80
Rule of Law 2002 13.88
  2007 21.53
  2012 30.81
Control of Corruption 2002 10.24
  2007 18.45
  2012 20.57

Earlier this year, the Heritage Foundation released its 20th annual Index of Economic Freedom, which evaluated countries in four broad areas of economic freedom with ten specific categories: rule of law (property rights, freedom from corruption); limited government (fiscal freedom, government spending); regulatory efficiency (business freedom, labor freedom, monetary freedom); open markets (trade freedom, investment freedom, financial freedom). In this study, the Washington, DC-based think tank rated Kazakhstan as firmly improving its economic freedom ranking: the country’s economic freedom score was 63.7, making its economy the 67th freest in the 2014 index. Kazakhstan’s score was 0.7 point higher than last year, with notable improvements in investment freedom, business freedom and monetary freedom.

It is worth noting that overall Kazakhstan ranks 11th out of 42 countries in the Asia–Pacific region, and its overall score is above the world and regional averages in this index.

Over the 17 years that Kazakhstan has been graded in the index, its economic freedom has advanced by 22 points, one of the 20 best improvements recorded by any country. This progress has been supported by improvements in regulatory efficiency and market openness. Scores for seven of the ten economic freedoms, including monetary freedom, trade freedom, financial freedom, fiscal freedom and business freedom have increased by double digits. Once considered a “repressed” economy, Kazakhstan has risen to “moderately free” since 2008.

As a recommendation, Heritage Foundation suggests deeper structural reforms for overcoming challenges associated with the need to reduce dependence on the energy sector and achieve more diversified growth. Besides, better improvement is expected in the area of property rights and freedom from corruption to maintain sustainable growth in the ranking.

Overall, few rankings avoid criticisms from various stakeholders. Some criticise the rankings for a biased approach and conflicts of interest, such as financial credit rankings. Other rankings, including those discussed in this article, are criticised by some for erroneous methodology approach. Despite the criticism, the rankings are worth paying attention to for they provide consumers with information with certain data and dynamics. A critical analysis may shed light on how to proceed with further development.