OECD Supports Strengthening Agricultural Cooperatives in Kazakhstan

The OECD Eurasia Competitiveness Programme, launched in 2008, helps accelerate economic reforms and improve the business climate to achieve sustainable economic growth and employment in two regions: Central Asia and Eastern Europe and the South Caucasus. The Kazakhstan Regional Competitiveness Project aims to promote regional competitiveness and inclusive growth in Kazakhstan’s regions. The project works with sub-national administrations and regional stakeholders to diversify sources of investment and increase private sector competitiveness through the design and implementation of reforms to improve the business climate.

As part of the Kazakhstan Regional Competitiveness Project, the OECD prepared a Policy Handbook for Strengthening Agricultural Cooperatives in Kazakhstan, which provides guidance for the government of Kazakhstan on the necessary reforms to strengthen agricultural cooperatives and thereby help small-scale producers overcome market failures and integrate into local supply chains. This policy handbook was presented and peer reviewed at the 2014 OECD Eurasia Competitiveness Round Table in November in Paris, a policy network that brings together high-level representatives and technical experts from Eurasian countries, OECD member countries and partner organisations. The Round Table meets annually and serves as a platform for peer review and knowledge sharing on the implementation of competitiveness reforms. Kazakhstan’s delegation to Paris was led by Yerbol Orynbayev, assistant to the President of Kazakhstan, along with Alikhan Baimenov, chairman of the Steering Committee of the Regional Hub of Civil Service of Central Asia; and Arman Yevniyev, executive secretary of the Ministry of Agriculture.

In Astana, this handbook was presented on Dec. 10, 2014, to the Ministry of Agriculture, KazAgro, the Fund for Financial Support of Agriculture, farmers’ associations and other relevant stakeholders. During the round-table meeting, Minister of Agriculture Assylzhan Mamytbekov noted that all recommendations of the OECD coincide with the draft law on agricultural cooperation prepared by the Ministry of Agriculture, as well as a number of other changes in the legislation. The project was carried out with the financial support of the European Union and the government of Kazakhstan.

Kazakhstan has the second highest availability of arable land per capitain the world, with over 77 percent of its territory classified as agricultural land. Agriculture plays an important role in Kazakhstan’s economy, society and political system. It accounted for 5 percent of gross domestic product (GDP) in 2013, and was the largest sector by far in terms of employment (24 percent). In spite of their important contribution to agricultural production, small farms in Kazakhstan face numerous structural size-related disadvantages that impede their ability to access supply chains, compete with large-scale agricultural enterprises and exploit their inherent productivity advantages. The main obstacles include deficiencies in basic rural infrastructure; limited access to agricultural education, research and development, and extension services; credit constraints; and a lack of mobility in the market for agricultural land.

Agricultural cooperatives can be an effective way to enhance the competitiveness of small-scale producers and improve the impact of policies targeting small-scale agriculture. Cooperatives are bottom-up organisations, created by farmers to overcome market failures and increase the welfare of members.

Agricultural cooperatives are underdeveloped in Kazakhstan, and many registered cooperatives are inactive or ineffective due to poorly designed policies to stimulate their establishment and growth. Cooperatives are often established solely to take advantage of state subsidies and government support programmes, and do not provide real benefits to their members. Several challenges need to be addressed in the short term in order to facilitate the development of agricultural cooperatives in Kazakhstan.

First, there are weaknesses in the current policy environment. The current legal framework is unnecessarily complex, with five separate laws on cooperatives. In addition, tax policies can lead to double taxation of cooperative members, creating disincentives to the formation of new cooperatives.

Second, farmers have limited confidence in cooperatives and little awareness of their potential benefits. Kazakhstan’s Soviet legacy means farmers automatically associate the term “cooperative” with a production cooperative, a remnant of the former collective farm system. They do not understand the concept of cooperatives in the context of a market economy. Their experience with collective agriculture during the Soviet period means they have little confidence in the potential benefits of cooperation.

Third, there is a lack of targeted financial support for agricultural cooperatives in Kazakhstan. Cooperatives require substantial investment during the early stages of development, as well as financing for short-term working capital and long-term investment needs. Currently the main focus of government policy for agricultural cooperatives is top-down financial support, which is primarily provided through subsidies and concessional loans to cooperatives. These policies have been largely ineffective in stimulating the formation of a functioning cooperative movement.

Long-term challenges will also need to be tackled to ensure the sustainability of agricultural cooperatives in Kazakhstan. For instance, there are significant skills shortages in rural Kazakhstan, particularly in the agricultural sector. This is partly driven by low agricultural wages, which makes it difficult for cooperatives to find skilled employees and managers. There are no targeted educational programmes to train cooperative members in operational issues and support cooperative managers in areas relating to governance. Furthermore, input suppliers, processing facilities and retailers have little interest in selling inputs to or purchasing outputs from smallholders. In Kazakhstan, there are no policies or programmes in place to encourage these large players to work with cooperatives. Additionally, there is a lack of proactive behaviour towards small-scale farmers, such as forward contracting, renting transport equipment and supplying households and small-scale individual farms with technical and financial assistance.

In order to strengthen agricultural cooperatives in Kazakhstan in the short term, the OECD has recommended that the government of Kazakhstan take the following actions, based on international experience: reform the policy environment, create awareness and trust, and provide targeted financial support.

To reform the policy environment, the OECD recommends reforming the legal framework for cooperatives and simplifying registration procedures, as well as reforming the tax code and reducing the tax burden for cooperatives. To create awareness and trust, the recommendation is to educate small farmers in rural areas on the benefits of cooperatives and provide information services and technical assistance to those setting up cooperatives. Finally, targeted financial support can be provided by developing targeted financing instruments for cooperatives and encouraging greater private sector participation in cooperative financing.

The OECD Policy Handbook on Strengthening Agricultural Cooperatives will be published by the OECD press in early 2015.

The author is a policy consultant and an instructor at the Graduate School of Public Policy of Nazarbayev University.