OECD: Developing Diversified Private Sector is Key to Kazakhstan’s Economic Sustainability

ASTANA — The key to Kazakhstan’s economic development and sustainability lies in developing a strong and diversified private sector, according to a report by the Organization for Economic Co-operation and Development (OECD). The report, which was dedicated to analyzing the business climate in the country, was released on Aug. 24. 

According to the OECD analysis, Kazakhstan can sustain strong growth rates in the long run. However, doing so will necessitate additional structural reforms to support structural transformation and the transition to a more sustainable development model. Photo credit: Shutter stock

The report stated that to build a robust and diversified private sector, the Kazakh government needs to address relevant policy issues that have hampered private sector development and address the changing needs of businesses in a rapidly changing global context. 

According to the report, Kazakhstan, the largest economy in Central Asia and a key hub for regional trade and investment, has had an annual real GDP growth of 5% since emerging from the transitional crisis in 1996. The country’s labor productivity and investment increased dramatically, particularly in the first decade of the twenty-first century. 

The extraction and export of immense natural resource reserves continue to be the country’s key driving force behind its robust economic performance. Factors such as Kazakhstan’s highly internationalized economy, openness to foreign investment and technology, and participation in international trade organizations such as the World Trade Organization (WTO) allowed it to swiftly create high-tech industries in these fields.

However, the report indicates that emphasis on the extractive industries has led to the economy’s non-inclusiveness and vulnerability to external shocks. Investment and the most productive jobs are concentrated in a few industries that provide relatively few jobs, with small and medium-sized enterprises playing only a minor role, 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,” reads the report. 

The OECD survey among foreign private corporations in Kazakhstan, primarily European firms, as well as several business and trade groups, revealed three general conclusions. 

Improving communication infrastructure and skills may accelerate the private sector’s digitalization 

Despite high enthusiasm among respondents about digital opportunities in Kazakhstan (nearly 80%), a lack of infrastructure and skills is holding back the digital transformation process. Most respondents said they already utilize advanced digital tools and positively assess digital technologies that improve the process of providing public services and reduce the time and costs involved with business interactions with government agencies. According to the report, more investment is needed in communications and digital infrastructure for digital transformation and in the legal framework supporting the process.

The report commended Kazakhstan’s progress in providing inexpensive access to broadband information and communication infrastructure for businesses and residents, but obstacles remain in improving its quality. 

“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 communications technology, which accounted for only 1.98% of total investment in 2019, significantly below the OECD average of 11.4%,” reads the report. 

Trade facilitation and contract enforcement will encourage diversification

Most respondents said that the Kazakh government has progressed significantly in implementing reforms to support the private sector over the past five years. Only 6% of respondents indicated that the business environment in Kazakhstan is generally unfavorable. Businesses commended progress in several areas affecting their day-to-day operations, notably the simplification of registration and licensing requirements.

However, the OECD survey indicated that trade facilitation and contract enforcement challenged businesses, implicating their ability to contribute to the government’s diversification program.

While the OECD Trade Facilitation Indicators (TFI) demonstrate that Kazakhstan has made some progress in improving its trade facilitation system, there is still a significant gap with the OECD average that could be reduced through developing and implementing targeted measures in economic policy. 

“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 firm’s concerns about the reliability of implementation and transparency decisions will be important for the government’s ability to attract high-quality investment,” notes the report. 

Lowering regulatory and competitive barriers to investment can boost FDI

The OECD survey respondents most positively assessed economic policy measures to support foreign investors. Flagship projects such as the Astana International Financial Centre and the creation of special economic zones were among the top three economic policies respondents rated as “very useful.” Many respondents also commended platforms for public-private dialogue, such as the Foreign Investors Council. This positive assessment of investment-related reforms comes from a relatively open regulatory regime for foreign direct investment (FDI), as evidenced by Kazakhstan’s high performance in the OECD FDI Regulatory Restrictions 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,” reads the OECD report. 

However, the report indicates that the actual level of foreign investment remains low, especially outside the commodity sector. 

“If the overall statutory regime of FDI is relatively open, there are nevertheless a number of regulatory restrictions – particularly in service trade, but also in certain network sectors – that may impede investment. Similarly, while the government is pushing ahead with a 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,” the report notes. 

The OECD report conclusions

According to the OECD analysis, Kazakhstan can sustain strong growth rates in the long run. However, doing so will necessitate additional structural reforms to support structural transformation and the transition to a more sustainable, diverse, and inclusive development 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,” the report reads. 

The report concludes that if Kazakhstan’s government fulfills its commitments to implement the planned reforms, it can set the groundwork for a better future for its people. 

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