Achieving Achieving diversified growth diversified growth

and sustaining and sustaining economic stability economic stability

in Kazakhstan: in Kazakhstan: Challenges and Challenges and opportunitiesopportunities

The Kazakh economy continues its The Kazakh economy continues its

strong performancestrong performance Eight years of strong growth (10.2 % over 2000-Eight years of strong growth (10.2 % over 2000-

2007)2007) $100 billion economy, $6,600 per capita by end $100 billion economy, $6,600 per capita by end

20072007 High investment rates (fixed capital investment High investment rates (fixed capital investment

reached 28% of GDP in 2006)reached 28% of GDP in 2006) Strong financial position of the government Strong financial position of the government Foreign trade and balance of payments in surplusForeign trade and balance of payments in surplus Rapid accumulation of foreign exchange reserves Rapid accumulation of foreign exchange reserves

and National Oil Fundand National Oil Fund Inflation has edged up but remains moderate at 8%Inflation has edged up but remains moderate at 8% Prospects for a major expansion of oil output over Prospects for a major expansion of oil output over

the medium termthe medium term

Yet Kazakhstan face a number of Yet Kazakhstan face a number of development challengesdevelopment challenges

Low competitiveness outside of oil and Low competitiveness outside of oil and resource-oriented industriesresource-oriented industries

Resource dependence generally associated with Resource dependence generally associated with slower growth, more instability, and inequalityslower growth, more instability, and inequality

Some recent sources of growth (finance, real Some recent sources of growth (finance, real estate) not sustainable at current levels, and estate) not sustainable at current levels, and also pose short and medium-term risksalso pose short and medium-term risks

Growing supply bottlenecks in infrastructure Growing supply bottlenecks in infrastructure and skilled laborand skilled labor

Barriers to the mobility of labor, goods, and Barriers to the mobility of labor, goods, and servicesservices

Low level of competition on many marketsLow level of competition on many markets Low effectiveness of many public servicesLow effectiveness of many public services

Some good news for diversification Some good news for diversification prospects: the tenge has been under prospects: the tenge has been under

less pressure for appreciation than the less pressure for appreciation than the currencies of many of other oil currencies of many of other oil

exportersexporters Responsible fiscal policy and the Responsible fiscal policy and the

accumulation of surplus resources in the accumulation of surplus resources in the National Fund have slowed the real National Fund have slowed the real appreciation of the tengeappreciation of the tenge

Rapid import growth and outflows of Rapid import growth and outflows of foreign income have also worked in this foreign income have also worked in this directiondirection

Current large capital inflows of foreign Current large capital inflows of foreign debt should become more moderate, and debt should become more moderate, and pressures on the tenge may easepressures on the tenge may ease

The tenge remains weaker than in the latter The tenge remains weaker than in the latter 1990s1990s

Real Effective Exchange Rate of the Tenge (up=appreciation)

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Yet, low productivity relative to wage growth in Yet, low productivity relative to wage growth in tradable sectors may have limited the ability of the tradable sectors may have limited the ability of the Kazakh economy to exploit this relative advantage Kazakh economy to exploit this relative advantage

in recent yearsin recent years

Value added per worker relative to average wages in resource extraction and manufacturing

3

4

5

6

7

8

9

10

2001 2002 2003 2004 2005 2006

Resource extraction

manufacturing

Competitiveness also appears to suffer Competitiveness also appears to suffer from some other problems in the from some other problems in the

Kazakh business environmentKazakh business environment

Kazakhstan has some of the highest administrative Kazakhstan has some of the highest administrative costs of doing business across borders (ranked 172costs of doing business across borders (ranked 172ndnd out of 175 countries in the 2007 World Bank Doing out of 175 countries in the 2007 World Bank Doing Business Survey) Business Survey)

Relative to other CIS and Eastern European countries, Relative to other CIS and Eastern European countries, Kazakh firms are subject to a relatively large number Kazakh firms are subject to a relatively large number of various inspections, often of long duration (World of various inspections, often of long duration (World Bank BEEPS 2005)Bank BEEPS 2005)

Kazakh firms tend to complain less about these and Kazakh firms tend to complain less about these and many other administrative obstacles to business than many other administrative obstacles to business than is the case on average in the CIS or Eastern Europe, is the case on average in the CIS or Eastern Europe, yet this is not necessarily a positive sign (more yet this is not necessarily a positive sign (more efficient firms competing on world markets tend to efficient firms competing on world markets tend to complain more about such administrative costs)complain more about such administrative costs)

There is much room for improving the quality of There is much room for improving the quality of governance in Kazakhstan (Governance Matters 2007)governance in Kazakhstan (Governance Matters 2007)

Dutch disease effects could become Dutch disease effects could become more serious in the future with the more serious in the future with the

rapid expansion of oil: rapid expansion of oil: now is the time now is the time to exploit a window of opportunity for to exploit a window of opportunity for

diversificationdiversification

0.00.51.01.52.02.53.03.54.04.5

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

mln

bb

pd

off-shore

on-shore

Potential oil production

Overheating in real estate market Overheating in real estate market and growing risks in the banking and growing risks in the banking

sector are causes for concernsector are causes for concern Fifty percent of current GDP growth is Fifty percent of current GDP growth is

accounted for by construction and finance: accounted for by construction and finance: not sustainablenot sustainable

The pace of commercial credit expansion in The pace of commercial credit expansion in Kazakhstan is enormous by international Kazakhstan is enormous by international standards, is financed largely through foreign standards, is financed largely through foreign borrowing, and poses serious risksborrowing, and poses serious risks

The majority of the current credit expansion The majority of the current credit expansion consists of consumer loans, many of which are consists of consumer loans, many of which are unsecuredunsecured

Real estate markets exhibit high volatility, Real estate markets exhibit high volatility, and are subject to speculative bubbles and are subject to speculative bubbles

Four topics of primary relevance for Four topics of primary relevance for achieving diversification and achieving diversification and

stabilizationstabilization

Administrative reformAdministrative reform: improving the : improving the effectiveness of governance and the quality of effectiveness of governance and the quality of public servicespublic services

Addressing overheating:Addressing overheating: Mitigating the Mitigating the risks from, the rapid expansion in foreign risks from, the rapid expansion in foreign borrowing, credit expansion, and real estateborrowing, credit expansion, and real estate

Programs to ignite growth and Programs to ignite growth and competitivenesscompetitiveness outside of resource outside of resource industriesindustries

Housing and communal servicesHousing and communal services: : addressing bottlenecks in infrastructure and addressing bottlenecks in infrastructure and barriers to labor mobilitybarriers to labor mobility

Reforming Government Reforming Government Administration: Toward a Administration: Toward a

Performance-Oriented, Performance-Oriented, Transparent, Empowered, Transparent, Empowered, Efficient, and Accountable Efficient, and Accountable

Public Management Public Management

Administrative Reform: Administrative Reform: Lessons from World Lessons from World

ExperienceExperience It isn’t easy anywhere, and a particular challenge It isn’t easy anywhere, and a particular challenge

in the face of corruption, low capacity, weak in the face of corruption, low capacity, weak information, and low civil service payinformation, and low civil service pay

Administrative reform has taken many years, Administrative reform has taken many years, even in the most developed countries, and even in the most developed countries, and remains an on-going processremains an on-going process

Start from a deep understanding of where you Start from a deep understanding of where you are today and what you can realistically achieve; are today and what you can realistically achieve; not some abstract view of global best practicenot some abstract view of global best practice

Basic principles of good public administration Basic principles of good public administration travel well between countries, but require a travel well between countries, but require a careful adaptation to local conditionscareful adaptation to local conditions

Importance of a strong long-run commitment of Importance of a strong long-run commitment of the government in policy and resourcesthe government in policy and resources

Implementing results oriented Implementing results oriented public management will involve public management will involve

changes to:changes to: Governance including roles of ministers, Governance including roles of ministers,

professional advisers, managers and service professional advisers, managers and service delivery personneldelivery personnel

Systems of accountability and transparencySystems of accountability and transparency Allocation of functions amongst ministries and Allocation of functions amongst ministries and

between levels of government and forms of between levels of government and forms of public and private organisationpublic and private organisation

Budgeting and financial management systemsBudgeting and financial management systems Civil service laws, structures, processes and Civil service laws, structures, processes and

remunerationremuneration Strategic planning, policy analysis and evaluationStrategic planning, policy analysis and evaluation Methods of management: away from compliance Methods of management: away from compliance

towards quality, responsiveness to citizens and towards quality, responsiveness to citizens and continuous learningcontinuous learning

Resources Resources Culture Culture

Some issues to considerSome issues to consider

Management of the reform processManagement of the reform process Prioritising and sequencing reform Prioritising and sequencing reform

initiatives and projectsinitiatives and projects Achieving balance in practical terms Achieving balance in practical terms

between responsibility and accountabilitybetween responsibility and accountability Making the joint stock companies and Making the joint stock companies and

social business corporations achieve resultssocial business corporations achieve results Making performance management work Making performance management work

across other state institutions in this across other state institutions in this constitutional and cultural environmentconstitutional and cultural environment

Some issues cont.Some issues cont. Clarifying the roles of ministers and Clarifying the roles of ministers and

administrative executivesadministrative executives Linking strategic planning to budgets and Linking strategic planning to budgets and

reporting systemsreporting systems Accountability system: what is appropriate to the Accountability system: what is appropriate to the

constitutional environment?constitutional environment? Accountability must be based on understanding Accountability must be based on understanding

of the linkages between action and outcome of the linkages between action and outcome within the complete management environmentwithin the complete management environment

Avoid badly chosen performance indicators that Avoid badly chosen performance indicators that can be very damagingcan be very damaging

Building capability needed for better public Building capability needed for better public sector performance – remember Bismarksector performance – remember Bismark

Addressing overheating and Addressing overheating and maintaining financial maintaining financial

stabilitystability

Improving the allocation Improving the allocation of risksof risks

Alleviating moral hazardAlleviating moral hazard: : international creditors and Kazakh international creditors and Kazakh banks should not perceive that the banks should not perceive that the government is implicitly insuring their government is implicitly insuring their risky activities on the real estate risky activities on the real estate market market

Commitment needed to bank problem Commitment needed to bank problem resolution procedures that allocate a resolution procedures that allocate a good share of the risk of failure to the good share of the risk of failure to the private (commercial) sectorprivate (commercial) sector

Improving the management of Improving the management of risks by AFN and the risks by AFN and the

governmentgovernment MacroeconomicMacroeconomic policy measures to absorb policy measures to absorb

liquidity (restrictive fiscal and monetary policy)liquidity (restrictive fiscal and monetary policy) RegulationsRegulations to ensure soundness and to slow to ensure soundness and to slow

risk accumulation in the financial sectorrisk accumulation in the financial sector Strengthened Strengthened supervisionsupervision to enable monitoring to enable monitoring

and enforce regulationsand enforce regulations Strengthening the Strengthening the capacity capacity of AFNof AFN Enhancing Enhancing consolidated supervisionconsolidated supervision Moving to risk based supervision Moving to risk based supervision strengthen strengthen

governancegovernance Readiness to manage financial sector problems: Readiness to manage financial sector problems:

contingency planningcontingency planning and and problem bank problem bank supervision and regulationsupervision and regulation

Financial Instability has Financial Instability has been quite common in been quite common in

emerging markets: many emerging markets: many countries have endured countries have endured bouts of instability and bouts of instability and

rebounded quicklyrebounded quicklyEffective regulation and contingency Effective regulation and contingency

planning can reduce the economic planning can reduce the economic costs of financial instability, as well costs of financial instability, as well as prevent the contagion of the as prevent the contagion of the entire banking or financial system entire banking or financial system from the insolvency of individual from the insolvency of individual organizationsorganizations

Government programs to Government programs to promote competitiveness promote competitiveness

and diversificationand diversification

There exist a number of important There exist a number of important policy directions for promoting policy directions for promoting

competitiveness and competitiveness and

diversificationdiversification Investment in human capitalInvestment in human capital: human capital is a : human capital is a primary determinant of productivity and primary determinant of productivity and competitiveness. Public education and support for competitiveness. Public education and support for professional training in Kazakhstan is under-funded professional training in Kazakhstan is under-funded and (in many cases) outmoded. and (in many cases) outmoded.

Lowering tax and other administrative burdens Lowering tax and other administrative burdens on business.on business. The presence of resource revenues can support the The presence of resource revenues can support the

compensation of non-resource sectors for higher costs compensation of non-resource sectors for higher costs associated with a stronger Tenge through a lower overall associated with a stronger Tenge through a lower overall tax burden (although the dependency of state finance on oil tax burden (although the dependency of state finance on oil should not become too great).should not become too great).

The foreign trade regime is in need of simplification and the The foreign trade regime is in need of simplification and the alleviation of exceedingly high non-tariff barriersalleviation of exceedingly high non-tariff barriers

Facilitating opportunities forFacilitating opportunities for fair competitionfair competition, , including the entry to, and exit from, marketsincluding the entry to, and exit from, markets

Industrial policy Industrial policy

Industrial policyIndustrial policy Kazakhstan can profit from careful Kazakhstan can profit from careful

attention to world experience, which is attention to world experience, which is very mixedvery mixed

The process should be understood as The process should be understood as an interactive search of all levels of an interactive search of all levels of government and business to identify government and business to identify and exploit growth opportunitiesand exploit growth opportunities

• Incentives of government officials and Incentives of government officials and businesses for decentralized initiatives are key businesses for decentralized initiatives are key to successto success

• The government can play a potentially The government can play a potentially important role in supplying specific public important role in supplying specific public goods and coordination goods and coordination

Important characteristics of Important characteristics of effective industrial policies effective industrial policies to support diversification to support diversification

Very high level political support and monitoringVery high level political support and monitoring Clear channels of communication with the private Clear channels of communication with the private

sectorsector Mechanisms for transparency and accountabilityMechanisms for transparency and accountability Clear benchmarks and criteria for success when Clear benchmarks and criteria for success when

providing support to the private sectorproviding support to the private sector Sunset clauses to force the system into letting Sunset clauses to force the system into letting

losers go: “success will be determined not by how losers go: “success will be determined not by how well the system picks winners, but on how well the system picks winners, but on how effectively it lets losers go”effectively it lets losers go”

Reforming Housing and Reforming Housing and Communal Services in Communal Services in

KazakhstanKazakhstan

Key Constraints Currently Faced by Key Constraints Currently Faced by Communal Service Providers in Communal Service Providers in

KazakhstanKazakhstan Tariff structureTariff structure

Cost-based, no allowance for rehabilitation/investment or Cost-based, no allowance for rehabilitation/investment or incentives to reduce costsincentives to reduce costs

Progressive tariffs not permitted.Progressive tariffs not permitted. Financial/regulatory environmentFinancial/regulatory environment

No mechanism for lending to utilitiesNo mechanism for lending to utilities Sector is not attractive for private investment due to tariff, Sector is not attractive for private investment due to tariff,

regulatory constraintsregulatory constraints Old and inefficient infrastructureOld and inefficient infrastructure

Over-designed from soviet-era norms-based demand criteriaOver-designed from soviet-era norms-based demand criteria Population shifts following independencePopulation shifts following independence Little investment in maintenance, rehabilitationLittle investment in maintenance, rehabilitation Internal apartment networks especially poorly maintainedInternal apartment networks especially poorly maintained

Institutional arrangements following decentralizationInstitutional arrangements following decentralization No apex body providing coordinated policy, strategic guidanceNo apex body providing coordinated policy, strategic guidance Need for strengthened institutions, management capacity at local Need for strengthened institutions, management capacity at local

level and in utilities.level and in utilities.

Reforming housing and Reforming housing and communal services: lessons communal services: lessons

from international from international experience (1)experience (1)

The The reform process requires the full reform process requires the full commitment of its policy makerscommitment of its policy makers to correctly to correctly balance financial and political objectives.balance financial and political objectives.

Success is often unattainable without Success is often unattainable without reforming the external environmentreforming the external environment, , especially the role of the owner.especially the role of the owner.

Fundamental reforms are not a quick fixFundamental reforms are not a quick fix and and cannot be substituted by private sector cannot be substituted by private sector participation.participation.

There must be an There must be an adherence to financial adherence to financial sustainability objectives.sustainability objectives.

Other Other external stakeholders may be external stakeholders may be importantimportant to balance potentially conflicting to balance potentially conflicting objectives.objectives.

Reforming housing and Reforming housing and communal services: lessons communal services: lessons

from international from international experience (2)experience (2) Housing management and maintenance are not Housing management and maintenance are not

natural monopolies, thus are inherently different from natural monopolies, thus are inherently different from CSs.CSs.

Apartment owners need to own and be responsible for Apartment owners need to own and be responsible for apartment buildings.apartment buildings.

Separating CS functions (ownership, oversight, Separating CS functions (ownership, oversight, service provision) and arm’s length transactions are service provision) and arm’s length transactions are important to the institutional setupimportant to the institutional setup

Customers can be an important voice for improving Customers can be an important voice for improving CS providers performanceCS providers performance

Guidance/regulations should not be overly restrictive. Guidance/regulations should not be overly restrictive. Utilities do not necessarily have to adhere to all that Utilities do not necessarily have to adhere to all that is prescribed in order to succeed. Each case is unique, is prescribed in order to succeed. Each case is unique, with each utility possessing a mix of attributes that with each utility possessing a mix of attributes that has worked for it in its own institutional setting. has worked for it in its own institutional setting.