Kazak Growth Figures Conceal Resource Dependency

In the 20 years since Kazakstan became a sovereign state, exploitation of its massive oil reserves have been crucial to turning it from a Soviet republic into a country that has embraced the market economy and attracted significant foreign investment.

However, the government’s failure to diversify the economy over this period has left Kazakstan dependent on the vagaries of global commodity markets.

As the world economy looks set to dip into further recession following the failure to recover from the recent financial crisis, the prospects for an oil-dependent Kazakstan over the next five to ten years do not look good.

The rise in oil prices over the last decade has brought Kazakstan rich export revenues, but the downside has been that this has allowed policymakers to sit back and enjoy the income without turning their minds to economic structural imbalances.

If a global economic slowdown reduces demand for oil and thus the price, Kazakstan will suffer a cut in the revenues on which its entire economic, financial and social system is built.

As Kazakstan’s independence day approaches on December 16, the authorities are keen to stress the country’s achievements to date, particularly on the economy.

In his annual address at the beginning of this year, President Nursultan Nazarbaev cited the growth of gross domestic product, GDP, per capita – seen as an indicator of a country’s standard of living – as a sign of how things had improved since independence. Per capita GDP now exceeded 9,000 US dollars, he said.

While the arithmetic is undoubtedly accurate, other yardsticks for living standards – health and education spending and economic disparities – as well as the composition of GDP itself are less impressive.

The World Health Organisation recommends that government spending on health should be equivalent to at least five or six per cent of GDP. In Kazakstan, the figure is 3.7 per cent, a third of what high-income countries like Germany spend, and less than some other former Soviet states. Russia, for example, spends the equivalent of 5.4 per cent of GDP on healthcare.

Spending on education is similarly meagre at the equivalent of 3.6 per cent of GDP.

Another standard-of-living measure on which Kazakstan sits far behind the more advanced economies is the ratio of wages to GDP. In Kazakstan, it is about a sixth of GDP whereas in a prosperous country one would expect it to be 50 per cent or more.

In most developed economies, more than three-quarters of GDP is generated by human and technological capital, with natural resources accounting for the rest. The composition of Kazakstan’s GDP is more or less exactly the reverse, with crude oil and metal extraction accounting for the bulk of it. Some 70 billion out of a total GDP figure of 150 billion dollars is generated by oil and metals; add to that the construction and transport inputs for those sectors, and you are close to a situation where three-quarters of GDP is attributable to extractive industries alone.

The dynamics of imports and exports are also those of a less developed economy. Around three-quarters of what Kazakstan produces is not for domestic consumption, and the country imports almost half of the items it does consume.

If commodity prices continue their upward trend, the trade balance will continue to favour Kazakstan. But that cannot be taken as a given. There will always be demand for oil and metals, but a downward adjustment in prices will be a blow to Kazakstan, and also to the government’s ability to spend its way out of crisis. That could pose a risk to social and political as well as economic and financial stability.

In the last 20 years, Kazakstan has joined the ranks of the top 20 oil producing nations. But the oil money has not trickled down to ordinary people, and other economic sectors have not developed in parallel. The current structure of GDP and government expenditure suggests a failure to make the most of Kazakstan’s resource wealth and build a solid foundation for the future.

Pyotr Svoik sits on the governing board of the National Social Democratic Party of Kazakstan, and head of the non-government Anti- Monopoly Commission for Almaty.

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