Due to its geographical location, Kazakhstan is a country rich of natural resources such as copper, iron, aluminum, lead, natural gas and oil. Thus, the resource sector plays a significant role in the economy of Kazakhstan. Extraction and production of natural resources contributed to the economic growth of the country in the 2000s, but the vulnerability of oil prices raised the issue of the natural resource curse, which is also called the Dutch disease.
Nature rewarded some countries with natural resources, while other countries do not have such advantage. However, as studies show, countries with high resource endowment perform worse economically than countries without it. The representative example of such case is the economic success of the Asian Tigers (Hong Kong, South Korea, Singapore, and Taiwan) that obtained high growth rates because of exports of manufactured goods and ‘without large resource reserves’ [Humphreys et al., 2007]. In contrary, countries with natural resources often fail or face difficulties in implementing important economic policies to achieve the economic growth. The resource endowment and its effects on a country’s economy is not a blessing but rather a curse [Mehlum et al., 2006]. This phenomenon is called the Dutch disease or originally the resource curse. The term ‘resource curse’ was introduced by Richard Auty in 1993 to describe the “situation at which the countries rich with natural resources weren’t able to use this wealth for development of the economy and, contrary to intuition, had lower economic growth than the countries which own smaller natural resources” [Ondagash et al., 2014].
Kazakhstan is one of the major oil producers and has “the second-largest reserves as well as second-largest oil production among the former Soviet republics after Russia” [U.S. Energy Information Administration, 2015]. According to Amineh (2006), after the collapse of the Soviet Union in 1991 and after gaining independence, post-Soviet states, rich of oil and gas, were supposed to easily develop economically, so there were also hopes and positive perspectives for Kazakhstan. Newly independent Kazakhstan did not have the technology and funds to extract oil and gas, so it attracted foreign investors. Thus, extraction of oil turned into the basis of the economic development of Kazakhstan, which became the first post-Soviet country to attract the large-scale foreign investment [Babak, 2006]. However, foreign companies mainly invested in oil extraction leading to the decline of the non-commodity sector. The focus on the development of the resource sector had a negative impact on the development of other sectors; this effect can be considered as the Dutch disease.
Due to the boom of the oil sector, the government paid less attention to the non-resource sectors, such as agriculture and manufacturing. With the increase of oil prices Kazakhstan started to export more crude oil making it difficult to produce and export non-commodity goods. The revenues from selling oil abroad were spent on imports of foreign-produced consumer goods, which increased the competition to domestic products. Humphreys et al. (2007) state that agriculture is the major suffering sector under the Dutch disease. In a country with high resource endowment, the manufacturing and agricultural sectors are destroyed because of increased prices for non-traded goods that are used as inputs in production. Foreign investment in the natural resource sector forces out the non-natural resource sectors such as manufacturing and agriculture, which do not receive equal economic support and investment. Therefore, it is significant to find ways to prevent the Dutch disease in Kazakhstan.
As the best solution to the Dutch disease, Humphreys et al. (2007) offer to leave oil in the ground and keep it there. However, this solution is utopic and the government will not immediately stop extracting oil, so the main step to fight the natural resource curse is to decentralize and diversify economy. A country with a diversified economy grows sustainably in more non-natural resources-based sectors and creates a more productive environment, while an undiversified economy limits the development and efficient production of the agricultural and manufacturing sectors.
Decentralization of income and diversification are the most important priorities of economic reforms in Kazakhstan. State-owned oil and gas companies dominate the economy of Kazakhstan making it harder for private firms, small and medium enterprises (SME) to develop. According to Amineh (2006), the government should choose a more decentralized model with ‘decentralized income redistribution’ that favors the private sector and SME. Decentralized income distribution means that income should be fairly distributed across different sectors of the economy rather than focusing only on the natural resource sector. As stated in the national plan “100 steps”, initiated by First President of Kazakhstan Nursultan Nazarbayev, the country aims at decentralizing the budget management [KazISS, 2019]. Moreover, the government can decentralize income with the help of foreign investment as the introduction of investment boosts decentralization of the economy. Kazakhstan should attract foreign investors to non-commodity sectors in order to build a healthy decentralized economy. In addition, it is a key step to diversify the economy. In their article, Ondagash et al. (2014) mention the ways to diversify the economy – the attraction of investments, the reorganization of system of the state investment, the development of the investment market and state-private partnership. The research of Hausmann and Klinger (2007) indicates that Kazakhstan should specialize on exporting those products, in production of which the country has a comparative advantage (wheat, crops). By specializing on products with a comparative advantage, Kazakhstan will be able to build a well-connected structure of the market. The government should stimulate the increase in demand for non-tradable goods to allocate the resources from the tradable resource sector. Additionally, the state should properly supervise government spending to have good management to support diversification of the economy.
The attraction of foreign investment to non-commodity sectors has been one of the significant challenges for Kazakhstan. The government is taking small steps in the direction of decentralization and diversification. Working on attracting investment to sectors other than natural resource extraction, the country has launched several initiatives opening economic sectors to foreign investment so that foreign companies have an equal footing with domestic companies [OECD, 2018]. In the strategy “Kazakhstan 2050”, the government announced that the agricultural sector would be the major factor in future economic development and diversification. If fully implemented, this strategy will make Kazakhstan a leader in supplying agricultural products to meet growing global demand. Concerning manufacturing, the Strategy for Industrial and Innovative Development was adopted in May 2003 by the presidential decree [Kazakhstan Business Magazine, 2003]. The strategy intends to move the economy away from resource dependency and support industrial modernization. Thus, the government provides funding and support for the development of the agricultural and manufacturing sectors that will diversify the country’s economy.
Le and Munthe-Dahl (2014) suggest creating a strong national fund in order to avoid the natural resource curse. Kazakhstan has the National Fund (NFRK) that was established by the presidential decree No. 402 “On the National Fund of the Republic of Kazakhstan” in 2000 [Ibadildin, 2011]. The main purpose of the National Fund is to save money for future generations from oil and gas revenues. The National Fund was based on the successful example of the Norwegian Government Pension Fund Global, which is known as Petroleum Fund [Kalyuzhnova, 2011]. The Ministry of Finance receives oil and gas revenues, the portion of which is transferred to the National Fund. Moreover, the National Fund has a stabilization function of saving money in oil price fluctuations. During the 2008 financial crisis, the fund was used to stabilize the economic situation of the country by subsidizing the banking sector, but the contribution of the NFRK was not adequately efficient due to non-transparency and poor institutional quality, which tend to lessen the positive influence of the National Fund. Kalyuzhnova (2011) recommends to make the structure of the fund more transparent and accountable, establish a ‘system of specific indicators’, follow the Santiago Principles and reduce the dependency on the resource sector revenues. In 2020, the government introduced a change in the National Fund’s regulations: the guaranteed transfer will be decreased to 2.7 trillion tenge protecting the state budget from oil price fluctuations [Radionov, 2020]. Thus, the government has implemented necessary changes in the NFRK in order to reduce dependence on oil revenues.
Overall, it is important for Kazakhstan to find a balance between the solutions mentioned above. Kazakhstan needs to follow multiple strategies to reach diversification of the economy and proper management of oil production and investment in non-commodity sectors. The resource sector played a significant role in achieving economic growth in the first three decades of independent Kazakhstan. The Dutch disease is one of the main challenges for a sustainable and long-term economic growth of Kazakhstan. Therefore, the government of Kazakhstan should implement more diversified policies, support the agricultural and manufacturing sectors, attract foreign investors and build competitive non-commodity industries to diversify economy.
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.
Dautova Ilana holds a Bachelor of Science degree in Economics from KIMEP University (Almaty, Kazakhstan). She has also studied at the Foundation course at Lancaster University (Lancaster, United Kingdom) and on the exchange program at Ewha Womans University (Seoul, South Korea). Previously, she worked as a business development manager at the POSCO International Corporation.