ERI's Chairman of the Board highlighted five policy directions for further diversification of Kazakhstan's economy
24.11.2022
First. Industrialisation.
It is important to understand what kind of industrialisation? Studies show that the productivity of enterprises that trade on foreign markets is higher than that of those that operate at home. Furthermore, empirical studies confirm that exporting also leads to a consequent increase in productivity of enterprises. The popular vision of import substitution can be seen as a "first step" in an export-oriented policy. In practice, it is important to apply reciprocal commitment mechanisms for business, as over time, enterprises which "master" the domestic market through state support forget about foreign markets. Closing down and generating non-competitive players in the long term can lead just to threats to economic security, forced imports and technological backwardness. We know that over the next decade Kazakhstan will be actively modernising its transport and municipal infrastructure, building schools, hospitals and housing. This is a big market for business and it is important to use it to build competitive advantages and preferably to export. We will need raw materials both for domestic production and for export revenues. Diversification does not mean an absolute rejection of exports of raw materials and traditional industries (e.g. metallurgy). Unlike other sectors, the food industry has a balanced number of small, medium and large players in terms of gross value added (about one-third each) and large employment (over 120,000 people). For reference: In many manufacturing sectors, the gross value added is provided by large and medium-sized enterprises. For example, tobacco products - 100% GVA - 2 large enterprises, oil refining - 90% GVA - 9 enterprises, pharmaceuticals - 65% - 3 enterprises, metallurgy - 85% - 27 large enterprises, chemistry - 75% - 11 large enterprises, etc. The industry uses primary raw materials from the agro-industrial complex. The effect of a well-developed food industry is large and visible to the population "on the counters" and on the "macro figures" in the economy. If we talk about food security, it is better to focus on increasing the competitiveness of produced food and agro-industrial primary products. An important point is that if we compete on the counters of other countries, securing our own market is already a "matter of technique". These are transit and logistics, financial, technical services (engineering and repair), trade (retail and wholesale, including digital opportunities), creative industries and tourism. Given the geopolitical situation, this is a great chance to gain regional leadership in the above-mentioned areas. We are remote from major markets. But, the products of the creative industries (IT, media, graphics, computer animation, software and games) have no borders and traditional transportation costs. Here it is important to note that Kazakhstan may become a magnet for talent in creative industries in the macro-region, for example in Central Asia. For reference: For example, the CSI Forum still noted the potential of the W.A.R.M. Qazaqs concept. Apart from traditional tourism and the development of creative industries, there are great opportunities for our megacities, as it is not always possible to build factories in big cities. Event, business and sports tourism as a part of city tourism deserves a lot of attention. No matter how the events develop in the world, the direct economic effect will depend on the culture of hospitality and openness of the citizens. For the last 10-15 years Kazakhstan has been actively introducing production facilities (over 1,500 (1,500) investment projects). However, according to our calculations, if we want to continue at the same pace, we need to double the energy capacities (from the current 19 thou MW to about 38 thou MW). In other words, even if investors "queue up" to build factories today, the speed of industrialisation will depend on the energy system. As events show, electricity, heat and gas may not be enough at some stages for the existing ones, let alone new ones. On the other hand, the global trend of low-carbon development will eventually begin to dictate new conditions. Infrastructure readiness needs to be improved and energy, transport, engineering infrastructure and available sites for production sites need to be built ahead of the curve. Without solving these issues, it is difficult to talk about any breakthrough.
In general, it is not "which sector we have prioritised" and "flooded" with funding that matters more in the matter of diversification, but rather the basic institutions - protection of private property and contracts, a fair judicial system, human capital, a high level of education, a responsive and transparent state apparatus. Resources from commodity revenues should be effectively allocated in the first instance to address the above institutions, without which sectoral development and diversification policies will not be effectively implemented. Sultanov and other speakers discussed economic diversification best practices with KISI at the international conference "Modernising Kazakhstan's Economy: Cooperation with the European Union and Priorities".
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