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Republic of Kazakhstan: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
July 2003
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III. Trade Strategy for Sustained Growth47

A. Introduction

57. This chapter explores medium- and long-term trade policy options facing Kazakhstan. Despite the strong trade performance in recent years, there are several constraints that have to be overcome to sustain the growth momentum. The rapid growth of exports has been largely led by the oil sector; non-oil exports have grown less rapidly and fluctuated considerably over time. This partly results from the concentration of exports in primary commodities whose demand in the world market is volatile. With continued large inflows of foreign exchange from the oil sector, the tenge will inevitably appreciate in real terms over the medium and long term which could jeopardize the competitiveness of non-oil exports. How to achieve sustained growth of non-oil exports is therefore a difficult challenge.

58. Kazakhstan’s trade policy is at a crossroads. After some bold trade reforms in the earlier years of transition, the trade liberalization process has lost its momentum. Reforms planned under the 1999 EFF-supported programs were not implemented. While the average tariff has stayed at about 8 percent since 1998, non-tariff barriers and ad hoc trade restrictions have continued. Negotiations on the accession to the World Trade Organization (WTO) have entered their eighth year. Despite the renewed efforts by all interested parties in the past year, there are still stumbling blocks to accession. Kazakhstan needs to make some critical decisions before the accession process can be accelerated. These decisions could determine the future path of the trade regime. Meanwhile, there are strategic policy issues that have to be considered in the context of regional trade. Trade policy directions in these key areas will help shape Kazakhstan’s medium and long-term growth environment.

59. The chapter is laid out as follows. The next section examines Kazakhstan’s trade performance in the recent past. The objective is to identify what has driven past trade growth and what constraints Kazakhstan may face in moving forward. Section C focuses on how trade policy affects the development of the non-oil sector. This is followed in Section D by discussions of Kazakhstan’s WTO accession process in the context of trade reform. Section E deals with policies relating to regional trade, and Section F concludes on policy implications.

B. Trade Performance

60. Growth of trade in Kazakhstan has been remarkable in the past seven years. Total exports of goods and services grew 14 percent per annum during 1996–2002, while imports grew 11 percent. The share of exports (imports) of goods and services in GDP reached 48 percent (47 percent) in 2002, up from 33 percent (36 percent) in 1996. Most of the trade expansion occurred after 1998, as GDP growth began to accelerate.

61. Oil exports played a key role over this period. Total oil export value grew 27 percent per annum during 1996–2002. Part of the rapid oil export growth resulted from an increase of the world oil price (over 20 percent during 1996–2002). The growth of non-oil exports accelerated after 1998, achieving an annual growth rate of 5 percent. In 2002, they grew by 9 percent.

62. Kazakhstan’s exports have become increasingly dependent on oil (Figure III-1). In 2002, oil exports exceeded non-oil merchandise exports for the first time. Even as late as 1998, oil was less than 30 percent of total merchandise exports. In general, Kazakhstan’s exports are heavily dependent on primary commodities. Minerals and primary agricultural products accounted for two-thirds of total merchandise exports. Even manufactured exports are dominated by metal products.

Figure III-1.Kazakhstan: Oil versus Non-Oil Exports, 1996–2002

(percent of total)

Source: Kazakhstani authorities and staff estimates.

63. Kazakhstan’s export destinations have also undergone profound changes in recent years. As late as 1998, CIS countries took nearly 40 percent of Kazakhstan’s total merchandise exports. By 2002, this share had nearly halved. Among non-CIS markets, China has become increasingly important, taking more than 10 percent of total merchandise exports in 2002. The importance of the EU, the largest non-CIS market, has declined since 1998, while exports to the North America Free Trade Area (NAFTA) market have stagnated and remained small. The rest of the world has gained substantial market share, largely as a result of increased oil exports.48 In 2002, oil made up 74 percent of Kazakhstan’s exports to the rest of the world, up from 39 percent in 1998. Overall, non-CIS countries accounted for 97 percent of the total increase in exports between 1998 and 2002.

Figure III-2.Kazakhstan’s Exports by Destination, CIS versus Non-CIS countries, 1998–2002

(percent of total exports)

Source: Kazakhstani authorities and staff estimates.

64. Increased competitiveness has been the driving force for Kazakhstan’s non-oil export growth. The real effective exchange rate has depreciated continuously since 1998, after a period of sharp appreciation in the early years of transition. Other competitiveness measures, such as the unit labor cost and the relative price of non-tradables to tradables, also suggest that Kazakhstan’s external sector remains competitive (See Box III-1). A tight fiscal stance and prudent monetary policy have helped avoid the Dutch disease syndrome so far. In the long run, however, the real appreciation of the tenge is inevitable given the projected large inflows of oil revenue.

Box III-1:Competitiveness and Its Indicators

It is difficult to assess a country’s international competitiveness, despite a large number of available indicators. These range from price or cost-based indicators, such as the real effective exchange rate (REER), to broadly based indicators that take into account various economic and non-economic variables. In general, the price and cost-based indicators are more appropriate for assessing a country’s competitiveness in terms of its external (e.g., trade balance) performance, whereas the broadly based indicators are probably more suitable for assessing a country’s economic strength and growth potential.

Empirical evidence suggests that the power of price and cost-based indicators in explaining trade performance varies from country to country. The CPI-based REER is potentially misleading because it usually includes the prices of many nontradables. The producer price-based REER, although more representative of tradable goods and services, is not a good measure of competitiveness if the country concerned is a price taker in the world market.1. In the case of Kazakhstan, this measure would fluctuate widely with oil price developments. The unit labor cost (ULC) index is shown to be more closely correlated with trade flows, despite its main drawback of ignoring other production costs.

In assessing a country’s competitiveness it is important to be clear about what is to be assessed and that a range of relevant indicators be used. For this reason, the relative price of non-tradables to tradables is also calculated here. The advantage of this measure is that it can point to the direction of resource allocation based on relative price changes, instead of price comparisons between domestic and foreign goods. It complements other measures. The figures below show that the three measures based on the CPI, ULC, and the relative price point to the same trend in the past few years: Kazakhstan’s real exchange rate has depreciated since 1998 and its price and cost-based competitiveness has improved.

Real EffectiveExchange Rate, 1994–2002, and Relative Price of Non-Tradables to Tradable, 1998–2001

Relative Dollar-Unit Labor Cost, 1995–2001

(With Respect to Russia)
1 For more detailed discussions of the various REER measures, see “Competitiveness in the Baltics in the Run-Up to EU Accession,” SM/03/118.

65. Analysis based on the constant market share model (Box III-2) confirms that Kazakhstan’s non-oil export growth was based on increased competitiveness. As shown in Table III-1, improved competitiveness was the leading force driving the growth of Kazakhstan’s non-oil exports from 1996 to 2000.49 Without this improved competitiveness, Kazakhstan would not have been able to keep pace with world export growth because of its unfavorable export composition and destinations.

Box III-2.The Constant Market Share (CMS) Model

The CMS model can be used to decompose a country’s export growth into four factors. Specifically, the change in country A’s exports over a period of time can be written as

where

  • Vi value of A’s exports of commodity i in period 1;

  • Vi value of A’s exports of commodity i in period 2;

  • Vj value of A’s exports to country j in period 1;

  • Vj value of A’s exports to country j in period 2;

  • Vij value of A’s exports of commodity i to country j in period 1;

  • V_ value of A’s total exports in period 1;

  • V value of A’s total exports in period 2;

  • r percentage increase in total world exports from period 1 to period 2;

  • ri percentage increase in world exports of commodity i from period 1 to period 2;

  • rij percentage increase in world exports of commodity i to country j from period 1 to period 2.

In the above equation, the increase in A’s exports is decomposed into parts attributed to: (1) the general rise in world exports; (2) changes in the commodity composition of A’s exports; (3) changes in the market distribution of A’s exports; and (4) a residual reflecting the difference between the actual export growth and the growth that would have occurred if A had maintained its share of the exports of each commodity to each market. For a more detailed exposition of the CMS model, see Learner and Stern (1970).

Table III-1Decomposition of Kazakhstan’s Non-Oil Export Growth, 1996–2000
Contributing factor:ValuePercent
(US$ mn)of total
World Growth76686
Product mix−341−38
Market distribution−773−87
Competitiveness1239139
Total891100
Source: Staff estimates based on the World Bank WITS Database.
Source: Staff estimates based on the World Bank WITS Database.

66. The results show that Kazakhstan’s export commodities consist of those that have been growing less rapidly than world exports. This is consistent with the fact that Kazakhstan’s exports are concentrated in primary commodities for which demand in the world market has been growing less rapidly than for manufactured goods. Since the CMS analysis is based on export values, the results also reflect changes in the prices of primary commodities. During 1996–2000, the non-oil price index decreased by 13 percent.

67. Kazakhstan’s greatest disadvantage in export expansion is the distribution of its export markets. Despite rapid export expansion in the Chinese market, one of the fastest growing in the world, Kazakhstan’s main export markets remain in the CIS and Europe, where demand grew relatively slowly during 1996–2000. The rebound of the Russian economy since 1999 should have favored Kazakhstan’s exports, but Kazakhstan’s exports to Russia and the other CIS countries actually declined between 2000 and 2002. This may be a result of weak complementarity between Kazakhstan’s exports and Russia’s imports, as the two countries have similar endowments. As will be discussed later in the context of regional trade arrangements, this raises an important question about Kazakhstan’s current policy on regional trade arrangements.

68. The challenge over the medium and long term is how to maintain this competitiveness in light of the increasing pressure for the tenge to appreciate in real terms. This challenge is especially daunting given Kazakhstan’s disadvantages in export composition and market distribution, which reflect its geographic disadvantages. While macroeconomic policies should be the key instrument to ensure a smooth transition in the event of an exchange rate appreciation, microeconomic policies also have a key part to play by accelerating productivity growth and promoting export diversification, both in terms of product mix and market distribution.

C. Trade Policy and Non-Oil Sector Growth

69. Kazakhstan’s simple average tariff rate of 7.9 percent (10 percent if trade-weighted) is relatively low by developing country standards (Table III-2). At the sectoral level, agriculture tariffs are much higher than those on capital and intermediate goods. Tariffs on consumer goods are almost on a par with those on agricultural products. At the product level, the dispersion of tariff rates is much larger, ranging from zero percent to 100 percent. About a quarter of tariff lines consists of tariff peaks (equal or above 15 percent). The number of tariff bands at 10 is also relatively large. Moreover, Kazakhstan maintains many specific and mixed tariffs (combinations of ad valorem and specific rates), which are less transparent than simple ad valorem tariffs because the extent of protection they provide varies with world prices.

Table III-2.Kazakhstan: Summary Tariff Statistics (including mixed rates) from 1999 to 2001
Oct.MarchOct.
19992001June 20012001
Average−7.87.17.87.9
Agricultural goods (1–24)12.212.211.912.0
Non-Agricultural goods (25–97)6.55.66.66.7
Capital and intermediate goods4.64.74.74.8
Consumer goods9.56.910.210.3
Minimum0.00.00.00.0
Maximum100100100100
Std Dev.7.47.56.66.7
Number of bands11101010
Number of tariff lines with mixed rates1175103711361125
Number of tariff lines with rates above 20 percent3603298383
Number of tariff lines with specific rates176164164164
Source: Kazakh authorities and staff estimates.
Source: Kazakh authorities and staff estimates.

70. Kazakhstan’s tariff structure exhibits a pattern of protection that is typical of countries pursuing import substitution. Tariffs increase as the level of processing moves up, which can give rise to large variations in the effective rate of protection (protection for value added) across industries.50 The relatively low tariffs on capital and intermediate goods give downstream and capital-intensive industries greater incentives to expand. They benefit industries such as the oil industry, consumer goods and agricultural industries. The government has also formulated an industry policy to assist hi-tech and high-value added industries.

71. This import substitution policy runs counter to Kazakhstan’s comparative advantage and can result in substantial costs to the economy. Given its rising labor cost, as a result of strong growth and increasing oil wealth, Kazakhstan’s comparative advantage at this stage seems to be in industries that have a medium level of value added and technological sophistication. Without protection, labor-intensive industries would find it difficult to compete with countries that have considerably lower labor cost. Increased inflows of migrants from Kyrgyzstan and Uzbekistan would improve the competitiveness of labor-intensive industries. Kazakhstan does not yet have a comparative advantage in high-tech and high value-added industries. The authorities justify their protection and assistance to these industries based on the infant industry theory, but such protection and assistance run the risk of creating permanent infant industries.

72. Tariff reforms aimed at a low and uniform tariff across all industries would help export diversification in the long run. It may appear that with a strengthening tenge, an effective way to help non-oil industries is to increase border protection for them. Although higher tariffs may indeed help import substitution in the short to medium term, they would undermine the long-term viability of non-oil industries. A domestic market of the size of Kazakhstan would make it difficult for local firms to reap economies of scale without exports, yet high import barriers would make them uncompetitive in the world market. Inefficient firms would need continued support to survive, constituting a drain on scarce resources. These firms would deprive other firms of scarce resources, especially small and medium-sized firms which are often key to export diversification and provide more jobs than large firms. The latter are, however, better connected to government bureaucracy and therefore better placed for seeking assistance.

73. Resources can be better spent on improving the investment climate. The current domestic environment is difficult for small and medium-sized firms, both domestic and foreign. A weak judicial system, entrenched interests, “capture” of important sectors, heavy-handed regulation, and lack of transparency are major obstacles to investment by firms. Kazakhstan has attracted very limited foreign direct investment (FDI) outside the oil sector. International experience shows that FDI can play a major and sometimes critical role in export growth and diversification. Thailand, Malaysia, and more recently, China, for instance, have rapidly moved away from their traditional dependence on the exports of primary commodities and made substantial progress in export diversification.

74. Agriculture poses more difficult policy challenges. Emotions run high when it comes to agricultural protection as it relates to the country’s food security. The authorities and many local commentators are concerned that liberalizing agriculture would jeopardize the country’s food supply in the event of food shortages in the world market or international conflicts. It should be noted, however, that food self-sufficiency does not guarantee food security. A food security policy involves a much broader policy framework, including, among other things, adequate purchasing power for the poor, reliable food storage, efficient transportation and distribution, and diversified and secured supply sources. Self-sufficiency could cause its own problems in the event of local crop failures. Absence of established channels of overseas supply could delay emergency imports. In a territory as large as Kazakhstan’s, it may be more efficient and quicker to ship food supplies to remote areas from neighboring countries than from other parts of Kazakhstan. In general, the global food markets are subject to smaller shocks than an individual country, even a large one such as Kazakhstan. Thus, an open agricultural trade regime can actually help improve food security.

75. Even under an open trade regime, Kazakhstan’s food self-sufficiency will not necessarily decline. During the period 1998–2002, the country ran a surplus in agricultural trade in two years, more than offsetting the deficit in the other three years. At present, Kazakhstan seems to have a comparative advantage in land-intensive agricultural products (e.g., cereals), and a disadvantage in labor-intensive products (e.g., fruits and vegetables). Agricultural productivity is low, but there is great potential for improvement. A liberal agricultural trade regime would allow the country to specialize in land-intensive products and enhance efficiency. The long-term benefits of such a regime could be substantial.

76. Broad trade reform is needed to ensure a level playing field. Non-tariff barriers, ad hoc trade restrictions, relatively frequent changes in trade regulations, and trade remedies continue to hamper trade expansion. For instance, non-automatic import licensing is required for some imports, and there have been bans on the exports of agricultural equipment and scrap metals. Safeguard duties were imposed on construction and extractive inputs. Other non-tariff barriers include local content requirements, and possible sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT). It is essential that when tariffs are reduced, they are not replaced by other forms of trade barriers, which are often less transparent. Improvement is also needed in trade facilitation.51 It has been reported, for instance, that unnecessary customs documentation (e.g., “transaction passports”) may have been required of importers (United State Trade Representative, 2003).

77. To support trade reform, the government needs to invest in physical and social infrastructure. For a land-locked country like Kazakhstan, transport and communications facilities are particularly important to reduce natural barriers to trade. Strategic planning in infrastructure development is necessary in line with Kazakhstan’s increasing need for export diversification. To complement physical infrastructure development, spending on education and training needs to be increased to support industrial upgrading. More broadly, Kazakhstan could take advantage of its large and increasing oil wealth to invest in human capital development. This would involve allocating more resources to the social sector.

78. Structural reforms in areas other than trade are necessary to boost the overall supply response in the export sector. Kazakhstan needs to bring down the cost of doing business in the country, both for domestic and foreign firms. It should address its restrictive policies on employment of foreign experts, procurement, transfer pricing regulations, the delivery of government services, and corruption. While steps have been taken to reduce overlapping and heavy-handed inspections of small enterprises, more needs to be done. At the same time, industry policy should avoid distorting export incentives. While it is appropriate to facilitate industrial adjustment by building the necessary infrastructure and social support, the government should avoid “picking winners” and channeling oil wealth to favored industries. Government support should not replace private initiatives based on commercial viability.

D. WTO Accession

79. Kazakhstan submitted its application for WTO membership on January 29, 1996, and a working party on its accession was established on February 9, 1996. The factfinding phase of the accession process is now complete. Bilateral negotiations on market access in goods and services have been going on since October 1997. Five working party meetings were convened during the period 1997–2002. The next meeting was scheduled for May 2003. No draft working party report has been produced so far (see Box III-3 for WTO accession procedures).

80. Topics under discussion in the Working Party include a wide range of issues: agriculture, the customs system (and customs union arrangements), price controls, import licensing, industrial subsidies, sanitary and phytosanitary (SPS) measures, technical barriers to trade (TBTs), transparency of the legal system and legislative reform, services and trade-related intellectual property rights (TRIPS). Kazakhstan has also been requested to join the Zero-for-Zero Initiative, an agreement which aims to phase out, among a group of WTO members, tariffs on selected liquors, pharmaceuticals, medical equipment, furniture, paper products, farm equipment, toys, construction equipment, steel, beer and other products.

81. Progress in the negotiations has been modest so far. During the last (5th) working party meeting in December 2002, negotiations on services were moving forward, but little progress was made in key areas of market access for goods, especially for agricultural products. Kazakhstan argued that given the strategic importance of agriculture to its economy and food security, it should be allowed to protect the sector by certain levels of tariffs and subsidies, including export subsidies. Kazakhstan also used high agricultural protection in major OECD countries to justify its own policy position.

Box III-3.The WTO Accession Procedure

The process of accession to the WTO commences when an applicant submits a communication to the Director-General of the WTO expressing its desire to accede to the WTO under Article XII. The General Council then considers the application and establishes a working party. Any member of the WTO can join the working party.

Once the working party is established, the applicant provides a memorandum describing in detail its foreign trade regime, together with information on the currently applicable tariff schedule and copies of relevant laws and regulations. This starts a factfinding process in which the conformity of the applicant’s trade regime with the various requirements of the WTO Agreements is examined through exchanges of questions and answers, and at working party meetings.

When the examination of the foreign trade regime is sufficiently advanced, members of the working party and the applicant commence bilateral market access negotiations on goods and services, as well as on the other specific terms of accession. The negotiating phase and the fact-finding work on the foreign trade regime usually overlap and proceed in parallel.

The discussions in the working party is summarized in the Report of the Working Party together with a draft Decision and Protocol of Accession. The Protocol of Accession contains the terms of accession agreed by the applicant and members of the working party. Following the conclusion of bilateral negotiations between interested Members and the Applicant, the Schedule of Concessions and Commitments on Goods and the Schedule of Specific Commitments on Services are prepared. These schedules are annexed to and are part of the Draft Protocol of Accession.

When the Draft Report, Draft Protocol and Schedules on Goods and Services have been finalized, the working party submits the package to the WTO General Council/Ministerial Conference for approval. Following the decision of the General Council/Ministerial Conference to adopt the package, the Protocol of Accession enters into force. Thirty days after acceptance by the applicant, it becomes a WTO Member.

Source: Based on information at the WTO website at http://www.wto.org.

82. Kazakhstan’s WTO accession is intertwined with its commitments to regional trade arrangements among members of CIS. Kazakhstan is a signatory to the Eurasian Economic Community (EAEC), whose other members include Belarus, the Kyrgyz Republic, the Russian Federation, Tajikistan. Efforts have been devoted to coordinate member countries’ (except for Kyrgyzstan which is already a WTO member) positions in negotiations with WTO members. On April 27, 2003, the presidents of the four non-WTO members of the EAEC further endorsed this approach in the hope that coordination would enable them to negotiate better terms of accession. Coordination would strengthen the bargaining power if the countries involved acted with a common position. However, this is difficult as each of the candidates is now pursuing a separate accession process at a different pace. The best outcome for such coordination is to prevent candidates from undercutting each other. The low levels of protection agreed to as part of the Kyrgyz (and perhaps to a lesser extent Georgian) accession have been widely regarded by other EAEC members to have undermined their negotiation positions.

83. Russia’s accession sets the benchmark for other countries since it is the most influential player in the coordination process and its accession process is more advanced.52 The average tariff in Russia is considerably higher than that in Kazakhstan. The Kazakhstani authorities indicated that Russia’s tariff levels were an informal benchmark for Kazakhstan’s tariff offers to WTO members. This tends to reduce the scope of tariff reductions in Kazakhstan’s offers.

84. WTO accession is likely to result in only limited improvements in market access. Kazakhstan sets its objectives for WTO accession at improving market access for its exports abroad and promoting export diversification while offering sufficient protection of domestic industries (Abdimoldayeva 2001). It sees benefits of bringing the country’s legislation and trade practices into conformity with WTO rules and international norms, as well as the benefits of more predictable, non-discriminatory export markets, and the WTO dispute settlement mechanism. However, it is unlikely that WTO accession will immediately improve market access for Kazakh exports. Most of Kazakhstan’s trading partners have granted it most-favored-nation (MFN) status. Both the United States and EU now recognize Kazakhstan as a market economy, reducing the chance of discriminatory actions from these two large economies. Some trading partners may have to remove discriminatory measures against Kazakh exports, but the main market access barriers other than tariffs are antidumping and safeguard actions against iron and steel products and other metals. It is not clear how WTO membership would have prevented these actions against Kazakhstan. Tariffs in Kazakhstan’s trading partners are almost certainly not to change as a result of Kazakhstan’s accession.

85. The largest gains from WTO accession would come from reforms to Kazakhstan’s own trade regime. Greater allocative efficiency and higher economic growth can be achieved from further trade reforms. Furthermore, the dynamic gains in the form of higher growth are likely to be far greater than the static gains from greater allocation efficiency. As noted earlier, a level playing field supported by a lower, more uniform tariff structure would increase domestic competition, which in turn enhances productivity progress. Greater openness to trade has been shown to contribute to growth and poverty reduction (Krueger and Berg 2002).

86. WTO accession could help reforms in areas other than trade. Accession-induced and other domestic reforms are complementary. In a transition economy like Kazakhstan’s, WTO commitments could serve to lock in domestic reforms that often have fragile institutional support. WTO accession can be used and has been used in other transition economies as an external catalyst to further domestic reforms. China’s 16-year long WTO accession has made important contributions to its domestic reform process (Bacchetta and Drabek 2003). On the other hand, any benefits from WTO accession may only be potential gains until supporting domestic reforms and institutional changes are instituted. This requires an overall strategy that exploits the synergy of trade and other reforms. A liberal trade regime needs and supports a liberal industry policy and supporting institutions to ensure fair and rigorous competition, the rule of law, and transparency.

87. There will be adjustment costs associated with WTO accession. Structural unemployment may increase in the short run as the result of WTO accession. Given Kazakhstan’s high (albeit declining) unemployment, these costs deserve attention. Although broadly based structural reforms mentioned above are likely to be the most effective measure dealing with the adjustment pressure, social institutions need to be strengthened to protect the vulnerable in the society. Social protection could help build a consensus on structural reforms and WTO accession.

E. Regional Trade

88. Kazakhstan has signed a number of regional and bilateral agreements which either exclusively deal with trade or have an important component on trade and investment (see the attachment for the agreements Kazakhstan has signed). Probably the most important among them is the Eurasian Economic Community (EAEC), which was signed in 2001 to replace the 1995 CIS Customs Union. The aim of the EAEC is to create a customs union and eventually a “Single Economic Space” among the member states.

89. Notwithstanding the regional trade arrangements, progress toward economic integration among CIS countries has been limited. Under the EAEC agreement, common external tariffs are to be adopted among member countries, thus forming a customs union. However, only about 60 percent of tariff lines (or about 40 percent of the trade value) has so far been harmonized among member countries. Even for these already harmonized tariffs, individual countries may opt for changes twice a year. Non-tariff barriers are not covered by the agreement. Meanwhile, trade frictions continue among the member countries. Some countries have imposed contingency protection on imports from other members, and major obstacles remain in the transit shipment of exports for some member countries. The Kyrgyz authorities, for example, have complained about various fees imposed on their transit trucks crossing Kazakhstan, while Kazakhstan has expressed concerns over Kyrgyzstan’s seasonal duties on wheat imports from Kazakhstan.

90. Preferential trade arrangements among CIS countries have not prevented intra-CIS trade from declining in importance, as noted earlier. However, trade intensity between Kazakhstan and its CIS partners remains high (Table III-2. See Box III-4 for definitions of trade intensity, complementarity and bias). Trade with Russia, for example, is 27 times more intense than the average. Although this high intensity is at least partly due to geographic proximity between the two countries and long-existed transport infrastructure (in particular, pipelines for oil transport), it may reflect the lasting effects of trade distortions during the Soviet era, and the current trade pattern for individual CIS countries may still not be optimal.

91. Trade complementarity between Kazakhstan and Russia, Kazakhstan’s most important trading partner, is below average. This is hardly surprising as both countries concentrate in the exports of oil and metal products (such as iron and steel). In contrast, there is a high degree of complementarity between Kazakhstan and Ukraine—Kazakhstan’s second largest CIS trading partner. Trade bias explains most of the high trade intensity in both trade with Russia and Ukraine. In addition to historical ties, the long common border with Russia and lower natural barriers in other areas (such as the use of the Russian language in all three countries) contribute to the high bias towards the bilateral trade.

Box III-4.Trade Intensity, Complementarity and Bias

The trade intensity index (Iij) measures the extent to which country j’ s share of i’ s total exports is large or small in relation to j’s share in world trade:

where

xij is country i’s exports to country j;

xi is i’s total exports;

mj is total imports of country j;

mw is total world imports.

The complementarity index (Cij) provides a measure of the extent to which country i’s export specialization matches country j’s import specialization:

where

xik is i’s exports of commodity k;

xi is i’s total exports;

Tk is world imports of commodity k;

T is total world imports;

mjk is j’s imports of commodity k;

mj is j’s total imports.

The country bias index (Bijk) provides a measure of the extent to which i’s exports of k have more or less favorable access to country j’s markets than exports of k from other countries. The country bias index can be weighted and aggregated across commodities to provide an overall measure of bias in bilateral trade (Bij).

The indexes Cij and Bij are so defined that their product equals Iij:

Iij = Cij * Bij

A unitary value of the indexes indicates average trade intensity, complementarity and bias (or no bias). Values greater (less) than unity indicate higher (lower) than average intensity, complementarity and bias.

Source: Based on Drysdale and Garnaut (1982).
Table III-3.Trade Intensity, Complementarity and Bias between Kazakhstan and its Major Trading Partners, 2000.
Trading partnerIntensityComplementarityBias
Russian Federation27.700.9130.54
Ukraine13.601.966.95
EU0.660.940.70
China2.101.741.21
Japan0.021.220.01
NAFTA0.090.850.11
Rest of the world1.581.171.34
Source: Calculations based on the World Bank WITS Database.
Source: Calculations based on the World Bank WITS Database.

92. Relatively low trade complementarity may explain part of the slow growth of trade between Kazakhstan and Russia in recent years. Russia’s rapid economic growth since its recovery from the 1998 crisis has not generated rapid demand for imports from Kazakhstan. This was reflected in the earlier CMS analysis which shows that Kazakhstan still has an unfavorable market distribution for its export growth. In contrast, Kazakhstan has high complementarity in trade with China and the “rest of the world.” For instance, 90 percent of Kazakhstan’s exports to China consists manufactured goods, especially metal products in which China generally has a comparative disadvantage. With improvement in transport, oil export to China could play an important role in the future.

93. The trade diversion effect of regional trade arrangements among CIS countries is potentially large. Promotion of intra-CIS trade against underlying comparative advantage may slow down overall export expansion. It is likely that non-CIS trade will continue to be more dynamic than CIS trade for some time in the future. In addition, technology transfer embodied in non-CIS trade with industrial countries is likely to be more intense than in CIS trade. This leads the World Bank (2000) to conclude that in general a north-south free trade arrangement is more beneficial than a south-south arrangement. Given the historical distortions during the Soviet era, this is particularly important for Kazakhstan.

94. One approach to reducing the potential trade diversion effect of EAEC would be to have low common external tariffs (CETs) for the customs union. This has been made difficult by variations in tariff levels among EAEC countries. As noted earlier, Russia has a considerably higher average tariff (11 percent) than the rest of the member states except Belarus. The pace of Russian trade liberalization tends to have strong influence over other member states. Although the EAEC has been largely ineffective, a free trade area among CIS countries would have given Kazakhstan more independence in trade policy.

F. Policy Implications

95. Kazakhstan’s heavy concentration in the exports of oil and other primary commodities raises difficult challenges. The oil sector is developing stronger backward and forward linkages to other manufacturing industries, and its high capital and resource intensity constrain job creation. At the same time, the large oil revenue inflows also generate pressure for the tenge to appreciate in real terms. Maintaining the competitiveness of the non-oil sector and diversifying exports are a daunting task.

96. Trade policy aimed at import substitution is unlikely to achieve these twin objectives. Such a strategy may help import-competing industries in the short and medium term, but it would turn the economy inward-looking and reduce the incentive to export. More importantly, it would reduce domestic competition, a key driver for increasing productivity. Temporary protection may be justified on the ground of the infant industry argument, but there is a high risk that protection becomes permanent, as it has happened in so many other developing countries.

97. A more promising alternative is to have a low and uniform tariff in combination with other structural reforms, which would help create a level playing field and improve the investment environment. This would also require the government to provide necessary infrastructure, including good transport and communications facilities and an increasingly skilled workforce to enable domestic industries to move up the value added chain as the country’s income level and technological sophistication rise. This strategy has a better chance of attracting export-oriented FDI to the non-oil sector and giving small and medium-sized firms a greater role in export diversification and job creation.

98. WTO accession provides a unique opportunity to implement such an outward-oriented strategy. If this strategy is adopted, Kazakhstan can use the accession process to accelerate trade and other domestic reforms. Much has been achieved in legislative reforms in support of WTO accession. Comprehensive reforms are needed, however, not necessarily for the sake of WTO accession, but rather for reaping the benefits of an improved investment climate and greater competition. A narrow, mercantilist approach to WTO accession needs to be avoided.

99. It is critical that Kazakhstan maintains trade policy independence so that it can undertake trade reforms at a pace that suits its own trade strategy and in support of its WTO accession. Kazakhstan is in the process of diversifying its exports away from CIS countries. Given time, domestic firms could supply an increasing variety of exports to non-CIS countries. It is important that regional trade arrangements do not create a disincentive to diversification.

ATTACHMENT: International Agreements Related to Trade and Investment
  • Economic Co-operation Organization, 1992 (Ten member countries: Islamic State of Afghanistan, Republic of Azerbaijan, Islamic Republic of Iran, Islamic Republic of Pakistan, Republic of Kazakhstan, Republic of Kyrgyzstan, Republic of Tajikistan, Republic of Turkey, Turkmenistan, and Republic of Uzbekistan.)

  • Free Trade Agreement of CIS, 1994 (Azerbaijan, Armenia, Belarus, Georgia, Moldova, Kazakhstan, the Russian Federation, Turkmenistan, Ukraine, Uzbekistan, Tajikistan, the Kyrgyz Republic)

  • Central Asian Economic Union, 1994 (Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan)

  • CIS Customs Union, 1995

  • Azerbaijan-Kazakhstan Bilateral Agreement, 1997

  • Georgia-Kazakhstan Bilateral Agreement, 1999

  • Eurasian Economic Community, 2001 (Belarus, Kazakhstan, the Kyrgyz Republic, the Russian Federation, Tajikistan) (replacing the CIS Customs Union)

  • Shanghai Cooperation Organization, 2001 (China, Kazakhstan, the Kyrgyz Republic, the Russian Federation, Tajikistan and Uzbekistan)

References

    AbdimoldayevaNailya2001KazakhstanAccession to the World Trade Organization: Issues and Recommendations for Central Asian and Caucasian Economies in TransitionST/ESCAP/2160UNESCAPBangkok.

    BacchettaMarc and ZdenekDrabek2003Effects of WTO accession on policy-making in sovereign states: preliminary lessons from the recent experience of transition countriesStaff Working Paper DERD-2002–02World Trade OrganizationGeneva.

    BergAndrew and AnneKrueger2003Trade Growth and Poverty: A Selective SurveyIMF Working Paper WP/03/30Washington, D.C.

    DrysdalePeter and RossGaraaut1982Trade intensities and the analysis of bilateral trade flows in a many-country world: a survey,Hitosubashi Journal of Economics22(2): 6284.

    LearnerEdward and RobertStern1970Quantitative International EconomicsAllyn and BaconBoston.

    United State Trade Representative (USTR)20032003 National Trade Estimate Report on Foreign Trade BarriersUSTRWashington, D.C.

    World Bank2000Trade BlocsOxford University PressOxford and New York.

Prepared by Yongzheng Yang

Some of the reported exports to the rest of the world may have been subsequently reexported to other markets, including the EU and NAFTA markets, or even simply transshipped to these markets. Thus, exports to the rest of the world may be considerably overstated, while exports to the EU and NAFTA may have been understated.

Since the competitiveness of oil exports largely depends on natural endowments rather than economic policy, the analysis was carried out on non-oil exports only.

As an illustration, suppose that a consumer goods industry is protected by a 20 percent tariff. It uses intermediate goods that are subject to a 5 percent tariff. Also suppose that under free trade value added in the consumer goods industry is 50 percent of its gross output value, with the remainder being the value of intermediates. With a 20 percent tariff on the consumer goods and 5 percent on intermediates, the gross output value will be 120 (assuming the free trade value to be 100), the cost of intermediates 52.5, and value added 67.5. The effective rate of protection for the consumer goods industry is then 35 percent, much higher than the 20 percent nominal rate of protection.

According to the WTO Secretariat, trade facilitation is often defined as “the simplification and harmonization of international trade procedures” with trade procedures being the “activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade”. This definition relates to a wide range of activities such as import and export procedures (e.g. customs or licensing procedures); transport formalities; and payments, insurance, and other financial requirements. See WTO website at http://www.imf.org.

The Working Party on Russia’s WTO accession has produced a draft report which was fully revised in April 2003. The major obstacles to overcome before accession seem to be in agriculture and services and in domestic energy pricing. On goods, Russia has virtually reached agreement with 18 major trading partners out of a total of 32. There are hopes for major breakthroughs before the Cancún WTO Ministerial in September 2003, but timing of accession is still uncertain.

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