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Prepared by Yongzheng Yang.
The construction of oil fields can be labor-intensive, but oil production itself is capital-intensive. Since new oil fields have to be constructed continuously to expand production capacity over time, labor input in the oil industry is not negligible. At present, there does not seem to be any shortage of unskilled labor, but some categories of skilled labor may be in short supply as oil companies have been trying to hire from overseas in the past. However, as the oil sector expands further, an overall labor shortage may emerge (see next section).
See Appendix for technical details of the model. The model is an upgraded version of the one used in IMF (2003), which examines the impact of an oil price rise on the Kazakhstani economy. The corresponding database has also been refined. The model is solved using GEMPACK (Harrison and Pearson 1996).
Note that this is a cumulative projection from 2000 to 2006, not an annual projection with a time path, as the model is a static one. The year 2006 was chosen for a snapshot examination of the medium-term outlook.
Once assumptions are made about the growth of GDP and the factors of production, technological change is endogenous to the production function Y = f(A, L, K), where Y stands for GDP, A for technology, L for labor, and K for capital.
Since the input-output table we used does not include the income account, the current account represented in the model essentially consists of the trade account only (including trade in services).
As explained above, the baseline oil production in 2006 is the same as the output level in 2000. The world oil price is assumed to remain unchanged at its projected 2006 level.
Devarajan et al. (1997) provide a neat exposition of how a resource boom can be modeled in this manner.
However, capital stocks in non-oil industries remain unaffected.
In the end, the level of labor supply implied by the 4 percent NARU begins to bind and real wages increase. There is great uncertainty over the efficiency of the labor market in Kazakhstan. The simulation results reported below are not particularly sensitive to the assumption about the level of NARU. Nevertheless, the assumed NARU of 4 percent may be on the low side, which would reduce the symptoms of the Dutch disease, should it occur. On the other hand, the potential for immigration (legal and illegal) would mitigate the risk.
In the end, labor supply implied by the 4 percent NARU begins to bind and real wages increase.
The tradables sectors include agriculture, oil, machinery, and the rest of industry. The less traded services sectors include construction, transport, retail and wholesale trade, and other services.
Since the model has only one period, income generated from investment abroad, as implied by increased net exports, does not accrue in the current period.
As in the second oil boom simulation, investment is assumed to increase by 3 percent, but government consumption by 16 percent (about half of the increase in the fixed current account scenario) while household consumption and the current account are endogenous. The results of the two simulations thus can be compared.
The simulation continues to include the shock resulting from the oil boom.
Changes in the real exchange rate are sensitive to this elasticity and the elasticity of substitution between domestic goods and imports. However, the qualitative conclusions of the simulations hold within a reasonable range of values for these elasticities. The elasticities used in this model are broadly in line with those used in other models, such as the Dervis-Robinson (1982) model and the GTAP model (Dimaranan and McDougall 2002).