This Selected Issues paper analyzes the optimal policy response on the part of the Kazakhstan authorities to the prospective oil inflows. It surveys the literature on the so-called natural resource curse and offers an analysis of Kazakhstan’s petroleum potential. The paper analyzes the impact of the oil boom on the non-oil sector, based on a general equilibrium model. It provides an analysis of fiscal rules and fiscal sustainability and assesses the possible role of fiscal policies in addressing the “natural resource curse.”

Abstract

This Selected Issues paper analyzes the optimal policy response on the part of the Kazakhstan authorities to the prospective oil inflows. It surveys the literature on the so-called natural resource curse and offers an analysis of Kazakhstan’s petroleum potential. The paper analyzes the impact of the oil boom on the non-oil sector, based on a general equilibrium model. It provides an analysis of fiscal rules and fiscal sustainability and assesses the possible role of fiscal policies in addressing the “natural resource curse.”

IV. The Impact of The Oil Boom on the Non-Oil Sector1

A. Introduction

1. Rising oil production and exports have been a key driving force for Kazakhstan’s rapid GDP growth over the past few years. At the same time, the oil boom has generated upward pressure on the real exchange rate. While an appreciating tenge is a sign of higher purchasing power and economic strength, it also poses challenges for structural adjustment and macroeconomic management. This chapter examines the impact of the oil boom on Kazakhstan’s real economy. More specifically, it seeks to answer the following questions:

  • How will the projected oil-driven economic growth affect the structure of the Kazakhstani economy over the medium term?

  • How will a real appreciation of the tenge affect the Kazakhstan economy, and what will be the macroeconomic impact of policies to resist real appreciation?

  • What would be the consequences of a policy to increase import barriers in response to real exchange rate appreciation?

  • What are the alternative policies for supporting the non-oil tradables sectors?

2. The most direct impact of the oil boom on the rest of the economy works through inter-sectoral linkages. A booming oil sector will necessarily require more material inputs and services from other sectors. It will also divert labor and capital from other sectors when relevant labor segments are in full or near-full employment and no idle productive capacity is available.2 How the oil sector’s increased demand for intermediate inputs and primary factors of production is distributed across various sectors of the economy is largely an empirical question. The answer will depend on particular patterns of intersectoral linkages and factor market conditions, such as labor mobility.

3. The oil boom also affects the rest of the economy through its impact on macroeconomic aggregates. Income increases as a result of rising oil revenue will likely lead to higher consumption and investment. How the higher aggregate demand is allocated among sectors has important implications for relative prices. A booming investment sector, for example, will provide a boost to machinery and construction industries, which provide most of domestically supplied capital goods. A large increase in government consumption, as opposed to private consumption, is more likely to boost the services sector, as the government spends more on education, health, and public administration. This would raise the prices of services relative to those of manufactures and agricultural commodities.

4. How policymakers respond to structural changes in the economy will have important implications for economic stability and long-term growth. One available option is to attempt to slow the real appreciation of the exchange rate through (sterilized) purchases of foreign exchange by the central bank in conjunction with a tight fiscal stance, as has been the policy of the Kazakhstani authorities in recent years. However, the resulting increase in savings limits the rise of private and public consumption and investment, which could affect negatively current living standards and the country’s long-term growth potential. The alternative is to accept the real appreciation of the exchange rate while seeking to mitigate its negative consequences for the non-oil tradables sectors. There many policy options are available. Two of them are briefly analyzed in this chapter: trade protection and a broad-based strategy aimed at improving productivity.

B. Simulating the Effects of the Oil Boom

5. To capture the inter-sectoral linkages and macroeconomic interactions discussed above, we employ a computable general equilibrium (CGE) model of the Kazakhstani economy for our analysis.3 The model identifies eight sectors (see Appendix Table 1) and two factors of production, labor and capital (the latter also includes natural resources, i.e., oil reserves). An input-output table of the Kazakhstani economy for 2000 captures inter-sectoral linkages. All macroeconomic aggregates are linked through national accounts identities. Government policies can be reflected in expenditure and taxation policies with respect to domestic economic activities and external trade. These policies in turn affect the real exchange rate, which is here defined as the price of non-tradables (domestic goods) relative to tradables (exports and imports). The model, which is grounded in trade theory (de Melo and Robinson 1989), does not comprise an explicit financial sector and hence no monetary variables or nominal exchange rates. The effect of monetary policy can be modeled implicitly through assumptions about changes in real domestic absorption and the current account balance. Since the model is static, expectations play no role and it can not shed light on short-run macroeconomic dynamics. The model is best suited for a medium-term analysis of structural change in the real economy. Nevertheless, as will become clear later on, medium-term results from the model (such as those on investment levels) do have significant long-term implications.

6. To simulate the impact of the oil boom, we first undertake a benchmark projection of the Kazakhstani economy for 2006 starting from 2000, based on unchanged levels of oil production.4 The projection assumes that GDP grows at an annual average rate of 8 percent during 2000-06. Comparative static experiments are then carried out against the benchmark projection for 2006 to gauge the impact of the oil boom. Once the actual and projected growth of oil output over the period 2000-06 (based on the Model of the Kazakhstani Oil Sector) is taken into account (assuming no other changes), the 2006 level of GDP implies an annual average GDP growth rate of 9.3 percent during the period 2000-06, which is broadly in line with the current WEO projection.

7. A graphic illustration of the benchmark projection and comparative static experiments is provided in Figure 1. Starting from point A in 2000, GDP reaches its 2006 level at point B under the benchmark projection. The exogenous shock (in this case, the projected increase in oil output) takes 2006 GDP to point C. BC thus represents the comparative static effect of the oil shock on GDP. The simulation results (below) are reported as percentage deviations from the benchmark (defined as CB/BD*100), rather than absolute changes (CB), unless otherwise indicated.

Figure 1:
Figure 1:

Kazakhstan: Benchmark Projection and Comparative Static Simulations

Citation: IMF Staff Country Reports 2004, 362; 10.5089/9781451820935.002.A004

Source: Fund staff projections.

8. Other inputs to the benchmark projection include assumptions about the growth of factors of production over the period 2000-06.5 The growth of the labor force of 0.5 percent per year is based on the projections of the United Nations Population Division, while the rate of capital accumulation is derived from staff projections, which assume a capital-output ratio of 3 and an annual deprecation rate of 5 percent. This results in an annual average growth rate of 5 percent for the capital stock over the period. In addition to the full absorption of the projected labor force growth, it is assumed that two percentage points of those currently unemployed (estimated at about 10 percent of the labor force in 2000) would join the workforce. The projection of the world oil price for 2006 is based on the January 2004 version of WEO assumptions. The current account is assumed to be in balance in 2006 to facilitate the analysis.6

Effects of the Oil Boom Under Accommodating Macroeconomic Policies

9. The first simulation of the oil boom is a 113 percent increase in the level of oil output by 2006.7 This is based on staff projections for oil production for 2006 as compared with 2000. The main objective of this simulation (and indeed of all subsequent simulations) is not to obtain precise estimates of quantitative effects of the oil boom, but rather to illustrate the mechanism that underlies the economic outcomes under different macroeconomic policy options. The increase in oil output is modeled as a windfall gain, stemming from an expansion of oil resources that suddenly become exploitable.8 As the model does not distinguish oil resources from capital stock, the windfall is represented as an increase in the stock of capital.9 It is also assumed that capital efficiency in the oil sector increases by 20 percent between 2000 and 2006 to reflect gains attainable from ongoing structural reforms and the maturing of the oil industry over time.

10. Policymakers are assumed to respond to the oil boom by allowing the real exchange rate to appreciate. More specifically, macroeconomic policies are such that real domestic absorption (investment, household consumption, and government expenditure) adjusts upward in line with GDP growth to prevent a widening of the current account surplus from its benchmark level. This outcome does not suggest that policymakers can control the real exchange rate directly, at least not in the long run. However, it assumes that they can use a combination of fiscal, monetary, and (nominal) exchange rate policies to achieve a certain real exchange rate target over the medium term, which will raise domestic absorption. Given the still substantial existing unemployment (8 percent in the 2006 benchmark), it is assumed that any rise in demand for labor would result in higher employment rather than real wage increases until the unemployment rate reaches 4 percent, which is assumed to be the natural rate of unemployment (NARU).10

11. Given the importance of the oil sector, the 113 percent increase in oil output results in large income gains (Table 1, Scenario I). Compared with the baseline projection, real GDP is 7.8 percent higher in 2006, while real household consumption is 7.4 percent higher, boosted by the absorption of part of the unemployed into the workforce and a real wage increase of 4 percent, in addition to rising returns from resource rents, of which a fixed proportion goes to the government as tax revenues.11 As a result, both household and government savings rise, to be absorbed by expanding investment.

Table 1.

The Impact of the Oil Boom Under Alternative Macro Assumptions, 2006

(Percentage deviation from 2006 baseline)

article image
Source: Simulations as described in the text.

12. A substantial appreciation of the real exchange rate, here defined as increase in the relative price of non-tradables to tradables, is required for the increase of domestic absorption. Industries producing tradable goods (except the oil industry, of course) contract significantly as productive resources move to the less traded services sectors (Table 2, Scenario I).12 Despite the 4 percent increase in overall employment, employment in agriculture, machinery, and the rest of industry falls. In contrast, output and employment in largely non-traded services industries expand. The construction industry, in particular, experiences a boom as investment rises.

Table 2.

Sectoral Effects of the Oil Boom, 2006

(Percentage deviation from 2006 baseline)

article image
Source: Simulations as described in the text.
Effects of the Oil Boom Under Tight Macroeconomic Policies

13. In the second simulation, policymakers choose to constrain the real exchange rate appreciation by limiting the rise of domestic absorption (Table 1, Scenario II). It is assumed that government policies are such that investment (including by the public sector) rises by only 3 percent above its 2006 baseline level and government consumption by 2 percent. Household consumption, which is endogenous and adjusts to government policies and the oil boom, is also increasing more slowly as real wages and rental prices of capital rise less. A current account surplus emerges as imports grow much less than under the first scenario and exports do somewhat better. Real GDP increases somewhat less than under the first scenario, but the composition of final demand differs significantly. The leading force for GDP expansion is now net exports (up by 2.8 percent of GDP), rather than domestic absorption.13

14. The smaller real appreciation of the exchange rate (i.e., increase in the relative price of non-tradables) reduces the “Dutch Disease” symptoms that characterized the first scenario, but at the expense of lower overall output and absorption. Non-oil tradable goods sectors still contract, but to a lesser degree, especially agriculture and the non-oil industry (Table 2, Scenario II). As investment is subdued, the construction industry expands only moderately; its growth is now largely driven by increased demand for intermediate inputs into other services industries.

15. To further dampen real appreciation and hence reduce the decline in the employment in the non-oil tradables sectors, domestic absorption needs to be restrained even further. For example, if the government were to aim to reduce real appreciation by half of the magnitude in the first scenario, it would have to force real domestic absorption to decline by 2.3 percent, and most of this fall would have to come from a sharp contraction in investment if the government maintained its baseline propensity to consume. Even if the government were to cap its consumption at the baseline level, investment would still decline considerably. To maintain the baseline level of investment, real government consumption has to fall by as much as 17 percent (Table 1, Scenario III). If the objective of government policies were to prevent any real appreciation at all, real domestic consumption would have to fall substantially. Again, depending on how this reduction is achieved, real investment would fall by nearly two-thirds if the government’s propensity to save would not change. If investment were to be maintained at the baseline level, government consumption would have to fall to a similar extent (Table 1, Scenario IV).

16. With further reduced real appreciation or no appreciation at all, non-oil tradables sectors fare better, but overall absorption (and welfare) is substantially lower. As shown in Table 2, Scenario II, if the real appreciation is reduced by half of the magnitude in the first scenario through a reduction in government consumption while holding investment at the baseline level, contractions in the output and employment in tradables sectors would be reduced by a third to a half. Not surprisingly, a further tightening of government consumption to eliminate real appreciation would enable Kazakhstan to maintain its baseline levels of output and employment in the tradables sectors as a whole (Table 2, Scenario IV).

17. The consequence of preventing a real appreciation is a 1.5 percent reduction in GDP, but the long-term cost of this policy is likely to be much larger. In general, lower investment (compared with the first scenario) as a result of the tight macroeconomic policies to mitigate real appreciation would likely reduce Kazakhstan’s long-term economic growth rate. Given the country’s vast, landlocked territory, higher investment in infrastructure may prove critical to improve its long-term productive capacity and export competitiveness. The health and education systems would also need substantial investment to build up the country’s human capital stock in order to achieve industrial upgrading as wages rise over time. Constraining public and private consumption growth would slow this process and deprive the current generation of some of the benefits of the resource boom.

Effects of the Oil Boom with Trade Protection

18. The above four simulations show that a real appreciation of the exchange rate is inevitable unless macroeconomic policies are extremely tight—so tight that it might be difficult to implement them, given the large required contraction in domestic absorption. However, allowing a large real appreciation of the exchange rate would require substantial structural changes which might well generate political pressure to protect jobs in the contracting non-oil tradables sectors. Moreover, a desire for diversification and reduced reliance on oil exports could prompt the government to increase assistance to the non-oil tradables sectors, either in the form of higher border protection to keep imports from competing with domestic industries, or by providing direct or indirect subsidies to industries.

19. A simulation of the imposition of a 20 percent import tariff (on top of existing moderate tariffs) was carried out in conjunction with the 113 percent increase in oil output (Table 1, Scenario V). Apart from the tariff increase, the economic framework remains the same as in the first scenario, including the fixed current account balance, the level of employment, oil resources, and technology. It is assumed that the government continues to spend a fixed proportion of its revenues despite a large expected increase in tax collections from import duties.

20. The simulation results indicate that the tariff increase would reduce GDP expansion by a full percentage point relative to Scenario I. Real household consumption would actually decline even compared with the baseline (a scenario without an oil boom) as consumption goods become more expensive and real wages decline. Government consumption increases with rising tariff revenues. The real exchange rate appreciates more than under Scenario I as the relative prices of non-tradable goods and services are further raised by the tariff increase. Note, however, that the tariff-induced real appreciation has a different effect on the non-oil tradables sectors than the oil boom. The former increases the relative prices of non-oil tradables whereas the latter reduces them, even though both raise the prices of non-tradables relative to those of tradables. Interestingly, a higher tariff does not seem to help the non-oil tradables sectors significantly except the machinery industry, which has the highest import penetration among all industries; its main impact is to reduce the expansion of most services sectors by retaining more resources in the non-oil tradables industries (Figure 2).

Figure 2:
Figure 2:

Sectoral Effects of Oil Boom under Fixed Current Account, 2006

(Percentage deviation from 2006 baseline)

Citation: IMF Staff Country Reports 2004, 362; 10.5089/9781451820935.002.A004

Source: Simulations as described in the text.

21. A further simulation was carried out to estimate the effect of the tariff increase under the assumption of a moderated real exchange rate appreciation through restraint on domestic absorption (Table 1, Scenario VI).14 Such a policy would result in even larger reductions in real wages and household consumption. However, the reduced real appreciation of the exchange rate (relative to Scenario V) leads to greater reductions in imports and smaller contractions in non-oil exports. As a result, all non-oil tradables sectors fare better than under Scenario V. As more resources are retained in the non-oil tradables sectors, the services sectors expand less, particularly the construction industry, owing to constant investment (by assumption) (Figure 3).

Figure 3:
Figure 3:

Sectoral Effects of Oil Boom with Tariff Increase: Fixed versus Endogenous Current Account, 2006

(Percentage deviation from the 2006 baseline)

Citation: IMF Staff Country Reports 2004, 362; 10.5089/9781451820935.002.A004

Source: Simulations as described in the text.

22. An interesting question is what would happen if real wages were downward rigid. Additional simulations indicate that employment would fall by nearly 8 percent from its 2006 baseline (Table 1, Scenarios VII and VIII). This would more than offset the employment gains of six years (2000-06) of economic growth and the oil boom. As a result, household consumption would fall significantly below the base line projection.

C. Accelerating Productivity Improvement

23. There are options for enhancing international competitiveness of the non-oil tradables industries. A clear alternative is a broad-based strategy of improving the productivity of the economy. Such a strategy should focus on reducing the cost of doing business in Kazakhstan by reducing bureaucratic obstacles and corruption. Moreover, restrictive policies on employment of foreign experts, procurement, and transfer pricing regulations should be relaxed. The authorities should take the opportunity of their WTO accession process to lock in existing reforms, increase competition in the domestic goods and services markets, and build institutions for sustained growth. More investment is needed, in the context of a high-quality public investment program, to improve the country’s physical and social infrastructure. Continued structural and institutional reforms that create a favorable investment climate for foreign and domestic firms alike, and a more liberal trade regime that ensures competition in the domestic market, are essential for improved performance.

24. To underscore the above point, we simulated the impact of a 10 percent rise in total factor productivity on the non-oil tradables sectors and the economy as whole.15 Figure 4 (upper panel) shows that such a rise, in combination with the oil boom, would increase GDP by nearly 20 percent. It would also be far more effective than a 20 percent tariff in arresting the decline in the non-oil tradables industries (Figure 4, lower panel). Of course, achieving a 10 percent productivity increase is a challenging task. But Kazakhstan’s past experience proves that this is attainable over the medium term. Between 1996 and 2001, Kazakhstan’s total factor productivity increased by 24 percent (4.4 percent per year) (IMF 2003). If the expanding oil wealth can be invested efficiently, such additional productivity gains can be within reach.

Figure 4:
Figure 4:

Effects of the Oil Boom: Productivity Improvement versus Tariff Increase, 2006

(Percentage deviation from 2006 baseline)

Citation: IMF Staff Country Reports 2004, 362; 10.5089/9781451820935.002.A004

Source: Simulations as described in the text.

D. Policy Implications

25. With an oil boom of the projected magnitude, a real appreciation of the tenge is almost inevitable. While policies designed to limit absorption through tight fiscal and monetary policies would reduce the pressure on the exchange rate over the short to medium term, they are unlikely to be sufficient to eliminate it. For now, a rapid build-up of foreign exchange reserves (which has been partially sterilized) and the accumulation of government assets in the NFRK have mitigated the pressure, but at the expense of domestic investment, the fiscal position, and private consumption. The projected increase in oil production over the medium term would require substantial further tightening of fiscal and monetary policies if the real exchange rate were to remain unchanged. To maintain a reasonable level of investment despite the substantial contraction required in domestic absorption, government consumption would have to contract so much that it could severely undermine the provision of public services and social benefits. An alternative would be lower private consumption and investment (by increasing taxes on households and pushing up real interest rates through government spending), which would reduce Kazakhstan’s long-term growth potential, as well as prevent the current generation from fully benefiting from the oil boom.

26. The real appreciation of the tenge will require considerable structural adjustment. Booming non-tradables sectors as a result of the oil output increase would attract considerable resources away from agriculture and other tradables sectors. Political pressure may develop to protect employment opportunities in these sectors through border measures and/or domestic subsidies. How this pressure is handled will have profound implications for the long-term growth of the Kazakhstani economy. For example, as illustrated above, a tariff increase may help the non-oil tradables sectors to some extent, but it could lead to losses in overall employment, especially if the labor market becomes downwardly-rigid in expectation of ever higher real wages resulting from increasing oil wealth. More importantly, in view of Kazakhstan’s relatively small domestic market, a protectionist policy runs the risk of creating inefficient industries and a distorted economy in the long run. An alternative approach to supporting the non-oil tradables sectors is to accelerate structural and institutional reforms, and to use the windfall oil wealth to build up the country’s physical infrastructure and human capital base. Over the long term, this would lay the ground for industrial diversification and upgrading, and productivity improvement.

A General Equilibrium Model of the Kazakhstani Economy

The model is based on neo-classical trade theory and has a structure similar to the Dervis-Robinson model of Korea (Dervis and Robinson 1982). Each of the eight industries (Table 1) identified in the model exhibits constant returns to scale. Firms are assumed to maximize their profits in perfectly competitive goods and factor (labor and capital) markets. Each industry produces one single commodity, which can either be sold at home or overseas, depending on relative prices. However, domestic sales and exports are no perfect substitutes. The degree to which domestic sales can be transformed into exports (and vice versa) is governed by a constant elasticity of transformation (CET) function. For the oil sector, we set the elasticity at 100, to reflect the fact that oil is a very homogenous product and that Kazakhstan has an established and improving oil transport system. For all other industries, we set the elasticity at one.1

Table 1.

Industries Identified in the Model

article image
Source: Model database.

Firms’ demand for intermediate inputs is proportional to output levels. These inputs are characterized by constant elasticity of substitution (CES) combinations of home products and imports. In setting the elasticities, we are guided by those available in the GTAP model (Hertel 1997) and the Korean model (Dervis and Robinson 1982). On the other hand, firms’ demand for primary factors is assumed to be governed by Cobb-Douglas production technology (with the implied elasticity of substitution being one) except for the oil sector, for which the elasticity of substitution is set at 0.2, making capital and labor gross complements. The very capital-intensive nature of oil production makes it difficult to substitute capital for labor.

Households are assumed to maximize a Cobb-Douglas utility function and their consumption bundle consists of eight goods and services, which are CES blends of home products and imports. Household incomes are derived from employment of labor and ownership of capital. Households pay income tax and their disposable income is used for either consumption or savings. Government revenue results from taxes on firm output and international trade, in addition to income taxes. The government contributes to national savings when its tax revenue exceeds consumption. The propensity to consume (for both households and the government) is assumed to be constant, unless exogenously specified.

Labor is assumed to be perfectly mobile between industries, while capital is sector-specific. The labor market is cleared by equating demand with a specified level of supply. Alternatively, wage rigidities can be introduced to render aggregate employment endogenous. Goods markets are assumed to be cleared without any price controls. Kazakhstan is assumed to be a small country in the sense that it can not influence world prices. However, the law of one price does not hold in the model as a result of product differentiation between home goods and imports, and between domestic sales and exports.

References

  • de Melo, J., and S. Robinson, 1989, “Product Differentiation and the Treatment of Foreign Trade in Computable General Equilibrium Models of Small Economies,” Journal of International Economies, Vol. 27, pp. 4767.

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  • Dervis, K. J., and S. Robinson, 1982, General Equilibrium Models for Development Policy, (Cambridge: Cambridge University Press).

  • Devarajan, S, D. Go, J. D. Lewis, S. Robinson, and P. Sinko, 1997, “Simple General Equilibrium Modeling,” in J. Francois and K.A. Reinert, eds., Applied Methods for Trade Policy Analysis (Cambridge: Cambridge University Press).

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  • Dimaranan, B. V. and R. A. McDougall, 2002, Global Trade, Assistance, and Production: The GTAP 5 Database, Center for Global Trade Analysis (West Lafayette: Purdue University).

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  • Harrison, W. J., and K. R. Pearson, 1996, “Computing Solutions for Large General Equilibrium Models using GEMPACK,” Computational Economics, Vol. 9, pp. 8327.

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  • Hertel, T. W., ed., 1997, Global Trade Analysis: Modeling and Applications (New York: Cambridge University Press).

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1

Prepared by Yongzheng Yang.

2

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).

3

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).

4

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.

5

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.

6

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).

7

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.

8

Devarajan et al. (1997) provide a neat exposition of how a resource boom can be modeled in this manner.

9

However, capital stocks in non-oil industries remain unaffected.

10

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.

11

In the end, labor supply implied by the 4 percent NARU begins to bind and real wages increase.

12

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.

13

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.

14

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.

15

The simulation continues to include the shock resulting from the oil boom.

1

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).

Republic of Kazakhstan: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Kazakhstan: Benchmark Projection and Comparative Static Simulations

  • View in gallery

    Sectoral Effects of Oil Boom under Fixed Current Account, 2006

    (Percentage deviation from 2006 baseline)

  • View in gallery

    Sectoral Effects of Oil Boom with Tariff Increase: Fixed versus Endogenous Current Account, 2006

    (Percentage deviation from the 2006 baseline)

  • View in gallery

    Effects of the Oil Boom: Productivity Improvement versus Tariff Increase, 2006

    (Percentage deviation from 2006 baseline)