In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Assessment of Inclusive Growth1

1. Inclusive growth is not only important for social cohesion, but also for macroeconomic stability. This chapter analyzes whether Kazakhstan has made progress in achieving a more equal income distribution, lower poverty, and a higher level of employment.

A. Income Inequality

2. Kazakhstan has made strides in economic development, which have contributed to boosting income and reducing income inequality. Kazakhstan has enjoyed robust GDP growth since 2000—averaging 8 percent. The rapid pace of growth contributed to a sharp rise in per capita income (Figure 1). An improvement of policy frameworks and institutions, as well as robust balance sheets associated with the country’s natural resource wealth, has delivered relative macroeconomic stability. The growth incidence curve2 for Kazakhstan between 2004 and 2009 suggests a decrease in inequality (Figure 2). Real GDP growth rates for the groups in the middle and lower parts of the income distribution have been higher than rates for those in the upper part of the distribution. This has led to a reduction in the income gap, in relative terms, between the poor and the rich.

Figure 1.
Figure 1.

Kazakhstan: Income and Income Inequality

(In percent)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Sources: WEO and WDI.
Figure 2.
Figure 2.

Kazakhstan: Growth Incidence Curve

(Average yearly rate of change in 2004–09)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: IMF staff estimates.

3. Poverty has considerably declined over the past decade, but rural poverty is still higher than in poorer countries in the region. Poverty declined from 47 percent in 2001 to 4 percent in 2012. Notably, rural poverty dropped from 59 percent to 6 percent for the same period, while urban poverty fell from 36 percent to 2 percent (Figure 3). Despite significant improvement in reducing rural poverty, however, the rural poverty gap3 is wider than in neighboring countries such as Armenia, Kyrgyz Republic, and Tajikistan (Figure 4).

Figure 3.
Figure 3.

Kazakhstan: Rural and Urban Poverty1/

(In percent of population)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: WDI.1/ Rural(urban) poverty rate is the percentage of the rural (urban) population living below the national rural(urban) poverty line.
Figure 4.
Figure 4.

Kazakhstan: Rural Poverty Gap1/

(In percentage points)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: WDI.1/ Defined by rural poverty rate in percentage of the rural population less national poverty rate in percentage of the nation’s population.

4. There remain substantial regional disparities in the concentration of poverty across the country. The share of people with income below the subsistence minimum varies widely across regions, from 1.7 percent in Astana to over 10 percent in south Kazakhstan (Figure 5). Ethnic migrants often choose to live in southern and western regions, where Kazakh is more widely spoken and the culture is more familiar. However, these regions suffer from an over-supply of labor, while the population of the northern regions is shrinking. High poverty rates are observed in both non-oil and oil-rich regions. This reflects the fact that the oil sector works as an enclave: it is capital intensive and does not generate many jobs, and thus does not create significant economic spillover effects.

Figure 5.
Figure 5.

Kazakhstan: Regional Income Distribution

(In 2011)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: Country Economic Memorandum, World Bank.

5. The authorities have taken measures to address the geographical income inequalities. Fiscal redistribution, by its nature, involves transferring resources from higher-income households through taxes and transfers. Cash transfers to poor households are usually superior to indirect methods such as price subsidies. Keeping this principle in mind, in 2013 the government increased the tax burden on real estate and properties and raised tax rates on luxury goods by amending the tax code; these changes came into effect in January 2014. As a medium-term objective, the authorities intend to strengthen the progressivity of the income tax. On the expenditure front, the government provided cash transfers to migrants to settle in target areas, particularly north Kazakhstan, for the purpose of spreading growth more evenly and reducing the gap between regions. Also the authorities increased the social orientation of the national budget, centering on improving access to education and health for low-income families. The plan includes eliminating the shortage of space in schools by 2017, providing free preschool education by 2020, and introducing a compulsory health insurance system in the medium term.

6. The government is mindful of maintaining fiscal sustainability, while aiming for effective redistribution policy. Redistributive fiscal policy should be consistent with fiscal sustainability, which can support economic growth and the capacity to finance higher spending on redistribution over the longer term. Better targeting of transfers reduces their fiscal cost and tax levels required to finance them, thus achieving distributional objectives in a more efficient manner.

7. Going forward, promoting economic diversification would help further reduce income inequality. The authorities recognize the enormous untapped potential of Kazakhstan’s resource-rich economy. Economic diversification requires a structural transformation, as envisaged in the Kazakhstan 2050 Vision. This effort requires sizeable investments in physical, human, and institutional capital. Policies should aim to address shortcomings in these areas by prioritizing investment in infrastructure and enhancing investment efficiency. The government needs to address these challenges through structural reforms and selective financial support.

B. Employment

8. Thanks to robust economic growth, the unemployment rate in Kazakhstan has declined rapidly since 2000. The downward trend rate remained intact during the crisis, with the unemployment rate at 5.2 percent in 2013, less than half of its level in the early 2000s (Figure 6). In particular, youth unemployment fell substantially, helped by the government’s targeted intervention, e.g., a greatly expanded vocational and training system to create employment opportunities for youth.

Figure 6.
Figure 6.

Kazakhstan: Unemployment

(In percent)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: Kazakhstani authorities.

9. High female labor force participation (FLFP) is another positive feature of the labor market in Kazakhstan. FLFP in Kazakhstan is reported at 67 percent of the total female labor force in 2012, higher than emerging market countries (Figure 7). High FLFP contributed positively to increasing output growth and reducing income inequality. In general, better opportunities for women to earn income could contribute to broader economic development. As a result, both income inequality and unemployment in Kazakhstan compare favorably to those of its emerging market economy peers (Figure 8).

Figure 7.
Figure 7.

Female Labor Force Participation

(In percent in 2012)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: WDI.
Figure 8.
Figure 8.

Unemployment and Inequality1/

(Latest available observation)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Sources: WEO and WDI.1/ Blue represents a decrease and red an increase in the unemployment rate in 2009–13. The bubble size illustrates the magnitude of the change in the unemployment rate.

10. Given the high level of self-employment, however, the low recorded level of unemployment needs to be treated with caution. Self-employed workers are those who work on their own account or with one or a few partners. They are less likely to have formal work arrangements, and are therefore more likely to lack decent working conditions, adequate social security, and voice through effective representation by trade unions and similar organizations. Efforts to reduce the share of self-employment in Kazakhstan have been a welcome development, but the labor structure in Kazakhstan is characterized by high vulnerable employment rate, i.e., unpaid family workers and own-account workers as a percentage of total employment (Figure 9). Among employed people, about 30 percent engage in vulnerable employment. If one were to apply the average vulnerable employment rate of emerging market economies (20 percent) to Kazakhstan, the measured unemployment rate would be above 10 percent (Figure 10). In addition, the quality of Kazakhstan’s labor statistics has been criticized, because of its ambiguous treatment of self-employment: a substantial portion of the rural labor force is recorded as self-employed.

Figure 9.
Figure 9.

Vulnerable Employment Rate

(In percent in 20121/)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: WDI.1/ KOR, MEX, RUS for 2009.
Figure 10.
Figure 10.

Kazakhstan: Unemployment Rate and Self-Employment

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: IMF staff estimates.

11. The relationship between job creation and growth has been weak, particularly since the onset of the global crisis (Figure 11). Job creation in the manufacturing sector is anemic, despite a strong focus on the accelerated industrialization program. Even employment in the agricultural sector has been continuously falling, because of the unproductive farm structure (Figure 12). This reflects the limited access to commercial credit and lack of long-term investment, and the weak integration of domestic food chains. While agriculture accounts for more than a quarter of total employment in 2011, the sector’s contribution to GDP stands at about 6 percent.4

Figure 11.
Figure 11.

Kazakhstan: Employment and Growth

(Annual growth rate, percent)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: IMF staff calculations.
Figure 12.
Figure 12.

Kazakhstan: Employment by Sectors

(Index: 2004=100)

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: Kazakhstani authorities.

12. The low degree of job creation reflects a capital intensive economy dominated by the oil sector and an underdeveloped private sector. Cross-comparison results suggest that long-term employment elasticity in Kazakhstan is low relative to its comparators. Several factors have contributed to lower elasticity of employment to GDP.5 First, the oil sector, by its nature, is not inclusive. Productivity growth in the oil-extracting regions was fueled by large capital investments associated with oil-extraction activities, while employment creation was limited. Second, to underdeveloped private sector does not contribute to increasing employment. Kazakhstan has undergone a wave of privatization over the past two decades, but many key economic sectors remain under direct or indirect state control. Moreover, the private sector is still subject to numerous constraints and distortions, and is not growing fast enough to absorb the large number of first-time job seekers. Also, economic diversification is hindered by a difficult business climate. Third, the oversized public sector negatively affects labor market efficiency. The public sector plays an important role as an employer. Among employed people, about 22 percent work in public entities.6 The public sector provides employees with higher compensation and benefit packages than the private sector offers. In the long run, high levels of government employment limit economic growth by trapping workers in less productive public-sector jobs and deterring investment in the private sector. Finally, there is excess demand for workers with higher and vocational education and excess supply of workers with general secondary school education and below. Kazakhstan fares poorly when it comes to providing adequately trained workers to the labor market. Only 41 percent of Kazakhstani firms provide formal training, while a significantly larger number of firms in Russia (52 percent), Poland (61 percent), and Malaysia (50 percent) are reported to offer formal training.7

Text Table 1.

Kazakhstan: Long-Term Employment Elasticities

article image
Source: IMF Working Paper (WP/12/218).

13. Under current policies, employment prospects are not likely to improve much. There will be significant challenges in keeping the unemployment low. A youth bulge in the population underscores the need for significant job growth. Taking into account the current demographic structure, about 0.8 million people are estimated to enter the labor force over the next five years, while GDP is projected to grow by 5.2 percent on average for the same period. The unemployment rate is therefore envisaged to continue rising to 6.3 percent in 2019 from 5.2 percent in 2013 (Figure 13). However, the medium-term growth prospects are closely linked to the capital intensive oil sector, i.e., the Kashagan oil field’s operation. Therefore, it is hard to rule out the possibility that unemployment could rise above 7 percent.

Figure 13.
Figure 13.

Kazakhstan: Unemployment Rate Projections

Citation: IMF Staff Country Reports 2014, 243; 10.5089/9781484355671.002.A001

Source: IMF staff projections.

14. Against this background, the government has designed a “Road Map” to contain sudden rises in unemployment during crises, through the creation of public works. As part of the implementation of the anti-crisis program, the authorities adopted a Regional Employment and Retraining Strategy (Road Map) in a joint effort with the International Labor Organization, in the aftermath of the global crisis. The objectives of the Road Map are: (i) to contain the increase in unemployment through provision of short-term employment and job creation in public works and other social programs; and (ii) to rehabilitate social infrastructure and facilities as a necessary condition for sustainable development. The program covers additional financing of projects in housing and utilities; construction and maintenance of local roads; maintenance of social infrastructure (schools and hospitals); maintenance of social infrastructure outside of main cities; creation of social jobs (including 50 percent co-financing of salaries for selected target groups); and youth internships and vocational training and retraining.

15. A combination of reforms and higher growth is essential to absorb new entrants to the labor market. To maintain unemployment at the current level (around 5 percent), medium-term GDP growth should be boosted to 6½ percent, 1¼ percentage points higher than envisaged in the staff’s macroeconomic projection. Structural reforms may, also, have a significant and positive impact on the responsiveness of employment elasticities. Staff simulations (Figure 13) suggest that making labor demand more elastic by increasing the employment-output elasticity to the middle-income country group average (i.e., 0.25) would support to keep unemployment at the current level without boosting medium-term economic growth.

Text Table 2.

Kazakhstan: Medium-Term Outlook for Unemployment 2014–19

article image
Source: IMF staff estimates and projections.

16. Keeping up the momentum on structural reforms is paramount to tackling key constraints to job creation. Higher growth performance will be necessary but not sufficient to significantly reduce unemployment over the medium term. In the absence of structural reforms aimed at improving the responsiveness of labor market conditions to changes in economic activity, higher economic growth is likely to have only a modest impact on the overall rate of unemployment and negligible effects on youth unemployment. Deepening structural policies aimed at improving the functioning of the labor market will be crucial for fostering the development of labor-intensive sectors that do not depend on exhaustible resources. In particular:

  • Reforms aimed at improving the business climate would help energize the private sector by boosting employment over the medium term. Supporting enterprise development by improving infrastructure and promoting small and medium-sized enterprises (SMEs) may have significant effects on employment.

  • Reforms aimed at addressing perceived weakness in the education environment would help to reduce skill mismatches between labor supply and demand. Secondary education needs to be better aligned with market needs. In this context, private sector involvement is crucial. Higher-quality education and training should be accompanied with much closer consultations with the private sector to assess their needs. It is important to strike the right balance between higher education and vocational education training.

  • Reforms aimed at strengthening the rule of the law and lowering the role of the state in the economy would help to promote a vigorous private sector.

17. Given the overarching structural challenges for Kazakhstan, the authorities are stepping up efforts to implement various measures. To bolster youth employment and address labor market challenges, the authorities have been revamping a college internship program and a job placement program, which will help to make educated youth competitive in the labor market and to reduce labor market mismatches. The authorities also intend to accelerate the implementation of structural reforms in close cooperation with international development partners (the Asian Development Bank, the European Bank for Reconstruction and Development, and the World Bank), centering on the following priority areas: the financial sector, SMEs, skills, the investment climate, regional development, and institutional reforms.

C. Conclusion

18. The results suggest that Kazakhstan’s economic growth has been broadly inclusive, but there is room for further improvement. Both income inequality and unemployment in Kazakhstan compare favorably to peers. That said, poverty rates in rural areas are higher than some poorer regional peers. Furthermore, the recent efforts to further reduce income inequality by promoting faster employment growth have been relatively weak.

19. Fiscal policy could be a useful tool to help reduce income inequality. Better targeting of transfers reduces their fiscal cost and tax levels required to finance them, thus achieving distributional objectives in a more efficient manner. Both tax and expenditure policies need to be carefully designed to balance distributional and efficiency objectives.

20. An ambitious structural reform agenda is paramount to Kazakhstan becoming a dynamic emerging market economy and ensuring sustainable and inclusive growth. Deepening structural policies aimed at improving the functioning of the labor market would be crucial to fostering the development of labor-intensive sectors that do not depend on extractive industries. Key priority areas include strengthening human capital and institutions and lowering the role of the state in a more diversified economy.

References

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  • International Monetary Fund, 2012, Fiscal Policy and Employment in Advanced and Emerging Economies, IMF Policy Paper (Washington).

  • International Monetary Fund, 2013, Guidance Note on Jobs and Growth Issues in Surveillance and Program Work, IMF Policy Paper (Washington).

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  • World Bank, 2013, Beyond Oil: Kazakhstan’s Path to Greater Prosperity through Diversifying, Report No. 78206-KZ (Washington).

1

Prepared by SeokHyun Yoon.

2

Growth incidence curves identify the extent to which each decile of households ranged by their income level benefits from growth.

3

Defined by rural poverty rate, in percentage of the rural population, less national poverty rate, in percentage of the nation’s population.

5
The long-term elasticity of employment to GDP was calculated based on the following equation:
log(Et)=α+ρlog(Et1)+βlog(GDPt)
where E is the number of people employed at time t, and β is the long-term elasticity.
Republic of Kazakhstan: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.