Selected Issues

Abstract

Selected Issues

Economic Diversification Through Trade1

Trade provides a route to economic diversification, given the limited size of Kazakhstan’s domestic market. However, significant effort will be needed to move away from the current, highly-concentrated export structure, where most products with revealed comparative advantage are based on natural resources. Appropriate policies can alleviate some of the constraints; these include upgrading infrastructure, improving the business climate, reducing distortions, investing in human capital and R&D and reforming the agricultural sector to tap its significant potential.

1. Increasing productivity and reducing natural resource dependence are key policy priorities for Kazakhstan. The Kazakhstan 2025 strategic development plan focuses on productivity and growth to support the country’s long-term aspiration of joining the 30 most developed nations by 2050. The plan lays out a new economic model, where growth is driven by technological innovation and strengthening the position of Kazakhstan’s industries on international markets through new products with high value-added. This implies diversification and development of strong export-oriented sectors, given limited domestic demand.

2. Building a more balanced economic structure would strengthen resilience to shocks. Natural resource endowments offer opportunities for growth, but also challenges to macroeconomic management. High reliance on commodities exposes economies to shifts in terms of trade, and evidence suggests that shocks to commodity prices tend to be highly persistent and asymmetric (IMF, 2012). They are often associated with substantial output and fiscal revenue volatility, and balance of payments pressures. Therefore, promoting growth of non-resource sectors would reduce vulnerability to adverse changes in external conditions.

3. Trade can play an instrumental role in diversification and growth. Openness to trade has been associated with productivity improvements from a more efficient allocation of resources, technology transfers, lower prices due to increased competition, richer consumer choices, and ultimately, higher living standards (IMF, WB and WTO, 2018). Trade may also provide a route to diversification, especially for countries with small domestic markets.

4. Kazakhstan has taken steps to liberalize trade, but openness has declined. Kazakhstan is one of the founding members of the Eurasian Economic Union (EEU), and in 2015, the country joined the World Trade Organization (WTO). Tariff and non-tariff barriers have been reduced—between 2010 and 2016, the average tariff rate was reduced by 2.5 percentage points to 5.1 percent.2 Trade openness, measured as the ratio of exports and imports of goods and services to GDP, has decreased to 60 percent from a peak level of nearly 100 percent. Relative to other EEU members, Kazakhstan is less open than Armenia, Belarus and Kyrgyzstan, but more open than Russia.

uA06fig01

Trade Openness

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

5. Crude oil dominates exports, while imports are more diverse (Figure 1). Kazakhstan exports about 2,900 products, based on the HS6 classification, up from about 2,100 in the early 2000s. Nevertheless, exports continue to be highly concentrated in a few commodity groups. The export-product concentration index is nearly twice as large as the average for other EEU members (Figure 2). Crude oil and petroleum products account for about 60 percent of total exports, and another 25 percent is comprised by metals, metal ores, and radioactive materials. Imports are more diversified. The number of imported goods is larger—about 4,400—and has been broadly stable. The top five products accounts for just 12 percent of total, compared to over 70 percent in exports.

Figure 1.
Figure 1.

Kazakhstan: Top 10 Exports and Imports in 2016 (HS4, percent of total)

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

Source: COMTRADE, IMF staff calculations
Figure 2.
Figure 2.

Kazakhstan: Export Concentration and Diversification

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

Source: WITS
uA06fig02

Kazakhstan: Number of Produces Exported and Imported

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

6. Trade patterns largely reflect Kazakhstan’s endowments, constraints, and policies:

  • Endowments. Measuring more than 2.7 million square kilometers, Kazakhstan is the world’s ninth largest country by area. Over three quarters of its surface area is suitable for farming; it has 25 million hectares of arable land and 180 million hectares of pastures.3 Kazakhstan has a wealth of natural resources, with some of the world’s largest deposits of chromium, uranium, lead, and zinc and significant reserves of oil, copper and iron ore (U.S. Geological Survey, 2007). Kazakhstan also has relatively high human capital, as measured in the Global Human Capital Report4

  • Constraints. Kazakhstan is landlocked and sparsely populated, with a concentration of population in the southern, south-western, and north-eastern parts of the country. This presents challenges due to the need for maintaining adequate infrastructure to ensure connectivity. High transportation costs affect competitiveness and present an obstacle to increasing trade. A mitigating factor is the proximity to two large markets: Russia and China.

  • Policies. Kazakhstan has made progress in improving the business environment, especially protecting minority investors, enforcing contracts, and registering property. Trading-across-borders and logistics are areas of relative weakness, with high costs of border and documentary compliance and shortcomings in customs administration, infrastructure, logistics quality, tracking, and tracing.5 The state’s presence in most sectors may deter diversification as entrepreneurs face challenges in growing to become competitive internationally.

Product Space

7. “Product space” is a useful tool to identify opportunities for increasing trade and diversification. Hausmann and others (2013) discussed product space, with the underlying idea being that a country’s export goods embed a large variety of factors— physical and human capital, policies, institutions, organizations, etc.—that cannot be easily separated and measured explicitly. However, if a country successfully exports a particular product, this implies that it has the required capabilities. Different products entail different sets of capabilities; however, countries that specialize in a particular product also tend to export similar products, as these require similar capabilities. This leads to a notion of “proximity”—the probability that a pair of products is co-exported. The “product space” is a network-graph connecting products that are significantly likely to be co-exported. More sophisticated products require more complex capabilities and are produced by fewer countries; such products are situated in the center of the product space network-graph.

8. The product space approach is made operational by deriving a measure of economic complexity to characterize a country’s export structure. Complexity is related to both diversity (the number of products in which a country has a revealed comparative advantage (RCA) according to the classical definition) and ubiquity (the number of countries that have RCA in a given product). Complexity is positively correlated with per capita income, and for a given level of income, countries with higher complexity grow faster (Hausmann and others, 2013). The product space approach has considerable practical appeal as it offers a framework to “predict” the evolution of trade patterns. It provides insights into the feasibility of developing new products that would increase the complexity of Kazakhstan’s economy, resulting in a more diverse structure.

9. Kazakhstan specializes in low-complexity products in the periphery of the product space; this presents challenges to diversification. Over the last five years, Kazakhstan has been able to increase significantly the number of goods in which it has RCA. However, the majority of these products—oil and gas, coal, ores, metals, agricultural products—are situated in the periphery of the product space. This suggests that the factors required for their production are not easily deployed in the production of other goods, making diversification into new products difficult (Figure 3). In general, the ability to diversify and move into more complex products depends on the initial position in the product space. Feasibility can be characterized in terms of distance of a product to the country’s export mix. Ideally, countries move to goods with higher complexity and opportunity gains. Figure 4 compares the feasibility charts for Kazakhstan and Turkey. It shows that for Kazakhstan, it is more difficult to diversify into higher-complexity products, given larger distances. Examples of products with above-average complexity and opportunity gains and relatively short distances include oats, asphalt, aluminum powders, railway cars, motor vehicles, agricultural machinery.

Figure 3.
Figure 3.

Kazakhstan: Product Space in 2016

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

Source: The Atlas of Economic Complexity at http://atlas.cid.harvard.edu/Note: The size of the dots represents the amount of world trade. Colored dots indicate products in which Kazakhstan has revealed comparative advantage, with different colors corresponding to different groups of products, e.g. agricultural products (yellow), textiles (green), minerals (brown), metals (dark red), chemicals (purple), transport vehicles (dark blue), electronics (light blue).
Figure 4.
Figure 4.

Kazakhstan: Distance, Complexity and Opportunity Gain

Citation: IMF Staff Country Reports 2018, 278; 10.5089/9781484376959.002.A006

Source: The Atlas of Economic Complexity at http://atlas.cid.harvard.edu/

10. Some constraints to export diversification can be alleviated by policies. These include:

  • Upgrading infrastructure. Kazakhstan should take advantage of its strategic location and continue to invest in upgrading road and rail infrastructure to reduce trade cost and improve connectivity. Improvements have been made in recent years under Nurly Zhol, and the BRI offers opportunities going forward. The need for infrastructure investment has fiscal implications; to maintain sufficiently high capital outlays without compromising fiscal sustainability, the government should generate additional revenue, preferably from the non-oil sector. PPPs can be used as well, provided they are properly designed and monitored.

  • Improving the business climate. Despite recent progress, there is room for improvement in the business climate through deregulation, simplifying procedures, and reducing red tape and corruption. This would create conditions for private companies to make productive investments to develop new products and create jobs. The various reform initiatives, including the “100 Concrete Steps,” recent amendments to the entrepreneurial code, and a program for improving global competitiveness target the right areas. Implementation is key.

  • Reducing distortions. Misallocation of resources arising from subsidies, preferential tax treatments, and product or labor market regulations can lead to a decrease in aggregate output and total factor productivity (Restuccia and Rogerson, 2008). This calls for phasing out loan subsidy programs, removing tax exemptions as companies generate profits and replacing them with incentives linked directly to investments, and reconsidering the “social function” of SOEs in terms of maintaining employment or loss-generating services.

  • Investing in human capital and R&D. The key to diversification into more complex products is accumulation of requisite knowledge. This is recognized by the authorities, and they have introduced measures to enhance human capital development, including the “Bolashak” program under which more than 13,000 students have been sent to study abroad, attracting foreign professors to local universities, creating a network of schools for gifted children, and updating general school curricula. More could be done to promote R&D. Kazakhstan spends just 0.2 percent of GDP on R&D, significantly less than the world’s average.6 Besides direct public spending, incentives (e.g., targeted tax credits) could be provided for R&D activities. Collaboration among universities, research centers, and industry should be encouraged.

  • Reforms in agriculture. Kazakhstan’s agricultural sector has an enormous potential, but reforms are needed to increase efficiency and productivity. These include removing constraints to land ownership and long-term lease and incentivizing appropriate land use, including through tax instruments, reducing subsidies, and increasing bank involvement in financing.7

References

  • Hausmann, R., Hidalgo, C., Bustos, S., Coscia, M., Simoes, A., Yildirim, M., (2013), “The Atlas of Economic Complexity: Mapping Paths to Prosperity”, 2nd ed., Cambridge: MIT Press

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  • International Monetary Fund (2012), “Macroeconomic Policy Frameworks for Resource-Rich Countries”, International Monetary Fund, Washington, DC

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  • International Monetary Fund, World Bank, World Trade Organization (2017), “Making Trade an Engine of Growth for All : The Case for Trade and for Policies to Facilitate Adjustment”, https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/04/08/making-trade-an-engine-of-growth-for-all

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  • Restuccia, D., Rogerson, R., (2008), “Policy Distortions and Aggregate Productivity with Heterogeneous Establishments”, Review of Economic Dynamics No. 11, pp. 707720

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  • U. S. Geological Survey (2007), “2005 Minerals Yearbook: Commonwealth of Independent States”, U.S. Department of the Interior, U.S. Geological Survey, Reston, Virginia

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  • World Bank (2017), “Creating Markets in Kazakhstan: Country Private Sector Diagnostic”, World Bank Group, Washington DC.

1

Prepared by Aziz Kholboboev and Rossen Rozenov.

2

World Development Indicators data.

3

Ministry of Agriculture data, http://mgov.kz/ru/zher-resurstary/

6

World Development Indicators data.

7

For more detailed analysis and recommendations, see World Bank (2017).

Republic of Kazakhstan: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.