Leading Economic Growth in Kazakhstan

Guest blog written by Baur Bektemirov

This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. Participants successfully completed this 10-week online course in July 2020. These are their learning journey stories.

There is an old cliché that crisis is an opportunity. In my case, the Great Lockdown has certainly become an opportunity to learn and even re-think my work as the Chief Economist for a government organization, which just recently was tasked with an expanded role to help the government to attract more investment and contribute to the economic growth.

The Leading Economic Growth program has helped me to assess, once again, the main problems and obstacles for the economic development of Kazakhstan, look for the real roots of these problems (the binding constraints), analyze possible solutions to these barriers, and even formulate a draft for solving some of them.

It does not, however, gives you a ready recipe to address current problems, instead, the program teaches and provides methodology: how to assess the problem, look for solutions, take a problem-driven iterative approach, build authority, ability, and acceptance to solve the problem in the existing political circumstances.

For example, Kazakhstan is showing all the symptoms of classical Dutch decease problem. The pro-growth policies adopted in late ‘90s—early 2000s, have led to rapid growth of the GDP at the expense of economic diversity (economic complexity). This has led to all the standard problems: strengthening of the national currency, growth of mining and non-tradable sectors of the economy with little productivity growth at the expense of other tradable goods and services. As the result, the economic growth has been stagnating for about 6-7 years now, while investment into economy has contracted, mostly due to the stagnation of banking lending.

The current pandemic does not help solving this problem either. But now, in addition to the short-term economic stimulus, central authorities must decide on economic policies, which will ensure long-term sustainable development. It is imperative to review the current model based on old pro-growth policies, which do not yield the same results as they used to 10—15 years ago.

It is required to make—using the course’s jargon—strategic bets and define additional priorities based on the following assumptions: (1) Kazakhstan is now at a crossroads; on current trajectory—and in the absence of major institutional and policy reforms, it is likely to be stuck at the middle-income level. It therefore needs to upgrade existing institutions and available instruments to build necessary capability move to the next level (which also means a significant improvement in local human capital); (2) there are existing binding constraints, such as low credibility to the national currency, that results in other problems, for example, high cost of borrowing or low level of investment; (3) debt financing without proper risk sharing mechanisms is most susceptible to external shocks, which means that the current financial system needs a total overhaul (4) Fourth industrial revolution and rapid development of new digital goods and services challenge existing business models; and (5) technological progress shapes global economy and the speed of economic changes has increased significantly, which means that Kazakh economy must become more agile and be able to absorb external shocks.

The course helped to identify many of these problems. It also provided methodology how to tackle some or all of them. However, for the sake of the assignment, I decided to focus on a more specific/narrow problem of low level of investment, in particular, still low level of investment through the Astana International Financial Centre.

One of the earlier assignments in the course was building a fishbone diagram, ask 3-5 why questions, and go beyond evident problems such as low level of investment to the underlying reasons. The diagram below lists some of the key issues to focus on: high labor costs, lack of expertise and low capability resulting in low productivity levels, currency risks (stemming from lack of trust to the national currency), bad corporate governance.

Drawing fishbone diagram and asking myself questions helped to identify a few AIFC specific issues, such as lack of clear mandate on investment attraction or lack of trust from the business because of little coordination with other government bodies.

It is hard to determine whether it was solely due to the LEG course or part of the work I do, but in preparation for the AIFC Management Council meeting, we have raised these issues to the key stakeholders and policy makers in Kazakhstan: President, Prime Minister, and Governor of the National Bank. As the result of two-week-long negotiations and discussions, we have found agreement on most of the issues with the government and National bank and received an explicit mandate on attracting foreign direct investment.

Now, the main goal is to build ability and authority in creating capacity and bringing expertise to improve a number of sectors. Following the advice of having only a few—but focused—strategic bets, we are developing expertise in agriculture, infrastructure financing, and energy: my teams has commenced a study on agriculture financing with the World bank and on infrastructure financing with a private consulting firm, while AIFC Business Connect, which would serve as an AIFC in-house investment promotion agency, has contracted a few industry experts to help them working with real economy projects.

Lastly, discussion on inclusion in the week 8 as well as the interview with Dani Rodrick and his article on the new social contract, helped me to realize the importance of creation of good jobs and increase of productivity. I re-evaluated how I view the pro-growth policies and understood that the long-term growth can only be achieved through increase of human capital when compared to [unsustainable] short-term growth spurs that can be achieved through increased spending or support of extracting institutions.

Overall, the course has helped me to grow as an economic development professional and has helped to build capacity in my organization (the governor of AIFC is also taking this course).

To learn more about Leading Economic Growth (LEG) watch the faculty video, and visit the course website.

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