The 2017 Address vs. the 2016 Address: Saying Everything Twice

Reading the Address, one notices many sound development priorities. But the main problem with a document of this kind, it seems to me, is that it goes entirely unimplemented. A quick review of how the President's 2016 Address was carried out shows that most of what was said last year has simply rolled over into 2017, and many issues remain unresolved. It is important, however, that instructions that economic experts had called for have begun to appear.

The plan was to conduct stress tests of second-tier banks, identify non-performing loans, write them off, and recapitalize the banking sector. Banks that failed to resolve their problems were to leave the market.

As it turned out, once stress testing began, it became clear that too much would have to be written off and that more than a dozen second-tier banks could go bankrupt. As a result, this task was not accomplished in any meaningful way and was postponed to later years.

The plan also called for correcting the institutional flaws of the National Bank and removing from it entities that create conflicts of interest: the Unified Accumulative Pension Fund (UAPF), the Problem Loans Fund, and other financial institutions. None of this has been done. Moreover, the state has strengthened its role in redistributing UAPF assets, even though the task was to transfer pension assets to private Kazakhstani and foreign asset managers in 2016.

The only positive development worth noting is the introduction of a more or less coherent interest rate mechanism.

The government was expected to develop a new concept for the use of the National Fund, revise tax administration, and conduct a review of budget programs.

Unfortunately, in this area only the review of budget programs has been carried out. Even that measure, incidentally, produced no significant savings, and the expenditure side of the budget has not shrunk noticeably. In 2017, a review of budget programs appears yet again among the instructions.

The government was to present a new privatization program, and the three main state holding companies were to be turned into compact organizations.

In practice, something resembling a privatization plan was produced, while the main effort (and enormous sums of money) went into the transformation of Samruk-Kazyna, which has nothing in common with creating a compact organization or with privatization. Privatization under the updated plan is itself dragging on, and in 2017 another instruction on privatization has been issued. Nevertheless, the new Address speaks not only of privatization but also of the transformation of the fund and of the Baiterek and KazAgro holdings.

The fourth priority of last year's Address was a program to attract investment, focused on large multinational companies, together with separate programs for six macro-regions. Unfortunately, the public was never presented with any macro-region programs, and multinationals are in no hurry to come to us. As a tool for creating a favorable investment climate, a detailed plan for improving it was to be drafted. In addition, an investment council was to be established under the government. The new program now speaks of an export council.

Thus, in 2017 we see a steady carryover of a number of instructions from the previous Address, along with new instructions that are yet to be implemented.

There is no point in analyzing the title of the Address; the substance is more interesting. Here we see that a new program called "Digital Kazakhstan" will appear, intended to give impetus to the development of digital technologies. The state has experience in developing online services, including through the state company Government for Citizens. However, recent moves to restrict the use of smartphones and gadgets in government bodies show the real attitude toward new technologies and toward the introduction of digital technologies.

Next, the Address envisages the development of IT infrastructure and fiber optics, with connection opportunities for the main economic actors. In principle, this area is purely commercial and should be developed by private companies, not by the state.

As the basis for economic growth, the Address has at last named basic industries rather than high-value-added processing industries, as many experts had urged.

The emphasis is on exports of goods, works, and services, and for this purpose yet another council is being created under the government, which is to develop a unified export strategy. Yet support for exporters on the business side should be the job of the Atameken National Chamber of Entrepreneurs, and, in principle, our export problems stem not from a lack of policy but from complex bureaucracy, customs clearance, and VAT refunds. A focus on removing barriers for exporters would be more logical.

Some things in the Address are quite illogical.

On the one hand, it speaks of developing basic industries and integrating into global production chains; on the other, it draws attention to semi-knocked-down (SKD) assembly of electric vehicles, which clearly does not meet the criteria just described.

And there is one more document to be drafted: an investment strategy for Kazakhstan. It is hard to say what is meant by an investment strategy. I think we are unlikely to see this document, just as we have not seen many of those that were supposed to be drafted earlier.

The section on developing the mining and metallurgical and the oil and gas sectors was a pleasant surprise. What the expert community has been saying is reflected in the Address. In particular, it speaks of developing geological exploration, adopting the long-awaited Mining Code, and amending taxation for subsoil users. In terms of its potential to drive the country's economic growth, this is the most significant item.

As in other recent strategic documents, the emphasis is on developing the agro-industrial complex. But the agro-industrial complex requires enormous reforms, and, it seems to me, not all of them are reflected in the Address. Moreover, the Address has the state deciding for private business what the efficient path of development is and which agricultural players will be the focus. It seems to me neither quite right nor logical to single out particular players or sectors. Everyone should receive equal support and equal opportunities.

For example, the emphasis is on household and subsidiary plots and small farms. However, these producers mostly rely on manual labor, with very low levels of mechanization and intensification. From a macro perspective, they will not raise labor productivity in rural areas, which is the main problem, and supporting them will therefore not make the agro-industrial complex more competitive.

I fully agree with the development of road and logistics infrastructure, and this area raises few questions.

As for the construction industry, it seems to me that the cart has been put before the horse. Urbanization can be a driver of economic growth, but construction cannot; it is essentially a tool for urbanization and for creating favorable conditions for urban development.

For now, the state's actions in the housing market have a negative effect, since they create unequal competition and an unbalanced supply of housing that is not backed by adequate demand. It would therefore be logical for the state to focus on developing urban infrastructure and subsidizing mortgages. In principle, that is where things are heading under the Nurly Zher program. However, it remains an open question how Nurly Zher will be implemented in Almaty and Astana, where the housing problem is most acute.

As part of labor market development, the Address proposes reforming employment centers and creating an online platform, which is a positive step.

The Address also assigns a major role to developing SMEs, and for this purpose proposes drafting what would be the third document on the subject: systemic measures to deregulate business.

As I noted above, the Address once again speaks of privatization, as well as of the transformation of the Samruk-Kazyna holding and the reorganization of KazAgro and Baiterek. I think this simply reflects processes already under way, and we will not see major changes. It would be more sensible to speed up privatization and the liquidation of some state holdings that proved their inefficiency long ago. This points only to a rather strong quasi-state lobby.

The Address again covers the financial sector. But the most important point, which was absent from last year's Address, is the strengthening of auditors' responsibility and the improvement of corporate governance. The reason for the poor state of the banking sector is not bad loans but poor management of banks, and by tackling the problem of bad loans the state is fighting the symptom rather than the cause.

Once again the emphasis is on optimizing budget expenditures, reviewing government programs, and tightening tax administration in order to increase tax revenues.

Given that the President has instructed the government to develop a Strategy 2025, one can assume that the previously drafted strategy was not approved.

Taken as a whole, the main issue remains the implementation of the President's Addresses. Experience shows that the government's record in carrying out instructions is patchy, which suggests either that the tasks themselves are quite ambitious or that the mechanisms within government bodies are heavily bureaucratized.