How to Stimulate a Country's Economy the Right Way

Kazakhstan has a multitude of state programs that use resources from the state budget, the National Fund and the National Bank to stimulate economic development. Yet when you read the substance of most of these programs, it is not entirely clear what their goal is or what exactly a given program is meant to stimulate.

In my view, any state program should stimulate only one thing: an increase in the country's GVA. Some programs may target employment, although I believe GVA alone is sufficient. The second criterion for supporting entrepreneurs should be business sustainability. If a business is not sustainable and becomes uncompetitive the moment it is cut off from state programs, it should not be stimulated.

At present, state programs are aimed at developing particular sectors or particular product groups. But such goal-setting is not merely wrong; it is actually very harmful for the country.

To be clear about what GVA is: it stands for gross value added. It can be calculated in different ways, but in basic terms it is labor costs, profit and depreciation of fixed assets.

This means that the larger the share of labor costs and profit in the cost of production, the greater the share of GVA created within the country.

GVA is also calculated as gross output of goods minus intermediate consumption (expenditure on goods, works and services purchased from other organizations). If domestically produced goods, works and services are used as intermediate consumption in production, this also increases the country's GVA, since consumption of intermediate goods grows. If, however, imported goods, works and services are used in production, that part of the expenditure becomes income for other countries. For this reason, sectors with high import dependence should not be stimulated.

Moreover, this approach to stimulus puts pressure on the country's balance of payments, which in turn puts pressure on the tenge exchange rate, because foreign currency earned from exports becomes insufficient to buy the currency needed to pay for imports.

Let me give several examples from our own reality of what it is harmful to stimulate with budget funds. First, the automotive industry, which, without the savings on customs duties, the recycling fee and vehicle registration costs, in some cases even has negative GVA. Second, housing construction, since, once apartment finishing and renovation are taken into account, the share of imports is very high. Third, the production of various goods that in Kazakhstan are simply portioned and packaged, tea production being one example.

Separately, we need to address depreciation of fixed assets, which is also part of GVA. Any capital structure that will be depreciated in the future through the production of other goods will increase the country's GVA. In this respect, we should stimulate the construction of roads, power grids, sewage systems, combined heat and power plants, pipelines, railways, land reclamation, irrigation systems and so on. For the same reason, it is not quite right to stimulate housing construction, since this kind of capital construction no longer takes part in creating value added in the future.

The second criterion for properly assessing economic stimulus is the sustainability of a sector. Here, too, there are examples of decisions that are not quite right. One is the production of simple goods. Without economies of scale, simple goods will be uncompetitive in the global market, because their unit cost will be very high compared with analogues made in large volumes. For example, there is no point in producing clothespins, toilets, taps, toothbrushes and so on. Or else production would have to be so large that we could export these goods in significant quantities. That, however, is unlikely.

Many will ask me what, then, can be stimulated in order to develop the economy at the sector level. In Kazakhstan, broadly speaking, such sectors include mining and metals, agriculture, further stages of processing in mining and metals, tourism, services of any kind, the IT sector, infrastructure construction, food processing that uses intermediate products made in Kazakhstan, fertilizer production and so on. But it is important to understand that sectors should not be restricted: what matters is to measure GVA within the country correctly, along with sustainability, when state money is allocated to stimulate the economy.

I would also ask readers not to confuse this with the state's social goals, which essentially come down to redistribution from rich to poor and the equalization of living standards. Examples include providing housing for socially vulnerable groups, free education, healthcare and so on.