Review of the National Economic Policy (NEP)

I took part passively in the discussion of the NEP. I will not criticize the document itself: it says a good many right things, and if they are at least implemented, the effect will be a good one. We have had plenty of attractive programs with the right goals, but it is the execution of our initiatives that suffers most.

Still, I had the impression that the document was prepared by the ministries and agencies themselves, which left little room for maneuver. If you do not want reforms, let those whom the reform is supposed to affect write the program. So I would like to address precisely those matters that were either left out or are contentious. My aim is not to criticize but to make the document better, so that it truly becomes a document of action.

The document opens with the rule of law and judicial reform. This is a very sound thesis. Yet the document says nothing about reform of the law enforcement agencies. In our country, economic and corruption crimes are now handled by as many as four agencies which, out of the inertia of the old Kazakhstan, do not seem to me to be oriented toward building a proper investment environment. In economic offenses, the main disputes should be resolved in civil proceedings, and only after that should the matter move on to a criminal investigation.

Next comes a very long paragraph on Samruk-Kazyna (SK). It looks as though this section was written by SK itself. It is so abstract that one can conclude SK will not be reformed: it will remain a mega-holding with controlling stakes in the main companies and will continue to be managed with a mandate to expand its presence. I would like the stakes in strategic companies to go directly to the state and be managed only through boards of directors, and SK to become a portfolio investor with stakes in companies where significant value added can be created to improve our welfare, since it is, after all, a national welfare fund. It seems logical to me to merge SK with the National Fund. All stakes in joint ventures such as TCO, which brings us more taxes than any other, should be transferred directly to the National Fund. But, apparently, this is my idealistic notion.

The document places great emphasis on developing the non-commodity sector. Many interesting things are proposed, yet very little is written about the commodity sector. We need to admit to ourselves that we are a commodity country, and there is nothing wrong with that. Canada, Norway, Australia, South Africa and others are purely commodity countries, and all of them rank among the top countries. What matters is knowing how to use commodity revenues properly. Not a word is written about the oil and gas sector. On the contrary, we need to develop the commodity sector, which will pull all the other industries along with it.

As always, the talk is of developing high-complexity enterprises. The top level of complexity implies producing a consumer product without sufficient sophistication, but such production does not generate high value added and, within global value chains, is a final stage that cannot be built into them. In our country, such production would not be competitive on the world market. There should be a policy of producing components of global products with the aim of integrating into production chains, and that requires deep specialization, not top-tier manufacturing. In this respect, Taiwan, for example, can serve as a benchmark.

On transport development, nothing is said about air transport, although Kazakhstan's geographic position makes it possible to develop air freight.

On agriculture, the document plans to raise productivity by subsidizing domestic machinery. I do not quite agree that domestic machinery will raise the productivity of our agriculture. On the contrary, it seems to me that we should actively import the most productive foreign machinery and technology in order to raise productivity. Rather, the plan here seems to be to stimulate agricultural machinery assembly plants at the expense of our farmers, which is very questionable from the standpoint of sustainability.

The section on tourism says nothing about urban and sports tourism, even though we have fairly decent infrastructure for them. The whole emphasis is on eco-tourism with soft infrastructure, yet to reach our national parks there are no roads, no toilets and no mobile coverage. Logically, we should start with hard infrastructure. I recently spent a week in East Kazakhstan Region, where I toured all of its sights. The scenery is no less beautiful than European landscapes, but in Europe I would have covered it all in comfort in two days, whereas in East Kazakhstan it took me 6 days and required specially equipped vehicles and personnel.

In fiscal policy, nothing is said about universal declaration of income or about progressive taxation with deductions, as is done in all developed countries. In my opinion, the taxation of subsoil users needs to be completely revised. In general, taxes are a separate subject that demands close attention in conditions of a budget deficit. The methods the tax authorities use today are highly questionable and Soviet in spirit: they are given collection targets, and the courts then back them regardless of whether the taxpayer is right or wrong. With such a system, it will be hard to attract investors.

The sore subject of the UAPF is likewise not reflected in the NEP, although it was clear from the outset that handing out UAPF money was not the best idea, and with the current pension system we may face difficulties in the future. We spent our savings on consumption, and now we are struggling hard against inflation and high real estate prices.

On developing lending, the main point is missing, without which lending cannot be developed: creditor rights. Under current legislation, the rights are on the side of borrowers, though it must be stressed: on the side of problem borrowers. This prevents lending to good borrowers, and lending is clearly skewed toward consumer credit, where risks are built into the interest rate and where there is no need to deal with the foreclosure of collateral. There also needs to be a clear understanding of reserve requirements. On the one hand, the ARDFM encourages banks to build reserves; on the other, the tax authorities demand that they not do so, so as to pay taxes.

In the healthcare section, everything is aimed at developing reactive medicine, and there is nothing about proactive medicine. I believe we need to do more to prevent disease. For this we need infrastructure for a healthy lifestyle, a good environment, mandatory check-ups, observance of sanitation, promotion of a healthy way of life and so on, and only then the construction of hospitals and the like.

These are very brief main comments and suggestions on this policy.

Review of the NEP

Dear colleagues, below are the main comments on the document.

Nothing is said about the law enforcement agencies, only about the judicial system. At present there is a great deal of interference by law enforcement agencies (the Police, the Financial Monitoring Agency, the Anti-Corruption Agency) in ordinary business activity, where disputes should be considered exclusively through civil proceedings in the courts. The President has said the same. I believe that where there is no damage to the state and no injured party, criminal cases should not be possible until this has been proven by a court in civil proceedings.

The reform of Samruk-Kazyna JSC is described in very vague terms, which later gives the right to choose any development strategy without leaving the market. I think it should be clearly defined that Samruk-Kazyna JSC will retain stakes in companies and that by 2025 Samruk will manage only stakes. It is worth considering transferring the stakes in strategic companies to state ownership without Samruk's involvement. I believe SK should then be merged with the National Fund, and national wealth should be managed only through portfolio investments. As long as SK exists in its current form, there will be no portfolio investment; this must be acknowledged.

On item 4.2.1, I do not quite agree with the emphasis on the non-commodity sector. At the level of doctrine, if we give preference to the non-commodity sector, it is always a signal to government bodies not to pay attention to the commodity sector, and then we get projects like Kazgeology. In this respect, we should simply improve the investment climate for everyone.

The message that social and economic aspects will be emphasized when investment contracts are concluded is unclear to me. I consider it the wrong message, since investors go, first of all, for profit. The social and economic dimension should be developed at the expense of the state through the tax mechanism.

On item 4.2.2, it is not quite clear who will create the trade hubs. If it is private business, then conditions must be created for the hubs; if the state builds them, this contradicts state policy on state participation in the economy.

On item 4.2.3, I disagree with the thesis, because the top level of complexity implies producing a consumer product without sufficient sophistication, but such production does not generate high value added and, within global chains, is a final stage that cannot be built into them. There should be a policy of producing components of global products with the aim of integrating into production chains, and that requires deep specialization, not top-tier manufacturing. Top-tier manufacturing works only for unique products with exclusive software, where the software generates the main revenue.

At the same time, there is nothing at all about developing the oil and gas sector, although it is key to the country. What is needed here is liberalization of production and exploration, digitalization and growth of the country's reserves. We need deep oil refining and a move away from KMG's social function.

On transport, there is nothing about air connectivity. I consider it one of the key sectors, with great potential.

On agriculture, the item on subsidizing domestic machinery to raise labor productivity looks contentious. I am not sure that domestic machinery will deliver higher labor productivity; in practice it will be like the auto industry's assembly scheme, aimed at saving on taxes and obtaining concessional funding without much effect on the economy.

I believe that, on trade, the only workable way to remove barriers is to legalize trade and move away from the shadow market. White-market trade allows full control over trade and reduces barriers.

In tourism, there is nothing about urban tourism or sports tourism. Soft infrastructure also requires full infrastructure for getting to the national parks, and we should start with that. There are very many problems there, from roads to mobile coverage and toilets.

In fiscal policy, many distortions need to be eliminated. Nothing is said about universal declaration. We need a progressive taxation system with a system of deductions, and a reform of the taxation of subsoil users, since the current one has flaws.

Nothing is said about encouraging the creation of institutional investors or about reforming the UAPF.

The question of creating conditions for creditors to recover problem debt should be singled out separately. Today the law is on the side of borrowers.

In the healthcare section, nothing is said about disease prevention. Disease prevention has a far greater effect than building infrastructure.

In public administration, nothing is said about meritocracy, the principles of decision-making, the principles of local government, or the election of regional akims.