Value Added: Build the Next Processing Stage, Not Kit Assembly

A Little About GDP, or What Is Better to Produce

There are several methods of calculating GDP.

The basic one is the production method, which is roughly calculated as GDP = GVA + net taxes on products − subsidies.

Taxes and subsidies are straightforward.

Now let us look at GVA, or gross value added: the value that is added to a product or service at the moment it is produced or provided. Value added can be calculated in two ways. Anyone who has dealt with VAT is roughly familiar with the first, the indirect method. It is also the method used in the overall base and in global calculations: gross output at producer prices minus intermediate consumption. The direct method is more complicated. It accounts for what is actually added at the enterprise, namely wages, taxes on wages, profit and so on. But for a general understanding, the indirect method is easier to work with.

From the state's point of view, it is always more attractive to produce goods with high value added. That is why developed countries mostly produce high-value-added goods, while developing countries produce low-value-added ones. Take a hypothetical cell phone whose production cost in terms of intermediate consumption is $50 and which the company sells for $500. Value added is $450. In essence, in material terms, the $450 we pay is not for raw materials but for technology. This is a hypothetical example.

Now consider the position of a developing country that produces cars by semi-knocked-down (SKD) assembly, leaving customs duties aside.

We import a car in disassembled form at a price of $18,000, assemble it and sell it for $20,000, not counting the dealer's markup. Value added is $2,000, and the product still ends up more expensive than in the neighboring country. Localization of production thus comes to roughly 10%. So in terms of GDP growth, such products bring Kazakhstan no real value added.

The higher the value added we create, the more we will develop. Value added is expressed through localization of production, and localization should always be built on what we ourselves produce. In other words, if we already have one processing stage, we should develop the next one, rather than leaping over ten stages straight to lofty heights.

Yet we stubbornly want to develop machine building, pharmaceuticals and other innovative products.

Such production could be developed without the preceding processing stages only if we had cheap labor, as China and other Asian countries do (for them it is a resource). Unfortunately, we do not have enough cheap labor to attract innovative companies to assemble particular products here.

So we should develop what we already have, relying on the raw materials we possess. To do this, we need to add processing stages step by step to what we have.

I agree with Asset Issekeshev that in this respect we should support metallurgy and export not metals but metal hardware.

But such support is needed not only for metallurgy but for other sectors as well, for example the uranium industry. Of course, this sector is highly politicized, but it is very promising. For now, we produce uranium oxide (U₃O₈), which is only the first processing stage after extraction, and only because uranium oxide is the one product we can sell, even though margins at the later stages are higher, several times over.

On this front, it is good that we have at least begun modernizing our refineries. Still, I cannot understand to this day (perhaps my non-technical education shows) why we are installing an aromatics unit at the Atyrau refinery. Aromatics are very hard to sell because transporting them is complex and expensive. Meanwhile, production of high-octane gasoline has been postponed for two years; we import it from Russia, and exports to neighboring countries have been banned.

Agriculture is a very interesting question. Kazakhstan has historically been an agrarian region. True, support for food production has been written into the priority investment sectors. But, unfortunately, the production of raw materials for food processing is in a deplorable state. It would have been a higher priority to include agriculture itself in investment projects, such as livestock, crop growing, feed production and so on, and to attract large foreign companies to these sectors in order to raise the efficiency of agriculture. Producing milk from imported powder or juice from Chinese concentrate could have been left for later. Of course, Assylzhan Mamytbekov will point out that the Ministry of Agriculture has many different subsidy and financing mechanisms for agriculture. But it seems to me that not all programs reach agricultural producers in an objective manner, and because of administrative barriers only large players can obtain such subsidies and preferences. Besides, there are far more support mechanisms for industrial enterprises than for agricultural producers.

In this respect, we should not divide enterprises into farmers and industrialists. We need equal conditions in terms of administration and preferences.

Therefore, I think we should reflect on this: rather than taking pride in producing Korean cars with zero value added, we should aim to be recognized as a global producer of canned tomatoes and cucumbers.