A New Economic Paradigm: Subsoil Use, Processing, Agribusiness and SMEs

Note: This reflects the author's position in 2015. The author later also supported raising the VAT rate to 16% alongside broadening the tax base.

In recent years, Kazakhstan's economic paradigm has been aimed at developing manufacturing, which was supposed to neutralize any storms on the international commodity markets on which we depend so heavily.

We should admit now that this policy has not quite worked. Over the entire period of the industrial development program, we have failed to create any significant production capacity that could compete even on the local market.

There were seemingly the right statements that we are part of a union and that we have access to the markets of the entire Eurasian Economic Union (EAEU). So why have we still not managed to create anything that could compete with producers from Russia and Belarus?

Changing the structure of industry takes time, resources and technology. We have neither, and government support alone could not, a priori, radically change the structure of the economy.

Why produce cars or locomotives with zero added value, when the earnings rely entirely on savings on customs duties?

There are many reasons why this is happening.

Some of them can be considered subjective, some objective, but it seems to me that we have simply not thought through the economic paradigm for our country's development.

State capitalism has proved unviable, and we have still not built a market economy.

We can already see problems at KazMunayGas (KMG) and Kazakhstan Temir Zholy (KTZ). After the devaluation, problems may now emerge for the power utilities.

Programs for the five institutional reforms have now been adopted, with 100 steps for implementing them, and naturally I, as a citizen of the Republic of Kazakhstan, hope they will be implemented successfully.

However, whatever reforms we carry out or plan, each one gets bogged down in bureaucratic intrigue and delay and is never completed. And if it is completed, it is in a form in which it simply does not work.

Every department tries to prove something, solve its own parochial problems and put in its two cents.

Take, for example, the new mining code, which is supposed to make life easier for subsoil users. How long have we been adopting it? More than two years have passed, and we are still where we started. The Ministry for Investment and Development, the Geology Committee, the Ministry of Energy, Parliament and others cannot finish the job. Yes, the document is complex, but if every document takes this long to draft, what reforms are we talking about?

The State Program for Industrial and Innovative Development is not coordinated at all with, for example, the Ministry of Agriculture: each lives by its own budgets and programs.

Even the Tax Code, adopted in 2009, is still unfinished and constantly being amended.

Or take the amendments to the law on investment incentives: I have not yet heard of a single multinational corporation or company that has used these incentives. Either there are none, or we simply have an information vacuum.

All of this is general talk, but something has to be done, and the country's economy needs a new paradigm and new development. I am not a great specialist in public administration, but I would like to offer my modest opinion on what we should focus on in industry specifically.

Naturally, the foundation must be reforms aimed at creating a favorable investment climate. That requires reform of the judicial system, permits and licensing, education, tax administration, financial regulation and so on.

But these must not be mere populist statements and words. They must be real actions that actually help entrepreneurs.

We should focus not on raising tax rates or improving tax collection through ambiguous interpretation of the Tax Code, but on broadening the tax base.

Now, a brief sketch on industry. I will try to write more on each area later.

Clearly, Kazakhstan does not need to reinvent the wheel, nor to chase competition with China and Russia in consumer goods. We should develop what we have and what constitutes our competitive advantage.

Our main competitive advantage is our resource base, and our task should be to build deeper processing of raw materials.

Strange as it may sound, in current conditions I would single out the need to develop subsoil use and fully liberalize this sector. Yes, oil and metal prices are low now, but as long as these industries remain profitable, it makes sense to support and develop them, and investment in them will give a boost to related sectors of the economy.

The second area should be a program aimed at increasing the domestic processing of the raw materials we extract.

We still cannot modernize our oil refineries, even though they would have a guaranteed market, and we continue to buy fuel from Russia and China.

We are the world leader in natural uranium production, yet for some reason the program for further uranium processing has remained on paper, and for some reason Kazatomprom has started working on alternative energy, even though it is well known that the later stages of the uranium value chain offer far more added value.

We have metals, yet we buy foreign-made drilling pipes. And so on.

Clearly, in each of these areas we need to increase the depth of processing and the number of production stages.

The third area of development should be the agro-industrial complex. Large funds are allocated to this sector, but greater coordination is still needed. We need to raise labor productivity in the sector and improve the efficiency with which we use our land.

Then there are SMEs. Small and medium-sized businesses should develop in large cities and focus on creating added value. SMEs are the foundation of the middle class's prosperity, and this requires a review of how the local akimats work on SME development.

These are only sketches. When I have time, I will try to write up my thoughts on each area.