The First Five-Year Industrialization Plan: Skipping Steps

I read Sabit Sukhanov's post on industrialization. Everything he says is correct, but there are a few points I would like to run through in the context of Kazakhstan's realities, extending them to the results of the first five-year industrialization plan.

I will not list the targets set in the first five-year plan, which were, frankly, extremely ambitious. Judged by them, the Asian tigers would not even come close. This is a question about the program, not the process: one has to understand that deliberately painting pretty fairy tales is amateurish.

Of course, we cannot do without industrialization. But the point is precisely that we lack the sequencing Sabit talks about.

No one expects miracles from industrialization, and that is natural.

We have no cheap labor, no capital, and very high transport costs, but we do have natural resources. We have high administrative barriers, a flawed system of subsoil regulation, and high costs of corruption.

So we could write ten programs, but without resolving the problems of related institutions, nothing will move off dead center.

Our only advantage is our natural resources, including in agriculture.

It would be logical to develop precisely the next stages of processing in these sectors.

I will note right away that this is not a criticism of the Ministry of Investment and Development (MID), which is hardly to blame here. The problem is a flawed decision-making system.

Here are a couple of plainly obvious failures in the industrialization of our economy, by project:

1. Oil refineries. 2016 is just around the corner, and we still cannot supply ourselves with our own fuel, let alone export it; exports have been closed for more than three years. Yet it is obvious that this should have been the first object of vertical support, given guaranteed demand and export potential. The modernization could have been completed long ago; the fuel shortage did not arise last year, but was foreseeable some 10 years ago.

Next, there is the simply devastating decision to build an aromatics complex at the Atyrau refinery, which does not even have a reforming unit. This year the aromatics complex was launched, at a cost of $1 billion. To service the loans, throughput was doubled. But the yield of light products stayed at 46%, and the loans for the aromatics complex already have to be repaid. The question is how the aromatics will be transported, and where to. To Russia or to China? First, they have plenty of such products themselves; second, the long haul will eat up every competitive advantage.

The related plants have not even been built yet. In other words, it is plain that a stage of development has been skipped.

2. The automotive industry, and the Kazakhstani dream of driving a domestically made car. We quickly joined the Eurasian Economic Union (EAEU) and raised duties. The difference in duties made it possible to save money on large-unit assembly and sell on the local market. A margin in the form of a 20% duty saving allowed the business to live comfortably. But with the first crisis, that was it: Russian cars, with their high localization of production, simply killed our automotive industry. Devaluation did not save it, because, it turns out, the spare parts are imported.

The same applies to the much-vaunted Locomotive Plant, the helicopter plant, and so on.

Once again we skipped steps, this time two at once.

The utopian idea of flooding Russia with Kazakhstani cars, given Russia's recycling fee, is simply a fairy tale.

There are plenty of such fairy-tale projects, and this is not the fault of the MID but of a system that is oriented more toward personalities than toward reality.