Where to Start Reforms: Institutions, Education and Subsoil Use

On the economy and development

Recently, Dosym Satpayev asked me to comment on the question of what to do and how to live from here. It is, of course, a very difficult question that cannot be answered simply. The question was where reforms should begin. My answer was very simple: with the foundation, as in the construction of any building. The stronger and better the foundation, the taller the house.

The most important things are the judicial system, the law enforcement system, the political system and state infrastructure. Next come an effective civil service, monetary policy, budget policy and fiscal policy. Only in the third tier come various quasi-state projects.

I looked at the country's economic indicators for the first half of the year. Credit where it is due: they are not the worst, but the problem is that the main growth comes from construction, mostly housing construction, which has no multiplier effect and only a short-term impact. In a couple of years the market will become saturated, effective demand is limited, and we will have to come up with something new. For a short-term effect, though, the strategy is probably justified.

Many people ask: what should Kazakhstan develop?

The problem is that the state should not be thinking about what to develop. It should be thinking about what conditions to create for development, while the market and entrepreneurs will determine for themselves what to develop and how. No one can do this better than the market.

It will be hard for us to build industrialization with domestic resources alone; we need foreign investment and expertise. Unfortunately, foreign investors will not come to low-margin and medium-margin projects in the country, because in our investment climate the profit from such projects does not cover all the risks. And this is the key point.

The only industry that is alive for foreigners is subsoil use, where returns are high, but so are the risks.

Each such project is a one-of-a-kind asset, large enough to be kept under close official watch, which allows investors to obtain personal support that offsets part of the country risks. But this is not a system; it is rather VIP service.

With the adoption of the new Code on Subsoil and Subsoil Use, the process has become more or less transparent, which is quite positive.

Of course, we all dream of diversification and high-tech production. But that requires the right institutions, as well as good education and science. It is a long-term project.

Subsoil use is the only export industry that provides the main inflow of foreign currency. With the development of alternative energy, the importance of hydrocarbons will decline in the future, and so will the value of this resource. So there is little point in keeping "candies in a chest while waiting for guests"; it is better to eat the candies now. In the short term, therefore, we need to pay more attention to subsoil use and, while the industry is profitable, try to squeeze the maximum out of it. Field development does have a multiplier effect, since Kazakhstan has recently accumulated considerable expertise in services, and we can already carry out most of the work on simple fields with our own resources.

Incidentally, in Kazakhstan it is much easier, in terms of liquidity, to sell a field than, say, a plant or a factory. There are many reasons for this, and one of them is that a field, like land, does not lose its properties over time.

So, in short, we need to develop institutions, invest in education and pay attention to subsoil use. Developed institutions will build up industry through entrepreneurship, education will help us move up into high-tech industries in the future, and subsoil use will help us in the short term.

My personal opinion