Kazakhstan’s Membership of the WTO: Problems, Consequences and Prospects
Kenzhegali Sagadiyev, Doctor of Economics, Member of the National Academy of Sciences of Kazakhstan, President of the University of International Business
Kazakhstan is becoming more and more globalized: we are building an open, democratic society and a liberal economic system, and establishing contacts with many of the states in the world. One of our scholars once said that globalization’s body is the economy, whilst international commerce forms its veins, providing the organism with blood. International commerce makes the world’s economy a dynamic entity and pulls the other aspects of globalization forward. Over the past 50 years, international commerce in industrial goods has grown by 17 (!) times, although global production has augmented only sixfold. Commerce has become an important factor of economic growth in developed and developing countries. And this influence is growing. During the past decade the growth of international commerce reached 6.5% per year, but the aggregate GNP went up by a mere 2%.
This dynamic nature of international commerce and its growing influence on the development of the global economy have not come out of nowhere, but are the results of a gradual and consistent development of international rules fostering the movement of goods, capital and services. In 1947, 23 states signed the General Agreement on Tariffs and Trade (GATT), which contained the set of regulations directing trade in goods. Since then these regulations have been improved and amended, and the number of countries that have acceded to GATT has increased. In 1990 GATT comprised 90 members. In 1995—following a series of lengthy negotiations—the World Trade Organisation was set up to become a successor of GATT and an international institution whose aims are to liberalize international commerce and make it fair. Simultaneously the General Agreement on Trade in Services (GATS) and the Agreement On Trade-Related Aspects of Intellectual Property Rights (TRIPS) were passed and came into effect. WTO now comprises 145 members and another thirty countries have stated their intention of joining the organization.
This means the inception of not simply a multilateral trade system, but a global one, heavily institutionalized and containing standards and rules mandatory for all the WTO countries. Through WTO the world is becoming united under a single liberal economic roof, which inevitably means submitting to certain common principles.
Kazakhstan has declared its intention of becoming a WTO member, and this is indeed a well-grounded move. The desire of a country that is building an open society and an open economy to become a full member of the international community cannot be unwelcome. WTO membership will be a very important landmark for all of us, since this is equal in importance to the transition to a market economy. The gains are obvious: domestic goods will gain access to foreign markets with no discrimination whatsoever, and additional investment will flow into sectors other than just mineral resources.
At the same time it should be understood that these gains and advantages will not come automatically. All depends on the timing, terms and level of preparation when joining this international institution. It is no coincidence that many countries have been preparing for WTO membership for a long time. For example China, where there is no doubt as to the success of the economy, had been getting ready for this step for 15 years and joined the organization in 2001. Nor is it by chance that those countries that did not put enough time and commitment into preparing for membership received no gains and even faced serious problems. Among those are Kyrgyzstan, Moldova and Georgia. Their experience of WTO membership can be considered negative, for this step never led them into the economic growth that they had been counting on. Kyrgyzstan opened its boundaries to all goods and expected considerable incoming investment as well. Alas, this did not increase, but decreased. Whereas foreign direct investment in the country came to $96m in 1997, in 2000 it was curtailed to $39m. The economic indices in Georgia are not improving, either. After Moldova joined WTO, the country experienced serious problems in a number of vitally important sectors such as agricultural engineering, and the tobacco and wine-making industries. Foreign investment fell by 8% in 2000.
By providing these examples I am in no way trying to reject the idea of Kazakhstan becoming a member of WTO. However a healthy pessimism and a good deal of consideration are imperative when choosing how to join this organization. Yes, we are outdoing the CIS countries mentioned above in terms of economic development rates and effectiveness of reforms. Yes, the USA and Europe have recognized Kazakhstan as a market economy country. We need to give the President’s strategy and the consistent actions of the government their due for this success. Still, there should be no haste in our preparations for WTO membership.
The time when a country joins is dictated by its willingness to profit from its participation in liberalizing international trade. For the time being the resource, legislative, institutional, human and information bases in Kazakhstan are not sufficient to be able to state with confidence that the country will profit from membership to the extent that we would like.
To put it bluntly, the advantages of Kazakhstan’s membership in WTO are of a more distant, long-term nature and therefore are not very obvious, while the downsides will quickly and painfully affect the entire domestic economy. The possible negative consequences are a considerable downturn in production in a number of sectors, weighty financial losses such as a reduction in customs revenues to the budget, weakening of the financial and banking system due to low capitalization, threats to national and food security due to loss of control over certain markets transferred to foreign companies, growth of unemployment and an influx of cheap foreign foodstuffs.
Currently the country has no high-end production that is of interest to international commerce. Usually a sector is considered competitive if it accounts for at least 3.25% of world exports. The share of our country in international exports in 2000 by groups of goods was as follows: agricultural products 0.18%, processed products 0.02%, chemicals 0.01%, base machine engineering 0.22% and minerals 0.49%. These figures mean that the gains from participating in global trade will be insignificant. Therefore, if we want to benefit from membership, we need to think about export-oriented production.
The necessity for creating export-oriented production, due to the narrowness of the domestic market, has long been acknowledged. We often refer to the experience of Singapore, Thailand, Malaysia and other countries whose export-led strategies have pushed their goods out to the foreign market and ensured stable economic growth in these countries. With its vast internal market, China nonetheless made it a priority to develop sectors and enterprises producing goods for export. But in Kazakhstan we went no further than just to acknowledge the need for export-orientation. Over the years of reform the number of people employed in Kazakhstani industry has been reduced by half, 60% of the basic assets have deteriorated and investment in the industrial sectors has never been sufficient. The clear point should be made that Kazakhstan’s membership of WTO depends above all on the development of domestic industry.
Another important issue is the measures to protect domestic manufacturers and markets. This is not about protecting all the sectors of the economy. Under the rules of WTO, when trade is fully liberalized, a number of our sectors with a low competitive edge will either cease to exist or be re-orientated. Though this will help us to overcome the problems of the post-Soviet economy more quickly, several vitally important sectors will be killed by foreign competition if no protective measures are taken. These are agriculture, light and food industries, engineering, and production of construction materials, among others.
Today the share of food imports ranges between 40-60% to the total volume of food consumed in Kazakhstan. This is given a considerable level of tariff protection. Yet one of the conditions for joining WTO is cutting down tariffs on imports. How will this affect the domestic food industry sectors? It may well lead to their bankruptcy. Here is just one example: today the share of imports in the confectionery industry is 54.2%. Only four of the existing 160 local companies are operating effectively. The rest are either idle or have been partially redirected to producing other goods. Caramel imports from Ukraine have grown by 15 times over the past two years, and pastry imports by 40 times! The share of Russian chocolate in our home market has reached 46%, and that of pastry 45%.
Let us presume that the more liberal WTO regulations, featuring a lower level of tariff protection, were to come into effect tomorrow. Competitive products from other countries will come to our market. What do we do then: shut down our home confectioneries? And not just the confectioneries, but the many other food and light industry enterprises that have found themselves in a similar situation.
Certain countries are taking the precaution of co-ordinating protective measures during negotiations over WTO membership; some are beginning to lower import tariffs before joining WTO to establish them at an acceptably low level when the transition period is over. To protect its own market, Russia abruptly raised tariffs on agricultural products and foodstuffs in 2001 and 2002. And how was this problem solved in Kazakhstan? Unfortunately, no information is available, though this will be one of the most important items in the negotiations.
Let us review agriculture, which is the most complex area of international commerce. In defiance of their declared principles, the protectionist policy pursued by the developed countries to defend their own markets is still in favour. For instance, the USA increased assistance to its agricultural sector from $7.2bn in 1996 to $22.9bn in 2000. The EU is also an ardent fan of protectionism when it comes to protecting its farmers.
In autumn 2002 the EU Commission decided to allocate 40bn euro ($39bn) per year in direct subsidies to European farmers.
In EU countries the share of subsidies makes up an average of 40% of the profits that farmers receive from selling their produce. In countries such as Poland and Switzerland the duty on imported agricultural produce comes to 500-650%.
This is why we need to take seriously the development of measures to support the agricultural sector and protect the internal market in agricultural produce. We have passed a three-year programme for rehabilitating rural areas, and this is a crucial step forward. Over 40bn tenge per year could make a considerable improvement to our agricultural situation. Still, the funds allocated by the state must grow, given that the material and technical base of this sector is in a poor state. The size of the state subsidies provided to the agricultural sector covers only 8% of the prime cost of farm produce. In Europe this figure is five times higher. Therefore we need to stipulate far greater state support for agriculture during the preparations for WTO membership. It should be even greater than we can currently afford. For example, the annual Russian subsidies to agriculture stand at around $1bn. And Russia is insisting on increasing the figure to $16bn. This seems to be a very intelligent position, because a fundamental reconstruction of Russian agriculture will require tremendous amounts of investment, due to its underdeveloped nature as compared to developed countries.
Out-of-date technology, unfavourable climatic conditions, and the low profitability of domestic agriculture will also increasingly force us to support it at state level. This should also be included on the agenda for serious negotiations with WTO.
At the negotiations, Kazakhstan will not be raising the issue of export subsidies for farming produce, pointing out that this concept does not exist in local export practice. This approach is hardly feasible economically. Kazakhstan is a landlocked country with a vast territory situated far from important markets. As a result, transport costs come to 20-25% of the prime cost of Kazakhstani production. In Europe and countries close to the sea this indicator does not exceed 10%. Therefore the competitive edge of certain Kazakhstani products is degraded by high transport costs.
At the same time we could become a large exporter of grain and meat, not only to neighbouring countries, but also further afield. It is crucial that the state pays the transportation costs related to selling this produce in foreign markets, in the form of export subsidies. This measure could solve the marketing problem and promote a revival of the agricultural economy. Incidentally, stimulating agricultural exports by state subsidies is widely used by many developed countries.
All in all, we need to analyse seriously all the possible consequences of Kazakhstan’s membership in WTO. We need to involve scholars and experts in the process, as happened in Russia. The public needs to be informed about the course and results of WTO negotiations, as well as about potential or existing problems. The WTO rules will affect us all: consumers and producers, exporters and importers. The more the public is aware of the WTO requirements, the more opportunities it will have to be ready for them. For example, China familiarized 2000 heads of provinces with WTO regulations, and these heads then held various awareness-building actions within their regions. In Kazakhstan nothing has been done in this regard. It would be feasible to open centres to train businessmen to work under WTO conditions. It is also time to begin training experts in international commerce, who are so badly lacking today in Kazakhstan.
In a word, we need to do everything possible to avoid making the same mistakes all over again. The first time was when shock therapy was applied and our country’s entire economic system changed. Then there were a multiplicity of objective and subjective factors that forced us to do this. Now everything is different. We need to analyse all the pros and cons in detail, take a series of preventative protection measures and stand up for our position during the negotiations, putting forward serious arguments. Kazakhstan’s membership of WTO should be as painless as possible and, what is most important, it should play a positive part in ensuring stable economic growth.
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