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  KAZAKHSTAN International Business Magazine №4, 2005
 Kazakhstan ?apable of a Qualitative Economic Breakthrough
Kazakhstan ?apable of a Qualitative Economic Breakthrough
The improvement of people's welfare, socio-political stability, sustainable socioeconomic development and the strengthening of economic security are Kazakhstan's priorities in integrating into the world economic system. Two main documents set a direction in this process – the Strategy for Kazakhstan's Development until 2030 and the Strategy for Kazakhstan to Join the World's Top 50 Most Competitive Countries. The speeded up modernisation of the country to the necessity of which Kazakh President Nursultan Nazarbayev has been constantly pointing demands a qualitative economic growth based on both an industrial innovative development and a more efficient use of traditional competitive advantages.
Kazakhstan's economic successes are proven by the fact that, according to the 2005 World Economic Forum report, in the competitiveness index the country occupies now the 61st place among 117 countries, ahead of all the CIS countries. In economic freedom Kazakhstan moved up by 17 ranks in the past year alone and occupies 113th place ahead of Russia (122nd place) and just behind China (111th place). In late December 2005, Fitch Ratings upgraded our country's investment rating on long-term obligations in foreign currency to BBB and on long-term obligations in the national currency to BBB+.
However, the analysis of the economic development has detected a number of serious problems, the main of which is that having succeeded certain achievements, the domestic economy still remains raw-materials based. At the same time, the world's developed economies are above all prospering thanks to improving the services sector and employing new technology, and this accounts for over a half of their GDP growth. In addition, the economies based on new technology are more robust since they have long-term competitive advantages.
Presenting the government's programme for the near future to parliament in February 2006, Kazakh Prime Minister Danial Akhmetov stressed that it was the diversification of the economy that would enable Kazakhstan to occupy its deserved place among the world's most competitive countries.
The Industry of Innovations and Industrial Innovations
The first stage of the Innovation Industrial Development Strategy until 2015 ended in 2005. This made it possible to create a favourable business climate and build a basis for strengthening non-extractive sectors of the economy by setting up hi-tech productions. The standardisation and certification sphere was improved. Development institutions were set up to ensure the state's involvement in investment and innovative projects. It should be noted that macro- and microeconomic processes were analysed in depth during the first stage. The Kazakh government, having given up support for certain sectors, is pursuing a policy to encourage investment projects and the private sector's institutional and infrastructural initiatives. Stimulating private business initiatives through development institutions, the state is taking part in projects which aim to create integral production systems. Only will an interrupted technological and economic sequence of adding value make it possible to set up diversified enterprises that work to produce competitive goods.
The development institutions fund projects at all the stages of their implementation. At the same time, the Development Bank of Kazakhstan (DBK) plays a key role and it allocates funds for long-term projects and export operations, and will fund leasing operations in the future. A new project, as a rule, starts with "planting" an idea through the Innovation Fund and its venture funds. Later, the project receives pilot funding from the Innovation Fund. The next stage envisages expanding project capacities and producing new products. Should the new enterprise enter export markets the risks entailed by this are insured by the State Corporation for Insuring Exports (SIC). It should be noted that there is a wide range of instruments to loan projects which include issuing guarantees, subsidising the costs of applying international standards, providing insurance, offering micro-loans and so on.
The combined capital of the development institutions has now exceeded $1bn. The development institutions' investment portfolio, excluding non-core operations (such as the DBK's export operations, the SIC's insurance contracts and others), has a hundred of projects approved for funding. A total of 62 projects worth $942.5m, in which the development institutions share $484m, are being currently carried out. The country is building a national innovation system which provides for introducing a system of state grants for scientific-technical and design projects on a competitive basis.
In line with the president’s state-of-the-nation address, the Kazyna Foundation for Kazakhstan’s Sustainable Development was set up in March 2006. It will focus on improving the system of the corporate management of development institutions that are designed to spur investment and innovation activities in various economic sectors. A government decree of 15 April approved a Memorandum of the Key Principles of the Activities by Kazyna and defined the list of organisations whose shares would be managed by the foundation. These are the joint stock ventures of the Development Bank of Kazakhstan, Investment Fund of Kazakhstan, National Innovation Fund, Fund for Development of Small Businesses, Centre for marketing and Analytical Studies, Corporation for Insuring Export Operations and Kazinvest Limited Liability Partnership.
The foundations of innovative infrastructure have also been set up. Three regional technology (science) parks were established in 2004: the Algorithm technology park in Uralsk, the Karaganda Regional Technology Park and the Almaty Regional Technology Park. Their infrastructures are being developed now and work to choose specialisations for them and select innovative projects is being conducted. Laboratory, certification and educational centres are also being built at the technology parks. An IT park will soon start operations in the Alatau area near Almaty, so will a biotechnology park in Astana.
Non-extractive Sectors' Development
State bodies and the private sector are concentrating their efforts on developing non-extractive sectors of the economy under a Kazakh programme to build production clusters. In 2005 the government designed and approved plans to build seven pilot clusters – Tourism, Food Industry, Oil and Gas Machine-Building, Textile, Transport Logistics, Metallurgy and Construction Materials.
In addition, the role of business associations and non-governmental organisations which protect the interests of Kazakh producers has increased in the country. By a resolution adopted in 2005, the government approved a programme for the rapid development of small and medium-sized businesses until 2007. The programme outlines the pattern of work in the private sector and steps to ensure efficient cooperation between business and the state; it also adopts new approaches to pursue a state policy on supporting private initiatives. Under the programme, the state is expected to transfer its non-core functions to small and medium-sized businesses and measures are expected to be taken to further increase loans for the private business.
Last year, the government also approved a development blueprint for the Small Entrepreneurship Development Fund joint-stock company until 2007. This fund is to become a "financial supermarket" of its kind for various strata of the population who wish to realise their entrepreneurial potential and ideas. Acting as the main element of state support for small businesses, the fund aims to provide financial and lending assistance and accompanying training, analytical and consulting services to private entrepreneurs. The fund is also expanding the range of its other services. It is adopting such forms of support as funding projects and issuing micro-loans; financial leasing and co-funding; loaning franchising operations and issuing guarantees for loans; reimbursing small and medium-sized businesses for 50% of the costs of adopting international standards; as well as training and consultancy services.
Accession to the WTO
The country's government is paying special attention to liberalising foreign trade and eliminating barriers in trade with partner countries. It is also creating optimal conditions for Kazakh exporters to enter foreign markets. A priority aspect of integration within the Eurasian Economic Community (EAEC), which was initiated by our country, is to set a unified customs tariff of the community (UCT EAEC). At the moment, Belarus, Kazakhstan and Russia have already unified 53% of their customs duties.
The process of Kazakhstan's accession to the World Trade Organisation is nearing completion. However, the future WTO membership sets special requirements for internal trade. In line with these requirements, state bodies constantly monitor changes in trade infrastructure, and pay key attention to developing consumer services centres, shops and retail and wholesale markets. They also monitor the movement of genetically-modified products in the Kazakh market.
In parallel, Kazakhstan is drafting a legislative framework for joining the WTO. The Law On Technical Regulations has been in force for almost a year, and it meets the requirements of the WTO Agreement on Technical Barriers to Trade. It provides for building a transparent two-level structure of documents in the sphere of technical regulation – compulsory technical rules and voluntary standards.
About 400 local enterprises have already certified their quality management systems to meet the ISO-9000 standards, and a further 160 are still working on this.
Taxes and Preferences
The president's state-of-the-nation address delivered on 1 March 2006 set the task of easing tax burden on business through improving taxation further.
The tax system created in the country aims to stimulate entrepreneurs to work in the non-extractive sectors. The system of offering corporate tax exemptions has been expanded to improve the investment climate, for example investors working in the non-extractive sectors are exempt from corporate tax for up to 10 years.
Amendments have been made to tax legislation to boost enterprises' motivation to set up new hi-tech facilities. The basis of a cotton-textile cluster is being set up in South Kazakhstan oblast – the Ontustik special economic zone which will enjoy a special tax regime.
In addition to tax preferences and soft loans by the state, the Tax Code envisages a special tax regime for small businesses which simplifies paying certain taxes to the budget. This offers three choices: a daily levy, an annual licence or a simplified tax declaration. Entrepreneurs make their own choices. Such taxation mechanism helps start-up businessmen understand the tax system and enables them to gradually grow into a big enterprise and use civilised forms of accounting and tax paying.
Managing State Assets
Companies with the state's holding play a significant role in the economy of any country. Given that state-owned companies produce 10% of Kazakhstan's GDP, boosting their efficiency is critical. In this connection, a presidential decree set up the Samruk state holding company in January 2006. It aims to improve the system of corporate management in state-owned companies. Samruk will act as an "active shareholder", i.e. manage the state-owned companies through boards of directors. At the same time, the managements of the companies retain functions of day-to-day management, and the government will take decisions on strategic aspects of their future development. Thus, the state holding company will become a professional instrument of cooperation between the state-owned companies and the government.
It should be noted that the experience of Singapore's Temasek and other Asian and European holding companies and agencies to manage state assets was taken into account in setting up Samruk. The Kazakh state holding company's portfolio is expected to be limited to 25 major companies.
The Samruk (phoenix) state holding company is to receive the state's holdings in Kazakhstan's major companies which account for 10% of the country's GDP (about $5.3bn). All the state holdings in the Kazakhtelecom joint-stock company, the Kazpost joint-stock company, the KEGOC joint-stock national power grid company, the KazMunayGaz national oil company and the Kazakstan Temir Zholy railway company make up the registered capital of the state holding company.
Kazakhstan has achieved certain success in reforming infrastructural sectors and implemented a set of measures to demonopolise them and boost competition. A qualitatively new stimulating environment has been created to restructure the railways, liberalise the telecommunications sector and set up a power-engineering market.
With the aim of liberalising the telecommunications sector further, the conditions have been created to attract existing and new operators to offer telecommunications services in rural areas. Powers of the state body responsible for the telecommunications sector have been specified. The level of digitisation of telecommunications networks has increased significantly in recent years. The National Information Highway has been "encircled", and this has significantly cut operational costs, increased the quality of connection and ensured the development of the telecommunications market through offering high-quality digital telecommunications channels and capacities. Under a state programme, an electronic government is being set up in the country. This is another step towards technological advance and creating a technical basis for the country's long-term competitive edge.
The project is being carried out to create and put telecommunications satellites into geostationary orbit and build a flight control centre to operate space apparatuses and a system to monitor communications. The first Kazakh satellite KazSat which was put into orbit in June 2006, enables our country to be among the countries which operate international satellite communications.
In the era of globalisation, the competitiveness of the Kazakh economy mainly depends on the efficiency of the transport and telecommunications sector. In this sphere, special attention is paid to upgrading and improving the railway infrastructure and expanding railway networks which are part of international routes. Stress is being put on the infrastructure of those networks which play a key role in transporting strategic freight and in transiting.
Kazakhstan is paying close attention to the quality of services in the motor road sector to increase the competitiveness of international routes cutting through Kazakhstan. In addition, under the state programme to develop roads, the roads of national significance are being reconstructed and repaired. The permitted parameters of vehicles have been set to conform to common standards adopted in CIS and other countries to unify the legal farmework and attract additional freight transits.
The country's civil aviation is also undergoing significant changes and developing the infrastructure of existing airports is receiving greater attention. A new airport building has been completed in Astana, and a new runway is being built at Atyrau airport to enable it to receive all types of aircraft. Air hubs are being formed in Astana, Almaty and Atyrau to link all the country's towns with one another and foreign countries. The country's air companies are adopting the ISO 9001:2000 and ICAO quality management systems.
Kazakhstan has also done a lot to develop maritime transport. It is building its national trade fleet. The Aktau international sea port is acquiring greater significance. The well-equipped port in the Caspian Sea is undergoing reconstruction to handle general and container freights; new terminals and protection facilities will be built at the port. An oil terminal is to be built at the Kuryk port to handle oil from the Kashagan field.
In conclusion, we can say that the domestic economy is properly reacting to the measures taken by the government, and this is only increasing its investment attractiveness. An analysis shows that the first stage of the Industrial Innovation Development Strategy produced a significant growth in the non-extractive sectors: in the machine-building sector by 20%, in the food industry by 13% and in the pulp industry by a third as compared to 2004. We should point to the development potential of the machine-building sector which has all the prospects of becoming a progressive sector should it produce hi-tech and export-oriented products.
By Irina Ivankova

Table of contents
Democracy Is a Development Priority  Yerbulat Seylkhanov, Aygul Abylgazina 
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