Report to the Government of Kazakhstan: Policies for Industrial and Service Diversification In
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Report to the Government of Kazakhstan: Policies for Industrial and Service Diversification in Report to the Government of Kazakhstan Policies for Industrial and Service Diversification in Asia in the 21st Century Asia in the 21st Century Report to the Government of Kazakhstan in Asia in the 21st Century Policies for Industrial and Service Diversification Jesus Felipe* Changyong Rhee* * We are grateful to H.E. Kairat Kelimbetov (Deputy Prime Minister of the Republic of Kazakhstan), Madina Abylkassymova (Vice-Minister of Economy and Budget Planning of the Republic of Kazakhstan), and a number of other ministers and high-level officials of the Government of the Republic of Kazakhstan for their guidance, inputs, and kind assistance since the inception of this project; to Maria Joy Abrenica, Joven Balbosa, Fred Block, Jungmoh Chang, Kristine Farla, Francesca Guadagno, Cesar Hidalgo, Matthew Keller, Mushtaq Khan, DoHoon Kim, Aigul Kosherbayeva, Keun Lee, Guanghui Li, Justin Lin, Cheryl Long, Jayant Menon, William Mitchell, Manshuk Nurseitova, Lyaziza G. Sabyrova, Siew Yean Tham, Bart Verspagen, Yan Wang, and Xiaobo Zhang, for their inputs; and to Mike Alba and Kevin Donahue for their editorial assistance. Disclaimer: The authors are responsible for any errors. Data analyses in this report use data up to 2010, and hence do not reflect progress on industrial diversification after such date. The views expressed in this report reflect those of the authors’ and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent. October 2013 © 2013 Asian Development Bank All rights reserved. Published 2013. Printed in the Philippines. ISBN 978-92-9254-282-5 (Print), 978-92-9254-283-2 (PDF) Publication Stock No. RPT136049-3 Cataloging-in-Publication Data Asian Development Bank Report to the Government of Kazakhstan: Policies for industrial and service diversification in Asia in the 21st century Mandaluyong City, Philippines: Asian Development Bank, 2013. 1. Kazakhstan. 2. Diversification. 3. Industrial Policy 4. Revealed Comparative Advantage. I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Note: In this publication, “$” refers to US dollars. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org For orders, please contact: Department of External Relations Fax +63 2 636 2648 [email protected] Printed on recycled paper Foreword The economy of Kazakhstan has performed remarkably well since gaining independence in 1991. Between 1993 and 2012, gross domestic product (GDP) per capita grew more than 17 times, from $696 to $12,119. Furthermore, during the last 10 years, GDP grew in real terms at an annual average growth rate of 7.2%. All sectors of the economy (both goods and services) contributed to achieving this high growth rate. Between 2002 and 2012, the most rapid growth was achieved by the mining sector, which grew 1.7 times, manufacturing (which grew 1.8 times), construction (which grew 3 times), telecommunications (which grew 7.5 times), and transportation services (which grew 1.9 times). The excellent performance of the economy was the result of both sound macroeconomic policies and a favorable investment climate. During 1993–2012, Kazakhstan attracted $170 billion of foreign direct investment. To sustain macroeconomic stability and manage its oil revenues, Kazakhstan established the National Fund with assets reaching $65.9 billion as of September 2013. Moving forward, Kazakhstan’s strategic development objective is long-term sustainability, which requires diversifying the economy and upgrading the human capital base. We forecast that the economy will be 45% larger in 2018 than in 2012, which will ensure that GDP per capita reaches $24,000 by then. Kazakhstan’s success is all the more remarkable given the significant slowdown of many economies after the global financial crisis. However, Kazakhstan’s economy remains heavily dependent on oil, and this dependence is increasing. In 2000 petroleum accounted for 50% of total exports. Over the next decade a disturbing trend became apparent and by 2010, oil represented an even larger share, 61% of total exports. Since 2010, the Government of Kazakhstan has renewed its efforts to increase economic diversification through a state program of Industrial–Innovative Development of Kazakhstan for 2010–2014. Currently, Kazakhstan is developing the second stage of this program, geared towards transforming the economy by emphasizing and prioritizing more knowledge-intensive and innovative industries. Kazakhstan has also chosen a policy of “related diversification.” This strategy is focused on four ‘new generation’ integrated industrial–economic clusters, including: (i) an integrated energy cluster; (ii) a metallurgy and machinery cluster; (iii) an agriculture and food processing cluster; and (iv) an integrated chemicals cluster. In 2011, the Government of Kazakhstan requested policy advice from the Asian Development Bank (ADB) on how to further diversify the economy and on how to modernize its industrial policy. The government was likewise keen to learn from the experiences on diversification and industrialization policies of both developed economies and other economies, including Australia, the People’s Republic of China, the European Union, the Republic of Korea, Malaysia, and the United States, as their experiences could provide important insights on the probable outcomes of Kazakhstan’s own efforts at diversification and industrialization. iv Foreword This report is the culmination of close cooperation between the Government of Kazakhstan and ADB. It documents the degree of diversification and sophistication of Kazakhstan’s economy during the past 15 years and summarizes the experiences and lessons of different economies in modernizing industrial policy tools. The report emphasizes that industrial policy should be stage-of-development dependent. Given Kazakhstan’s current income level and industrial structure, it points out that the effectiveness of traditional industrial policies may have reached a limit and that the government ought to benchmark advanced countries’ indirect industrial policies and risk-management framework through the financial markets. ADB staff in the Economics and Research Department, the Central and West Asia Regional Department, and the Kazakhstan resident mission cooperated closely with the Government of Kazakhstan in preparing this report. I’m confident that the analyses and recommendations in this publication will prove useful to the Government of Kazakhstan in its quest for economic diversification and modernization. Kairat Kelimbetov Deputy Prime Minister of Kazakhstan 30 September 2013 Contents Foreword iii Boxes, Figures, and Tables vi Acronyms and Abbreviations viii Executive Summary x Introduction 1 PART I 3 A. Why Does Kazakhstan Need to Diversify its Economy? 3 B. Kazakhstan’s Industrial Policy Programs: A Brief Overview 7 C. Kazakhstan’s Diversification 1995–2010 14 D. The Limits to Diversification in Kazakhstan 20 PART II 23 A. Key Issues in Industrial Policy 23 1. Who selects the sectors? 24 2. What is the rationale for sector selection? 28 3. What are the main tools used to promote sectors? 39 4. How can innovation, technology, and human capital development be fostered? 42 5. What are the most effective monitoring and evaluation mechanisms? 50 B. Policy Priorities for Industrial Diversification in Kazakhstan 56 Appendix 59 References 73 Boxes, Figures, and Tables Box 1: Algeria’s Failure to Diversify 7 Box 2: Samruk–Kazyna: Kazakhstan’s Sovereign Wealth Fund 12 Box 3: Green Growth in Kazakhstan 13 Box 4: The National Financial Support System for SMEs in the Republic of Korea 41 Box 5: The Rapid Development of Human Capital at the Pohang Steel Corporation 44 Box 6: Coordination Systems for Policy Implementation 51 Box 7: Designing Evaluation Indicators and Mechanisms 52 Box 8: Monitoring and Evaluation of Government Support Programs for SME Innovation and R&D 53 Figure 1: Kazakhstan’s Oil Production and Consumption, 2000–2013 2 Figure 2: Export Structures of Costa Rica, Kazakhstan, Turkey, and Venezuela 4 Figure 3: Diversification of Brazil’s Exports, 1965 and 2010 5 Figure 4: Kazakhstan’s Real Gross Domestic Product—Trend and Projection (1994 prices) 8 Figure 5: Standardness and Diversification 18 Figure 6: Economic Complexity Index—Selected Asian Economies 19 Figure 7: The Product Space 30 Figure 8: Product Space—Kazakhstan and Turkey, 1995 and 2010 32 Figure 9: The Lisbon Strategy “MAP” 34 Figure 10: European Investment Fund 34 Figure 11: Onlending by KfW 35 Figure 12: