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World Bank Document Report No. 30852-KZNo. Report Report No. Republic ofKazakhstan CountryEconomic M 30852-KZ Republic of Kazakhstan Country Economic Memorandum Public Disclosure Authorized Getting Competitive, Staying Competitive: The Challenge of Managing Kazakhstans Oil Boom June 2005 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized emorandum Document of the World Bank Public Disclosure Authorized Produced under the Joint Economic Research Program of the World Bank and the Ministry of Economy and Budget Planning Republic of Kazakhstan: Getting Competitive. Staying Competitive: The Challenge of Managing Kazakhstan’s Oil Boom EXECUTIVE SUMMARY........................................................................................................... i ... 1) Economic Policy ......................................................................................................... 111 2) Human Capital ............................................................................................................ iv 3) Infrastructure ................................................................................................................. v Public Sector Institutions ............................................................................................ vi 4) ... 5) Sectoral Policies ........................................................................................................ vu1 6) Innovation and R&D ................................................................................................... ix Summary ofDiagnostics and Recommendations ................................................................. 1 I. CONTEXT: A TASTE OF tHE FUTURE .......................................................................... 1 A . Transforming Kazakhstan within a Decade ...................................................................... 1 B. 2004: The Two Faces ofKaza~stan ................................................................................ 2 11 . CATCHING UP WITH HIGH-MIDDLE INCOME ECONOMIES ............................ 5 A . The Challenge’s Perspective ............................................................................................. 5 B. The Key Ingredients ofCompetitiveness in Kazakhstan .................................................. 7 1. The Framework ............................................................................................................. 7 2 . A Simple Benchmarking Exercise ................................................................................ 9 a. Economic Management ............................................................................................ 9 b . Labor Productivity .................................................................................................. 13 c . Infrastructure ........................................................................................................... 13 .. d. Institutions............................................................................................................... 15 e . Summary ................................................................................................................. 17 11I. THE STRATEGIC POLICYAGENDA ........................................................................ 19 A . Policy Context ................................................................................................................. 19 1. Current Policy Stance ................................................................................................. 19 2 . Additional Considerations .......................................................................................... 22 B. The Economic Management Agenda for Competitiveness ............................................ 28 1. The Oil Windfall: Benefits and Risks ......................................................................... 28 2 . Policy Choices ............................................................................................................ 31 a. Fiscal Policy ............................................................................................................ 31 b . Exchange Rate Policy ............................................................................................. 37 c . Supervision and Regulatory Policy and Policies towards Capital Inflows............. 38 C . The Structural Reform Agenda for Competitiveness...................................................... 40 1. Infrastructure: the Case ofTelecommunication Reform ............................................ 40 a. Market Liberalization .............................................................................................. 41 b . Tariff Rebalancing .................................................................................................. 42 c . Interconnection ....................................................................................................... 42 d. Roles and Responsibilities ofDifferent Players ..................................................... 44 e . Promoting Universal Access in Rural Areas .......................................................... 45 2 . Sector Policies: The Case ofLocal Content for the Oil and Gas Sector ..................... 48 a. Background: Partnering with Multinationals .......................................................... 48 b . Obstacles to Domestic Supply into the Oil and Gas Sector .................................... 49 c . A Three-Pronged Strategy to Foster Competitiveness ofSuppliers ....................... 51 Annex Table 1: Kazakhstank Key Economic Indicators. 1999-2004 .................................... 59 Annex Table 2: Kazakhstan: GDP Growth. 1999-2005 ......................................................... 60 Annex Table 3: Kazakhstan: Structure ofGDP. 2003 ............................................................ 60 Annex Table 4: Kazakhstan: Value Added in Regions, 1996-2003 ....................................... 61 Annex Table 5: Kazakhstan: Real Exchange Rate, 2000-2004 .............................................. 61 Annex Table 6: Kazakhstan: Savings and Investment Rates, 1999-2004 .............................. 62 (% OfGDP) ............................................................................................................................. 62 Annex Table 7: Kazakhstan: Exports ofKey Commodities, 1999-2004 ............................... 63 Annex Table 8: Kazakhstan: Consolidated Govemment Fiscal Accounts, 1999-2007 ..........64 Annex Table 9: Kazakhstan: Commercial bank loans by sector, 1998-2004 ......................... 65 Annex Table 10: Selected indicators for Kazakhstan and Comparator Countries, 1990-2003 ..................................................................................................... 66 Annex 2: List ofBackground Papers and Activities ............................................................... 68 Annex 3: References ............................................................................................................... 70 List of Text Tables, Figures, Boxes, and Diagrams Table 1: Performance in Venezuela and Kazakhstan during Selected Oil Boom Periods Table 2: Kazakhstan: Composition of Investment in Fixed Assets, 1999-2004 Table 3 : Volatility of Exchange Rates and Prices, January 1997 to September 2004 Table 4: Kazakhstan: Use of Oil Inflows and Overall Spending Priorities, 2000-2007 Table 5: Kazakhstan: end-2002 Net Wealth under Alternative Assumptions Table 6: Kazakhstan: Key Economic Indicators, 2000-2007 Figure 1: Kazakhstan: Two transitions, 1990-2004 Figure 2: Kazakhstan: Gross Foreign Direct Investments, 1993 - 2003 Figure 3: Kazakhstan: Real GDP Growth, 1997-2005 Figure 4: Kazakhstan: Oil Revenue Saved and Spent, and Total Spending Levels, 1999-2005 Figure 5: Kazakhstan: Real Exchange Rate Index, 2000-2004 Figure 6: Kazakhstan: Saving and Investment Ratios, 1997-2003 Figure 7: Kazakhstan: Structure of GDP, 2003 Figure 8: Kazakhstan: Exports of Selected Goods, 1997-2004 Figure 9: GNI per capita in new EU and Common Economic Space Countries, 2003 Figure 10: Kazakhstan: Convergence with EU8, 1990-2024 Figure 11 : Fuel Exports in Selected Oil Countries, 1970-2002 Figure 12: Kazakhstan: Total Savings Ratio, 1995-2003 Figure 13: Kazakhstan: Total Investment Ratio, 1992-2003 Figure 14: Kazakhstan: Non-oil Investment Ratio, 1999-2003 Figure 15: Kazakhstan: Government Spending, 1993-2003 Figure 16: Kazakhstan: Manufacturing Labor Productivity per Worker, 1992-2003 Figure 17: Kazakhstan: Agriculture Labor Productivity per Worker, 1992-2005 Figure 18: Kazakhstan: Infant Mortality Rate, 1990-2002 Figure 19: Kazakhstan: Public Spending in Health and Education, 1995-2001 Figure 20: Kazakhstan: Selected Benchmarks ofTransport and Telecommunications Infrastructure Figure 2 1: Kazakhstan: Selected Benchmarks for the Institutional Framework, 2002 Figure 22: Growth Experience in Selected Oil Rich Countries Figure 23: Kazakhstan: State Budget Spending in Major Categories, 1999 - 2007 Figure 24: Kazakhstan: Potential Oil Production, 1999 - 2035 Figure 25: A Simulation of the New Saving Rule Box 1: What Kind of State Support for Agriculture? Box 2: Strengthening the Contribution of Education to Kazakhstan’s Economic Transformation Box 3: Approaches to Industrial Policy Box 4: Strategic Directions for Telecommunication Reform Diagram 1: A Framework to Study Competitiveness in Kazakhstan Diagram 2: Key Players in the Oil & Gas
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