What’s Wrong With State Capitalism in Kazakhstan?

In Kazakhstan, the largest economic sectors, which generate the main financial flows in the country, are fully controlled by the state, foreign companies, and businesspeople affiliated with the elite. Others are given “admission” to less privileged sectors with a high level of competition, low and medium margins, and no opportunity to generate the kind of financial flows seen in the resource sector. For ordinary entrepreneurs, partially or completely, the gates to sectors such as construction, real estate, transport, logistics, trade, and so on are open. This happens for a reason. But first, we need to deal with the numbers. 

According to the Deloitte research center, the following sectors account for 76 percent of national GDP: mining and processing (including oil, gas, and metals), 29 percent; trade, 16 percent; banking and real estate, 12 percent; transport and communications, 11 percent; construction, 6 percent; and energy, 2 percent. In addition, according to a number of experts, companies operating in these sectors account for 80 to 90 percent of the assets used in the economy. In each of the above-mentioned sectors, except trade, transport, and construction, there are mainly foreign companies, government-owned companies, or commercial entities associated with elites. Access to these sectors by independent, non-elite-affiliated domestic businesses is difficult due to various entry restrictions. At the same time, according to some experts, the presence of the state in business is between 40 percent and 50 percent, but there is no official data on the size of the state (including quasi-state) presence in Kazakhstan’s GDP. 

According to the comprehensive privatization plan that the government prepared in 2015, the share of the public sector in Kazakhstan should have been brought to 15 percent of GDP by 2020, or equal to the average of OECD countries. But if we look at the main quasi-state enterprises, which are represented by financial and investment organizations, mega-holdings that unite diversified businesses (JSC Samruk-Kazyna, JSC Zerde, JSC Baiterek, JSC KazAgro, etc.), we see that today, by assets, these institutions occupy more than 60 percent of the country’s economy, and their contribution to GDP is about 50 percent.

As economist V. Dodonov mentioned in the article “Investment activity of leading countries in Kazakhstan,“ the total amount of Kazakhstan’s state assets, including the combined international reserves of the National Fund and the National Bank (about $80 billion, or about 45 percent of GDP), as well as the assets of state holdings Samku-Kazan, Baiterek, KazAgro, and Zerde, is almost equal to the size of the GDP. A similar indicator in such countries as the United Kingdom, Germany, and Denmark is about 5 percent.  

According to the calculations of the Kazakhstan School of Applied Politics and Economic Research (KSAP), conducted on the basis of open source data, the number of people receiving salaries from the state budget is about 1.44 million. If we add to this figure 300,000 employees of the quasi-state sector (about 500 companies), we arrive at the conclusion that the state “feeds” 1.7 million people. In total, about 6-7 trillion tenge is spent annually on their maintenance (everything from salaries and benefits to buildings and other costs), which is equal to half of the national budget or 10 percent of the GDP of the country.

Thus we have two main questions. First: Why does the state accumulate such a quantity of assets and, opposing privatization, feed a whole army of civil servants, state employees, and managers? Second: Why are independent Kazakhstani businesses not admitted to the “privileged” sectors of the economy? 

It is not difficult to answer the first question. At the expense of state property, the government creates a huge number of unproductive jobs (including some that are highly paid and attractive, given the possibility in such posts to take bribes). This is done both to maintain social stability and to coordinate an important social stratum (the elite). Practice shows that the people who benefit from the state, for the most part, retain their loyalty to the current regime during periods of political instability. At the same time, one of the methods of co-optation of the elite (relatives, friends, fellow tribesmen, friends of friends, etc.) is the distribution of well-paid, administrative posts. With the state having such a heavy presence in the economy, it is much easier to do this.   

In addition, in the case of Kazakhstan, it is “post-Soviet syndrome.” In the past, the party, and today the ruling elite of a sovereign state, feels political and psychological comfort from the presence of state property.

The second question is more difficult to answer. Kazakhstan has been in a stage of technological stagnation for 20 years. The country is not generating new technologies; it is not increasing the share of the manufacturing industry, and there is virtually no natural, vertical transformation of business – when small businesses grow to medium-sized and then large. According to the World Bank, the potential for increasing productivity and economic growth in Kazakhstan is limited by the predominant role of the state in the economy through quasi-state-owned companies. The state is not known to be the best owner; it is good at creating employment but bad at creating added value.

But at the same time, the main internal constraint on the economic and technological development of Kazakhstan’s economy is an access problem – a lack of access to “privileged” sectors of the economy for non-elites. Equal and fair access to these sectors would provide more equitable redistribution of incomes in society, creating a good reserve for the development of the middle class and technologies, improvement of investment climate, and business activity of the population. Partially, or even completely, this issue could be resolved by large-scale privatization of state property and national holdings. But with a high level of corruption, the imperfection of the judicial and legal system, and a lack of transparency in the work of the civil service, there is a high risk of repeating the mistakes of earlier waves of privatization of the 1990s, after the collapse of the Soviet Union. Without the systemic reform of these structures, it is pointless to carry out major privatization.   

Through the Strategy for Industrial and Innovative Development in the early 2000s, the Kazakh government was actively engaged in the development of technology. But at some point, the elite decided that technological development was risky, as it could lead to the generation of profits beyond state or elite control, which in the future might be transformed into an independent political force. Thus, fear of the side effects of technological development prompted the elite to take control of capital and technology, along with restricting access to certain sectors of the economy. As a result, the economic model, or “rules of the game” that the elite set in Kazakhstan, stymied the technological development of the country and led to a permanent reduction in the investment climate and business activity of the population. As a result, the economic rights of citizens have been narrowed along with political rights, and property rights are poorly protected. 

The main problem of the current government is that it wants to preserve the established “status quo,” which is why fundamental institutional problems are not being resolved today. The authorities are in no hurry to make the work of public services transparent, introduce political pluralism and multi-party democracy, and create independent and effective courts and a fair and incorruptible law enforcement system. The motivation is clear: the activities of such inclusive institutions will inevitably increase demands on the state apparatus, create high costs for corrupt officials at all levels, and most importantly, lead to the inevitable rejection of one-man, authoritarian power. But the problem is that the chosen model, as history (including the late Soviet Union), has shown, has a limited and unsustainable growth associated with the inevitable onset of technological stagnation and subsequent collapse. 

If Kazakhstan wants long-term economic growth, it needs constraints and counterweights. Kazakhstan needs a long-term horizon. It needs an open electoral process, an independent Parliament and National Bank, and fair and independent courts. Both domestic and foreign investors need to understand that there are stable laws in the country, that taxes are not revised every day, that the decisions of the National Bank are independent, that there is a competitive policy, that there are independent courts, that business will not be taken away tomorrow by officials or competitors. And, of course, that equal and fair opportunities are important, in all sectors of the economy, without exception or discrimination.