The Kazakh economy continues its strong performance

1. Achieving diversified growth and sustaining economic stability in Kazakhstan: Challenges and opportunities

2. The Kazakh economy continues its strong performance • Eight years of strong growth (10.2 % over 2000-2007) • $100 billion economy, $6,600 per capita by end 2007 • High investment rates (fixed capital investment reached 28% of GDP in 2006) • Strong financial position of the government • Foreign trade and balance of payments in surplus • Rapid accumulation of foreign exchange reserves and National Oil Fund • Inflation has edged up but remains moderate at 8% • Prospects for a major expansion of oil output over the medium term

3. Yet Kazakhstan face a number of development challenges • Low competitiveness outside of oil and resource-oriented industries • Resource dependence generally associated with slower growth, more instability, and inequality • Some recent sources of growth (finance, real estate) not sustainable at current levels, and also pose short and medium-term risks • Growing supply bottlenecks in infrastructure and skilled labor • Barriers to the mobility of labor, goods, and services • Low level of competition on many markets • Low effectiveness of many public services

4. Some good news for diversification prospects: the tenge has been under less pressure for appreciation than the currencies of many of other oil exporters • Responsible fiscal policy and the accumulation of surplus resources in the National Fund have slowed the real appreciation of the tenge • Rapid import growth and outflows of foreign income have also worked in this direction • Current large capital inflows of foreign debt should become more moderate, and pressures on the tenge may ease

5. The tenge remains weaker than in the latter 1990s

6. Yet, low productivity relative to wage growth in tradable sectors may have limited the ability of the Kazakh economy to exploit this relative advantage in recent years

7. Competitiveness also appears to suffer from some other problems in the Kazakh business environment • Kazakhstan has some of the highest administrative costs of doing business across borders (ranked 172nd out of 175 countries in the 2007 World Bank Doing Business Survey) • Relative to other CIS and Eastern European countries, Kazakh firms are subject to a relatively large number of various inspections, often of long duration (World Bank BEEPS 2005) • Kazakh firms tend to complain less about these and many other administrative obstacles to business than is the case on average in the CIS or Eastern Europe, yet this is not necessarily a positive sign (more efficient firms competing on world markets tend to complain more about such administrative costs) • There is much room for improving the quality of governance in Kazakhstan (Governance Matters 2007)

8. Dutch disease effects could become more serious in the future with the rapid expansion of oil: now is the time to exploit a window of opportunity for diversification Potential oil production

9. Overheating in real estate market and growing risks in the banking sector are causes for concern • Fifty percent of current GDP growth is accounted for by construction and finance: not sustainable • The pace of commercial credit expansion in Kazakhstan is enormous by international standards, is financed largely through foreign borrowing, and poses serious risks • The majority of the current credit expansion consists of consumer loans, many of which are unsecured • Real estate markets exhibit high volatility, and are subject to speculative bubbles

10. Four topics of primary relevance for achieving diversification and stabilization • Administrative reform: improving the effectiveness of governance and the quality of public services • Addressing overheating: Mitigating the risks from, the rapid expansion in foreign borrowing, credit expansion, and real estate • Programs to ignite growth and competitiveness outside of resource industries • Housing and communal services: addressing bottlenecks in infrastructure and barriers to labor mobility

11. Reforming Government Administration: Toward a Performance-Oriented, Transparent, Empowered, Efficient, and Accountable Public Management

12. Administrative Reform: Lessons from World Experience • It isn’t easy anywhere, and a particular challenge in the face of corruption, low capacity, weak information, and low civil service pay • Administrative reform has taken many years, even in the most developed countries, and remains an on-going process • Start from a deep understanding of where you are today and what you can realistically achieve; not some abstract view of global best practice • Basic principles of good public administration travel well between countries, but require a careful adaptation to local conditions • Importance of a strong long-run commitment of the government in policy and resources

13. Implementing results oriented public management will involve changes to: • Governance including roles of ministers, professional advisers, managers and service delivery personnel • Systems of accountability and transparency • Allocation of functions amongst ministries and between levels of government and forms of public and private organisation • Budgeting and financial management systems • Civil service laws, structures, processes and remuneration • Strategic planning, policy analysis and evaluation • Methods of management: away from compliance towards quality, responsiveness to citizens and continuous learning • Resources • Culture

14. Some issues to consider • Management of the reform process • Prioritising and sequencing reform initiatives and projects • Achieving balance in practical terms between responsibility and accountability • Making the joint stock companies and social business corporations achieve results • Making performance management work across other state institutions in this constitutional and cultural environment

15. Some issues cont. • Clarifying the roles of ministers and administrative executives • Linking strategic planning to budgets and reporting systems • Accountability system: what is appropriate to the constitutional environment? • Accountability must be based on understanding of the linkages between action and outcome within the complete management environment • Avoid badly chosen performance indicators that can be very damaging • Building capability needed for better public sector performance – remember Bismark

16. Addressing overheating and maintaining financial stability

17. Improving the allocation of risks • Alleviating moral hazard: international creditors and Kazakh banks should not perceive that the government is implicitly insuring their risky activities on the real estate market • Commitment needed to bank problem resolution procedures that allocate a good share of the risk of failure to the private (commercial) sector

18. Improving the management of risks by AFN and the government • Macroeconomic policy measures to absorb liquidity (restrictive fiscal and monetary policy) • Regulations to ensure soundness and to slow risk accumulation in the financial sector • Strengthened supervision to enable monitoring and enforce regulations • Strengthening the capacity of AFN • Enhancing consolidated supervision • Moving to risk based supervision  strengthen governance • Readiness to manage financial sector problems: contingency planning and problem bank supervision and regulation

19. Financial Instability has been quite common in emerging markets: many countries have endured bouts of instability and rebounded quickly Effective regulation and contingency planning can reduce the economic costs of financial instability, as well as prevent the contagion of the entire banking or financial system from the insolvency of individual organizations

20. Government programs to promote competitiveness and diversification

21. There exist a number of important policy directions for promoting competitiveness and diversification • Investment in human capital: human capital is a primary determinant of productivity and competitiveness. Public education and support for professional training in Kazakhstan is under-funded and (in many cases) outmoded. • Lowering tax and other administrative burdens on business. • The presence of resource revenues can support the compensation of non-resource sectors for higher costs associated with a stronger Tenge through a lower overall tax burden (although the dependency of state finance on oil should not become too great). • The foreign trade regime is in need of simplification and the alleviation of exceedingly high non-tariff barriers • Facilitating opportunities forfair competition, including the entry to, and exit from, markets • Industrial policy

22. Industrial policy • Kazakhstan can profit from careful attention to world experience, which is very mixed • The process should be understood as an interactive search of all levels of government and business to identify and exploit growth opportunities • Incentives of government officials and businesses for decentralized initiatives are key to success • The government can play a potentially important role in supplying specific public goods and coordination

23. Important characteristics of effective industrial policies to support diversification • Very high level political support and monitoring • Clear channels of communication with the private sector • Mechanisms for transparency and accountability • Clear benchmarks and criteria for success when providing support to the private sector • Sunset clauses to force the system into letting losers go: “success will be determined not by how well the system picks winners, but on how effectively it lets losers go”

24. Reforming Housing and Communal Services in Kazakhstan

25. Key Constraints Currently Faced by Communal Service Providers in Kazakhstan • Tariff structure • Cost-based, no allowance for rehabilitation/investment or incentives to reduce costs • Progressive tariffs not permitted. • Financial/regulatory environment • No mechanism for lending to utilities • Sector is not attractive for private investment due to tariff, regulatory constraints • Old and inefficient infrastructure • Over-designed from soviet-era norms-based demand criteria • Population shifts following independence • Little investment in maintenance, rehabilitation • Internal apartment networks especially poorly maintained • Institutional arrangements following decentralization • No apex body providing coordinated policy, strategic guidance • Need for strengthened institutions, management capacity at local level and in utilities.

26. Reforming housing and communal services: lessons from international experience (1) • The reform process requires the full commitment of its policy makers to correctly balance financial and political objectives. • Success is often unattainable without reforming the external environment, especially the role of the owner. • Fundamental reforms are not a quick fix and cannot be substituted by private sector participation. • There must be an adherence to financial sustainability objectives. • Other external stakeholders may be important to balance potentially conflicting objectives.

27. Reforming housing and communal services: lessons from international experience (2) • Housing management and maintenance are not natural monopolies, thus are inherently different from CSs. • Apartment owners need to own and be responsible for apartment buildings. • Separating CS functions (ownership, oversight, service provision) and arm’s length transactions are important to the institutional setup • Customers can be an important voice for improving CS providers performance • Guidance/regulations should not be overly restrictive. Utilities do not necessarily have to adhere to all that is prescribed in order to succeed. Each case is unique, with each utility possessing a mix of attributes that has worked for it in its own institutional setting.