Kazakhstan, Central Asia and the transition to effective market economies

Introduction

Good afternoon.

It gives me great pleasure to be back in Kazakhstan, one of the countries I have been to most often in my five years as the EBRD’s President.

On this occasion I have the added excitement of visiting Nazarbayev University for the first time.

I have to say I am very impressed by what I have seen so far.

And rather apprehensive about the questions I may have to answer later from any students of this formidable seat of learning here today.

The ambition behind the setting up of a world class university here in Astana is very striking.                        

But its scope comes as no surprise to those of us who are Kazakhstan’s friends.

President Nazarbayev has defined one of the country’s strategic goals as that of joining the ranks of the world’s most competitive nations.

I know that this university was set up with the express purpose of nurturing the academic environment required to help make that dream come true.

It is already doing its bit, I can see.

It is already contributing to the creation of the open society that any country with this objective in mind must cultivate if it is to succeed.

But the challenges facing Kazakhstan are still greater than just becoming more competitive.

As we at the European Bank for Reconstruction and Development – the EBRD - see things, competitiveness is only one of several qualities that an economy needs to be modern, effective and successful.

Allow me to explain in more detail what I mean.

And to detail how your friends, friends such as the EBRD, can help you build on the promise of your country’s first decades of independence and sovereignty.                        

The EBRD, its mission and Central Asia

To do that, I have first to go back in time to our founding, which coincided with the birth of modern Kazakhstan.

The EBRD was set up in 1991 to help build a new post-Cold War era in Central and Eastern Europe and what was then the Soviet Union.

Kazakhstan - and the rest of Central Asia – has been part of our story, both as a shareholder and a country where we have been investing almost from the start.

The EBRD is rather different from other multilateral development banks in ways that reflect the historical context of our creation.

One, we work only in countries committed to multi-party democracy, to political pluralism and to the market economy.

Two, our constitution lays down that 60% of our project lending must be to the private sector. That figure currently stands at 80%. 

Thanks to our projects, we know a lot about sectors and companies in the countries where we invest.

But if I were asked to sum up, in one sentence, what the EBRD actually does, I would simply quote the very first sentence of Article One of our founding document. 

There our very purpose is defined as fostering “the transition towards open market-oriented economies and to promote private and entrepreneurial initiative”.

Ever since our creation we have been pioneers in this transition, helping shift thinking and leading the way in:

• leveraging the private sector to achieve development outcomes;

• devising financial instruments to build sustainable infrastructure;

• launching programmes to help small and medium-sized businesses, thus creating new jobs, enhancing skills and driving growth;

• promoting sustainable energy, reducing waste and lowering carbon emissions;  and

• advancing the cause of energy security based on the private sector and the blending of grants and loans.

We are a powerful catalyst for foreign direct investment and the channelling of equity and private financial flows into emerging markets.

Over time we have also learned a lot about the role of the state in encouraging the development of open and sustainable market economies.

We now combine a private sector focus on financing and the delivery of development goals with extensive work on policy reform with the governments of the countries where we work.

In Central Asia, for example, we are actively engaged in such reform in the areas of green energy, diversification, the investment climate and the role of the private sector.

Yours really is one of our most important regions.

Our total investment in the whole of Central Asia, which we define as Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan and Uzbekistan, now stands at well over $12 billion.

Recent years represent just the start of what I believe will be an era of even greater achievement for you and your neighbours.

A period in which Central Asia, bolstered by new initiatives such as that of One Belt, One Road, will be even better connected to and integrated within the wider global economy.

Kazakhstan has a special role to play here.

Your country has the potential to be a shining example to others as they seek to re-energise their transition towards more open and more sustainable market economies.

The EBRD applauds the reforms and the work to build a more diversified economy that your government is undertaking.

The Enhanced Partnership Framework Agreement we agreed with the government three years ago has allowed us to expand our work and the volume of our investments here in a way that has surpassed all expectations.

Last year EBRD invested $1.1 billion here, making Kazakhstan our second largest market after Turkey.

Transition to more effective market economies

I mentioned earlier the several qualities that we believe a successful, effective and modern economy needs to display.

Last year we updated the definition of ‘transition’ which is at the core of the EBRD mandate and defines what our objectives are whenever we invest in or offer advice to our clients and partners.

This new vision of what a modern economy actually looks like is informed by years of hands-on experience.

And also an awareness of how the world is changing – and how we as a Bank need to change with it.

Back in the 1990s, when we first embarked on the exercise of defining transition, the overriding priority for any economy was that it should be competitive.

Our view is now more nuanced.

The years since our creation have deepened, broadened and refined our understanding of what a successful market economy actually is and how to promote its development.

Our refreshed transition concept, which came into effect at the beginning of this year, now lists the several qualities that our countries need to embrace.

They need to become:

• More competitive, because greater competition means lower prices, more innovation, and better value for consumers, as well as more growth.

• Better governed, because good governance and the rule of law promote trust, fairness and cohesion in societies, and encourage investment and competition.

• Greener, because a genuinely sustainable economy must protect natural resources and the broader environment for the benefit of all – including those not yet born.

• More inclusive, because economic growth must benefit entire societies, without leaving any groups behind.

• More resilient, because sustainable economies need to be able to withstand turbulence and shocks which we know can be painful.

• And they have to be more integrated because integration, within and across borders, empowers both entrepreneurs and consumers, promoting competition and resilience and motivating better governance.

Kazakhstan and the new transition qualities

So, how is Kazakhstan performing against these six transition qualities that are essential for the make-up of an effective market economy?

Let me give you the EBRD view, touching on EBRD projects that are helping Kazakhstan to make headway on each of those qualities and to remedy shortcomings where they exist.

1. Competitive

Let’s start with competitiveness, our original yardstick for measuring an economy’s progress on the transition journey.

Kazakhstan has made great strides in improving its competitiveness over the last decade and is already in a very respectable position in the World Economic Forum’s list of most competitive nations.

Many of the features of a competitive economy are already in place, a significant achievement in itself.

However, your state-owned enterprises are acting, thanks to their major impact on the private sector, as a constraint on the development of a more competitive and commercially-oriented economy.

Where we see further work needs to be done is in the fields of corporate governance, improved HR practices, procurement and the regulatory framework.

Productivity across the economy is above average for the CIS. But it lags below that of OECD countries.

Key to improving that is increasing product and process innovation, particularly in low-tech sectors.

The EBRD is helping boost Kazakhstan’s competitiveness through projects such as the $20 million of equity we have invested in a major new integrated poultry farm and processing plant in the north.

2. Better governed

We agree wholeheartedly with your authorities that improving governance is a key priority for reforms.

The main obstacles are twofold.

Lack of capacity within the civil service is restricting the state’s ability to help foster private sector development, not least through well implemented structural reforms.                               

And while programmes of state subsidies to firms have played an important role in supporting the economy during downturns, the resulting policies do not seem to have helped increase exports and diversify the economy.

There is also a lot more we can do to improve state and corporate governance here.

The EBRD is already active in this field, one example being our work on corporate development and restructuring with a municipal district heating company in Kyzylorda, a project which also has important benefits for greening the economy.  

3. Green

Which brings me to how Kazakhstan is faring on the third of our transition qualities: green.

Unfortunately, it remains the largest emitter of greenhouse gases in Central Asia and its economy has a very high CO2 intensity.

But we need to give credit where it is due as well.

Kazakhstan has enacted significant legislative improvements covering energy efficiency and renewable energy.

Its ambitious Green Economy Concept focuses on decarbonisation in such energy- and carbon-intensive sectors as power, oil and gas, mining, manufacturing and transport.

Greening the Kazakh economy could act as a major catalyst for private sector growth.

The EBRD is helping in this area too.

Only last week we announced an investment in the second stage of the ambitious Burnoye solar park, part of our $200 million renewable energy financing framework for Kazakhstan.

And, of course, just several days ago, there was a successful launch of Expo 2017, on a site next to Nazarbayev University. This is a great achievement of the Kazakh people.

A successful Expo will, I am sure, allow to make even more progress on the Green agenda.

4. Inclusive

The fourth transition quality is an inclusive market economy. The EBRD recently unveiled our first ever Economic Inclusion Strategy, putting the transition quality of ‘inclusive’ right at the heart of what we do.

Gender equality, regional development, and opportunities for young people, underpinned by strong and diverse skills base across regions, age and gender groups, are going to be vital for sustainable growth in Kazakhstan.

This country scores well for youth and gender inclusion.

But it performs less well when it comes to regional inclusion.

The mismatch in skills across the regions is hampering the development of a competitive and inclusive economy.

Around one in eight firms identify skills as a major constraint on their growth

In the manufacturing sector the figure is one in five.

And while Kazakhstan’s relatively high ranking for gender inclusion is heartening, it is no cause for complacency.   

Most working women here are employed in education, health care, trade, social welfare and services.

Many of these jobs are in the public sector and typically offer lower salaries than male-dominated occupations in extractives, construction and industry.                                                   

There are explicit and implicit legislative restrictions on female participation in sectors such as mining.

In general, employers need to work harder to encourage young women to take up education and training opportunities in sectors that pay better.

One way the EBRD helps to promote inclusion is by closing the gender gap in access to finance through funding for on-lending to female-led SMEs, such as our $10 million dollars loan to ForteBank.

And just recently we also signed a $120 million loan with Shalkiya Zinc, which addresses youth and gender inclusion in the regions.

5. Resilient

The fifth transition quality is resilience.

Kazakhstan’s dependence on oil and gas, which accounted for 16 per cent of GDP and 52 per cent of exports in 2015, is a brake on efforts to improve its economic resilience.

This is cushioned by the National Fund, worth 35 per cent of GDP, which can be drawn on in periods of low oil prices.

But it is still a problem that needs addressing.

Kazakhstan’s banking sector needs to become more resilient as well.

While banks’ reported capitalisation is adequate, the sector may still be under pressure due to such factors as off-balance sheet liabilities and crystallisation of losses from restructured loans.

Other challenges include developing capital markets.

We are working hard to help bolster the economy’s resilience, not least fostering the development of the Astana International Financial Centre.

6. Integrated

The last transition quality is integration.

While much progress has been made in improving Kazakhstan’s economic integration with its neighbours and beyond, the state of cross-border connectivity still constrains growth.

This hinders business opportunities, increases costs and reduces competition domestically.

Reversing this involves improving the quality of infrastructure, including “soft” infrastructure, and logistics.

But also “hard” infrastructure plays a very important part in integrating an economy.

Here I would highlight our loan to finance the reconstruction and widening of the main highway between Astana and Almaty.   

Trade policy can also foster integration. Lowering tariffs and boosting FDI by making Kazakhstan more attractive to foreign investors, two other important ingredients of better integration, should be helped by this country’s accession to the WTO.

Incidentally, technical cooperation funded by EBRD helped the Kazakhstan government’s efforts to join the WTO. 

The big picture development model for Kazakhstan

That covers the EBRD view of the transition challenges and opportunities for Kazakhstan. But let me try and summarise all that with the big picture development model for Kazakhstan’s future prosperity.

Which are the areas for improvements that would most boost the private sector and growth in the wider economy?

In order of importance, and referring back to the six transition qualities, I believe this big picture development model for Kazakhstan should have five key features.

• First, a more clearly defined role for the state, and one that is better executed, as well as a gradual reduction of its presence in the economy would make the latter both more competitive and better governed;

• Second, improved access to finance and a more robust financial sector would support diversification of the economy and make growth more resilient;

• Third, the economy’s integration with your neighbours and with the global economy would be helped by boosting the ease of crossing your borders;

• Fourth, greening the economy is critical for the private sector’s long-term sustainable growth;

• And fifth, the private sector needs a more skilled workforce to achieve its potential and make economic growth as a whole more inclusive.

A few final thoughts

Ladies and gentlemen, I hope I have made clear the EBRD’s enthusiastic support for the reforms Kazakhstan has pursued in recent years.

Each of my visits here – and I come every year – offers new evidence of exciting progress, whether here in Astana, in the many other cities where we have offices, or the regions where we are investing in projects that are changing lives on the ground.  

And, on my travels to other EBRD regions, I often hold Kazakhstan up as a model of what can be achieved when the right conditions prevail.

I am conscious that I am speaking today to those who are and those who aspire to be members of the country’s elite.

And that, as such, you are more aware than many of the gap between what Kazakhstan is today and all it could be tomorrow.

Some of you are members of the generation that in the future will hold leading positions in government, the private sector, the professions, scientific research and academia.

It really will be in your power then to effect the changes your country needs. 

You know too that I come here today as a firm friend of Kazakhstan - and the President of a Bank which has, over the years, invested more than $8 billion in your economy.

It is in that spirit of friendship that I have been frank in my assessment of the Kazakh economy and what still needs to be done to deliver the inclusive growth that can consolidate reforms.

It is my firm belief that implementing the policy recommendations I have sketched out today will be yet another one of those successes.

The lion’s share of that work will be carried out by Kazakhstan, of course.

We have already seen the impressive energy, determination and vision your country displays in planning and carrying out strategic reforms.

We will, as ever, be happy to help. 

By focussing on the six transition qualities I listed, the EBRD can have a major impact on the ground. 

We are already doing so here in Kazakhstan, as I hope the projects I cited, taken from many different sectors, demonstrate.

And we see similar results in neighbouring countries, all of which are confronting the same challenges.

In all of this – the whole transition journey – there is the crucial role that an open society has to play in creating the right environment for the sort of changes we are talking about.

This university is an important part of that.

But, as I am sure you understand, it cannot do this in isolation from the rest of society. 

Without checks and balances in the shape of the rule of law, a vigorous civil society to articulate and defend different interests, scrutiny from the media and democratic accountability via elections, reforms will be stillborn.

I am confident, however, that your country’s reforms will indeed flourish and prosper, just as Kazakhstan and its people will.

And that the EBRD will continue to support your country in its historic transition to an effective market economy.   

Thank you very much.