Without waiting for economic diversity, what steps can Kazakhstan take to raise per capita income?
Can everything be blamed on resources?
Let’s begin with a brief historical overview, specifically the decades of the Soviet Union’s stagnancy. People continue to have varying interpretations of this time era. Some people think of it as a time of scarcity and lengthy lines at shops, while others remember it as a time of prosperity and stability.
Stagnation followed nearly 25 years of economic development, during which people’s standard of living rose steadily against the backdrop of the 1970s oil boom. Unfortunately, the “miracle” predicted by the high cost of oil never materialised. Rather, despite the economy’s long-term growth, there was a “stagnation” because people’s incomes started to rise, and the planned economy couldn’t keep up with their increased demand for high-quality products. Thus, there was a critical lack of them.
The Soviet leadership made some attempts to fix the issues that had emerged. Several papers, including the Food Program, were drafted with this goal of decreasing product scarcity. But they did not produce the expected outcomes.
The truth is that only a market economy is capable of swiftly and correctly meet the rising demand of consumers. It’s because of the basic law of supply and demand: when demand rises, so do costs, and so do the number of suppliers willing to meet that demand. However, in the Soviet Union, where prices were controlled by the government, the economy lagged behind changing tastes and demands, and a severe scarcity of products persisted.
Now let’s return to present-day Kazakhstan. Our economy has historically been characterised by a high dependency on raw materials. Recent sharp dynamics in oil prices have contributed to a widespread perception that the raw material model has run its course and that the absence of diversification is the only thing holding back the country’s revenue development.
Is there a comparable country with a more equitable distribution of national revenue that Kazakhstan could learn from, or will it repeat the experience of the period of stagnation?
Choosing a nation in this way requires some nuanced criteria. We limited ourselves in three parameters. First, it’s a comparable amount of money coming in per capita, between 2 thousand and 4 thousand USD. Second, the export bundle is of uniformly high grade. And thirdly, annual per capita revenue should be greater than 3.3 thousand USD (i.e. a higher level in Kazakhstan).
In the end, only Chile meets all of these requirements. It is a unitary state with a population that is very close to Kazakhstan’s at 19.5 million, and it has very long distances within it: 4,600 kilometers from north to south. The economy of Chile depends on the export of primary processing products — copper and agricultural goods. Furthermore, at 25-27 thousand USD per capita, Chile’s GDP is on level with that of Kazakhstan.
Nonetheless, the Chilean economy is more inclusive. The population’s income is roughly 1.5-2 times that of Kazakhstan, inflation is significantly lower – 12.8% versus 20.3% in Kazakhstan, and life expectancy, which is an indirect indicator of quality, is 5 years higher.
What is the cause of such disparities between countries? Chile’s success could be attributed to its advantageous geographical position. But, like the rest of South America, the state is far from big and prosperous markets. The cause for the more successful growth, as many well-known experts have pointed out, is an internal factor, namely the quality of economic institutions. Chile is ranked 20th in the Index of Economic Freedom (Heritage Foundation), and Kazakhstan is ranked 64th.
When the data from the two countries are compared, Chile has an undeniable advantage in the rule of law, particularly in the effectiveness of the judicial system (Chile ranked 19th, Kazakhstan ranked 117th), freedom from corruption (Chile ranked 26th, Kazakhstan ranked 106th), and protection of property rights (Chile ranked 46th, Kazakhstan ranked 79th).
Chile also has more efficient regulation — according to the indicator of pricing freedom, the country ranks 65th, with Kazakhstan ranking 151st, and according to business management, the country ranks 31st, with Kazakhstan ranking 70th.
Furthermore, Chile is regarded as a more open and competitive market — in terms of investment freedom, Chile ranks 52nd, while Kazakhstan ranks 120th; in the financial sector, Chile ranks 34th, while Kazakhstan ranks 95th; and in commerce, Chile ranks 55th, while Kazakhstan ranks 69th.
At the same time, it is essential to observe that Chile has consistently maintained good economic freedom positions in all of the above-mentioned areas for at least 25 years. During this period, both market and socialist forces were in control, but the fundamentals of economic liberty were largely unaffected.
Thus, in global practice, there is an example of a reasonably successful resource-based economy that is still capable of ensuring the growth of its population’s income through market mechanisms. Notably, despite the pressure of populism agenda in nearby Latin American nations.
As a result, before discussing diversification in Kazakhstan, it is necessary to clear the fundamental economic channels.