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Competitiveness of Non-Oil Sectors in Kazakhstan:

Issues and Priorities in the areas of Macroeconomic, Industrial, Trade and Institutional Development Policies


The Republic of Kazakhstan was one of the earliest and most vigorous reformers of the CIS in areas such as price and trade liberalization and privatization of small and medium-scale enterprises. The government has succeeded in establishing a framework to attract foreign direct investment (FDI) into its rich oil and mineral resource base. Important improvements have been made to the payments, banking and pension systems, and to the electricity sector. Both the US and the EU have granted Kazakhstan the status of a market economy.

Macroeconomic management and performance has improved progressively throughout the past decade, notably after the regional financial crisis of 1998. Sustained expenditure cuts and growing oil revenues resulted in a consolidated general government deficit of less than 1% of GDP  in 2000-2002. Inflation has been maintained at single-digit levels since 2001. The real exchange rate depreciated by almost 60 percent between 1997 and 1999, and has remained relatively stable at this level. Real GDP growth tended to track these developments, and after a lack-luster performance in 1995-99, has averaged over 10 percent each year in 2000-2002. The recent boom in real GDP growth stemmed largely from oil production and exports.  However, other sectors, notably mining, food processing and services, have made increasingly strong contributions. Thus, importantly, real non-oil GDP grew by a cumulative 33 percent between 1999 and 2002.

Despite the foregoing favorable developments, Kazakhstan’s dependence on oil and other extractive industries is already high, and is likely to increase further. Oil currently accounts for about half of exports, and one-fifth of government revenues. Altogether, extractive industries (including ferrous and non-ferrous metals in addition to oil and gas) account for around two-thirds of exports and one-third of fiscal revenues and represent a third of GDP.

The urgent challenge for diversification and creation of employment opportunities presents critical questions to the GOK in determining what role to ascribe to its windfall natural resource revenues in accelerating development of the rest of the economy and improving current welfare. An oil fund, the National Fund of the Republic of Kazakhstan or NFRK, was established in 2001, and currently holds about $4 billion in assets, serving both stabilization and saving function.  Projected oil price levels and anticipated increases in production volumes, indicate that the NFRK could accumulate very substantial revenues in the next several years. Based on ongoing investment projects, oil production is expected to double from 1 to 2 million barrels per day by the end of this decade, and triple by 2020, followed by a long plateau. Gas production is also increasing rapidly, as will exports once the existing transport constraints are addressed.

The Government sees innovation and industrialization as key to sustained improvements in living standards in Kazakhstan.  This view, and the pre-eminent role ascribed to economic diversification, is outlined in the recently adopted Innovation Industrial Strategy, which sponsored the creation of the new development institutions. More recently, concerns about the need to enhance economic competitiveness as a means of spurring diversification have also revitalized interest in accession to the WTO.


Key Policy Challenges

Over the last two years, the government of Kazakhstan has been focusing on the various aspects that determine competitiveness in Kazakhstan, and is making an effort to develop policies that:

  1. Macroeconomic policy, i.e., the combination of fiscal, monetary, exchange rate, trade, and financial sector policies that will ensure a sound basis for private investments and sustainable growth 

  2. Microeconomic policy, i.e., the combination of sectoral policies that will be needed to promote investments and growth in non-oil sectors, including some of the institutional aspects dealing with the business environment

  3. Role of the public sector, and in particular issues of priorities for public spending and ways to improve expenditure efficiency (quality of public servants, public administration reform, etc.)

 Objective of the Project

The general partner of the project is the JSC Center for Marketing and Analytical Research (JSC CMAR). Other beneficiaries include the Ministry of Economy and Budget Planning of the Republic of Kazakhstan (MEBP) and the Ministry of Finance of the Republic of Kazakhstan (MoF).  These have been partnered with a select group of academics from Harvard University who have graciously agreed to provide their expertise.

The overarching objective of this project is to highlight policy priories in the various areas covered by the consultancy. In choosing these priorities efforts should be made to prepare a good diagnostic of issues, and evaluate the current policy stance.   At the end of the project, the government wants to have several policy actions alternatives aiming at diversification and technological upgrading of Kazakhstan’s economy, based on theoretical knowledge, international experience and Kazakhstan-specific conditions.

Scope of the Project

The consultancy is expected to cover the following areas:

  1. Macroeconomic policies (fiscal, monetary and exchange rate, financial, trade)

  2. Sectoral policies in relations to the development of various non-oil industries

  3. Institutional framework, particularly in regards to the role of the state, and the measures to increase its effectiveness.


The research is expected to accomplish the following more specific tasks: 

  1. Detailed  assessment of current situation and issues in each of the three broade areas enumerated above for Kazakhstan:

          i.   Highlighting the most significant bottlenecks and potential threats;

          ii.  Indicating their causes

  1. Developing scenarios, simulations, or illustrations (for the whole policy package or for specific pieces such as the macro policies) that would help the expert team convey the problems and the way forward to the high level authorities in Kazakhstan. The simulations or scenarios ideally will constrast sharply potential outcomes under the existing and proposed new policies.

         i.   Provide the relevant international experience in the above three broad areas (e.g., oil-rich countries which faced similar threats in their development, middle income economies, industrial countries). This would be particularly important when discussing the issues of “Dutch disease” and “overheating”.

  1. Provide broad and detail policy recommendations for the Government actions in achieving the effective and optimal competitiveness policy, which shall include:

          i.   Recommendations on necessary corrections in the three policy areas enumerated above;

         ii.   Areas for  further work (specific measures)

Further Information

Further details are contained in ‘Terms of Reference’ document that can be obtained from Prasad Bhamre, CMAR  (prasad@cmar.kz)


Please contact Kwang Ryu at kwang_ryu@harvard.edu