On Financing Industries

I have written more than once about the principles of supporting the country's various industries, and about the need for that support to be systemic and genuinely beneficial for the economy.

The first rule, which must be observed: support should not be divided by industry, because the state cannot, even in theory, cover every sector or determine which one is better and more needed. There must be uniform principles for all.

The second rule: any support must have a multiplier effect on the economy. In other words, a tenge invested should work not for one cycle but for many years.

The third rule: support must create either value added for the country as a whole, or knowledge and skills that will help create value in the future.

In my view, there should be no other principles.

Value added is, broadly, determined by two parameters: the share of our country's labor force involved in creating a product or service, and the profit that remains after the product is sold. This is the foundation of GDP.

Skills and knowledge are built through the import of technologies, standards and specialists who pass their knowledge on to our people.

Let me give several examples of what should not be supported, and what, on the contrary, should be.

Take the food industry. We support it and set up a juice bottling plant. It is currently a priority sector. But if we look closely, we see that the packaging and the concentrate are brought in from China, the sugar from Russia, the equipment from Europe. Bottling is automated, and the industry is so competitive that margins on juice are not very high. As a result, localization of production is practically zero, and money leaves the country as imports to China and Russia, all of it funded by state support. And this is despite the sector's priority status. If the juice were made, say, from domestic apples, then such an enterprise could be supported. In fact, the economic effect of this kind of support will be negative or, at best, zero.

Another example. An entrepreneur decides to build a chain hotel in a region under an international franchise. Such a business does not qualify for state assistance. Yet if we break down what a hotel does, it is mostly a labor-intensive business that employs local people, which means high localization. With a chain franchise, specialists come in, introduce standards and train our staff on site. Employees who have worked in chain hotels acquire qualified skills for such work; the price of their labor rises every year, and in the future they can introduce the same standards at other local hotels and restaurants. This is, in effect, an exportable service, since tourists and foreign guests come and leave their money in Kazakhstan. The image of regional cities also improves. But this sector is not on the priority list.

These are two clear examples showing that our programs contain distortions that prevent state money from being used effectively. That is why any support should be based solely on principles, while the volume of support should be regulated by the level of localization and, for example, by employment. Otherwise, the industry that gets supported will be determined by the strength of its lobbying, not by its economic effect for the country.