Dutch Disease in Kazakhstan

Our country's economy is in the grip of classic Dutch disease, and it cannot seem to break free. For those unfamiliar with the term, the essence is this: when one sector grows much faster than the others because of external or internal factors, the real exchange rate strengthens, and that in turn hurts the other sectors.

As a rule, this happens in the extraction of natural resources, because such a sector grows thanks to natural wealth rather than to entrepreneurship. In our case it is the oil sector. The state receives foreign currency from oil sales in the form of taxes and spends it on public expenditure, and the national currency strengthens as a result. Labor productivity growth in mining (which includes oil) depends entirely on the quality and accessibility of the deposits and on prices set by market supply and demand. Other sectors depend far more on technological sophistication, creativity and uniqueness, and on the strength of a country's institutions, which allow sectors that need freedom and competition to develop.

Why is it important to develop other sectors, and not only oil? First, our oil sector is developing poorly: it is increasingly concentrated in large extraction projects whose profits mostly go to foreign investors. These companies have a considerable effect on the country's GDP, but only a limited one on the well-being of citizens, because the profits go to foreign shareholders. Second, the oil sector is not labor-intensive. It depends more on the quality of the deposit, and the beneficiaries are a limited number of people. That is why it is important to develop other sectors, where profits and wages (which are the foundation of GDP) are distributed among many more people.

All sectors are divided into tradable and non-tradable. Non-tradable sectors are those whose output cannot be imported or exported, for example services of all kinds, perishable foods, transport services, mobile communications and so on. Their development depends on that of other sectors, since they are oriented mainly toward domestic demand. The higher the labor productivity and growth in tradable sectors, the higher the demand for non-tradable sectors, which will then develop as well. There is therefore no need at all to stimulate non-tradable sectors; they will develop on their own, because their income depends on the spending of tradable sectors and of the people employed in them. If you look at what the state stimulates, you will find a great many non-tradable sectors that make no economic sense to support.

For tradable sectors to develop, the exchange rate must always be at parity with the countries we compete with, otherwise our goods become uncompetitive. It is therefore vital to neutralize the effect of oil dollars so that our other sectors can develop on equal terms with those of other countries. There were attempts to sterilize oil dollars through the National Fund, but for many years now we have been actively spending that money, and in doing so we prevent other sectors of the economy from developing. Subsidies, which are in essence also a part of oil rent, cannot replace market incentives. They cannot be given to everyone, and so they create market imbalances. They involve an element of selectivity, which breeds corruption risks, and they foster a dependency mentality that is extremely hard to shake off afterwards.

That is why it is vital to limit transfers from the National Fund, to eliminate the various subsidies that distort market mechanisms, and to concentrate on creating systemic conditions for the country's development.

Support for sectors should rest on transparent regulation, the protection of private property, fair courts, and flawless, transparent and easy procedures for obtaining public services. Examples include the issuance of technical specifications, land plots, the signing of subsoil use contracts, and so on and so forth. By contrast, handing out money from the National Fund in the form of higher public spending and subsidies distorts market mechanisms (for example, no one knows the real cost of money in the country). It enriches particular individuals (some receive super-cheap loans worth hundreds of billions of tenge, or giant government contracts where the market could have done the job). It creates imbalances in the economy (a budget deficit, the cost of housing, the tenge exchange rate). It fosters a dependency mentality (the hope of having loans written off). And it deepens inequality in society (for example, elevated inflation has made the poor even poorer and the rich even richer).