Fadi Farra, Head of the OECD Eurasia Competitiveness Program, comments on the development trajectory for Kazakhstan, its success in attracting FDI, and new opportunities for growth.
Amply endowed with natural resources, but handicapped by its landlocked situation, Central Asia has experienced unparalleled rates of growth over the past 10 years. The exploitation of these resources and the investments that have been made, often with the help of foreign capital, provide the basis for this paradigm of growth and productivity. However, many challenges including economic diversification and private sector development hamper future growth prospects.
Abundant natural resources
The existence of oil deposits is a major factor in the distribution of wealth among the Central Asian republics. While on the one hand countries such as Kazakhstan or Turkmenistan, and to a lesser extent Uzbekistan, have major reserves of fossil fuels, on the other hand Tajikistan and Kyrgyzstan have no oil and gas reserves at all. This difference can be seen in national economic indicators. In 2009, Kazakhstan’s GDI per capita (in purchasing power parity) was more than $10,000, that is to say five times greater than that of Kyrgyzstan or Tajikistan. Besides oil and gas deposits in the Caspian Sea, Central Asia also has abundant natural resources. Gold deposits in Kyrgyzstan account for 15% of that country’s GDP; Tajikistan has significant hydro-electric potential; and Uzbekistan is one of the world’s leading exporters of cotton, while its gold deposits could potentially make it a major gold-exporting country. Kazakhstan, for its part, is richly endowed with natural resources: a major exporter of wheat and flour, the country also has large deposits of precious metals such as chromium, zinc, lead, and uranium.
What these countries have in common is their geographical location, which is both a disadvantage and at the same time a source of opportunities. It is firstly a disadvantage in the fact that the region is landlocked, has a low population density, and a difficult climate, and these tend to increase the transaction costs associated with trade, such as the costs of crossing borders (time spent in customs, possible corruption, the unpredictability of delivery dates, etc.), transport, and storage. It is secondly a source of opportunities in that Central Asia lies mid-way between Asia and Europe and could therefore serve as a transit zone and logistics platform for trade between the two continents. Overcoming the problems arising from being landlocked is key to the future success of the region. The creation of transnational transport infrastructure and the elimination of red tape at border crossings within the region call for close cooperation between the countries in the region—cooperation, which in the light of the present situation, could be improved.
Diversifying FDI flows
Since 2000, Kazakhstan has enjoyed average annual growth rates above 8%, thereby ranking it among the 10 best performing economies in the world. To date, this strong economic performance has largely been driven by the natural resources sector.
Kazakhstan alone attracts more FDI than all the other Central Asian countries combined. In 2009, foreign funding amounted to 8.2% of Kazakhstan’s GDP, with FDI flows accounting for over 140% of the total, which offset major outflows of capital in the form of bank loans. Again in 2009, 70% of all FDI flows to Kazakhstan were destined for oil and gas exploration and development, that is to say twice the level reported in the mid-1990s. In the same year, around 70% of FDI was still being provided by OECD member countries, with major investments by the US, the UK, Italy, France, and the Netherlands (the traditional headquarters of the major oil companies).
To improve the competitiveness of the non-energy sectors and attract foreign investors to the latter, Kazakhstan must overcome two obstacles. Firstly, OECD member countries have invested significantly less abroad since the beginning of the economic crisis in the second half of 2008. Secondly, OECD countries are themselves the main recipients of foreign investment, given that in 2009 they still accounted for almost 68% of all FDI flows. Kazakhstan is also competing against other high-growth emerging economies such as Russia, India, or China for the remainder, i.e. 32%, of global FDI flows.
Kazakhstan can count several obvious competitive advantages to help it meet these challenges. Labor costs in the service sector are half those in countries currently attracting a new wave of investment, such as Poland or Hungary, and slightly lower than labor costs in Russia.
In the agricultural sector, the countries can count on their vast prairies for cattle rearing and on vast expanses of arable land for crops. Kazakhstan, for example, has almost 24.5 million hectares of arable land—the 14th largest area of arable land in the world. At present, up to 3.5 million hectares of arable land—i.e. around 15% of the total arable land in the country—are not cultivated. Opportunities exist. Let’s look at the wheat sector, for example. The excellent agro-climatic conditions are highly conducive to growing very high-quality spring wheat.
Kazakhstan’s low production costs (which are, for example, half those of France for wheat, and approximately 60% of those for Ukraine and Russia) put this country in a good position to compete in international markets, particularly in view of the fact that the country can profit from its geographical location, with low shipping costs to Middle Eastern countries (which are massive wheat importers) and to the EU two or three times lower than those of other major exporters of cereals such as Australia or the US.
Several priority sectors for FDI could be targeted such as the agri-food sector (in particular wheat, beef, and dairy products), the chemical fertilizer sector, and the logistics for the latter, as well as the IT and other business services sector (ICT, consultancies, and so on). These sectors are both attractive (which includes, for example, market growth potential) and beneficial for the country (for example, through transfers of knowledge and technologies).
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