CIC Special Briefing - Avoiding the Oil Curse: Kazakhstan and Diversification

For many countries with abundant natural resources, what was at first taken to be a blessing has turned out to be a curse. It is a striking fact that resource rich countries do not necessarily develop more rapidly than others, and that following the development of their natural resources some have entered a spiral of economic disintegration combined with political instability or civil war. Oil-rich Nigeria is massively in debt, having squandered trillions of dollars. The Democratic Republic of the Congo, which possesses massive mineral wealth, has been rent by a civil war that has claimed more than three million lives in the costliest human conflict since the Second World War. In South America, oil wealth appears to have done nothing to raise living standards in Venezuela, where more than half the population live in poverty. The over-hasty and insensitive development of natural resources has also resulted everywhere in environmental catastrophe or public health hazards on a colossal scale.

Economically, the causes of the problem are relatively easy to identify: oil or mineral wealth can produce the so-called 'Dutch disease', characterised by an increase in the exchange rate which makes imports cheaper, which in turn squeezes home-produced goods out of both foreign and domestic markets. Oil and natural gas development often monopolises investment funds and leads to the decline of other sectors, and to consequent unemployment. As a perceptive study from the Open Society Institute points out: "Economic problems also arise because the oil and natural gas industries are capital rather than labour-intensive and employ relatively few people. Thus when industries in an oil state's broader economy contract, the highly specialised and capital-intensive oil exploration and production sectors can absorb few of the laid-off workers. The result is higher unemployment, lower wages, more poverty, and increased numbers of people who are dependent upon state largesse. As in any economy where a downturn occurs, displaced workers find it difficult to be absorbed elsewhere."

As the oil revenues begin to flow during the first exciting stage of this process, there is a tendency to neglect such problems, and to use revenues to prop up failing state-run enterprises. This can divert funds from potentially viable enterprises elsewhere in the economy. All too often, funds are dispensed according to political criteria with the attendant risk of corruption. There can also be a tendency to fail to learn the lessons of other countries that have gone through a similar experience, and to ignore, or only pay lip service to outside advice. The danger is that when oil prices fall, governments will increase external debt in the expectation of an upturn, which may not materialise during the anticipated time-span.

How well has Kazakhstan coped with these problems, and how well will it rise to future challenges?

In judging the record, it needs to be borne in mind that the country's oil boom coincided with a transition from communist rule to a market economy, as well as the transition from Soviet dominion to full national independence. This tumultuous chapter in Kazakhstan's history, into which it was obliged to compress social and economic processes that have taken centuries elsewhere, also coincided with a period of instability on its borders and the heightened risk of international terrorism. This latter factor has inevitably placed constraints on the rate of progress towards a modern free market democracy, for without political stability there could be no guarantee that the country's newly-found independence would survive, or that it could attract sufficient inward investment to exploit its resources. Political and social stability, underwritten by a powerful, democratically-elected presidency, is the sine qua non of achieving all the country's goals and of living up to the high hopes of friends. The President has provided a reassuring figure of permanency against background of rapid, and sometimes bewildering, change without promoting a cult of personality.

Comparisons with countries that have a totally different historical experience are not instructive. Prior to 1991, there was one party, one voice, and one policy. Quite suddenly, after 250 years of rule under the Mongols and 150 under rule from Moscow, first under the Tsars and then under the Soviets, a free Kazakhstan took the decision to launch itself in the direction of economic and political liberty. The first of these is being approached more rapidly than the second. This is because, in the transition to liberal democracy, the latter requires a revolution in expectations, attitudes and behaviour among those who have known only top-down decision-making.

There is nothing artificial about Kazakhstan's democracy, but it remains in its infancy, as does the creation of a cohesive functioning civil society. The goals that Kazakhstan has set itself are being pursued pragmatically, but there has been no turning back. Hence the announcement, made by President Nazarbayev in his Annual Address, that a greater number of appointments are to be filled by free elections, and of new of measures to decentralise decision making and to encourage the development of what the English eighteenth century political philosopher, Edmund Burke, described as the "the little platoons" - the elements of civil society to which the citizen comes to owe his loyalty and affection.

So far, success in these areas has been sufficient to ensure that, at least so far, many of the problems experienced by oil rich states have either not materialised or have been shrewdly managed. Judged by regional standards, Kazakhstan has an enviable record of political stability and of good relations between its 100 or so ethnic groups.

Most importantly, it has not shown signs of following the pattern of explosive growth followed by equally dramatic decline familiar in oil rich states in Africa and elsewhere. After desperately difficult years as investment was switched from heavy industry to more productive forms of investment, Kazakhstan has experienced con-sistent economic growth. This has averaged almost ten per cent over the last four years, and looks set to continue. Inflation has been tamed and is currently running at around six per cent. If a society is to be judged by the prospects of its poorest members, there are grounds for quiet satisfaction if not complacency. The percentage of those living below the poverty line fell from 42 per cent in 2000 to 28 per cent in 2003, according to UN figures. In the words of The Washington Times: "… life is good and the economy is booming" (17 May 2003). GDP per head is far above the regional average.

The fact that economic growth has not been seriously damaged by periodic dips in the oil price suggests that the National Fund has exercised the stabilising influence that it was intended to achieve. Increasing oil revenues will mean that the Fund will provide an increasingly important financial bulwark in future years.

While the economy remains sensitive to major changes in the price of oil and gas, its rich reserves of other mineral resources provide for huge export potential, and therefore will limit over-dependency on oil and gas, if not from a general decline in commodity prices. In Kazakhstan there are said to be 1,200 different minerals with a value estimated at US$9 trillion. The country has a third of the world's reserves of chromium and manganese, and a quarter of the world's uranium resources, with plans to become the world's largest pro-ducer in seven years. Production is also expected to rise in copper, gold and aluminium. The Republic is the third largest producer of coal, which accounts for 60 per cent of domestic energy consumption.

Manufacturing has exhibited consistently high rates of growth - averaging more than 11.1 per cent over the four-year period 2000-2003, according to government figures. Moreover, the present programme of economic diversification - which the New Prime Minister, Daniyal Akhmetov, has made his number one priority – is producing positive results. Meanwhile, the long-awaited Land Act, which became law in June 2003, represents an important step in the privatisation of agriculture, which now looks forward to an era of growth.

The steadily expanding economic base of the country, combined with shrewd macroeconomic management, sound monetary policy and political stability, suggests that there is good reason to think that Kazakhstan can and will escape 'the oil curse'. Certainly, few of its citizens doubt for one moment that the benefits of the country's oil riches far exceed the costs.