Theodore Kaye/Alamy

Kazakhstan’s Knocking

by robert looney

bob looney teaches economics at the Naval Postgraduate School in California.

Published January 22, 2020


Nursultan Nazarbayev, Kazakhstan’s first president and the last national leader to begin his rule under the Soviet Union, resigned in March 2019 after more than 30 years in power. The departure of the autocrat surprised Kazakhs and international observers alike. Nazarbayev’s constitutionally designated successor, former Senate Speaker Kassym-Jomart Tokayev, responded to his unexpected rise in fortune by praising his predecessor’s leadership and recommending that the capital be renamed in Nazarbayev’s honor.

Tokayev may have spoken too soon. In a June 2019 special election, he received just 71 percent of the vote — despite running unopposed. The apparent problem: widespread discontent with a slowing economy, pervasive government corruption and increased Chinese presence, all of which had their roots in Nazarbayev’s administration.

Nazarbayev, it should be noted, has hardly departed the political scene. But by resigning, he managed to shift public criticism to his successor while still maintaining enormous behind-the-scene power. As head of the Security Council, he retains influence over the police and military, while his honorific position as “leader of the nation” reminds Kazaks that he is still not to be trifled with. Most important, as leader of the country’s sole political party, Nazarbayev will determine the candidate (and therefore the winner) of Kazakhstan’s next presidential election, currently slated for 2020. Oddsmakers predict he will tap his controversial eldest daughter, Dariga — unless he still needs Tokayev to take the heat.

The New Singapore?

In remaining the power behind the throne, Nazarbayev followed the example of Singapore’s former prime minister, Lee Kuan Yew, whose Singapore Model for development Nazarbayev long sought to emulate. Nazarbayev’s goal was to transform Kazakhstan into a high-functioning (but still authoritarian) economy/state. And, for a while, it looked like he might succeed.

After contracting at an average annual rate of 3.8 percent in the 1990s following the collapse of the Soviet Union, oil-rich Kazakhstan’s growth rate rebounded (along with the natural resources markets) to an average annual 8.6 percent in the 2000s. By the time Nazarbayev left office, significant progress had been made in opening the economy to market mechanisms. The country rose from “repressed” to “moderately free” on the Heritage House’s Index of Economic Freedom, ranking just below Indonesia in 2019.

In other critical areas, however, Nazarbayev badly missed the mark. He focused on the timing of the Singapore Model — the development of a strong economy before political liberalization — as the key to its success. But unlike Singapore, he failed to tackle corruption or government inefficiency.

Consider, too, that because Singapore lacked mineral resources, it was never distracted from the goals of creating globally competitive manufacturing and a diversified export structure. In contrast, Kazakhstan took the path of least resistance, enjoying the petro-boom of the early 2000s and making little effort to strengthen and diversify the country’s manufacturing and agricultural sectors.

As a result, Kazakhstan remains overly dependent on hydrocarbons for both exports and government revenue, as well as on oil-dependent and sanctions-prone Russia as its main trading partner. Lower oil prices beginning in 2014 reduced Kazakhstan’s average annual growth rate to 4.5 percent for the 2010 to 2018 period, with a decline to around 3 percent forecast for 2019 to 2022.

In Singapore, Lee created a reliable and competent civil service, judiciary and police force, effective anti-corruption measures, a top-notch educational system and profitable state-run enterprises. In Kazakhstan, all are more or less lacking. Corruption, in particular, is widespread and endemic. In the World Bank’s Governance Indicators, the country’s ranking for control of corruption moved from the 15th to only the 20th percentile between 1998 and 2017 (the last year of available data).

Weak regulatory and institutional capacity makes businesses highly vulnerable to crime. Garden-variety theft is the most common, but companies are also bludgeoned by a mix of cybercrime, Mafia-style extortion and regulators with their hands out, all of which add to the cost of doing business.

Already, there are valid concerns that Kazakhstan may be falling into a “governance trap” whereby Chinese involvement undermines the none-too-robust incentives for reform, leaving the country without the foundation needed to make the leap to global economic integration.

Rather than risk his own power by challenging corruption and crime, Nazarbayev focused on infrastructure, hoping to follow Singapore’s example and transform Kazakhstan into a global transport/logistical center. But Singapore’s carefully planned infrastructure expansion benefited from the comparative advantage of the city-state’s prime maritime location, whereas Kazakhstan is largely isolated, thousands of miles from the markets of Europe and East Asia.

If Not Singapore, Maybe China?

Enter China and its Belt and Road Initiative, a multi-country infrastructure enterprise primarily aimed at expanding Chinese geopolitical influence while creating a modern-day Silk Road connecting China with Europe. As China’s western neighbor, Kazakhstan is vital to the BRI’s success and was wooed accordingly. It was the first country to sign on to the joint-venture agreement in 2013. Since then, China has been funneling billions of dollars’ worth of finance into the country to fund BRI projects.

In any event, Kazakhstan has yet to realize much from the arrangement. In the 2019 World Economic Forum’s Competitiveness Index, Kazakhstan ranked 98th for road quality and 89th for air transport services out of 144 countries. But Nazarbayev and cronies are counting on the BRI’s infrastructure expansion to increase the profitability of private investment by lowering transportation costs, thereby inducing a surge in investment that will lead to diversification.

The catch is that, with the exception of extractive industries, private investment is rarely forthcoming in emerging-market countries without complementary governance reforms. Already, there are valid concerns that Kazakhstan may be falling into a “governance trap” whereby Chinese involvement undermines the none-too-robust incentives for reform, leaving the country without the foundation needed to make the leap to global economic integration.

There are also increasing doubts as to whether Chinese investment in corruption-prone Kazakhstan will ultimately provide a better standard of living for broad segments of the population. Kazakhstan is relatively lucky in the sense that, thanks to oodles of oil and a modest population (18 million), its per capita income is relatively high — double that of nearby Mongolia in terms of purchasing power — and deep poverty is relatively rare. But faced with limited opportunities, young professionals are nonetheless increasingly choosing to emigrate, feeding what appears to be a nascent brain drain.

Chinese Colony?

Then there is the issue of the profitability of the BRI projects. Take, for example, Khorgos on the Kazakhstan/China border, where the Chinese built the largest “dry port” (i.e., rail/truck transport hub) in the world in the expectation of a massive increase in land-based Chinese exports to Europe. So far, the trade has failed to materialize, due in part to Europe’s snail-like growth over the past decade. Given that Khorgos is located at one of the most remote spots on earth, the project threatens to become a giant white elephant.

Even if traffic picks up, Kazakhstan’s only gain from the dry port and similar land links to the West may be the transit revenues. To produce broader benefits, BRI projects would need to lead to follow-on investment and industries — an increasingly unlikely outcome in light of Kazakhstan’s failure to attract foreign direct investment and China’s recent economic slowdown, which led to the cancellation of the highly anticipated BRI light rail project in Nur-Sultan, Kazakhstan’s capital.

Sinophobia has been rising in Kazakhstan, reflecting growing public concern that China will be the primary beneficiary of the BRI investments and, in time, could control large segments of the economy to the exclusion of Kazakhs. Anti-Chinese demonstrations, which began in 2016 when the Nazarbayev government proposed loosening restrictions on foreign leasing and ownership of agricultural land, are on the rise.

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In light of the growing unrest, Nazarbayev’s decision to step down as Kazakhstan’s official leader seems to have been tactically savvy, although it’s uncertain how long he’ll be able to keep his hold on successor governments. Likewise, the jury is still out on whether his gamble on the BRI as a means of diversifying and supercharging the economy will pay off.

It’s an old story in emerging market countries that manage to get on the high-income growth track. Without long-overdue governance reforms, normalization of the economy in terms of diversification and international investment is hard to pull off.

main topic: Region: Asia