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Indermit Gill

KAZAKHSTAN - Economy

Suddenly Better

Chief Economist of the Europe and Central Asia region, World Bank

Bio

Indermit Gill is the Chief Economist of the Europe and Central Asia Region of the World Bank. Prior to this, he was the Director of the World Development Report 2009: Reshaping Economic Geography. He joined the World Bank in 1993 and has held various positions. He was the sector manager in the Poverty Reduction and Economic Management Unit in the East Asia and Pacific Regional Office, where he was also economic adviser to the chief economist. Previously, he had been the economic adviser to the vice president of the Poverty Reduction and Economic Management Unit.

If one had to summarize Kazakhstan’s economic prospects in two words, they would be: “suddenly better.” Why suddenly, and why better? Because Kazakhstan is suddenly a stronger economy, and Central […]

If one had to summarize Kazakhstan’s economic prospects in two words, they would be: “suddenly better.”

Why suddenly, and why better? Because Kazakhstan is suddenly a stronger economy, and Central Asia is suddenly a better neighborhood.

To see why, go back to the year 2005. Global GDP was $37 trillion; $27 trillion of this was in advanced economies and about $10 trillion in developing countries. Five years before that, in 2000, global GDP was $32 trillion, and three-quarters of it was in advanced economies. You do not have to be a geographer to know that there are no advanced economies near Kazakhstan. It pays to be close to countries that are doing well, but the countries of Central Asia were far away from where much of the world’s economic activity was concentrated. Central Asia was not a very good neighborhood 10 years ago.

In 2005, something remarkable happened. Global GDP increased by $1.3 trillion, but that had happened before. For the first time, more than half of this increase in global economic activity came from developing countries. Among these developing countries were China, India, Russia, South Korea and Turkey—the big neighbors for Kazakhstan. Together, these five countries had almost 10% of world GDP in 2005. Today, it may be close to twice that share.

When Kazakhstan became independent in 1990, assume that output was 100 in each of these countries. Today, it is 800 in China, 400 in India, 250 in South Korea, 200 in Turkey, and once again 100 in Russia. One-fifth of the world’s GDP has come closer—much closer—to Astana. And world GDP is much bigger now. In 2011, it was $42 trillion, up by $5 trillion in real terms since 2005.

To be sure, developing countries are still just one-third of global GDP, so Europe, the US, and Japan still matter a lot. But China, India, Russia, South Korea, and Turkey are growing rapidly, making the whole world dynamic, and making the Central Asian neighborhood better. This year, developing countries will add more than $1 trillion to global output. And a lot of this will be close to Kazakhstan.

These are big changes, in just six short years. For Kazakhstan, things are suddenly better.

Making the Most

These changes are resulting in a broadening of the sources of global economic growth and innovation beyond North America and Europe, and the creation of new poles of growth in Asia. As incredible as the changes in the former Soviet Union were over the last 20 years, the next 20 may bring even bigger changes.

What are the economic prospects for Kazakhstan the next decade? This is difficult to predict, because so much depends on what businesses and policymakers do between now and then, and there will be many surprises. But it is likely that the big trends will continue for some years. Over the next decade or so, developing countries are expected to grow by about 4.5% each year. Developed countries will grow at less than half that pace. How can Kazakhstan be a part of this story?

In two words: investment and trade. Kazakhstan has done well to protect investors and to make it easier to trade and to invest. It can do even better. Perhaps the two biggest parts of the strategy are better regulations for traders and investors, and more transparent government. World Bank assessments of policies and institutions rate Kazakhstan highly in terms of macro stability and budgetary processes. But they are not so favorable when it comes to what we call structural policies—those that govern trade, finance, and private enterprise. They are even less favorable when it comes to the institutions needed to ensure transparent policymaking. Consider the following:

•In terms of per capita income, Kazakhstan was ranked 66th out of 180 countries in the world by the IMF in 2011, almost in the top third of all economies.

•In terms of economic freedom, Kazakhstan was ranked 78th out of 179 countries by the Heritage Foundation in 2011, just barely in the top half of all countries.

•In terms of transparency and corruption perceptions, Kazakhstan was ranked 105th out of 178 countries, well inside the lower half of all nations.

So, as we look at income levels to economic freedoms to corruption perceptions, Kazakhstan slips further and further down.

Diversify, Diversify, Diversify

The case of Sweden is especially instructive, and tells us of the importance of three ingredients. The first is agriculture. Sweden changed the structure of land ownership to allow for consolidated farms. As a matter of policy, new production techniques were introduced. Within 20 years between 1830 and 1850, Sweden went from being a big importer of food grains to being a big exporter. The second is education. Like the institutional changes in agriculture, education was reformed as a matter of policy. Schools, technical institutes, and universities were all expanded. By 1850, Sweden had the core of a modern engineering industry. The third is “protoindustry”—simple manufacturing, mining, and forestry—though this was not the result of explicit industrial policy. It resulted in Sweden exporting processed food and wood products, and simple industrial products like iron ore.

Goal: Emulation by Neighbors, and the Admiration of Others

Why is this so important? It is important because Kazakhstan has the potential to be an inspiration to its neighbors in Eurasia and to others around the world. It is important because these are the visions and aspirations of thoughtful people in successful economies in the world. I am reminded of an essay in a book called East Asian Visions, by Singapore’s leading ambassador and academic, Professor Tommy Koh, who writes that his “dream is that Asia will be admired by the world not only for [its] prosperity and modernity, but also for [its] soft power. Three of the obstacles that we have to overcome in order to achieve my dream are corruption, growing social inequity, and environmental neglect. We have to solve these and other short-comings if we want the West to treat us as equals and if we want the rest of the non-Western world to look to Asia for inspiration.”

At the World Bank, we share this vision of a world in which Kazakhstan is emulated and admired by other countries. And while this article is about Kazakhstan, its conclusions hold as much or even more for other countries in the neighborhood such as Azerbaijan, Armenia, Russia, and Uzbekistan.

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