Chapter 2 the analysis of the possible effects of the kazakhstan’s accession to the customs union on the country’s agricultural sector

2.1. Specifics of the economic structure for the Kazakhstan

2.1.1 The General Features of Kazakhstan’s Economy

As a Soviet republic, Kazakhstan was a major grain exporter. Meat, milk and eggs were also sold to other Soviet republics. Cotton was regionally important in south Kazakhstan and the republic’s second-largest hard currency earning export.

After independence in 1991 Kazakhstan experienced a severe transitional recession which lasted for almost all of the 1990s. Incipient recovery in 1997 was aborted by the Russian Crisis of 1998, and sustained growth only began after the large devaluation of April 1999.

Output of all agricultural products fell substantially after 1990, although wheat and cotton output were volatile around the trend. Large-scale livestock farming almost disappeared as animal stocks became concentrated on the small household plots, and meat, milk and eggs became essentially non-traded goods. Since the late 1990s the agricultural sector has rebounded, with annual growth of 6-8 percent since 1997.

Public policy towards agriculture during the 1990s was mostly passive. The government was more concerned with macroeconomic stabilization, privatization and, especially, the arrangements for exploiting the country’s oil.

Trade policy has been fairly liberal with moderate tariffs on imports and few tariff peaks or non-tariff barriers to trade in agricultural products. Kazakhstan’s WTO accession negotiations are at an advanced stage; the Draft Report of the Working Party was completed in May 2005.³²

In the late Soviet era agriculture was supported by budget subsidies, input support and market support, as well as by subsidies (such as cheap fuel and transport) which were not agriculture-specific. OECD producer support estimates for Russia and Ukraine are highly positive up to 1991 and then fall dramatically for 1992 to around zero or to negative values. A similar picture almost certainly applies to Kazakhstan as price liberalization removed the benefit of receiving key inputs at below world prices. Relative prices are difficult to identify precisely in the hyperinflation of 1992-4, but most evidence suggests that farmers’ input prices rose by at least twice as much as output prices.

During the second half of the 1990s most farmers were operating in undistorted markets. Some farmers faced locally monopsonistic buyers for their outputs, and for all producers trade costs were high, but there were no policy-driven distortions to impact significantly on market support. Subsides for agriculture were negligible between 1995 and 2000.

The livestock sector’s situation has improved dramatically since 2000 as the government has taken positive steps to end its neglect of the sector and to reverse the decline in quality which accompanied the disintegration of the large production units. Budget support has increased substantially, especially since 2003, but many items are difficult to allocate across different sub-sectors. Improved domestic demand and supply chains are also contributing to the reestablishment of Kazakhstan’s trade based on comparative advantage in milk and meat.

Future prospects for Kazakhstan’s agriculture are positive because of the solid comparative advantage for much of the country’s farming. Products which became import substitutes or non-traded goods after independence are not highly protected by artificial barriers, so with continued investment to improve supply chains and promote quality upgrades, farm revenues should continue to grow. The political economy of farm policy is characterized by continuing power of former state-farm managers and of local authorities, but Kazakhstan is a centralized state still

Kazakhstan, geographically the largest of the former Soviet republics, excluding Russia, possesses enormous fossil fuel reserves and plentiful supplies of other minerals and metals, such as uranium, copper, and zinc. Kazakhstan's industrial sector is primarily focused on the extraction and processing of these natural resources. Kazakhstan enjoyed double-digit growth in 2000-01 and 8% or more per year in 2002-07 - thanks largely to its booming energy sector but also to economic reform, good harvests, and increased foreign investment. Kazakhstan is important to world energy markets because it has significant oil and natural gas reserves. With sufficient export options, Kazakhstan could become one of the world's largest oil producers and exporters in the next decade. But Kazakhstan's strategic aspiration is to become a modern, diversified economy with a high value added and high-tech component, well integrated in to the global economy. The energy sector is viewed as a good basis to achieve this goal. The perspective of the Economy of Kazakhstan is closely connected with further integration into international economic relations, utilization of unique reserves of energy and mineral resources, vast possibilities to export industrial and agricultural products, optimum employment of country's transit potential and also with availability of highly qualified specialists in different spheres.

The main economic content of more than 10 years of independence has become transition from the central command planning to a market system. During these years, Kazakhstan has made considerable progress in implementing complex political, economic and social reforms to establish a democratic state with a market economy. While the country has not experienced political disturbances during the transition period, it has faced numerous economic, social and environmental challenges.

The first few years of Kazakhstan's independence were characterized by an economic decline (mostly due to the destabilizing force of disintegration of the Soviet Union): by 1995 real GDP dropped to 61,4% of its 1990 level. This economic deterioration exceeded the losses experienced during the Great Depression of the 1930s. The wide-ranging inflation observed in the early 1990s peaked at annual rate of up to 3000% in mid-nineties. Since 1992, Kazakhstan has actively pursued a program of economic reform designed to establish a free market economy through privatization of state enterprises and deregulation and today is generally considered to be more advanced in this respect than most other countries of the CIS. Kazakhstan remains one of the most successful reformers in the CIS, though its record is less strong when compared with more advanced transition countries of Central and Eastern Europe, and it has the strongest banking system in Central Asia and CIS. Futhermore, the EU and USA have recognized Kazakhstan (first in the CIS) as a country with market economy in 2001 and 2002 respectively. In October 2002 international rating agency Moody's upgraded Kazakhstan, thus Kazakhstan has become the first country in the CIS to reach investment grade status. Standard & Poor's in 2004 upgraded Sovereigns rating to BBB/Stable/A-3. In October 2004, Fitch upgraded Kazakhstan's local currency rating to BBB/Stable. In January 2005 the Organization for Economic Cooperation and Development (OECD) has upgraded Kazakhstan's country export risks rating, moving it from the 5th to the 4th group of risks. Kazakhstan has enjoyed impressive economic growth over the past five years, buoyed by increased oil exports, as well as by bold economic reforms, prudent fiscal policies and economic initiatives that were instituted in 1999. This has resulted in a stable level of inflation (2002 - 6.6%, 2003 - 6.8%, 2004 - 6.7%, 2005 - 6.6%), a budget surplus, a firm currency, and a decreasing unemployment rate (2003 - 8.8%, 2004 - 8.4%). After posting moderate growth of 2.7% in 1999 as a whole, Kazakhstan's real gross domestic product (GDP) rose 9.6% in 2000, 13.2% (2001), easily the country's best year of economic performance since independence, 9% in 2002, 9.1% in 2003, 9.3 in 2004 and according to The Economist Intelligent Unit Kazakhstan is within Top 10 world fastest-growing economies in 2005.

The main driver behind Kazakhstan's economic growth has been foreign investment, mainly in the country's booming oil and natural gas industries. Since independence from Soviet rule in 1991, Kazakhstan has received more than 30 bln. US$ of foreign direct investment - the highest per capita indicator in the former Eastern Bloc. Hard currency reserves of the National Bank and National Fund combined reached US$ 14.4 billion. in 2004 (growth 66.3%). In 2004 the minimum wage in comparison with 2003 grew by 32% and average wages grew by 21.4%.

At independence in 1991, Kazakhstan had a promising resource base, from its sizable hydrocarbon reserves to its well-educated workforce. More importantly, though, it had the wisdom to move quickly away from the failed policies of the past. Kazakhstan's leadership embarked on a new - transformational-course. In a little over ten years, Kazakhstan implemented a series of broad-based reforms that brought Kazakhstan from planned to market economy.

Kazakhstan undertook a process of demonopolization, privatization, debt restructuring, price liberalization, customs reform, and tax restructuring. Kazakhstan established a securities and exchange commission, liberalized trade, enacted laws on investment, established a new government procurement process, and reformed the banking system. The United States formally recognized this achievement when, in March 2002, it accorded Kazakhstan the status of a market economy, and these reforms yielded impressive results at home. The Government of Kazakhstan has privatized much of the economy, although much work needs to be done to restructure major sectors such as telecommunications. The banking sector has flourished. The financial system has been a leader in innovation, including the emergence of successful private pension funds, the establishment of a national fund to preserve oil wealth for future generations, and a budding mortgage-lending market Unemployment, while still high in Western terms, is lower than elsewhere in the region. These impressive reforms took place against a background of internal political stability and gradual advance of democratic reform and a civil society. We are heartened to see that economic reform is continuing. Introducing diversity into Kazakhstan's economy and freeing its human potential will require a huge national effort and, a renewed commitment to democratic and market reforms; and a key objective will be making this new economy open to outside investors. The United States has decided to support this effort through the Houston Initiative - a comprehensive partnership with Kazakhstan to build a modern, market-based economy, with particular emphasis on small and medium enterprises. We look forward to working with the Government of Kazakhstan, with local governments throughout the country, and especially with individual entrepreneurs to realize the full potential of Houston Initiative.

Now country's investment potential is based on minerals and raw materials. Because their exploitation creates more than a half of the gross product, the quality and extent of deposits utilization and the reproduction of raw material reserves play decisive role in the present and future of Kazakhstan. For example, it is supposed that exploitation of the oil and gas field Kashagan which is one of largest fields in the world will make Kazakhstan one of the major producers of hydrocarbons not only on the regional, but also on the international level.

Aiming at attracting foreign direct investments Kazakhstan carries out the policy of ensuring stable macroeconomic environment and realizes other measures which contribute to the improvement of investment climate in the country. The Government and the National Bank pursue the co ordinated policy directed to ensuring sustainable economic growth with low inflation rate and budget deficit not higher than it is envisaged. For the purpose of meeting current requirements and those of future generations at the account of reserve resources the National Fund has been formed in Kazakhstan in 2000 accumulating external proceeds to the budget from the activity of Kazakh and foreign enterprises in the oil sector and aiming at stabilization of state budget revenues.

All these institutions serve the further development and diversification of the economy of Kazakhstan. Thus, during these years Kazakhstan has covered a path which has not been easy, and has achieved significant results. Having created and strengthened sociopolitical stability by implementing democratic and market reforms on a steady basis, Kazakhstan has gained macroeconomic stability, formed legislation essential for conducting successful business, and realized structural reforms which, while being unpopular initially, created a firm basis and favorable environment for the accelerated development of the country in the mid and long terms.