AidforTradeNeedsAssessmentKazakhstan TradeandHumanDevelopment

July2010
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval systemortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying, recordingorotherwise,withoutpriorpermissions. ThisisanindependentpublicationcommissionedbyUNDP.Theviewsexpressedinthis publicationarethoseoftheauthor(s)anddonotnecessarilyrepresentthoseoftheUnited Nations,includingUNDP,ortheirMemberStates.

ISBN978-92-95092-19-8 CopyrightUNDP2010 Allrightsreserved UNDPRegionalBureauforEuropeandtheCommonwealthofIndependentStates ManufacturedinKazakhstan

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The Aid for Trade agenda is one of the most important development-related
outcomes of the 2005 WTO Ministerial Conference in Hong Kong. It targets developingcountriesthroughstrengtheningtheirproductivecapacities,trade-related infrastructuresandtheabilitytocompeteinregionalandglobalmarkets.T radeplays an important role in development, although the relationship between trade and humandevelopmentisnotautomatic.Inordertobeinclusive,tradehastobesetin ahumandevelopmentframework.Itneedstobeconceivedasatooltoenlargethe abilitiesandchoicesofpeople.

TheAidforT radeinitiativecoversthefollowingcategories:

Tradepoliciesandregulations; Tradedevelopment;

Developingproductivecapacities;
Traderelatedadjustment,and;

Othertrade-relatedneeds.

UNDPsregional AidforTradeproject

Wider Europe: Aid for T rade for Central

Asia,SouthCaucasusandWesternCIS ,financedinthecontextofFinlandsWider

Europe Initiative, focuses on the identification of capacity gaps and technical assistanceneedsbothatthenationalandsub-regionallevelinCentralAsia,South CaucasusandWesternCISandsupporttotheeconomicdevelopmentintheareas locatedalongtheselectedtransportcorridors,helpingsmallentrepreneurstogain fromnewtradeopportunities.

The

WiderEuropeInitiative

is Finlands harmonised regional development

f r a m e w o r k . T h e i n i t i a t i ve t a rg e t s t h e f o l l o w i n g t h e m e s : s e c u r i t y, t r a d e a n d development, information society development, energy and the environment and socialsustainability .Theframeworkincludesthreeregionalcooperationprogrammes -inEasternEurope(Belarus,MoldovaandUkraine),theSouthCaucasus(Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan, T ajikistan, T urkmenistan and Uzbekistan).

TheNeedsAssessmentsproducedundertheAidforT radeprojectformpartofa long-termvisionofdevelopingtradecapacities,whichwillbenefithumandevelopment intheregion.Therecommendationspresentedareexpectedtoconstitutethebasis for a second phase (2011 2013), focusing on the implementation of the recommendations developed in the national and regional Needs Assessments.

Team for the preparation of the Publication Authors

RaushanSembayeva GulzhaziraIshmukhamedova Advisory Group

Zhanar Aitzhanova Kenzhegali Sagadiyev Jacek Cukrowski StelianaNedera

Peer Group
BotagozBuralkieva LiliyaMussina MeirzhanMaikenov NurgaishaSakhipova
Editors
KenCharman

Acknowledgment
This research Kazakhstan: The Impact of Trade Policy on Human Development hasbenefittedfromvaluableinputsreceivedfromrepresentativesoftheMajilisof theParliamentoftheRK,MinistryofEconomicDevelopmentandTradeoftheRK, Agency of the Re for Statistics, Ministry of Agriculture of the RK, KAZNEX Export Development and Promotion Corporation JSC, Ministry of Industry and New TechnologiesoftheRKandKazAgroNationalManagingHoldingJSC.

TheauthorsexpresstheirsinceregratitudeforassistinginthisprojectinKazakhstan andprovidingvaluablefeedbackduringtheresearchto:Mr.JacekCukrowski,Head ofPovertyReductionPracticeforEuropeandCIS,UNDPBratislavaRegionalCentre;

Mr.MarioApostolov ,RegionalSPECAAdviser,UNEconomicCommissionforEurope; Mr. Balazs Horvath, Practice Leader, UNDP Regional Bureau for Europe and the CIS, Ms. Steliana Nedera, UNDP Resident Representative in Kazakhstan a.i., and Ms. Botagoz Buralkieva, Projects Coordinator , UNDP Kazakhstan.

The authors express their particular gratitude to the management of the Majilis of the Parliament of the RK, Mr. Kenzhegali Sagadiyev , Member of the Environment andNatureUseCommitteeundertheMajilisoftheParliamentoftheRK,Chairman of the Economic Diversification Board under the Nur Otan Fraction in the Majilis of theParliamentoftheRK;managementandexpertsofKAZNEXExportDevelopment and Promotion Corporation JSC of the Ministry of Industry and New T echnologies of the RK, Mr. Meirzhan Maikenov, Deputy Chairman of the Board; Mr. Sayat K u r m a n g a l i ye v, e x p e r t ; a n d t o K a z A g ro N a t i o n a l M a n a g i n g H o l d i n g J S C representatives, Ms. Liliya Mussina, Deputy Chairperson, Mr. Karim Arginbayev , Director of Strategy, Corporate Development and International Cooperation Department, and Mr. Berik Mabiyev, Deputy Director of Strategy, Corporate DevelopmentandInternationalCooperationDepartment,Ms.NurgaishaSakhipova, the First Deputy Director of the National Intellectual Property Institute, who took an active part in the preparation of this research and helped to identify AfT proposals forpotentialnational-leveldonorintervention.

TheauthorsextendsspecialthankstotheGovernmentofFinland,whosegenerous contributionsinthecontextofthe

CaucasusandWesternCIS

WiderEurope:AidforTradeforCentralAsia,South

initiative made this publication possible.

Contents
Acronymsandabbreviations Foreword
8 10 11 11 12 14 17 18 19

SECTIONI.AMACROECONOMICSITUATION
1.1.KazakhstansEconomicGrowthIndicators 1.2.Employment,PovertyandIncomeDistributionLevels 1.3.AnalysisofTradeDevelopmentduringEconomicReformsand AccessiontotheWorldTradeOrganisation 1.4.DevelopmentofServices,InvestmentPoliciesandtheImpactof ForeignCapitalontheEconomicDevelopmentofKazakhstan 1.5.InvestmentPoliciesandtheImpactofForeignCapitalon EconomicDevelopmentofKazakhstan 1.6.TheImpactoftheGlobalFinancialCrisisonKazakhstansEconomy

SectionIITRADEPOLICYDEVELOPMENTPROSPECTSAND IMPACTONECONOMICGROWTHANDHUMAN DEVELOPMENT

2.1.RegionalTradeDevelopment(EurAsEC,CU) AccessionoftheRepublicofKazakhstantotheWorldTrade Organisation:AssessmentofEconomicImplications 2.2.ProspectsfortheDevelopmentofExport-OrientedandImportSubstitutingIndustries 2.3.TradeandIndustrialPolicyHarmonisationAreas 2.4.SWOT-Analysis

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24 30 32 33 35

SECTIONIII.IMPACTOFAGRICULTURALTRADEPOLICY LIBERALISATIONONHUMANDEVELOPMENT
3.1.AgribusinessinKazakhstan:Peculiarities,CurrentStatusand DevelopmentTrends,ImpactofGlobalFoodandFinancial CrisesonAgribusiness. 3.2.PeculiaritiesofRuralHumanDevelopment 3.3.CompetitivenessofAgriculturalandFoodProducts 3.4.AgriculturalTradePolicyReformsintheContextoftheRepublics AccessiontotheWTOanditsImpactonHumanDevelopment
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35 43 46 49

3.5.SWOT-Analysis

53 56

SECTIONIV.NATIONALPOLICYPRIORITIESINDISTRIBUTION SERVICESDEVELOPMENT
4.1.TheRoleofDistributionServicesintheNationalEconomyand PopulationEmployment.TheImpactoftheGlobalFinancialCrisis ontheDistributionServicesSector 4.2.TheDevelopmentandLiberalisationofWholesaleandRetailTrade 4.3.OutlookforEfficientDistributionServicesDevelopment 4.4.SWOT-Analysis

56 60 61 63 64 68 72 79 80

SECTIONV.CONCLUSIONSANDPROPOSALS ACTIONMATRIX DONORAIDPROJECTS ANNEXES SECTIONVI.REFERENCES

ACRONYMS
ABAgribusiness ACC AgrarianCreditCorporation AfT UnitedNationsDevelopmentProgrammesAidforTradeInitiative ADB AsianDevelopmentBank AMS Aggregatemeasureofsupport BRICBrazil,Russia,India,China CB CentralBank CC ChamberofCommerce CCL Commoditycodelisting CCT CommonCustomsTariff CIF Cost,insurance,freight CIP CommitteeonIntellectualPropertyRights CIS CommonwealthofIndependentStates CPI Consumerpriceindex CU CustomsUnion EBRDEuropeanBankforReconstructionandDevelopment ECA ExportCreditAgency EU EuropeanUnion EurAsECEurasianEconomicCommunity FAO UnitedNationsFoodandAgricultureOrganisation FDI ForeignDirectInvestment FEA Foreigneconomicactivities FEZ FreeEconomicZone FMSA(SeeRKFMSA) FOB Freeonboard GATTGeneralAgreementonTariffsandTrade GCT GeneralCustomsTariff GDP Grossdomesticproduct GNP Grossnationalproduct HEI Highereducationinstitution HS Harmonisedsystem IDL Internationaldivisionoflabour ISO InternationalStandardisationOrganisation KZT KazakhstanTenge LE Legalentity NIPI NationalIntellectualPropertyInstitute POS PointofSale R&D Researchanddevelopment RFCARA JSCRatingAgencyofRegionalFinancialCentreofAlmaty RK RepublicofKazakhstan RKFMSA AgencyoftheRepublicofKazakhstanonRegulationand SupervisionoftheFinancialMarketandFinancialOrganisations RKMEDT MinistryofEconomicDevelopmentandTradeoftheRepublic ofKazakhstan RKMINT MinistryofIndustryandNewTechnologiesoftheRepublicofKazakhstan RKMJ MinistryofJusticeoftheRepublicofKazakhstan SAP 2003-2005StateAgri-foodProgrammeoftheRepublicofKazakhstan SBS Smallbusinesssector
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SCC StateCustomsCommittee SFTC StateForeignTradeCompanies SMB SmallandMediumSizedBusiness SML Subsistenceminimumlevel SPECA SpecialProgrammeforEconomiesofCentralAsia STB SecondTierBanks SWOT StrengthsWeaknessesOpportunitiesThreats TNC Transnationalcorporation UNCTAD UnitedNationsConferenceonTradeandDevelopment UNDP UnitedNationsDevelopmentProgramme WHOWorldHealthOrganisation WTO WorldTradeOrganisation

Foreword Anincreasingnumberofdevelopingcountriesgloballyaretryingtoimprovetheir understanding of the impact of the growth and liberalisation of trade on human development by exploring interrelations in the regulation of macroeconomic indicators,industrial,tradeandinstitutionaldevelopment. This research Kazakhstan: The Impact of Trade Policy on Human Development

wascompiledwithintheframeworkoftheUnitedNationsDevelopmentProgrammes AidforTrade(AfT)InitiativeinKazakhstan.TheoverallaimoftheAfTInitiativeisto strengtheneconomicgrowthinKazakhstanbypromotingtradeandenhancingthe countrys competitiveness. The main objectives of the project are to improve identificationandimplementationofpro-poortradereforms;developmeasuresaimed tobuildthecountrystradepotentialbyidentifyingandcuringshortcomingsimpacting ondevelopment;andidentifyKazakhstansnationalandregionalprioritiesinthe tradefacilitationsystemwithaspecialfocusonchallengesarisingduringthecrisis periodandprospectsfollowingtheendoftheglobaleconomiccrisis. This is a research report on the macroeconomic situation of the Republic of Kazakhstan;prospectsforthedevelopmentoftradepoliciesandtheirimpacton economicgrowthandhumandevelopment;theimpactofagriculturaltradepolicy liberalisationonhumandevelopmentandnationalpolicyprioritiesinthedevelopment ofdistributionservices. Basedonthefindingsoftheresearchundertaken,thispaperpresentsAfTproposals for potential donor intervention at the national level and recommendations on challengesintheregulationofKazakhstanstradeactivitiestoimprovehuman developmentgainsfromtrade. Thispaperisintendedtobeofpracticaluseintheareaoftradedevelopment facilitationforexpertsessionsandSPECAministerialmeetings.

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SECTION I. MACROECONOMIC SITUATION

1.1. Kazakhstans Economic Growth Indicators.
exportsandgrowingindustrialandagriculturaloutput. In2008,realGDPwas103.3%and203.2%comparedto2007and2000respectively , whichmeansthatthecountrysGDPdoubling,targetedfor2008wasachievedtwo years ahead of schedule (T able 1.1). The years 2000-2007 saw high and stable economic growth of the Republic of Kazakhstan. Key economic growth drivers included foreign capital inflows, high world prices of oil and other

Real GDP Changes in Kazakhstan, 2000 - 2008

Source:compiledbytheauthorsbasedonthedataoftheRKStatisticsAgencyand WorldDevelopmentDataBase. In2007,realeconomicgrowthincurrentpricesreached8.5%,a110.7%dropfrom 2006.In2008,theglobalfinancialandfoodcrisespushedRKGDPgrowthdownto 103.3%. InJanuary-September,2009,afurtherdropinRKGDPby2.2%resultedfromfalling industrial,trade,transport,constructionandfinancialsectoroutputs,withcommodity andserviceoutputshrinkingby1.7%and2.8%respectively.TheGDPshareof commoditieshasincreasedto42.3%,withthatofservicesdecreasingto56.4%. TheRKNationalBankestimatesGDPend-usefigurestodropby3%fromJanuary toJune2009.Finalconsumptionhasgrownby0.9%,withgrosssavingsdecreasing by1.8%. The drop in final consumption had to do with a slowdown in household and governmentconsumptiongrowth.Thedecreaseingrosssavingshadtodowitha reductioninfixedcapitalformationby17.6percent. Year-on-yearinflation
ratewas5.8percent(9.5percentinDecember2008).Since thebeginningof2009,priceshavegrownby5.6percent(9.2percentin2008). In November , the inflation rate was 0.5 percent (0.4 percent in November 2008). Pricesoffood,non-foodproductsandpaidservicesgrewby0.2,0.8and0.5percent respectively .Thus,aslowdowningrowthofpricesoffoodandpaidservicesfacilitated theslowdownininflationinNovember. Railway passenger transport, healthcare, education and cultural services have demonstrated growth in prices by 1.0, 0.9, 0.7 and 0.3 percent respectively . As far aspublicutilitiesareconcerned,powerandhotwatertariffsrecordedanincreaseof 2.7 and 1.1 percent respectively . At the same time, prices of gas transmitted via distributionnetworksdroppedby0.5percent. During the period January-November , 2009, investment fell by 2.3 percent, with

fundsprimarilyinvestedintotransportandcommunications,industry,healthcareand socialservices.Lackofown-fundsandborrowingrestrainsinvestmentgrowth. AnincreaseinFDIand,accordingly,inproductionofoilandgascondensatepushed the oil and gas share in the countrys GDP upwards. In particular, in 1998-2008 it increasedby2.4times,reaching18.7percentin2008(T able1.2).Theshareofthe

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oilandgassectorinthecountrysGDPexpandedto22.6percentduringthefirstsix monthsof2008anddroppedto16.2percentduringthefirstsixmonthsof2009. Table 1.2 GDP Breakdown, Republic of Kazakhstan, 1998, 2007-2009 (%)

Source : c o m p i l e d b y t h e a u t h o r s b a s e d o n R K S t a t i s t i c s A g e n c y s d a t a .
I n 2 0 0 8 , i n d u s t r y a c c o u n t e d f o r 3 2 . 2 p e rc e n t o f t h e R K G D P , u p f ro m 2 4 . 4 percentin1998;theshareofservicesreached60percentinthefirsthalf o f 2 0 0 9 , w i t h t h e s h a r e o f c o n s t r u c t i o n i n c r e a s i n g f r o m 4 . 9 p e r c e n t i n 1 9 9 8 to 8.1 percent in 2008 and transportation dropping from 12.3 percent in 1998to8.5percentin2008.Growingworldhydrocarbonpricesdroveoil c o m p a n i e s t o i n c r e a s e p r o d u c t i o n s i n c e t h e m a i n s h a r e o f o i l i s e x p o r t e d . Intotalexports,theshareofoilandgascondensatereached63percent, having increased in value terms by 22 times over the past 15 years. As a whole,over85percentofoilproducedinthecountryisexported. A major part of Kazakhstani oil exports goes to the European Union, CIS a n d C h i n a , w i t h t h e i r s h a re g ro w i n g s t e a d i l y. I n 1 9 9 5 , t h e C I S c o u n t r i e s accounted for 44.2 percent of the total value of hydrocarbon exports c o m p a re d t o 1 9 . 0 p e rc e n t i n 2 0 0 0 a n d 5 p e rc e n t n o w.

1.2 Employment, Poverty and Income Distribution Levels

GDP per capita was US$ 6,771.6 in 2007 and reached US$ 8,513.5 in 2008. InNovember2009,unemploymentinKazakhstanroseto6.5percent,with thenumberofunemployedestimatedat548,500inNovember2009. BytheendofNovember,79,700peoplewereofficiallyregisteredwiththe employmentbodiesoftheMinistryofLabourandSocialProtectionofthe PopulationoftheRepublicofKazakhstan.Registeredunemployedpeople accounted for 0.9 percent of the economically active population, a 0.2 percentagepointincreasefromthepreviousyear. In November, the Kazakh economy was estimated to employ 7.9 million people,anincreaseof15,700or0.2%fromthesameperiodpreviousyear. Duringthesaidperiodtherewereatotalof5.2millionemployees(66.2% oftheentireemployedpopulation). At the same time, the social sector remains the most vulnerable area of theKazakheconomy.WhencomparedtotheCentralAsiancountries,high realincomesarenotanobjectiveindicatorofthestatusandsolvencyof
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population.Thecountryexperiencesdramaticwagedifferencesbysectors and regions. Wages and incomes of Kazakhstani citizens are growing slowly. In 1998-2005, nominal average monthly wages increased in the countryfromUS$123.7to256.6,i.e.by2.1times(Table1.3). Table 1.3

Monthly Average Nominal Wages per Worker in Kazakhstan by Sector, 1998-2006

(KZT/USD)

Note:*dataisprovidedforDecember2006; top-rownumbersareinKZT,bottom-rownumbers(inbold) areinUSD. Source:RKStatisticsAgency.

Theshareofthepopulationwithincomesbelowthesubsistenceminimum remains high, at over 30 percent, i.e. one third of the entire population. However,followingrecalculationsusingthenewsubsistenceminimumlevel (SML) assessment procedure effective since 1 January 2006, the share of population with incomes below subsistence minimum became 12.1 percentin2008(Annex1). InAugust2009,theSMLincreasedby4.8percentfromthepreviousmonth and amounted to KZT 13,568, with food accounting for KZT 8,141 and non-food products and paid services accounting for 5,427 KZT of this amount,asreportedbytheRKStatisticsAgency. In August, the SML amounted to KZT 12,001 for children under 13 years of age, KZT 16,837 and KZT 12,898 for boys and girls aged 14-17, KZT 15,958and12,661fortheworking-agepopulationover18yearsofage, includingmenandwomen;KZT12,492forpensionersandelderlypersons. The trend of importing considerable amounts of non-food products still remains, which has a negative impact on inflation. Yet another factor impacting on the inflation growth dynamics is high prices for services, which have increased by 4.7 times over the past 10 years (Table 1.4). AccordingtotheRKStatisticsAgencyinJanuary2007pricesofallgoods andserviceshavegrownby287%comparedto1995.
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Change in Prices of Consumer Goods and Services in Kazakhstan 2000-2005

Table 1.4

(%, December 1995 = 100)

Source:RKStatisticsAgency. Kazakhstan has considerable regional disproportions in terms of incomes and differencesinpricelevels,which,asawhole,impactonthepatternofcashexpenses ofthepopulationasaconcentratedexpressionofconsumption.Forexample,the minimumsetofgoodsandservicesinAstanaandAlmatyisalmostoneandahalf timesmoreexpensivethaninthepoorestregions(Source:Analiticalmaterialfrom thewebsiteDumaem.ru).
Theinflationratemeasuredinallcountrieswiththehelpoftheconsumerpriceindex (CPI)doesnotreflecttherealcostoflivinginthecountry.Thishastodowiththefact thatCPIdoesnotreflectariseinrealestateprices,anessentialfactorforKazakhstan, whichhasexperiencedaconstructionboomandskyrocketingrealestatepricesin the past few years. Therefore, the real cost of living index is considerably higher since in 2006 alone, housing market prices in Kazakhstan grew by 1.3-1.7
times(withthesteepestgrowth,by172percent,recordedinAlmaty).

Allthesefactorshavehadanegativeimpactonlabourproductivityinthecountry andthelevelofprofessionalismandsocialprotectionofworkingpopulation.Thus, thenationaleconomyisstilldevelopingprimarilyonanextensivebasis.

1.3 Analysis of Trade Development during Economic Reforms and Accession to the World Trade Organisation
ForeigneconomicpoliciespursuedbytheRepublicofKazakhstanimmediatelyafter itshasbeendeclaredanindependentstateareprimarilygearedtowardsagradual liberalizationofforeigneconomicactivitiesandopennessofthedomesticeconomy intoto. Worldpracticesdemonstratethatanopenstateofeconomymultipliesopportunities forusingexternalfactorstogoodadvantageonthewayofdevelopmentinvigoration. This,however,impliesthatthenationaleconomyshouldwidelyapplystate-of-theartforeigntechnologies,newgenerationsofmachineryandequipment,advanced management experience, raise additional funds and possibly join international productioncooperation,whichhasfailedtofinditswaytotheKazakheconomy. In 1994-1995, foreign trade experienced considerable liberalisation including cancelled export quotas, a shortened list of licensed products, cancelled export customsduties,customsandtaxprivilegesandamonopolyof13SFTCengagingin strategiccommodityoperations.InAugust1995,therequirementtosurrender50% ofexportgainswascancelled. As a result of the countrys foreign economic policies, the trade balance has considerablyimproved.
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Atthesametime,improvedopennessbringsnotonlybenefits,butalsoposescertain threats, especially for economies in transition. This gives rise to various external risks such as the deeper dependence of certain sectors on the global market situation,tradeandfinancialpoliciesofbothindustrialisedcountriesandkeytrade partners, the squeezing out of national commodity manufacturers by foreign competitors,etc.Itisalsoobviousthatevenpartialisolationfromforeignmarkets canentailnegativeconsequences.Exporterscanlosetheirsalesmarkets,which canbringaboutadeclineinutilisationofproductioncapacities,and,hence,employee displacementanddecliningcompetitivenessofdomesticcommodities. The Asian financial crisis, August 1998 events in Russia, the global economic slowdownanddecliningpricesofoilandothersenergyresourceshavehighlighted Kazakhstansconsiderabledependenceonexternalfactors. Thus, positive trade balance policies pursued at that time are an example of competing macroeconomic policy goals. Such policies were correct from the perspectiveofavoidanceofalargeforeigndebtburden,buthadanegativeimpact as far as investment strengthening through large-scale imports of equipment is concerned.Atthesametime,thebalanceoftradeturnedouttobenegativedueto aconsiderableturnoverofnon-organisedtradeprimarilyaccountedforbyunofficial imports.Theshareofcarsandequipmentdidnotexceed15-16%ofallimports(in FOBprices). Inthiscontext,focusonopennessalonecouldnotremaintheonlydecisiveareaof thecountrysforeigneconomicpolicies. ForeigneconomicregulationmeasuresrecentlyemphasisedbytheGovernmentof Kazakhstan included safeguard measures to protect national production against adverseimpactsfromtheoutside,i.e.externalrisks.Therefore,ofparticularrelevance istheanalysisofthestateoftheglobaleconomy,inparticular,thatofKazakhstans keytradepartnersincludingCentralAsiaeconomies. An upward trend in average export prices on the back of relative stabilisation of averageimportpricesdrovetradeconditionstoimproveuntil2008andalloweda considerablepositivebalanceoftrade,almostdoubletothatin2007,tobeachieved (Table1.5).

RK Foreign Trade Indicators, 2007 - 2009

Table 1.5

Source:compiledbytheauthorsbasedonthedataoftheNationalBankofthe RepublicofKazakhstan In2009,exportsexperiencedstrongfluctuationsandareprojectedtodeclinefurther. Inthethirdquarterof2009(vs.Q3-2008)EUGDPfelldownby4.3percent,CIS GDPisestimatedtohavedecreasedonaverageby9percentduringtheperiod

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January-September,withChinaalonerecordingGDPgrowthby7.7percentinthe period January-September. Declining foreign demand has caused Kazakhstans foreigntradeturnoverwithCISandothercountriestofallby36.2and40.8percent duringtheperiodJanuary-October2009respectively. A substantial increase in export flows will be impeded by the ongoing global economicrecession,whichaccordingtotheanalystsfromtheUNConference on Trade and Development (UNCTAD) results, in a majority of developing countries,fromvaryingfactorssuchastheirinitialcurrentaccountandnetforeign asset positions, degree of exposure to private international capital flows, composition and direction of international trade in manufactures and services, dependenceonprimarycommodityexportsandinflowsofmigrantsremittances At the same time, despite a notable export- import imbalance domestic manufacturers depend heavily on external factors, as seen from an essential reductionintherangeofexportcommodities,changesintheirpatternandprice factorinstability. At this stage, competitiveness of the national economy is only secured by abundantnaturalresourcesandcheaplabour,suchadvantages,however,being temporaryones. Of the entire range of products manufactured in Kazakhstan, foreign markets haveademandmainlyforprimaryresources,whichmaythreatenthecountrys economywithfurtherstructuralshiftsandastrongerindustrialsectorbiastowards extraction of non-renewable energy and mineral resources due to large investmentinflowscomingintotheoilandgassector. Mineralsectorsareunderastronginfluenceofglobalisationandpoliciespursued bymultinationalcorporations,and,asconsequence,thecountryseconomyis notfullyprotectedfromthenegativeimpactofexternalfactors. Inthiscontext,theprospectsofstructuralreformsinthenationaleconomyare fadingtoacertainextent,withitsdependenceontheworldmarketgrowing.At thesametime,thereisapossibilitythatcapitalcanmigratefromthedomestic market. At present one can state that the country has put in place a market economy basedonprivateownershipandfreecompetition.Thecountryhasestablished marketeconomyinstitutions,withabout85percentofthegrossdomesticproduct comingfromtheprivatesector.Moreover,theUSAhasrecognisedKazakhstan as a market economy, which also testifies to openness of its economy and liberalisation of foreign trade policies. Negotiations with the European Union regardingthesamematterwillfinishsoon. Contemporary world development is dominated by globalised economic processes,enhancedinternationalcompetition,accelerateddevelopmentofhigh and information technologies designed to yield technology- and knowledgeintensiveoutput.Inthiscontext,Kazakhstanintendstodevelopcleanproduction, to keep and develop core enterprises, protect the labour market, step up its policiestosecureemployment,reducepovertyandrestructureenergy-,labourandresource-intensiveplants. AsprescribedbytheDecreeofthePresidentoftheRepublicofKazakhstanNo. 922dd.February12010OntheStrategicPlanforDevelopmentoftheRepublic of Kazakhstan till 2020, the forthcoming decade will see the Government of Kazakhstanfocusingonfivekeyareas:preparationforpost-crisisdevelopment; accelerated economic diversification; investment into the future; services for

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citizens; ensuring inter-ethnic concord, security and stability of international relations.

1.4 Development of Services, Investment Policies and the Impact of Foreign Capital on the Economic Development of Kazakhstan

Theservicessectorremainsoneoffastest-growingsectorsandwillgarnerincreasing attentioninthefuture.Since1990,theshareofservicesinGDPhasbeengrowing gradually,havingpeakedinthefirsthalfof2009at60percentandaveragingover 50percentoftheGDPinthepastdecade. At the same time, however, the services balance deficit emerging in 1994 and promptlyescalatingoverthepastyearsfrom2000to2009hasweighednegatively ontheservicesector(Table1.6).

Table 1.6

Balance of International Services and Investment Income (USD million).

* Source:compiledbytheauthorsbasedonthedataoftheNationalBankofthe

RepublicofKazakhstan(RKBalanceofPayments).

Despiteservicesexportgrowth(123%)slightlyoutstrippingthatofimports(94.5%) in2008,thenegativebalancestoodatUS$6,615.7millionandUS$4,301.5million over9monthsof2009. Asfarastradeinservicesisconcerned,foreigndirectinvestment(FDI)enterprises accountformorethan90%ofturnoverofarchitectural,constructionanddifferent professionalservices. Foreignsuppliersprovideservicesinsuchareasastransport(sea,airandrailway), geologicalprospecting,productcertification,insurance,legalandotherconsulting services,computerdataprocessingandtechnicalservices. Aslowdowninservicedevelopmentreflectsalowernumberofservicesectorswhere Kazakhstan had had a positive balance in the past years. Whereas in 2003 Kazakhstanwasanetexporterofcargopipelinetransport,auxiliarytransportservices, accounting,audit,advertising,marketingandresearchservices,in2008thislist wasreducedtoonetypeofservice,publicservices,withapositivebalancefor2008 beingUS$242million;in2009twotypesofservicesboastedapositivetradebalance, transportservicesandpublicservices,withapositivebalanceofUS$282million andUS$290millionrespectively,butapparentlypositivebalanceindicatorsinthese servicesectorsarestillquitelow.

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Analysisofserviceexportsandimportsonanationalandregionalscalehasshown thatthenegativeservicetradebalancetoagreaterextenthastodowiththeimport ofservicesfromnon-CIScountries. Against this background, Kazakhstans recurrent and progressing 15-year-long servicestradebalancedeficitis,firstofall,themaineconomicfactornegatingthe positivecommoditytradebalance,and,secondly,reflectstheexistingintegrationof theservicesectorsintotheglobaleconomyduetotheirlowcompetitivenessand emergingnature.Atthemoment,Kazakhstanisanabsolutenetimporterina

significantnumberofservicesectors.

At the same time, the service sector statistics base is still being improved to adequately reflect service development trends, and service sector regulation measures are being determined to effectively balance the presence of foreign servicesprovidersinparticulardomesticservicesectors.Allofthesetakentogether makeitverydifficulttodetermineclearcutcriteriaoftheirfurtherliberalisationandfor Kazakhstantocommittofurtherliberalisationoftheservicesector. Inthiscontext,Kazakhstanconsidersitfeasibletouse,onatemporarybasis,state service trade regulation measures in order to set up a competitive environment promotingbalanceddevelopmentoftheserviceandlabourmarketstoavoidadverse economicandsocialimplicationsforKazakhstanseconomy. Furthermore,thecurrentnationallegislativeframeworkgoverningtheservicesectors isnotyetadequate.Itprovidesfornomechanismsregulatingrelationsarisingoutof certainnewtypesofservicestobeprovided.Inthiscontext,theGovernmentofthe RepublicofKazakhstanistakingactiveeffortstodeveloplegislationonservicesthat wouldenabletheirfurtherliberalisation.Oneshouldmentioncertainprogressmade inthepastfewyearsindraftingandadoptinglawsonanumberofservicesectors, which served as a basis for outlining commitments with respect to access to Kazakhstansservicesmarkets.

1.5 Investment Policies and the Impact of Foreign Capital on Economic Development of Kazakhstan
Foreigndirectinvestment
inflowscontinuetogoprimarilyintotheminingsectors, whichhastodowiththeimplementationofprojectsinvolvingforeigninvestments. Investmentincomefigures(anegativebalanceofUS$19.3billionin2008)intheRK balance of payments (T able 1.6) reflect the consequences of the Governments economicpoliciesasfarasattractionofforeigninvestmentisconcerned. This implies that while achieving high growth, Kazakhstan, at the same time, is suffering considerable losses of financial resources (incomes) in favour of foreign investorsandtothedetrimentofthenationaleconomy .

A significant negative balance of international services and investment incomenegatingthepositivebalanceofcommoditytradeandgrossnational product(GNP)shouldbeviewedaskeyeconomicindicatorsreflectingthe consequences of spontaneous and non-transparent privatization, low Kazakhstancontent,imperfecttaxpoliciesand,asconsequence,inefficient integrationofKazakhstanintoglobaleconomicrelationsandIDL,which subsequently has a direct negative impact on human development in Kazakhstan.
Furthermore,suchenormousandcontinuousGNPreductionhasadirectimpact onthecountrysnationalsecurity,posesariskofaugmentingthecountryscurrent accountdeficit,whichiscompensatedbyforeigndirectinvestmentinflowsandforeign borrowings,andmakingitdifficulttocover.

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Ifthisproblemstaysonforalongtimeandnourgentpreventivemeasuresaretaken, Kazakhstanwillfacethethreatofafinancialcrisisduetoadramaticincreaseinthe balanceofpaymentsdeficitandtheforeigndebtburdenofprivatecompaniesand second-tier banks.

1.6 The Impact of the Global Financial Crisis on Kazakhstans Economy

The global liquidity crisis, which started in August 2007, along with a fall in world prices of primary resources in the second half of 2008 brought about a global economicrecession. Kazakhstans financial sector, manufacturing, agriculture, trade and construction services were struck by the crisis more than the others, and small and medium sizedbusinessoutputhasshrunk. Kazakhstansbankingsectorfounditselfinadifficultsituation.Havinglostforeign
funding opportunities, Kazakhstani banks almost curtailed their lending and raised theirinterestratesin2008.Asaresult,sectorsrelyingonbanklendingalmoststopped theirdevelopment.Consumerdemandkeptafloat,toalargeextent,bybankloans hasdeclineddrastically . Asaresult,whereasin2007,loansinthecountrygrewby54.7percent,in2008and during the period January-July 2009 they only grew by 2.7 and 8.3 percent respectively . Inthiscontext,theGovernmentofKazakhstanhadtoofferstrategicassetsforsale to foreign entities in 2009. Kazakhstans banking sector was on the threshold of collapse, whereas the national currency, the Kazakh tenge, faced large-scale devaluation. The government of Kazakhstan represented by the Samruk-Kazyna NationalWelfareFundhasacquireda78.14percentstakeinthetroubledBTAbank. BTA Group is one of leading banking networks in the CIS and the largest one in Kazakhstan. As of the end of the third quarter of 2008, the bank had consolidated assetstotallingKZT3,671trillion,oraboutUS$30.6billion,aconsolidatednetincome of KZT 35.2 billion, or US$ 293 million, and a loan book of KZT 2,814 trillion (US$ 23.5billion). Three other systemic banks, Alliance Bank, Halyk Savings Bank and Kazkommertsbank, also received governmental support. Because of higher borrowing costs and lack of refinancing opportunities Kazakh banksfacedaliquiditysqueeze.A30-percentfallinsecondarymarkethousingprices madethesituationevenworsesincecollateralformostloanswasprovidedbyreal estate.

Despite the Governments considerable efforts to boost industrial and innovative development, the share of
in the countrys GDP has

manufacturingindustry

droppedfrom16.5percentin2000to11.8percentin2008anddidnotexceed12 percent in the first half of 2009. The share

of the construction sector

in the

countrysGDPdeclinedfrom9.4percentin2007to8.1percentin2008. The financial crisis has had a negative impact on the countrys

sector(SBS).Asof1January2009,thenumberofsmallbusinessentitiesactivein

small business

the market has decreased by 3.1 percent compared to the same period of the previous year and totalled 621,114 entities including 58,480 legal entities (LE), 392,948individualentrepreneursand169,686farms.Individualentrepreneurs,farms andLEsaccountedfor63.3,27.3and9.4percentoftheSBSrespectively .

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Smallbusinessemploymenthasdroppedby4.7percentandtotalled1,726,170 personsincluding484,188LEs(28percent),816,091individualentrepreneurs (47.3percent)and425,891farms(24.7percent). In January-December 2008, output (commodities and services) of active small businessentitieshasdroppedfromthesameperiodofthepreviousyear(inreal terms)by9.7percentandamountedtoKZT2,182,199.9million,includingKZT 1,405,028.4 million by LEs (64.4 percent), KZT 479,562.6 million by individual entrepreneurs(22percent)andKZT297,608.9millionbyfarms(13.6percent).

Theoutput(commodities,services)indexhasdroppedto90.3percent(in realterms).Allthecountrysregionsexperiencedadropinoutput,mostnoticeably, SouthKazakhstan(by19.5percent),Kyzylorda(by13.6percent),Pavlodar(by13.2 percent),Almaty(by12.3percent)Oblasts,andthecitiesofAstana(by14.4percent) andAlmaty(by14.2percent). ComparedtoJanuary-September2008,inJanuary-September2009,theshareof trade,carmaintenance,householdproductsandpersonalitemsinsmallbusiness output(commoditiesandservices)hasdroppedby5.6percent(KZT518,113million in2008),withthatofconstructionandindustrydownby9.3percent(KZT262,696 millionin2008)and8.2percent(KZT172,821millionin2008)respectively. AdecreaseinoutputwasmostnoticeableinWestKazakhstan(by10percent)and Aktyubinsk(by4percent)OblastsandthecityofAlmaty(by3.6percent). Toaddresstheexistingsituation,Governmentauthoritieshadtotakeactive measures.
Economy has been in place since the autumn of 2007. Under this plan, the state budgetallocatedoverUS$4.5billion(4.2percentofGDP)fromtheautumnof2007 through the first half of 2008 to support shared construction investors, agriculture, small and medium sized businesses. Inlate2008,thePresidentofKazakhstaninstructedtodevelopthe2009-2010Joint ActionPlanoftheGovernment,NationalBankandtheFinancialSupervisionAgency toStabilisetheEconomyandFinancialSystem.US$10billion,anequivalentofmore than8percentoftheGDP ,wasallocatedfromtheNationalFundtofundtheaforesaid Plan. Fiveactivityareaswereidentified: -financialsectorstabilisation; -housingsectordevelopment; - small and medium sized business support; -agriculturedevelopment; -implementationofinnovative,industrialandinfrastructuralprojects. With that end in view, the Priority Action Plan to Stabilise Kazakhstans

TheNationalBanksRegulationMeasures

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On4February2009,theNationalBankdevaluedthetengeandsetanexchange ratecorridoratKZT150/USD1withafluctuationrangeof3percentorKZT5. Theone-stepchangeintheexchangeratehasconsiderablylowereddevaluation expectationsthathadbeenmountingoverthepastfewmonths.Asaresult,from4 February2009todatethetengeratehasbeenKZT148-151perU.S.dollaratthe KazakhstanStockExchange. Theestablishedexchangeratecorridorisdesignedforthemediumterm.Itmeans thattheNationalBankdoesnotintendtoreviseit,upwardsordownwards,inthe nearfuture. Furthermore,theNationalBankassistedbyRKFMSAandRKRFCAratingagencies hasdraftedtheConceptofPost-CrisisFinancialSectorDevelopmentofKazakhstan.

ThisConceptdeterminesthefollowingbasicareasofdevelopmentofthefinancial sector: 1. Use of public-privatepartnerships as the main mechanism to finance the

developmentofthenationaleconomy . Construction of infrastructure facilities will become one of the core priorities of economic development of Kazakhstan. Use of public-private partnership mechanismsshouldbecomethemaincomponentofanupgradeofsuchstrategic economic sectors as transport and telecommunication infrastructure, chemical industry, metallurgy , power industry , housing and utilities. This type of partnership will help realise and develop the potential of private entrepreneurial initiatives and attractinstitutionalinvestorsfunds,ontheonehand,andmaintainthefunctionsthe statehasinsociallysignificanteconomicsectors,ontheotherhand. 2.Financialsectorregulationandsupervisionofthe

counter-cyclicalityprinciple Thekeyconclusion,whichtheglobalfinancialcommunityhasmadeintheaftermath ofthecurrentcrisisandwhichrequiresparticularattentioninthefutureinthecontext ofanupgradeoftheregulatorysystemandpreventionofsuchcrises,isthatregulation pro-cyclicalityshouldbeminimised. Itissuggestedtointroducethecounter-cyclicapproachimplyingthatfinancialsector regulation and supervision should be toughened during economic upswings and softenedduringrecessions. 3.Selectionofoptimumregulationofthefinancialsector.
Development of an optimum mechanism to prevent accumulating imbalances, emergence of bubbles in real and financial assets markets and minimise system risksremainsrelevantforthemedium-term.Thefuturemodelofgovernmentpolicies in this area will be geared towards macro-prudential regulation principles. Developmentofmacro-prudentialregulationimplieskeydecision-makingonsubjects (institutions),objects(activities,markets)andsystemicriskzones. 4.Changingthe legislation

governingfinancialsectorrelationsonthebackofthe lessonslearntfromtheglobalfinancialcrisis. The Concept of Post-Crisis Financial Sector Development of Kazakhstan being currently developed contains a section targeting enhanced financial sector competition.Asadirectmeasure,itstipulatesagradualincreaseintheminimum capital requirements, first of all, for banks. Their integration and consolidation or reorganisationintoothertypesoffinancialinstitutionswillfacilitatethegrowthofthe marketshareofmedium-sizedbankscapableofproperlycompetingwithlargebanks as far as mass products are concerned. Moreover, the competitiveness of banks andbankproductsremainsthemostsuccessfulconditionfortheirdevelopment.It isalsoimportantfromthepointofviewofexpansionofpopulationcoverageand accesstothewidestpossiblelistofbankservices,inparticular,intheregions. At the same time, to identify a proper degree of regulation and supervision of all systemic financial institutions, markets and tools the National Bank will develop a methodologytodeterminewhetherabankisasystemicorasystemicallyimportant oneagainstawidenumberoffactorssuchastheirsize,debt-to-equityratio,their interrelation with other financial organisations, markets and tools, shock transformationmappingmethodologyandregulatoryimpactanalysistools. Ifneeded,limitationofforeignparticipationinthefinancialsectorto50percentofthe totalauthorisedcapitalforeachsegmentofthefinancialsectorseparatelywillbe considered. OverUS$4.5billionhasbeenallocatedfromthestatebudgettosupportsmalland medium-sized businesses.
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Asaresult,inOctober2009,ascomparedtoSeptember2009,basicindicators describingthedevelopmentofsmallandmedium-sizedbusinesseschanged:output grewby16.5percent(inrealterms),employmentby1.1percentandthenumberof activeSMBentitiesby0.1percent. Thus,theseindicatorsdemonstratethedynamicsofgradualgrowthofsmalland mediumsizedbusinesses(Graph1.1).

Decrease (Increase) in Key Indicators Describing Development Small and medium sized business (SMB)

Graph 1.1 as a % to the corresponding period of the previous year

Source:MinistryofEconomyandBudgetPlanning OfficialmonthlyeconomicfiguresforOctober-December2009indicateagradual recoveryoftheeconomyfromtherecession,withanexceptionofthefinancialsector still experiencing certain challenges. Seasonally adjusted fourth-quarter GDP dynamicsonthebasisofmonthlydatademonstratesaboutafive-percentgrowth fromthepreviousquarterandaseven-percentgrowthfromthefourthquarterof 2008.Strongrealgrowthofagricultureinthefourthquarterof2009(51.9),which, mostlikely,hastodowithlatestatisticalrecordingofapartofgraincropsand/orthe so-called low-base effect (last years poor harvest and output) was somewhat unexpected. For the sake of effective post-crisis economic development, the President of KazakhstanissuedDecreeNo.958dd.19March2010approvingthe2010-2014 Forced Industrial and Innovative Development Programme (hereinafter State Programme). TheStateProgrammeisalogicalcontinuationofeconomicdiversificationpolicies beingcurrentlypursuedandintegrateskeyapproachesofthe2003-2015Strategy of Industrial and Innovative Development and other industrial development programmedocuments. AccordingtotheStateProgrammethemainpriorityofforcedindustrialdevelopment policiesistoimplementlarge-scaleinvestmentprojectsintraditionalexport-oriented economic sectors, with replication of new business opportunities for small and mediumsizedbusinessesthroughfocuseddevelopmentofKazakhstancontent, upstreamoperationsandprocessing.

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Also,toachievethegoalsoftheStateProgramme,fourdifferentprogrammesof financialsupportofoperatingenterprisesandinvestmentprojects,bothrepublican andlocal,areunderway.TheseincludeInvestor2020,Productivity2020,Export 2020andBusiness2020.

Investor 2020 Programme promotes attraction of foreign direct investment by
providinginvestorprivilegesandpreferencesincludingestablishmentofaFEZand required infrastructure.

Productivity2020Programmeaimstoreplacefixedassets,upgradeandenhance
productivityofexistingenterprises. ThegoalofExport2020Programmeistopromotedomesticcompaniesinforeign markets.Asameasuretofacilitateexport,itstipulatescompensationofcostsincurred topromoteoutputinforeignmarkets. T o i n s u re e x p o r t s , s e c u re l e n d i n g f o r e x p o r t t r a d e o p e r a t i o n s a n d c e r t a i n accompanyingservicesofnon-oilandgassmallandmediumsizedbusinessesitis plannedtosetupanexportcreditagency(ECA).

Business 2020 Programme aims to develop business outside of Almaty and

Astana and targets, first of all, small and medium sized businesses. The key areas of this budget programme are as follows: loan interest rate subsidies, partial loan guarantees for small and medium sized businesses, grant funding, staff retraining and improvement of professional skills and regional infrastructure.

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SECTION II. TRADE POLICY DEVELOPMENT PROSPECTS AND IMPACT ON ECONOMIC GROWTH AND HUMAN DEVELOPMENT
2.1 Regional Trade Development (EurAsEC, CU) Accession of the Republic of Kazakhstan to the World Trade Organisation: Assessment of Economic Implications
EurasianEconomicCommunity(EurAsEC)IntegrationStages
In August 2006, the heads of the EurAsEC countries decided to set up a Customs Union representing a higher degree of integration than a free trade area currently existingbetweenEurAsECandCISmemberstates. ThenextstageofintegrationwithintheCustomsUnionwouldbesettingupaCommon EconomicZone.

EstablishmentofEurAsECFreeTradeArea

As prescribed by Articles 8 and 9 of the Agreement on a Customs Union and a CommonEconomicZonedated26February1999signedbytheHeadsofBelarus, RepublicofKazakhstan,KyrgyzRepublicandRussianFederation,implementation ofthefreetraderegimewithoutexceptionsandrestrictionsonthebasisofbilateral andmultilateralfreetradeagreementsprovidesthat: (a)notarifforquantitativerestrictionsshallbeimposedongoodsoriginatinginthe customsareaofonePartyandbeingexported(imported)tothecustomsareaof anotherPartyandintendedforfreecirculationinthecustomsareaoftheParties; (b)asinglesystemshallbeintroducedforthelevyofindirecttaxes; (c)nothingshallpreventonePartyfromtemporarilyapplyingprotectivemeasures withregardtotheimportofgoodsfromanotherPartyinconformitywithgenerally recognisedinternationalnormsandrulesorwithitsnationallegislation; (d)nothirdState,whichisnotapartytotheAgreement,shallbegrantedatrade regimewhichismorefavourablethanthatgrantedbythePartiestoeachotherwithout theagreementoftheParties; (e) restrictions on competition caused by the actions of economic entities or by interferenceonthepartofgovernmentalorterritorialbodies,shallbeeliminated,to theextentthatsuchactivitiescouldaffectthemutualtradeofeconomicentitiesof theParties. Atthemoment,thefreetraderegimeforgoodsisoperatingbetweentheEurAsEC statesinaccordancewithbi-andmultilateralagreements. Applicationofspecificprotective,antidumpingandcompensatorymeasuresinmutual tradewithintheEurAsECisregulatedbyProtocolsdated17February2000and28 October2003anddoesnotcontradicttheprovisionsoftheGeneralAgreementon Tariffs and Trade (WTO) and Agreement on a Customs Union and a Common EconomicZonedated26February1999. Thecommonprincipleoflevyofindirecttaxesbasedonthecountryofdestinationis appliedinmutualtradebetweentheCommunitystates. AtthemomentEurAsECmembercountriesareworkingtoapprovethedraftEurAsEC FreeTradeAreaDeclaration,whichisexpectedtostatethefactthatestablishment ofthefreetradeareaiscompleted.

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EstablishmentofEurAsECCustomsUnion

AsprescribedbyArticle21oftheAgreementonaCustomsUnionandaCommon Economic Zone dated 26 February 1999 the customs union, being a trade and economicassociation,assumesthatthereis: (a)aCommoncustomszone; (b)acommoncustomstariff; (c)aregimethatexcludesalltariffandnon-tariffrestrictions(licensing,quotas)in mutualtradeunlessotherwiseprovidedforintheAgreement; (d)simplificationandsubsequenteliminationofcustomscontrolsalongtheinternal customsborders; (e)uniformmechanismsforregulatingtheeconomyandtradebasedonuniversal marketprinciplesofmanagementandonharmonisedeconomiclegislation; (f)managementbodiessecuringconditionsforthefunctioninganddevelopmentof thecustomsunion; (g)asinglecustomspolicyandapplicationofsinglecustomsregimes. ToelaborateEurAsECmemberstatesunifiedforeigntradepolicieswithregardsto third countries, the Community states are unifying legislation in the main foreign traderegulationareas:customstariffandnon-tariffareas. 1.Thecustomstariffareaincludes: -applicationofunifiedcustomsdutiesforgoodsimportedfromthirdcountries formationoftheGeneralCustomTariff(GCT)(hereinafterCommonCustomTariff (CCT); -applicationofunifiedtraderegimesintradewiththirdcountriesandapplicationof the common preference system in trade with developing and least developed countries. Atthemoment,traderegimesappliedbytheCommunitystateswithrespecttothird countries and lists of countries using the common tariff preference system with developingandleastdevelopedcountrieshavenotbeenunifiedwithintheEurAsEC. 2.Thenon-tariffregulationareaincludes: -commodityimportandexportlicensing; -technicalregulation,sanitary,veterinaryandPhytosanitarymeasures; -introductionofspecialprotective,antidumpingandcompensatorymeasures; -exportcontrol. EurAsEChas: AgreementonUniformNon-TariffRegulationMeasuresinFormationoftheCustoms Uniondated22October1997; Unifiedlistofgoodsunderanimportand/orexportbanorrestrictionbyCustoms Unionmemberstatesinforeigntradewiththirdcountriesdated22January2004; TheProtocolonUniformRulesforLicensingofCommodityImportandExportand CertainTypesofActivitiesofEurasianEconomicCommunityMemberStatesdated 25October2004; The Protocol on Uniform Procedures for Application of Technical, Medical, Pharmaceutical,Sanitary, Veterinary,PhytosanitaryandEnvironmentalStandards, Norms,RulesandRequirementswithRegardtoCommoditiesImportedintoCustoms UnionMemberStatesdated28January1999; AgreementonFoundationsofHarmonisationofTechnicalRegulationsofEurasian EconomicCommunityMemberStatesdated24March2005; List of EurAsEC Priority Technical Regulations to Be Developed dated 24 March 2005;

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TheMechanismofApplicationofSpecialProtective,AntidumpingandCompensatory Measures in Trade between EurAsEC Member States is determined in Protocols dated17February2000and28October2003; The Agreement on Uniform Procedures for Export Control of Eurasian Economic CommunityMemberStatesdated28October2003; ModelListsofGoodsandTechnologiesSubjecttoExportControl(approvedon21 September2004). RulesforIssueofLicencesforForeignEconomicOperationsAssociatedwithExport ofGoodsandTechnologiesSubjecttoExportControlwereapproved(27September 2005). Asfarasnon-tariffregulationisconcerned,themainprovisionsofEurAsECmember stateslegislationsgoverningquotas,licensing,technicalregulation,applicationof sanitary,phytosanitary,veterinaryandenvironmentalmeasureswereunified. There is still a need to continue unification of list of goods subject to quotas and licensing, develop and implement uniform sanitary, phytosanitary, veterinary and environmentalmeasuresandtechnicalregulations.Adocumentisexpectedtobe developedonunificationoflicenceconditionsbygroupsofgoodssubjecttolicensing (otherthangoodsandtechnologiesunderexportcontrol). TosetthestagefortheestablishmentoftheCustomsUnionandCommonEconomic Zone,theEurAsECInterstateCouncildecidedin2002thatconditionsofRussias accession to the WTO should be assumed as the basis for WTO negotiations by otherEurAsECmemberstates. As demonstrated by Russian Federations bi- and multilateral consultations and analysisofconsequencesoftheCommunitymemberstatesnegotiationpositions, incompleteWTOnegotiationspreventlarge-scalechanges(unification)ofcurrent customdutiesofRussia,KazakhstanandBelarusfrombeingmade.Atthesame time, it is expedient to unify customs duties on certain goods provided that such changeswillreinforcethenegotiationpositionofeachofthethreecountrieswithin theframeworkoftheWTOaccessionprocess. Tostreamlinetheestablishmentofthecustomsunionandcommoneconomiczone, theHeadsoftheEurAsECmemberstatesissuedaresolutiondated16August2006 (in Sochi) providing that the customs union, and, subsequently, the common economiczonewillinitiallyconsistofthreecountries,Russia,BelarusandKazakhstan, withotherEurAsECmemberstatestojoinlater. AccordingtotheaforesaidresolutiontheRepublicofBelarus,RepublicofKazakhstan andRussianFederationhavepreparedasetof13documentsandthedraftAction PlanforEstablishingtheCustomsUnionwithintheEurasianEconomicCommunity, whichestablishesthesequenceofactionsfor2007-2010. Atthe19thsessionoftheEurAsECInterstateCouncilon6October2007theheads ofthethreeCommunitystatessigneddocumentskeyforfunctioningofthecustoms union, forming its institutional framework and determining the mechanism of accessionofotherstatestothecustomsunion:

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AgreementontheCustomsUnionCommission; Agreement on Establishment of the Common Customs Territory and EstablishmentoftheCustomsUnion; ProtocolonProceduresforEntryintoForceof,AccessiontoandWithdrawalfrom InternationalTreatiesFormingtheContractualandLegalFrameworkoftheCustoms Union. TheActionPlanforEstablishingtheCustomsUnionwithintheEurasianEconomic Communitywasapproved. HeadsofallCommunitystateshavesignedtheProtocolofAmendmentstothe

AgreementonEstablishmentoftheEurasianEconomicCommunitydated10October 2000. Duringthe20thsessionoftheEurAsECInterstateCouncilon25January2008,the headsofthegovernmentsoftheRepublicofBelarus,RepublicofKazakhstanand Russian Federation signed the remaining nine documents forming the legal frameworkofthecustomsunionofthethreestates: AgreementonCommonCustomsTariffRegulation; AgreementonExportCustomsDutiesforThirdCountries; AgreementonUniformRulesofDeterminingtheCountryofOriginofGoods; Agreement on Uniform Measures of Non-Tariff Regulation with respect to Third Countries; AgreementonCoordinatedPoliciesintheAreaofTechnicalRegulation,Sanitary andPhytosanitaryMeasures; AgreementonApplicationofSpecialProtective,AntidumpingandCompensatory MeasurestowardsThirdCountries; AgreementonDeterminationofCustomsValueofGoodsMovedacrosstheCustoms BorderoftheCustomsUnion; AgreementonMaintenanceofCustomsStatisticsofForeignandMutualTradein GoodsoftheCustomsUnion; AgreementonPrinciplesofLevyofIndirectTaxesWhenExportingand/orImporting Goods,PerformingWorks,ProvidingServicesintheCustomsUnion. TheEurAsECInterstateCouncilandtheCustomsUnionCommissiondecidedto introduceanumberofagreementsgoverningapplicationofcustomstariffandnontariffregulationmeasures. Furthermore,theCommonCustomTariffoftheCustomsUnionandtheUniformList ofGoods,toWhichUniformNon-TariffRegulationMeasureswillbeAppliedhave comeintoforceon1January2010. TheAgreementontheCustomsCodeoftheCustomsUnionstipulatingtheentryof the Customs Code into effect on 1 July 2010 has been signed, with specific mechanismsuniformforallthethreeCustomsUnionstatesintroduced. FormationofCommonEconomicZone Asfarasestablishmentofthecommoneconomiczoneisconcerned,thereisstilla needtoestablishthecontractualframeworktosetup: acommonservicemarket, acommonfinancialmarketanddevelopmentofcurrencyintegration,and acommonlabourmarketandcooperationintheareaofmigratorypolicies andinthesocialandhumanitarianarea. Establishment of the common service market requires that the stage be set for liberalisingmutualtradeinservices,coordinatedpoliciestowardsthirdcountries, exceptionsfromthemost-favoured-nationtreatmentinfavourofEurAsECmember statesincontractualrelationswiththirdcountriesandcustomsunions. Thereisaneedtotakeeffortstoarrangeconditionsensuringfreedomofmovement ofcapital,toestablishacommonfinancialmarketandcoordinateprinciplesofand conditionsfortransitiontoasinglecurrencywithintheEurAsEC. Migratorypolicycooperationcallsforcoordinatedsocialpolicies,conditionsforfree movementofcitizensonthebasisofsimple,clearandunderstandablemeasuresto controlpopulationmigration,developmentoflabourmigrationregulationprinciples andincreasedlabourmobilityofthepopulationoftheCommunitymemberstates;
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socialandhumanitariancooperationsuchascreationofacommoneducationzone. TheEurAsECInterstateCouncil(supremecustomsunionbody)atthelevelofthe headsofthestatesissuedResolution#35dated19December2009toproceed with establishing the contractual and legal framework of the Common Economic ZoneofBelarus,RepublicofKazakhstanandRussianFederation. Considerable differences in the economic potential and the structure of the Community economies and a different market transformation pace should be regardedasmainEurAsECintegrationchallenges. Furthermore,whileestablishingthecustomsunionandthecommoneconomiczone the EurAsEC states (other than Kyrgyz Republic) are carrying on simultaneous negotiations on accession to the World Trade Organisation, which requires coordinationoftheiractivitiesduringthenegotiationprocess. Unificationofthepartiestariffandnon-tariffregulationlegislationisalongprocess, withnegotiationstofurtherproceedinthisarea. Within the EurAsEC, 112 documents pertaining to economic and foreign trade activities, customs, border policies, energy, transport, agribusiness, social and humanitarianarea,etc.havebeensignedincluding21foreigntradeacts(including ninedocumentswithintheCustomsUnionofRussia,BelarusandKazakhstan).

Participation of Kazakhstan in the Customs Union: Challenges and Prospects

TheCustomsUnionestablishesdeepeconomicintegrationmechanisms.Expansion of the free commodity market is always a blessing for all countries. It should be mentionedthatthesmallercountry,themoreitbenefitssinceitscommoditymarket expandsduetothecommonarea. TheCustomsUnionisthebasisforcreationoftheCommonEconomicZone,which is quite realistic. The following factors are regarded as positive aspects of establishmentoftheCustomsUnionofBelarus,KazakhstanandRussia: -extensiveresourcebase; -enoughofqualifiedworkforce; -totalpopulationofalmost170million; -improvementofcross-bordercooperationduetocross-bordercostminimisation effect; -possiblecreationoftheCommonEconomicZonewithunifiedpowerandtransport systems; -possibleestablishmentofacurrencyunioninthelongrunonthebasisofauniform currencyunit. ThegoaloftheCustomsUnionbeing,firstofall,toseekestablishmentofauniform tradeareasuggeststhatconditionswillbesetforraisinglabourproductivity,economic competitiveness of the Customs Union states, enhancing the responsibility of the businesscommunityand,asaresult,improvingthewell-beingofthepopulation. Theglobalcrisishasshownthattheworldtradesystemcanbreakupintoregional unions. Countries start forming economic zones around themselves and seek to create regional stability zones. Establishment of the Customs Union consisting of thethreestatescanbeseenasoppositiontonegativeconsequencesoftheglobal economiccrisis.TheCUgivesthethreecountriesachancetosecureeconomic stabilityintheregion,setthestageforeconomicgrowth,liftexistingtradebarriers, developacommondevelopmentstrategyrelyingoninternalsources,andsetsa
28

goalforthebusinesscommunitytoenhancethecompetitivenessnotonlywithin theeconomiczone,butalsointheglobalmarket. EstablishmentoftheCustomsUnionwillbeofbenefitforboththecitizensofthe CustomsUnioncountriesandbusinesses.Businessentitiesofthethreecountries will have favourable conditions to develop their activities, expand industrial and technologicaloperationsandimplementjointprojects.Alargecommondomestic marketwillhelpremovetradebarriers,improvetheinvestmentclimateandincrease thecommodityturnoverconsiderably. IntegrationwillallowtheCustomsUniontobecomearealglobalplayeralongwith other integration unions in the immediate future, and its operations will create synergies for the economic development not only of Belarus, Kazakhstan and Russia,butallEurAsECandCIScountries. KazakhstansaccessiontotheCustomsUniontogetherwithRussiaandBelarus since1January2010aimstounifycustomtariffsbetweenthecountriesandset up a common customs zone that will have the common custom tariff (CCT) in mutualtradeandhavenocustomsdutiesoreconomicrestrictions.Thethreestates willenterthecommonlevelofeconomicintegrationandmaintaintheuniformforeign economicactivitycommodityclassification.Inthefuture,itisplannedtodetermine alistofcountriesusingtheCustomsUnionstariffpreferencesystemandgoods subjecttosuchimportpreferences;alistofsensitivegoodssubjecttoaconsensus decisionoftheCustomsUnionCommission;alistofgoodsandratesinrespectof whichaCustomsUnionmemberstateappliesimportcustomsdutiesdifferentfrom CCTratesduringthetransitionperiod.Atthesametime,itisplannedtoapprove agreementsonthetariffquotatermsandmechanism,protocolsonconditionsof andproceduresforapplicationofimportcustomsdutiesdifferentfromCCTrates inexceptionalcases,protocolsonprovisionoftariffprivilegesandprotocolson theCustomsUnionscommontariffpreferencesystem. The aforementioned procedures for transition to the common economic zone should be completed within the next one and a half years and will result in establishinganenormouscommonmarketwithanindustrialpotentialofUSD600 billion.ThethreecountrieshaveatotalGDPoftwotrillionU.S.dollars,agricultural GDPofUSD112billionandacommodityturnoverofUSD900billion. Expertsbelievethat,ifestablished,theCustomsUnionwillallowRussia,Belarus and Kazakhstan to gain in additional 16.8, 16.1 and 14 percent of their current GDPleveloveracourseoffiveyears. Since the outset, a majority of mutual trade barriers will be removed and the commodityturnoverbetweenthecountrieswillincrease.Atthesametime,asa result of unification of custom duties Kazakhstan will have higher tariffs on commoditiesoriginatingfromthirdcountries.Atthemoment,theRKGovernment isconsideringawiderangeofmeasurestosupportdomesticmanufacturerssuch astargetedsubsidies;provisionofaccesstocreditandlowerdebtserviceburden; provisionofadditionaltaxincentivestonon-oilandgassector;establishmentof aninfrastructureforinvestmentattractionpurposes.Anincreaseinimportduties willentailacertainincreaseininternalprices.

Accession to the Customs Union suggests that the process of accession of the three countries to the WTO on the same terms and conditions and at the same time will be stepped up.

At the end of the day, the Customs Union should set the basis for the Common EconomicZonebybecomingaprototypeofhighlyintegratedeconomiessuchas thosecurrentlyexistingintheEuropeanUnion.

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GiventhattheWTOistheonlyinternationalorganisationinchargeofglobalrulesof internationaltrade,therightbalanceshouldbestruckintermsofthesinglecommon setofrules,privilegesandcommitmentsapplieduniformlytoallWTOmembersgiven thatWTOmembersareatverydifferentstagesofdevelopment. Forthesakeofeconomicfeasibility,accessiontotheWTOandopeningofnational marketscanonlybetakenstepbystepandcanbeperformedafterachallenging structuralreorganisationiscompletedandsustainableeconomicgrowthisachieved. Termsandconditionsforaccessionshouldbecommensuratewithbenefitsand advantagestobegainedbyeachcountryfromitsmembershipinthisorganisation, possibilitiestoresistforeigncompetitionandprotectdomesticcommodityproducers.
2.2. Prospects for the Development of Export-Oriented and ImportSubstituting Industries
The priority objective for promoting Kazakhstani output in foreign markets is to determinealistofprioritysectorsandextentoftheirliberalisationwithoutdamaging varioussectors.Prioritysectorscannowbeclassifiedasfollows: 1. those oriented primarily towards foreign markets and developing the countrys existingresourcepotential(oil,ferrousandnonferrousmetals); 2.manufacturingindustriesoriented,forthemostpart,towardsthedomesticmarket and developing on the basis of the countrys resource potential (light, chemical, petrochemical, pharmaceutical, medical, food and textile industries) and manufacturinghighervalue-addedproducts; 3.Agriculturaloutput.

The first group

energy, including oil production and refining; gas industry;nuclearpowerandminingindustries. Kazakhstans electric power sector
development prospects: (power development, transmission and distribution) is now virtually an open market for companies from all over the world and,overall,arrivalofforeigncompaniesinourmarkethashadapositiveimpact. Asfarasthesecondgroupofprioritysectorsisconcerned,incaseofaccession

includes the following priority sectors taking into account their

to WTO a comprehensive mechanism of protective measures will in many respects support competitiveness of light, chemical, petrochemical, pharmaceutical,

medical,foodandtextileindustries,whichwillincludethelevelofimportcustoms
duties required for protection as one of principal types of support. These sectors need to be developed to address social problems as far as an increase in employment and improvement of the well-being of the population of Kazakhstan areconcerned.

Agriculturalandmanufacturingindustries have a list of priority or sensitive

goods requiring a certain degree of protection: meat and dairy products, butter, wheat,peas,rice,sunfloweroil,sugar,tomatoesandjam. Despiteagriculturalgrowthrecordedoverthepastyearsandhavingtodowithgrain productionandsale,thiseconomicsectorcallsforconsiderablereforms. Inthiscontext,Kazakhstanintendstoimprovethenationallegislation,inparticular, on land ownership, agricultural equipment lease and protection of agricultural producers rights and interests and to implement advanced forms of credit and financingoffarmprojects. Theseandanumberofothermeasureswillalsotargetsuchchallengesfacedby agricultureas:
30

-lowcompetitivenessofagriculturaloutput; -minorinvestmentsintoagriculture; -under-equippedagriculturalindustryandunder-developedequipmentleasing; -underdevelopedagriculturaloutputprocurementandwholesalesystems; -lackofsoilfertilitymonitoring,poorcropcultivationpractices,reducedfertilizeruse, poorforagereserveand,asaconsequence,lowproductivity; -poorwatersupplyinsouthernareas,lackoftargetedgovernmentsupportofhydrotechnologies. Whereasthecountryhadasystemofgovernmentalsupportforagriculturalproduction established,thesameisyettobeputinplaceforprocessedoutput. As a result, foodstuff imports are increasing; the threat for the countrys food dependenceisemerging,withanopportunitytoenterforeignfoodmarketslost. Only 15 percent of manufactured meat and 7.8 percent of milk are used for processinginfood-processingenterprisescomparedto71and61.1percentin1990 respectively. Atthesametime,existingfoodmanufacturingcapacitiesotherthanmillsareunderutilised,with54,26,26,50,40,30and47percentofcapacitiesofsugar,oil-extraction, fruit-and-vegetable,cannedmeat,sausage,cheeseandbutterplants,respectively, utilised. Low-technology and obsolete equipment prevents competitive products compliantwithinternationalstandardsfrombeingmade. Maintaining sustainable economic growth, a favourable investment climate, the presenceofownfinancialresourcesandaneedtoimplementastructuralmanoeuvre toincreasetheshareofmanufacturingindustrieshavepredeterminedtheneedto developanewmedium-termindustrialpolicy. Particularfocuswillbemadeonaddressingtheproblemassociatedwiththeinputintensiveindustrystructure.Themainreasonforhighinputintensityoftheeconomy isequipmentwearandtearandobsolescence.Over40percentofworn-outfixed assets are operated in coal-mining, textile, wool-working industries, production of nuclearmaterials,non-ferrousmetalsandplasticproducts,machine-buildingindustry andmunicipalservices. Asfarasservicesareconcerned, alistofsensitiveservicesectorsrequiring

the greatest level of protection for their effective development

research and development services was made. Thereisaneedtoelaboratea

such as

financial, legal, commercial, transport, telecommunication, tourism, construction,

marketsinthecontextofWTOintegrationinthefollowingmainareas:

strategyofdevelopmentofKazakhstaniservice

-establishmentofthedomesticlegislativeframeworktoregulatetradeinservices; - expansion of potential and enhancement of competitiveness of domestic service sectors; -developmentofhumanresourcesandtechnicalcapacitybuilding; - improvement of service forms (telecommunication infrastructure, cross-border trade),developmentofthenationalserviceexportstrategy . Overall, Kazakhstans estimated per capita export potential is considerably higher thanthatofEurAsECmembercountries.However ,intermsofpercapitaexportour countryconsiderablylagsbehindtheaveragefiguresfortheEurocountries.

Iftheexportstructureisnotimprovedbyincreasingtheshareofthemanufacturing industry, finished agricultural and food high value-added products, the countrys exportcompetitivenessprospectsappeardoubtful.Thiswillhaveanegativeimpact ontheoverallcompetitivenessofthenationaleconomy .

31

To determine the main areas of enhancement of Kazakhstans export potential competitiveness,anationalexportprogrammeneedstobedeveloped.

2.3 Trade and Industrial Policy Harmonisation Areas

The share of the mining industry in Kazakhstans economy has been increasing year in year out, resulting in its lop-sided development and reducing the overall competitiveness of Kazakhstani economy. At the same time, the mining industry should form the basis for development of other economic sectors and promote macroeconomicstability,modernisationoftheeconomyandsocialwell-beingofthe peopleofKazakhstan. Asdemonstratedbyinternationalexperience,efficientstateregulationofeconomic relationscanyieldpositiveeconomicresults,however,governmentpoliciesshould notbelimitedtoconsumerimpactmeasuresalone,butshould,atthesametime, ensuredevelopmentofthecapacityofthedomesticindustry. Unfortunately,currentindicatorsdescribingthelevelofKazakhstancontentarelow, since the output and, accordingly, procurement of domestic goods, works and servicesofKazakhstanioriginisinsignificantcomparedtoimports.Atthesametime, oneshouldadmitthatthedomesticmanufacturingindustryiscapableofsaturating thehomemarketwithcompetitivedomesticoutput. Themainwaysforthestatetoimpactontheexistingsituationareasfollows: - strengthening of regulatory measures in the procurement processes of state authorities, enterprises, managing entities, which are a part of national holdings, subsoilusercompanies; -grantingvariousprivilegesandpreferencestodomesticgoods,workandservice producers; -provisionofinformationsupportofdomesticcommodityproducers; -furtherdevelopmentandimprovementofmechanismsofenhancementofthequality ofdomesticoutputinlinewithinternationalrequirements; -elaborationandpromotionofqualitymanagementprinciplesestablishingpriorities forKazakhstanicommodityproducersintermsofimprovementofthecompetitiveness ofproductsandservices. DevelopmentofKazakhstancontentdependsdirectlyonincreasedcompetitiveness ofdomesticenterprises,fullrealisationofexportpotentialandmaximumeffective utilisationofavailableresourcesandabilities.ItwillalsohelpKazakhstanjointhe50 mostcompetitivecountriesoftheworld. ThisConceptofDevelopmentofKazakhstanContentwasdevelopedtoimplement DecreeofthePresidentoftheRepublicofKazakhstanNo.733dated27January 2009OnCertainIssuesofKazakhstanContentinProcurementofCommodities, WorksandServicesbyOrganisationsandStateAuthoritiesandStrategyofIndustrial InnovativeDevelopmentoftheRepublicofKazakhstanfor2003-2015approvedby DecreeofthePresidentoftheRepublicofKazakhstan#1096dated17May2003. Tradepoliciesshouldbeacomponentofthedevelopmentstrategy.Theproblemis thatthetodaystradingsystemisoutoflinewiththesefrontierissuesineconomic thought.InastudypublishedbyBostonUniversityPardeeCenterforStudyofthe
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Longer-Range Future, lawyer Rachel Denae Thrasher and P. Krugman examined the extent to which the World Trade Organisation (WTO) agreements, European UnionstradeagreementsandUnitedStatesregionaltradeagreementsbitintoa nations ability to deploy strategic trade and conduct industrial policies to benefit from the globalisation process. The authors have come to a conclusion that the worldtradingsystemmakesitmuchmoredifficultfornationstocraftstrategictrade andindustrialpoliciesforgrowthanddevelopmentasawhole.Enshrinedinvirtually all trade agreements is the national treatment regime, which requires that a WTO countrymusttreatforeignproducersnodifferentlythanitsdomesticproducers,which directlycontradictsthedomesticindustrysupportidea. Thatmaymakesensewhendevelopednationscompeteagainsteachother,butin aworldwhere57.6percentofthepopulationlivesonlessthanUS$2.50perday, thesametradingrulescannotfitallthecountries.Thisrestrictionisaccentuatedin provisionsforforeigninvestment,intellectualproperty,andsubsidies. Negotiations between WTO countries regarding the development of provisions of theAgreementonSubsidiesandCompensatoryMeasures(SCM)arecontinuing, butnotinfavourofdevelopingcountriesyet.Developedcountries,inparticularUSA, seektoexpandalistofforbiddensubsidiestosupportanddeveloptheeconomys industrialsector. Itshouldbeemphasisedthatdevelopedcountriesachievedahighlevelofindustrial developmentthroughdirectstatesupportintheformoflong-termapplicationofa widenumberofsubsidiesoverthepastdecades.Inthiscontext,developingcountries pointtoasymmetryemergingattodaysstageofindustrialdevelopmentofdeveloping countries, which under the influence of increasingly tougher provisions of the Agreement on Subsidies and Countervailing Measures bear a risk of facing considerableproblemsandinhibitingfurtherindustrialdiversification.

KazakhstanshouldpaymoreattentiontotheprovisionsoftheAgreement onSubsidiesandCountervailingMeasures,inparticular,atthemostrecent WTOnegotiationsaimingtoincreasethenumberofprohibitedindustrial subsidiesinordertomaintainflexibilityintheirfurtherapplication. BelowistheSWOTanalysisofeconomicimplicationsoftheaccessionoftheRepublic ofKazakhstantotheWorldTradeOrganisation(Table2.1).

Table 2.4 SWOT analysis of economic implications of the accession of the Republic of Kazakhstan to the World Trade Organisation

Strengths
1. Expanded access of Kazakhstani goods to WTO member countries markets; WTO member countries giving Kazakhstan the same rights as all other trade partners, in particular, no current quantitative restrictions, unfair antidumping duties and other discriminatorymeasurescanbeapplied toexportsfromKazakhstan;

Weaknesses

1. Difficult climatic conditions, lack of adequate transport infrastructure, low population density, remoteness of commoditymarkets,land-lockedstatus; 2. raw-materials orientation of manufactureandexportofcommodities; 3. non-competitiveness of high valueaddedfoods; 4.hightransportationcostswhen
33

2. Establishment of a transparent and predictable domestic legislative environment in line with international standards; 3.Assistanceinprotectionofintellectual propertyrights; 4.Expandedquantityandqualityofgoods offeredtoaconsumer; 5.Promotedeconomicgrowththrough long-termtradeexpansion; 6. Use of the WTO dispute settlement mechanism. 7.Participationinanewmultilateraltrade negotiation round on a wide range of issues and, through voting, in making decisionsthatwilldeterminelong-term internationaltraderules. Opportunities 1.stagedandgradualtradeliberalisation usingatransitperiod; 2.useoftariffquotasasanintermediate tool between tariffs and quantitative restrictions; 3. release of more competitive output based on the countrys comparative advantages; 4. finding new markets for specialised domesticoutput. Source:compiledbytheauthors.

exporting/importingcommodities; 5.under-developedproductionandsocial infrastructure; 6. limited ability to apply protectionist measures, in particular, impossibility to applyquantitativerestrictions. 7.insufficientknowledgeandexperience inforeigntradeoperations; 8. under-developed marketing and informationservices,lackofawareness of potential sale markets and foreign traderules. Threats 1. strengthened competition and, as a consequence,possibledeteriorationof the status of certain most sensitive economicsectors;thisistrue,firstofall, foragriculture,lightandfood-processing industries,variousservices; 2. more limited ability, as far as introductionofnewregulationmeasures for trade in goods and services is concerned, in issues of government supportandsubsidiesforcertaintypes ofindustries; 3.impossibilitytousequantitativetrade restrictionsotherthaninspecialcases; 4. prevalence of larger trade partners opinions and position in the course of multilateralnegotiations.

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SECTION III. IMPACT OF AGRICULTURAL TRADE POLICY LIBERALISATION ON HUMAN DEVELOPMENT

3.1. Agribusiness in Kazakhstan: Peculiarities, Current Status and Development Trends, Impact of the Global Food and Financial Crises on Agribusiness
AgribusinessisamajorcomponentofKazakhstanseconomy.Itproducessocially vital products and concentrates a huge economic and human potential. The agribusinessdevelopmentleveldeterminesthelevelofthecountrysfoodsafety andsocio-economicconditions.Stablefunctioningoftheagrifoodsectorisoneof thekeycomponentsofeconomicgrowth. Themostcrucialelementofagribusinessisagriculture,whichholdsaspecialplace notonlyinagribusinessalone,butintheentirenationaleconomy.Developmentof agriculturefacilitatesthedevelopmentofothersectors,whichsupplyproduction factors,useagriculturalproductsasaninput,andprovidetransportation,tradeand othertypesofservices. Statisticsstatethatasof1October2009Kazakhstansruralpopulationaccounted for46.6percentoftheentirepopulationor7,422,000people.Theagrariansector employs2.4millionpeople,orabout30percentofthetotalemployment. Kazakhstans agriculture is peculiar due to the countrys challenging climatic conditions,largeterritory,lowpopulationdensity,remotenessfromsalesmarkets and land-locked status. At present, it has to function in the context of strong degradationofagriculturallandsduetolarge-scaleploughingofvirginlands,useof worn-outandobsoleteequipmentandoutdatedtechnologies,aggravatedwater andenvironmentalproblems. AllareasofKazakhstanseeasteadylanddeteriorationtrend:reducedhumusand nutrientcontentinsoil;achangeinthevegetationspeciescompositionandefficiency. Agricultural lands are exposed to degradation and pollution and are losing their fertilityandreproductiveability. Thethreatofdeindustrialisationofagricultureisstillthere.Over80percentoftechnical equipmentneedstobeimmediatelyreplacedduetoitsdeterioration.Vehiclefleet renewalratesarelow,withannualratesofrenewaloftractorsandgrainharvesters averaging0.87and3.2percentrespectively. Grossagriculturaloutputdynamicsareunstable.Inparticular,cropproductiongrowth ratesfluctuateconsiderablyyearbyyear. TheshareofagricultureinthecountrysGDPdroppedfrom34percentin1990to 3.1percentasattheendofthefirstsixmonthsof2009(seeTable1.2),withcrop outputdecreasingbyalmostathirdandlivestockoutputdroppingbymorethanhalf. Accordingly,theareaunderbasiccropshasreducedbymorethantwofold,whereas thecattleandpoultrynumbershaveshrunkbymorethan90percent1.Atthemoment,
about 85 percent of cattle and poultry are concentrated in subsidiary farms of the population.

Permanentfinancingproblems,lackofworkingcapital,dramaticwearandtearand applicationofoutdatedtechnologieshavecausedanongoingreductioninproduction efficiency,afallinfarmingpracticesandlabourproductivityinagriculture.Despitean increaseinagriculturaloutputobservedsince1999,theshareofagricultureinGDP isstilldropping(seethetable).

1

RKStatisticsAgency

35

Growth rates of this vital sector remain insignificant, with an extremely high dependenceofproductiononclimaticfactorsandmarketstatus. Tables3.1and3.2andchart3.1showagriculturaloutputgrowthratesasawhole, aswellaslivestockandplantproducts. Theagriculturalproducerstructureisalsochanging.Thus,in1997agriculturalplants, farmsandpopulationssubsidiaryplotsaccountedfor43.8,10.2and46.0percent ofgrossoutput,whereasin2007thesharesofthesecategorieswere27.2,23.7 and49.1percentrespectively.Apparently,thecountrysagriculturaloutputremains small-scaleand,asresult,technologicallyoutdated. Therelativedensityofbreedinglivestock,atonly1.25percentisalsolow.Comparison oftheleveloflivestockindustrydevelopmentofleadingmeatexporters(Brazil,USA, etc.)hasshownthatthebasicoutputthereisconcentratedonlargecommodity farms,whichensurepreservationofhighefficiencyandincreasedlivestockoutput.
PhysicalAgriculturalOutputIndex,2004-2008
(as%ofpreviousyear)2

Chart3.1

Agricultural,CropandLivestockOutput,2004-2008(percent)

Source:calculatedbytheauthorsbasedonthedataprovidedbyRKStatisticsAgency

Table 3.1

36

AccordingtoRKStatisticsAgency

GrossAgriculturalOutputoftheRepublicofKazakhstanin2004-2009
effectiveprices,inKZTbillions)

(in

Table 3.2

Source:RKStatisticsAgency Asawhole,livestockoutputgrowthoutstrippingcropoutputgrowthhascausedan increaseintheformersshareinthetotalagriculturaloutputfrom39to49percent duringtheperiodinquestion.However,despitegrowinglivestockoutputoverthe pastfewyears,livestockoutputin2006wasonly58percentofthe1990level, whereascropoutputwasabout73percent. Adegreeofstabilisationandanincreaseinagriculturaloutputduringtheperiod 2000-2008enabledanincreaseinagriculturaloutput.Agriculturaloutputgrowth overthepasteightyearswas143.7percent,whichincludedcropoutputgrowingby 144.9percentandlivestockoutputby141.0percent(Tables3.3and3.4).
Thisyearsagrariansectorgrowthratesarethehighestoverthepasteightyears. Thus,over11monthsthesectorhasgrownbyanother10.6percentincluding16.5 percentincropoutputand2.5percentinlivestockindustry.Outstrippingparameters arereachedfirstofallduetotherecord-breakinggrainharvest,20milliontonswith a10millionexportpotential3.

DynamicsofMainLivestockOutputTypes
Table 3.3

Source:RKStatisticsAgency

DynamicsofMainCropOutputs(thousandoftons)
Table 3.4

Source:RKStatisticsAgency Ingeneral,Kazakhstansagriculturestickstoextensivedevelopment. Theinsufficientagribusinessoutputlevelhasledtothecountryshighdependence onmanyagriculturalimports.Forexample,importsmeet37percentofdemandfor vegetable oil, 49 percent of sugar, 39.4 percent of sausages, 56.5 percent of
3

Source:KazakhstanskayaPravda,11December2009

37

confectionery products, 78.6 percent of fruit and vegetable preserves and 42 percent of canned meat. Dependence on import of fish and fish products standingatmorethan80percentisextremelyhigh.Kazakhstanisanetimporter ofsuchvitalfoodsasmeatproducts,milk,cream,sugar,confectioneryproducts and chocolate, vegetable oil and fats. This situation should cause a concern from the food safety perspective as import exceeds the safe threshold level determined by the International Food Organisation (FAO) at 17 percent. Meanwhile,thecountryhasconsiderablepotentialtomeetitsowndemandfor basicfoods. Oneofthefactorsensuringdynamicagribusinessdevelopmentanditsrecovery onthebackofmodernmarketprinciplesisthepresenceofqualifiedexpertsof alllevels. Inanumberofthecountrysregions,technicalandvocationaltraininginstitutions wereprivatisedorcloseddown,whichhasconsiderablyreducedtheavailability oftechnicalandvocationaltraining,especiallyforruralyouth,andresultedina lack of qualified experts that could secure the development of agribusiness sectors.Thereisaneedfor5,700morehighlyskilleduniversity-trainedagrarian personnel and 40,000 more staff who have passed technical and vocational training (including that in colleges, professional lyceums and schools). Furthermore, research entities are in need of experts in a number of priority agrarianareas,inwhichthecountryprovidesnoprofessionaltrainingatall. Theprocessingagribusinesssub-complexincludesstrategiceconomicsectors andovermorethan11,000associations,joint-stockcompanies,enterprisesand shopsemployingover370,000people. The level of the manufacturing industry determines the well-being of the populationandisanimportantpartofthecountrysfoodsafety. Themanufacturingindustryismarkedbythecrisisinamajorityoffoodenterprises andintheageingofbasicproductionassets.Almostnoeffortsarebeingtaken tomanufactureequipment,newtypesoffoodsprovidingarequiredsetofvitamins and proteins. The range of manufactured diabetic and special products has shrunk considerably. Themainreasonsforunsatisfactoryperformanceofthemanufacturingsectors areasfollows: highwearandtearofprocessequipment; enterpriseslackinghigh-qualityrawmaterials; insufficientcompetitivenessofprocessedproducts; ongoingriseinenergyprices; rigidborrowingconditions. Given that processing is one of weak links in the agrarian sector, the RK Governmentplanstoreinforcestatepromotionandsupportandbydoingsoto achievethetechnicalandtechnologicalupgradeofthesector. The need to strengthen state support to the processing sector has also to do withthefactthatKazakhstanspendsaboutUS$1.9billioneachyeartoimport deep-processedproducts,withmorethanhalfofthembeingfromRussiaand Ukraine,wheretheprocessingenjoysstrengthenedstatesupportmeasures. One of main reasons for the current situation in Kazakhstani agribusiness is a price increase disparity. During reforms years prices of industrial goods grew muchfasterthanthoseofagribusinessoutput. Toaddresstheseproblems,the2003-2005StateAgrifoodProgramme(SAP)of theRepublicofKazakhstanwasadopted,aimingatensuringtheRepublicsfood
38

safetyonthebasisofanefficientagribusinesssystemandproductionofcompetitive output4.
In pursuance of the SAP , an objective was set to streamline government support measures, with general and special measures determined.

Generalmeasuresincludedstatefundingofdiagnostics,monitoringandcombating particularly dangerous animal and plant diseases, laboratory and phytosanitary analysisofproductssubjecttoquarantine,agriculturalcropgradetesting,assessment of the ameliorative condition of irrigated land, storage of state reserve grain, the preservation and development of elite seed production and livestock breeding, subsidies for purchasing mineral fertilizers, establishment and development of an agricultural information system and applied research. General measures also included preferential taxation for agricultural producers (a patent for legal entities andasinglelandtaxforfarms)andagraceperiodforbudgetdebts.

Basically, the above-described types of aid are characteristic of a majority of WTO membercountriesandbelongtotheso-calledGreenBox.Asfarasthesemeasures areconcerned,WTOrulesadmitthattheyrendernoorminimalimpactoninternational tradeinagriculturalgoods,therefore,thecountriesarenotrestrictedintheirabilityto rendersuchaid. Special measures were aimed at supporting specific sectors and industries. As a rule, they are provided on a reimbursement basis and target financially sound businessentities:procurementofcropoutput,firstofall,grain,cottonandlivestock outputbythestate,loansforagriculturalmachinerylease,loanstolocalbudgetsto perform spring sowing and harvesting campaigns, establishment of a system of ruralcreditassociations,andprovisionofagriculturecreditsbythestateusingraised foreignfunding,etc.

The SAP provided for measures to increase the amounts of the described state support types and streamline such aid to gain the maximum effect from better competitiveness of domestic output and target orientation of budget financing. In particular, it provided for introduction of tax regulation measures, better access of commodityproducerstocreditresources,technicalandtechnologicalstandardsof productionandqualityassuranceoffoodonthebasisofISO-9000qualitysystem, development and implementation of regulatory legal acts on veterinary services, accordingtowhichveterinaryandquarantinelaboratorieswillbere-equippedwith state-of-the-artlab-wareandequipment.

AccordingtotheSAP ,by2005republicanbudgetexpensestosupportagriculturein Kazakhstanwerenotlessthan1.8percentofGDPincludingtherepublicanbudget supportamountperoneagriculturalentityof$2,500or$15.9perhectareofarable land.

This was more than the state support amounts for agrifood enterprises provided earlier,butisstillnotsufficienttoaligncompetitiveadvantagesofdomesticagricultural outputcomparedtosimilarimports. In this context, it is relevant to determine an optimum structure and size of state support and switch from traditional support forms to more advanced and efficient ones.Themainobjectivehereistoavoidviolationofrightsininternationaltradeand ensuretrulybetteraccesstotheworldcommodityandservicemarkets,whileretaining foodsafetyandapossibilityforefficientdevelopmentofthecountrysagrariansector.

RKStateAgrifoodProgrammefor2003-2005

39

The SAP also set a task to develop a substantiated tariff policy in regulating the export/importregimeasthemainforeigntradepolicytool. The completion of the SAP resulted in certain positive shifts towards stabilisation andfurtherdevelopmentofagribusiness.Onecanobservegrowingproductionof agriculturaloutputandprocessedproducts,decreasingfoodimportsandimproving equipmentandagriculturalmachineryavailability.Thereisanincreaseinthenumber ofprocessingenterprises,firstofall,processingoffruitsandvegetables,graincrops, sugarandcotton.Effortsarebeingtakentodevelopnationalagribusinessstandards, harmonisenationalandinternationalstandardsandhelpprocessingenterprisesto introduceISOinternationalstandards. Work was started to set up the information and marketing system. Specifically, Kazagromarketing Joint-Stock Company was set up in 2003, with a mandate to research markets of agricultural output and processed products and to provide marketinginformationtoagriculturalproducers.Ruralinformationandconsultation centres were started to be set up to offer assistance to agricultural producers in arrangingsaleandpromotionoftheirgoods.Underthededicatedagriculturepostprivatisationsupportproject,agriculturalproducersbenefitedfromeducationaland consulting services on enterprise management, commercial and technological activities. To address the shortage of funds for procuring equipment and acquiring working assetsthestateinitiatedruralcreditassociations.TheAgrarianCreditCorporation (ACC),setupspecificallyforthesepurposes,isdevelopingtheCreditAssociation DevelopmentandSupportProgrammetill2010,whichprovidesforannualallocations from the republican budget for these purposes. The corporation provides state support to agribusiness in implementing budget programmes for development of agriculturalproducerassociationsanddirectlendingtoagribusinessentitiesusing raisedextra-budgetaryfundsandproceedsoftheNationalFund(Table3.5).The ACCisaneffectivetoolforinteractionbetweenthestateandruralproducerspromoting growthofthiseconomicsector.
InvestmentsintoRKAgriculturalFixedAssetsin20042008 (inKZTmillions)
Table 3.5

Source:RKStatisticsAgency To protect agricultural producers ownership interests, the Law On Mandatory Insurance in Crop Production was passed in 2004, aiming to protect property interestsofcropoutputproducersagainsttheconsequencesofadverseactsof natureresultinginpartialorfulllossofcrop,inwhichcaseinsurancepayments includingthosefromtherepublicanbudgetbecomepayable. Furthermore,machineryandtechnologicalstationsaresetupusingstatebudget fundsinordertoprovideservicesincropcultivation,saleandrepairofagricultural machinery,equipmentandspareparts.
40

Despitethemeasurestaken,theefficiencylevelofthesectorisstillinsufficient.The countrysagriculturalproductionremainssmall-scaleand,asaconsequence, technologicallyoutdated.Thesectorisindesperateneedofpromptsubstitutionof capitalassetsand,firstofall,technicalfleet.About80percentofagriculturaloutput issoldasunprocessedprimarygoods,whilefinishedproductsarehardlycompetitive duetotechnologicalbackwardnessofprocessingenterprises,obsolescenceand wearandtearoftheirequipment. Despiteapositivebalanceinforeigntradeinagriculturalproductsandprocessed productsrecordedoverthepastyears,theagriculturaloutputtradestructureremains inefficient.Kazakhstanexportsmainlyprimaryproductssuchaswheat,rye,barley, flourandrice. AhighshareofprimaryproductsinagriculturalexportsmakestheKazakheconomy vulnerabletochangesintheworldmarkets.Thus,experienceshowsthatnegative consequencesforthecountryseconomycanbeobservedbothwhenworldprices growandfall.Thesituationexistinginthemarketofgrain,oneofthecountrysmost importantexportitems,is,therefore,illustrative. Inthecontextoftheemergingglobalfoodcrisisandbreadgrainshortage,world grainpriceshavebeenobservedtogrowoverthepastfewyears.In2007alonethe priceofgrainintheworldmarketshasmorethandoubled. ThisfacilitatedgrowthingrainproductionandexportfromKazakhstantoalarge extent.Thus,in2007grainproductionreachedarecord-breakinglevelforthe Republic,2.1milliontons.In2007,exportofgraincropsfromKazakhstangrewby almost50percent,andtotalled9milliontonstakingintoaccountflourexports.Growing exportsand,simultaneously,worldgraincroppriceshavealsocausedaconsiderable increaseinexportrevenues.In2007,graincropexportproceedsmorethandoubled frompreviousyearandexceededUS$1.5billion.Asaresult,theshareofgrainin totalexportsalsogrewbymorethantwotimesandaccountedforabout3percentin 2007. Inrecentyears,thegrainexportgrowthtrendhasstillbeenthere.Monthlyexportsin early2008wereestimatedtototalabout1.1-1.4milliontons. Atthesametime,growingworldpricesofagriculturalgoodsinthecontextofeconomic opennessanddependenceonimportsofalargenumberoffoodsweretoalarge extentresponsibleforaconsiderableriseinpricesoffoodsinKazakhstansdomestic market. Thus,inDecember2007foodpriceshavegrownby26.6percentfromDecember 2006.InMarch2008,foodpricesgrewby27.1percentfromMarch2007.Inflation remainedhighin2008aswell.Surprisingly,despiteKazakhstanbeingalarge producerandexporterofgrain,primarily,wheat,inflationaffectedsuchessential foodstuffsasflourandbreadmost.Thus,duringtheperiodinquestionthepriceof flourandbreadgrewby67and42.4percent5
. Ahighriseinpricesofbasicfoodstuffsaffectsstandardsofliving,firstofall,thatof socially vulnerable groups, and must be addressed by the countrys Government throughinflationreductionmeasuresincludingadjustmentsinforeigntradepolicies. Agricultural imports are dominated by goods with a higher degree of processing, cannedmeat,fruitandvegetablepreserves,dairyproducts,sausages,confectionery products,babyfood,etc.Onecanobserveahighdependenceofconsumptionon importsofalltheseproducts,whichconsiderablyexceedsthemaximumpermissible leveloffoodimportsfromthefoodsafetyperspective.
5

AccordingtotheexpressinformationprovidedbytheRKStatisticsAgency

41

Hence,itstillremainsrelevanttoensurefurtherdevelopmentofagribusinessonthe basisofgrowinglabourproductivityanddevelopmentofcompetitiveadvantagesof domesticproducts. TocontinuereformsstartedundertheSAP,thecountryadoptedtheAgribusiness SustainableDevelopmentConceptfor2006-2010andthecorrespondingPriority Programmeforitsimplementation.Theaforesaiddocumentssetthefollowingpriority objectives: Ensuringtechnicalandtechnologicalupgradeofagribusinesssectors; Regionalspecialisationandintegrationofagriculturalenterprises; Establishmentofintegratedplantsonthebasisofclusterinitiatives; Developmentoffinancial,insurance,informationandmarketinginfrastructure; Developmentofthesystemofpreparationofandwholesaletradeinagricultural output; Improvementoftheoutputqualityandsafetymonitoringsystem; Developmentofresearchandinnovationinfrastructureandagribusinessstaffing improvement6
. TheProgrammedetailswaysandmechanismstoimplementthesetobjectivesand providesforconsiderablerepublicanandlocalbudgetallocationsforthesepurposes. Thus, in 2006 it was about KZT 70 billion, and by 2007 and 2008 it had already exceededKZT120billion. In2008,thestateeconomicpolicyfocusonlong-termdevelopmentofthecapacity oflarge-scaleagricultureandassociatedindustriesstartedtoemerge. The essence of the food scenario is that Kazakhstan is capable of providing with foodapopulationwhichexceedsthecurrentpopulationof16millionbymanytimes, on the back of its land resources, climate, labour and technological experience. T wentyfiveyearsagoKazakhstanwasalargeexporterofthemostvaluableproducts, hard wheat and meat, and had powerful agribusiness. Since then, the resource potential has dropped by almost two times, agricultural machine-building was disrupted; mineral fertilizer chemistry is in little demand, while agricultural stock processingcapacitiesareunder-utilised.Theentireruralinfrastructurehasdegraded, starting from power supply and repair of equipment to agronomics and veterinary science.Inrecentyears,thedefectsinthepatternofKazakhstanifoodproduction sectorwerecompensatedduetoimports. T ransparent and rational use of budget funds has become a pressing problem. Money was actually used to only maintain the former level, while not creating an effective base for further development. However, a number of agribusiness managementreformsimplementedinthecourseoftheprogrammebecameamajor outcomeofthecompletedstateprogrammes. T oidentifyfurtheragribusinessdevelopmentprospects,theRKGovernmentadopted the 2009-2011 Sustainable Development Concept, aiming at sustainable developmentofagribusiness,maintenanceofthecountrysfoodsafety,development of national competitive advantages of domestic output and adaptation of agrarian productiontothecountrysaccessiontotheWorldT radeOrganisation(WTO).

Agribusiness characteristics require that the state should pursue agrifood policies, withstateregulationandsupporttoplayabiggerrolethaninothersectors.Itisnot only necessary to adopt an adequate programme of further development of agribusiness,butalsotoincreasethesizeandtypesofagriculturaloutputsubsidies, andstrengthencontroloveruseofstateinvestmentsintoagriculture.Inthefuture,it wouldbenecessarytosetupasystemofstatemonitoringoftheeconomyfromthe

42

2006-2010AgribusinessSustainableDevelopmentConcept,2006-2008PriorityProgrammeto Implementthe2006-2010AgribusinessSustainableDevelopmentConcept
6

foodsafetyprospective,andasystemoffoodproductionincentivesandsubsidies takingintoaccountregionalspecialisation. Development of the agrifood sector should become one of main priorities for the countryssocioeconomicpolicies.

In recent years, international food trade has become a sensitive political process jeopardizing integrity of countries and survival of peoples.

Food supplyisbecominganationalideaforamajorityofcountries,whereasexportserves asanindicatorofacountryseconomicpower. Thecurrentglobalfoodmarketispeculiarinthatthedemandforgrain(onthepart ofthepoorestconsumercountries)andmeatanddairyproducts(firstofall,onthe part of the BRIC countries) has been growing simultaneously. Given biofuel consumption,chemicalcontaminationoffoodandmistrustofgeneticallymodified foods,thedemandforregularlyshrinkingresourcesoftraditionalfoodandagrarian primarygoodshasbeeneverincreasing.Therefore,pricesofhigh-quality(biologically andchemicallyclean)foodstuffswillgrowinthelongterm,withpricesofhigh-quality livestockoutputmarkedbyalongerproductioncycletogrowatanacceleratedpace. ThekeyareaofKazakhstansfoodsafetyisaccelerateddevelopmentofforages, efficientandbalancedintheircomposition,whicharethemainagribusinessoutput intermsoftonnage.Onlythiswillallowmeat,poultryandfishoutputtobeincreased. Forages are not so much about grain, as about vegetables, potatoes, cultivated herbsandbiologicaladditives.Therefore,thekeypartofthelong-termruralstrategy istobuildupthefodderbalanceandagriculturalmicrobiology. Hence, the pattern of areas under crops should be changed dramatically and industrialhigh-qualityforageproductionshouldbeenhanced.InKazakhstanicontext, in order to maintain a stable productive herd (and reduce the cost of agricultural outputasawholewhileincreasingtheprofitability)itisnecessarytoreverttostate policiesaimedatcreatingandmaintainingaforagestockfor1.5-2years(depending ontheregionalcontext). Previousexperienceandforecastsforthefutureshowthatatthispointoftimeitis impossibletocomebacktotheformerstyleofeconomy.Therefore,thefollowing requirementstoshort-termcrisismitigationmeasuresarise: 1. Artificialheatingofanysector(e.g.,agriculture)resultsinaninevitablecrisis inthissector.Aninvestorneedslong-termmarketincentives(firstofall,demand) ratherthancheapinvestments. 2. Normalinvestmentactivitiescannotbesecuredwithoutrelyingonenterprises (andentities)ownfunds. 3. Demand will be determined not only by an average income level, but also by incomedistribution.Thehigherthenumberofpeopleearningwellis,thestronger theeconomyis. 4.Short-termmeasuresshouldbedesignedwithdueregardformid-andlong-term development. Mitigation of negative crisis consequences and Kazakhstans recovery from the subsequentdepressionwilldependonthestatesstructuralpoliciesandmediumtermactivity.

3.2 Peculiarities of Rural Human Development

About47percentofthecountryspopulationlivesinruralareas.Adeepagricultural crisisinthe1990shasaffectedruralhumandevelopmentindicators.Firstofall,itis trueforlifeexpectancy,akeyhumandevelopmentindicator.Aconsiderabledropin
43

life expectancy explains an overall decrease in Kazakhstans human development index. While in 1990 life expectancy was 68.1 years, in 1995 and 2008 it was 63.5 and 67.1 years respectively .

Despite an insignificant improvement in this indicator over the past decade, it still remainsquitelow .ItismuchbelowthepeakthisindicatorreachedinKazakhstanin 1987(70.5years).ItisremarkablethatintermsoflifeexpectancyKazakhstanlags behind not only developed countries, but also almost all CIS countries including T ajikistan and Azerbaijan, where life expectancy is more than 72 years.

High mortality , low birth rate and a negative migration balance have for a long time affected growth of the countrys population. A slowing natural increase of the rural population is particularly noticeable in this context. Thus, over the past five years a natural increase of rural population totalled 25 percent, whereas for the urban populationitgrewby63percent.Thisfactreflects,firstofall,anincreasingrelative differenceintheoveralllevelandqualityoflifeinruralareasandlargecities.However , social factors and deterioration of the social infrastructure in rural areas are the mostimportantfactorunderlyingnegativeruraltrendsfromthehumandevelopment perspective.Thus,followingthecostoptimisationinthecountrysnationaleducation andhealthcaresystems,about60percentofruralsettlementswereleftwithoutpublic healthcare facilities, libraries and clubs, and over 50 percent were left without post offices.

Lack of healthcare facilities, qualified experts, poor quality of existing medical institutions in many rural settlements were reasons for growing rural mortality from infectious and parasitic diseases, first of all, tuberculosis. Respiratory diseases account for about half of all diseases in the countrys population

8.Thisalsohasto

dowithdeterioratingenvironmentandlackofhigh-qualitywatersupplyandsewage infrastructureandseverepollutionofsurfaceandgroundwaters.

Intermsofriverflows,Kazakhstanisoneofcountrieswiththepoorestwatersupply . Water sources originating within the country provide only 56 percent of water resources,withotherflowscomingfromadjacentstates.Furthermore,thequalityof almost all water facilities is assessed as unsatisfactory. Water supply of rural settlements has been almost completely destroyed, with more than 72 percent of settlementshavingnowaterpipes. Despite a certain drop from previous years, maternal and infant mortality in rural areas remains high.

Thenumberofchildrennotattendingschoolforhealthormoneyreasonsisgrowing. T wentyonepercentofruralsettlementshavenoschools,whereasapartofexisting schools fail to comply with standards and occupy premises without running water andsewage.Almosthalfofruralschoolshavenosportsgyms;manyofthemhave nolibraries,studyroomsorworkshops. Despitesecondaryeducationbeingmandatory,lowpopulationdensityanduneven distribution of rural population pose certain challenges for secondary education in ruralareas.Ashrinkingnetworkofboardingschoolsandanincreaseinthenumber ofungradedschoolsrenderaconsiderablenegativeeffectonthequalityofeducation in rural areas. There is an obvious shortage of teaching staff in rural areas and a high staff turnover, whereas the quality of rural teaching staff leaves much to be

44

desired.

7 8

Source:RKStatisticsAgency. Source:RKStatisticsAgency

Culturalandsportslifeinruralareasisalmostfrozen.Asaresultofcostoptimisation, regionalculturedepartments,whichwereinchargeofleisureinruralareas,were dissolved.Thenumberofmovietheatresdroppedby15times;ruralclubshave beenprivatised;amajorityofexistingrurallibrarieshavenoaccesstoinformation systemsandareinneedofmaintenanceandrepair.Sportsfacilitiesareprimarily inactiveandthereisashortageofsportsinstructorsinruralareas. Asaresult,thegapbetweeneducationalandculturallevelsofruralandcityyouthis growing,implyingthatinequalitybetweenruralandurbanpopulationwillfurtherbe continuedandwillgrow. Deepeninginequalitybetweenruralandurbanpopulationtoalargedegreehasto dowiththeincomeinequalitylevel.Averageagriculturalyearlywagesreportedby theRKStatisticsAgencyarethelowestamongallsectors.In2008,monthlyaverage wagesperworkerwereKZT31,397(cf.KZT81,072inconstruction,KZT74,644in industry).Thisis48.3percentlowerthantheaveragerepublicanfigure.Onthe average,thecountryspercapitaincomesexceedpercapitaincomesinruralareas byalmosttwotimes. Growingunemploymentandthelackofofficialincome-earningopportunitiesledto aconsiderablegrowthintheso-calledself-employedpopulation.Accordingtoofficial statistics,in20071.8million(about70percent)outof2.6millionself-employedlived inruralareas.Thus,themajorityofthoseemployedinagriculture,i.e.over73percent, areself-employed.Formorethan90percentofself-employedthisisnotaboutthe development of private entrepreneurship, but the only way to survive. Such employmentalsomeansexclusionoftheself-employedfromthesocialfundsupport. Asaresult,theshareofruralpopulationwithincomesbelowthesubsistence minimumexceedstheurbanonebyalmosttwotimes.Thisalsoleadstoalarge outflowofpopulation,firstofall,youth,tocitiesandothercountries.Atthemoment, theruralpopulationisdominatedbyelderlypeopleandchildren.Morethanathird ofallwomenemployedintheeconomyworkinruralareas. Thus,intermsofallhumandevelopmentindicators,theKazakhstaniruralpopulation is worse off than the urban population. In this context, high GDP growth demonstratedbythecountrysince2000andgrowingbudgetrevenueshavefailed toplayasignificantpositiveroleintheimprovementofruralpopulationslife.Inmany respects,thishastodowithinsufficientrepublicanbudgetallocationsforsocial purposes,firstofall,healthcareandeducation.Thus,in2006healthcareexpenses accountedforonly2.2percentoftheGDP,2-3timeslowerthanindeveloped countries9
. Cf: healthcare costs total 3.7 percent of GDP in Russia, 4.8 percent in Belarusand2.9percentinUkraine. Thesameistrueforeducationoutlays.In2006,educationexpensesaccountedfor 3.2 percent of GDP , which is less than a half of those in developed countries and lowerthaninBelarus(6percent)andUkraine(4.2percent).Asawhole,education and healthcare outlays are 1.5-2 times lower than in 1991, which suggests that there is a need for a noticeable increase in spending in these two major human development areas. This is particularly relevant for rural population, who are not abletoaddressthelarge-scaleproblemstheyfacebythemselves.

Low agricultural output growth, a rise in agricultural prices almost five times less than that in industrial prices since the 1990s, the lamentable state of the industrial

Source:RKStatisticsAgency

45

andsocialinfrastructurehavepredeterminedaneedtodevelopandadoptthe20042010 State Programme of Rural Development. Its primary goals are to secure a higherstandardoflivingfortheruralpopulation,setthestageforsustainablerural development, address environmental problems and achieve more efficient resettlementofthepopulation. The aforesaid programme provides for an improvement in physical infrastructure andruralhealthcare.Construction,reconstruction,majorrepairofhealthcarefacilities and provision of all required medical equipment and ambulance vehicles are performed under the 2005-2010 State Healthcare Reform and Development Programme.UnderthisProgramme,90healthcarefacilitieswereconstructed,450 wererepaired,andpopulationsneedfortuberculosistreatmentandobstetricaidin ruralareasismet.Toprovideruralhealthcarefacilitieswithqualifiedmedicalstaff, effectivemechanismstoensuresettlementofstaffinruralareasarebeingelaborated, such as the provision of free housing, one-time benefits, repayment of state educationloansandallocationoftargetededucationgrantsprovidedthatthestaff hasworkedinruralareasforatleastthreeyears. Agriculturalproductionispeculiarinthattheagricultureisnotonlyaproductionarea, but also a habitat for a large part of the countrys population. Therefore, the agribusinessstatusanditsdevelopmentrenderakeyimpactonhumandevelopment andviceversa.Whereasattheinitialstagestateeffortswerefocusedprimarilyon agriculturaloutputdevelopmentandgrowth,thecriticalstateofhumandevelopment indicatorsforruralpopulationcanturnouttobethemostsignificantbarrieronthe waytowardsfurtherdevelopmentofagribusiness.

3.3 Competitiveness of Agricultural and Food Products

Overthepasthalfacenturytheworldtradeinmanufacturedgoodshasincreased by54.5times,inagriculturaloutput-by6.9timesandinminingoutput-by9.5times. Whereasin1990theglobalexportofmanufacturedoutputwas50percentofthe 2000level,in2007itgrewbymorethan1.5times.In2007,worldagriculturalexports exceededthe2000levelbyathird.Thequoteddatatestifytooutstrippingthegrowth inglobalproductionandexportofmanufacturedoutputcomparedtothatof productionanddeliveryofagriculturalproductiontotheworldmarkets. Meanwhile,Kazakhstanhasadifferentsituation.Therepublicanexportsare dominatedbyminingoutput.AccordingtotheWTOtheshareofmanufacturedoutput in2007was13percent,agriculturaloutputalittlemorethan3percent.Asa comparison,in2007themining,manufacturingandagriculturaloutputinRussia accountedfor72.5,19.4and6.6percentrespectively. Asiswell-known, agriculture ) is one of
(including food-processing industry

Kazakhstansmostsensitivesectors.Therefore,assessmentofcompetitivenessof agriculturalandfoodoutputisofparticularrelevance. AspecialprojectoftheMinistryofAgricultureimplementedincooperationwiththe World Bank in 2005-2009 was dedicated to enhancing the countrys agricultural competitiveness. The project aimed to improve the agricultural competitiveness through facilitation of access to markets by improving the quality and safety of agriculturalproducts,facilitatingaccessknowledgeandinformation.Expectedproject outcomesincluded,amongothers,acceleratedintroductionofnewequipmentand advancedtechnologies,increasedproductivityofagriculturalentitiesandimproved varietyandqualityofoutput.

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ThehighestdegreeofcompetitivenessischaracteristicofKazakhstaniwheatexports. Overthepast10years,exportsofallproductsofthefood-processingindustry,other thanflour,areabsolutelynon-competitive. Inthepasttwoyears,Kazakhstanbecametheworldleaderinflourexport,witha dominantshareoftheworldmarket(18percentingrainequivalentin2007/2008), followedbyEU,Argentina,Turkey(largestexporterin2005/2006)andChina(listed inthedescendingorder).ThemainimporterofKazakhstaniflourisUzbekistan(50.56 percentin2007),thelargestworldimporterofthisproductin2006/2007.Lastyear Brazil became the largest world importer followed by Tajikistan (32 percent), Afghanistan (8.84 percent), Kyrgyzstan (3.9 percent) and Turkmenistan (1.95 percent). Letusanalysethesituationwithcertainabsolutelynon-competitiveproductsofthe food-processingindustry.Forexample,thesituationwithsugarexportsisquitelogical. DuringtheUSSRperiodtheshareofsugarimportascomparedtoitsproduction was about 77 percent. In 2001-2007, this indicator has dropped considerably, reaching41.2percentofproductionbytheendoftheperiod.Sugarexportsfrom Kazakhstanareratherinsignificant,withtheexceptionof2003-2005,when117.119 and128,000tonsofthisproductwereexported.Consumptionofthisoutputinthe countrydroppedby35.4percentcomparedto1990.Itisimpossibletostatethatthe shareofimportedsugarinpersonalconsumptiondemonstratesastabledownward trend.Nevertheless,in2001-2007thisindicatordroppedascomparedtothe1990s, whereas in 2007 it was about 40.7 percent (43.5 percent in 1990). From 1990, sugarproductionincreasedby12.8percent,butthedomesticmarketdemandis traditionallymetbyimports,primarilyfromtheCIScountries.In2007,95percentof sugarwasimportedfromRussia,Belarus,Kyrgyzstan,AzerbaijanandUkraine(listed inthedescendingorder).DomesticsugarisexportedtotheCIScountries,withthe most supplies in 2007 delivered to Kyrgyzstan followed by Russia, Ukraine and Tajikistan.In1995-2007sugarimportswere10(ormore)timeshigherthanitsexports. This situation changes when it comes to the export of meat and meat products. Overthepastdecade,theexportofmeatandmeatproductshasbecomeabsolutely non-competitive.In1990-2007,exportofmeatandmeatproductsdroppedfrom 341.7to2,900tons,i.e.almostby118times,whereasimportshaveincreasedfrom 13,500to193,200tons,orby14.3times.Thissituationhastodo,toacertainextent, withaconsiderabledropinproduction,whichmorethanhalvedduringtheperiod 1990-2007. Ofspecialconcernisthesituationwithpoultryimports(chickenthighquarters)and edible by-products. For example, in 2007 147,100 tons of these products were imported (including 145,400 tons from non-CIS countries), accounting for 70.6 percentoftotalconsumptionofthisproductinthedomesticmarket(62.6percentin 2004).Sixtyfourthousandtonsofpoultryandedibleby-productswereproducedin 2007, 2.3 times less than imported. Let us also add that poultry production has droppedby68percent,from200,900to64,000tons,from1990. Meanwhile,comparedtothemarketsofothertypesofmeat,theworldpoultrymarket hasbeenthefastest-growingone.Chickenaccountsforthemainpartoftheglobal poultryproductionandconsumption.Asawhole,overthepastquarterofthecentury thepoultrymarketlandscapehaschangeddramatically.WithEuropebeingthelargest manufacturerofthisproductintheearlyeightiestheUSA,BrazilandEUbecame themainpoultrysupplierstotheworldmarketbytheearly21stcentury.About30 percentofpoultryisproducedinAsia,NorthernandCentralAmerica.SouthAmerica andEuropeaccountforacombinedshareofapproximately15percent.In2000,
47

poultryexportsgrewby6percentandreachedarecordlevelof8.7milliontons, whereastheglobaldemandhasexceeded85milliontons,whichcausedtheUSA, Brazil and EU to increase world market supplies. The highest demand growth is reportedinChinaandintheeast.TheworldslargestpoultryimporterisRussia. Vegetables, melons and gourds produced in and exported from Kazakhstan are highly competitive. The countrys exports of vegetables, melons and gourds are steadily growing: in 2003 exports increased by 74 percent from 1990, with their production growing by 77 percent. Over the said period, the import dynamics remained almost unchanged. The relative share of imported vegetables, melons andgourdsofthecountrysproductionisinsignificantanddecreasedconsiderably in1990-2003,from3.4to2percent. Onthecontrary,productionoffruits,berriesandgrapeshaslostitscompetitiveness since the 1990s. During the period 1990-2003, total output of fruits, berries and grapesdroppedby2.3times.Atthesametime,exportsofthesetypesofproducts haveincreasedby4times,whereasimportdynamicsarequiteunstable.However, itsshareofthecountrysownoutputislargeenoughandtotalled45.4percentin 2003(13percentin1990).Unfortunately,duetolackofdataonexportandimportof vegetables, melons and gourds, fruit, berries and grapes in 2004-2008 it is impossibletodeterminetheircompetitivenessduringthesaidperiod.Nevertheless, itisquiteclearthatthecountrydoesnotpaydueattentiontofruit.Thisisarather negativefactorforacountrythatcangrowawiderangeoftheseproductsinsignificant quantities (other than citrus and exotic fruits). A drop in the output resulted in an increaseintheshareoffruitimports,whichin2003accountedforalmosthalfofthe entirepersonalconsumptionoftheseproducts(14percentin1990). Asawhole,theKazakhagrariansectoroutputisnon-competitiveduetoanumber of traditional reasons: obsolescence and wear and tear of facilities, low labour productivity,ratherlowcropandlivestockindustryefficiency.Atthemoment,budget subsidies (both direct and indirect) to Kazakh agricultural manufacturers are essentiallylowerthaninmanyWTOmembercountries.InKazakhstan,theamount ofstatesupportperhectareofarablelandisestimatedatUS$7.5,11timeslower thaninCanada,15timeslowerthanintheUSA,115timeslowerthanintheEUand 570timeslowerthaninSwitzerland.AccordingtotheWorldBank,developedcountries spendUS$1billioneverydaytosupporttheiragriculturalproducers.Therefore,the negotiation partners requests for considerable agricultural concessions are completely unjustified. The agrarian sector of the WTO member countries has incomparable competitive advantages; therefore, many Kazakh agricultural producerswillbemerelystampeddowntotheground.Atthesametime,theKazakh marketwillreceiveimportsinsuchquantities(butnotofthebestquality)thatwill pose serious problems for the countrys food safety. Meanwhile, as convincingly demonstratedbytheglobalexperience,ifexceedingthethresholdof30percentof thefoodmarket,importsjeopardizeacountryseconomicsafety. As far as per capita exports are concerned, in 2005 EurAsEC member countries laggedbehindtheEurozonesindicatorsbymorethan45years,withKyrgyzstan, Tajikistan and Uzbekistan trailing by more than 60 years, Belarus and Russia by morethan45yearsandKazakhstanby45years(foryourinformation:EU8countries laggedbehindtheEurozonespercapitaaverageexportsby30years). Note:TheEU8includesHungary,Latvia,Lithuania,Poland,Slovakia,Slovenia,Czech RepublicandEstonia. OfalltheEurAsECmembercountries,Kazakhstanreportedthehighestpercapita exportsin2005.
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3.4 Agricultural Trade Policy Reforms in the Context of the Republics Accession to the WTO and its Impact on Human Development
At present, the countrys foreign trade policies are quite liberal, imposing no quantitativerestrictionsonimports,havingratherlowcustomsdutiesanditsexport and import licensing system focused on a short list of goods, primarily dual-use goods,etc. Thecountryslegislativeframework,asawhole,isinlinewithWTOprinciplesand rules,whichisevidencedbycurrenttop-priorityandmostrelevantlawsonforeign tradesuchastheCustomsCode,thePatentLaw,RKLawsOnTrademarks,Service Marks and Names of Places of Origin of Goods, On Protection of Selection Achievements,OnPlantQuarantine,OnStandardisation,OnCertification,On Measures to Protect the Domestic Market in Case of Import of Goods, On AntidumpingMeasures,OnSubsidiesandCountervailingMeasures,OnUnfair Competition,etc. Themainforeigntradepolicytooliscustomsduties.Theoverwhelmingmajorityof tariffs(over85percent)areadvalorem.Theaveragetariffrateisabout8.6percent. Advaloremratesrangefrom0to30percent,withcommodityitemshavingarateof 0to15percentaccountingfor95percentofallcommodityitems.DuetoKazakhstans accessiontotheCustomsUnionon1January2010,customsdutyrateswillincrease. InKazakhstan,thepreferencesystemisalsoappliedtoanumberofdeveloping andlessdevelopedcountriesbasedonthecommonpreferencesystemadoptedin internationaltrade.Accordingtothissystemgoodsoriginatingfromdevelopingand less developed countries are subject to more preferential customs duties (for developing countries) or are exempt from customs duties (for least developed countries). Alongwithcustomsduties,importsarealsosubjecttoavalue-addedtax,VAT(16 percent),andexcisetax.VATdependsonthecountryofdestinationisleviedfor almostallcountriesandallgoods.Feesforcustomsclearance,storageandother customsproceduresarefixedandreflectthecostofrespectiveservicesrendered toforeigntradeactivityentities. InthecontextofchangesincustomsproceduresduetoKazakhstansaccessionto theCustomsUnion,thefocusonfurtherforeigntradepolicyreformsshouldbemade notonlyonmeasuresappliedattheborder,butalsothosewithinthecountry.These canincludeintroductionofinternationalqualitystandards,sanitaryandphytosanitary measures, provision of access to information and new technologies, respective institutional reforms enabling benefits from wide involvement into regional and internationaltradeassociations.Here,keyelementswouldbeestablishmentofan efficientregulatoryenvironment,developmentofmeasurestosupportandpromote productionofhi-techcompetitivegoods,establishmentofinstitutionsforsupporting andpromotingKazakhgoodsininternationalmarkets. Since further development of agricultural trade policies is connected with KazakhstansaccessiontotheWTOAgreements,foreigntradepolicytoolsshould alsobeinlinewiththerulesandprinciplesofthisinternationalorganisation.Tradein agricultural goods is governed by dedicated WTOs Agreement on Agriculture, accordingtowhichtradepolicyregulationconsistsofthethreekeyelements: 1. marketaccess; 2. domesticsupport; 3. exportsubsidies.
49

Access to the market of agricultural goods is only regulated by tariffs. Special protective measures can be applied in certain cases to compensate, in part, a dramaticdecreaseinimportpricesoradramaticincreaseinimportvolume.Insome cases,minimumaccessissecuredwiththehelpoftariffquotas. Tomaintainfoodsafety,developedcountriesimplementthefollowinggovernment programmes:cropinsurance,earmarkingfundsforstabilisationoffarmersincomes, protectionoffarmersrevenuesincaseofcommoditymarketinstabilityandadverse weather conditions; interest-free advance loans for spring sowing campaigns, autumninterest-freecreditsallowingfarmerstopostponesaleofseasonalproducts, information and consulting services, in farmers debt re-structuring mediation programmes,agriculturaloutputmarketingsupport,adecreaseintaxesincaseof forcedsaleofbreedingcattleindrought-proneareas.Theyalsoapplyguaranteed purchase of surplus products at minimum prices, procurement and commodity interventions in the food market, specific soft loan forms; customs regulation (economicandadministrativeregulation),etc. At the moment, Kazakhstan does not apply quantitative restrictions for trade in agriculturalgoods.Furthermore,thecountrysaverageweightedtariffforagricultural imports is 16.3 percent, which is considerably lower than import tariffs in other countries,developedordeveloping.Forexample,WTOmembercountriesaverage weightedtariffratesareasfollows:Bulgaria35percent,Latvia34percent,Jordan 25percent,Oman31percentetc. A rather low import tariff, its further reduction as a result of Kazakhstans WTO accession negotiations, lack of quantitative restrictions at present and lack of possibilitiestousetheminthefuturecallforexpansionoftradepolicymeasuresthat arelegalfromWTOsperspective,withtariffquotasbeingoneofthem.Activeuseof thistoolbytheWTOmembercountriesincludingthosewithdevelopedagriculture, varietyoftariffquotaformsandadministrationmethodsappliedbythecountriesbeg aconclusionthatitisfeasibletokeepsuchanimportanttoolinthecountrysforeign tradepolicies.UseoftariffquotasisparticularlyrelevantforKazakhstanpursuing structuralreforms,inthecontextoflackofclearlyestablishedtraditionalcommercial linksandsustainablemarketsaswellashighdependenceonimports.Inthiscase, tariffquotascanactasaprotectivemeasurehelpingnottoadmittothecountry importedgoodsinexcessofacertainquantitythreateningdomesticproduction.Ifit isimpossibletopreserveahighersingleuniformtariffbindingleveloncertainsensitive goods,applicationoftariffquotabybindingarateatahighlevel,evenafterreaching certainimportquantities,itwouldbesomekindofapalliative. Domesticsupportmeasuresaregovernedwithintheframeworkofreductionofthe total aggregate measure of support (AMS), i.e. total subsidies granted to the agriculturalsector. Each WTO member assesses its AMS measure based on the data for the next threeyearsandcommitstoachievea20-percentreductionoverasix-yearperiod (for developed countries) or 13-percent reduction over a 10-year period (for developingcountries). Measureshavingaminimalimpactontrade(greenbox)areexcludedfromreduction commitments.Suchmeasuresincludegeneralservicesrenderedbystateentities,

50

forexample,research,diseasecontrol,generalinfrastructureandfoodsafety .Certain direct support forms, structural adjustment assistance and direct payments under environmentalprogrammesandregionalaidprogrammesalsobelonghere.

Excluded from the AMS assessment are certain state assistance measures to facilitate the development of agriculture and rural regions in developing countries and other forms of support accounting for an insignificant part, the so-called de minimis,i.e.fivepercentoftotaloutputfordevelopedcountriesand10percentfor developingcountries.

Asmentionedabove,Kazakhstanisimplementingcertaingovernmentprogrammes to develop agribusiness, improve its efficiency and develop rural areas including solutionofsocialandenvironmentalproblems.Theaforesaidprogrammesprovide forallocationofsignificantandincreasingbudgetfundsforthesepurposes.

Among them are general measures aiming to control pest and diseases of crops and livestock, personnel training and retraining, agricultural science, development ofinformationandmarketingservice,developmentofgeneralinfrastructure,including thehydraulicnetwork,engineeringfacilities,etc.AccordingtotheWTOsclassification such measures have no or minimal negative impact on trade and are treated as GreenBoxmeasuresthatareknowntobeexcludedfromreductioncommitments.

Apart from these measures, significant amounts of budget funds are spent on agricultural production support. These measures include: state grants targeting developmentofeliteseedproductionandlivestockbreeding,purchaseoffuelsand lubricants,mixedfoddersandmineralfertilizersbyfarms,watersupplyforagricultural producers and subsidies for purchasing agricultural goods for further processing. Considerableamountsoffundsincludingthosefromlocalbudgetsareallocatedfor organisation and performance of spring field and harvesting campaigns.

Recently, national companies have been playing an increasing role in assisting agricultural producers through specialised funds including the Fund of Financial Support of Agriculture, Small and Medium Business Support Fund and relevant national companies such as Agrarian Credit Corporation, Food Corporation, KazAgroFinanceJSCandMalOnimderiCorporation.

Both the republican budget and these companies themselves allocate significant resourcestofinancespringsowingcampaigns,setupmachineryandtechnological stationsandruralcreditassociationsforprovidingservicestoagriculturalproducers. Theyalsoprovidesoftloansforprocuringandleasingagriculturalmachinery,process equipment and spare parts. The Fund of Financial Support of Agriculture also effects direct payments under mandatory crop production insurance programmes and offers microcredit to lowincomeproducers.

Formoreefficientadministrationofstateaidtoagribusiness,controloverallofthese organisationswastransferredtoKazAgroNationalOperatingHoldingCompany .The primary goal of the holding company is to implement state policies to facilitate the development of agriculture of the Republic of Kazakhstan by ensuring efficient management of investment assets and developing the corporate culture of jointstockcompaniesoperatinginagriculturewhosesharesitreceivedinconsideration for placed shares.

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KazAgrosobjectiveswithinthesetgoalareto:focusinvestments onaddressingpriorityobjectivesoftheagribusiness;improvetheefficiencyofstate investmentintoagriculture;developtheagrarianindustrialandserviceinfrastructure; assistinestablishinganddevelopingagriculturalclusters;developagriculturaloutput exports;regulateandstabilizedomesticfoodmarkets;enhancetheefficiencyof corporategovernance. Atthemoment,theholdingcompanyhasstartedthe2010agribusinessentitylending programme aiming to finance spring sowing and harvesting campaigns and purchaseagriculturalproductsforsubsequentfinancingofagriculturalproducers byenteringintoforwardprocurementcontractsandreplenishmentofagribusiness entitiesworkingcapital.ThetotalloanamountwillbeKZT80billiontobeborrowed byKazAgrofromtherepublicanbudget.Thetotalamountofthefinancialsupportfor theruralsectorin2009-2010takingintoaccounttheturnoverwillbeKZT248.6 billion.In2009,KZT17.6billionwasdisbursedforinvestmentprojects,KZT68.8 billionwasspentonthespringsowingandharvestingcampaigns,KZT55.1billion wasspentongrainprocurement.
To ensure the food market stability, KazAgroNationalOperatingHolding CompanyplacedaKZT120billionbondissuepaidfromtheNationalFund proceeds. A part of these funds was used to finance 12 agribusiness investmentprojectstotallingKZT10billion.In2008,Samruk-KazynaFund placed target deposits with second-tier banks (STB) for an amount exceedingKZT20billion.Thesefundsweredisbursedforproductionand processingofwhitesugar,vegetableoil,milkandmeat10.

Higheragribusinesscompetitivenessisparticularlyimportantduetolimitationsof thecountryshomemarket,needtosearchfornewmarkets,diversificationof productionandexpansionofagriculturalexports.Alongwiththis,agriculturalexports canbelimitedduetoremotenessofworldmarkets,thecountrysland-lockedstatus and,therefore,hightransportationcosts.However,itshouldbenotedthatitis questionablewhetheragriculturalexportsubsidiescanbeusedsincethereisa trendtoprohibitthisformofsupportwithintheWTO. Asiswell-known,theAgreementconsiders exportsubsidiestobedirectexport subsidiescontingentonexportperformance,internaltransportsubsidiesapplying toexports;subsidiestoreducethecostofmarketinggoodsforexportandsome others.TheWTOmembers,whoreservetheirrighttoprovideexportsubsidies, identifiedcertaingoodssubjecttosubsidies.Suchcommitmentsprovideforagradual reduction in export subsidies expressed both in value terms and volumes of subsidisedexports.Thus,thedevelopedcountrieshavecommittedtoreduceduring thesix-yearimplementationperiodcommencingintheyear1995theamountsof directexportsubsidiesby36percentfromthebase-periodlevelandthevolume subsidizedexportsby21percent.Developingcountriesareexpectedtoreducethe budgetaryoutlaysforexportsubsidiesby24percentandexportvolumesby14 percentinthecourseof10years.Therefore,itwouldbeimportantforKazakhstanto usecertainkindsofsuchsubsidies,inparticular,toreducemarketingcostsfor agriculturalexportandinternaltransportationofexports.
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ProceedingfromthecurrentstatusoftheKazakhagriculture,itsmulti-functionality,it wouldbeveryimportanttousetheSpecialandDifferentialTreatmentstipulatedby
10

Source:50.KZ,Issue#10,2009

theWTOsAgreementonAgriculturefordevelopingcountries.Itisparticularlyrelevant tousestateassistancemeasuresforpromotingthedevelopmentofagricultureand rural regions, investment subsidies and raw-material subsidies, which, as a rule, areprovidedtolow-incomeorresource-poorproducers.TheSpecialandDifferential T reatmentfordevelopingcountriesimpliesthatsuchmeasureswillbeexcludedfrom thereductioncommitments.

It is even more important due to the fact that Kazakhstans agriculture can suffer considerably from strengthened competition as a result of further liberalisation of trade and accession to WTO Agreements, especially in the short-term prospect. Therefore, further liberalisation steps should be phased, consecutive and within a clear-cuttimeframe. Completion of agricultural reforms and the successful and stable development of agriculturecallfortargetedstatepoliciesandrespectivefinancialsupport.Itisalso importanttopointouttheultimategoalofallreforms,whichishumandevelopment in its broad sense, i.e. meeting a persons growing vital needs, formation and realisationofapersonscapabilitiesineconomic,social,culturalandpoliticalareas. At the same time, agribusiness development will promote the rural populations wellbeing, growing revenues and quality of life, as well as an increase in the consumption of high-quality and various foods made in Kazakhstan. T ogether with areductioninforcedmigrationofruralpopulationtocities,primarilyyouths,allthese will also mitigate the housing and labour market tensions and promote human developmentinthecountry,asawhole.

Table 3.5 SWOT analysis of the impact of trade, trade policies and Kazakhstans accession to the WTO on human development: agricultural sector
Strengths 1. Tradeliberalisationpromotesmore efficientdistributionoflimitedresources, including labour, growth production efficiencyandlabourquality; 2. Participationininternationaldivision of labour based on comparative advantages,improvementofprofessional skillsandlabourspecialisation; 3. Ensuring long-term economic growthandhumandevelopmentinthe long-termprospect; 4. Expansionofquantityandqualityof goods at more affordable prices for consumers; 5. Stableandtransparentlegislative framework in line with international standards; 6. Creation of more favourable conditionsforattractingforeign Weaknesses 1.Challengingclimaticconditions,lackof adequate transport infrastructure, low population density, remoteness of commoditymarkets,land-lockedstatus; 2. raw-materials orientation of manufactureandexportofcommodities; 3. non-competitiveness of high valueaddedfoods; 4. high transportation costs when exporting/importingcommodities; 5. under-developed production and socialinfrastructure; 6. limited ability to apply protectionist measures,inparticular,impossibilityto applyquantitativerestrictions. 7. insufficient knowledge of and experienceinforeigntradeoperations; 8. underdeveloped marketing and informationservices,lackofawareness

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investment,newtechnologiesandknowhow; 7. Expansionofcommoditymarkets fordomesticoutput,exportdiversification; 8. Participationindevelopmentofthe internationalrulesoftradeingoodsand servicesthroughWTOmembership; 9. Obtainingthemost-favoured-nation treatmentfromWTOmembercountries; 10. PossibleuseoftheWTOdispute settlementmechanism. Opportunities 1. Stage-by-stage and gradual liberalisationoftradeinagriculturalgoods usingthetransitperiod; 2. Useoftariffquotasasaninterimtool between tariffs and quantitative restrictions; 3. Almost unlimited state aid possibilities in developing the overall agriculture infrastructure, improving agricultural workers qualifications, providing information and consulting services; 4. provisionoftargetedstatefinancial aidtoagriculturalproducersinincreasing efficiencyandexpandingproductionto theextentpossiblefortheWTOmember countries within the framework of the stipulated Aggregated Measure of Support; 5. Use of Special and Differential TreatmentprovidedundertheAgreement oftheWTOonAgriculture; 6. Manufactureofmorecompetitive output based on the countrys comparativeadvantages; 7. Search for new markets for specialiseddomesticoutput. 8. A decrease in unemployment amongruralpopulation,povertyleveland socialtension.

ofpotentialsalemarketsandforeigntrade rules. 9.small-scaleproductionandfragmentation ofagriculturalproducers; 10.strengthenedcompetitionand,asa consequence,possibledeteriorationofthe statusofthecountrysagriculture,especially intheshort-termprospect; 11.morelimitedability,asfarasintroduction ofnewregulationmeasuresfortradein goodsandservicesisconcerned,inissues ofgovernmentsupportandsubsidiesfor certaintypesofindustries; 12.impossibilitytousequantitativetrade restrictionsotherthaninspecialcases; 13.prevalenceoflargertradepartners opinions and position in the course of multilateralnegotiations. 14.undevelopedinformationandmarketing services, no knowledge of potential commoditymarketsandforeigntraderules; 15.lackoftheclear-cutexportstrategy; 16. insufficient consideration of the peculiaritiesoftheagriculturalsector,which isatthesametimeruralpopulationshabitat, ininternationaltraderules; 17.limitedabilitytodevelopruralareas, ensurefoodsafetyandsolvewaterand environmentalproblems; 18.growingunemploymentamongrural populationandstrengthenedsocialtension inthetransitionperiod; 19.internalmigrationgrowth. Threats 1. failuretoobtaininthecourseofWTO accessionnegotiationstherequiredlevelof the Aggregated Measure of Support requiredduringthetransitionperiodas stipulatedbytheAgreementoftheWTOon Agriculture,foradaptationofagriculturefor functioningwithintheWTOmembership context; 2. preservationandstrengtheningofthe countrysdependenceonimportsofa considerablenumberoffoods; 3. preservation of raw-materials orientationofexport; 4. preservationandreplicationofpoverty amongruralpopulation.

54

Source:compiledbytheauthors.

Note: Opportunities mentioned in items 6 and 7 can have a positive impact on unemployment,povertyandreductioninsocialtension. Threats(consequencesofKazakhstansaccessiontotheWTO)mentionedinitems 2,3and4shouldbetakenintoaccount,sinceKazakhstanneedsthetransition period to complete reforms aimed at enhancing the production efficiency in agribusiness,maintainemploymentandkeepexportpositions. Thethreatscitedinitems2,3and4havetodowithpossibleoccurrenceofcompetitive pressure,especiallyduringthetransitionperiod.FollowingKazakhstansaccession totheWTO,asaresultofliberalisationoftheagriculturaldomesticsectoritishighly likelythatforeignenterpriseswiththebestmanagement,bestproductivityandhigher capitalisationwillemergeinthehomemarket.Inthelong-termperiod,itispossible thatcompetitiveKazakhstanienterpriseswillappearinthisarea.

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SECTION IV. NATIONAL POLICY PRIORITIES IN DISTRIBUTION SERVICES DEVELOPMENT

4.1 The Role of Distribution Services in National Economy and Population Employment. The Impact of the Global Financial Crisis on the Distribution Services Sector
DistributionservicesareKazakhstanslargesteconomicsector,withitsshare remainingat12percentofRKGDPduringthepasttenyears.Accordingtoofficial statistics,retailtradealoneemploys1.2millionpeople,orabout15percentofthe economicallyactivepopulation(unofficialstatisticsshowthisatabout3million).About 40percentoflegalentitiesareengagedindomestictrade.Atthesametime,this sectorfacesproblemsassociatedwithdeteriorationinthecountrysfinancialsector andthesocialstatusofthepopulationandpresenceofadministrativebarriers.
In Kazakhstan, distribution services include wholesale, retail, exchange trade, Internet trade and multi-level network marketing.

Wholesaletradeismarkedbyanunder-developedtradeinfrastructure,weak wholesalechain,frequentchangeofplayersandlackofownworkingcapital.These preventwholesaletradefromregulationofcommodityflows. Inearly2009,therewere814trademarkets.Classificationofbazaarsastrade marketsisratherformalanddoesnotencourageenterpriseownerstoinvestactively intodevelopmentofthemarkets.Lengthypermissionproceduresofsupervisory authoritiespreventthemarketsfromtimelyconstructionofnewfacilitiesand reconstructionoftheexistinginfrastructure. Assessmentoftherealstateofaffairsinretailtradecallsforongoingcollectionof statisticsonvariousindicators.TheRKStatisticsAgency,however,doesnotkeepa recordoftradenetworks,food,non-foodanddepartmentstores,whichmakesit impossibletoassesstherealstatusofthesector,identifyretailtradedevelopment trends,comparetheratiosofforeignandKazakhstaninetworks,exposedevelopment trendsandidentifythenumberofjobsprovidedbyretailtrade. Whiledeterminingstatepoliciesforsecuringastreamlinedaccessofgoodsto consumers,tradeadministrativebarriersshouldbeanalysed. Shortageofworkingcapitalisaproblemfor65percentofentrepreneurs,whereas 55percentofthemconsiderpoorvarietyofgoods,whichmayresultfromlackof workingcapital,asaproblem.Overathirdofentrepreneurs(35percent)facedsupply interruptions,whichtestifiestopoorinfrastructureandorganisationofcommodity supplies.Atotalof22.5percentoftendealwithpoor-qualitygoods,whichisa consequenceoflackofanadequateinfrastructureforstoringandpreparinggoods forsale.42.5percentreporteddifficultiesincertificationandlicensing,whichcalls forareductioninandsimplificationoflicensingandcertificationprocedures. Retailtradeentities,morethanothers,areinspectedbyvariousstatebodies.Most often,entrepreneursdealwiththetaxauthorities(82.5percent),statesanitaryand epidemiologicalcontrolbodies(72.5percent),fireinspection(52.5percent)and akimatemployees(37.5percent).Accordingtoentrepreneurs,officersofthe aforesaidauthoritiesareleadersinreceivingunofficialpayments.Primarily, entrepreneurspayinordernottohaveadministrativeproceedingsinitiatedagainst
56

them (37.5 percent), or to escape administrative liability (20 percent) or to get a smaller fine (12.5 percent).

The problem of retail trade financing by banks and financial institutions deserves special mention. Thus, almost half of entrepreneurs (45 percent) have no access to financing, with 30 percent of entrepreneurs having no accessduetohighbankinterestrates,and17.5percentunabletoprovide guarantees. Only 20 percent of entrepreneurs believe they have sufficient own funds. These findings beg a conclusion that Kazakh banks now fail to offer products supporting retail trade and, therefore, those entrepreneurs, whoneedadditionalfunds,havetoexpandtheirrangeofproductsandsales premises using their own funds or do not do it at all.

One can point out the following retail problems: the high price of modern sales technologies and business processes; the high cost of capital investment (land, rent, wage fund); under-developed retail consultancy market; impossibility to lower prices due to high direct costs, undeveloped logistics and expensive transportation services, etc.

Relations with manufacturing companies hold a special place in the functioningoftheretailtrade.Manufacturersreportdifficultiesdealingwith tradeentities,namely,obstaclesinplacementoftheirproductsbecauseof highrefrigeratorequipmentprices,theneedtopublishadvertisingmaterials, etc.Theserelationsstillcallforanimprovementinfunctioningmechanisms, with all parties concerned to participate in this process.

In Kazakhstan, the market share of organised retail trade ranges from 5 to 10 percent. A few other challenges in this sector can be pointed out.

- Kazakhstan has no standards with respect to the declared shop format. Quiteoftensupermarketscallthemselveshypermarketsandsetahighrent price when shopping areas are lacking. Discount stores, in their turn, overprice their merchandise for no obvious reason. It should be noted that due to lack of high-quality sales premises in the Kazakh real estate market world-famous brands refuse to deliver their merchandise to RK, for which reasonnewshoppingcentresexperienceconsiderabledifficultiesattracting lessees. - high logistic costs and lack of warehouses compliant with modern standards.

Duetotheimpactofthefinancialcrisis,thesedifficulties,previously unnoticed, have rendered a perceptible effect together with problemsassociatedwithimbalancesintheKazakheconomy.

Insufficient consumer demand prevents retail trade from considerably improving its state. In November 2009, commodity turnover was down by 6.1percentfromNovember2008,butupby13.4percentfromOctober2009 ( C h a r t 4 . 1 ) . S u c h r e t a i l t r a d e g r o w t h o v e r a m o n t h w a s d u e t o a n i n c r e a s e d activity both in fixed shops and in markets. In2009,theretailcommodityturnoverdroppedby10percentfrom2008.

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Chart 4.1 Retail Trade

Source:NationalBankoftheRepublicofKazakhstan In2010,thecommodityturnoverisforecastedtokeepshrinkingbyanestimated0.4 to 8.4 percent depending on the scenario of development of international and domesticmarketsandoilprices. Themainreasonswhythesituationwithdistributionservicesisgettingworseareas follows: worse financing terms, heavy debt load of trade enterprises, reduced incomesofthepopulation,administrativebarriers. Particularly,tradeenterprisesexperienceadropinreceivedworkingcapitaland, thus,canaffordlessprimaryproductsandmaterials.AccordingtotheNationalBank oftheRepublicofKazakhstan,inthefirstquarterof2009therateofsuchdropwas 7percentfromthesameperiodin2008,whereasinthethirdquarterof2009itwas aslargeas50percent.Duringthefirstsixmonthsof2009theAnti-CrisisProgramme allocationsweredisbursed,butsuchallocationswillstopinthesecondquarterof 2009 and in 2010. Increased provisions for foreign currency loans issued to borrowersearningtheirincomeintenge,arequirementintroducedbytheFinancial SupervisionAgency(FMSA),alsoplayeditsrole.Generally,thequalityofloanportfolio isdeteriorating.Ratingagenciesbelievethatthelevelofloansunderstressmay exceedtheofficiallyreportedonebyseveraltimes.Unsolvedtradefinanceproblems resultincreditlimitsstillbeingclosedfortheKazakhbanks. According to the Customs Control Committee of the Ministry of Finance of the RepublicofKazakhstanthegapbetweencustomspricesandretailpricesincreased by4timesoveraweek,from30Octoberto5November2009,comparedtoanormal levelat2.5-3. Weak trade prospects for 2010 also have to do with a heavy debt burden of entrepreneursandreducedincomesofthepopulation. Thelevelofthedebtburdenoftradeenterprisesis3timeshigherthanthatinother sectors.Alongsidewiththat,incomesofthepopulationkeepshrinking,whichwill affecttradein2010.Basedontheresultsofthefirstthreequartersof2009,income droppedby11.2percent.Incomesareexpectedtodropby25percentbytheendof 2009. However,eveninthiscontext,rigidadministrativebarriersarestillthere,requiring threeyearstosetupabusinessandonedaytocloseitdown.Accordingtoan
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entrepreneursurveysinKazakhstan,inordertoopenasmallshopanentrepreneur wouldhavetopay147visitsto37statesupervisoryandlicensingauthorities,prepare asetof431documents,payfrom865,000to935,000tengeandwaitfor812-840 daysbeforeopeningtheshop.

Trade Service Regulatory System in Kazakhstan

clause2oftheCivilCodegoverningbasiccivillawprinciplesofobligationsand dutiesofpartiestoapurchaseagreement, Law of the Republic of Kazakhstan dated 12 April 2004 No.544-2 On Trade Regulation, LawoftheRepublicofKazakhstandated31January2006no.124-3OnPrivate Entrepreneurship; DomestictraderegulationsapprovedbyGovernmentDecreedated21April2005 No.371, RulesofOrganisationofTradeMarketActivitiesapprovedbyGovernmentDecree dated05February2003No.131, Rules of Retail Trade outside of Trading Premises Performed through Network Marketing, Social Marketing, Mail-Order Sales and Other Methods approved by Government Decree of the Republic of Kazakhstan dated 14 September 2005 No.918, Rules of Cross-Border Trade approved by Government Decree dated 05 April 2007No.272, Law of the Republic of Kazakhstan dated 4 December 2002 On Sanitary and Epidemiological Well-being of Population and sanitary and epidemiological requirementstoestablishment,maintenanceandoperationoffoodtradefacilities approvedbytheOrderoftheMinisterofHealthcareoftheRepublicofKazakhstan dated30January2004No.100. Order of the Minister of Healthcare of the Republic of Kazakhstan dated 15 November2007No.669OnApprovalofRulesforIssuing,recordingandCompleting Hygiene Certificates for Food Production and Storage Facilities, Domestic Trade FacilitiesandVehicles; Law of the Republic of Kazakhstan dated 22 November 1996 No.48-I On Fire Safety, LawoftheRepublicofKazakhstandated16July2001No.242-IIOnArchitectural, CityPlanningandConstructionActivitiesintheRepublicofKazakhstan, LawoftheRepublicofKazakhstandated10July2002No.339-IIOnVeterinary Services, EnvironmentalCodeoftheRepublicofKazakhstandated09January2007.

Product Requirements

Law of the Republic of Kazakhstan dated 09 November 2004 No.603-2 On technicalregulations, LawoftheRepublicofKazakhstandated05July2008No.61-4Onaccreditation inconformityassessment, LawoftheRepublicofKazakhstandated07June2000No.53-2Onensuring theunityofmeasurements.

LiabilityforOffences

CriminalCode CodeofAdministrativeOffences

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Thetimeforwaitingandperformingprocedurestosetupashopshouldbe reducedtosixmonthsandunlawfulpaymentstostatebodiesshouldbe eliminated. 4.2TheDevelopmentandLiberalisationofWholesaleandRetailTrade

Since 1995, retail and wholesale commodity turnover in Kazakhstan has been steadilygrowing.Retailcommodityturnoverincreased17-foldby2009,compared to1995,whereaswholesalecommodityturnoverincreased129-foldforthesame period(seeTable4.1).
Table 4.1

Retail and Wholesale Trade in the Republic of Kazakhstan (in KZT millions)

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Source:StatisticsAgencyoftheRepublicofKazakhstan Muchofthefocusinthedistributionservicesareaisplacedontheestablishmentof developed trade infrastructure equipped with state-of-the-art trade equipment enabling high-quality customer care using modern trade forms and methods, developmentoflargespecialisedanduniversalmalls. Asarule,newtradefacilitiesareofthesupermarkettype,usingtheshelfproduct placementandofferingbothretailandsmallwholesaleservices. Almostinalllargeshoppingcentresandmallscustomersmaypaywithcreditcards viaPOSterminals.Effortstakeninthisareafacilitatethereductionofcashturnover andexpansionofnon-cashpayments. Effortsarebeingmadeinthetradeserviceareatobringtrademarketsinconformity withtheRulesapprovedtheGovernmentDecreeoftheRepublicofKazakhstan. Theyarebeingreconstructed,withlargepavilionsconstructedandappropriate conditionsarrangedforcustomersandsellersandsanitary,hygienicandtechnical conditionsimproved. Suppliesofessentialgoodstodistributionservicemarketsaremonitored(atpresent, suchessentialgoodsassalt,sugar,vegetableoilandricearereservedbymain

wholesaleprovidersintheoblastconsumermarket).Foodreservesinoblastsand citiesareanalysedonaweeklybasis(10fooditems). Inordertoensurestablesaturationofthedomesticmarketwithhome-madesugar andvegetableoilatreasonablepricestrilateralmemorandahavebeensigned betweentheoblastAkimat,wholesaleandretaileconomicentities. Meetings are held on a regular basis with entrepreneurs, manufacturers and managementoftrademarketstodiscusssupply,pricechecksandtradenetwork expansion. Inordertoproviderealassistancetoagriculturalproducers,tradeplaceswere allocatedinoblastfoodmarketsspecificallyforproducerstoselltheirproducts. Directproductsuppliesfromproducersrepresentativestoretailnetworksare practiced,whichreducesthenumberofintermediariesbetweenproducersand customers. InordertoprovidepeopleofKazakhstanwithagriculturalproductsatlowerprices, retailtradefairshavebeenarrangedsinceOctober2004inthemarketsandmalls, whichinvolveagriculturalentities,processingentitiesandindividualsfromallregions of an oblast. A wide range of products, such as meat, milk, fresh fish, eggs, vegetables,potatoes,flour,breadandbakeryproductsareprovided.Theseproducts cost1015percentlessthanaveragemarketprices. Duringagriculturaltradefairssellingpremiseswereprovidedtomanufacturersfree ofcharge.

4.3 Outlook for Efficient Distribution Services Development

It is recommended to make the following arrangements for further efficient developmentofdistributionservices: - to revoke secondary legislative acts that create administrative barriers to development of trade services in Kazakhstan; - to improve regulatory acts governing retail and wholesale trade, including the following trade regulation areas in Kazakhstan: - amending the Administrative Code in order to ensure compliance with the requirements imposed to the market, establishment of a trade enterprise register, trademarketcertification,implementationofregulatoryrequirementstoprovisionof populationwithsalespremises,separationofrightsandobligationsbetweenmarket owners and market administrators, and assignment of responsibility upon market administrationforactionstakenintrademarketsandreporting; -introductionofacommonsystemofrulesforretaileroperationsintheRepublicof Kazakhstan.Theprimaryobjectiveofthestandardsintroducedistomakerelations betweenproductsuppliersandtradeenterprisesastransparentaspossible,andto protectconsumersfromretailtrademonopolization; - introduction of main standards to prevent monopolisation of regional markets by largetradenetworksthroughimpositionofrestrictionsonenetworkcancontrolno more than 25 percent of sales of food products within one oblast entity, municipal Akimatorrayon; -settingdeadlinesforpaymentforproductsdependingontheircategory .Aproduct withashelflifeofupto10daysshouldbepaidnolaterthan10daysafterthedateof itsacceptance,withashelflifefrom10to30daysnolaterthan30days,forfood productswithashelflifeofabove30days,andalcoholicproductsmadeinRussia nolaterthan45days.

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Furthermore,giventhatshuttletradebusinessissociallyimportant,beingawayfor asignificantpartofthepopulation,especiallyintheborderareas,tosurvive,focus shouldbeplacedonadministrativebarriersandimperfectionoflegislationgoverning shuttletrade,whichaffectsthistypeofbusiness. In this regard, the Kazakhstan Entrepreneurs Forum proposes to hold a legal awareness workshop programme for entrepreneurs and civil servants, to analyse the existing regulatory framework and prepare proposals on changes and amendments,aswellastopublishabookletRightsandDutiesofShuttleTrader. Insufficiency of sales premises is a still pressing problem in Kazakhstan, which causesanti-competitiveactionsonthepartofmarketownersandhighrentalcosts and,therefore,affectspricesofgoods. AccordingtotheStatisticsAgencyoftheRepublicofKazakhstanthereare164.0 squaremetresofsalespremisesincludingthoseintrademarketsper1,000ofthe population. ThisfigureindicatesthatKazakhstanisfallingbehindaveragestandardsindeveloped countries,includingCIScountries.Inthisregards,thereisaneedtointroducethe standardsforurbanareas. Inthecontextofinsufficientsalespremisesandmarkets,especiallyinurbanareas, Akimatsshouldelaborateregionalplansforupgradinganddevelopingtrademarkets till2012,takingintoaccounttherequirementsandlocationrecommendationsand implementmechanismstofacilitateanupgradeofsalespremises.

Table 4.4 SWOT Analysis of economic opportunities for development of distribution services in the Republic of Kazakhstan Weaknesses Strengths
1.GeopoliticallocationofKazakhstanin theheartoftheEurasianContinenthasa significanttransitpotentialandprovides terrestrial communication between EuropeandAsia,aswellasRussiaand China; 1. Difficult climatic conditions, lack of adequate transport infrastructure, low population density, remoteness of populationcentres,land-lockedstatus; 2.Low consumer product demand elasticity;

2.Stable political and socioeconomic 3.Undeveloped transportation and environmentinthecountry; logisticssystemsandlogistic(warehouse) 3. A general increase in populations infrastructureinthecountry,hence,high logisticcosts; solvency(withoutcrisisdata); 4.Anincreaseinindustrialoutput,risein 4. Undeveloped distribution systems, foreigntrade,wholesaleandretailtrade product distributors, logistic service providers and industrial enterprises turnover. manufacturingproducts. 5. Certain undeveloped types of distributionservices,forexample,retail trade; 5. Sophisticated territorial and administrativestructureofKazakhstans governmentbodies;

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6. Uneven distribution of food and industrialplants; 7. Bulkiness of the existing distribution servicesregulationframework; 8. Undeveloped information and marketingservices; 9.Dramaticlackofqualifiedstaffanda comprehensive training and retraining systemfordistributionservicesstaff Opportunities Threats 1.MakingKazakhstanatrans-continental 1.Reducedfoodsafetyofthecountry; economiclinkforinteractionofEuropean, Asian, Pacific and South Asian trade 2. Higher retail prices of consumer productsreducingthepurchasingpower economicsystems; andsocialprotectionofthepopulation; 2.Establishmentofadevelopedservice centreinKazakhstanfortheentireEurasian 3. Reduced quantities, required range regioninordertoprovideawiderangeof and quality of products supplied to the distributionservicesmeetinginternational domesticmarket; standards; 4.Lackofacompetentinfluentialpublic 3. Establishment of a transparent and association of trade enterprises in predictabledomesticlegislativeframework Kazakhstan can lead to tougher fordistributionservicesinlinewithinternational competition,andconsequently,possible deterioration of the status of trade standards; enterprisesinKazakhstan. 4.Expandedquantityandqualityofproducts providedtocustomers; 5.Opportunitiestoestablishtransnational companies(TNC)inthefoodindustrywithin EurasianEconomicCommunity(EurAsEC); 6.Promotionofeconomicgrowththrough domestictradeexpansioninthelongterm. Source:compiledbytheauthors.

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SECTION V. CONCLUSIONS AND PROPOSALS

OutstrippingGDPgrowthratesrecordedin2007andthefirsthalfof2008were primarilyduetotheboomingnaturalresourcessectorcausedbyanincreaseinoil productionandariseinworldhydrocarbonprices.Theglobalfinancialcrisishas impactedonthefallinKazakhstansGDPgrowthratesinthefirsthalfof2009by2.4 percentascomparedtothesameperiodof2008.Nevertheless,theestimatedGDP forthethirdquarterof2009andthefourthquartertrendshavedemonstratedan increaseinKazakhstans2009GDPbyabout0.5percentascomparedto2008. Thecurrentcrisishasexposedconsiderablevulnerabilityandalowdegreeof independenceofKazakhstanseconomyfromexternalshocks,whichhastodo witheconomicstructureinefficienciesandremainingdisintegrationbetweenthe financialandindustrialsectors. Inthiscontext,atthepost-crisisdevelopmentstage,Kazakhstanseconomyneeds toimplementstructuralreformsandconverttothe
industrialdevelopmentmodel,

which will allow the dependence of the economy on the world energy and mineral pricestobemitigated. There is also a need to enhance the investment appeal of Kazakhstans economy bysettingafavourableinvestmentclimateintherealeconomicsector.T othisend, Kazakhstanneedstodevelopjustifiedinvestmentpolicies,withaneffectivesystem ofregulationoftheirsectoralandregionalfocustobedetermined. Inthecontextoftheongoingglobalfinancialcrisis,cooperationwithintheEurAsEC and

establishmentoftheCustomsUnionbyBelarus,RepublicofKazakhstan andRussianFederation canbeconsideredasanefforttojointlyovercomethe

negative consequences of the crisis. The Customs Union, an advanced regional union,isopenforotherCIScountriestojoin.IntegrationofKazakhstanwithSPECA countriesisalsoseenasapromisingoption. To date, the Customs Union countries have already implemented a unified and preferentialtraderegimewithintheCustomsUnion(importdutyratesinthethree countriesarezero).Moreover,furtherintegrationwithintheCustomsUnionwillmake itpossibleforproducerstoapplyuniformthird-partytraderegulationmeasures,which willfacilitatedeepereconomicrelationsbetweenrealsectormanufacturersandlead toamorefavourableinvestmentregimethroughouttheCustomsUnion. Atthesametime,theCustomsUnioncountriesarenegotiatingforeignsuppliers accesstotheircommodityandservicemarkets,stateagriculturesupportmeasures andintellectualpropertyrightswithintheframeworkoftheWTOaccessionnegotiation process. In the future, at subsequent stages of development of the Common EconomicZone,theseareaswillrequirecloseattentioninthecontextoftheintegration ofBelarus,RepublicofKazakhstanandRussianFederation. EffectiveintegrationoftheCustomsUnioncountriesandWTOaccessionwillcallfor the best possible harmonisation of domestic legislation and the three countries WTOcommitmentsintheareaofservices,stateagriculturesupportmeasuresand intellectualpropertyrights. Particular emphasis should be placed on effective development of agriculture.

Withoutaneffectivestatesupportsystem,promotionofpotentialconsumerssolvent demandandstructuralpolicyprioritisationinthemarketadaptationcontext,itwould beimpossibletopursueefficientcompetitionpoliciesandenhancedomestic agriculturalproducerscompetitiveness. Asetofmeasuresneedstobedevelopedtoprotectdomesticagriculturalproducers. Focusshouldalsobeplacedonprotectingthehomemarketfromunjustified

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expansionofimportsandonsupportingdomesticproducersinthedomesticand foreignmarkets. Thereisaneedforenterprisemanagerstofocusmoreonimprovementofthequality of products and services, development of new competitive types and models of products.Anincreaseintheshareofimportedfoodssaturatesthemarketwithcheap, poor-quality and often unhealthy imports. Certainly, this undermines the competitivenessofdomesticagriculturalproducers,leadstogrowingdependence ofthecountrysconsumermarketonimportedfoods.Inthiscontext,anumberof measuresneedtobetakentoreduceimportsoffoodsproducedinthecountryin sufficientquantities.Thisistrueforalltypesofmeatproductstraditionallyconsumed bythecountryspopulation,vegetables,melonsandgourds.Fruitandberrieshold aspecialplaceonthislist.Strictmeasuresneedtobetakenwithrespecttoimports of those products, whose quality and other consumer properties cause serious concerns.Inordertoharmonisenationalstandardswiththerecommendationsof theWorldHealthOrganisation(WHO),UNFoodandAgriculturalOrganisation(FAO) themainprinciplesoftheirelaborationinWorldTradeOrganisation(WTO)member countriesneedtobeconsidered.Thiswillhelpdevelopanefficientsetofmeasures toregulatethequalityandsafetyofagriculturaloutputformaintainingtherequired highqualityoffoodsandfacilitatingaccessionoftheRepublicofKazakhstantothe WTO. One of the reasons aggravating the fall in domestic agricultural output is loss of access of the rural population and agribusinesses to affordable credit. The main reasonfordiminishingcompetitiveadvantagesofKazakhstanigoodsislowefficiency of utilised production factors. The quality indicators of economic dynamics were affectedbyawidergapinlabourproductivityratesandwagesfavouringthelatter. The main efforts of the governments agrarian policies should be focused on protectionofthehomemarketagainstfoodimports.Sugar,meat,meatproducts, vegetables, melons and gourds, fruit should become the main areas of trade regulationinyearstocome.Themeatsegmentofthedomesticfoodmarket,firstof all,poultryshouldbeofspecialconcern.Itappearsexpedienttoimplementquotas formeatimportsintoKazakhstan. As far as human development is concerned, the analysis of the trade policy as a whole,andcertainsectorsspecificallyenablesthefollowingconclusionstobemade: agricultureisKazakhstansmostsensitivesectorthatsufferedmorethanothers fromtransitionfromacentralisedeconomytoamarketeconomyandfromdissolution oftraditionalinter-farmconnections;afallinthissectorsoutputwassoconsiderable that it is now expedient to revive and develop production to maintain a minimum levelofownproductionrequiredonthegroundsofthecountrysfoodandeconomic safetyconsiderations; thefallinthecountrysoutputasawholeand,inparticular,inagriculture,was accompaniedbyaconsiderabledropinallhumandevelopmentindicatorsincluding adropinlifeexpectancyandpopulationincomesandunemploymentgrowth; agriculturaloutputgrowthtrendrecordedinthepastfewyearsisyettoleadto animprovementinthemainhumandevelopmentindicators; production growth is a necessary, yet insufficient condition for human development;economicgrowthshouldbeaccompaniedbyeconomicdevelopment, whichincorporateshumandevelopmentasamandatorycomponent;

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toensurehumandevelopment,economicgrowthshouldbeaccompaniedby targeted social policies and efficient educational, healthcare and environmental policies; the goal of achieving sustainable economic development calls for structural reforms,diversifiedproductionandenhancedoutputcompetitiveness; allthissuggests,amongotherthings,thathighly-skilledworkforce,high-quality managementandcertainmanpowermobilityshouldbeinplace,i.e.therearecertain requirementstothehumanfactor; insufficient human development at this stage can be a serious obstacle for maintaininglong-termsustainableeconomicgrowth. Takingintoaccounttheaforesaid,economicpolicies,beitmacroeconomic,sectoral orregional,shouldmakehumandevelopmenttheirprimaryconcern.Asfarastrade policiesareconcerned,thefollowingshouldbementioned. 1. Subsequent trade and trade policy reforms should be aimed at further strengtheningoftheclearandtransparentlegislativesystemandregulatorypractice, loweringadministrativebarriers,creatingfairconditionsforallforeigntradeparticipants inthecountry. 2. FurthertradeliberalisationinthecontextofKazakhstansaccessiontotheWTO Agreementsshouldtakeintoaccountpeculiaritiesofthecountrystransitionperiod andmeettheprimarygoalsofthecurrentdevelopmentstage,i.e.toraiseproduction efficiencyandcompetitivenessandtodiversifytheeconomy. 3. Thereisaneedforadetailedsubstantiveandquantitativeanalysisofeconomic andsocialimplicationsofKazakhstansaccessiontotheWTOAgreementsforthe economy,asawhole,andcertainsectorsspecifically. 4. Asetofmeasuresneedstobedevelopedtoadaptsensitiveeconomicsectors to functioning in the context of an open economy and the countrys future WTO membership. 5. Asfarasagricultureisconcerned,thereisaneedtoapply,alongwithtariffs, tariff quotas permitted by WTO rules and allowing higher protection of certain economicallyimportantindustries. 6. Giventheongoingcrisisinagriculture,sufficientstatesupportshouldincluding AmberBoxmeasuresbesecuredinordertoenhancetheproductionefficiencyin the sector, decrease the dependence on imports of essential foods and secure overallfoodsafety. 7. ThereisaneedtoachievethelevelofsupportpermittedbytheWTOrulesfor developing countries including the so-called Special and Differential Treatment, complying with the development objectives and allowing developing countries to provide investment subsidies as well as subsidies for development of small and mediumsizedbusinessesinruralareas. 8. Given a high share of private subsidiary farms, there is a need for a set of measures to develop the trade and transportation infrastructure, information and marketing support and an effective system of procurement and preparation of agriculturalstock. 9. There is a need to facilitate development of entrepreneurship in rural areas including doing so by establishing agricultural producer associations and unions and offering methodical, technical and financial aid in setting up and developing smallandmediumsizedbusinesses. 10. Along with enhancing economic growth in agriculture, it is necessary to implementtheprogrammeofsocial,medical,educationalandculturalrevivalofrural areas. 11. Asfaras distributionservices areconcerned,thereisaneedforshaping

tradepoliciesandimprovinglegislationgoverningtradeactivities.Thereisaneedto remove administrative barriers in retail and wholesale trade, address trade finance and income reinvestment issues in order to create an effective supply chain. It is necessary to note a dramatic lack of qualified staff and a comprehensive training andretrainingsystemforthoseworkinginthissector. 12. Thereisaneedtoexaminecarefullysocialandeconomicimplicationsofthe

so-called shuttle trade including its impact on employment, status of certain economic sectors, budget revenue part and, as a whole, the countrys short- and long-termeconomicdevelopment. 13. Theaforesaidmeasuresassociatedwiththeuseoftradepolicieswillpromote

economicdiversification,enhancedproductionefficiencyandcompetitivenessand solutionoflong-termeconomicdevelopmentchallenges,whichisapreconditionfor furtherhumanfactordevelopmentandimprovedlifequalityinKazakhstan. 14. Proposedmeasuresdonotcontradictfreetradeprinciplesandintegrationof

Kazakhstanintotheinternationaltradesystem,butwillallowKazakhstantoparticipate in globalisation processes taking into account key national interests and promote furthereconomicdevelopment.

Inthiscontext,inordertofacilitatehumandevelopment-focusedtradethe followingActionMatrix(T able5.1)wasdevelopedandthefollowingprojects wereidentifiedforpotentialnational-leveldonorinterventionbasedonthe proposals of RK Parliament Mazhilis, ministries and departments (Table 5.2).

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VI. REFERENCES
1.ReportoftheChairmanoftheNationalBankoftheRepublicofKazakhstanG. MarchenkoContemporaryChallengesandProspectsofDevelopmentofthe FinancialSectorinKazakhstan,25September2009,Almaty; 2.RussiasAccessiontotheWorldTradeOrganisation:AssessmentofEconomic ConsequencesforRegions.MikhailKorlyakov:www.wto.ru; 3.RecordsofTradeEnterpriseCongressI,December2009,Almaty; 4.NationalInvestmentCouncil(NIC)EconomicConsequencesofRussias AccessiontotheWTO,July2002,Moscow; 5.NationalBankoftheRepublicofKazakhstanInformationandAnalyticalReview ofEconomyofKazakhstan,November2009,Almaty; 6.UniversityofInternationalBusinessSectoralAnalysisofConsequencesof AccessionoftheRepublicofKazakhstantotheWorldTradeOrganisation: Cost-BenefitAnalysis,RaushanSembayeva,2005,Almaty; 7.HarvardUniversityforInternationalDevelopmentEconomicDevelopmentand CompetitioninKazakhstan:PolicyIssuesandPrioritiesinMacroeconomic, Industrial,TradeandInstitutionalDevelopment,RicardoHausmann,AkashDeep, RafaelDiTella,JeffreyFrankel,RobertLawrence,DaniRodrik,AndresVelasco; 8.RacursEconomicAnalysisCentre:QuarterIVof2009:ExtraordinaryGrowth.

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