Kazakhstan at 32: story of challenge and change

While Kazakhstan has a long, rich, and complex history, little of it is as a fully recognized country in its own right.  Originally, the immense territory now known as Kazakhstan was home to nomadic tribes of Indo-European, Turkic, and Mongol origin.  The region then fell under the rule of Tzarist Russia in the 18^th Century.  In the 19^th Century, it found itself swept into the vast Soviet Union. Only in 1991 did Kazakhstan achieve true statehood, with legal borders and independence from the USSR.

In the days of the tribes, Kazakhstan was an almost entirely nomadic society, with people riding on horses across vast steppes in search of fresh pastures for their livestock. The spacious “Kazakh” territories attracted the attention of many unfriendly neighbors such as the Mongolian Dzhungars who repeatedly attacked “Kazakh” settlements. The “Kazakh” region also became an area of strategic interest for Tsarist Russia which quickly gained control over the Kazakh steppes. The regime implemented policies aimed at engaging Kazakhs in non-nomadic activities mostly related to agriculture.

Having been an “eastern agricultural Russian territory” for almost two centuries, Kazakhstan was quickly transformed into an industrial powerhouse when it was brought under Soviet leadership as part of the USSR. In short order, this supposedly “backward” Asiatic republic rapidly became a huge contributor to the All-Union economy and “helped” the Soviet Army enormously during World War II with significant supplies of food, coal, metals, and other strategic resources. 

During the Soviet years, Kazakhstan endured numerous economic and social experiments carried out upon it by the totalitarian Soviet government. These experiments included forced collectivization, a Virgin Lands campaign, the desiccation of the Aral Sea, and the nuclear testing conducted at Semipalatinsk. Under Stalin, in particular, the suffering was horrific - over two million Kazakhs perished from famine, disease, and execution. Another million were forcibly driven from their motherland into exile. These departures were compensated for by a massive inflow of ill-treated populations and so-called “trouble-making” nationalities. Stalin forcibly shifted entire communities of Germans, Poles, Jews, Koreans, and other groups into Kazakh territory. The Virgin Land campaign, the draining of the Aral Sea and the thermonuclear explosions in the Semipalatinsk region (some of them with a force 20 times greater than that of the atomic bomb dropped on Hiroshima) resulted in a huge environmental crisis in the 1980s. 

In December 1986, the silent frustration of the Kazakh people with the authoritarian decisions made by Moscow finally boiled over into anti-government protests. Young people, mostly college students, spilled into the streets of Almaty to express their frustration with the appointment of an ethnic Russian named Gennady Kolbin as leader of the Kazakh Republic, a job earlier held by the Kazakh national Dinmukhamed Kunayev. Kolbin’s appointment, while upsetting, was simply the final straw after a history of insults and injuries to the Kazakh people. 

It would take five more years, however, and a long period of indecision, fear, and doubt before Kazakhstan would actually achieve the dream of true independence.  Finally, on December 16, 1991, the Kazakh Soviet Republic was no more.  In its place arose an independent state, determined to begin its difficult transition from a region of the USSR to a market-oriented society. 

The early days of independence were far from euphoric. The very survival of the country seemed to be in question at times. In its first years of independence, Kazakhstan faced painful challenges such as hyperinflation, empty shelves in the stores, the inability of the government to pay basic social security allowances, the mass exodus of skilled people from European backgrounds, and political instability.  But with time, hard work, and a willingness to tap into natural resources such as oil, Kazakhstan slowly began to stabilize.  There would be no turning back for the young nation. Going forward, however, would mean figuring out how to work outside of the familiar systems and supports of the USSR.

Before becoming independent, Kazakhstan was a country with an economy that was purposefully built around extractive industries. During the Soviet era, Kazakhstan was integrated into the centralized system of the USSR as a highly specialized supplier of raw materials. It also served as a location for heavy industries and as an area for agricultural production. The Soviet pattern of production and an awkward transportation infrastructure made Kazakhstan extremely dependent on other republics for non-oil products such as chemicals, machinery, food, and items produced by light industry.

When the Soviet Union collapsed in 1991, Kazakhstan, along with fourteen other republics, set out on a new and unknown course as an independent state.  Facing economic chaos, Kazakhstan could not afford to rebuild its industrial structure and invest in industries that were not able to cope with import competition — such as machine-building, manufacturing construction materials, chemical production, light industry, and the like. Instead, the country focused on developing sectors such as oil and gas and ferrous and nonferrous metallurgy. These industries were able to attract large flows of direct foreign investment relatively quickly, to seize increased export opportunities, to bring in quick cash, to support the country’s development, and to maintain standards of living for the population. Since then, most of Kazakhstan’s economic growth has continued to be based on the exploitation of its natural resources.

The occasional downturns of oil and other commodity prices, however, have increased Kazakhstan’s vulnerability to external shocks and constrained the country’s revenue base. For example, in 1998, after the economic collapse in Russia and a sharp drop in oil and metal prices, Kazakhstan’s real GDP contracted by 2.5%. This decline came after Kazakhstan had appeared to recover from the initial difficult years of a massive decline in economic output. In 2014, another oil shock put a heavy weight on Kazakhstan’s economic and investment prospects forcing the National Bank to devaluate the currency and the government to cut spending on important social programs. 

These challenges underscored the need for Kazakhstan to develop a clear policy to foster more diversified growth and reduce its dependence on extractive industries. According to estimates made by the Asian Development Bank, consistent reforms in key non-oil sectors such as agriculture, manufacturing, oilfield services, and transit trade could improve Kazakhstan’s growth rate by 2.1% annually. Implementing these reforms will be extremely important given the government’s target of achieving an annual growth rate of 4-5%.

Some of the first attempts to diversify the Kazakh economy can be traced back to 1997 when the authorities created a National Council for Sustainable Development. The Council was a government body aimed at identifying how Kazakhstan should use any oil windfall to diversify the economy. In 2001, the government established an oil fund, the National Fund of the Republic of Kazakhstan, to hold the country’s oil earnings. The main objectives of the oil fund have been to stabilize budget revenue and finance infrastructure and social projects. 

In 2003, in order to boost investment in non-oil sectors, the government chose the path of adopting state-directed industrial policies. First, the government announced a twelve-year plan, entitled “Strategy of Industrial Innovation Development of the Republic of Kazakhstan for 2003-2015”. The plan, which was designed to achieve economic diversification through the promotion of target industries, set very ambitious goals such as maintaining an average annual real growth rate of 8% in manufacturing over the twelve-year period. As the core of the strategy, the government founded five agencies that were to facilitate investment in non-oil sectors. These agencies included, in particular, the Investment Fund and the National Innovation Fund which were supposed to finance technological projects and help to minimize risks for private investors. These institutions were also designed to develop “technology clusters” in industries such as food processing, metallurgy, machine-building, and textiles.

Kazakhstan’s experiment with the development of strategic plans and state programs continued in 2010 when the government adopted the “State Program of Forced Industrial and Innovative Development”. The Program was designed to improve the competitiveness of the economy and foster its diversification through investment in infrastructure and training. In 2012, the government adopted “Strategy 2050” where it laid out its goal to transform Kazakhstan into a knowledge-based economy driven by the private sector. Goals related to diversification and technological development have since been reiterated in numerous medium-term strategic plans adopted by the Kazakh government. 

These days, Kazakhstan’s hopes for diversifying the economy are pinned on President Kassym-Jomart Tokayev. Since assuming office over four years ago, Mr Tokayev, a former career diplomat, has positioned himself as a political and economic reformer. His approach to reform has included trying to develop an entrepreneurial culture and attempting to lay a foundation for an economy based on new technologies. In his latest “Address to the People of Kazakhstan”, Tokayev offered a far-ranging approach to economic policies that will determine the industrial future of Kazakhstan and bring long-awaited progress to the country. In particular, he went on to outline that efforts should focus on building up Kazakhstan’s processing industries. Industries that Kazakhstan plans to use as engines of economic advancement include metal manufacturing, oil refining and gas processing, the construction of heavy machinery, uranium conversion and enrichment, and the production of fertilizers.

In his address, Tokayev stressed that the mining sector should receive particular attention from the government and investors. According to the President, the “rare-earth” minerals industry must become the “new oil” in Kazakhstan. Tokayev pledged that the Kazakh government will give a tax exemption to both local and foreign investors who are willing to come and explore the “rare-earth” bounty of our country.

Agriculture and food processing industries also occupied a special place in the President’s address. The President called for these sectors to increase their output of processed products, as opposed to raw agricultural produce. He set a goal for these higher-value processed items to account for 70 percent of the overall agricultural output within the next three years.

Tokayev’s remarks did not fail to engage with the vital topic of energy production. In his speech, the President touched on key issues such as energy security, the development of hydroelectric power stations, renewable energy, and natural gas processing.  He observed that these must become priority areas in the new economic development of the country. He also raised the sensitive issue of possibly building an atomic power station in Kazakhstan, urging that public hearings on the matter be commenced

Tokayev encouraged the nation to undertake “breakthrough projects” as part of a strategy for successfully increasing tourism and creating effective transportation links. He also identified further development of the IT sector and increased digitalization of the Kazakh economy (and society in general) as priority missions for the Cabinet. In his address, Tokayev set an overall goal to identify fifteen large projects that will determine the industrial future of Kazakhstan and bring long-awaited progress to the country.  

For over thirty years, since Kazakhstan became an independent country, its politicians/authorities have embraced many economic models and invented numerous economic programs. These models and programs had the goal of increasing economic growth, supporting financial stability, promoting the diversification of the economy, and improving the well-being of the nation. 

These endeavors have indeed provided boosts to economic growth, but the fact remains that the Kazakh economy is still heavily dependent on the production of fossil fuels. The development of non-energy industries has been slow at best. The economy continues to rely on commodity exports, most of which travel through physical infrastructure shared with another country whose role on the world stage is very uncertain these days. In other words, it is still an economy in which a big part of the GDP comes from oil and gas revenues, an economy thus prone to energy price swings and production disruptions and an economy heavily impacted by neighboring Russia. It is still an economy where the most significant activity is concentrated in industries that are not labor-intensive and therefore employ a relatively small number of people. Unfortunately, non-oil sectors such as agriculture, construction, and trade, despite having a high employment potential, remain underinvested and often use unrecorded labor for seasonal short-term contracts. 

The global financial crises in 1998 and 2008 signaled clearly that Kazakhstan’s reliance on oil would ultimately let the nation down. In 2015, another oil price decline also threw the Kazakh economy off its path to growth. President Tokayev is to be applauded for trying to embrace greater economic diversification to end the overreliance on oil. Diversification alone, however, will not solve all of Kazakhstan’s issues.

Despite decades of economic growth, many people in Kazakhstan still feel pessimistic about their future. Citizens of Kazakhstan continue to grapple with a lack of affordable housing, high food prices, low job security, corruption issues, and rising levels of inequality. Economic plans must take into account addressing the needs of the populace and securing their trust.

For too long the Kazakh authorities have relied on language that fails to resonate with people’s actual living experience. With President Tokayev’s commitment to change, the government of Kazakhstan has an opportunity before it, to focus on responding to the real needs of the people. Well-researched and thought-out approaches that create better infrastructure and living conditions, support high-employment industries, and focus on alternatives to oil and gas, are required. Economic improvement is possible but will only be achieved with innovative thinking and a commitment to real action. The President’s recent address gives Kazakhstan hope that true change is underway.

Over three decades have passed since Kazakhstan took the brave step to embrace independence. While the years that followed 1991 were not comfortable, they were most certainly worthwhile.  Kazakhstan has developed immensely in the past 32 years in its industries, its economy, and its culture.  If you walk the streets of Almaty or Astana today, it’s hard to imagine that the country was so recently in the shadow of the USSR.  Kazakhs have returned to their homeland in droves, the Kazakh language is resurging and the population of the country has surpassed 20 million for the first time. One can hope that from this large population, there will arise a solid middle class, raising a generation of educated young people who will implement progressive reforms and bring about real change. 

The Kazakhs, once proud nomadic horseback riders, are once again riding freely across their own territory – not on stallions, but carried by a greater sense of themselves as a nation and a people. The needs of the future are still great and the tasks of reform and diversification will not be easy. But Kazakhstan has never been a land of ease and its people have proven again and again that they can succeed despite the challenges they have faced. This is cause indeed for celebration on December 16^th and all year round.

By Assel Nussupova

Assel Nussupova is a highly accomplished analyst with an extensive background in economics and over two decades of dedicated service to the Kazakh government. Holding a prestigious Master's Degree in Economics from Georgetown University in Washington, DC, she has become a recognized authority in the fields of macroeconomics, commodity markets, financial markets, and economic and social policies. With a profound understanding of Kazakhstan's economic landscape and a global perspective, Nussupova is a sought-after expert who continues to contribute valuable insights to the field of economics. Additionally, she is a prominent contributor to the Astana Times, where her articles provide readers with expert analysis and in-depth perspectives on economic matters.

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