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KAZAKHSTAN
SECTOR COMPETITIVENESS STRATEGY
KEY FINDINGS
Since 2000, the economy of the Republic of Kazakhstan has been growing at an annual rate of between 8 and 9%, making it one of the ten fastest growing economies in the world. Kazakhstan attracts more foreign direct investment than all other Central Asian countries together. To date, the countrys economic performance has been driven largely by its natural resources sector the oil and gas sectors alone attract three quarters of foreign investment inflows. However, Kazakhstan also has clear competitive advantages in non-energy sectors. These potential sources for growth and competitiveness remain largely untapped. As part of a far-reaching programme to support the country in diversifying its sources of foreign direct investment (FDI) and defining a targeted investment promotion agenda, the government of the Republic of Kazakhstan asked the OECD to help develop a Sector Competitiveness Strategy. The first stage in developing this strategy was an assessment of the competitiveness and FDI attractiveness of the countrys key non-energy sectors: AGRI-BUSINESS (with special emphasis on the grain, meat and dairy sectors) CHEMICALS (with a focus on fertilizers)
The OECD Eurasia Competitiveness Programme was launched in 2008 to support Eurasian economies in developing more vibrant and competitive markets. It includes seven countries from Central Asia (Afghanistan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, Uzbekistan) and six countries from Eastern Europe and the South Caucasus (Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine). The Programmes approach leverages OECD instruments and tools in order to assess where and how to enhance the competitiveness of countries, sectors and regions to generate sustainable growth. Since its inception, the Programme has developed and implemented several regional and country specific competitiveness strategies, complemented by capacity building seminars and coaching for policy makers.
LOGISTICS FOR AGRI-BUSINESS INFORMATION TECHNOLOGY AND BUSINESS SERVICES This brochure contains the main conclusions of this assessment, which serve as a basis for the Sector Competitiveness Strategy for Kazakhstan. It examines the main challenges facing these high-potential sectors and related sub-sectors and provides key recommendations to policymakers on ways to remove sector-specific barriers. It also outlines next steps in helping these sectors further modernise to create a more diverse, balanced and sustainable development model for Kazakhstan.
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GROWING PROSPERITY
Since 2000 per capita income has doubled, the unemployment rate has been halved, and close to USD 30 billion of foreign exchange reserves have been accumulated.
OPENNESS TO TRADE
From 1999-2008, Kazakhstans international trade has grown twelve-fold in value of exports from USD 6 billion to over USD 71 billion. During the same period imports went from USD 4 billion to nearly 38 billion, reflecting a growing economy and rising incomes.
INCOME INEQUALITIES
Kazakhstans income inequalities present the widest regional economic disparities among Eastern European and Central Asian countries.
Agri-business
Kazakhstans agricultural sector has extensive arable land resources, high regional demand prospects, growing domestic consumption and an absence of distortive government support in most agri-business sectors. To enhance its competitiveness across the agri-business sector, policy makers and the private sector must address the following sector-wide barriers: Limited working capital Obsolete technology Limited access to land, especially for foreign investors Major skills gaps Lack of consistency of legislative framework Limited logistics infrastructure Specifically, the grain, meat and dairy sub-sectors are where Kazakhstan shows the greatest potential to successfully compete on global markets.
SECTOR CHALLENGES:
Increase in demand from emerging markets: Asia, Latin America and North Africa made up 55% of world imports in 2009. Limited access to finance: 53% of Kazakhstans enterprises surveyed cited access to financing/credit as a first priority in developing their businesses. Investment in machinery and other inputs remains too low, and farmers do not have sufficient credit and financial support. Low productivity: farmers have little knowledge of modern farm management and marketing techniques. Insufficient standards to attract foreign retailers: global retail chains require suppliers to guarantee product availability, quality and safety.
Facts:
Grain production makes up
65% of Kazakhstans agricultural enterprises and dominates 75% of the total cultivated area.
Agri-business: meat
SECTOR STRENGTHS:
Global demand for meat and meat products, particularly in developing countries, has been growing steadily over the past three decades. Globally, a greater concentration of retailers is providing stronger buying power, creating a more lasting relationship with producers and providing stability in markets for their produce. Although OECD countries account for a large portion of todays world beef production, this share is decreasing while emerging economies are stepping up their share of exports. Kazakhstan could tap into this trend by leveraging its regional strengths: abundant land resources, low production costs, low labour and land costs, low processing costs and access to premium markets, such as Russia.
Kazakhstan meat companies cite lack of financing as major barrier to sector growth
BARRIERS FOR BUSINESS DEVELOPMENT: FINANCING
SECTOR CHALLENGES:
Low production levels: domestic meat consumption exceeds production. Low cattle inventory relative to the vast pasture area: Kazakhstan has the same cattle inventory as Ukraine with four times the land. Quality issues: low quality standards in meat production. Marketing: absence of an active marketing institution for Kazakhstan beef. Affordable financing: Kazakhstan businesses cite the dearth of affordable financing as a major hindrance to sector growth.
Note: Currency of loans refers to the difficulty of obtaining a loan in the national currency (not in euros or U.S. dollars).
Facts:
The beef sector can be highly
profitable for producers, as farming accounts for half of the creation of value added across the supply chain.
Note(1): Costs of production only include breeding costs and do not cover here slaughtering and primary processing costs. Source: Asian AgriBusiness Research Center, International Meat Trade Associaion, KazAgroMarketing, OECD
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Agri-business: dairy
Milk yields remain low by international standards
SECTOR STRENGTHS:
Globally, the dairy sector has changed significantly in its structure, geographical distribution and volumes of production. Technology and changing global trends in dairy consumption have seen a shift of power from producers and processors to retail operators; the main growth of dairy production has been in developing countries. Kazakhstan is presently a dairy-importing country but in the long run should position itself as a producer of higher value-added dairy products with export potential, such as milk powder. The Kazakhstan dairy industry has relatively low costs of milk production and can take advantage of favourable sector development trends globally. It now has an opportunity to move up the value chain into value-added dairy products. Importantly, its government subsidy levels as measured by Sector Commodity Transfers (SCT) are near zero.
MILK YIELD IN KAZAKHSTAN BY INTERNATIONAL STANDARDS Average annual productivity, cow milk, whole, fresh, kilograms per animal, 2008
SECTOR CHALLENGES:
Loss of market: with the dissolution of the Soviet Union, Kazakhstan lost a major market: cow milk production fell by 40% in 4 years; herd levels have not yet regained 1992 levels. Quality of product: the quality of milk is poor: 38% of milk-processing businesses in Kazakhstan point to the low quality of milk inputs as the most important business challenge for moving up the value chain. Domination of smallholder farms: small farms account for about 85% of the total number of dairy stock and almost 90% of total milk production. Low productivity: Kazakhstan is import-dependent for milk products; between 2003 and 2008 imports of dairy products increased by 516% Lack of access to finance to grow the livestock supply.
Facts:
Kazakhstan experiences
an annual shortage of milk for internal consumption estimated at 255 thousand tonnes.
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Chemicals
The mineral fertilisers sector is the largest of all agri-chemicals sectors in volume and market value. The global value of the fertiliser market was estimated at USD 132 billion in 2008, 1.8 times larger than the value of the herbicides, insecticides, food additives and food packaging sectors together.
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SECTOR STRENGTHS:
Kazakhstan has all of the basics in place for developing its fertiliser production: deposits of between 4 and 15 billion tonnes of phosphate rock, significant reserves of natural gas and sulphur, and low cost access to ammonia. Moreover, with a very low current level of fertiliser use, the countrys large potential domestic market remains untapped. It also has major market opportunities in the growing neighboring economies of Central Asia, China and India.
SECTOR CHALLENGES:
Underutilised capacities and low domestic demand: government subsidies to farmers up to 40% for the purchase of domestically produced agricultural chemicals -- reduce incentives for local producers to improve quality. Import of higher quality fertilisers: also reduces incentives for producers to raise quality. Low level of investment: basic and outdated technology, low quality inputs and absence of know-how among farmers. Lack of awareness among foreign investors of Kazakhstans mineral fertiliser sector.
Facts:
Asia and Eastern Europe lead
fertiliser demand (more than USD 12 billion annually).
Simplify procedures for access to land for construction of new production facilities and extraction of minerals. Facilitate international trade by benchmarking customs clearance procedures. Offer incentives for introduction of new technologies. Improve access to long-term financing for large-scale investment projects and promote business opportunities
to foreign investors.
Raise awareness among foreign companies of sector-specific investment clearance procedures. Capture the domestic market through extension programmes. Open the market to competition and promote to foreign investors.
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Logistics
An effective value chain depends on efficient transportation and logistics services. Its role of reducing cost, improving efficiency of businesses, and ensuring that goods reach markets effectively is particularly crucial for the agri-business sector, which relies on cold stores, warehousing and good transport systems.
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SECTOR STRENGTHS:
Kazakhstan is at the crossroads of transit routes between Europe and Asia and has a number of logistics centres and free-trade zones for production warehousing and transportation of goods.
SECTOR CHALLENGES:
Outdated transport infrastructure: Kazakhstans transportation system, inherited from Soviet times, has not undergone sufficient modernisation. Institutional policies and regulations: high customs levies and cumbersome customs clearance procedures and frequent changes in customs laws are significant barriers. Inadequate operational capability and logistics knowledge: workers need training and skills improvement; no training exists in logistics or supply chain management and a lack of technological innovation -- particularly in cold chain logistics -- limits the wider development of the agri-business sector.
Facts:
Between 1995 and 2008 world
container traffic more than tripled in volume and grew at an average annual rate of 8%.
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SECTOR STRENGTHS:
Kazakhstan has strong potential for provision of information technology outsourcing. The government of Kazakhstan has made a commitment to enhance education, particularly in information technology (IT). With the low cost of labour as compared to key regional competitors such as Russia and existing skill levels, the IT sector is taking advantage of strong demand for its services from government, local businesses and foreign investors already based in Kazakhstan. A high level of broadband penetration and mobile connection as compared to its neighbours also make Kazakhstan a potential platform for IT businesses in Central Asia.
...and low labour costs give the business services sector a competitive edge
COMPARISON OF AVERAGE MONTHLY LABOUR WAGES IN SERVICES, 2003-2007
SECTOR CHALLENGES:
Limited public-private dialogue: absence of links between government, private enterprise, multinationals and training institutions mean that skills often do not match industry needs. Lack of soft skills among employees: despite strong Russian language skills and many study abroad programmes, cultural understanding and other soft skills need to be further developed. Limited human capital capabilities: few Kazakhs have formal IT qualifications. Low levels of innovation: IT companies have little opportunity for technology transfer.
Source: International Labour Organization, zdnetasia; Wall Street Journal; OECD interviews and analysis.
Facts:
There are about 500 IT and
business service companies in Kazakhstan.
Develop a supplier database: investors require up-to-date Encourage human capital development to raise labour
productivity, rise in the value chain and attract FDI.
of the World Economic Forum ranks Kazakhstan 73rd out of 134 countries.
committed to providing basic IT services and ensuring that 60% of Kazakhs are computer literate by 2020.
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www.oecd.org/daf/psd/eurasia