March 2, 2023
Kazakhstan's growth in recent decades has been driven by the oil industry, which has helped the country achieve middle-income status (see Figure 1). However, it is becoming increasingly apparent that the country is struggling to transform its vast income from hydrocarbons into productivity improvements in the non-oil sector. While this has been perceived as a long-term risk for many years, our recent analysis for the country shows that the negative consequences for growth potential are becoming more evident.
Figure 1. Regional Comparison of Selected Development Indicators
One clear indication of the negative trend is provided by the National Bank of Kazakhstan itself, which shows that although investment has been increasing in recent years, it is still concentrated in the extraction sector, while other parts of the economy are struggling to attract new capital spending (see Figure 2).
Figure 2. Fixed Capital Investments in 2010 Prices, SA, mln KZT
What paints an even gloomier picture is splitting the estimated trend growth into components. The analysis conducted by the IMF recently shows how the contribution of total factor productivity has turned negative in recent years, clearly signalling that the country is struggling to channel its oil wealth to productivity gains (Figure 3).
Figure 3. Contribution to Trend Growth (percentage points, YoY)
Recently, Russia's war against Ukraine seemed to offer Kazakhstan a chance to start diversifying its economy, at least in terms of trade ties. However, Russia, showing its discontent with Kazakhstan's distancing moves, resorted to recurrent sabotage on the Caspian Pipeline Consortium's (CPC) infrastructure, the main trading route for Kazakh oil exports. The disruptions (and the subsequent reconciliation with Russia) not only underlined Kazakhstan's exposure and vulnerability to its big neighbour but also revealed that as the future of oil is less bright with the upturn of renewable energy, investing in new infrastructure (in this case, alternative oil transport routes to circumvent Russia) is less appealing in this sector.
Thus, with only mild prospects for further growth in the extractive industry and a lack of productivity improvement in the non-oil sector, we do not expect Kazakhstan to escape the middle-income trap in the foreseeable future, and we are rather pessimistic about its convergence with advanced countries.