BORAT AND KAZAKHSTAN

Borat is a nice movie. From the standpoint of movie critic, I think that the content of the movie plays a minor role in ranking the movie compared to Borat's acting enthusiasm, interest in investagiting the cultural patterns in the U.S., and doing particular things which almost nobody dares to do today such as the immensly accurate 'on air' performance completely unexpectedly.

However, I think that after Borat, Kazkahstan widely affirmed its recognition and trademark promotion in the world as well as the Republic of Montenegro in this year's May when Rolling Stones had a concert in Budva, when Mick Jagger said: "Zdravo Budvo, dobro veće Crna Gora..." Inviting Rolling Stones to Montenegro, was probably a sufficient investment to boost the trademark of Montenegro in the international market regarding aspects such as tourist supply and investment location.

While I was watching Borat, I thought I'd be good to write a brief economic analysis of current macroeconomic trends of Kazakhstan and compare the results and numbers to the rest of the world. At Trzišno Rešenje, Slaviša Tasić posted Borat za predsednika (Borat for president) where he wrote:

"Kazakhstan is open to foreign investment, private companies are able to exploit oil and other natural resources while the most interesting of all is the fact that the privatization of the social security accounts has been accomplished in the middle of 1990s. The majority of Europe and the U.S. is still about to face this particular reform..." (link)

Macroeconomic trends, Monetary policy and Economic growth

Kazakhstan is a typical post-communist economy which is recovering from decades of socialistically mismanaged Soviet-styled economy resulted in a short-term contraction with the steepest decline which occured in 1994. During 1995 and 1997, the economic reforms and the privatization of state-owned assets, significantly boosted the GDP performance through high output growth rate where booming energy sector and thriving export market accelerate the pace of growth. In 2006, the output grew incredibly by 10,6 percent and 9,6 percent in 2007. Not surprisingly, the gross fixed investment equaled robust 27 percent of the GDP.

The estimates of the real GDP growth in the future seem optimistic to stimulate output increases. In spite of distorting pressures of high inflation, the price controls hiked through state-owned enterprises and holding prices below or above the market level, are significantly reducing the edge of monetary stability whereas the Kazakhstan's central bank suffers from the lack of responsibility and independence to curtail the money supply and circulated monetary emissions. Not surprisingly, the official inflation rate is 8,3 percent in Kazakhstan and is estimated to decline by 2011 with a distorting increase during the pass from 2010 to 2011 resulted from optimistic output growth estimates reversed into higher inflation. A transition report by EBRD (European Bank for Reconstruction and Development) comments the inflation tendencies surrounding Kazakhstan economy, its outlook and risk:

"Inflation remains on an upward trend – the consumer price index increased from 7.6 per cent year on year in December 2005 to 8.6 per cent in December 2006. To stem inflationary pressures and dampen credit growth (which remained buoyant in the first half of the year), the Central Bank raised the refinancing rate by a cumulative one percentage point during the first seven months of 2006 and broadened reserve requirements... A possible levelling off of oil prices in 2007 (albeit at the current high level) may mitigate inflationary pressures arising from excess domestic liquidity. Deceleration of real GDP growth to 9 per cent is expected in 2007, reflecting the decline in oil prices, constraints on hydrocarbon production and the tightening of monetary policy in the second half of 2006. However, given continued strong appetite for external borrowing by Kazakh banks, further monetary and regulatory tightening may be required. A key risk over the medium term is the rapid credit expansion, funded through the accumulation of external liabilities of banks, and the resulting construction and real estate boom."

Source: EBRD, Transition Report (link)

Low degree of economic freedom

Kazakhstan's economy is 60,4 percent free, slightly below the world average. Low score in economic freedom presents an especially weak rule of law, widespread corruption and extensive over-regulation of foreign direct investment. Despite the high contribution rate to annual periodic GDP growth rates, the oil sector still remains marred by extensive control over the entry into the sector by foreign investors. Since 1991, the foreign direct investment regime changed significantly and improved the entry and operative conditions for foreign investors. The U.S. Department of State reports:

"Kazakhstan has made significant progress toward creating a market economy since its independence in 1991. The European Union in 2000 and the U.S. Department of Commerce in March 2002 recognized the success of Kazakhstan's reforms by granting it market economy status. Kazakhstan also has attracted significant foreign investment since independence. By July 2005, foreign investors had invested a total of about $36.8 billion in Kazakhstan, primarily in the oil and gas sector, during the country's fourteen years of independence. Following independence, the government created a favorable regime for oil and gas investments at the same time that it undertook other liberalizing economic measures and began an ambitious privatization program." (link)

However, the oil sector is not the sole case of restricting the inflow of foreign direct investment. In the closer past, Kazahstan's economy has not yet experienced a devaluation of its currency which would lead to the reduction of domestic purchasing power parity. Further, with $22,6 billion net worth of export, Kazakhstan is a net exporter of its natural and oil resources. Solid export market is soundly performed by foreign direct investors, bringing technological feedback and required knowledge needed to face the challenge of the new economy with a high-growing energy sector. According to the Index of Economic Freedom, the government of Kazakhstan legislates to favor domestic investors over foreign ones by deterring the foreign investment investment itself. The unofficial barriers to new investment is particularly persisting 25% government cap ownership on banking sector investment and 20% ceiling on media ownership.

Conditional Business Climate (link)

An interesting observation is that poor investment conditions usually coexists with highly perceived signals of corruption, the lack of sufficient protection of private property rights and with the lack of rule of law.
According to Doing Business, Kazakhstan ranks 63rd in the world in the ease of doing business. While the most of indicators show the inefficiency of complex bureaucratic codes; the labor market is subject to a high degree of freedom and flexibility over firing and hiring practices which possibly do not hinder the growth of overall productivity. The labor code entails absolutely no rigidity in hiring labor supply while firing causes no significant negative cost ends. In spite of high non-salary wage costs (22%), the costs of firing (8,7 weeks of wages) are low compared to international standards. As the economy booms, the deregulation of credit is neccessary to unleash the potential of the supply of the banking system to respond to incentives and properly manage market behavior of participants. Surprisingly, Kazakhstan gained 69 places in the rank of doing business. While trading across borders is still very costly (high cost wedge of export and import activity), the commercial contract enforcement is not complicated and marred by long time period of waiting to enforce a typical commercial contract.

Pro-Growth Tax Reform

In 2007, Kazakhstan introduced several new features into its system of taxation. The flat-rate VAT on all goods was reduced from 15% to 14%, and a flat rate of income tax of 10% was introduced, replaced after previous three-bracket progressive tax system ranging from 5 to 20 percent. The impact of pro-growth low-rated tax ssystem is definitely the way to generate higher growth through revenue-neutral rates and reduced real aggregate tax burden. Prof. Allan Rabushka says:

"On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007."

Source: Alvin Rabuhska: Flat and Flatter Taxes Continue to Spread Around the Globe , January 16, 2007 (link)