KAZAKHSTAN'S ECONOMIC DEVELOPMENT MODEL: CHICKEN OR EGG

	Alibek KONKAKOV Director of Public Administration and Policy
	Kuanysh ZHAIKOV CEO Desht

For the past 15 years, Kazakhstan has been in search of a long-term model of economic development. Historically, it relied on commodity sectors—agriculture and mining. During the Soviet era, this model was characterized by a lack of economic independence and a focus on meeting the industrial needs of the Center. The republic's role in the union economy was limited to that of a "raw material appendage," evident in the absence of local production of technologically complex end products and corresponding competencies. Demographically, this model was exacerbated by delayed urbanization of the indigenous population, leading to social and interethnic tensions by the end of the Soviet period.

A decade after gaining independence, during the global commodity boom, the potential of the resource-based model was realized through the inflow of export revenues into the domestic economy. Structurally, this gave rise to a growing service sector, including construction. The main macroeconomic consequence was an appreciation of the national currency and a decline in export competitiveness—classic symptoms of “Dutch disease.” In the absence of market-competitive manufacturing of end products, the resource-dependent path of economic development became further entrenched.

Economic policy then shifted away from strengthening market institutions and toward building state capitalism and centralizing the distribution of resource revenues. Yet the capitalist model of development presupposes free enterprise. In practice, Kazakhstan’s state merely secured rent from integrating the extractive sector into new global supply chains and moved to adapt elements of the former socialist model.

As a result, Kazakhstan's economy came to exhibit the features of a "rentier state"—marked by rising expenditures on expansive social programs and subsidies to select sectors amid inefficient tax administration, and by a high degree of dependence on external market conditions. The National Fund and the Samruk-Kazyna holding company became central institutions for stabilization and control within this model.

Industrialization in the Spirit of the State Plan

The end of the global commodity cycle in the 2010s acted as an external shock and caused turbulence in Kazakhstan’s economy. The government responded by launching industrialization and infrastructure development programs which, in the spirit of Keynesian anti-crisis packages, served as channels for injecting liquidity into the economy.

At the same time, the industrialization program represented a direct intervention in the economy by identifying priority sectors and creating favorable conditions for certain enterprises, especially state-owned ones. Given the weakness of institutions, the program’s implementation faced criticism for inefficient budget spending and for failing to achieve fundamental economic transformations.

Nevertheless, the initiation of state programs transformed the paradigm through which the government apparatus perceived its functions. In the following years, state planning became an integral tool for implementing economic policy. Within the established system of state planning, new five-year plans of various programs, national projects, numerous sectoral strategies, and so forth were adopted.

In Kazakhstan’s context, this approach to public administration constitutes a significant oversimplification of both the problems and processes involved, as well as the solutions required. With the state dominating the economy and lacking a critical mass of private enterprises, the government views the economy as a “playing field.”

For example, weak domestic production of consumer goods was framed as a problem that could be solved through the adoption of a dedicated document and the stimulation of business via state financing. As a “solution” to this “problem,” the “Economy of Simple Things” program was adopted – only to be soon forgotten.

In a market economy, such a “problem” is resolved by private enterprises, which respond instantly to profit opportunities by establishing the necessary production or organizing imports. The government’s role in such a system is to ensure the functioning of market mechanisms, starting with the protection of private property rights.

Experience of Import Substitution Policy

This approach also illustrates a broader manifestation of a simplified understanding of economic processes within the state planning system – namely, the promotion of the import substitution agenda.

It has been actively integrated into state programs and individual sectoral documents as a policy to promote domestic production and ensure economic self-sufficiency. At the same time, this agenda is presented as a successful global practice and a component of the current economic policies of both developed and developing countries.

However, international experience actually demonstrates that import substitution cannot serve as a comprehensive strategy. It was widely implemented in post-colonial countries between the 1950s and early 1960s with the hope of catching up to former colonial metropolises. Policymakers at the time were skeptical of market economies because they were associated with colonial oppression and the Great Depression of the 1930s.

Following the example of socialist countries, these states structured their economic policies around state planning and protectionism, using tariffs, quotas, and artificial exchange rate overvaluation. As a result, import substitution policies caused significant price distortions and inefficient resource allocation, achieved only moderate reductions in underemployment and poverty, and failed to generate sufficient growth in labor productivity. The allocation of government contracts and control over access to domestic markets by an underfunded and often incompetent state apparatus frequently encouraged its entanglement with business interests and fostered corruption. This systemic inefficiency negatively affected export competitiveness and, paradoxically, led to increased imports and an even greater erosion of economic independence than at the end of the colonial period.

An external signal of the flawed development trajectory was the failure of the socialist system itself, marked by chronic shortages of basic consumer goods – a phenomenon later openly mocked by U.S. President Ronald Reagan in reference to the long queues in the USSR for items like automobiles.

History of the Export-Oriented Model

By the 1970s, it became clear to developing countries that import substitution policies could not serve as a viable long-term strategy for economic development. Economists came to understand that sustainable growth was not simply a consequence of increasing output, but rather the result of a more systemic process driven by productivity gains. During this period, the progress of the “Asian Tigers” became increasingly evident—countries where governments pragmatically stimulated productivity growth by orienting private companies towards export markets. Instead of passively surviving in protected environments, firms were forced to discipline themselves and mobilize resources to improve their products, secure market niches, and establish a foothold in competitive markets.

The success of countries such as Japan, South Korea, Taiwan, Hong Kong, and Singapore led to widespread recognition of export orientation as a viable development model. Among its advantages are the exploitation of economies of scale, reduced risk of balance of payments problems, and increased resilience to external shocks through diversification of the export basket, often by targeting goods with inelastic demand.

However, it is important to understand that this model is not a universal “recipe” for success. Its advocates sometimes overlook key factors unique to these countries. First, all had access to the sea, enabling exports to developed markets. Second, most developed under conditions of strong national unity in the face of external threats. Given the geopolitical nature of those threats, they received allied support from the United States, including preferential access to U.S. markets. Third, cultural factors such as collectivism, respect for hierarchy, and a willingness to engage in hard manual labor played a significant role.

Additionally, a less obvious but critical factor was that the economic takeoff in these countries was underpinned by robust institutional foundations and supported by the accumulation of physical and human capital—assets largely inherited from more advanced countries, especially the U.S. and the U.K.

For example, Japan’s modernization was made possible by the country’s forced opening to Europeans and Americans and proceeded with their active support. After establishing itself as an imperial power in East Asia, Japan invested heavily in infrastructure, enterprise development, specialist training, and unique production practices in its colonies. Unlike typical colonial powers, Japan’s geographic isolation motivated it to treat controlled territories as industrial bases rather than merely markets or resource providers. Similarly, Hong Kong and Singapore benefited from the infrastructure and institutional legacy of British colonial rule.

Conclusions from International Experience

Overall, the experience of various countries in developing different economic models demonstrates the absence of any universal "recipes" for success. It is no coincidence that, according to a well-known World Bank study, only 13 out of 101 countries managed to transition from the category of middle-income to high-income status between 1960 and 2008.

It is important to recognize that the recent economic progress of developing countries largely resulted from the unprecedented growth of the "Western" world – a “rising tide that lifts all boats” – and from the international division of labor. Critical factors included geography, cheap labor, and distinctive cultural traits.

This is how the rise of East Asian and Eastern European countries took place. Additionally, the resource boom generated wealth for several small-population monarchies; however, these states did not evolve into dynamic, industrial, and innovative economies.

For Kazakhstan, following a similar trajectory is extremely challenging due to fundamentally different conditions. The extraction of key natural resources is reaching a plateau. Excluding resource value chains controlled by transnational corporations and their indirect effects, the rest of the country faces several structural challenges: a) the majority of the population lives in rural areas or belongs to the first urban generation; b) the labor market is dominated by agriculture and labor-intensive services; c) there is a high level of shadow and semi-shadow economy. State institutions remain weakly developed, and civil society is still in its formative stages.

Reliance on foreign trade policy is also problematic. Kazakhstan is geographically distant from developed markets; land transportation costs are high; and its neighbors are relatively poor, closed economies. Against this backdrop, it is notable that the classical economist Adam Smith, considering a somewhat analogous geographic predicament, cautioned against relying on external factors and instead urged focus on the efficiency of internal exchange:

“A nation that desires to become wealthy through foreign trade will achieve its goal if its neighbors are wealthy, industrious, and trading nations. Surrounded on all sides by savages and poor barbarians, a nation may acquire wealth through cultivating its own lands and through internal trade, but certainly not through external trade.”

While Kazakhstan’s neighbors are at a very different developmental stage than those Smith described, they too remain developing countries that actively practice protectionism.

Systemic Approaches to Economic Policy

In this context, the insight of Nobel laureate Douglass North is particularly important. He observed that economic history is largely a record of economies that failed to establish the necessary “rules of the game.” He further emphasized that understanding economic development hinges on recognizing that the institutional environment shapes the incentive structures within society. Consequently, political and economic institutions are the key determinants of development.

Therefore, Kazakhstan’s current economic policy should primarily focus on comprehensive efforts to build an effective system centered on independent agents. Blindly copying international experiences, chasing external benchmarks (such as “FDI,” “OECD standards,” “SDGs,” etc.), or relying on top-down, manual management approaches is unjustified. Instead, it is essential to fine-tune endogenous growth mechanisms and promote broad industrialization, taking into account the development logic that characterized Western Europe and the United States before the 20th century—while adapting to today’s realities, including digitalization and technology on one hand, and labor rights and environmental constraints on the other.

This agenda aligns with the President’s directives on the current economic priorities. Notably, at the extended meeting of the new government on February 7, 2024, the President underscored the need for “systemic measures to comprehensively liberalize the economy” via an official decree. Particular emphasis was placed on fostering market competition, implementing effective privatization, and reforming the quasi-public sector.

In the spirit of these directives, Kazakhstan’s economic policy must be grounded in rationality and a holistic understanding of competition’s role within the economic system, as well as the critical importance of protecting the market ecosystem. Regarding the relationship between the state apparatus and business, strategic cooperation based on mutually beneficial partnership should prevail over dirigisme and regulatory command from above.