Kazakhstan: The Investor's Perspective

At a recent Kennan Institute talk, William Veale, Executive Director, U.S.-Kazakhstan Business Association, discussed the prospects for foreign investment in Kazakhstan. Veale argued that Kazakhstan has passed many important milestones in its political and economic development in the short period since the collapse of the Soviet Union. The country has been politically and socially stable and has a great deal to offer foreign investors, including: vast natural resources, a well-educated and talented population, a geographic location at the crossroads of Eurasia, and a strong financial sector. Veale noted that Kazakhstan has absorbed some $30 billion in foreign investment since becoming independent. In order to encourage more investment, Veale said, Kazakhstan's leaders need to unfetter the economic dynamism of their own citizens and to set forth a charter for the positive treatment of existing investors in the country.

Kazakhstan's record since independence is somewhat mixed, according to Veale. Following good progress in both political and economic reforms in the first years of independence, political reform slowed significantly by the mid-1990s, although there are now signs that progress is resuming. However, Veale noted, reforms are not always implemented quickly and effectively, and the continuing process of reform has been seen as a source of risk by investors, who look for stability and predictability. He added that in recent years, Kazakhstan has experienced impressive rates of economic growth, although the economy is still burdened by the concentrated holding of privatized state assets and by the rent-seeking behavior of some economic elites. According to Veale, the driving engine of economic growth has been the energy sector, and spending by oil and gas companies has been "trickling down" to promote growth in services and upscale consumer goods.

Veale argued that Kazakhstan needs to continue on its path of political and economic reform. Among the most pressing items on the reform agenda are: improving education and healthcare, consolidating the rule of law, fighting corruption, strengthening the social safety net, fostering entrepreneurship and the development of small- and medium businesses, and overcoming societal distrust of money earned through legitimate private activity. Foreign investors, he contended, can help the reform process by advocating improvements in the business and legal climate. Foreign investment is also beneficial, according to Veale, because investment brings money into the local economy and state budget, and because foreign firms provide training to local workers and set an example of business culture, entrepreneurship, and corporate citizenship to indigenous business people.

As Kazakhstan prepares for accession to the World Trade Organization, it will have to address the structural problems of its present economy and prescribe new paths for economic behavior, Veale argued. The country's most natural and complementary economic relationships, he said, are with Russia, Ukraine, and Belarus, but Ukraine's increasingly westward orientation has put the future of this economic relationship in question. Although Kazakhstan is the clear economic leader in Central Asia, Veale argued that the country has limited interest in forming a regional market. Of more interest to Kazakhstan would be a larger-scale regional approach that would include access to markets in South Asia and China.