Kazakhstan: The Long-Term Costs of Short-Term Gains

The Long-Term Costs of Short-Term Gains

by Pauline Jones Luong
August 1, 1999

The agreement on China’s entry into the WTO will rank with President Nixon’s 1972 visit to Beijing and President Carter’s extension of diplomatic recognition to China as a major step in bringing China into the world. It will help stabilize China’s relations with the major powers most particularly the United States and burnish Jiang Zemin’s (and perhaps Zhu Rongji’s) leadership credentials. Most importantly, it will reinforce domestic reform and lead China to play an increasingly constructive role in world affairs.

With the full confidence of energy abundance behind him, Nursultan Nazarbaev, President of the Republic of Kazakhstan, wrote in the fall of 1997: “I am convinced that by 2030 Kazakhstan will become a Central Asian snow leopard and will serve as an example to other developing states….” [1] In the years since independence, government officials have expressly relied upon the promised wealth of Kazakhstan’s immense oil and gas reserves as the solution to the most acute social and economic problems, and the key to future development. [2] This pervasive attitude is not surprising, considering the emphasis that foreign governments and investors, international lending organizations, and development agencies alike have placed on Kazakhstan’s energy sector. The United States government in particular has concentrated the bulk of its efforts in Kazakhstan on encouraging a legal, political, and economic environment conducive to oil and gas development. [3]

Nor is it surprising, considering the experiences of other countries endowed with substantial energy reserves, that the Kazakhstani government has pursued several policies based on an overly optimistic estimation of their future income from developing and exporting oil and gas reserves. [4] As in other petroleum–rich states, government officials’ exaggerated calculations of impending riches have led Kazakhstan’s leaders to encourage popular expectations of imminent wealth and to engage in overspending and excessive borrowing, while ignoring the plight of other key economic sectors, such as manufacturing and agriculture, and failing to develop a reliable tax collection system.

At the same time, Kazakhstan’s strategy toward the development of its energy sector departs significantly from that of other states similarly well–endowed with natural resources. Whereas most such states choose to jealously guard these resources through full state ownership and control, Kazakhstan rapidly privatized the bulk of its energy sector and invited an unprecedented level of direct international involvement in the development, production, and export of its energy reserves. [5] These policies have generated serious social, political, and economic consequences, including a strong reliance on foreign companies for improving socio–economic conditions at the local and regional levels, intense elite competition over the additional resources these foreign companies can provide, corruption at all levels of government, and an increasing trend toward the centralization and concentration of power in the presidential apparat. Why would the Kazakhstani government adopt such counterproductive policies? In short, because they offer several real and perceived short–term “gains” from the perspective of government officials. The pervasive optimism that oil and gas reserves would…

[1] N.A. Nazarbaev, “Kazakhstan—2030. Protsvetanie, bezopasnost’ i uluchshenie blagosostoianiia vsekh kazakhstantsev,” Kazakhstanskaia pravda, October 11, 1997, p. 15.

[2] See, for example, Richard Auty, “Does Kazakhstan Oil Wealth Help or Hinder the Transition?” Development Discussion Paper, no. 615, Harvard Institute for International Development, December 1997, p. 3.

[3] Author’s interviews with USAID officers and consultants in Almaty, Kazakhstan, March and December 1997. Some oil industry experts have claimed that the U.S. government has also deliberately inflated the Caspian’s potential reserves to attract more foreign investment. See Patrick Crow, “Watching Government: Caspian Dreams,” Oil and Gas Journal Online, vol. 96, no. 43 (October 26, 1998), . (November 7, 1998).

[4] Auty, “Does Kazakhstan Oil Wealth Help or Hinder the Transition?” p. 14.

[5] Pauline Jones Luong and Erika Weinthal, “Domestic Determinants of the International Role in Oil and Gas Development: The Case of Central Asia,” unpublished paper, January 1999.