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  • Regional Dissection of the Welfare in Kazakhstan

    21.11.2017 | Comments | Economy | 75 Kanat Makhanov

    Significant income disparities between the regions of Kazakhstan are one of the major problems of Kazakhstan in the context of spatial economics. The issue of interregional disparities is of political relevance since significant public resources are spent to promote regional development in relatively poor regions mainly through transferring excessive resources from wealthier regions. One of the most recent explanations of the interregional welfare disparities is provided by the New Economic Geography developed by Paul Krugman (1991a, 1991b). Thus, two fundamental factors cause differences between territories in terms of economic development. The first one is the group of natural factors such as natural resources (mineral resources, location, land, etc.). The second one is the group of factors created by the human activity such as agglomeration effect, human capital, institutions, population mobility, infrastructure, innovative activity, etc. The combination of the two groups of the factors provides rapid economic development. If to analyze Kazakhstan within the framework of the New Economic Geography, it becomes evident that Kazakhstan as a whole is well endowed by the first group of natural factors. The presence and the quality of the second group of factors, however, is not so evident. In particular, Kazakhstan has low population density (6.64 people/sq.km), weak agglomeration effect (N. V. Zubarevich and S. G. Safronov 2011), moderate human capital development rate, low quality of institutions and low innovative activity. Extrapolating these facts on the vast territory of Kazakhstan and its regions that differ a lot from each other we get huge interregional differences in the economic development and wellbeing of the regions.

    Throughout the recent history, the regional approach of economic development was not in the focus of the economic policymaking. During the USSR period, the central government in Moscow pledged the equalization of socioeconomic conditions across regions, between rural and urban areas, and among more than hundred ethnicities of the Soviet Union as one of their major domestic policy goals (Liebowitz, 1989). After the collapse of the USSR, with the rapid transition to the market economy, the regions of Kazakhstan started to diverge in terms of economic development in such manner that resource-rich industrial regions and regions with larger urban areas began to outpace the rest of the regions creating interregional differences in economic development within the country. These differences became more pronounced during the 2000s when Kazakhstan has enjoyed robust GDP growth largely based on mineral resource exports. The interregional differences in Gross Regional Product (GRP) per capita are shown in Table 1 below.

    Table 1: Regions of Kazakhstan Ranked by GRP Per Capita

    Rank

    Region

    GRP Per Capita in 2016 (tenge)

    1

    Atyrau

    8,653,100

    2

    Almaty city

    6,138,500

    3

    Astana city

    5,273,300

    4

    Mangystau

    3,880,600

    5

    West Kazakhstan

    3,179,800

    6

    Karaganda

    2,682,600

    7

    Pavlodar

    2,606,900

    8

    Aktobe

    2,464,900

    9

    East Kazakhstan

    2,006,000

    10

    Akmola

    1,818,200

    11

    Kostanay

    1,727,000

    12

    Kyzylorda

    1,701,100

    13

    North Kazakhstan

    1,621,000

    14

    Almaty

    1,114,200

    15

    Zhambyl

    1,062,700

    16

    South Kazakhstan

    975,300

    Source: Committee on Statistics of Kazakhstan

    The main oil-producing regions such as Atyrau, Mangystau, West Kazakhstan and the two major agglomerations of Almaty and Astana have traditionally been the wealthiest regions with highest GRP per capita rates whereas labor abundant southern regions of South Kazakhstan, Zhambyl and Almaty have been the poorest ones. The difference between the regions is that the GRP per capita in the richest regions is 8.8 times higher than in the poorest ones. The situation is rather consistent with many of the arguments of the New Economic Geography. Exports of resources in the western regions of Kazakhstan and high agglomeration effects in the cities of Almaty and Astana, which also possess relatively developed urban infrastructure, create a higher GRP per capita. On the other hand, some factors explaining the interregional differences like, for instance, higher population density and location along major trade routes are typical for the southern regions. Nevertheless, even the average income regions have GRP that is much higher than those of the southern regions. This difference, however, is not so pronounced due to the policy of redistribution, which is primarily realized through fiscal mechanisms. However, there are arguments that its effectiveness was proved to be very limited and incapable of providing convergence of the regions of Kazakhstan in terms of per capita income (Zubarevich and Safronov, 2011). Even though Kazakhstan has one of the highest interregional income differences along with Brazil, the Philippines and South Africa (Novotný, 2007).

    Figure 1 above shows that, in general, if we take the GRP per capita, the process of discrepancy between the regions was clearly dominant during 2001-2006, which is the period of rapid economic growth. This was followed by the process of convergence between 2007 and 2012 when the adverse effect of the crisis of 2008-2009 persisted. The difference between the richest and the poorest regions was in an ascending trend from 2001 to 2010, and when down afterwards. However, there was no fundamental real GRP change if to compare the beginning and the end of the sample period.

    One of the accurate ways of evaluating the welfare is measuring the household expenditures. The Figure 2 shows a clear descending pattern of the Gini Index for household expenditure as well as for the maximum to minimum ratio throughout the whole period of observation suggesting the persistence of the convergence between the regions of Kazakhstan. However, between 2007 and 2010 the process of convergence of the household expenditures between the regions of Kazakhstan slowed down.

    The Gini index for the consumption expenditures measured in per capita terms also present a clear descending pattern over the course of the sample period. The difference in per capita consumption expenditure also goes down. It is interesting to note that the descending trend shows large oscillations during 2008-2010 in interregional per capita consumption rates as well as household expenditures. One of the possible explanations for this might be the effects of the world crisis of 2008-2009, and the regional effects of the governmental anti-crisis package. On the other hand, during the crisis that started in 2014 with the downturn of the oil prices we can see a slight rise in the differences in household expenditures and per capita consumption detected by the Gini index.

    Although there are huge real GRP per capita differences in between the regions of Kazakhstan, they are smoothed rather well by the redistribution policies. Thus, the difference between the richest and the poorest regions in terms of household expenditures is only about 2.2 times. The same difference regarding the per capita consumption expenditure is nearly 2.1 folds whereas in the difference in GRP is 8.8 times. It is also important to note that the cities of Almaty and Astana have the highest per capita household expenditure and per capita consumption expenditure, which are far more precise indicators of welfare. Atyrau region, on the other hand, ranks 11th among all 16 regions in terms of household expenditures and 12th in terms of per capita consumption expenditures despite having the highest GRP per capita.

    Another way of measuring welfare is the labor cost, which is a perfect indicator of the wage rate. From Figure 4 we can see that the Gini index for interregional wage differences between the regions did not change dramatically during 2001-2016. However, the average wage difference between the region with the highest wage rate and the one with the lowest wage rate has obviously descended during the period under consideration.

    We can see that the effects of the redistributive fiscal policy of the government are very strong. Despite the astonishing of 8.8 times in GRP per capita terms between the richest and the poorest regions of the country, the differences in terms of real household expenditures, consumption expenditures and wage rates between the richest and the poorest regions are about 2.2 times. However, this rough method of redistribution of the national income through making budget transfers from rich regions to the poor ones is highly ineffective in providing regional economic development. The regional policy of the central government of Kazakhstan is characterized by a dirigisme that reduces the effectiveness of decisions taken. (Zubarevich and Safronov, 2011). One of its shortcomings is that the productive forces and activities with high value added are not transferred throughout the regions and are concentrated in major urban areas like the cities of Almaty and Astana. For instance, 41.5% of the research staff of the country is concentrated in the city of Almaty, and another 12.8% is in the city of Astana. 26.7% of all operating firms is based in the city of Almaty and about 14.3% is based in Astana. As a result, the two major cities of the country sustain enormous service sectors. Thus, the city of Almaty alone sustains nearly a quarter of all the services provided in Kazakhstan and the capital city of Astana has another 18% of them given that only about 15% of the population of the country live in these two major agglomerations. On the other hand, South Kazakhstan region, where 17% of the whole population of Kazakhstan lives, accounts for less than 2% of the country’s service sector. Hence, the two cities benefit from agglomeration effects. However, the products of concentration of innovative, entrepreneurial and other economic activities are not transferred to other regions and cities. The major reason is the inefficient regional policy that fails to provide high and low cost population mobility, effective institutions and infrastructure for increasing the human capital in the regions. For instance, the elasticity of migration to distance in Kazakhstan happens to be higher than in Russia, the US, and even China. Firms have little incentives to move to regions other than Almaty and Astana not only because of market size and skilled labor but also because of a lack of public and social infrastructure, low quality of human capital and high transportation costs.

    Within the theoretical framework of the New Economic Geography, Kazakhstan definitely has favorable natural conditions for economic development such as abundant natural resources, location along major international routes, etc. On the other hand, factors such as low population density, uneven distribution of the mineral resources across space, and high transportations costs create natural forces of spatial divergence in economic development. However, the fiscal redistributive policy of the government of Kazakhstan, basically consists in transferring budget revenues from wealthy regions to poorer ones, has a rather strong equalizing effect. The measurements indicate that during the 2001-2016 the interregional differences in welfare have been decreasing. Interestingly, periods of economic crisis tend to be characterized by spikes in interregional income differences. Thus, the GDP per capita difference of 8.8 times between the poorest and the richest regions is reduced to 2.2 times. However, these redistributive measures are rough and do not stimulate regional economic development. Thus, despite nominal differences reduced through budget transfers, majority of the firms and services provided and more than a half of all research activity remains concentrated in the two major agglomerations. Within the framework of the New Economic Geography, this can be classified as a failure of providing the second group of factors for development such as human capital, institutions, population mobility, infrastructure, innovative activity, etc. Ensuring harmonized regional economic development has political relevance as one could argue that investment in public and social infrastructure might facilitate the regional convergence in the economic development in Kazakhstan. Moreover, it has been proved on many examples that inequality in the distribution of income within a territory reduces its growth (Rupasingha et. al., 2002).


    References

    Aldashev, A. and Dietz, B. (2011): “Determinants of internal migration in Kazakhstan”, Arbeitsbereich Wirtschaft, Migration und Integration, No. 301, October-2011, pp. 1-19.

    Rupasingha, A., Goetz, S. J. and Freshwater, D. (2002): “Social and institutional factor as determinants of economic growth: Evidence from the Unites States counties”, Papers in Regional Science, vol. 81, No. 2, pp. 139-155.

    Liebowitz, R. (1989): “Spatial Inequality Under Gorbachev,” in Bradshaw, M., ed., The Soviet Union: A New Regional Geography? London, UK: Belhaven Press, 1989, pp. 17-37.

    Krugman, P.R. (1991a): Geography and Trade. Cambridge: MIT Press.

    Krugman, P.R. (1991b): "Increasing returns and economic geography", Journal of Political Economy, No. 99, pp. 483-499.

    Novotný, J. (2007): “On the measurement of regional inequality: does spatial dimension of income inequality matter?”, Ann Reg Sci, 2007, No. 41, pp. 563-580.

    Zubarevich N. V. and Safronov S. G. (2011): “Regional Inequality in Large Post-Soviet Countries”, Regional Research of Russia, 2011, Vol. 1, No. 1, pp. 15–26.


    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

    Tags: Kazakhstan, Economy, Regional Dissection

Author

  • Junior Research Fellow

    Kanat Makhanov

    Kanat Makhanov is a research fellow at the Eurasian Institute of the International H.A Yassawi Kazakh-Turkish University. He holds a BA in Business Economics from the KIMEP University from 2012.