Kazakhstan’s Next Economic Boom: The SME Sector Prepares to Take Off

It is a well-known fact that small- and medium-size enterprises (SMEs) have been the engine of economic growth of the developed economies and the source for creating most new jobs. In the majority of the member countries of the Organization for Economic Cooperation and Development (OECD), SMEs account for over 95 percent of enterprises and up to 70 percent of employment (oecd.org/statistics/). In contrast, the strategy of Kazakhstan’s economic development since independence has been centered on creating big enterprises in extractive industries. Such a strategy was justified by the need to build a solid foundation and accumulate financial resources to enable economic deepening and growth in other sectors of the national economy.

The time has finally come to switch gears and make SMEs the driver of Kazakhstan’s economy. Ways of accelerating the growth of the SME sector were discussed at the April 10 meeting of the Council of Businessmen and Entrepreneurs chaired by President Nursultan Nazarbayev (Nomad.su, April 10). As of January 1, 2013, the share of SMEs in the country’s GDP is only 17.8 percent. They employ 2.5 million workers, which accounts for approximately 28 percent of the labor force (The Agency of Statistics of the Republic of Kazakhstan, accessed April 22). That not only contrasts Kazakhstan sharply with the structure of labor in developed economies, but interestingly enough does not reflect the preferences of Kazakhstanis themselves. A poll conducted on the prime minister’s website last year demonstrated that 89 percent of respondents would like to start their own business (Kapital.kz, January 12, 2012). That number shows a vast untapped potential for the growth of the SME sector. It also illustrates that the Kazakhstanis’ economic behavior has more in common with that of developed economies than their former Soviet compatriots. In Belarus, for example, only 46.9 percent want to work in the private sector (https://carnegieendowment.org/2013/04/12/update-from-belarus/fu3i).

The same poll, however, revealed the reasons why Kazakhstanis were reluctant to start their own businesses—30 percent cited high administrative and tax burdens, while 59 percent pointed to the lack of government help with startup capital. In fact, misgivings about obstacles facing SMEs are supported by data showing only 32.7 percent out of 301,300 small businesses registered to actually operate in Kazakhstan (Ranking.kz, January 21). Among other problems facing SMEs are high transaction costs. It takes 370 days and 37 procedural steps to enforce contracts in courts costing businesses, on average, 22 percent of the contract value (Kapital.kz, February 8).

It is true that in recent years Kazakhstan has made great strides in addressing these and other problems in order to improve the domestic business environment. The country now ranks 49th in the world in terms of ease of doing business (see EDM, November 8, 2012), and one can start up a business online, including its registration, in one day. That more needs to be done to ensure the real development of the SME sector was acknowledged and discussed at the April 10 meeting. Three measures announced by President Nazarbayev stand out.

First, the second wave of privatization—to include education, health care, IT, and social services sectors—would be explicitly designed to benefit the SME sector. The basic mechanism of privatization will be the public-private partnership. Such a partnership in developed economies is generally considered to be the quickest path to creating a dynamic SME sector. Its application to privatization in Kazakhstan would be a novel approach. Even more novel will be the specific forms it will take in privatization. Alongside the usual method of an auction sale, the government will identify sound and successful businesses and businessmen to offer them privatized companies through renting with the rights to purchase, payment by installments, and even free transfer (Nomad.su, April 10).

Second, the legal environment is to be drastically improved. By law, SMEs have been recently exempt from any checks for the first three years of operation. The submission of reporting and accounting paperwork will be switched to an electronic format, which should save SMEs around $30.4 million annually. The government was tasked to produce improved legislation on legal protection of businesses and legal guarantees of private property. The latter is of particular importance and is needed, in Nazarbayev’s words, to stamp out any talk of redistribution of property. As a sign of a changing legal and government management mentality vis-à-vis the economy and economic actors, Nazarbayev voiced the well-known dictum of neoclassical economics that the government should limit itself to providing a legal framework for businesses and enforcing it rather than control “everything and everywhere” (Nomad.su, April 10).

Third, the task of developing the SME sector will effectively be transferred to the new Ministry of Regional Development. The ministry will pursue this task in coordination with the Council of Businessmen and Entrepreneurs, which was transformed into the Council of National Investors. This is a step in the right direction. Even more than is the case with the national economy, the SME sector has been disproportionately skewed toward two geographic areas—Astana and Almaty, where 40 percent of registered SMEs are located (Ranking.kz, January 21). The regional development ministry is tasked with leveling the playing field and ensuring that all Kazakhstanis have access to the same resources in starting their own businesses. As an effective tool of promoting the growth of the SMEs and monitoring the activities of regional administrations, Kazakhstan’s central government and the Atameken National Chamber of Commerce will publish a “Doing Business” regional rating index (Nomad.su, April 10).

Though the SME sector in Kazakhstan faces many challenges, the fact that 89 percent of Kazakhstanis want to start their own business shows no shortage of their enthusiasm for risk-taking and entrepreneurship. In that respect, they are no different than citizens of developed economies. In itself, this is a very encouraging sign for the future of economic development in the country. It is also a signal to the government of Kazakhstan that given the right incentives, some of which were introduced at the April 10 meeting, the country can see a boom in the SME sector and easily exceed the target of increasing the GDP share of small and medium businesses to 40 percent by 2020.