According to the research of the World Bank ranking, Kazakhstan entered the top 30 leading countries for ease of doing business for the first time, thus 2019 in the country was marked by this fact. This indicator turned out to be the best among the countries of Central Asia and ahead of many advanced economies of the world. What is the secret of success and who felt the ease of doing business in the Kazakh market?
The material was prepared as part of the internship program for participants of CABAR.asia School of Analytics in Tbilisi (Georgia).
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What is the “Doing business” rating?
“Doing business” or “Ease of doing business” is an annual study conducted by the World Bank, in order to determine the countries with the most comfortable conditions for doing business. Evaluation of countries on the favorable conditions for doing business is carried out from 1 to 190. The rating is compiled by measuring cumulative indicators on 10 topics, each of which consists several indicators, and has an equivalent effect on the overall rating of the country:
- “Starting a business” – the total number of procedures is calculated, as well as their cost and terms, which are necessary for the business representatives to register;
- “Dealing with construction permits” – the total number of procedures is determined, as well as their cost and timing, in order to build a small warehouse;
- “Getting electricity” – assessment of the quantity, cost and terms of procedures that are necessary for a business to connect to the power supply system;
- “Registering property” – tangible and intangible expenses of an entrepreneur for registering property rights after purchasing commercial real estate;
- “Getting loans/credit” – estimating the level of simplification of business access to loan funds;
- “Protecting minority investors” – assesses the degree of investor protection from conflict of interest in case of directors’ use of the company’s assets for personal gain;
- “Paying taxes” – analyzes taxes and obligatory deductions that the company must pay in the relevant year, as well as the administrative burden on their payments;
- “Trading across borders” – estimates the time and financial costs of organizing and ensuring the export and import of goods;
- “Enforcing contracts” – costs are calculated for resolving a commercial dispute in a local court of first instance and the quality of legal proceedings;
- “Resolving insolvency” – examines the effectiveness of the regulatory framework applicable to the liquidation and reorganization of an enterprise.[1]
In order to determine the rating for the current year, in 2018 only 10 of the 11 parameters were included in the cumulative rating of favorable business conditions. This year, the organizers of the study excluded such indicator as “Labor Market Regulation”.
Kazakhstan in the ranking: never late to learn
In connection with the growing crisis in the global economy and the decline in commodity prices in the 2010s, the economy of Kazakhstan, which is mostly dependent on oil prices, has faced serious problems that required urgent measures and fundamental changes in the country’s development. In this regard, the country’s leadership, it was decided to develop appropriate strategic programs to diversify the domestic economy. The government has considered various mechanisms for achieving the program targets, including the attraction of foreign direct investment in non-resource based sectors of the economy and developing local small and medium-sized businesses. It should be noted that, according to the results of the World Bank study, the conditions for entrepreneurs were not so bloomy and comfortable at that time.
In order to attract investment in the economy and support local businesspersons, Kazakhstan was faced with the task of creating appropriate conditions for doing business in the country. This, in turn, demanded serious training of employees and large-scale legislative reforms. In achieving significant results in the shortest possible time, it was decided to study the experience of Georgia.
“Georgian secret of success”
Being one of the poorest countries in the world and lacking raw materials, Georgia today has become the largest player in the Caucasus region. The flow of foreign investment is increasing and many large transnational companies are opening their regional offices in the country. So, what is the secret of success? In the early 2000s, the country was faced with the question of either remaining economically dependent on Russia and remains one of the poorest nations in the world, or starts reforms and improves the social well-being of the population. The Georgian government, without any doubt, chose the second scenario. However, given the lack of any resources and the depressing state of the economy, another difficult moment arose – what should be done? The way out was the development of local entrepreneurship and attraction of foreign direct investment into Georgia. To achieve these goals, it was decided to turn the country into an “economic hub” of the Caucasus and East European regions. At the same time, by cardinal reforms in the field of legislation, to create necessary conditions for running a business in the country. Reforms, which continued for more than 10 years, were based on the following 7 principles:
- One government principle – the approach is similar to the principle of “single-window system”, where any citizen can get the necessary public services very quickly in one place. The main goal was to reduce bureaucratic delays and eradicate corruption.
- Silence is Consent – this principle was aimed at reducing the time period for providing feedback to civil servants at the request of the applicant.
- Fee-based service delivery – the task was to bring services of a corrupt nature into the legal field by legalizing them and providing them with a paid character.
- Ex ante vs. ex post licensing – the idea was to enable small and medium businesses to obtain a license for their activities after a certain period of operation of their business.
- Regulatory Guillotine – the goal was to reduce government regulation of the economy to create a free market in the country.
- Piggybacking – in order to reduce costs and save money on the provision of various permits, standardization of services and goods, the country identified a list of those developed countries, with the standards of which it automatically agrees, which allowed unhindered delivery of goods and services to the domestic market.
- Sunset clause approach – the essence is in the provision on the automatic termination of the norms, laws and other regulatory documents in case of their limitations period. Despite the brilliance of this idea, the government of the country had not yet decided to implement this approach.[2]
Thanks to political will and courageous reforms, Georgia has managed to rise in the “Doing Business” rating from 112 in 2004 to 37th place in 2007. Moreover, after 7 years, the country was in the top 10 countries in the world with the most favorable conditions for launching a business. In 2011, Georgia was awarded the nomination “No. 1 reformer in the world from 2006 to 2011”. According to the World Bank, no other country has undertaken as many reforms as Georgia to create a comfortable environment for entrepreneurs. An important fact of success is also the country’s tough stance against corruption among law enforcement agencies and civil servants.
Results of the Kazakh-Georgian cooperation: achievements and problems
Kazakh officials, having studied the rich experience of reforming the business sector in Georgia, in 2015 began official cooperation with Georgian reformers. In the first year of joint work, more than 130 changes were made to legislation, various rules and regulations, which led to the nomination of Kazakhstan in the same year with the title of “reformer No. 1 in the world”. The results were not long in coming. Therefore, already in 2016, in the “Doing Business” rating, the state managed to improve its position in the world by 36 points (77th place in 2015).
According to the World Bank’s rating, and based in the results of the study, already in 2018, Kazakhstan managed to climb an additional 8 lines in the rating, ahead of many Western countries and the largest economies of the Asian region.
To achieve such positive results and a significant jump in the rating, without a doubt, the government of Kazakhstan took a number of practical measures to improve the business environment in the country. As the World Bank notes, the success of Kazakhstan became possible due to the ongoing systematic work on reforming the current legislation, improving the licensing system, and simplifying business creation procedures. Having studied the report of the organization, one can see that Kazakhstan has succeeded most in such aspects as the protection of minority investors and the enforcement of contracts. Relatively low rates are preserved in the parameters – “connection to the power supply system”, “receiving loans” and “taxation”.
While analyzing the indicators of the World Bank, it can be stated that the government of Kazakhstan is taking all appropriate measures to improve the business climate for foreign investors who wish to open their business in the republic. Whereas, actions to stimulate the development of domestic business, both small and medium, remain in a “protracted” condition and do not show significant improvements in the last years of research. Despite numerous government programs to support small and medium-sized businesses and to ease the tax burden for them, now the Kazakh business practically does not live, but survives. In all fairness, it should be mentioned that this study also demonstrates “shortcomings” in the work of local authorities, pointing out such problem areas as loans and taxation.
Problems of the Kazakh business
Today, it is becoming more difficult for small and medium businesses to maintain the necessary number of personnel. The main reason is tax deductions from employee wages. Collection from the actual salary of the worker today is more than 30%, which imposes a significant burden on the shoulders of the business to fulfill the employment contract. In addition, it should be noted about the difficult situation around domestic businesses loaning framework. Due to the distrust of second-tier Banks to local entrepreneurs, financial institutions impose insurmountable barriers to business in the form of 15% remuneration on loans. This approach not only stifles entrepreneurial activity in the country, but even completely kills any desire among the population to engage in personal business.
It is also important to note the unconditional “capitulation” of small and medium-sized businesses to monopolists and major companies in the republic, whose activities are in many cases coordinated by the country’s influential political establishment. This provides them, firstly, with unlimited access to financial resources, and secondly, to manipulate prices in the market. Consequently, the established unfair competition in the local market binds the hands of smaller entrepreneurs and forces them to leave the “battlefield”.
An important fact is the high level of businesspersons’ distrust to the judicial system, as well as corruption at all levels of activity. Despite the existence of business ombudsmen and an institution authorized to protect the rights of entrepreneurs, the situation on preserving the legality of decisions taken leaves nothing to be desired. In order to resolve this issue, in the current year, the government decided to give businesspersons an opportunity to file a lawsuit with an international arbitration court in the AIFC (International Finance Center of Astana). How that will solve anything, remains to be seen.
Conclusions
It should be noted that the methodology for determining the “Doing business” rating is limited only to the review and analysis of regulatory documents, as well as matter-of-facts on the number of reforms carried out in the country. At the same time, usually the analysis is based on the results of only one large city in the country. In case of Kazakhstan, this is Almaty. Considering the existing flaws in the research methodology and in the pursuit of ratings, the ministries are actively working on the development of numerous government programs and roadmaps. In addition, we must give them a credit, since they are very good at it, and even sometimes, it seems that this is their main activity – to print out quickly the state program without taking into account the in-depth analysis and profitability of this program for business and society as a whole.
However, one should not underestimate the efforts of the Government of Kazakhstan to improve the business climate in the country. Cooperation with Georgia and their invaluable experience yielded results. The business climate in the country improved comparatively and investments began to flow into the domestic market of Kazakhstan. In general, progress is taking place, but only a question arises for whom our officials are striving. Taking into account the worsening economic situation both in the country and in the world as a whole, as well as ongoing trade wars between the major powers of the world, today there is a “bitter” struggle for foreign direct investment among the countries of the Central Asian region and the CIS. In this regard, we can safely say that in the current realities, the Kazakh leadership is making every effort to provide favorable business conditions for foreign investors. This is evidenced by the results of the “Doing Business” research.
As it often happens in Kazakhstan, finding a “middle ground” is a very difficult process for our civil servants. In contrast, as is already customary, the local community always loses and all the “serenades” sound only in honor of foreign capital. In pursuit of investments, it is not rare for our government to forget that the main driver of economic growth was and is the domestic small and medium business. Without giving due attention to the development of Kazakh business, we risk becoming more import-dependent state, as well as facing a sharp outflow of the most qualified and enterprising population.
This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project implemented with the financial support of the Foreign Ministry of Norway. The opinions expressed in the article do not reflect the position of the editorial or donor.
Sources:
[1] World Bank official website, Doing Business http://russian.doingbusiness.org/en/methodology
[2] Gilauri, N. (2016). Georgia in 2004-2012
[3] World Bank Country Review http://www.doingbusiness.org/en/data/exploreeconomies/kazakhstan
[4] Annual Report of the World Bank http://www.doingbusiness.org/en/reports/global-reports/doing-business-2019