On the other hand, demand-side constraints can be attributable to most of the branches in the Growth Lab diagnostic tree, including low social return on investments, low skills, and an unfair competition landscape. Supply constraints can result from a high price of credit, tight lending conditions, or poor intermediation that fails to allocate available capital to the most promising investment. Low corporate credit growth can be a result of supply constraints, demand constraints, or a mix of both. It might also reflect perceptions about the appropriability of returns on innovation and investment.
Constrained access to finance can reduce the potential for innovation by forcing companies to forgo investment opportunities and affecting companies’ survival and growth by contributing to working capital constraints. In its diagnostic framework, the Growth Lab assesses whether access to finance is an obstacle to growth for many reasons. However, corporate credit growth remained dampened despite policy support (Figure 1).
Recognizing the role of access to finance in investment promotion, the government has implemented several credit initiatives to boost corporate credit, including subsidized lending, credit guarantees, and direct lending. Kazakhstan has a stable deposit-to-GDP ratio but a declining private-credit-to-GDP ratio. My first few weeks of the internship were based at the Harvard Kennedy School, where I worked on assessing whether access to finance was a constraint to investments and growth in Kazakhstan. The third objective was to discuss the team’s diagnostics findings and policy recommendations with stakeholders on the ground in Kazakhstan. The second objective was to formulate policy recommendations to ease the binding constraints identified in the areas of macroeconomics and finance. One of these puzzles I focused on was stagnant corporate growth despite generous policy support. First, to dig deeper into some of the puzzles identified in constraints analysis. My internship, therefore, had three objectives. My internship with the Growth lab coincided with analyses that aimed to link growth diagnostics with policy recommendations. The research collaboration involves analyzing the country’s productive structure, identifying binding constraints to growth, and providing support for policy formulation and implementation with the aim of initiating sustainable and inclusive growth. The Growth Lab is currently engaged with the Government of Kazakhstan to help decision-makers promote sustained long-term growth and inform investment policy design. However, the fall in oil prices starting in 2014, the lack of economic diversification into non-oil tradables despite ample policy support, and recent geopolitical challenges have put the sustainability of growth in jeopardy. This strong growth witnessed in the early and mid-2000s was fueled by the country’s hydrocarbon resources, structural reforms, and high Foreign Direct Investments (FDI).
Kazakhstan was able to achieve an impressive growth episode between 2000-2020, more than doubling its GDP per capita. Finally, its history as a former Soviet-state leaves Kazakhstan with domestic macroeconomic imbalances and a loss of productive capacities as a result of the centrally planned economy of the Soviet Union. The dominance of oil in its export basket puts Kazakhstan at risk of the consequences of Dutch disease and resource-dependent growth.
The country’s large size and low population density mean it is a remote place, and economic innovation and productivity growth are impeded by the difficulty in agglomerating people in major urban centers. Kazakhstan’s unique socioeconomic history and its vulnerability to commodity price shocks have led to three interrelated development challenges. The global commodity super-cycle ended in 2014, and oil prices fell. Kazakhstan became Independent in 1991 after the fall of the Soviet Union and shortly thereafter experienced an oil boom. It has an area roughly equal to that of all of Western Europe and a population of 19 million – around that of the Netherlands. Kazakhstan is one of the least densely populated countries in the world.
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