The Astana Economic Forum can rightly be considered the biggest event of economic topic for Kazakhstan and, perhaps, not only for our country. The scale of problems, announced in the past three years existing in this discussion area, bears a truly global character – from the idea of Eurasian integration to the introduction of a new world currency. The President of Kazakhstan, as it is essential for the National Leader, presented new initiatives of a global level while in their presentations the foreign experts raised the topics, of first importance for Kazakhstan.
The organizers of the 3rd Astana Economic Forum on "Sustainable economic development in the post-recession period", which was held on July 1–2 in the Independence Palace in Astana, were Eurasian Economic Club of Scientists association, the Republic of Kazakhstan Economy Development and Trade Ministry and the Institute of Economic Research. This time Astana met over 3000 representatives of political, business and research circles from over 70 countries of the world. Among the forum participants there were Nobel Prize winners Robert Mundell, Finn Kydland and Robert Aumann. Among the honored guests there were Deputy UN Secretary General Yan Kubish, OSCE Secretary General Mark Perrin de Brichambaut, former Canadian Prime-Minister Jean Chretien, President of the European Investment Bank Philippe Maystadt, ADB Vice President Zhao Xiaoyu, IDB President Akhmad Mokhammed Ali Al-Madani and other famous people.
This was an unprecedented forum not only by representation, but also its information intensity. Besides plenary sessions, the forum held such events as the Business forum of manufacturers and entrepreneurs, the conference of PPP-centers of the world, the Innovation congress, conferences on "Human resources management in the post-recession period" and "Islamic finance regulation mechanisms", a session of Dispute club of scientists and experts, a number of round tables and specific panel sessions as well as an exhibition of innovative projects.
The major goal of the Astana forum, which took place immediately after another G-20 Summit in Toronto, became the development of mechanisms for creation of conditions for long-term sustainable development of the world economy in the post-recession period. The major impulse for discussions was traditionally given by the President of Kazakhstan Nursultan Nazarbayev in his speech.
According to our head of the state, today we observe a new transformation of the geopolitical system of world order. "Twenty years ago the collapse of USSR turned a bi-polar world into a single-polar system. Today, the single-polar world is transformed into a multi-polar system. In the near future we will become an active participant of processes, creating big continental unions."
So far, in the opinion of Nursultan Nazarbayev, the post-recession development of the economy and financial system is characterized by quite large uncertainty. The situation is deteriorated by common challenges of such problems of ecology, climate, inequality and food security. In other words, the global agenda of post-recession development is a new model of world order; therefore, today, it is very important to develop common rules of the game and major principles of economic development at a global level.
The President believes that, at the same time, priority attention must be paid to the following global issues.
Reforming of financial markets. The support of stability in the financial markets at a national level only is not enough – this is the time for establishing a new financial infrastructure. Its center must be represented by a Global system of regulation and supervision of financial markets that will allow strengthening the responsibility of the owners of financial institutes for their decision making. Nursultan Nazarbayev criticized the world forums, including G-8 and G-20, since they "cover the old problems only", not paying attention to the real reasons of recession – non-efficiency of current world currency systems, undemocratic and unregulated. "There many discussions over the role of a reserve currency and adequacy of use of national currencies in this role…All assumptions, saying that turning any large world currency into supranational does not solve the problem of more stable macroeconomics.. I continue insisting that the global economy needs a new global currency", said the Kazakhstani leader. At the same time, the world community needs to think about the institutionalization of a new supranational currency that would help avoid defected distortion of the world currency system, speculative overflows of "empty resources" and "provision of loans" for consumption of development countries at the expense of developing world.
Environmental security. The world needs new, environmentally friendly technologies, rapid exchange of them and wider application of renewable energy sources. In this concern, at the recent UN ESCAP Summit Kazakhstan initiated the adoption of a new environmental declaration, so-called "green bridge" between Europe and Asia. This will allow to reconcile and expedite the processes of ensuring the environmental security and formation of a "green" economy.
Food security and price stability. Considering the deteriorating situation in the financial markets, unfortunately, the warnings of experts about a possible food crisis were not given serious attention. However, people in the developing countries, first of all, impoverished people, were affected by the dramatic price run-up for food. By 2050 the analysts forecast the increase of global population to 9–12 billion people. The provision of food and water to a growing global population needs new solutions and technologies. The President of Kazakhstan believes these solutions must be found today.
The reduction of poverty and inequality between the countries. Building a more stable community and stronger economy in any country needs better welfare of its population. However, this process must take place not only at the domestic, but also international level with higher focus on developing countries.
The President also presented his vision of initiatives in the area of economy and post-recession development under the OSCE framework. "One of key principles of Kazakhstan’s chairmanship in OSCE became equal filling of all three "baskets" of the organization. The current Bonn declaration and the OSCE Maastricht strategy are the main instruments of its second "basket" – economic and environmental dimensions". In the opinion of Nursultan Nazarbayev, many principles, reflected in these documents, are still important "but they demand a new focus since today’s world is at a crossroad again". He paid attention to the fact that, at the moment, many OSCE member-states actively discuss the issues of post-recession development in such integration formats as G-8, G-20, SCO, CICMA, World Islamic Economic Forum. On the other hand, the recession and anti-recession issues were never directly raised at the OSCE optional level. "Therefore, I propose to start developing a new document that can be conditionally named as Maastricht-plus. It must reflect modern post-recession realities of a changing world and its goal is to become a timely guide for the medium and long term perspective. We propose to discuss it at the summit of OSCE member-states that we will initiate to organize in Astana at the end of this year. This is not one days work and I hope to get the support and interest of OSCE member-countries".
Upon its successful implementation the next initiative, announced by Nursultan Nazarbayev, may become a real breakthrough in the global integration processes. He paid attention to the fact that historically cooperation between Europe and Asia has been tied to trade and the relatively free relocation of people within the continent. At the same time, the integration processes in Eurasian space are mainly focused on different, sometimes competing with each other, regional blocks. "This does not let us fully employ the potential of cooperation between Europe and Asia". In the opinion of the head of the state, OSCE is the organization, able to implement the idea of full-scale post-recession integration of the Eurasian continent. In this concern, he proposed to develop a single document, reflecting major principles and directions of such integration and bring it for discussion by OSCE member-states for the adoption at the upcoming summit.
According to him, the future "Declaration of Eurasian integration" must be focused on the following seven priority areas.
Development of trade and open borders, including the preparation of common and fair rules for regulating trade flows, excluding the possibility of regional protectionism.
Development of the transport and communication infrastructure throughpromotion of global transport and communication hubs and application of the newest logistics and information technologies and standards, allowing to significantly reduce the transaction costs.
Stimulating mutual investment and technological exchange, thanks to generating and re-orientation of investment flows as well as the creation of a favorable investment climate within the continent.
Development of common capital markets through integration of European and Asian financial markets thanks to development and harmonization of financial regulation. At the same time, common approaches to risk-management will help build a stable financial system, effectively accompanying trade and investment flows within the continent.
Stable and new energy sources, clean energy. In this direction it is necessary to develop a continental energy balance. Meanwhile, new ideology must be the development of alternative energy and promotion of energy efficiency as well as the exchange of experience and results of scientific research between countries.
Exchange and development of human resources through coordination and simplification of migration policies in the countries of Eurasia, intensification of intellectual potential and exchange of knowledge.
In conclusion, he underlined that integration of Europe and Asia will have a large scale and synergy impact, positively affecting the economic development and social welfare not only of the Eurasian continent, but also the new post-recession world. In its turn, Kazakhstan, being in the heart of the continent, maybe ready to become the initiator and coordinator of the Eurasian integration.
The proposals of our president were generally supported by high ranking guests of the forum. For instance, the Deputy UN Secretary General Yan Kubish referred to the Maastricht-plus idea as very serious and important. "I state this as former OSCE Secretary General. I know how important it is and how it may influence not only the work progress of this organization, but also Eurasian economic cooperation", he underlined.
Much attention was paid to the evaluation of an anti-recession program in Kazakhstan. In the opinion of Robert Mundell, the republic promptly responded to the global recession: "The steps, taken by Kazakhstan, were absolutely right". Another Nobel Prize winner Finn Kydland believes that one of the important achievements of our government is the timely recovery of a banking system that ensured the stability of entire economy. "The situation in Kazakhstan is much better than in most of other countries of the world", he said.
Continuing and developing this topic, the Executive Director of the World Bank Konstantin Huber proposed to use the Kazakhstani bank restructuring experience, "where both direct takeover and liquidation of major banks are avoided" as a positive example for other countries. In his opinion, the agreements on restructuring BTA and Alliance Bank allowed to write off about $10 billion of debt that were provided to these banks by foreign lenders at their own risk in the form of private unsecured loans. This achievement evidences not only the cost reduction in Kazakhstan as a result of the recession, but also "gives a very important signals for the market, indicating that investors must not believe the petro-financial reserves of the country implicitly cover their risks". At the same time, the head of the World Bank noted that there is still much uncertainty in the financial market of Kazakhstan: a number of commercial banks continue facing the burden of bad assets, adapting to new regulatory economic conditions and may face new problems if the current economic recovery is slow.
Nonetheless, the current challenges will probably not prevent the investors showing interest to Kazakhstan and CIS in general. Thus, Anne Marie Idrac, French Secretary of State for Foreign Trade under the Ministry of Economy, Industry and Employment, affirms that French companies are determined to work and invest in our region as well as increase the number of their subsidiary companies that already operate in CIS. "This is a big opportunity to increase business and innovation cooperation between CIS and France", she says.
In his turn the President of the European Investment Bank Philippe Maystadt noted that it was necessary to increase the investment in energy and environmental sectors of the Central Asian region. Specifically, the European investment bank in Kazakhstan will consider various projects on development of additional supply routes and infrastructure for transport of energy resources. The serious intensions of this investment bank are backed up by the fact that during the forum it was agreed that the European investment bank will finance investment projects in the republic for total amount of 1.5 billion Euros.
China is another important investor in Kazakhstan. According to the data, announced by the head of Samruk-Kazyna NWF Kayrat Kelimbetov, in 2009 only Chinese financial institutions provided Kazakhstan with credit lines for a total amount of over $13 billion. "This year we hope to increase the volume; they are used not only in the implementation of large investment projects in the oil and gas sector, but also in the development of petrochemical, oil processing industries, construction of bitumen plants, trunk gas pipelines, oil processing and metallurgical enterprises".
On this optimistic background a sobering affect was produced by the reports of Peter Boone, the professor of economics at the London School of Economics & Political Science and a principal at Salute Capital Management. In his opinion, in the near future CIS countries may face the instability of capital flows and price volatility for raw material goods. At the same time, this problem is rooted not in the developing markets, but it is produced in the developed world. "Every time, Europe and USA have financial troubles, instead of allowing the defaults we start helping out our banks and financial institutions. This was at the beginning of 70s, end of 80s, beginning of 90s, during the Asian recession and during the dotcom bubble. The same happened today – during the sub-prime recession. As a result, banks start feeling they will be rescued in any case and this provides incentives to invest in riskier projects. We also face moral costs; despite "reforms" in progress, our global financial system is still in danger", the expert noted.
After a one-time increase of control lobbying will be continued in the attempt to liberate the regulation while the weak monetary policy and recovery from incurred risks will lead to significant and "overall risky" capital flow in the developing markets.
Considering the fact that in the near future Europe and USA will operate interest rates at the level of zero, such countries as Kazakhstan and Russia, in the opinion of Mr. Boone, will be especially attractive for western capital due to its strong financial position and possibility to generate maximum return on investment. Cheap capital many give push to a new growth cycle of new developing markets; thus, it will (possibly) lead to a raw material boom and produce false confidence to raw material enterprises. "However, this is money, coming from a sick financial system. In the case of a new recession, this flow may be cut off again", the professor warned.
In his opinion, if the developing markets want to benefit from interaction with unstable capital flows, they must take a number of limiting measures. First of all, it is important that foreign investment is directed in the own capital of local companies, but not through corporate debt, since capital will participate in loss sharing during an economic recession period. In this case it is necessary to use taxes and royalty with the purpose to make profit on natural resources as well as introduce clear limits for quasi-sovereign debts (which is, by the way, more than important for Kazakhstan – editorial note). Simple financial requirements on large capital and liabilities on use of national currency must be introduced at the level of macro-prudential regulation. Finally, Mr. Boone is affirmed that the debt restructuring practice must be applied at regular bases.
"Hence, we are at the beginning of a new cycle. Large capital will come to Kazakhstan. Western banks will expect high profits. Let us hope that all this will not end up being a big problem for Kazakhstan or other countries", the expert concluded.
We will not exaggerate if we say that such a crucial issue for our country as the diversification of production and export was also mentioned in the presentations of nearly all speakers of the forum. In this connection, the most interesting, although not indisputable, presentation was delivered by Dr. Barry Ickes, the Director of the Center for Research on International Financial and Energy Security and the professor at the Pennsylvania State University. In his opinion, the key problem for economies with rich energy resources is not their availability but the presence of rent on them.
Yes, these countries were severely damaged by the fall of raw material prices during the recession, but these high prices for oil became the foundation of the pre-recession economic growth in Russia and Kazakhstan, while their recovery helped us overcome the recession period faster.
The major risk for the resource producing countries (especially, when the production of energy resources is linked with high costs) is the high volatility of oil prices that today are close to "random walks of the post-war period". In this situation the major task of these countries is to protect themselves from this risk, smooth the volatility through equalization of the business cycle of rent distribution.
"In many petroleum producing countries the oil revenues are spent on consumption only. When the prices fall this is painful, but still quite transparent – obviously, it is necessary to cut imports and decrease the consumption that was earlier support by the sale of oil. Nonetheless, it is not very transparent in post-Soviet republics, dependent on production. Most of the rent is distributed informally through price subsidies between the enterprises that produce goods for the sake of production."
At the same time, the expert warned that, first of all, he implies Russia, where the raw material income is used in order to support and expand other industries, "especially those, inherited from the Soviet economy". Mr. Ickes referred to such "diversification" as an "obsessive habit that does not need to be supported, but eliminated in every way".
As an example, he brought up the case, described by economist Steven Landsburg in 1993. "There are two types of vehicle production technologies in USA. One is the production in Detroit, another one is growing in Iowa. At first, seeds are set. Then we wait few months until we see wheat. Then we take the crop, load it to ships and export to the east via the Pacific Ocean. After few months the ships come back and bring Toyotas. This is a much more efficient way to produce cars than Detroit’s way."
Extrapolating it to the case of Kazakhstan, where diversification means the establishment of new non-raw material sectors of economy, the points of Mr. Ickes may be paraphrased in the following way. If these plants are not efficient and non-competitive, their establishment will not lessen the dependence on resources, but, however paradoxically it is, will increase it. And here Kazakhstan has something to contemplate.
As one of the options the expert offered Russia and Kazakhstan to use another form of smoothing the raw material dependence – diversify the resource rent, investing it in non-energy producing assets throughout the world.
Zhao Xiaoyu, the Vice-President of the Asian Development Bank, very well-informed about our country, also shared his formula on how Kazakhstan can successfully manage and use the revenues, generated by the sale of natural resources. In his opinion, the first step in this direction is compensating the damage to environment and people that suffered from the development of fields. It is also necessary to set the issue of restructuring corporate income tax, produced by the extraction of resources. However, the most challenging decision for the government Mr. Zhao views as the correct distribution of produced raw material income between consumption, investment and savings.
"Here the government must estimate the desire of the population to significantly increase consumption and necessity to direct savings for medium term and long term economic growth. Considering the limited capital in Kazakhstan, the correct decision may the direction of savings into domestic investment in human physical capital. When the decision on this important issue is made it is essential to think of what types of domestic investment are demanded and how to implement them. Here the government must improve the investment process and develop effective institutional mechanisms for evaluation and implementation of projects", the ADB representative highlighted.
Also in his opinion, another challenging problem for Kazakhstan is the emerging threat of getting into the so-called "trap of medium-income countries". This happens when rapid economic growth reduces poverty, but then the country "gets stuck" among medium-income states. In this condition it is not able to compete with poor countries with lower salaries or developed states with higher technological skills and new products. “World history gives many examples when the countries were able to transform from low-income into middle-income states. However, there are relatively few cases when they were able to make it further and enter the list of high-income states". In order to prevent this it is necessary to move the production chain – from assembly to independent production that is, in its turn, accompanied with a step forward to production of highly technological innovative products and services. According to Mr. Zhao, the crucially important condition here is the investment in human capital.