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 KAZAKHSTAN International Business Magazine №5/6, 2010
 Rankings of Kazakhstan: Five Points Down
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Rankings of Kazakhstan: Five Points Down
 
Editorial

For our magazine it has become a tradition at the end of every year to publish material, devoted to the ranking of global competitiveness by the World Economic Forum (WEF). For years we have been sincerely hoping that Kazakhstan would stop going down and at last be among the top 50 most competitive economies of the world. Unfortunately, the year 2010 brought disappointment – the country went down 5 points, ranking 72nd. Thus, in the last four years, the rankings of Kazakhstan went down 11 points in total.

In 2010 the Global Competitiveness Report 2010–2011 of the WEF ranked a record number of countries – 139 countries in total (133 countries in 2009).

The status of the most competitive economy in the world was given again to Switzerland owing to its huge innovation potential and developed business culture. In the opinion of the authors of the report, the Swiss research institutes are among the top leading ones in the world, and the close interaction between the academic sector and business contributes to quick penetration of the R&D results, turning into particular market products. The efficient system of protection of intellectual property and support of innovations through government orders adds to this as well.

Sweden ranks second, leaving behind Singapore and USA (Table 1). The largest economy in the world is still experiencing shakes. By the macroeconomic stability indicator, the USA ranks only 87th. Among the major problems America faces, WEF experts call a huge state budget deficit, exceeding $1 trillion, and a sharp reduction in public trust to the government, which is criticized for inefficient expenditure of budgetary funds. German ranks 5th, then Finland, Netherlands and Canada follow. Great Britain which was losing its previous positions is now one point up, ranking 12th. China continues improving its competitive position also, now two points up from 29th to 27th that makes it be among the top thirty competitive economies in the world. Its rivals on the BRIC block – India, Brazil and Russia – rank 51st, 58th and 63rd, respectively. Among the Asian countries with the most competitive economies, along with Japan, are Hong-Kong (11th) and South Korea (22nd). In Latin America, the leaders are Chile (30th), Panama (53rd) and Costa Rica (56th).

A general trend observed in the latest report of the WEF is the worsening of the position for the majority of the developed countries, whereas the developing economies, on the contrary, have improved their rankings.

Speaking of the most prominent “breaks-through and failures” of 2010, the best “performers” are Mongolia (18 points up to 99th), Vietnam (16 points up to 58th) and Indonesia (10 points up to 44th). Among those most failed are Nigeria (28 points down to 127th), Pakistan (22 points down to 123rd), Jordan (15 points down to 65th), Slovakia (13 points down to 60th), and Greece (12 points down to 83rd).

Lastly, the nomination “Stability” can be given to the Persian Gulf states, which have been steadily going up in overall performance. A well-aimed policy on efficient spending of the raw material sector revenues and conducting of economic reforms allowed Qatar (17th), UAE (25th), Oman (34th), Kuwait (35th) and Bahrain (37th) not only to preserve, but improve their positions in the condition of the economic recession.

Originating from the USSR…

Speaking about the post-Soviet states, here the trends are different. Five of the former Soviet Union republics have managed to improve their competitiveness. Among them is Estonia, which is 2 points up from 35th to 33rd, Lithuania which has managed to return to the top 50 states, improving its position from 53rd to 47th, and Moldova that took a one year break and is now one point up from 95th in 2008 to 94th in 2010, and Tajikistan (from 122nd to 116th) and Kyrgyzstan (from 123rd to 121st) as well.

Russia has managed to retain its 63rd place, compensating a macroeconomic stability decline by improvements in the area of infrastructure, healthcare, education and technological readiness.

The remaining countries of the former USSR block have weakened their positions. The star of the last year’s rankings – Azerbaijan, which was 19 points up in 2009, this year is 6 points down to 57th. The competitiveness of a third neighbor of the Baltic states – Latvia – continues worsening. This country which three years ago was ranking 45th is now ranking 70th, outstripping Kazakhstan by just 2 points. Ukraine (89th), Georgia (CIS) (93rd) and Armenia, standing behind Kazakhstan in the competitiveness ranking list, are now 7, 3 and 2 points down, respectively.

Belarus, Turkmenistan and Uzbekistan, as usual, were not covered by the WEF rankings.

Blamestorming

Let us turn to the detailed blamestorming of those changes, which have led to the decline of Kazakhstan competitiveness in 2010. We should remind that while ranking the countries, the WEF experts apply a Global Competitiveness Index (GCI), developed under the methodology of the Columbia University Professor Xavier Sala-i-Martin. The GCI is based on 12 pillars, or the so-called “components of competitiveness”, which are divided into 3 pillar groups or subindexes. The 12 pillars are based, in their turn, on 111 variables, under which every country is evaluated.

For those readers who familiarize with the methodology of WEF ranking for the first time, we recommend to read our previous publications concerning this subject-matter1.

1 See the archives of the Kazakhstan magazine, Issues #4’2006, #4’2007, #5/6’2008, and #6’2009 on the website www.investkz.com

Considering the competitiveness “map” of our country by pillars and pillar groups (Table 2), the only positive aspect is that Kazakhstan by the Basic Requirements Subindex has almost returned to its pre-recession level, reaching 69th, compared to 74th in 2009). In the post-recession condition, the Macroeconomic Environment pillar again demonstrated a spurt by going up 33 points. Health and primary education pillar has improved a little bit, going 5 positions up. However, if even to suppose that we will be able to further on move with the same pace, it will take us 7 years as a minimum to raise in the ranking from current 85th to 50th.

The two last components of competitiveness, making up the Basic Requirements Subindex, demonstrated negative dynamics. While the large-scale investment programs, aimed at improving the infrastructure (5 positions down to 81st) in the framework of the Program of Accelerated Industrial and Innovative Development, allow forecasting a turning point in the negative trends in this area, the critically low indicator of the Public Institutions pillar (5 points down to 91st) can hardly be remedied by capital investments alone. 

Kazakhstan lost 2 points in the Efficiency Enhancers Subindex (from 69th to 71st). Of the six pillars it involves, only Market Size remained stable that is not a surprise. The other five pillars demonstrated declines. Technological Readiness had the worst result (13 points down to 82nd), Higher Education and Training showed 6 points down to 65th, and Financial Market Development is also 6 points down to 117th.

Finally, the evident outsider for Kazakhstan in 2010 is its ranking by Innovation and Sophistication Factors Subindex that showed a catastrophic decline by 24 points to 102nd. The latter is seemed a decisive factor that worsened Kazakhstan’s position in the GCI ranking. The only thing that saved our country from an even greater failure is that by the WEF classification Kazakhstan refers to the group of countries, having an intermediate position between the 1st and 2nd phases of economy development. Thus, for the competitiveness of Kazakhstan the Basic Requirements Subindex seems of the most value. The share of innovation factors is just 5%–10% in the overall result.

The overall dynamics of domestic competitiveness looks as follows: Of 111 variables that make up the final GCI, the Kazakhstan’s position improved on 25 variables and declined on 75 variables; 6 variables remained stable. 5 new variables have appeared in the current year, and, thus, no comparison is carried out on them.

 

A number of variables, on which Kazakhstan demonstrated positive dynamics and which can be regarded as its advantages, have reduced (Table 3). Today, by only 17 variables Kazakhstan could be referred to the top 50 most competitive economies in the world (last year, their number was 19). In particular, Kazakhstan is lower than 50th position by Tertiary Education Enrollment Rate and by level of Total Tax Rate; also, it declined sharply by Capacity for Innovation (from 50th to 75th). WEF experts stopped considering the indicators Business Impact of Malaria and Malaria Incidence as our competitive advantage. Although, by the given indicators we were holding first place in the world but, of course, this can hardly be called a specific merit of our economy or government.

Along with that, Kazakhstan has some new advantages. The level of Public Trust of Politicians increases. By this indicator, we rose to the 47th place, outstripping, for example, the USA (54th). Our country made an explicitly phenomenal leap by raising 86 points up to the 23rd place by the Interest Rate Spread indicator. On one part, the banks have considerably moderated their appetites, while the state in its attempts to reanimate the economic activity is introducing programs of subsidizing loans to small and medium businesses. On the other part, the bankers, in the condition of closure of the external borrowing markets in the last year, organized a real hunting for deposits of the population, so that the Deposits Guarantee Fund had even to reduce the maximum deposits rates recommended for the second-tier banks.

 

The position of Kazakhstan by Buyer Sophistication indicator (from 79th to 49th) improved cardinally. This means that the Kazakhstani people while buying something pays a lot of attention to the quality of goods and services, apart from the low price.

 

In all other respects, the list of our advantages remained without change. Among the indicators, which Kazakhstan can be proud of by right, are the low level of Government Debt (7th) and Government Budget Balance (33rd). The ranking of Kazakhstan by Labor Market Efficiency (21st) looks quite competitive – by 5 of 9 indicators of this pillar Kazakhstan is among top 30 of the ranking. Along with that, we have to recognize that joining the Customs Union by Kazakhstan was not painless. By the average customs rate, our country is 9 points down to 50th.

 

As per the WEF methodology, any indicator by which a country is lower than 50th is considered a negative factor for the country’s competitiveness. For Kazakhstan, 85% of all the indicators that make up the final GCI Kazakhstan are ranked as negative. Moreover, the number of indicators by which we are lower than 100th have increased from 20 to 35 during the year.


The most critical areas, in our opinion, are showed in Table 4. The domestic banking system, which was regarded as “the best in the CIS” some time ago, is now perceived as one of most instable in the world (lower in ranking are just Chad, Great Britain, Burundi, Zimbabwe, Mongolia, Iceland, Ukraine, and Ireland). In this situation, the results of Ease of Access to Loans (35 points down, reaching 121st) and Affordability of Financial Services (102nd) can merely be called unexpected.

The lag in the institutional development area increases: Now by Property Rights Kazakhstan reaches 112th, by Intellectual Property Protection 98th, 20 points down, by Diversion of public funds/Corruption 97th, 19 points down, by Judicial Independence 109th, 11 points down, and by Favoritism in Decisions of Government Officials 81st, 23 points down.

This list can be continued further. Even if the problems in the area of finance can be referred to the consequences of the world economic slow down, the decline in the indicators which are the basic conditions for the development of competitiveness in Kazakhstan is purely the internal problems of the country.
 
Innovation failure

The most attention in the latest WEF report should be brought to the results of Kazakhstan on Innovation and Sophistication Factors Subindex. We have not shown so sharp a decline by this subindex for all the history of participation of Kazakhstan in the WEF rankings. The decline is in both of the pillars. Business Sophistication went 12 points down from 88th to 102nd, while Innovation 37 points down from 64th to 101st.

In order to realize why this has happened, one should take into account the methodological specifics of the WEF rankings. The reason is that the main source of data used to compile the index is the Executive Opinion Survey, which makes up 70% of the overall further data, used in evaluation of a country for the final GCI. The other 30% are the official statistics and hard data by international organizations. Of 16 variables, making up Innovation and Sophistication Factors Subindex, only one – Utility Patents per Million Population – is calculated by using the statistics data, i.e. here this proportion is 94 to 6.

Thus, the outcome is that the sharp decline in this indicator was a direct consequence of overestimation, occurring in the brains of the Kazakhstan business affected by the global recession. Not only the beginning and lapse of the economic recession in Kazakhstan, but the nature of our coming out of this recession, showed with all obviousness that the competitiveness of the domestic economy still entirely depends on the raw material sector and the situation in external markets (Nature of Competitive Advantages, 33 points down to 112th). With this, our export possibilities mainly depend on the activity of transnational players operating in the domestic market (Control of International Distribution, 37 points down to 95th). The efforts to re-orient to the domestic demand and to find new points of economic growth revealed problems in the local content area. There is the lack of domestic suppliers in the country (Local supplier quantity, 8 points down to 113th), while the quality of their products left much to be desired (97th), since they use outdated technologies (Production Process Sophistication,18 points down to 80th) and are weak from the viewpoint of marketing and logistics (Extent of Marketing, 10 points down to 109th).

That fact that the industrial and innovative development strategy till 2015 has failed, while the created development institutes have turned out to be ineffective is recognized not only by entrepreneurs, but government officials as well. According to the Head of NWF Samruk Kazyna, Kairat Kelimbetov, of 32 projects to the total amount of $250 million, comprising the Kazakhstan Investment Fund’s portfolio, none has turned out to be successful.

The launch into operation of the new Accelerated Industrial and Innovation Development program forced the domestic enterprises to sensibly view the insufficiency of those investments they allocated for research and development (24 points down, reaching 84th) and, as a consequence, the level of interaction with the universities (34 points down to 111th). It is clear that science can not exist on its own for a long time; thus, the low quality of the Kazakhstani research institutes (21 points down to 112th) and the failure in the availability of scientists and engineers (17 points down to 91st) are not a surprise.

Overall, just a year ago, in the opinion of the Kazakhstani businessmen, from the viewpoint of the opportunities available for innovations development, WEF ranked our country 50th, in 2010 we are ranked 75th.

Collapse in the minds

Experts of the Economic Research Institute pointed out several times that individual evaluations of the respondents do not at all times reflect correctly the real situation and level of competitiveness of a country and this fact can considerably affect the low evaluations by the GCI rankings. In their opinion, the reason of that is the comprehensive and exhaustive nature of the questions, comprising the questionnaire form, and to produce adequate information about Kazakhstan every respondent has to have profound knowledge on many aspects of the development of the country. As a basis for such supposition they give an example of other reliable rankings of global competitiveness, made up by the Lausanne-based Institute of Management Development (IMD) in Switzerland, according to which Kazakhstan has improved its competitiveness. In 2010, our country, by version of the IMD, is 3 points up from 36th to 33rd.

In fact, there is a fundamental difference in the WEF and IMD approaches. The latter of the mentioned organizations evaluates competitiveness, mainly, by using statistics data. However, firstly, ranking 72nd of 139 countries is even much better than ranking 33rd of 58 states. Secondly, for instance, if even evaluating the country’s position from the viewpoint of innovation, Kazakhstan ranks only 54th in the IMD rankings by the share of expenditure for R&D in the total GDP. It can hardly be called an outstanding result as well. Here is the example of official statistics, not personal opinion.

Still, this is not the chief thing. The value of the WEF reports is that they allow seeing what exactly the business community of the evaluated country considers the weak and strong points of the economy of that country. Restating the words of one of the classical scholars, we can say that the competitiveness starts in the minds. The fact that our companies are rather critical in their evaluation of the innovation environment says that for them this environment becomes an important condition for further development of business. We have no choice but hope that mental re-evaluation in the brains will fluently grow into a “government reboot” of competitiveness.

 


Table of contents
Partnership without Borders  Charles Monk 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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