Wealth Gap Widening in Kazakhstan

Despite its mineral-led economic boom, the Central Asian nation's development agenda is inchoate—leaving most of the benefits to cities like Astana and Almaty

By Aiman Tynyshbaeva

This past February, the small city of Stepnogorsk in northern Kazakhstan lived through a desperate week with no water, after the supply system collapsed following years of neglect. Once a well-financed secret town during the Soviet era – the site of the world's largest biological warfare development and production facility – in recent years the town has fallen on tough times, partly because of the death of the local metallurgical plant that used to employ many local people.

But there is a larger reason for the crumbling infrastructure in Stepnogorsk, and in other regions of this vast country: sewage systems in Aktobe and Uralsk, water supply facilities in Ust-Kamenogorsk and Karaganda, and the airports of Petropavlovsk and Kostanay, to name just a few examples. While the European Union and Russia have developmental programs and institutions to prevent huge inequality between regions and preserve their cohesiveness as integrated entities, in Kazakhstan, a country the size of Western Europe, the regional development agenda remains inchoate. In addition to its fragmented national economy, sparse population, enormous distances, and Soviet-era physical infrastructure, the country also remains plagued by a weakly enshrined system of local governance.

As a result, only large urban areas such as Astana and Almaty enjoy really sustainable development, whereas the periphery is left aside without benefiting much from the fruits of the economic boom of the last few years. A European Bank for Reconstruction and Development strategy document for 2006, for example, found a wide poverty gap and wide variations in access to health services and in the quality of several essential infrastructure services such as sewerage, clean water, and central heating.

The problem, critics say, starts with the centralized system of allocating funds to the regions, because the system remains very unpredictable and non-transparent, and, overall, is too tied to the whims of individuals on the national budget commission. The oil and gas industries located mainly in the west of the country generate most of Kazakhstan's wealth, as well as some mineral extraction companies operating in the central and eastern parts. These companies are required to pay their taxes to the National Fund, which then serves as a major source of income for the national budget, in addition to VAT payments and other corporate taxes.

Local budgets, on the other hand, mainly rely on personal income taxes and large transfers from the national budget to cover developmental programs and the social service net. That system gives local governments little flexibility about where to allocate resources, making them very dependent on the authorities in the capital Astana.

Zhanibek Khassan, the manager of the "Budget Transparency and Accountability" program at the Soros Foundation-Kazakhstan, said that, on average, financial transfers from the center cover 56 percent of local budgets. In contrast, he said, "The most advanced international practice is that the regional budgets are mainly composed of VAT and corporate and personal income tax payments in a decentralized structure of taxation without much reliance on the central budget."

The net result, said Nina Erkaeva, the head of the Development Through Education non-profit organization in Karaganda, is that "Once they become subsidized territories, the regions become very addicted to the growth of the financial transfers from the center." "According to the research data we have, these transfers do not contribute to regional development at all," she added.

SPECIAL TREATMENT

In the struggle for funds from the national budget, Astana and Almaty have retained their privileged status, the first because of its growing status as the national capital and the second as still the most developed urban area of the country. Even so, in Almaty people typically complain that their city does not receive enough funds and largely finances Astana, which became the capital in 1997.

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