2009 Index of Economic Freedom

Quick Facts

Population:

• 15.3 million

GDP (PPP):

• $150.5 billion
• 10.7% growth
• 9.8% 5-year compound annual growth
• $9832 per capita

Unemployment:

• 7.3%

Inflation (CPI):

• 10.8%

FDI Inflow:

• $6.1 billion

Kazakhstan's economic freedom score is 60.1, making its economy the 83rd freest in the 2009 Index. Its score is 1 point lower than last year, primarily reflecting declines in freedom from corruption and respect for property rights. Kazakhstan ranks 14th out of 41 countries in the Asia'Pacific region.

Overall macroeconomic stability, a series of economic reforms, and high oil prices have allowed Kazakhstan to achieve economic growth of around 10 percent annually over the past five years. Kazakhstan scores high in trade freedom, fiscal freedom, government size, and labor freedom. Government expenditure is excessive, although the government has gradually been privatizing state-owned companies. Kazakhstan has flexible labor regulations.

However, challenges to economic freedom remain. The economy has considerable shortcomings in three areas: investment freedom, property rights, and freedom from corruption. Foreign investment is hindered by ad hoc barriers and favoritism toward domestic firms. The weak rule of law allows for significant corruption and insecure property rights.

Background Back to the top

Kazakhstan, a member of the Shanghai Cooperation Organization, is an economic development leader in Central Asia. It maintains a special relationship with Russia, and China has invested billions to access its hydrocarbon resources. In August 2007, President Nursultan Nazarbayev's Nur Otan party won all of the seats in the lower house of parliament. The parliament approved constitutional reforms that increase its role in governance and abolish presidential term limits. Energy and commodities have driven economic growth, and oil output is projected to grow from 1.45 million barrels a day in 2007 to 3.5 million barrels a day in 2020. Despite Eurasia's highest levels of foreign direct investment in 2007, resource nationalism and corruption exacerbate investor uncertainty.

Business Freedom 57.9 Back to the top

The overall freedom to conduct a business is restricted by Kazakhstan's regulatory environment. Starting a business takes an average of 21 days, compared to the world average of 38 days. Obtaining a business license requires more than the world average of 18 procedures, and fees are high. Bankruptcy proceedings can be burdensome and lengthy.

Trade Freedom 86.2 Back to the top

Kazakhstan's average tariff rate was 1.9 percent in 2004. Liberalization has progressed, but services market access barriers, import licensing requirements, non-transparent regulations and standards, opaque government procurement, weak enforcement of intellectual property rights, and customs inefficiency and complexity still add to the cost of trade. Ten points were deducted from Kazakhstan's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 82.8 Back to the top

Kazakhstan has a low income tax rate and a moderate corporate tax rate. The flat income tax rate is 10 percent, and the standard corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT) and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 26.8 percent. Partly to compensate for increased social spending, an export tax on oil was imposed in May 2008.

Government Size 87.5 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 20.4 percent of GDP. As a result of gradual privatization, much of the economy is now in private hands. Budgetary targets were revised in May 2008 to allow for increases in social spending.

Monetary Freedom70.0 Back to the top

Inflation is relatively high, averaging 9.9 percent between 2005 and 2007. The market sets most prices, but the government retains the right to control prices, influences them through state-owned enterprises and manufacturing subsidies, and has made little progress in promoting competition in agriculture. Ten points were deducted from Kazakhstan's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

The government plays a large role in overseeing foreign investment. Screening of foreign investment proposals is often non-transparent, arbitrary, and slow. With the exception of investments in oil production or mining, rules on local content and local sources of financing vary from contract to contract. An investor may be obligated to train local specialists and contribute to the social development of the region. An unclear legal code, legislative favoritism toward Kazakh companies, and government interference in commercial operations further deter investment. Subject to restrictions, foreign exchange accounts may be held by residents and non-residents. Most capital transactions, payments, and transfers are subject to government approval, quantitative limits, and strict documentary requirements. The Investment Law of 2003 weakened protections related to expropriation and compensation and provides no clear guidance for either process. Land ownership is restricted.

Financial Freedom60.0 Back to the top

Kazakhstan's banking system is Central Asia's most developed. All banks must meet international standards. There are about 30 banks, down from 130 at the end of 1995. Kazkommertsbank, Turan-Alem Bank, and the state-owned Halyk Bank dominate the market. Foreign banks may not have branches but may establish subsidiaries, joint ventures, and representative offices. There are three state-owned banks (a development bank, an export'import bank, and a housing finance bank), two development funds, and a number of microfinance institutions. Capital markets are underdeveloped, though the bond market has been growing. The insurance sector is small, and foreign companies are limited to joint ventures with local companies.

Property Rights25.0 Back to the top

Most legal disputes arise from breaches of contract or non-payment by the government. Corruption is widespread, and the judiciary views itself more as an arm of the executive than as an enforcer of contracts or property rights. Some foreign investors encounter serious problems short of expropriation. Piracy of copyrighted products is widespread, and enforcement of intellectual property rights is weak.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. Kazakhstan ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is a significant obstacle to investment, and law enforcement agencies occasionally pressure foreign investors to cooperate with government demands.

Labor Freedom80.5 Back to the top

Kazakhstan's flexible labor regulations generally enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. Regulations on the number of work hours can be rigid.