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Republic of Kazakhstan: Selected Issues

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International Monetary Fund
Published Date:
November 2004
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VII. Transparency, Governance, and Institutions1

1. A possible direct link between oil wealth and corruption has been explored by several authors. Mauro (1995) finds that resource abundance leads to higher corruption.2 Aggressive rent-seeking as a result of natural resources wealth is described by Lane and Tornell (1997). Leite and Weidmann (1999) explain the high incidence of corruption in resource rich economies with the corruption-fostering effects of capital-intensive natural resource exploration. In empirical studies, Khan (1994), and Sala-i-Martin and Subramanian (2003) attribute the pervasiveness of corruption in Nigeria to the oil boom. Ross (1999) underlines that enterprises in resource extracting sectors can be expected to fare better in an environment of weak property rights than other companies, as firms earning resource rents can afford expenses for private enforcement of their property rights while still earning a normal profit. The formation of such extralegal formations, which rely on opportunities for extortion and protection rents, might thus benefit from the resource extracting sectors.

2. Transparency and accountability in the management of oil revenues are considered essential to prevent elites from appropriating oil resources (Sala-i-Martin and Subramanian 2003). In a recent analysis of African oil-producers, Katz et al. (2004) emphasize the importance of transparency in oil sector operations for: (i) allowing democratic debate on fiscal policy and spending priorities;3 (ii) avoiding corruption and the waste of public resources; and (iii) allowing forward planning. In this context, the relationship between transparency and civil society is a reciprocal one. On the one hand, a strong civil society is in the position to bring about well-functioning domestic institutions, and a more accountable and effective fiscal management. On the other hand, greater fiscal transparency by government would enhance the monitoring capacity by civil society and the general public of fiscal management. Although it does not cover all transparency issues at the sub-national level, the Fund’s Fiscal Transparency Code is a helpful tool for enhancing the transparency of national governments (Petrie 2003), also regarding the management of oil resources.

3. With respect to Fund initiatives on data dissemination and publication of reports, Kazakhstan has achieved a rather high degree of transparency, higher than several other countries in the region. Kazakhstan was quick to volunteer for ROSCs and agreed to the publication of reports when this became common practice. The 2003 fiscal ROSC concluded that the government’s credibility has been enhanced with improvements in fiscal legislation, the simplification of intergovernmental relations, and the move towards a medium-term budget framework. It recommended several measures for increasing transparency and integrating all fiscal costs and risks associated with extrabudgetary and quasi-fiscal operations into the budget (see also Chapter V).4 While Kazakhstan does not face the problem of budget deficits at present, transparency and control must be maintained over the entire public sector balance sheet.5 Priority should also be given to consolidating treasury reporting, in particular to ensure comprehensive coverage of the general government.

4. With regard to transparency in the oil sector, the U.K. Government’s Extractive Industries Transparency Initiative (EITI), implemented by the U.K. Department for Finance and International Development (DFID) is of particular importance. The EITI was endorsed internationally at the London Conference on June 17, 2003 by representatives from extracting industries and companies, and a wide range of countries, including by the Kazakhstani ambassador to Britain.6 The Kazakhstani authorities have so far not followed up on their support for the EITI at the London Conference. On October 27, 2003, an EITI conference was held in Almaty with about 100 participants, representing government, the Majlis (lower house of parliament), local NGOs, local branches of oil companies, and some international organizations. Overall, representatives of Kazakhstani NGOs have shown a thorough interest in issues related to transparency in the oil sector, as demonstrated by their participation in the EITI conference.7 The EITI supports the reconciliation of government and company reporting on revenues from resource extracting activities in order to ensure that all revenues contractually due are actually received.8 The initiative aims to enhance transparency of revenues derived from natural resources in order to address the governance problems often associated with such revenues, establish credibility, and ensure accountability. Fund Management has welcomed EITI as a valuable contribution to economic development and conflict prevention, and as consistent with the Fund’s emphasis on transparency.9 The Fund’s fiscal transparency ROSCs constitute an obvious vehicle for promoting the EITI in Fund work.

Table 1.Governance Indicators and Corruption Perceptions Index, 1996-2003
199619982000200120022003Average
Dimension of Governance
(range -2.5 to +2.5)
Voice and accountability-0.94-0.73-0.91...-1.05...-0.91
Political stability-0.030.260.32...0.52...0.27
Government effectiveness-0.78-0.69-0.53...-0.80...-0.70
Regulatory quality-0.29-0.35-0.47...-0.74...-0.46
Rule of law-0.69-0.80-0.76...-0.90...-0.79
Control of corruption-0.79-0.86-0.87...-1.05...-0.89
Corruption perceptions index
Score3.02.72.32.42.6
Ranking65/9071/9188/102100/133...
Source: Kaufman et al. 2003 and Transparency International, Annual Reports
Source: Kaufman et al. 2003 and Transparency International, Annual Reports

Box 1.Transparency and Corruption

The quality of governance in Kazakhstan has recently been assessed by the World Bank (Kaufman et al. 2003). Based on several hundred individual variables measuring perceptions of governance, Kaufmann et al. (2003) construct composite indices for six dimensions of governance: voice and accountability (measuring civil liberties and political rights), political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. The index assesses (i) the process by which governments are selected, (ii) the capacity of the government to effectively formulate and implement sound policies, and (iii) the respect of citizens and the state for the institutions that govern economic and social interactions among them. The analysis uses 25 separate data sources established by 18 organizations for a total of 199 countries in 1996, 1998, 2000, and 2002. As estimates are normally distributed with a mean of zero and a standard deviation of one in each period, virtually all scores range from -2.5 to 2.5, with higher numbers corresponding to better results. For the four years assessed, most governance indicators for Kazakhstan were substantially negative (Table 1). Only the political stability index shows positive values and an improvement between 1996 and 2002. The remaining five indicators deteriorated during this period, with voice and accountability, and control of corruption receiving the lowest scores.

According to another World Bank study (World Bank 2002a), corruption is wide-spread in Kazakhstan. Respondents to surveys reported that corruption was prevalent in law enforcement, courts, and customs and tax authorities. Over the previous twelve months, 51 percent of enterprises and 31 percent of households had encountered bribery. While households with higher incomes tend to bribe to obtain speed of services, poorer households where found to pay bribes for access to public services. Close to 10 percent of the population had faced a situation where medical care had been necessary, but unavailable due to their inability to pay bribes. University education was stated to be available only to those who can afford unofficial payments.

Higher-level corruption in the corporate sector also appears to be pervasive in Kazakhstan. With regard to the corporate environment, the World Business Environment Survey (World Bank 2002b) found that companies operating in Kazakhstan pay on average 2 percent of their sales income in unofficial payments. Kazakhstan’s oil sector has in the past been affected by non-transparent transactions. For example, unofficial payments related to the acquisition of a share in the Tengiz oil field are under investigation by the U.S. judiciary. In this connection, the Swiss authorities, have frozen a number of bank accounts, allegedly owned by former and current Kazakhstani officials.

Since the year 2000, Kazakhstan has been included in the Corruption Perceptions Index published by Transparency International.1 This composite index ranks countries by the degree to which corruption among public officials and politicians is perceived to exist, on a scale ranging from 0 (highly corrupt) to 10 (highly clean); it is based on multi-year surveys among the business community, country analysts, and the general public. Kazakhstan’s score fell from 3.0 in 2000 to 2.4 in 2003, indicating a perception of increased prevalence of corruption.2 While Kazakhstan had achieved the highest rating of the seven Former Soviet Union countries (except the Baltic countries) assessed in 2000, it fell behind Belarus, Armenia, and Russia in 2003, when all CIS countries except Turkmenistan were ranked. Transparency International, together with other private/non-government organizations, has recently started an initiative to promote the publication of financial indicators for oil companies.

1 Transparency International launched its Corruption Perception Index in 1995; the reliability of data sources varies widely between countries.2 While the country’s ranking deteriorated through 2002, it improved somewhat in 2003. The number of underlying surveys for Kazakhstan increased from 3 in 2000 and 2001 to 4 in 2002, and further to 7 in the year 2003. Compared to other countries, the standard deviation for Kazakhstan was rather high, indicating high variation between the outcomes of the different surveys.

5. In September 2003, the Kazakhstani government strengthened its anti-corruption legislation, which had originally been passed in 1998. This law provides for criminal, administrative, and disciplinary sanctions. Amendments to the Criminal Code, Criminal Procedures Code, and Administrative Code, and the laws on Civil Service, Labor, and anti-corruption measures were made with the aim to enhance the efficiency of anti-corruption measures in the Civil Service, budgetary organizations, and state-owned enterprises. The amendments widen the definition of corruption and the circle of public officials covered by anti-corruption laws and regulations, at the same time increasing the penalties.

6. The Agency for the Fight Against Economic and Corruption Crimes was established in December 2003, as successor agency to the Financial Police, which did not have a clear anti-corruption mandate. It enjoys a semi-autonomous status under the Ministry of the Interior. The institutional modalities of the Agency, which is based in Astana with local offices, are still in the process of being specified.10 The Agency operates on the basis of the Anti-Corruption Law and investigates economic crimes, tax crimes, and corruption related crimes. Once an investigation has been completed and the allegation of corruption substantiated, the case is handed over to other public bodies, such as criminal investigators or the prosecutor’s office. The Agency aims to reduce government interference in the activities of small- and medium-scale enterprises and, to this end, initiated a moratorium on all inspections of enterprises, which was upheld for several months in 2003. The Agency is currently assessing anti-corruption legislation and measures in a large number of countries, in order to develop best practices for Kazakhstan. Through the Ministry of Foreign Affairs it has launched an initiative for Kazakhstan to join international agreements on the fight against corruption.11 The Constitutional Council, which previously focused on economically relevant legislation, now intends to examine the reasons for corruption.

7. To date, Kazakhstan’s management of its petroleum resources has been prudent and there have been few, if any, indications of the resource curse. However, as income from oil is expected to multiply over the coming decades, it will become crucial to build institutions that are sufficiently independent to withstand likely pressures for spending, some of which could be wasteful. As part of the institutional development, accountability of all resource related transactions will need to be enhanced considerably in order to reduce the risks. In this area, Kazakhstan could benefit (as it has done in other areas such as the financial system) from following best established world practices.

References

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1Prepared by Katrin Elborgh-Woytek.
2Secondary negative effects of corruption on growth are discussed by Isham et al. (2003) who find that the negative impact on institutional quality results in a systematic and robust negative impact on growth. Leite and Weidmann (1999) also emphasize the importance of the corruption channel as an explanation for the slow growth of resource-rich economies. The negative effect of corruption on growth was found to be more pronounced in less developed economies, where institution building, i.e. improvements in monitoring capacity, was crucial but lacking.
3The authors are critical of the argument for withholding information about resource availability on the presumption that inappropriate spending pressures would build up in case parliament and the general public had access to full information.
4Kazakhstan subscribes to the SDDS and publishes its Staff Reports and PINs, and there are no constraints on discussing data or specific issues in Board reports. Unlike in neighboring Azerbaijan, contracts related to oil production in Kazakhstan are neither published nor approved by parliament.
5A soft budget constraint may weaken accountability, create moral hazard, and eventually threaten macroeconomic stability by creating contingent liabilities for the central government, which it may find hard not to pay.
6Since this conference, Azerbaijan, Ghana, and Nigeria have volunteered to become pilot cases for the initiative, while some other countries had indicated strong interest.
7While the number of NGOs in Kazakhstan is sizable, also comprising organizations and research institutes with a focus on economic developments, NGO activities remain constrained by bureaucratic regulations and direct government control (Ruffin and Waugh 1999).
8As was revealed by the then Prime Minister of Kazakhstan in March 2002, about $1 billion in receipts from the sale of shares in the Tengiz oil field bypassed the budget in the second half of the 1990s and were hidden from parliament in an offshore account. A group of Kazakhstani parliamentary deputies recently authored a draft law, still to be considered, aiming at requiring the government to reveal the details of subsurface use contracts signed between the government and oil companies.
9In his speech in Almaty in November 2003, the then Managing Director of the IMF encouraged all resource-rich countries in the region to become active participants.
10On April 20, 2004, Sarybay Kalmurzaev, former chief of the presidential administration, was named Chairman of the Agency.
11See Box 1 for views on the present state of transparency and governance in Kazakhstan.

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