Mineral wealth and the economic transition: Kazakstan

The exploitation of mineral wealth can amplify the problems of the transition economies in three basic ways. First, the rebound of the real exchange rate that characterises a successful transition may be augmented by the capital inflow required to expand mineral production. This can cause both recession in the short-run and lower growth in the medium-term. Second, when the mineral revenues expand, the Dutch Disease effects may intensify the transition-related shrinkage of the non-mining tradeable sector, thereby retarding economic diversification and rendering the economy vulnerable to external shocks. Third, a mineral boom tends to concentrate revenue on the government, which may use it to postpone difficult decisions on economic reform and/or dissipate the revenue due to weak financial markets and inadequate public accountability. Kazakstan, like oil-rich Azerbaijan, is a late reformer and displays evidence of a faster transition rebound than other less resource-rich countries in the CIS do. However, Kazakstan has two advantages over Azerbaijan. First, Kazakstan has a more diversified mineral endowment with which to counter any trend towards single commodity specialization. Second, Kazakstan is making a later start on oil expansion so that it can learn from the experience of Azerbaijan. Priorities for Kazakstan are the continuation of prudent economic policies, the creation of institutions to enhance the transparency of the revenue flows, and the use of environmental accounting to provide a rationale for the deployment of the oil rents.