Using energy resources to diversify the economy: agricultural price distortions in Kazakhstan.(Symposium Paper)(Report)

INTRODUCTION

After becoming independent at the end of 1991, Eazakhstan went through a severe recession, which was prolonged by the 1998 Russian Crisis and only turned around in 1999. (1) In sharp contrast, in the first decade of the 21st century, the country has experienced rapid GDP growth driven by booming oil exports (Pomfret, 2006). Rapid growth since the late 1990s raised the question of how to ensure that the oil boom will bring enduring prosperity, and among the policy responses have been establishment of an oil fund, direction of resources into human capital formation, and promotion of economic diversification. This paper focuses on one aspect of the diversification strategy, the promotion of agriculture. Specifically, it reports estimates of producer support in order to assess whether announced polices resulted in improved incentives for farmers during the period 2000-2004.

The agricultural sector is a major part of Kazakhstan's economy, with between a quarter and a half of the population depending upon it. (2) Following the Virgin Lands programme of the late 1950s and 1960s, Kazakhstan became a major grain producer, on top of the traditional pastoral economy and a cotton sector concentrated in the south. After independence the agricultural sector experienced a severe decline; the annual growth rate of agricultural value-added in 1990-2001 was -3.22 %. The decline was reversed around the turn of the century, and from 1999 to 2004 agricultural output grew at over 5% a year, mostly due to increased crop production while livestock growth was more modest. (3) One reason for the decline was a policy vacuum, which saw the rapid switch in the early 1990s from support for farmers to a market situation where prices of inputs rose much faster than output prices. The policy situation was reversed in the early 2000s as the government responded to the oil boom by promoting economic diversification, which included generous support for agriculture.

The first two sections of this paper examine the historical background and the evolution of policies since independence. The third section presents estimates of the budgetary support to and price distortions facing farmers, with emphasis on three principal and different sectors of the farm economy: the grains which dominate agricultural exports, the livestock sector, and the regionally concentrated cotton sector. The ultimate goal of the quantitative exercise is to determine whether policy statements about promoting agriculture are captured in measures of producer support or whether they were empty announcements. The fourth section draws conclusions.

HISTORICAL BACKGROUND

The traditionally pastoral and nomadic economy in the territory of Kazakhstan became increasingly sedentary during the Tsarist and Soviet eras. From the mid-1800s, as Russia exercised greater control over the territory, public policy encouraged sedentarisation, and a growing proportion of nomads, as well as Russian settlers, were planting winter grain by the end of the century. The most dramatic change after the 1917 revolution was the enforced collectivisation of 1928-1929, which resulted in huge loss of livestock and a great famine. In the 1950s the Virgin Lands programme brought about 25 million hectares into cultivation (ie over three-fifths of today's arable land). Northern Kazakhstan became a major producer of wheat and barley, although a substantial portion of the land could not sustain long-term agriculture and due to the variable climate harvests were highly volatile (Pomfret, 1995, p. 82). Agricultural production was carried out on large state or collective farms, whose size averaged 35,000-40,000 hectares in Kazakhstan, and on over 3 million small private plots which produced over a third of total output (Green and Vokes, 1997).

In 1991 just over a quarter of the workforce was employed in agriculture, but agricultural output accounted for less than 15% of GDP. Grazing and rangeland occupied 140 million hectares, and the livestock sector comprised mainly cattle and sheep. Of 39 million hectares of cultivated land, 65 % was devoted to cereals and 33% to fodder crops. In the 1980s Kazakhstan exported up to 10 million tons of wheat, and around 300,000 tons of meat, 250,000 tons of milk, and 150 million eggs a year to other Soviet republics (de Broeck and Kostial, 1998). Other crops, while minor in terms of acreage, were regionally significant. In the south, rice and cotton were important, and in 1991 cotton was Kazakhstan's third-largest export to non-USSR markets, after fertilisers and coal. Oil crops (sunflower, soy, rape, etc), mainly grown in East Kazakhstan and Pavlodar oblasts, satisfied two-fifths of domestic demand.