TRADE, INVESTMENT AND FINANCING
5. THE INVESTMENT ENVIRONMENT
5.3 Infrastructure and Costs Related to the Machinery Industry
5.3.1 Utility Costs
5.3.2 Wages
Kazakhstan's population is relatively well educated, and its literacy rate is almost 98 percent. Under the Soviet system, developments in education, science and culture were marked by impressive achievements. While in 1939, 84 percent of Kazakhs in the 9-39 year old age group were literate, in 1959 the rate had increased to 95 percent. Although Kazakhs lagged behind Russians in terms of formal education during the mid-1950s, by the end of 1970s that was no longer the case. An advanced scientific base consisting of 220 research institutes and regional agricultural stations developed in Kazakhstan over the years. Over half a million students currently attend more than 300 institutions of specialized secondary and higher education. The country produces 125,000 specialists and 190,000 qualified workers each year. However, the education system is geared toward a central, command economy and a basic understanding of how a market economy works is often lacking. The result is an inadequately trained labor force in the manufacturing and service sectors.
The Machinery Industry in Kazakhstan: Economic Conditions and Policies
Table 5.4
Comparative Utilities and Transportation Services Costs of Kazakhstan
Country
Kazakhstan Prior to 8/97, $0.028 (2 tenge). After 8/97,
$0.053 (4 tenge).
Indonesia $0.10 $0.92-$1.21 $2.21 --- $3,000
Malaysia
b/ Dedicated 4800 baud telephone line.
c/ Based on national average rates.
d/ Based on data for Sabah.
e/ Prevailing rate throughout the Philippines; pending application has been made for a reduced rate of telephone calls to/from EAGA member countries.
f/ Average monthly charges for Internet hook-up; excludes long-distance telephone charges, if applicable.
g/ Domestic rates only; based on average rates of two major carriers, Aboitiz and Sulpicio.
H/ Based on Philippine Airline rates.
I/ Based on average Philippines Airline rates between Manila and San Francisco, Los Angeles and New York.
Sources:For Malaysia,Basic Facts and Information, Department of Industrial Development and Research; for Indonesia, regional statistical offices; for the Philippines, Department of Trade and Industry.
Labor productivity is low by most standards. According to a recent study by Blake (1997), labor productivity in Kazakhstan is only 58 percent of its effectiveness level. The results are based on a survey measuring the amount of time that workers were actively productive during the course of the workday.2Apart from inadequate worker training programs, the study found that management-level inadequacies were partially to blame for the low productivity figures, due inadequate management supervision, lack of planning, and poor management techniques. Fundamental problems were also observed in defective machinery and associated recurrent breakdowns, material shortages, and inefficient factory designs.
2Comparable labor productivity figures are generally higher in other countries for which data are available.
For example, in Germany, labor productivity is 92 percent; in Japan, 83 percent; and in England, 79
Table 5.5
Monthly Wages in Industry, Agriculture and All Sectors, 1995.1 - 1997.3
(US dollars)
Industry Agriculture
All Sectors
1995.1 113 28 66
1995.2 130 36 76
1995.3 146 48 91
1995.4 174 53 107
1996.1 165 40 102
1996.2 163 51 111
1996.3 173 66 118
1996.4 184 68 126
1997.1 164 50 112
Source: Government of Kazakhstan, Center for Economic Reform, based on information provided by the National Statistical Agency of Kazakhstan.
Table 5.6
Cost Structure Of Selected Industries, 1995-96 (percent)
Total Of which:
Cost Materials Labor
1995 1996 1995 1996
All Industries 100 52.9 50.4 13.9 20.4
Machine Building 100 50.7 52.7 24.8 34.1
Ferrous Metallurgy 100 61.8 58.0 13.1 28.3
Nonferrous Metallurgy 100 52.9 49.8 18.0 23.2
Forestry, Pulp And Paper 100 48.9 53.0 21.5 29.2
Light Industry 100 54.0 55.0 15.6 24.6
Food Industry 100 65.3 66.8 12.6 16.9
Chemicals And Petrochemicals 100 62.9 54.3 13.9 22.6
Electricity 100 41.6 39.8 10.2 12.7
Fuel 100 50.5 49.5 11.1 15.2
Source: National Statistical Agency.
The Machinery Industry in Kazakhstan: Economic Conditions and Policies
Official estimates show that real wages have more than halved between 1991 and 1995 (Cummings, 1995). As a result, labor costs are low are generally make up a relatively low proportion of output costs (see Table 5.5). At the same time, while officially recorded unemployment remains low, there is a high level of hidden unemployment - perhaps close to 15 percent (US Embassy, 1997a). With significant hidden unemployment in Kazakhstan's enterprises and numerous employees working only part-time or on compulsory leave, wages are often unpaid or are badly in arrears. At the end of 1996, wage arrears (excluding social payments and pensions) were approximately US$789 million. In the spring of 1997, the Prime Minster ordered local governments to begin repaying some US$150 million in back wages owed to workers. Still, there remains a problem of long delays in wage payments among state-owned enterprises and the public sector in general.
5.3.3 Transportation Costs
5.3.4 Other Investment Issues for the Machinery Industry
There are several other laws and regulatory issues that are important to investments in the machinery industry, which are briefly described in the remainder of this chapter.
Domestic Subsidies - Subsidies have been applied to the agricultural and industrial sectors, but they are being reduced as more enterprises are privatized and the economy becomes increasingly market-oriented. Moreover, a number of these subsidies are actionable under the WTO Agreement and, once Kazakhstan becomes a member of that organization, it will probably be required to terminate those subsidies within an agreed-upon timetable.
The Government grants agricultural subsidies to support small and medium size state and private enterprises. Domestic subsidies have been provided through the Agricultural Support Fund, credits through the EXIM Bank of Kazakhstan, loan guarantees and the rescheduling of arrears. Other agricultural subsidies include preferential tariff rates for railroad transport of agriculture and food products produced locally (70 percent of regular rates). In addition, Article 30 of the tax code provides preferential tax rates for income derived from activities where land is the main means of production (e.g. agriculture) 10 percent versus 30 percent for non-agriculture.
The Government also provides a number of subsidies to industry. According to the Ministry of Energy, Industry and Trade, the following subsidies were offered in 1996:
Non-specific subsidies through preferential internal credits of the EXIM Bank and the Rehabilitation Bank and Government guarantees on
external loan US$461.5 mil.
Actionable subsidies from tax deferments, debt forgiveness and
deferred debt US$400.4 mil.
Export subsidies in the form of preferential credits directed to support
of export and import substitution US$50.0 mil.
Subsidies as percent of GDP 5.6 percent
Actionable and export subsidies as percent of industrial production 12.7 percent
Land Reform - The Land Code of 1991 established distinct land categories for agriculture, settlements, land under industrial enterprises, forestry, national reserves and recreation. According to the Constitution, all land in Kazakhstan is the property of the State and, as a consequence, all other forms of ownership are at the discretion of the state.
Building from this base, early legislation did not intend to embrace the concept of private ownership and instead established the following categories: (i) permanent ownership, which was restricted to state enterprises; (ii) life inheritable tenure (LIT), which was granted for peasant farms, household plots, gardens, and dachas; (iii) permanent use; (iv) temporary use; and (v) leasing. Since the State owns all land, the first category of permanent ownership remains a logical consequence of being a state enterprise. The concept of LIT appears to have been an attempt to bridge the gap between the concept of private ownership (non-state) and the constitutional status of land (USAID, 1996). The remaining categories of permanent and temporary use convey the possibility of termination of rights.
The introduction of the Civil Code in early 1995 with its acceptance into law of the concept of private ownership called for the reconciliation of land reform laws with its basic principles. As a consequence, the concept of private ownership of land was recognized in the December 1995 Law on Land. Private ownership can now be held over personal household plots, gardens and dachas and also under private industrial enterprises. However, land of agricultural designation cannot be granted a private ownership status, and foreign citizens and foreign legal entities can only lease land through a domestic partner for a period up to 99 years.
Duty Drawback Scheme -Under the Customs Code, the Duty Drawback Scheme allows goods to be exempted from payment of import duties and taxes when goods are imported for re-export. The goods must be exported in the same condition as imported and within six months of their importation. Otherwise, they are liable to full duties and taxes plus interest.
Provision is also made in the Customs Code for the refund of customs duties and taxes on goods that have been imported, subjected to processing, and then re-exported. The goods must be declared for processing at the time of importation and a permit obtained from customs to undertake the processing. Goods can be used for manufacturing, installation, assembly, processing or repair. The processing of goods must be completed within time limits set by the customs authority. Goods that have been processed in accordance with the requirements of the Customs Code are entitled to a refund of customs duties and taxes if the goods are re-exported within two years of their importation. The foreign components of such processed and re-exported goods are exempt from customs export duties.
The Machinery Industry in Kazakhstan: Economic Conditions and Policies