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№4 (237) 25 February - 10 March 2009

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The government has to set up relief programs and interfere in economic affairs. This is traditional way to withstand the crisis. Advocates of liberalism in economy are a minority today. History shows that the State capitalism may play the role of the life buoy for market economy

Alexey Ikonnikov

Economic stabilizers

When hard times come the state assumes a role of the key market player as it wields great financial, material and human resources. This is quite a painful for entrepreneurs and businesses. Kazakhstan has never experienced exotic governmental involvement into economy, but we do remember the USSR when the state run companies monopolized the substitute of market, and governmental structures established control over economy. Pessimists believe as one expert puts it, when crisis hit Kazakhstan our country entered a new stage in its economic development. First business cycle has been completed- the era of free market is over.

When the economy grew in leaps and bounds and was awash with cash only few people were interested in state run companies and entities. They made their choice in favor of money. Private companies paid generous wages and work in any free market structures was regarded as a prestigious one. Self- employment was also popular with Kazakhs. The state in its turn managed to give an impetus to development of private sector of economy by cutting taxes and minimizing its presence on the free market and ensuring only minimal economic control. Unlike Russian authorities, Kazakh ones adhered to liberal economic principles and only slightly regulated business affairs. When credits have seized up and it turned out that only government owned some resources businesses had to adapt to harsh economic environment and play in accordance with rules set by the state. Now businesses are highly dependent on orders placed by the state on the market. There are practically no alternatives to the state , no any other clients as practically all market players are on the verge of financial disaster.

The state now has more leverages of control over the economy it runs projects in different industries. There are more state controlled market players. The number of companies that survive due to state donations in the GDP structure grew dramatically. Wall Street Journal issued a survey where the authors referred to rating of economic freedom. In Kazakhstan index of economic freedom is slightly below 20%. Affiliated or controlled structures of Sumruk Kazina fund (according to recent data there are more than 400 of them) choose trade partners and supplies in full accordance with stringent requirements and specifications set by the state. Many Kazakh businesses fall short of standards applied to weigh their potential by Kazakh authorities. Some companies (which are on the verge of going bust) complete construction of certain buildings and facilities in Astana and Almaty. The state dictates final price of apartments. Some stock corporations acquire apartments in Almaty and Astana at fixed price, which is threefold lower than the speculative one.

The state helps businesses to keep in a relatively robust state thus triggering demand, preventing unemployment etc. At the same time such dependence on the state also carries risks. For instance one interviewee who works in large IT company said that the state is not so reliable in comparison with the partners his company dealt before the crisis. in some aspects. He told us a story when the company won a tender, delivered equipment received 30% prepayment and that's all. Until now no money has been sent to the bank account of supplier. The head office of the state- run company hasn't still authorized payment. The supplier isn't afraid that its partner won't pay at all. Both partners have to execute contracts. The thing is that now the supplier suffers billion dollar losses. The servants of the state are far from being good managers sometimes.

All market players face liquidity problems. The demand even for basic services has shrunk. The state still holds vast reserves and now economic of provinces and some industries depends on the state sector. It is increasingly clear that the Samruk Kazina, the national fund is gaining power. This structure is to rescue key market players by acquiring shares in them. Recently , Samruk Kazina has bailed out BTA and Alliance banks. Financial industry is the most vulnerable as it has been badly hit by crisis. It appears that the state tends to dictate its rules to financiers. "corporate deposits of the state-run or controlled companies account for the lion share of reserves and assets managed by banks today. It is just a fact. No wonder it is so, given a fact that majority of Kazkhstan companies are highly exposed to crisis ", says Milena Ivanova-Venturini, the vice president of the bank and financial organizations department within the Central Assia- Rennaisance capital. "The logic is very simple. Banks shored up by the state, that hold state capital will have more chances to attract clients and retain them. The state also prefer to pour injections into banks, it has a stake in".

It is no surprise, intervention of the state in the traditional domain of businessmen , nationalization of strategical industires the very fact that numerous markets grow dependent on the government orders , all this irritates advocates of the liberal market theory and some businessman. Muhtar Ablyazov, the former head of the BTA hasn't even attempted to conceal his feelings towards recent developments. In his interview to the state media he called the last acquisition of Sumruk Kazina (which acted on behalf of the state) namely 80% share of BTA a perfect example of governmental racket. The former top- manager argues that the bank could have survived without resorting to extreme measures. Investors and individual and corporate stockholders have to advance their interests. They could have retained their business but at what cost?. They could have done it at the expense of others(via job cuts, withdrawal of deposits) even shattering overall economic stability on the whole. BTA borrowed billions abroad it could follow the lead of Northern star , saving remnant capital and leaving the state empty-handed. The state had to deal with angry depositors and bad loans amassed by the bank. BTA closure would have caused panic among bank clients and sent the market in the downward spiral. There is only one explanation for sudden intervention of the state and acquisition of 80% stake in BTA : it attempted to avoid far more dystopian scenario for financial industry.

Run on the free market.

Microeconomic instability is usually accompanied by unemployment. The state purview in this case shouldn't be limited to devising of corrective measures and issuing guidelines for economy. It's role as regulator during hard times, should increase. Rising unemployment, lower salaries, more unpaid days- offs many people ascribe all this mess to private sector of economy. First, private companies are run by individuals who want to retain their income and turn minimal profits, second, rivalry on the market with scarce demand for basic goods and services is intense. What is the typical scenario for privately owned businesses? KUAT ( the construction giant headquartered in Almaty) and Mittal Steel Temirtau based in Karaganda have already laid off may people. "Sales fell 13-14%, salaries were reduced by 35%, all bonuses were annulled, and one quarter of employees was sent on leave", laments manager from one the Almaty sales networks ". It seems that our company uses crisis as a pretext to get maximum profits from the personnel without giving it sufficient remuneration for their work' adds he.

Job in one of the state structures is regarded as the only peaceful harbor in modern the labor market. In the period of economic boom, people hated the very idea to be employed by state-run entities. They were aware about all disadvantages of such a job: low salary, excessive red tape, and necessity to meet high requirements. All this scared away potential employees . Now people tend to find a job they are unlikely to lose. "Professionals are a minority. Only one tenth of people who' re fit to work climb career ladder or run successful businesses. Others work for somebody. They are hired labor', says Serik Kaparov , the professor of the National Academy of Public Administration of RoK. Such people when they are fired have to find alternative source of income. Job in public entities is their last hope. Nowadays hardly any company would invest into training programs for its employees. The state still provides a variety of educational programs for those people who work in public structures. In the times of recession the state is the most reliable employer.

Psychologically, people employed by commercial structures and those who work in the state -run entities differ from each other dramatically. The last group , those who are paid from the budget sources are sure about their future, this is really important given harsh economic environment we have to survive in. "Much depends on what company you have a job in, either state run structure or in the privately owned business. This a determining factor when u re affected by the stress.', writes in his blog Viktor Romanihin, the employee of Beta Consulting HR Agency. - In organizations owned by the individuals , top management doesn't care if the subordinates feel comfortable or if they can have private life. In the state- run companies people have to find a balance between behavior which is acceptable within knit and friendly community and the desire to work their way up and make a career", today public sector is more popular with future employees as their at list slight hope for any kind of comfort.

Public sector influence is growing . While, businesses tend to get rid of people and fire them, state run entities create jobs. According to data published by the Agency for Public Administration services, officials number 94 000 . 1.7 billion of people that can be called full time servants of the state work in public sectors structures such as ( government, state-run and pubic companies, army, police, schools, hospitals ). They account for 1/3 of population. By placing its orders on the free market the state gets tighter grip on basic industries of our country (oil and gas, financial, construction and transportation services). Thus the state increases its presence on the labor market. According to the preliminary survey, in 2009 100 000 highly qualified specialists with university degree and 600 000- 700 0000 workers might decide to apply for a job in public sector.

As crisis persists, selection becomes a sheer necessity. Rivalry in all segments of the market has intensified and not all people that have lost job in the private sector can succeed in getting a new one in public one. Potential applicants should pass tests for their ability to work under pressure and they have to prove that they deserve what they want to get . Only half of applicants can count on the decent salary and high post (say top management positions in the state-run companies or in public administration).

Public administration and state-run companies: High requirements and standards.

People who occupy administrative posts are normally not older than 39, they work in public administration structures for 9 years roughly. Average official is about 49 years old. 80 % of civil servants have university degree. Many are graduates of two universities. Clerks that apply for a job in public administration structures have to engage in fierce competition for the place under the sun with their peers. Their average age ranges between 25- 37. In Russia officials that hold high posts in administrative in the government are normally slightly above 51. Crisis gave an impetus to rivalry on the labor market in the public sector of economy. One novelty also stands out: in public administrations management techniques developed by the capitalist private sector are employed.

On March 29th, 2007 the president issued a decree on "some issues regarding administrative reform". From now on the top managers of public administration structures can manage human resources how they like, they are allowed to form small mobile teams, and optimize they work. The government can force their vision on the heads of administrative department and make them to hire new employees. At the state the state continues to allocate money to the department and doesn't economize on salaries. Top management can pay higher salaries to the employees of the remaining reliable and qualified administrators and officials. People might be sacked to optimize administrative resources. 96 000 people work, but not seat idle in public utilities , but in accordance with the plan laid out by the government 104 000 people should be employed by these structures. Money saved from the program aimed at building highly skilled and mobile team, will help to pay higher salaries to people, who do their job in the proper way. Many mangers are eager to pursue their carrier in public administration because officials usually qualify for additional bonuses and privileges. Salaries in public sphere rose by 25% they increased by 25% in 2008 and by 30% in 2008. Free market dictates its rule of game to all participants. Crisis sometimes may be regarded as a positive thing for many industries. Weak companies will quit the market. The same principle is applicable to public entities. Many budget organizations will have to get rid of ballast. Officials who don't contribute to development of the company and just eat their bread will be removed from the system. Nowadays, different techniques are tested to verify if they can improve performance of the public structures.

All companies ,operating on the free market and public structures have to raise the requirements to employees, because of the liquidity problems. State run companies scale back their revenue forecasts and cut spending. KazMunayGaz attempted to optimize company resources. Due to urgently taken measures the company managed to decrease the cost of final product by 44% and reduced administrative expenditures by 16%. Prognosis for the coming years looks gloomy: the net profits of company might fall threefold. At the same time KazMunai Gaz is not going to abandon its basic policies: it is going to realize 65 projects. Price of this project was estimated approximately at 969 billion tenge. The Head of Kazakhstan Munay Gaz said that the company had chosen only promising projects and retain current ones, trying to avoid job cuts. "We have to restore potential of this industry to pre-crisis level, keep main projects running, and people employed. We try not to shed jobs.", said the top manger of national company.

Welfare factor

Unlike in privately owned companies Welfare guarantees and bonuses remain determining factor in the state run ones . National state run entities confirm their commitment to sustain employment at the current level. Nowadays thousands of people work there. Kazakhstan Mungay gaz management hopes to get tax benefits for some of its deposits . For the last few months petroleum prices hit new lows and crude oil extracted in unreachable regions is difficult to realize on free market. Profits hardly cover company expenditures. Sometimes problem looks far more complicated. Company suffers losses selling crude oil in the open market. Any investor would suspend wells and sack people in such areas like Uzen and Emba. The initial price of crude oil there is $25 per barrel, taking into account transportation costs and tax payments the final price may reach $40. Oil is sold at $35 on the world market. The company doesn't not only turn profits, but visa versa, it incurs losses. State-run national company can't fire people anyway. It does it best to sustain current level of employment.

The state is now to accomplish the mission of the national savior. The state is to protect disadvantaged people, fuel demand etc. There are territories and regions that will depend solely on the state, since all sources of easy money have evaporated. The state sector is the only driving engine for many Kazakh provinces. Demand for goods and services remain strong due to state interference , which according to Keynisian model implement anti-crisis policies place orders on the market and increase salaries of those people, who are paid from the governmental coffers. Governmental loans and private investments are simply luxury for some provinces. The state serves main stabilizer in depressed areas. In small towns, with population of 20 000 30 000 people can't find a job, as industries are in decline. Small and middle sized businesses and self employed people also depend on the state which launches spending programs to boost demand . Our friends from Tekili(small local village) who own two or three shops on one of the local markets have noticed that sales jumped after the state raised salaries of policemen from 28-30 thousand tenge up to 60- 70 thousand. The market reacted the same way to increase of salaries of teacher, doctors from the public hospitals and schools.

The state has to be aware that in some areas, which thrived during construction boom, unemployment rose dramatically. Densely populated South provinces of republic are in disaster now. The state can propose an alternative to the young people that reached the right age to be recruited in the Army and serve there on the contractual basis. Practically 70% of the armed forces of Kazakhstan are comprised of recruits and most of them are migrates from rural regions of the country. Those youngsters that had lived in villages before they became soldiers accounted for the majority of the newcomers. Kazakh soldiers can count on numerous benefits when their contracts expire. Soldiers and officers who serve in the army more than 8 years receive educational grant. The state might cover up to 50% of the educational fee of the student who has been a professional soldier once. From 2008 the state started to pay every new recruit an allowance of 33 000 to 660 000 tenge. The salaries of the army officers and soldiers is below average level from 30 to 70 thousand tenge. It is not such a low salary taking into account bonuses such as basic food allowance and other benefits. For instance soldiers shouldn't pay transportation fee in municipal buses. In addition military servants can make brilliant career and also acquire municipal apartment. Some governmental structures (MIA akimats and police ) hire only those people who served in the army.

Prospects of the public sectors don't look gloomy at all. Many Kazakhs prefer stability and lower salary to uncertainly and stressful work in privately held companies. The state has to solve basic economic problems. In times of economic recession the state props up ailing businesses and serves a guarantor of stability and prosperity. Even the countries that have always been symbols of free economic market are to rely on the state assistance, that like a sewage pipe cleaner fix all the problems the corporate sector caused. Meanwhile if the trend of domineering of the state continues for quite a long time, economy might suffer as well. The state has to weaken excessive control over economy in due time. Ecclisiastes reads: that there is time to throw away stones, and a time to gather stones together.

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