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i
THE IMPACT OF
INFRASTRUCTURE ON
TRADE IN THE REPUBLIC OF
KAZAKHSTAN: POLICY
SUGGESTIONS
Aidyn Kuralov
Master of Arts in International Studies
(International Commerce)
GRADUATE SCHOOL OF INTERNATIONAL STUDIES
KOREA UNIVERSITY
February, 2016

ii
THE IMPACT OF
INFRASTRUCTURE ON TRADE IN
THE REPUBLIC OF KAZAKHSTAN:
POLICY SUGGESTIONS
APPROVED BY
EVALUATION COMMITTEE:
_________________________
Park Sunghoon, Supervisor
_________________________
Kang Moonsung, Committee
__________________________
Kyuwon Kang, Committee

iii
I declare that all material in this dissertation is my own work except where there is
a clear acknowledgement and reference to the work of others.
Signed __Aidyn Kuralov_________Date ____December 3, 2015___________

iv
AKNOWLEDGEMENTS
Firstly, I would like to express my sincere gratitude to my advisor Prof.
Sunghoon Park, for the continuous support of my masters’ study and related
research, for his patience, motivation, and immense knowledge. His guidance
helped me in all the time of research and writing of this thesis. I could not have
imagined having a better advisor and mentor for my study.
Besides my advisor, I would like to thank the rest of my thesis committee:
Prof. Moonsung Kang and Prof. Kyuwon Kang, for their insightful comments and
encouragement, but also for the hard question which incented me to widen my
research from various perspectives.
I thank my fellow group mates for the stimulating discussions, for the
sleepless nights we were working together before deadlines, and for all the fun we
have had in the last year. Also I thank my friends in Korea University. In
particular, I am grateful to Minkyung Ha and Bohyun Choi for their continuous
support and guidance in writing this paper.
Last but not the least, I would like to thank my family: my wife and my
son, my parents and sisters, for supporting me spiritually throughout writing this
thesis and in my life in general.

v
ABSTRACT
The main objective of this study was to estimate the relationship between
infrastructure development and ease of doing trade related businesses in The
Republic of Kazakhstan (Kazakhstan). This was mainly done through analysing
the results of the survey conducted among export and import firms of Kazakhstan.
The results of study revealed the importance of adequate transport links,
access to sea, and cost of transport services along with the access to
telecommunication technologies in regards to trade related activities.
Furthermore, research found that the regulatory environment for doing
business in Kazakhstan is more important for trading firms than reduction of
tariffs and taxes. Moreover, the survey found how important are customs and
border procedures to trade due to opportunity outlays, related with delivery time
and spoilage of commodities caused by congestion on borders.
The results of this study are essential especially for policymakers, since it
tried to provide conceptual roadmap for developing effective policies and tools in
infrastructure sector for enhancing trade capacity and sustaining trade growth.
Key Words: Infrastructure, foreign trade, trade cost, remoteness;

vi
Table of Contents
CHAPTER 1: INTRODUCTION .......................................................................................1
1.1 Objectives..................................................................................................................3
1.2 Purpose and significance of the study (rationale) .....................................................4
1.3 Organization..............................................................................................................6
CHAPTER 2: THE REVIEW OF THE LITERATURE.....................................................8
2.1 The Role of Infrastructure in an Economy................................................................8
2.2 The Role of Infrastructure in International Trade ...................................................10
2.3. The Effect of Telecommunication in International Trade......................................11
2.4 The Role of Telecommunication as IT in an Economy ..........................................15
CHAPTER 3: CURRENT SITUATION ..........................................................................17
3.1. Kazakhstan’s infrastructure sector .........................................................................17
3.2. Economy of The Republic of Kazakhstan..............................................................21
CHAPTER 4: RESEARCH METHODOLOGY ..............................................................24
4.1 The design of the questionnaire ..............................................................................24
4.2 Sampling and administration of the study...............................................................25
4.2.1 Demographics ..................................................................................................25
4.2.2. General information about the business..........................................................26
CHAPTER 5: RESULTS AND DISCUSSIONS..............................................................33
5.1 Infrastructure and geography related trade cost ......................................................33
5.2 Institutional and policy barriers to trade .................................................................37
CHAPTER 6: CONCLUSION AND POLICY SUGGESTIONS ....................................45
Bibliography......................................................................................................................49
APPENDECIES................................................................................................................54

vii
LIST OF FIGURES
Figure 1: Eurasian Transport Corridors
Figure 2: Gender
Figure 3: Age of respondents
Figure 4: Position
Figure 5: Location of the firm
Figure 6: Specialization
Figure 7: Major commodities traded
Figure 8: Age of the firm
Figure 9: Average annual revenue of the company
Figure 10: Size of the firm
Figure 11: Annual average volume of commodities traded
Figure 12: Major trade destinations
Figure 13: Frequency of trade related activities
Figure 14: Time needed to export/import (average)
Figure 15: Most preferred type of transportation
Figure 16: Logistics Performance Index of Kazakhstan 2014
Figure 17: Significance of infrastructure and geography related trade costs
Figure 18: Cross-country correlation between ‘doing business’ export times and
the total value of exports to the rest of the world in 2005 (in logarithms)

viii
Figure 19: LPI survey respondents (2012) indicating that transport and ICT
infrastructure has 'improved' or been 'much improved' in their country relative to
2009, by region
Figure 20: Significance of institutional and policy barriers to trade
Table 1: Transport and ICT infrastructure factors identified by the private sector
APPENDIX 1: Enterpreneur questionnaire covering letter
APPENDIX 2: Entrepreneur Questionnaire

ix
LIST OF ABBREVIATIONS
ADB – Asian Development Bank;
CAREC – Central Asian Regional Economic Cooperation;
CIA – Central Intelligence Agency;
CIS – Commonwealth of Independent States;
CPI – Consumer Price Index;
C- S – Center-South road corridor;
C – W – Center – West road corridor;
DFS – Dornbush – Fisher – Samuelson model;
EBRD – European Bank for Reconstruction and Development;
ECU – European Currency Unit;
E –W – Eeast – West road corridor;
GDP –Gross Domestic Product;
IBRD – International Bank of Reconstruction and Development;
ISDB – Islamic Development Bank;
IT- Information Technologies;
JICA – Japan International Cooperation Agency;
LPI – Logistics Performance Index;
MSM – Method of Stimulated Moment;
NET – New Economic Theory;
NEP – New Economic Program;

x
PPP – Purchasing Power Parity;
PPP – Private and Public Partnership;
SSA – Sub – Saharan Africa;
SWRP – South-West Road Project;
TCI – Trade Facilitation Indicators;
U.S. – The United States (of America);
USD – United States Dollars;
WB – World Bank;
WE – WC – Western Europe – Western China road corridor;
WTO- World Trade Organization;

1
CHAPTER 1: INTRODUCTION
The real costs of trade - the transport and other costs of doing business
internationally - are important determinants of a country's ability to participate
fully in the world economy. Remoteness and poor transport and communications
infrastructure isolate countries, inhibiting their participation in global production
networks. Recent liberalizations processes that took place in a year 2015, when
Kazakhstan became a member of World Trade Organization (WTO) and regional
integration processes, when the country became a member of Eurasian Economic
Union formed by Kazakhstan, Russia and Belarus, have reduced artificial trade
barriers, and mean that the effective rate of protection provided by transport costs
is, for the country, considerably higher than that provided by tariffs. To bring the
country further into the trading system it is important to understand both the
determinants of transport costs, and the magnitude of the barriers to trade that they
create.
This paper studies result of the survey conducted among export and import
companies of The Republic of Kazakhstan. The survey is conducted to find out
main constraints to trade comprising two categories of questions, these are:
«infrastructure and geography related trade costs» and «institutional and policy
barriers to trade».
Transportation infrastructure is generally considered as one of the essential
variables in trade, especially when it comes to trade of everyday use commodities
and food, because it connects production and consumption areas. Moreover, the
transportation costs, especially of agriculture commodities are much higher than
those for non-agricultural commodities, due to inadequate road, railroad, airport,

2
dry and seaport infrastructure, along with excessive document requirements while
crossing borders between countries.
Important to note, that transport and logistics are sectors in which global
value chains (GVCs) play a vital role in connecting countries, spreading
technology, and promoting best practice around the world. The transport and
logistics GVC is notable for the variety of lead firms involved in it—including
major shipping, express delivery, and freight forwarding firms—and the range of
local operators they partner with. Increasingly, transport and logistics GVCs are
extending their reach into developing countries, including some low income
countries and least-developed countries. In addition to its role as a GVC in its own
right, the transport and logistics sector is also key for the performance of other
sectors of the economy. Manufacturing and agriculture both depend on being able
to ship their goods to consumers quickly, costeffectively, and reliably. Indeed, the
GVC business model that has become so important in sectors such as electronics
or agrifood is impossible to implement without a strong transport and logistics
sector in each of the countries involved. The data suggest that countries with
better logistics performance tend to specialize more in manufacturing GVCs.
Delays, which are related to poor transport and logistics performance, can be
costly: an extra day can reduce exports by at least 1%, and can also impede export
diversification. Indeed, transport and logistics have a number of direct and
indirect links with important economic and social development goals. On the one
hand, transport and logistics can boost trade performance, which, under
appropriate circumstances, leads to higher incomes, employment gains, and lower
poverty rates.
Besides road infrastructure, the most striking trend, however, is the rapid
diffusion of information and communication technologies (ICTs) in most
developing regions. Because the improvement of trade is considered as necessity

3
and the result of recent trade liberalization processes, namely becoming a member
of WTO and formation of Eurasian Economic Union with Russia and Belorussia,
improved telecommunications may further have impact on trade. Actually,
industrial goods are more competitive than agricultural goods, so
telecommunication plays an important role especially in marketing of goods
traded. Additionally, having access to the tools such as internet, stationary and
cellular phones are also crucial for fast communication, management and
monitoring of today’s «doing business» environment.
Despite, integration and trade liberalization processes, it’s still topical and
crucial to further improve country’s legislative acts and policies related to trade
facilitation, in order to promote overall enhancement of trade related activities of
the country.
1.1 Objectives
The main objective of this study is to estimate the relationship between
infrastructure development in Kazakhstan and ease of doing trade related business.
The study specifically focuses on estimating the effect of an improved transport
links on foreign trade.
Specific objective of current study is to analyze the level of importance of
improved infrastructure (hard and soft) and geography on trade;
Additionally, the study will also try to find out the essentiality of
institutional and policy problems in infrastructure sector that also affects trade.
Moreover, this research will try to provide policy recommendations and
suggestions to The Government of Kazakhstan for further enhancement of trade
sector through improvement of infrastructure sector;

4
1.2 Purpose and significance of the study (rationale)
In the 1950s, the expansion and improvement of infrastructure was
regarded as a necessary pre-condition to the accumulation of capital and rise in
production and productivity in Third World countries (Rostow). Services provided
by the infrastructure capital stock (e.g., power, transport, telecommunications,
provision of water and sanitation) are essential to stimulate the economy and
transportation activities for economic development.
Improvement in infrastructure provides not only better access to markets
for inputs and final products but also more efficient allocation of factors of
production. The resulting outward shift of the supply schedule reduces production
costs.
The role of infrastructure remains largely unexplored, although a few
studies attempt to estimate the impact of transport services on productivity or
economic growth.
Little research has focused on the relationship between transportation and
the terms of trade (Casas, 1983). Transport costs were introduced to international
trade theory to explain the distinction between traded and non-traded commodities
(Samuelson, 1954; Mundell, 1957). Distance between trading countries has been
considered as the proxy of transportation costs. The volume of international trade
increases with reduced transport costs (Bougheas, Demetriades, and Morgenroth
(1999)). Research also shows that reduced costs led to increased production of
tradable commodities in six core EU countries. Reductions in transportation and
infrastructure costs tend to increase specialization in production. In fact, the U.S.
Census data suggest that there may well be a positive correlation between core
infrastructure and production specialization. Moreover, the data highlight the
importance of infrastructure accumulation, especially in developing countries.

5
Felloni et. Al (2001) demonstrated that transportation and energy are
significant explanatory variables for the aggregate value of production and
agricultural productivity in China. These were crucial elements in the transition
from staple crops to higher-value agricultural production. Energy is a key factor in
agricultural production when processing or intensifying (intensive livestock
rearing) production is required. The study suggested that the availability of roads
and electricity was a key factor in the modernization of Chinese agriculture.
Transportation infrastructure and public capital affects the volume of
international trade. Bougheas, Demetriades, and Morgenroth (1999) used
transportation costs as one of the independent variables in their bilateral trade
model. Not only did they find that all of the variables are statistically significant
in the model, but they also concluded that inclusion of the infrastructure indicators
improves the fit of the model in most cases.
The development of the road infrastructure is perhaps one of the most
important processes especially for developing countries to achieve steady
economic growth as well as trade capacity improvement. The Republic of
Kazakhstan is 9th
biggest country in the world, and yet, one of the biggest
landlocked countries that have no access to the sea. Kazakhstan is a second large
country after Russian Federation in Commonwealth of Independent States and
became one of the fastest growing economies in the region. In order to sustain
high economic growth, improving road infrastructure has become an important
priority for The Government of Kazakhstan.
In accordance with the available empirical evidence, suggested by
Raballand (2003) and Cadot et al. (2006), which states that ‘being landlocked
adds significantly to the cost of trading internationally’, it is especially important
for Kazakhstan as for the landlocked country to improve its infrastructure
situation.

6
This a public policy question, because transport infrastructure in most
developing countries is mainly provided by the public sector. This is also a
strategic question for policy-makers especially those in charge for long-term and
medium-term development plans and budget allocation for public infrastructure.
When it comes to specific guidance for infrastructure investment decision-making,
particularly at the strategic level, our knowledge on the linkages of transport with
trade growth does not appear to be adequate.
The primary purpose of this conceptual study was to provide a review of
relevant literature about the links between infrastructure (soft and hard)
development and trade in Kazakhstan. The assumed relationship between
infrastructure and trade capacity improvement becomes the base of the study.
Secondary purpose of this study is to assist policymakers from the
Government of Kazakhstan by providing with conceptual roadmap for developing
effective policies and tools in enhancing trade capacity and trade growth, by
improvement of infrastructure of the country.
Considering that most previous papers have focused only on the
transportation factor in analyzing the effects of infrastructure in the international
trade and were either cross-sectional or panel data studies on a large number of
countries, where each country in the analysis could not be considered as a
representative sample. A study focusing on Kazakhstan is a contribution to the
literature, as for now there are no studies examining the role of road infrastructure
development on trade growth of Kazakhstan.
1.3 Organization
Chapter 2 shows previous studies related to the economic effects of
infrastructure on an economy and hypotheses development. Current situation in
infrastructure sector of Kazakhstan is shown in Chapter 3. This study’s, research

7
methodology, questionnaire design, sampling and administration of survey are
presented in Chapter 4. Results of the survey conducted among export/import
firms of Kazakhstan are shown in Chapter 5. Finally, Chapter 6 summarizes the
study.

8
CHAPTER 2: THE REVIEW OF THE LITERATURE
2.1 The Role of Infrastructure in an Economy
By investing in hard infrastructure, such as roads, railroads, sea and dry
ports (inland ports), governments can build solid foundation for physical
environment to support its existing businesses and help new firms to decrease
their costs related to transportation, hence, giving them more opportunities to
improve their production. Such investments, believed to make the market more
attractive for foreign investors, that will help to sustain overall economic
enhancement and rehabilitation. Possible projects include building or improving
key access roads. By contrast, investment in soft infrastructure (Information
technologies, institutions) is aimed to create more suitable commercial
environment for businesses.
In a study conducted by E. M. Gramlich (1994), author regards the stock
of public capital as an important factor in the production of total output. The
definition of infrastructure from an economic standpoint consists of large, capital-
intensive, natural monopolies such as highways, other transportation facilities,
water and sewer lines, and communications systems. The government owns most
of these systems. To prove the effect of infrastructure investment on productivity,
he argues that the government should expand production facilities with the public
capital stock. The Gramlich study clarifies how to identify a shortage in
infrastructure investment: whether there is an overall shortage and whether it is a
factor in aggregate productivity decline. He finds evidence that some types of
infrastructure could have been in short supply, however, the evidence was
inconclusive, and it was not clear that the overall shortage persisted.
D. Canning (1998) describes the database of World Infrastructure Stocks.
Physical infrastructure stocks for a cross-section of 152 countries are taken for the

9
period 1950-95. Non-transportation infrastructure stocks tend to increase one-for-
one with population but increase more than proportionately with GDP per capita.
Transportation infrastructure appears to increase less than proportionately with
population and income only after a middle-income threshold has been reached.
Specifically, he finds that the number of telephone main lines per capita has a
significant impact on subsequent growth rates of GDP per capita but that other
infrastructure variables do not.
Other group of researchers, Bougheas, Demetriades, and Mamuneas (1999)
demonstrate that infrastructure may promote specialization and long-term growth,
using a cross-country growth model and instrumental variable estimation. They
conclude that there is a positive correlation between core infrastructure and
production specialization, and they emphasize the importance of infrastructure
accumulation, especially for poor countries. In their study, infrastructure variables
are simplified as telecommunication and transportation. Both infrastructure
indicators are positively correlated with economic growth. The correlation is
strongest in the case of the telephone lines. They use the infrastructure variables
individually in their regressions in order to avoid multi-colinearity because the
indicators are positively correlated with each other. Finally, they mention that
modelling “soft” infrastructure is likely to yield further important insights into the
process of economic growth.
Flloni et al. (2001) use cross-sectional data from 83 countries and 30
provinces in China to assess the effect of transportation infrastructure and
electricity on agricultural production and productivity. They run a model based on
a Cobb-Douglas production function. In accordance with economic theory, it is
suggested that the density of roads and the availability of electricity predicts
production and productivity in agriculture. Results of the analysis suggest that

10
access to transportation infrastructure and electricity will be crucial in the
modernization of Chinese agriculture.
2.2 The Role of Infrastructure in International Trade
Several studies have focused on transportation costs as one of the main
factors that influence international trade. F.R. Casas (1983) developed a
systematic approach to deal with various issues deriving from the incorporation of
transport costs into the standard models of international trade under different
assumptions about the nature of the technology of transportation. He argues that
the technology of transport plays an important role in determining “who pays for
transport” together with demand patterns for the two traded goods. In this study,
he concentrates on the transportation costs and distances between trading partners
that may affect transport costs.
L. Bottazzi and G.I. Ottaviano (1996) also attempt to model transport costs
in international trade. In their study, transport costs are introduced in “new trade
theory” to explain the geographical pattern of production and trade. Geographical
distance is an obstacle in international trade. A more efficient transport system
improves flows of goods between countries and enhances social welfare in the
countries. That is demonstrated by EU plans to invest 140 billion ECUs in
transportation infrastructure costs by 2010 to increase the volume of the
international trade. Transportation infrastructure is one of the determinants that
affect transport costs because it can reduce domestic transport costs. Although
transport costs play an important role in the international trade, other factors are
considered in their study.
Bougheas, Demetriades, and Morgenroth (1999) develop a gravity model
to examine the role of infrastructure in a bilateral trade model with transport costs.
They introduce infrastructure to the Dornbusch-Fischer-Samuelson (DFS, 1977)

11
model. The model includes indexes for transport cost, public capital, and length of
the motorway network. This study reveals that the coefficients of infrastructure
variables have a significant, positive impact on the volume of international trade.
Limao and Venables (2001) also examine the determinants of transport
costs and illustrate how transportation costs depend both on a country’s
geography and on the level of infrastructure. The researchers use a gravity model
similar to one developed by Bougheas, Demetriades, and Mamuneas (1999).
However, their model includes dummy variables representing landlocked counties
or possibility for transit. The study reveals that, if either the importer or exporter
is landlocked, the transit that connects trading countries stimulates trade flows
between them. They argue that land distances are much more costly than sea
distances. Moreover, in an empirical study that applies to Sub-Saharan African
(SSA) trade, they find that poor economic performance in SSA can be explained
by infrastructure variables. The low volume of trade among the countries in Sub-
Saharan Africa is mainly explained by poor infrastructure in the region.
2.3. The Effect of Telecommunication in International Trade
Since artificial trade barriers have been reduced under liberalization, the
effect of telecommunication is remarkably stronger for international trade than the
effects of any other infrastructure variables. Bougheas, Demetriades, and
Mamuneas (1999) use telephone lines as the indicator of telecommunication
infrastructure.
Baldwin (1986) presents two versions of the beachhead of sunk-cost model.
He displays hysteresis in import quantities as well as import prices. When the
shock is small, there is no change in the price for home and foreign firms in the
domestic market. The exchange rate, therefore, returns to its original level, and the
price of goods returns to its original value. Upon announcement of the

12
overvaluation, the price level in the domestic market jumps up. The price, on the
other hand, falls for foreign firms due to the marginal cost reduction and the
market structure change. The price falls the marginal cost reduction and due to the
market structure change. A lower exchange rate reduces costs measured in home
currency for foreign firms, and increased competition lowers profit margins for
domestic firms. After the overvaluation, the marginal costs return to their original
level. However, the domestic price is still higher, so the postshock price is
permanently lower than the pre-shock price (hysteresis). The study showed that,
while large exchange rate shocks can have persistent, real effects, small shocks do
not. Empirical evidence shows the predicted structural breaks in the U.S. pass-
through equation in the 1980s.
Baldwin and Krugman (1986) allow for a stochastic exchange rate process
in their study. They show that hysteresis in imports leads to hysteresis in the
equilibrium exchange rate. Foster and Baldwin (1986) examine a model of
marketing capacity constraints in which hysteresis in quantities occurs. Charles
Bean (1987), using a modified beachhead model, finds evidence that the 1978-
1981 Sterling overvaluation has had hysteretic effects on British exports.
Baldwin (1988) suggests that temporary exchange rate shocks might result
in hysteresis in import prices and quantities. This paper presents evidence
suggesting that the dollar overvaluation in the mid 1980s was an example of a
hysteresis-inducing shock. He argues that a large enough appreciation can induce
market entry and that the presence of additional entrants can affect pricing
behaviour. This paper shows that, in a simple industrial organization model, large
exchange rate shocks could have a persistent, real effect, while small shocks
cannot. Additionally, Krugman and Baldwin (1987) argue that the dollar decline
in the 1970s did not reflect a shift in competitiveness which would be required to
induce hysteresis, but rather resulted in a bias in foreign productivity growth.

13
Roberts and Tybout (1997) argue that sunk entry or exit costs produce
hysteresis in trade flows. When future market conditions are uncertain, sunk costs
make patterns of entry and exit depending upon the stochastic processes in the
exchange rate. This paper examines the effect of prior exporting experience on the
decisions of Colombian manufacturing plants to participate in foreign markets.
The empirical results reject the hypothesis that sunk costs are zero, implying that
prior export-market experience significantly affects the current decision to export.
They find that sunk costs rose less than proportionately with export volume. The
combination of sunk costs and uncertainty about future market conditions can
make producers stay in importing markets as exporters. The null hypothesis
rejects that entry costs are unimportant, implying that sunk-cost hysteresis models
are empirically relevant.
Roberts and Tybout (1997) quantify the effect of prior exporting
experience on the decisions of Colombian manufacturing plants to participate in
foreign markets for the years, 1981-1989. Michael P. Keane (1994) adapts the
method of simulated moments (MSM) for use with panel data. The results
indicate that prior export-market experience significantly affected the current
decision to export and that the policy implications stressed in the hysteresis
literature are empirically relevant.
Freund and Weinhold (2004) conclude in their paper that the Internet
stimulates trade flows. The main purpose of this paper is to quantify the effect of
the Internet on international trade in recent years. They develop a gravity model
under imperfect competition and suggest that sunk costs for market entry have
historically been very important for trade. Several empirical studies have found
that past linkages in trade and business networks are significant determinants of
current trade flows. The Internet has the potential to reduce sunk costs due to prior
export-market experiences, policy implications, and colonial linkage. Suppliers

14
can advertise to numerous buyers at once through the Internet. The role of the
Internet has important implications for trade volumes and bilateral trade patterns.
The study also shows that the effect of distance on trade will be reduced if
distance affects trade mainly through sunk costs; this is by improving access to
information about distance markets. Alternatively, if distance affects trade
primarily through transport costs, then it is unclear if the development of the
Internet will change the way in which distance affects trade. In summary, they do
not find evidence of the effect of web access on international trade in 1995 and
only very weak evidence in 1996. However, from 1997 to 1999, they find a
significant and increasing impact of the Internet on trade flows. The Internet has
had the strongest impact on trade flows among developing countries. This is
consistent with the predictions based on the economic theory that countries
without established trade links gain more from Internet technology than countries
with trade links. Surprisingly, they find little evidence that the Internet has
reduced the impact of distance on trade, suggesting that distance influences trade
patterns mainly as a result of transport costs. They also find evidence that the
Internet has reduced the importance of past linkages on trade flows. The Internet
is, therefore, likely to have a relatively greater effect on the volume of trade in
services.
Freund and Weinhold focus on goods trade and the market-creating effect
of the Internet on goods trade. This paper suggests that trade should expand
because sunk costs for entry or exit are reduced. They also find no evidence that
the Internet has affected the relationship between distance and trade, suggesting
that transportation costs play a more important role than search costs do in
determining trade patterns. As predicted, the effect of Internet access is shown
primarily through exports. Countries with relatively more of an Internet presence
also display less dependence on historical determinants of trade such as a common

15
language. More importantly, the results suggest that the benefits of the Internet
might accrue disproportionately to poorer countries. Freund and Weinhold have
argued that, given sufficient access to the Internet, the overall effect should be to
lessen historically determined inequalities in trading patterns and to increase
export opportunities for developing countries, thus reducing global inequality.
2.4 The Role of Telecommunication as IT in an Economy
In a series of papers, Gordon (1999, 2000) has argued that IT’s
contribution to accelerate productivity in the late 1990s has been solely through
the more efficient production of IT. The use of IT, Gordon claims, has not added
to the uptick in productivity. Workers became more productive after 1995 because
they had access to more high-technology equipment to perform their jobs. Growth
in investment in all other forms of capital, machinery, structures, etc. Slowed
during the late 1990s and contributed less to productivity in this period than
during the “productivity slowdown” the mid 1990s. This implies that total factor
productivity did accelerate appreciably in the later period (Jorgenson and Stiroh,
1999, Oliner and Sichel, 2000). Stiroh (2001) looked at productivity in the late
1990s in 61 industry groups sorted by level of investment in IT. He measured
each industry’s IT investment before 1995. His main finding was that industries
that had invested heavily in IT experienced more rapid productivity growth than
other industries. This result is consistent with the New Economy Theory that
maintains that the increased use of IT is increasing the productivity of American
business. After comparing industry groups, Stiroh concluded that the aggregate
productivity revival was entirely due to industries producing IT. The incidental
finding of this paper is that outlays for IT, unlike other forms of capital, affect
productivity several years after the investment was made.

16
In order to estimate the effect of investment in IT on firm productivity,
Brynjolfsson and Hitt (1998) tracked the amount of computer investment
undertaken by a sample of 60 firms over the 8-year period from 1987 to 1994.
They found that, in the short term, the marginal cost of computer investment is
equal to its marginal revenue, suggesting that short-term IT investment
contributes to productivity solely though the capital deepening mechanism.
Interestingly, they found that, over the longer term (seven years), marginal
revenue rose to between two and five dollars for every dollar invested in
computers. The authors interpreted this finding as suggesting existence of a
productive, complementary relationship between computer investment and
organizational restructuring. Moreover, Lamberton (1996) stated that lags and
adjustment periods were shorter, while information and productivity were
enhanced, in a communication-driven information economy.

17
CHAPTER 3: CURRENT SITUATION
3.1. Kazakhstan’s infrastructure sector
Although strategically The Republic of Kazakhstan has the potential to
connect the growing markets of Southeast Asia and China to Russia and Europe,
the country ranks only 88th among the 160 economies included in the trade
logistics survey as presented in the World Bank’s 2014 report, “Connecting to
Compete 2014: Trade Logistics in the Global Economy.” Routes to and from
dynamic growth poles such as Turkey, Russia, India, and China (accounting for
more than half of the world’s economic and trade growth) cross through the
country. Improving internal road transit links is crucial for Kazakhstan’s
development in order to interact with and benefit from the economic growth
adjacent to its borders. There are also nonphysical barriers to trade, including
inefficiencies at border crossings, unofficial payments, and deficiencies in the
harmonization of basic transit documents and regulations.
Kazakhstan’s current transport system includes 97,427 kilometers of roads,
14,000 kilometers of railways, and numerous logistics centers, as well as free-
trade zones to facilitate production, warehousing, and transportation. The road and
rail networks account for the transportation of nearly 90 percent of total cargo
volume.
The total volume of goods in transit through Kazakhstan in 2012 amounted
to 17.8 million tons, which amounted to more than US$1 billion in income. The
majority of goods in transit are transported via the rail network (16.3 million tons),
the rest by road (1.46 million tons) and water transport (0.16 million tons). Most
of the items in transit originate in Russia, whose share was 50 percent in 2012.
China accounts for 15 percent of the total goods in transit, with Georgia and
Uzbekistan roughly 9 percent each. The main destination countries for transit

18
cargo through Kazakhstan are countries in Central Asia (Uzbekistan, 36 percent;
Kyrgyzstan, 19 percent; Tajikistan, 11 percent; and Turkmenistan, 8 percent),
Afghanistan (13 percent), and Russia and China (5 percent).
The overall development objectives for the transport sector in Kazakhstan
have been refined in the new State Program for Transport Infrastructure
Development up to 2020 (Transport Strategy) with the assistance of the World
Bank. The Transport Strategy calls for more efficient transport infrastructure and
logistics, with a greater focus on infrastructure at the local level, in terms of both
improving basic accessibility and increasing connectivity throughout the country,
including remote and sparsely populated regions, to provide access to social
infrastructure and services. Among the key priorities are investment programs that
include the rehabilitation of the national road network, one-fourth of which is in
poor condition; the provision of selected additional infrastructure, particularly
along the Central Asia Regional Economic Cooperation (CAREC) corridors; the
development of the country’s potential as a regional logistics hub in Central Asia
and as a transit country between Europe and Asia (to double the transit traffic to
reach 35 million tons of transit flow per year by 2020); and institutional and
legislative changes.
In the railways sector, key reforms have been aimed at separating
infrastructure from rail transport, largely eliminating above-rail tariff regulation,
providing open access to infrastructure, and subsidizing unprofitable but socially
important services. The National Railway Company “Kazakhstan Temir Zholy”
defines its strategic role as a key logistics provider for transit traffic between Asia
and Europe and takes measures to attract transit freight traffic through Kazakhstan.
In the roads sector, key institutional reforms are planned to improve road
maintenance and to secure investments in highway infrastructure. The special

19
organization “KazAvtoZhol” has been established to oversee the construction,
management, and funding of the major republican road network.
In the aviation sector, the gradual liberalization of air transport regulation
is planned, along with investments in infrastructure and significant measures to
improve safety.
In the water transport sector, the emphasis is on the Aktau port and
services infrastructure, expansion of the merchant fleet, maritime safety, and the
development of human resources.
The Government of Kazakhstan embarked on an ambitious roads
development program in 2010, the Western Europe-Western China (WE-WC)
(see Figure 1) International Transit Corridor Project (part of CAREC), to
stimulate economic growth and reduce poverty in the poorest parts of the country
by improving access to the regions and providing employment in the construction
sector and related services. As part of the Government’s plan to upgrade the 2,840
kilometers linking Europe and Russia to China through Kazakhstan, the World
Bank supports the implementation of the South-West Roads Project (SWRP), the
largest infrastructure project in Central Asia and one of the largest single
investment loans in the World Bank’s history. Overall, about 85 percent of the
total amount of the WE-WC project is cofinanced by the International Bank for
Reconstruction and Development (IBRD), the Asian Development Bank (ADB),
the European Bank for Reconstruction and Development (EBRD), the Japan
International Cooperation Agency (JICA), and the Islamic Development Bank
(ISDB).
Objectives of the SWRP include: (i) upgrading and reconstructing 1,150
kilometers of road sections within the South Kazakhstan and Kyzylorda oblasts
along the WE-WC corridor; (ii) strengthening the institutional capacity of the
Ministry of Transport and Communications and the Committee of Roads; and (iii)

20
improving road safety and road services. To date, more than two-thirds of the road
length has been opened to traffic, the National Road Operating Company
“KazAvtoZhol” has been created to optimize management of the national road
network, and around 35,000 local jobs have been created under the project.
The Government of Kazakhstan expanded its partnership with the World
Bank on the rehabilitation and development of the WE-WC corridor by seeking
the Bank’s assistance on implementing the East-West Road Project, which is part
of the Government’s long-term strategy to stimulate sustained growth and
improve competitiveness. This project will provide an efficient transport link from
Khorgos, which is the primary road border crossing point between Kazakhstan
and China, to the city of Almaty, one of the major economic centers of Central
Asia. The project aims to increase the efficiency and effectiveness of modern
highway operation and maintenance by scaling up road transport sector reform
efforts initiated under the ongoing WB-financed SWRP. It will also facilitate the
more efficient movement of goods and people and enhance road safety by
providing improved conditions for the growth of industrial, agricultural, and
commercial activities along the road and in adjacent towns and cities.
As weaker global growth depressed oil prices and external demand, in late
2014, the President announced a new economic program “Nurly Zhol” (NEP),
which charges the Government to implement road and rail transport projects
connecting Astana at the center of the country with areas in the east, west, north,
and south via rail, air, and road networks.
The Government of Kazakhstan sees the WB as a partner of choice to
implement the NEP through the cofinancing of two important road corridors
linking the center (Astana) with the west (Aktau) and the south (Almaty). The
Center-West Corridor is the main gateway to the west through the Caspian Sea
and beyond, through the Caucasus to Europe, and to the east to the port of

21
Lianyungang in the Pacific Ocean. The Center-South Corridor strategically
connects Kazakhstan to Western China and Russia. These projects are intended to
create an environment conducive to business-driven regional economic integration
through enhanced factor and goods mobility that allows the formation of
distributed production and delivery systems. Additional jobs and incomes
generated by the proposed transport projects will help support domestic demand.
Figure 1: Eurasian Transport Corridors
Source: The Astana times
3.2. Economy of The Republic of Kazakhstan
Kazakhstan, geographically the largest of the former Soviet republics,
excluding Russia, possesses enormous fossil fuel reserves and plentiful supplies
of other minerals and metals, such as uranium, copper, and zinc. It also has a large

22
agricultural sector featuring livestock and grain. Extractive industries have been
and will continue to be the engine of Kazakhstan's growth, although the country is
aggressively pursuing diversification strategies. Landlocked, with restricted
access to the high seas, Kazakhstan relies on its neighbours to export its products,
especially oil and grain.
Although its Caspian Sea ports, pipelines, and rail lines carrying oil have
been upgraded, civil aviation and roadways continue to need attention. Telecoms
are improving, but require considerable investment, as does the information
technology base. Supply and distribution of electricity can be erratic because of
regional dependencies, but the country is moving forward with plans to improve
reliability of electricity and gas supply to its population. (CIA, 2015)
Kazakhstan is an upper-middle-income country with per capita GDP of
nearly US$13 thousand in 2013. Kazakhstan’s real GDP growth slowed from 6
percent in 2013 to 3.9 percent during the first half of 2014, due to internal
capacity constraints in the oil industry, less favourable terms of trade, and an
economic slowdown in Russia. The contribution of net exports to GDP growth
improved materially followed by a sharp devaluation of the Kazakhstan tenge in
February 2014, leading to a strong drop in imports of goods that became more
costly. As a result of the devaluation, domestic inflation, as measured by the
consumer price index (CPI), increased from 4.8 percent year-on-year in December
2013 to 6.9 percent in August 2014, due to higher imported input prices. (WB,
2014)
Income growth in the country had a positive impact on poverty indicators,
with prosperity shared broadly. The share of the Kazakhstan population living in
poverty went down from 47 percent in 2001 to about 3 percent in 2013, as
measured by the national poverty line. Similarly, at the international poverty line,
as measured by the purchasing power parity (PPP)-corrected US$2.50 per capita

23
per day, poverty in Kazakhstan fell from 41 percent in 2001 to 4 percent in 2009.
However, against a benchmark of a higher poverty line at the PPP-corrected US$5
per capita per day (which is more appropriate for countries with a higher level of
income per capita), some 42 percent of Kazakhstan’s population were still living
in poverty in 2009, though down from 79 percent in 2001. Kazakhstan’s
performance in the World Bank’s indicator of shared prosperity also shows
progress, with growth rate of consumption per capita of the bottom 40 percent of
households of about 6 percent, while the average consumption growth for all
households was about 5 percent during 2006-2010.
Trade policy will remain a central instrument to help the country integrate
into the global economy. The economy is adjusting to the Eurasia Economic
Union which it joined on 1 January, 2015. Kazakhstan has also joined the World
Trade Organization in 27 July, 2015. (WB, 2015)

24
CHAPTER 4: RESEARCH METHODOLOGY
4.1 The design of the questionnaire
infrastructure development and ease of doing trade related business in Kazakhstan.
The first step of the survey was to design a questionnaire with a focus on
the export/import companies’ performances who are already in business and who
have just started their own businesses – “new-comers”. Important to note, that
exclusively export and import companies of Kazakhstan were only surveyed.
The questionnaire comprised of 3 main sections:
- Section A. Demographics. Whereby respondents answer to the
questions regarding their gender, age and position;
- Section B. General Information. In this section respondents were
asked to specify the type of the businesses, either export or import, the industry
where their products mostly belong to (i.e. agriculture products), the region where
headquarters of their company located in, experience of the firm, average annual
revenue of the company, the size of the company (in the last four years where
applicable), average yearly volume of commodities exported/imported, main
destinations, frequency of export/import activities, how long does it take to
import/export in average from selected region, preferred transportation type;
- Section C. Main constraints to trade. This is the main section
that comprises 2 subsections that includes related questions:
- 1. Infrastructure and geography related trade costs: importance of
inadequate transport links, cost of transport services, access to telecommunication
technologies, access to sea (landlockedness);

25
- 2. Institutional and policy barriers to trade: limited access to trade
finance, standards compliance, customs and border procedures, tariffs and taxes,
regulatory environment for doing business, informal restrictions; (see Appendix 2).
4.2 Sampling and administration of the study
After the questionnaire was designed and pre-tested, only entrepreneurs
who have worked by that time were contacted by a research contact person and
asked to complete the questionnaire and allowed to complete it in private. After
completion, the questionnaire was returned to the research contact person.
We point out that there was no direct personal relationship (family
members) between the interviewers and the respondents. Nonetheless, it is
possible that the interviewers were acquainted with the respondents through other
connections. A total 100 entrepreneurs out of 120 responded to the survey.
4.2.1 Demographics
The sample comprised of 27% females, 73% males with an average age
falling between 41-45 years. (see figure 2 and figure 3)
Figure 2: Gender Figure 3: Age of respondents
Source: Researchers’ survey, 2015
73%
27%
Male
Female
13%
20% 23%
44%
0%
10%
20%
30%
40%
50%
Age of the
respondents

26
The large proportion of surveyed respondents (37%) were founders of the
business, 25% of respondents were senior managers, 20% managers and 18%
other positions. (see Figure 4 )
Figure 4: Position
4.2.2. General information about the business
The collection was during business hours; however, it was sometimes
appropriate to administer the questionnaire while the business was closed or at a
convenient time that met the business owners’ schedules. The questionnaire was
administered to a convenience sample of business owners in capital city Astana,
in big business city Almaty and two administrative regions: Akmolinsk and
Central Kazakhstan regions, between mid September and end of October 2015.
(See Figure 5)
37%
25%
20% 18%
Founders Senior Managers Managers Others
0%
10%
20%
30%
40%
Position

27
Figure 5: Location of the firm
Most of the surveyed firms were importing (53%) whereas the rest of the
firms were export oriented companies (47%). (See Figure 6);
Figure 6: Specialization
Considering that bad infrastructure’s has huge negative effect on
especially agricultural products, due to quick spoilage at the time of delivery, our
survey was distributed mainly to agriculture products oriented trading firms. 56%
of respondent firms were involved in agricultural products export and import
activities, whereas the rest of the firms (44%) were involved in non-agricultural
products. (see Figure 7)
30%
45%
10%
15%
Astana
Almaty
Akmolinskaya oblast'
Central Kazakhstan (Karagandinskaya
oblast')
0% 10% 20% 30% 40% 50%
Location of the firm
Location of the firm
47%
53%
Export firms
Import firms

28
Figure 7: Major commodities traded
The respondent firms were relatively young companies comprising of 20%
working in a market between 0-3 years, 40% between 3-5 years, 23% between 6-
10 years and the rest 17% are more experienced firms who work in their field
more than 10 years. The mean age of studied firms was 5 years. (see Figure 8)
Figure 8: Age of the firm
Respondent firms were relatively small in regards to their average annual
revenue (AAR). According to a survey large proportion (58%) of firms’ AAR
draws up between 50-100 thousand USD, whereas 29% of the firms enjoyed AAR
of 100-200 thousand USD. The rest 7% of the firms had 200-300 thousand AAR
and only 6% of surveyed firms had AAR more than 300 thousand USD. (see
Figure 9)
56%
44% Agricultural
Non-agricultural
20%
40%
23%
17%
0-3 yrs 3- 5 yrs 6-10 yrs >10
0%
10%
20%
30%
40%
50%
Experience

29
Figure 9: Average annual revenue of the company
In terms of size of the firm 47% of the companies consist of 10-20
employees, 43% of enterprises comprised of 2-10 employees, 6% of the firms
comprised of 20-50 people and only 4% of respondent firms have more than 50
employees. (see Figure 10)
Figure 10: Size of the firm
58%
29%
7% 6%
0%
10%
20%
30%
40%
50%
60%
70%
Average annual revenue (thousand USD)
50-100
100-200
200-300
>300
43%
47%
6%
4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Size of the firm
2-10 employees
10-20 employees
20-50 employees
>50 employees

30
The average volume of goods exported/imported by firms per year as
follows: 57% of firms are only capable to export/import only up to 12 forty feet
containers (containers) per year, 30% of the respondents 13-24 containers, only 8%
of respondent firms can only import/export 24-40 containers per year and lastly 5%
of the surveyed firms are capable to export-import more than 40 containers per
year. (see Figure 11)
Figure 11: Annual average volume of commodities traded
Although The Republic of Kazakhstan is a landlocked country and
nowadays has some challenges with infrastructure development, mainly due to
vast territory and limited access to sea, the country is relatively active in trade
with Europe (26%) and Americas (10%). However, main trade destinations for
Kazakhstan are CIS (37%), Middle-Eastern and Asian countries (27%). (see
Figure 12)
57%
30%
8%
5%
0%
10%
20%
30%
40%
50%
60%
Average volume per year
0-12 containers
13-24 containers
24-40 containers
>40 containers

31
Figure 12: Major trade destinations
The results of the study also revealed the average frequency of the firms’
trade activities. Particularly, 56% of respondents answered that their firms
export/import 5-12 times per year, 31% - 13-24 times per year, 7% - 24-40 times
per year and 6% - more than 40 times a year. (see Figure 13)
Figure 13: Frequency of trade related activities
About 1 month is needed to export/import for 36% of surveyed enterprises,
more than 1 month is needed for 24% of the firms to transport goods, more than 1
week is needed for 21% of the firms to transport their goods, 24% of respondents
26%
10%
27%
37%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Main destinations
CIS and Central Asia
Middle-East and Asia
Americas
Europe
56%
31%
7% 6%
0%
10%
20%
30%
40%
50%
60%
Frequency of trade activities (per year)
5-12 times
13-24 times
24-40 times
>40 times

32
claim that more than 1 month it takes for them to ship their goods and only 19%
of respondents answered that it takes less than a week to transport their products.
Figure 14: Time needed to export/import (average)
Study found, that the most preferred types of transportation of the
surveyed companies are: automobile (42%), rail transport (38%), air transport
(15%) and 5% for sea transport. (see Figure 15)
Figure 15: Most preferred type of transportation
19%
21%
36%
24%
0% 5% 10% 15% 20% 25% 30% 35% 40%
>1 month
around 1 month
>1 week
<1 week
38%
42%
15%
5%
Rail transport
Automobile transport
Air transport
Sea transport

33
CHAPTER 5: RESULTS AND DISCUSSIONS
5.1 Infrastructure and geography related trade cost
Both the quantity of infrastructure investment and the quality of
infrastructure services influence trade performance (see e.g., Limao and Venables
2001; Clark et al. 2004). This occurs through infrastructure’s impacts on damage
and spoilage to goods in transit, and timeliness of delivery, among other factors.
Nordas and Piermartini (2004) delineate four dimensions of the
relationship between infrastructure and trade costs:
1. Direct monetary outlays for delivering traded goods are partly
determined by the quality of infrastructure and the cost and quality of related
services;
2. Timeliness, even more than freight rates, is likely to be influenced by
geography and infrastructure;
3. Risk of damage, losses, or larger insurance costs is higher when
infrastructure is of poor quality;
4. Lack of access to a good transport or telecommunication service can
have a high opportunity cost, restricting market access and limiting the likelihood
of participating fully in the benefits of trade;
In order to better illustrate what are the main challenges for Kazakhstan
related with its logistic performance, we turn to the World Banks Logistic
Performance Index (LPI) data of 2014. The LPI of WB provides an overall
measure of transport and logistics performance in up to 155 countries around the
globe.
The international score uses six key dimensions to benchmark countries'
performance and also displays the derived overall LPI index. The scorecard
allows comparisons with the world (with the option to display world's best

34
performer) and with the region or income group (with the option to display the
region’s or income group's best performer) on the six indicators and the overall
LPI index.
The logistics performance (LPI) is the weighted average of the country
scores on the six key dimensions. These are: efficiency of the clearance process
(i.e., speed, simplicity and predictability of formalities) by border control agencies,
including customs, quality of trade and transport related infrastructure (e.g., ports,
railroads, roads, information technology), ease of arranging competitively priced
shipments, competence and quality of logistics services (e.g., transport operators,
customs brokers), ability to track and trace consignments and timeliness of
shipments in reaching destination within the scheduled or expected delivery time.
The scorecards demonstrate comparative performance—the dimensions
show on a scale (lowest score to highest score) from 1 to 5 relevant to the possible
comparison groups—of all countries (world), region and income groups.
To give provide clearer view, along with Kazakhstan three other countries
were added to the graph: Germany as a top performer in the entire World, Turkey
as a best performer in the region and Uzbekistan as a neighbouring country with
similar geographic conditions. (see Figure 16)
Figure 16: Logistics Performance Index of Kazakhstan 2014

35
Source: Logistic Performance Index of The World Bank
Looking at the figure above it can be observed, that overall Kazakhstan is
in need of urgent improvement of especially its trade and transport related
infrastructure, including ports, railroads, roads, information technology. Along
with infrastructure, the clearance processes are also needed to be improved to
guarantee speed, simplicity and predictability of formalities by border control
agencies, including customs.
Similarly, the results of current study support the views of the researchers
above. 60% percent of respondents marked the importance of adequate transport
links, access to sea (79%), cost of transport services (70%) and access to
telecommunication technologies (85%). (see Figure 17)
Figure 17: Significance of infrastructure and geography related trade costs

36
Thus, it should be noted that the business environment is changing
nowadays, especially in terms of business organisation and globalisation, which is
likely to lead to a greater importance of logistics and global transport links.
Without good transport links, markets are likely to become segmented (separated)
(Treasury, 2001), thus reducing competition and the potential for new businesses
to enter.
A geographic disadvantage of Kazakhstan is not only its landlockedness,
but also a vast territory, which makes it even more difficult to have better
interlinked and sophisticated infrastructure. In this regards, an important
component of transportation costs is the time cost involved is to be mentioned.
This is particularly critical for perishable or other time-sensitive goods.
Recent academic research provides useful clues as to the economic effects
that delays can have. Hummels (2001) is one of the first papers to examine the
impact of time on trade flows. Using data for US imports, he found that the time
cost of one day in transit for US imports is equivalent to an ad valorem tariff rate
of 0.8%, implying the equivalent of a 16% tariff on an average ocean shipment of
20 days. The same reduction also increases the probability that the US will source
imports from a country by 1%-1.5%. To show the importance of delays caused by
international transport, Hummels (2001) estimates that the increasing use of faster
60%
70%
85%
79%
35%
20%
10%
15%
3%
7%
2% 5%2% 3% 3% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Inadequate transport
links
Cost of transport
services
Access to telecom Access to sea
Most important
Important
Less important
Not important

37
transport methods over recent decades—which reduces trade times—boosted
trade by an amount equivalent to a tariff reduction from 32% to 9% over the
1950-1998 period. One limitation of the Hummels (2001) study is that it only
considers international transport times. It does not consider other factors that
contribute to trade times, such as internal transit, document preparation, and
customs and border formalities.
5.2 Institutional and policy barriers to trade
Institutions set the rules for the interaction between private sector and for
the interaction between private and public sectors. Well functioning institutions
therefore reduce the level of uncertainty inherent to this interaction and as a result
reduce transaction costs. High quality institutions are therefore expected to have a
positive effect on economic activity in general and on international trade in
particular.
From the point of view of individual projects, it is often important to
measure not just congestion-related wait times, and those that are due to red tape
and inefficient border processes, but also those that arise due to regulatory
differences between countries. In some neighboring countries in Africa, for
instance, load limits and certification requirements are different, and cargo has to
be unloaded and reloaded at border crossings. These operations often add
significant time and cost to the overall delay experienced by operators.
Inefficient institutions, in contrast, can lead to serious obstacles for trade.
Bigsten et al. (2000), for instance, describe how the absence of an efficient legal
system hinders interaction between manufacturing firms in a number of African
countries and potential foreign importers. The authors examine the contractual

38
practices of African manufacturing firms using survey data collected in Burundi,
Cameroon, Côte d'Ivoire, Kenya, Zambia and Zimbabwe. It is shown that
contractual flexibility is pervasive and that it is a rational response to risk: the
riskier the environment, the higher the incidence of contract non-performance, and
the higher the probability of renegotiation of a contract. Complete contract
breaches and the use of lawyers and courts to enforce the original contract are rare,
simply because of the absence of an efficient legal system. Instead, suppliers and
clients fulfil their contracts but in a "flexible" way: supplies occasionally arrive
late or their quality is different from what was ordered, and clients sometimes pay
late. In their dealings with African firms, trading partners are often taken by
surprise by contractual delays and calls for contractual renegotiation. Those who
are used to functioning in a very different environment may find it hard to
understand that the somewhat unpredictable behaviour of African firms in such
cases is a rational response to an inefficient system. This may explain why foreign
firms find it difficult to deal with African partners and why African manufacturers
have a hard time breaking into export markets.
Djankov et al. (2010) use Doing Business data on export times to examine
the impact of those factors on trade. Their results are similar to those of Hummels
(2001) in terms of quantitative magnitude: a one day reduction in pre-shipment
delays is associated with a trade increase of about 1%. (Figure 18 illustrates this
negative correlation.) In effect, countries with long export times are isolating
themselves from world markets: Djankov et al. (2010) estimate that an additional
day’s delay in an average country is equivalent to moving it away from its trading
partners by about 70km. The implication is that trade delays are particularly
important for countries that already suffer from geographic disadvantages, such as
being landlocked, or being small island developing states: they can reduce the

39
effects of geographical isolation by improving their delay performance prior to
shipment, including by improving border processes. Interestingly, Djankov et al.
(2010) find that pre-shipment delays matter more for some products that for others:
specifically, time sensitive products—including some manufactured goods and
perishable agricultural products—benefit more from improved performance than
others.
Figure 18: Cross-country correlation between ‘doing business’ export
times and the total value of exports to the rest of the world in 2005 (in
logarithms)
Source: WITS-Comtrade for exports; Doing Business for export times.
Martincus et al. (2013) focus specifically on the case of customs, but use
firm-level export data from Uruguay, rather than cross-country data as in all the
other papers. They find that customs delays on their own—without considering
other aspects of transport, logistics, and trade facilitation—can be responsible for

40
significant trade reductions. Concretely, an extra day spent in customs translates
into a 2.8% decline in the growth rate of exports.
In addition, the OECD/WTO private sector survey confirms the
importance of customs and border procedures, both as business constraints, and as
factors in GVC sourcing and investment decisions (Table 1). In terms of
operational difficulties, customs documentation requirements are the factor most
commonly identified by survey respondents. Border waiting times—which are
closely related to the performance of customs and other border agencies—are
identified by respondents less frequently, but are still within the top handful of
operational difficulties identified by business. This same pattern is reflected in the
data on sourcing and investment decisions of GVCs: customs and other border
procedures are the most commonly identified factor, over six percentage points
ahead of the next ranked issue.
Table 1: Transport and ICT infrastructure factors identified by the private
sector
Source: OECD/WTO.
These perceptions are confirmed by the findings of the TFIs, which show
that the harmonization and simplification of documentation requirements account
for the greatest proportion of the observed variation in trade flows and trade costs,

41
in particular for low income and lower middle income countries (3% and 2.7%
respectively). The streamlining of border procedures, which has the most direct
impact on waiting times, appears as the second most significant source of variance
for trade flows and trade costs (2.2% for lower middle income countries, and 2.8%
for upper middle income countries; OECD 2013c).
Figure 19 represents LPI results on the prevalence of improvements in
transport and ICT infrastructure, breaking the data out by region. Across all
regions, there is widespread agreement among respondents that ICT infrastructure
improved between 2009 and 2012. Opinions are less homogeneous for trade and
transport infrastructure: Sub-Saharan Africa and the Middle East and North Africa
report improvements relatively frequently, which is encouraging, but the data are
weaker for South Asia. However, the most notable feature of the figure is that for
most regions, improvements in ICT infrastructure are more prevalent than
improvements in transport infrastructure. Although the spread of ICTs is to be
welcomed, as it can considerably reduce the time and cost associated with
transport and logistics operations, it is important for some developing countries
such as Kazakhstan to continue to improve basic infrastructure such as ports,
airports, and roads as well.
Figure 19 Transport and ICT infrastructure in 2012 relative to 2009
performance

42
Source: LPI database.
Similarly, the survey revealed, that the regulatory environment for doing
business in Kazakhstan is more important for trade firms than reduction of tariffs
and taxes, this can be due to recent trade liberalization and economic integration
processes. However, customs and border procedures are also taking important
place in this rating, 80% of respondents think that border and customs procedures
are significant obstacles to trade. It can be linked to opportunity outlays related
with delivery time, spoilage of some commodities due to congestion on borders
that is caused by excessive document requirements and other procedures. (see
Figure 19)
Figure 20: Significance of institutional and policy barriers to trade

43
Domestic institutions, both in the home and the foreign country, can thus
affect a country’s choice of trading partners and, as a consequence, the overall
pattern of international trade. Foreign firms are less willing to trade with
Kazakhstan due to institutional problems. At the same time domestic institutions
to affect a country’s overall level of openness, in the sense that countries with
better institutions trade more. Inefficient institutions represent a cost factor for
domestic exporters and thus lower their international competitiveness with
negative repercussions on export flows. Transaction costs due to inefficient
institutions also raise the final consumer price of imported goods with negative
repercussions on a country’s import flows. Last but not least institutions affect the
effectiveness of trade policy. Even if a country lowers its trade barriers, outsiders
may be reluctant to trade with that country if, for instance, they do not believe
contracts can be enforced or are not sure whether payments will be made.
Uncertainties and the resources involved in negotiating and enforcing
contracts amount to considerable transaction costs that invariably affect the
volume of trade. Since countries differ as far as enforcement of contracts is
25%
15%
80%
70%
95%
20% 20%
15%
20%
2%
30%
40%
2%
7%
2%
25% 25%
3% 3% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Limited access to
trade finance
Standard
compliance
Customs and border
procedures
Tarrifs and taxes Regulatory
environment for
doing business
Most important
Important
Less important
Not important

44
concerned and they have different institutional structures, one would also expect
that transaction costs related to trade differ between trading partners.
Summing up, improvements in infrastructure services that reduce delays in
ports, border crossing procedures or transit times will influence a country’s
propensity to trade. Developments in containerization and intermodal transport
networks contribute to quicker delivery times and the growth in air shipments.

45
CHAPTER 6: CONCLUSION AND POLICY SUGGESTIONS
Trade has played an important role in Kazakhstan’s economic re-
emergence. The infrastructure’s part in trade facilitation, namely lowering trade
costs was crucial up to nowadays. The shift toward increased value of timely
delivery has implications for infrastructure investments and expansion. Notably,
the development of physical infrastructure should be complemented by
improvements in supporting institutions.
In order to drive Kazakhstan’s rapid economic growth and poverty
reduction in coming years, a series of policy and institutional reforms related to
infrastructure development to be suggested:
Firstly, the contemporary state of the public administration in Kazakhstan
is characterized by its high centralization. This makes the president as the central
and key actor in the political system and regime. The main conductor of the
presidential policies is the executive authorities in all three levels of the public
administration: central, regional, and local.
In this way, the public administration remains highly centralized and
functions as a bureaucratic system with all vices typical for bureaucracy. It has a
huge negative impact on infrastructure related projects. It is believed to be a main
cause for delayed completion of projects, enormous amount of reports and
correspondence between the central and local governments.
Today it has become more and more evident for the public opinion that the
decentralization of the state power is one of the main ways for the democratization
and effectiveness of the political system of Kazakhstan. Gradual transition to
decentralization of the government power, including infrastructure sector can

46
definitely reduce burden and load on the central government as a whole and help
speed up processes.
Secondly, enchasing governments’ institutional capacity towards
eliminating corruption, especially in infrastructure sector is crucial. Although,
many reforms and improvements were made within last decade by Republic of
Kazakhstan Agency for Civil Service Affairs and Anti-Corruption, Kazakhstan is
still ranked 126th
among 175 nations in Corruption Perceptions Index 2014 of
Transparency international (The Global coalition against corruption). Thus, the
government of Kazakhstan should take all necessary actions such as: increasing
transparency of procurement and tender processes, stricter rules towards
government officials and private partners on the example of the best international
practices of the countries that already have eliminated corruption (New Zealand,
Singapore and Denmark), as well as providing better remuneration for public
bodies as an incentives.
Thirdly, Kazakhstan had a huge improvement in economic stability in its
short life as an independent country and sent an important signal to international
investors with its Standard & Poor’s investment grade. This allows the country
relatively cheap access to international financial resources in comparison to
countries that do not have this important investment grade recognition. Its positive
rating also suggests that domestic investors can participate in Kazakhstan’s long-
term contracts with low risk. However, this country is still young and the
investment grade is still the lowest among the group of ranking. Some
international investors may require additional guarantees to invest in PPPs or
long-term contracts. For instance, Chile has a higher investment grade (A) than
Kazakhstan, and yet private investors demand guarantees in Private and public
partnership (PPP) contracts.
In this regards, several recommendations to be suggested:

47
- Building capacity. The PPP Unit and most of the professionals
working in the public sector and dealing with PPP projects must have a permanent
education program in the technical areas related to PPPs. For instance,
engineering, environmental concerns, economics, cost-benefit analysis, financial
modelling, regulation, transport economics, and other topics. Such a program will
enable professionals to increase their skills. At the same time, the PPP system will
be highly responsive to the needs of the specific jobs;
- Multilateral agencies participation. It is strongly recommended that
bilateral and multilateral agencies like EBRD, Eurasian Bank, ADB, and others
can participate as transaction advisors to the projects, providing funds for the
correct design of feasibility studies, participating in the promotion of the PPP
projects, and finally helping the government bring high levels of transparency by
participating in the selection process of a couple of PPP projects;
- Level of salaries. It seems that currently and according to the
professionals interviewed, the salary level for the average professional working in
the public sector is low. Increasing the salaries of professional people working in
the PPP world should be seriously considered. Public sector professionals must be
motivated to protect the public interest in each interaction with the private sector.
This policy will attract highly qualified professionals that also will have
increasing levels of motivation.
- Minimum standard requirements. The Law on Concessions raises
the possibility that ministries, regional governments, and the Committee on State
Property and Privatization under the Ministry of Finance can all be responsible for
preparing project bids. This situation could create a heterogeneous environment
for similar projects. For example, if similar projects in roads are managed by the
three different government authorities, the business design and standards for
operation and maintenance could be different, raising a source of potential

48
renegotiation for the concessionaire. The concessionaire could dispute the
differences in requirements, and argue for increasing or reducing the requirements
according to the principle of maximized profits. We recommend that the
Kazakhstan government follow the principle of “one public window” or “one
stop-shop” in the relation to the private sector. This public policy principle will
strengthen the government and will show a unified public sector.
The above policy recommendations are important for Kazakhstan’s
infrastructure development, yet the implementation will be meaningless without
coordination among the government, state-owned enterprises, and private sector
as the key stakeholders. Government reforms and further development of this
sector will certainly not be a problem-free, however payoffs in short and long
term perspectives, especially to the trade in particular can benefit the economy as
a whole.

49
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54
APPENDECIES
APPENDIX 1. Enterpreneur questionnaire covering letter
Introduction.
My name is Aidyn Kuralov, a master’s student at Korea University in
Seoul, South Korea. I am conducting this study among export and import
companies of The Republic of Kazakhstan. The survey is carried to find out the
main constraints to trade. This questionnaire is comprised of two main categories
of questions, these are: «infrastructure and geography related trade costs»,
«institutional and policy barriers to trade».
infrastructure development and ease of doing trade related business in Kazakhstan.
The purpose of this study is to write my master thesis report. However, the
findings will enable the relevant policy makers to use it for designing policies and
strategies to build solid infrastructure base for stimulating trade in The Republic
of Kazakhstan.
CONFIDENTIALITY AND CONSENT: “I am going to ask you some
personal questions and request you to feel free to respond to those you are
comfortable with. The answers you give are completely confidential. Your name
will not be written on this form, and will never be used in connection with any of
the information you provide. You do not have to answer any questions that you
are not comfortable with. However, your honest answers to these questions will
help us better understand what export and import business firms think about the
issues raised in this survey.”

55
APPENDIX 2. Entrepreneur Questionnaire
Section A. Demographics
Gender Male Female
Age 25-30 31-35 36-40 41-45
Position Founder of
business
Senior
manager
Manager Others, please
specify______
Section B. General information about the business
1. What industry
does your business
belong to?
Export Import
2. Major
commodities
traded
(ex. agricultural,
textile, food and
beverages, daily
use commodities,
pottery,
Agricultral Non-agricultural

56
pharmaceutical,
office
commodities,
3. Location of your business______________________(City, Region)
4. How long has
your firm been
operating in
export/import
industry?
0-3 years 3-5 years 6-10 years > 10 years;
5. Average yearly
revenue of your
firm during past
four years ( in
USD)
50,000 –
100,000
100,001-
200,000
200,001-
300, 000
>300,001
6. Number of
employees in
previous four years
(size of the firm)
2-10 10-20 20-50 >50

57
7. What is the
average volume of
goods
exported/imported
per year by your
company?
0-12
(40ft)
containers
13-24
(40ft)
containers
24-40 (40
ft)
containers
more than 40 (40 ft)
containers
8. Please name one
region where your
goods are mainly
exported
to/imported from:
Europe Americas Middle-
East
& Asia
CIS
and
Central Asia
9. How often does
your company
transport goods
to/from abroad per
month?
5-12
times in a
year
13- 24
times in
year
24-40
times in a
year
>40 times

58
10. How long does
it normally take in
average to import
from/export to
your selected
region?
< 1
week
> 1
week
1 month > 1 month
11. Please outline
preferred type of
transportation used
by your firm, to
transport goods
from/to
abroad(please tick
in the box where
appropriate)
Rail
transport
Automobil
e transport
Sea
transport
Air transport
Others
Please specify:_________________________________________________

59
Section D. Please outline the main constraints to trade
Most
important
Important Less
important
Not important
Infrastructure and geography related trade costs
Inadequate
transport
links
Cost of
transport
services
Access to
telecommuni
cation
technologies
Access to sea
Institutional and policy barriers to trade
Limited
access to
trade finance
Standards
compliance

60
Customs and
border
procedures
Tariffs and
taxes
Regulatory
environment
for doing
business
Informal
restrictions
Others
Please specify:_________________________________________________

AIDYN THESIS LIBRARY

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