This past February, the small city of Stepnogorsk in northern Kazakhstan lived through a desperate week with no water, after the supply system collapsed following years of neglect. Once a well-financed secret town during the Soviet era – the site of the world's largest biological warfare development and production facility – in recent years the town has fallen on tough times, partly because of the death of the local metallurgical plant that used to employ many local people.
But there is a larger reason for the crumbling infrastructure in Stepnogorsk, and in other regions of this vast country: sewage systems in Aktobe and Uralsk, water supply facilities in Ust-Kamenogorsk and Karaganda, and the airports of Petropavlovsk and Kostanay, to name just a few examples. While the European Union and Russia have developmental programs and institutions to prevent huge inequality between regions and preserve their cohesiveness as integrated entities, in Kazakhstan, a country the size of Western Europe, the regional development agenda remains inchoate. In addition to its fragmented national economy, sparse population, enormous distances, and Soviet-era physical infrastructure, the country also remains plagued by a weakly enshrined system of local governance.
As a result, only large urban areas such as Astana and Almaty enjoy really sustainable development, whereas the periphery is left aside without benefiting much from the fruits of the economic boom of the last few years. A European Bank for Reconstruction and Development strategy document for 2006, for example, found a wide poverty gap and wide variations in access to health services and in the quality of several essential infrastructure services such as sewerage, clean water, and central heating.
The problem, critics say, starts with the centralized system of allocating funds to the regions, because the system remains very unpredictable and non-transparent, and, overall, is too tied to the whims of individuals on the national budget commission. The oil and gas industries located mainly in the west of the country generate most of Kazakhstan's wealth, as well as some mineral extraction companies operating in the central and eastern parts. These companies are required to pay their taxes to the National Fund, which then serves as a major source of income for the national budget, in addition to VAT payments and other corporate taxes.
Local budgets, on the other hand, mainly rely on personal income taxes and large transfers from the national budget to cover developmental programs and the social service net. That system gives local governments little flexibility about where to allocate resources, making them very dependent on the authorities in the capital Astana.
Zhanibek Khassan, the manager of the "Budget Transparency and Accountability" program at the Soros Foundation-Kazakhstan, said that, on average, financial transfers from the center cover 56 percent of local budgets. In contrast, he said, "The most advanced international practice is that the regional budgets are mainly composed of VAT and corporate and personal income tax payments in a decentralized structure of taxation without much reliance on the central budget."
The net result, said Nina Erkaeva, the head of the Development Through Education non-profit organization in Karaganda, is that "Once they become subsidized territories, the regions become very addicted to the growth of the financial transfers from the center." "According to the research data we have, these transfers do not contribute to regional development at all," she added.
In the struggle for funds from the national budget, Astana and Almaty have retained their privileged status, the first because of its growing status as the national capital and the second as still the most developed urban area of the country. Even so, in Almaty people typically complain that their city does not receive enough funds and largely finances Astana, which became the capital in 1997.
"The city with capital status was always a source of funding from the state budget during Soviet times," said Tulegen Askarov, a leading Kazakh business columnist. "However, at this point Astana is only absorbing financial transfers from the national budget, and that seems abnormal." According to the Ministry of Finance, in 2008 Astana received about $1.6 billion in transfers from the national budget, but contributed back only about $80 million. In contrast, Almaty, with around twice as many residents and a much more extensive infrastructure, received only $750 million last year. The former capital remains an island of prosperity and growth thanks to its status as the financial, cultural, and intellectual center of the country.
The dichotomy between the cities and regions is likely to increase, as migrants within the country surge to Almaty and Astana to reap the benefits of the mineral-driven economy, which was officially growing at an almost double-digit pace before the global downturn. Many top professionals from the regions – doctors, teachers, engineers, and managers – have already made the move, helping lift Almaty's population to almost two million. According to forecasts by the National Statistics Agency, Astana could have one million residents by 2010, about twice the size of five years ago. That only further worsens the prospects of the regions in terms of investment, economy of scale, and infrastructure development.
The country's political system itself undermines the prospects for more effective regional development. Local governments, all appointed by the authorities in Astana, rarely have real incentives to promote the interests of the regions they run, as they are accountable to the political center and not elected by local citizens. Some officials usually hail from the loyal clans and networks of the ruling political class and often do not have enough managerial skills, since their performance is mainly assessed according to their loyalty instead of their merit. Critics of this system say that appointed officials then bring along their own cronies, whose intentions are even more short-term, predatory, and marginal to the interests of the locality.
As a result, many local and foreign experts blame mainly the regions themselves for the underdevelopment of their communities. For example, Togzhan Kizatova, a civic activist from Demos, a non-governmental organization in the Atyrau region, said that "if the local governments could effectively use the local budgets with no corruption, we could easily manage without any alternative budget redistribution system on a nationwide scale." That opinion is echoed by Olzhas Khudaibergenov, a well-known Kazakh economist. "The main problem of regional development is that a lot of nationwide developmental programs are implemented ineffectively on the local level," Khudaibergenov said.
A LACK OF PEOPLE POWER
Not everyone agrees. "On the regional level, the use of budgetary resources is much more effective," said Evgeniy Aman, a ruling party member of the Mazhilis, the lower chamber of parliament. "The projects implemented there are more tangible and concrete because they are tied to specific utility, infrastructure, and healthcare improvement programs. On the local level they are under tighter control because they are implemented and monitored very closely and the punishment for [poor management] is much more severe."
Until now, however, local citizens have rarely emerged from the general apathy and inertia to force local officials to improve governance. "The challenge is how the local population and their representatives in the local elected bodies can ensure the effectiveness of their local governments," said Haoliang Xu, the UNDP permanent representative in Kazakhstan. "In this regard, wider public participation in decision-making and in monitoring of government activities will be helpful."
"Kazakhstani society still does not have a developed public discourse and political language on the territorial development of the country," said Eset Esengarayev, a sociology professor from the state university in Karaganda. But, observers say, the time to initiate such a discussion is now as the global economic slump forces tremendous cuts in the national budget and has already led to growing disputes over resource distribution to the regions, Astana, and Almaty.
This year, the two big cities again received good portions of the shrinking public finance cake, leaving the other regions with fewer resources to meet basic social needs and to deal with the likelihood that incidents such as the water stoppage in Stepnogorsk will repeat, with ever-increasing frequency.