A “LOAD” BEFORE ENTERING WTO

The RK Statistics Agency has recently published data on industrial development for January-September 2006. We found this information to be quite interesting to analyze, especially the part concerning the production industry.

Why the production industry? It is widely known that this sector of economy, despite its own importance (and particularly before entering the WTO), in comparison with the extraction industry traditionally lacks both informational support and, unfortunately, real state support. Why consider it now, if the year has not yet finished? The symbolic nine months still allow assumptions about what burdens our economy, what the results of the year – the last year before WTO membership – could be. All in all, the all-important WTO is the last thing to worry about: it is simply worth paying attention to the tendencies in one of the most significant sectors of the economy, although it has been driven into the “shadow” portion. Without having pretensions to methodological perfection, we decided to ask experts in the two fields of machine building and the wood products industry. This choice was based on considerations that were virtually subjective, but seemingly sound. The country that strives for successful development in the area of innovative industry, should both provide for itself (it goes without saying!), and have some “heavy” industry in quite sufficient volumes. Such production should be “heavy” in terms of: investment volume; the length of the technology chain domestically, and its “links” with the outside world; the number of employees [an persons] directly or indirectly involved; and, the level of innovation. As a result, a choice was made in favour of the wood products industry and machine building.

The wood products industry “in the shadow”
The wood products industry shone quite favorably during the first three quarters of the current year. The statistical category (as designated by the State Statistics Agency of Kazakhstan – SSA) of “wood processing and wood products manufacturing” has shown growth of 105.3%, in comparison with the same period in 2005. In the pulp and paper industry this is still larger (117.8%), but in [domestic] statistics reporting, it is combined with the publishing business, which, in our point of view, makes an analysis of development trends in the wood products industry more complicated. In the process of researching the present article, it is worth noting, we received many remarks from experts in various branches of statistics. For example, that the interim statistical data should be published both by percent growth and by monetary value. In order to observe the entire picture clearly, it is necessary to see the share of this or that sector of industry in terms of GDP [contribution], as regards tax contribution to the budget, among the branches of production industries… “Existing official statistics do not provide information on the real dynamics of the branches: first of all, this is an evaluation of only the facts reported by enterprises, without any attempt to analyze the volumes of the shadow economy. Probably, it is not the responsibility of the SSA, but who else is responsible, aside from [possibly] business associations? That is, the data given in statistical reports is factually incomplete. But how much is lacking?” commented Yevgeny Bessonov, vice president of the RK Association of Enterprises of the Furniture and Wood Processing Industry (АEFWPI), on development of the wood products industry. Representatives of this industrial sector traditionally tend to announce very serious figures that characterize the branches potential. For instance, now Mr. Bessonov says that the production volume of the whole wood products industry of Kazakhstan is over US$4 bln. Also, he says notes that about 120,000 positions could potentially be created in the branch now, as there were at the beginning of the 1990s (taking into account the service and trade infrastructure). Is this really so, or not? The answer could be given following Mr. Bessonov’s line of questioning in the paragraph above. However, the fact that in the current year there has been considerable growth was noted by all producers in the sector, of whom we have addressed about ten from various branches. The experts also say that the SSA does not provide consolidated reports on all related fields within the industry. Nonetheless, assessment of the nature of this growth has been generally enough. If to assess this briefly in relation to the topic of the article, it could be said that a number of entrepreneurs believe that positive dynamics exists not because of state policy, but in spite of it. Or, to provide another variant on this answer, due to its absence. “So far, the current year has shown a total absence of economic decisions as regards the [wood] products industry. Moreover, let us refresh our memory concerning the research work conducted according to [Michael] Porter’s method for [industrial] cluster development [as applied to] our branch. Though, there were no decisions as regards [application of] this. The story of the [government’s] development strategy – “Kazakhstan 2030” – is being repeated, as well as with the World Bank research on the increasing the forests of Kazakhstan, which implied sustained exploitation of the woods. This shows a misunderstanding and a lack of knowledge on the significance of the wood products industry, and, on the whole, the total lack of a systematic approach in decision-making,” states Mr. Bessonov in summing up the common situation. The branch, as its representatives have commented, is prone to pressure from four sides, which include the influence of the state, smuggling [from outside the republic], legally sanctioned imports, and shadow operations. This is what everybody says: “A legal producer is in the tight corner because of the pressure from everywhere – products smuggled onto the market, shadow production, legal import, and corrupt civil servants.” But we would like to mention one of the main problems – training. There are many pessimistic prognoses and assessments regarding this problem as well. There have been cases when companies started major projects backed up with funds attracted on favourable terms and with a potential market, but everything slows down because of the human resource problem, at all levels, including workers and engineers, technicians, designers… “There is no connection between the Strategy of Industrial and Innovation Development and the policies for preparing specialists. There is no [state] organ to coordinate this very important work. And moreover, there are no training processes forecasting the activities of the [industrial] fields. As a result, the state simply does not have objective material, or information which could serve as a basis for developing a policy on preparation of qualified specialists,” says Mr. Bessonov. Employers have frequently evaluated the competency of teachers in higher education institutions that deal with preparing these kinds of specialists, the level of methodological support, and consequently the graduates’ abilities as catastrophic. Also, there is a problem created by the absence of professional and technical schools. It looks as if those who think that the situation could potentially be changed by inviting teachers with higher and advanced university degrees from neighboring and distant countries may be correct. For example, only foreign specialists were employed in implementing one of the largest projects in the pulp and paper industry. Yes, all young countries shaping their economies have had to overcome this, but our problem is that alongside with attracting “imported” specialists, we do not prepare our own in adequate numbers and to a suitable level. According to Mr. Bessonov, instead of the former multiple types of specialities [available] in Kazakhstani higher education institutions and technical schools which used to prepare different specialists for the sectors of forestry, wood processing, and the furniture industry, there is only one now – the wood processing technician, according to the classification of the Ministry of Education. But worst of all is that the solution to the problem of training is a long-term process, and the poor methods of the system of the preparatory system are very slow [to be resolved]. Even provided that the state focuses all its power on this task today, there will be no obvious results immediately, tomorrow, or even earlier than after several years. But doing nothing is impossible too. “We should understand that nobody will be waiting for us in the market. We will simply be inundated by imported wood products from the industries from Finland, Russia and China,” says Mr. Bessonov.

Machinery construction: “a breath” from an Eastern neighbor…
Machine building over this period of statistical reporting shows unprecedented growth of 118.6%. This is not simply a lot, but too much – no other branch of industry has displayed such dynamics. Moreover, it is important to remember what Kazakhstani machine builders were experiencing during the 1990s. There can hardly be found another economic sphere that has undergone such a historical breakthrough as machine building, and now there is a growth. Frankly speaking, the production of machinery and equipment in January through September of this year has gone down. Statistics show [results of] only 92.7% as compared with the same period last year. Instead, there has been a rise in production within such areas of machine building as electrical, electronic and optical equipment (who knew that we have it at all?). As well, production of vehicles and transport-related equipment showed an increase of 144.8% [year on year]. Such things really happen. What is hidden here within the remnants of this industry? “There is certainly growth in the industry, which has been steady for several years already. The heads of a number of enterprises have noted a diversification in the orders for their products, which is very positive fact. Through these orders, Kazakhstani plants are starting to feel the growth [that has occurred] in the construction and food industries. Nonetheless, one should remember that the failure in machine building during the 1990s was so sharp that even now any growth above zero looks positive. Of course, several new projects have been realized, for example: BIPEK-AUTO, the West-Kazakhstan [oblast] machine building and metal production plants, construction of which is underway; and, shipbuilding docks [on the Caspian Sea]. In Aktau, two enterprises have been established with foreign – South Korean and Arabian – participation. In Uralsk, the “Metallist” plant has become the site for the development of new manufacturing. But, there is little serious machine building. So, in order to consider stable and serious growth in the branch, it is necessary to look not at the percents, but at the times,” commented Vladimir Zhurin, executive director of the Union of Engineering Companies of Kazakhstan. Experts have brought up a number of stories, as opposed to the whole range of positive examples, concerning the opening of new manufactures or the restoration of, to a bigger or smaller extent, the old ones. The following interesting case serves to illustrate a certain tendency: this year there were less Kazakhstani participants in the Kazakhstan International Oil and Gas Exhibition (KIOGE), despite the increase size in size of [both] the event and the quantity of the domestic equipment producers. A whole range of machinery building and metal processing enterprises, which used to regularly participate in the exhibition, have foregone it – there was not enough money even for [rental of] booths. Those in the know can name some very well-known and large plants. Although, some must rely on their memory. Speaking straightforward, Kazakhstan has little to be proud of in the sphere of machine building. The goods produced are not numerous, and one cannot talk about unique and exclusive products. There are problems with the international certification as well: some enterprises were among the first in Kazakhstan to receive ISO certification, and have been certified by the prestigious American Association of Mechanical Engineers (ASME), while others do not have anything at all. Is it possible to lift up Kazakhstan’s machinery building industry? Almost every expert surveyed gave a positive response, although some have remarked that the first concern is the time. “More and more often we feel our Eastern neighbor’s “breath”. The Chinese deliver equipment here in bigger volumes and into ever more numerous spheres. Not touching upon cars, this includes equipment for the mining and oil processing sectors. Not long ago, everybody smiled at the idea that our neighbors could really do it. There was an opinion that if the Chinese work in our extraction industry, they would have to purchase our equipment, as they did not have their own. Now, they do have it, and it meets world-class standards. They have developed this sphere very quickly and successfully. There is a threat that we will lose our domestic market due to our slow development. So, it is necessary to allocate preferences before entering the WTO, in order to allow those contracted to start work… There are a lot of things to do,” believes Mr. Zhurin. One of the major problems in the sphere is training as well. This problem is not specific [to this sector], as it is typical for the economy on the whole. However, the exact nature of [the problems in] the machine building industry is deeper due to very large-scale brain drain, as well as to the outflow of talent to foreign companies wishing to develop the Kazakhstani market of machine building and metalworking. Certainly, competition is good, and there should be competition in the domestic market as well, but still it hurts to think that those highly qualified specialists who were previously sacked by our enterprises now help the foreigners to dominate it. “The desire and political will of the President to develop this sphere, along with his understanding that without this branch the country would be at a disadvantage, are obvious. But further down the state bureaucratic chain, there is misunderstanding as to how to implement this task. On the one hand, in the environment of civil servants a lack of understanding exists, in addition to the task of doing this on their own. This task is for the entrepreneurs, not for the state. Civil servants have no idea that they should support businesspeople, conduct a dialogue with them, and look for advice. In other words, there is no discourse between civil servants and entrepreneurs. Although, institutions have been established for this very purpose, they are very slow, “ considers Mr. Zhurin. In summation, on top of the obviously major problems discussed by those from within the enterprises themselves, there are additional ones regarding training and the state policy towards the sector (basically assessed, an absence of policy). Among the threats are lost positioning on the domestic market, along with complicated conditions for any consequent efforts in restoring the production industry. The most alarming situation, in our opinion, is that experts had made these assessments during establishment of the existing State Industrial and Innovation Program, with numerous discussions and declarations on the subject. The problem of rather ineffective governmental policy regarding support to the processing industry is obvious. The issue is more obvious as all recipes for solutions to many of the problems, with training for example, have been discussed, and [solutions] even announced many times thus far. But the sacred phrase about the “load that is still there” remains the issue under discussion in all these problems. It looks as if only the WTO will be able to properly “shake” this “load” free.