Free International Relations & Trade Dissertation

 The National Law Centre for Inter-American Free Trade states that industrialised countries attained their status mostly by protecting their intellectual property and enacting protectionist measures, however developing and transitioning economies are being advised to liberalise their markets in order to achieve economic growth in the 21st century. Kazakhstan, a transition economy, after achieving independence from the Soviet Union in 1991, adopted democracy and took several steps towards liberalising its markets. Now it is a member of several international organisations and has vast natural gas reserves, however mixed results still exist on the effect that trade liberalisation has had on its economic growth and human development. The objective of this study is therefore to ascertain the effect trade openness has had on economic growth and human development. Hypotheses were conceptualised based on the review of existing literature, and secondary data was gathered from several statistical websites. The data were analysed mostly through correlation and linear regression analysis and the results obtained illustrated that trade liberalisation in Kazakhstan is indeed directly proportional to GDP Growth and UN Human Development Index (both of which were used to calculate Economic Growth and Human Development respectively). Trade openness was also directly proportional to FDI Net Inflow and Domestic Savings, but not so with Corruption. Based on these results, and analyses thereafter, it was concluded that trade liberalisation is indeed beneficial for transitioning economies as it positively influences human development and economic growth, this economic growth in turn promotes investment inflow and domestic savings within the country. Therefore transitioning economies intending to achieve these feats should deepen their liberalisation measures in order to gain considerable advantage in the international economy.

1. Introduction

a. Globalisation

Ha-Joon Chang in his seminal book “Kicking Away The Ladder”, discusses the major steps that developed western countries, notably western European countries like Britain, France, Netherlands and the United States, took during the 19th and 20th century to achieve developed status and economic leadership. He emphasises that these major economies adopted protectionist measures to ensure their individual economic growth, before adopting free trade regimes with other multinationals. According to the US based National Law Centre for Inter-American Free Trade, the developed countries only attained that status by protecting their intellectual property and enacting some protectionist measures that favoured the development of their indigenous industries, such as high import tariffs, import substitution and export subsidies.

Following this era, when most western countries were fully westernised and attained economic prosperity through their advances in technology and intellectual property, the developing economies of South America, attained economic prosperity through import substitution, while socialist economies of South East Asia such as Taiwan, gradually adopted political and economic liberalisation policies, India had liberalised its markets, enhancing international trade, while China, after joining the WTO also adopted liberalisation measures, albeit keeping its political communism, all of which have promoted their economic growth. For instance, China and India are respectively the 2nd and 4th countries with the highest GDP as at 2009, after only recently liberalising their markets in recent years, as opposed to other western countries further down the list (Piasecki and Wolnicki, 2005).

These trade policies have been largely influenced by multilateral trade organisations such as the WTO, and regional trade blocs like the EU and NAFTA. Mexico for instance had to open up its borders to American and Canadian businesses, thereby highly influencing the expansion of Wal-Mart, which is now a market leader within its country (Wilson et al, 2002). Other countries aiming to ascend into the blocs such as EU, have to meet geographic, democratic, legal, economic, and most importantly market economy policies, which asserts that the country should be able to cope with “competitive pressures and market forces within the union”. The WTO requires that ascension countries adopt to specific trade agreements such as the TRIPS, TRIMS and GATTS agreements that protect international investors in issues such as Intellectual Property, Foreign Direct Investments and trade in Goods and Services (Wilson et al, 2002)

The increasing growth experienced recently by these developing countries has been attributed mostly to these free trade regimes and multilateral trade agreements (Levine, 2002). However according to Tavares (2007), the rate of growth experienced by these countries are mostly based on the current state of their industries and economy prior to liberalisation policies. For instance, Chinese countries with developed industries were better able to compete with their western counterparts once their borders were open, as opposed to other developed countries in Africa and Latin America that did not have these developed resources. Therefore, if a country has relevant industrial competence prior to adopting trade policies, then it is likely that its development and economic growth would be more rapid than those who do not.

b. Kazakhstan and the Socialist Economies

Following the collapse of the communist regimes throughout Eastern Europe and the former Soviet Union, most of the individual countries that claimed independence shortly afterwards were democratised (Fidrmuc, 2002). Following the democratic transition, the political freedom and civil liberties of three major countries Czech Republic, Hungary and Slovenia, were in par with those of other Western European countries, while other post communist countries also made considerable progress in their feat. Comparing this transition in relation to the world at large, Fidrmuc explains that the average communist country moved from a having political ideologies and civil liberties similar to Iran to those similar to those of Brazil within the first 2 years. These newly acclaimed post communist countries also achieved moderate levels of democracies albeit struggling and turbulent economic and political developments, military conflicts and coup attempts.

According to Piasecki and Wolnicki (2005), the collapse of the Soviet Union quickly led to the establishment of the Independent Republic of Kazakhstan on 16 December 1991. Like all the other former communist republics, the economy of the nation fell immediately after liberalising its markets and adopting democracy, which by 2005, when Piasecki and Wolnicki wrote their article, was still yet to recover. The immediate output of the nation decreased by 12 – 13% yearly following its independence, and even to as low as 25% in 1994 (EBRB, 1995). The main priority of Kazakhstan after its independence has been to achieve “national economic growth within the context of enhanced financial stability and social stability”. A national plan to achieve this feat, which stretches towards 2030, is currently being implemented, while discussions are constantly being held on the most appropriate constitutional and legal frameworks to facilitate the achievement of these plans (Wilson et al, 2002).

Kazakhstan is a vast country geographically with a landmass almost equal to that of Western Europe, with a population of just 16 million people, out of which 23.7% are Russians, and several others are Uzbeks and Ukrainians. It has a population density of 5.7 persons per sq. km, among the world’s lowest. There is abundant supply of easily accessible mineral and fossil fuel resources within Kazakhstan, as the development of oil and gas within the nation has attracted a vast majority of the foreign direct investments since its discovery in 1993 and also accounts for 57% of its industrial output and 13% of 2009 GDP (CIA.Gov, 2010). The country possesses huge reserves in Chromium, Lead, Zinc, Uranium, Copper and Manganese and ranks highly for Iron, Gold and Coal, whilst also being an exporter of Diamonds. Kazakhstan has had steady relationships with its post soviet neighbours and is a member o the UN, OECD, Organisation for Islamic Conference, World Trade Organisation, Commonwealth of Independent States, and several other multinational bodies. This, in addition to the exploitation of its natural reserves has contributed to its GDP growth, which has grown consistently since 2001, contrary to its production output decline following its independence.

c.Research Objective And Structure

Though Kazakhstan has been able to achieve these economic achievements by joining these bodies and engaging in open market systems, little information exist on the impact it is having on economic and human development, particularly of citizens within the state. The objective of this research is therefore to ascertain how adopting these trade policies have guided economic and human development growth within Kazakhstan over the past decade that it has transitioned its economy from communism to democracy.

This dissertation therefore aims to accomplish those research objectives by reviewing all relevant literature regarding this issue, as outlined in the following Literature Review chapter, then outline the hypothesis that would form the basis of the research question. Following that, the Methodology chapter would outline all the necessary steps that would be used to gather data, analyse data and verify or discredit those hypothesis. The results of these analyses would be outlined in Results, whilst the discussion and conclusion, which aim to give a detailed explanation of our research findings, would be included in the concluding chapters.

2.Literature Review

a. Market Liberalisation

Amartya Sen, winner of the 1998 Novel Prize in Economics, defines globalisation as the “intensification of the process of interaction involving trade, migration and dissemination of knowledge that has shaped the progress of the world over millennia” Gerber (2002 pg. 33). In accordance, Levitt (1983) also ascribes the world in modern times as being shaped by technology and globalisation. This increasing focus on globalisation has been spurred by economic development theories and experiences that have helped to explain why some countries and societies are not as rich as others, and do outline what policy makers can do to rectify these situations (Streeten, 2001). Studies by theorists such as Salih (2005) have focused on how low income or transition economies can acquire the high standard of living, security and amenities available in other developed countries, while theorists such as Wilson et al (2002) also argue that poorer societies are thriving to obtain and maintain high levels of economic and human development, which is one of several theoretical advantages of globalisation.

Foo (2005) argues that the ability to maintain and generate wealth enables developing countries to acquire relevant infrastructure, grow and develop faster, thus resulting in a better socioeconomic environment for the population. Therefore these nations actively seek policies and changes that result in better employability, higher productivity, higher income levels, and a narrowing of the gap between the rich and the poor. The objective of market liberalisation in developing or transition economies is therefore to improve the social wellbeing and quality of life of its residents, in terms of education, social amenities, small business growth, and other human development indexes, which subsequently builds the nation (Cukierman et al, 2000).

Numerous methods are normally utilised by developing countries to facilitate the increase in economic growth, and these methods mostly constitute one or more forms of political and economic liberalisations (Fidrmuc, 2002). Financial development (the structure of financial services and the width of products available) has been found to have a positive effect on economic growth (Salih, 2005). Bencivenga and Smith (1991) found that efficient financial markets promote domestic and foreign investments, thereby speeding up the process of economic growth. In their theoretical model, they find that the development of financial markets prevents the unnecessary premature liquidation by investors, improves investment liquidity, thereby promoting financial liberalisation supports economic growth.

Studies by Rajan and Zingales (1998) have found a positive relationship between financial development and economic growth. These studies have also been supported by Kolvu (2002) and Levine (2002), who find that the development of the financial structure within a nation, can accelerate the growth of its economy by affecting factors such as savings rate, directing savings to investments, and by improving investment productivity. Levine (2002) further finds that the development of a financial system, complemented strongly by an effective legal system that protects the right of outside investors, contributes to long-term economic growth. Thus concluding that financial development is essential for economic growth within a developing economy. However, Shan et al (2001) in contrast found that variations exist in the long-term positive effect between financial development and economic growth amongst countries, and its particular effect is affected by several factors not common amongst all countries.

b. Liberalisation In Post Socialist Economies

Prior to the dissolution of the communist economies in the 1990s, a famous characteristic of theories on developmental economies were on the benefits of industrial policies and state trade strategies, especially with respect to subsidies and state owned firms, which both cooperated in establishing relevant export industries, price intervention and protectionism (Piasecki and Wolnicki, 2005). According to Gerber (2002), this notion purportedly supported the nation state in being strong and active in the promotion of economic growth. However, advances in international trade and investments within democratic market economies of the developed West was eventually seen as indisputable proof of the need for a neo-liberal model in encouraging economic growth (Shan et al, 2001).

According to Streeten (2001), the concept of trade openness and economic development through globalisation and integration of regional blocs become new development paradigms that was sought after by other developing and transition economies that also wanted to develop. Globalisation has since equated with the democratization of global economic growth, an activity that converges the interest of both rich and poor counties. The different countries within Eastern Europe, especially the different segments of Central Eastern Europe, and Post Soviet Nations, have both pursued market reforms recently, and mostly achieved positive economic growth rates, however, due to susceptibility to external shocks, several of these countries have experienced lower growth rates since early 2000s, whilst countries like Russia, Romania and Ukraine, all part of the former soviet socialist economy, have experienced erratic economic growth (Foo, 2005).

Fries and Taci (2002) further explain that the ability of post socialist economies to attain market growth initially was limited as required structures were either inexistent or underdeveloped. Under the socialist economy, banks were limited to bookkeeping and depository functions for centrally planned allocations and household savings respectively. Intermediary services were restricted to investment directives of state owned enterprises. Enterprises and households were limited in their investment opportunities, whilst the government controlled interest rates. Financial supervision and legal protection were not practiced, whilst the functions of the commercial banks and central banks were usually identical, as a result the functions of socialist banks were restricted to servicing state owned enterprises, and agriculture and not necessarily in commercial banking.

According to Cukierman et al (2000), the continuing process of transition within former socialist economies entails a fundamental process of change in the structure of these economies. They have succeeded in replacing old stated owned institutions with new ones patterned after similar western institutions, in a bit to achieve market economy governments, required for sustainable growth. The creation of a western type of central bank has been one of the major factors constituting recent efforts by transition economies. In general, the banking systems within post-socialist economies have been upgraded over pre-reform periods.

Kolodko (1999) emphasises that transition into a market economy is a “lengthy process comprised on various spheres of economic activities”. Of key importance are the new institutional arrangements required for successful transformation. A market economy requires regulations that are liberal, private ownership, and adequate institutions, as expressed by Rajan and Zingales (1998). Successful transitions are usually executed in gradual processes, as the commissioning of new institutions entail a graduate process based on new organisations, new laws, and a change in behaviour in various economic activities. For transition economies, gradual processes could only lead to fully viable market economies, as radical “shock therapies” usually cause more problems than solved. Shock therapies according to Kolodko are only essential in liberalisation and stabilisation measures, and highly dependent on the scope of financial destabilisation and certain political conditions.

These newly enacted policies that direct developing and transition economies to adopt liberalisation views in both their politics and economy, is based largely on the Washington consensus, which advocates the importance of liberalisation, privatisation and the opening up of post socialist economies to foreign market, as well as the importance of maintaining discipline in the financial markets (Kennedy, 2002). However, according to Piasecki and Wolnicki (2005), the elements required for systematic overhaul, stabilisation and growth, are factors such as state sector privatisation, the need for corporate governance, redesign of the role of the state, and its urgent withdrawal from economic activities. Kolodko (1999) further asserts that the incorrect assumption regarding the rate that emerging markets can substitute government for institutional investors, have caused “severe contraction and growing social stress” within the transition economies.

Kolodko further argues that the only method through which a transition economy could achieve ultimate success in its transformation is in the design of suitable institutions, which would have to be developed from scratch. However, this development is apparently more difficult in post socialist economies of Eastern Europe, as there was a lack of basic institutions such as a central bank, national currency, and private property. The government’s involvement in the process of institution building, just like they were involved in administering the livelihood during the socialist era is of vital importance for post transition economies (Tavares, 2007).

Cukierman et al (2000) also asserts that governments would be unable to achieve the sort of results they require just solely liberalisation and privatisation, without being involved in taking care of institutional arrangements. Therefore by failing to design an appropriate institutional framework, market failures may prevail and informal institutions take over. A bandit capitalism market emerges instead of a sound market. Furthermore, Wilson et al (2002) advocates that the need for new institutions should be based on the belief that none were pre-existent, since they were not needed in the centrally planned economies. Transitioning into a market economy involves a new legal system and learning a new type of behaviour. The banks, civil service, state governments, households, and private enterprises must all learn how to exist within and accept the circumstances of the emerging market system (Shan et al, 2001).

Foo (2005) further argues that the major problem affecting transition countries is an easily identifiable lack of corporate governance oversight to protect investors, which Bennett and Dixon (1995) advocates as essential in market economies. The corruption risk of newly privatized firms also increases the importance of banks as financial intermediaries, who can provide loans and in turn perform oversight roles on behalf of shareholders. This speeds up the process of enterprise privatisation within transition economies and provides better corporate governance mechanisms for recently privatised firms.

Fidrmuc (2002) also argues that the high speed of democratisation in former socialist economies reflect the desire of citizens to live in democracy, and also represents the encouragement and pressure from developed western governments, that have influenced these governments into adopting democracy and market economies. The European Union especially has made democracy an explicit prerequisite for accession negotiations. Therefore post socialist economies aiming to enjoy the luxuries and benefits of being part of the EU have to open their economies and political systems and westernise them in accordance to their western counterparts. The process in which this has been carried out differs strongly from recently developed countries in Asia such as China, Chile, Taiwan and South Korea, which first achieved market economies by liberalising their economic systems before adopting democratic measures. China still practices communism. According to Gerber (2002), the sequence in which a transition nation adopts political and economic liberalisation does have an effect on their subsequent economic growth.

According to Fries and Taci (2002), banks are essential in financial development, as they are the financial intermediaries that promote efficient payment mechanisms and provide savers with a means of saving their excess income, and investing, both of which promote long term economic growth. They mobilize depositor savings efficiently, and appropriately channel credit to the investment opportunities with the best returns. Foo (2005) further asserts that they play a “useful and vital role” in transitioning a country to a market economy by being the intermediate between newly privatized firms and foreign and domestic investors. The lack of substantial financial entities is thereby an obstacle for the growth of the enterprise, which then hinders economic development.

In his study of the soviet era banking history, Foo (2005) argues that the socialist era banking system within the Soviet Union was inefficient and lost money. State enterprises that were inefficient and usually unprofitable were propped up by bank loans under the direction of the state. The most successful transition economies that have been able to achieve higher economic growth are those that have made great efforts in market reforms and opened up their markets to foreign participation in financial development. Those that are unwilling to incur economic, social and political costs in the restructuring of their pre-socialist banking system have achieved far less economic growth (Foo, 2005). Furthermore, Kolodko (1999) asserts that the faster the country can build its institutions, the better the environment is for business activities and economic growth. Government assistance and intervention usually hasten the process, but whenever it is mismanaged, it can also destroy the process and whatever progress had already been built. However, Shan et al (2001) advocates that the risk of failure should not be a reason not to engage in market liberalisation measures but should act as a call for wise guidance and rational intervention.

The privatisation of state owned enterprises is therefore seen as the path these economies could take to attain successful market economies and economic growth (Foo, 2005), however this has only been met with limited success within these economies. According to Caprio (2005), some of these economies have witnessed difficulties in eradicating soft budgets, inefficiencies within the system, corruption and inconsistent intellectual property rights. For example, western commercial bank operators and investors are new and somewhat inexperienced with transition countries; therefore depositors and investors need to be reassured of the legal recourse and protection of their investment. Financial crisis episodes in transition countries are somewhat devastating on its economy and growth (Gerber, 2002), whilst a successful banking sector is essential to support a growing privatized enterprise sector, which then supports economic growth (Salih, 2005).

c. Promoting Economic And Human Growth

As initially expressed by Kennedy (2002), the manner in which a country pursues economic and political liberalisation, could determine its growth rate and developmental success. According to Giavazzi and Tebellini (2005), the sequence of political and economical liberalisation is the most important, and not necessarily whether a country chooses to adopt any of both. For instance, they argue that countries that initially liberalise their economies, then transition into democracies, often perform better in terms of investment attraction, economic growth, trade volumes and macro policies, in contrast to those who democratise, then reform their markets.

A possible explanation behind these, as expatiated by Kolodko (1999), is that economic liberalisations first enacted are usually more effective, as it is associated with an increase in trade volumes during periods of liberalisation and after on. In contrast, economic liberalisations that are often preceded by democratisation often result in lower trade. Similarly, Rajah and Zingales (1998) also note the instance of inflation being lower in instances whereby economic liberalisation often precedes political liberalisation. The sort of economic liberalisation also differs in countries, as it is often a factor of whether or not it is a democracy. According to Salih (2005), democracies are effective in liberalizing economies, but not so in expanding trade, which suggests that although the economy is open in a formal way, protection remains in existence, whilst non-tariff barriers are usually enacted to replace previous tariffs. However, in dictatorships, such as in China, rulers are less likely to open up their economies, however, those who do so are able to suppress liberalisation and market economy opposition groups, thereby making liberalisation more pervasive and effective.

In accordance with these views, Kolodko (1999) asserts that the attention given to development policy and the treatment given to market oriented reforms are depicted to have contributed significantly to the high growth rate in China and Vietnam, which were previously centrally planned economies (Kennedy, 2002), this is essential as it differs significantly from the state of growth witnessed in post socialist economies of the former soviet union. The processes taken by various socialist economies in Europe to reform their systems, which failed for some, works for countries in Asia, where it was possible to take advantage of the system and adjust it as appropriate to the new challenges required for further growth (Kolvu, 2002).

Giavazzi and Tabellini (2005) use panel data in analysing the relationship between economic and political liberalisations, and their effect on growth, investment, inflation, budget surplus, quality of institutions, and corruption, and that found in isolation, the liberalisation of economic and political systems decreased corruption, however, in contrast to previous arguments, they found that the order in which they are enacted do not matter, but countries that undergo both types of liberalisations (political and economical), have lower forms of corruption. They also found that the impact of liberalisation on growth is usually positive and significant, especially during the transition period. Progress during the transition period, is an especially important determinant for economic growth.

They further found that a centrally planned economy could improve its average growth rate by 20 – 26% if they were more fully liberalised, than partially. According to Levine (2002), initial conditions and external environments also have a significant effect on growth. Fidrmuc (2002) thereby concludes that the introduction of democracy into a nation, does not positively promote the growth performance of transition economies, however its effect only appears ambiguous, especially when democracy is directly included as a measurement variable when ascertaining growth rates. However, democracy reinforces the liberalisation of the economy, which in turn inadvertently leads to better growth performance. Whenever political or economical liberalisations are accounted for, the effect of democracy on economic growth is usually found to be more profound later in the transition process, rather than at the outset (Fidrmuc, 2002)

d. Liberalisation Critiques

In as much as political and economical liberalisation has been widely promoted, several theorists point out several issues that may cause unintended results. Salih (2005) states that globalisation, which has come to be known as a form of international economic integration, does not promote positive economic reaction amongst certain parties, as the sort of unilateral dependency amongst developing nations represent an issue for progressive integration. Furthermore, Shan et al (2001) asserts that the number of nations dependent on international trade, foreign direct investments and global financial markets has increased significantly, which has then increased the bargaining power of multinational firms against developing countries. The WTO has emerged as a powerful force within international trade, being able to influence the actions of individual countries towards following favourable trade policies.

The foremost criticism of liberalisation, especially on transition economies, was identified by Fidrmuc (2002) who found that dramatic contractions of output has been experienced since these socialist economies liberalised their economies and markets. In particular, within Czech Republic and Georgia, output fell between 15% and 75%, whilst the subsequent recovery was not enough to make up for depleted output. In addition, Fidrmuc finds that most post communist countries have not regained their levels of output since having liberalised in 1990s. Kolodko (1999) also points out that the widely held assumption that moving a country from a socialist economy to a market economy, would result in improvements in competitiveness and efficiency in the former soviet economies, within a short time and eventually lead to fast growth, have not occurred.

In contrast, according to Piasecki and Wolnicki (2005), the transitioning recession lasted much longer than anticipated, economic contraction was deeper than initially expected, while the eventual economic recover, in most cases did not turn out to be as smooth as proposed by government and international organisations. In contrast to the speedy recovery and strong growth, the economic contraction and drop in output led to a series of transitional issues, known as the Great Transitional Depression, which occurred in both Russia and Ukraine (Kolodko, 1999). Wilson et al (2002) also highlights the drop in GDP of post soviet states within the first decade of transition, as their weighted GDP for the 25 former soviet countries, still stood at around 65% of what they were initially. The output decline was unexpected, whilst the outcomes of these activities stirred the perception of international and domestic onlookers

According to Piasecki and Wolnicki (2005), the relationship between liberalisation and economic development, is generally hard to determine objectively, which depends highly on the state politics and the relationships it has to other countries. In contrast to theoretical underpinnings that globalisation could create opportunities for job creation, export expansion, and solve human development issues such as education, housing, environmental and health issues, it does not actually happen that way. International corporations are driven mostly to operate in developing countries, due to their cost savings measures, they actually invest in these regions because they are of lower cost, therefore decreasing their emphasis to contribute toward these measures. In terms of job creation and export expansion, developing countries actually offered their foreign investors higher tax holidays, subsidies, and various other incentives that reduce the net positive effect that is theoretical attributable to globalisation. According to globalisation critic, Chang (2002), the key issue for globalisation in developing and transitioning economies, is the deepening of the gap that occurs within finance and investment internationally, and the absence of relevant institutions that are capable of managing and enacting control over these liberalisation processes.

According to Treisman (2000), corruption is also a likely occurrence of trade liberalisation; especially in instances whereby the liberalisation is not extensive enough. For instance, if trade reforms are not accredited by international standards, then corruption may arise. Tanzi (1998) further argues that removal of barriers to entry, which were predominantly imposed by national barriers, may be effective, but does nothing to remove predominant barriers imposed by states and local governments. Tanzi further states that trade liberalisation has created new opportunities for corruption, as it increases the chance that bribes would be paid in order to obtain foreign contracts, privileged access to certain markets and tax incentives. Politicians that wish to be re-elected may also increase their chances by awarding contracts to foreign firms that offer bribes, which could in turn increase their financing for campaign (Giavazzi and Tabellini, 2005).

However, several other theorists have downplayed the effect of corruption. Krueger (1974) advocates that countries that are open, measured in terms of their share of imports in GDP, have lesser options of corruption, as the opening of trade barriers decreases the incentive for importers and custom officials to exchange bribes. Once trade barriers are open, local firms have to compete with foreign firms, reducing the economic advantage of local firms, and reducing the need for corruption. Thus, greater openness within an economy may reduce the possibility of corruption, as the more trade barriers there are, the more corruption there is (Treisman, 2000).

e. Research Question And Hypothesis

Based on the literature review, it can be concluded globalisation has been widely seen by theorists and stakeholders alike, as the most suitable solution for transition and developing countries aiming to improve economic growth and human development, and also as a method to enhance trade relations between developed countries and the rest of the world. However, mixed reviews exist with respect to true importance for transition economies, and how exactly they could achieve relevant results.

The following research question has therefore been coined with reference to the progress of transition within Kazakhstan. To what extent is market liberalization beneficial or detrimental for economic and human development in Kazakhstan?

Based on the deductive methodology outlined further within the Methodology chapter, the following are the hypotheses that the research question has been based on, and this study would aim to verify.

Hypotheses 1

Trade liberalisation has had a net positive effect on social wellbeing and quality of life of residents within Kazakhstan.

Hypotheses 2

Trade and market policies have:

Positively influenced economic growth in terms of GDP, GNP and Per Capita Income
Reduced corruption within Kazakhstan

Hypotheses 3

Positive economic growth within Kazakhstan is beneficial to:

1. Domestic Savings
2. Foreign investment inflow

 3.Methodology And Hypothesis Testing

A. Research Approach

This methodology section aims to explain the procedures through which the aforementioned research question was answered by testing each hypothesis. The hypothesis has been coined based on extensive literature research regarding the topic of economic growth and human development within Kazakhstan, a transitioning economy. This research would adopt a deductive approach, which aims to verify each hypothesis by gathering and analysing quantitative and objective data. Though the general methodology of the dissertation would be to compare empirical data against existing literature, as proposed in the definition of the deductive approach by Babbie (2004), each hypothesis would include different forms of data gathering and analyses methodology, as they aim to measure slightly different variables.

However, each dependent and independent variable has been chosen based on extensive literature research, and each is important in answering the research question. Based on the question, the following have been depicted as the dependent variables: Economic growth and Human Development. Dependent variable 1, Economic Growth (EGRW) would be measured in terms of GDP growth, while Dependent variable 2, Human Development (HDEV) would be measured with respect to Kazakhstan’s Human Development Index over the past couple of years. These dependent variables are uniform and would be incorporated in the appropriate hypothesis testing. The Independent variable in this study would be Trade Liberalisation (TLIB). The research question is based largely on whether the occurrence of trade liberalisation in Kazakhstan, a transitioning economy, has been beneficial or detrimental to both dependent variables, therefore it is assumed that an increase in Trade Liberalisation that has occurred over recent years, would have had an effect on both dependent variables.

According to Salih (2005), Trade Liberalisation within an economy is subjective, as the processes and policies that one country enacts is different from another, all of which could affect human development and economic growth. Therefore the Index for Economic Freedom published yearly by Heritage.org and the Wall Street Journal, have been utilised as an effective measure of the degree of trade openness within an economy, as recommended by Gwartney and Lawson (2003). This index measures the degree of trade freedom, monetary freedom, government size, fiscal freedom, business freedom, financial freedom, freedom from corruption, labour freedom and property rights of all countries on a scale of 1 – 10, total scores are collated to give an overall ranking ranging from 1 – 100. Countries that have a ranking closer to 100 are more conductive for doing business by both domestic and international firms. Gwarney and Lawson (2003) note this ranking method as an effective method of ascertaining the level at which an organisation has liberalised its markets. Data from 2000 – 2009 would therefore be sourced from heritage.org.

However, since Salih (2005) has noted that trade liberalisation is subjective, it would be necessary to account for other factors that could also affect the rate at which liberalisation affects economic and human development growth, irrespective of the country’s international rating, thus the following Control Variables have been identified.

Corruption (CRPT): As identified earlier by Foo (2005), the level of corruption within a country could denote whether investors are willing to invest. Corruption in some countries is so widespread that foreign companies need to bribe their way into markets (Bennett and Dixon, 1995), therefore impacting hugely on human development, hence its inclusion. Data for this variable would be sourced from Transparency International Corruption Perception Index from 2000 – 2009.

Domestic Savings (DSAV), and Foreign Direct Investments (FDIV): These are all independent control variables that are useful in explaining the eventual effect that economic growth has on the economy. Foo (2005) theorises that domestic savings is a side effect of the benefit of trade openness, which also promotes FDI, as financial intermediaries have more funds to lend to foreign investors who want to engage in domestic services. The availability of domestic savings also ensures that banks can choose the right investment opportunities with their clients, which subsequently improves investment productivity (Kolodko, 1999). Data for domestic savings would be gathered from The National Bank of Kazakhstan, whilst FDI data would be gathered from UNCTAD.org. The data would be gathered over a 10 year period from 2000 -2009, thus constituting 10 observations each.

The following table contains data has been gathered and analysed for the aim of testing each research hypothesis.

b. Hypothesis Testing

Hypotheses 1:

Trade liberalisation has had a net positive effect on social wellbeing and quality of life of residents within Kazakhstan.

The UN Human Development Index has been utilised in measuring the social wellbeing and quality of life, according to the methodology through which it was measured (UN, 2010), and supporting arguments by Noorbakhsh (1998). Trade Liberalisation data has been obtained from Heritage.org as initially described. 10 year quantitative data have been obtained from their respective websites and plotted against each other in SPSS. Correlation analyses were then conducted on both variables in a bid to determine how they were related. Results would be outlined in a table, and positive or negative correlations, significant at the 0.05, and 0.01 levels, would verify of discredit the hypothesis. Lack of significant correlation would also disprove the hypothesis.

Hypotheses 2:

Trade and market policies have positively influenced economic growth in terms of GDP; and reduced corruption within Kazakhstan. This hypothesis would be tested with Economic Growth (EGRW) being the dependent variable, and Trade Liberalisation (TLIB) and Corruption (CRPT) as independent variables. Fries and Taci (2002) depict that trade liberalisation and corruption should have significant contributing influences on the level of economic growth within Kazakhstan. Linear regression analyses would thereby be conducted on all observations, with the aim of ascertaining the extent to which these variables influence one another. The regression analysis would be conducted by plotting the independent variables against the dependent variable, on a scatter diagram, and the results would be displayed on a Scatter Diagram, with a Linear Line showcasing the Coefficient of Determination. Regression results with a high coefficient of determination would illustrate a dependent variable (EGRW) that is highly influenced by its independent variables, and vice versa.

Hypotheses 3

Positive economic growth within Kazakhstan is beneficial to:

1. Domestic Savings
2. Foreign investment inflow

Correlation studies would be conducted on the level of economic growth, in terms of GDP Growth, and data on the level of domestic savings and FDI inflow within Kazakhstan. Results would be displayed as Tables within the Results chapter, and would be crucial in explaining the hypothesised relationship between all three variables.

C. Reliability And Validity

Data for this study, as illustrated in Table 1, has been obtained from the statistical websites of multinational organisations such as the United Nations, World Bank, Transparency International and the Heritage Foundation, all of which gather data from macroeconomic indicators in individual countries, and utilise them in establishing indices and rankings. Due to the widely available nature of this data, and the manner in which they have been gathered, it could be concluded that the data gathered for this data is reliable. There has been no observer bias or error in gathering the data, as they have been derived and downloaded directly from their respective sources.

The manner in which the hypotheses have been tested are in accordance to statistical principles and previous studied conducted by Fries and Taci (2002), who then stated that correlation and regression studies were one of the most commonly utilised method of determining changes in macroeconomic data, and their effect on other variables. Therefore, based on our utilisation of regression and correlation statistical analyses in statistical analyses, we believe the results of this study are valid.

D. Research Limitations

The following are the limitations inherent in this research:

Inability to gather data on variables that extend more than 10 years, preferably 20 years, as most statistics website do not currently have much data on Kazakhstan.

Data on financial intermediaries and central bank independence in Kazakhstan, over the ten-year period, could not be easily derived from these statistical websites, or that of the National Bank of Kazakhstan, which then limited our ability to measure the impact of these factors on economic growth.

Policy makers within Kazakhstan could not be easily interviewed in order to have a qualitative point of view on the state of economic growth in Kazakhstan, as opposed to quantitative analyses on data easily obtainable from statistical websites.

4.RESULTS

This chapter is structured around the three hypotheses currently being tested. Tables or graphs would be utilised to show the results of analyses, while a commentary would follow on what these results actually mean, and whether or not they verify or discredit the initial hypothesis.

a. Hypothesis 1

Figure 1 illustrates the growth in economic freedom that has occurred in Kazakhstan over the past 12 years, when data was first being gathered. In 1998, Kazakhstan had an Economic Freedom Index of 41.7, which has growth by 46.28% to 61 in 2010. Linear correlation analysis was conducted on the values of Trade Liberalisation in Kazakhstan, derived from the Index of Economic Freedom (heritage.org), and their Human Development Index value for the past 10 years (2000 – 2009). T

The results from the Pearson Correlation illustrate that the relationship between Trade Liberalisation, in the form of Economic Freedom within Kazakhstan, is directly proportional to their Human Development Index. This illustrates that growth in trade and increased economic freedom, has led improved human development. Thus confirming hypothesis 1.

b. HYPOTHESIS 2

The second hypothesis is centred on ascertaining the effect that Economic Growth, measured in terms of GDP Growth, and Trade Liberalisation has affected Corruption Perception within Kazakhstan. GDP growth is a percentage that fluctuates yearly depending on the level of economic activity within Kazakhstan, and is a nominal data, compared to ordinal data such as Corruption Perception and Trade Liberalisation Index. Therefore, the GDP growth rate measured in has been calculated against an initial value of 1.Therefore if the GDP growth for 2000 had been 9.8%, then the value plotted in this graph would have been 1.098, and if after that, it was 9%, then the value would have been 1.233% and so on. Those figures were plotted against the Index of Economic Freedom derived from heritage.org to give the scatter diagram shown below.

Figure 2: Scatter Diagram of GDP Growth and Trade Liberalisation

Figures from the Figure 2 illustrate a very steep linear regression diagram. The coefficient of determination (R2) shown in the diagram, has a value of 0.773, thus illustrating that up to 77.3% of the change in GDP Growth can be explained through increased trade openness within Kazakhstan. Thus confirming the first part of Hypothesis 2, which states that Trade and market policies have positively influenced economic growth in terms of GDP. Using the formula presented above y=0.052x – 1.3792, the likely growth in GDP could be determined based on the level of trade liberalisation alone. Where x = Level of Trade Liberalisation, and Y is GDP Growth.

For instance, if the Index of Economic Freedom were to enter reach 70 for Kazakhstan, then the likely GDP Growth would be 0.052 * 70 – 1.3792 = 2.2608. Obtaining the percentage difference between 2.2608 from the previous year’s figure (as calculated earlier), would give the GDP Growth. For instance in 2009, Kazakhstan had an Index of 61 for trade liberalisation and GDP Growth figure of 1.855 (based on my calculations). Therefore, if it were to rise to 70, then the country could experience a growth rate of 21.87% from its current rate.

Figure 3 represents the second part of Hypothesis 2, in which the Index of Economic Freedom (Trade Liberalisation) is plotted against the Corruption Perception Index, in a bid to determine how opening trade barriers could impact corruption.

The results from the scatter diagram shown illustrate that Trade Liberalisation and Corruption have a less steep linear relationship, with a coefficient of determination of only 3.75%. These figures show very low correlations between corruption figures and that of trade liberalisation, and thus show that trade liberalisation in now way proportional to the rate of corruption within Kazakhstan.

c. HYPOTHESIS 3

The third and final hypothesis is based on the relationship on the relationship between GDP Growth, Domestic Savings and FDI Net Inflow. It was hypothesised that as the economy grows, it would have a beneficial effect on domestic savings within Kazakhstan and the FDI inflow into the country by foreign investors. Correlations studies were conducted on all three figures initially shown in Table 1.

Results from the correlation studies illustrate that GDP growth is indeed beneficial to Gross Domestic Savings and FDI Net Inflow, as all figures are highly proportional, being significant at the 0.01 level. This analysis confirms both sections of Hypothesis 3, thus illustrating that as the GDP grows within Kazakhstan, the domestic savings is likely to grow, and so is the FDI by international investors.

5. Discussion And Conclusion

A. Study And Research Question Rationale

The main objective of this study has been to ascertain how adopting multinational trade policies have guided economic and human development growth within Kazakhstan over the past decade that the country has transitioned from a socialist economy to a market economy. This research objective, in conjunction with the discussed literature review has led to the following research question: “To what extent is market liberalization beneficial or detrimental for economic and human development in Kazakhstan?” The decision to write on the effect of liberalisation on Kazakhstan was influenced by the writer’s experience with transitioning economies and vague understanding of Kazakhstan, its oil rich resources and the sudden upsurge in FDI recently.

Trade liberalisation has been described as a major facilitator of wealth in all countries, developed, developing or transitioning economies. Developing and transitioning countries could achieve economic growth by opening up their borders to international trade, and ensuring international companies can have unrivalled access to their markets and cheaper labour resources; whilst developed countries could benefit by exporting their products into more markets, or producing their products cheaper within these regions. It affects the workforce within developing countries by creating more specialised jobs that require highly skilled labour and pay higher, whilst also assisting small businesses by importing resources and increasing their competitive power. However, contradicting views exist on its effect on human development and social welfare within the developing and transitioning economies.

Based on the literature, it was found that globalisation has indeed been rapid and widespread amongst several countries, especially those that claimed independence right after the fall of communism in 1991. A wide number of these former soviet countries claimed independence and begun liberalising their markets, however, production output fell considerably, while the rate of economic growth was about 25% – 75% of what it was previously. There was a lack of financial intermediaries and entrepreneurship. Foreign investors were weary about investing in these previously unexplored markets, while state owned enterprises were ineffective, previously been given several lifelines by state owned banks. The onus in recent years has been on these countries including Kazakhstan to build their markets, set up a central bank, and encourage foreign investment. This has even been more rapid for Kazakhstan that is rich in mineral resources such as Oil and Gas, however, what effect has it had on economic growth, and most importantly, human development within Kazakhstan.

B. Sampling Approach

Due to the complex nature of data required to answer the research question and achieve its objectives, primary data could not be obtained for this study due to its unfeasibility. Gathering primary data would have entailed gathering individual data from Kazakhstan, some of which may have been difficult to obtain, then analysing these. However, the United Nations, World Bank and several other websites had a number of indices that could be utilised for accurate comparison of human development and economic growth data in all Kazakhstan, most notable of which were the Human Development Index, Corruption Perception Index and Index on Economic Freedom obtained from these websites.

Hypotheses were conceptualised from the literature review, variables to be measured were identified, and data on these variables were gathered from several websites. This study measured the effect of trade liberalisation on human development and economic growth, and thus compared the growth of indices such as those of economic freedom, corruption, GDP Growth and Investment Inflow, against each over, over a period of 10 years, to find an appropriate answer for the research question.

C. The Research Answer

Answering the research question would entail a comparison of the literature review, and results derived from data analysis, all in a bid to reach a logical coherent conclusion on how trade liberalisation has affected economic growth and human development. The hypotheses being studied have been verified with the exception of one, the effect of trade liberalisation on corruption. Therefore, the structure of this subchapter would be in accordance with the research question, which is focused primarily on ascertaining the effect of trade on 1. Human Development, and 2. Economic Growth.

i.Trade Liberalisation and Human Development in Kazakhstan

The United Nations defines Human Development as being composed of three major factors. Firstly, it is calculated based on life expectancy at birth; secondly, it is measured based on the adult literacy rate, and lastly, the standard of living, as illustrated by the gross domestic per capita income. These figures are used jointly in calculating the human development index, and have been utilised in measuring the social wellbeing and quality of life in member countries (UN, 2010). Residents of countries with high human development index, usually have a better life expectancy, education and standard of living, and therefore can live comfortably without poverty worries. According to Cukierman et al (2000), the objective of market liberalisation in developing or transition economies is to improve social wellbeing and quality of life of its residents, in terms of education, social amenities, small business growth, and other human development factors, which could then join together in building a nation, with respect to its individual citizens.

Results obtained from the analysis of Hypothesis 1, show that trade has indeed grown in Kazakhstan by at least 46% over the past 12 years, which gives insight into the level of economic freedom the country has been witnessing. Correlation analysis between the changes to the Index of Economic Freedom and the Human Development Index from 2000 – 2009, show that these figures are directly proportional, illustrating that human development and trade within Kazakhstan has been growing at a directly proportional pace. These findings illustrate that for every measure through which Kazakhstan makes its market free, human development in terms of education, standard of living and life expectancy is also greatly improved, thus confirming Cukierman et al’s view on the benefits of market liberalisation. The findings also coheres with Foo (2005) who argues that the ability to maintain and generate wealth enables developing countries to acquire relevant infrastructure, grow and develop faster, thus resulting in a better socioeconomic environment for the population.

ii.Trade Liberalisation and Economic Growth

Economic growth can be calculated through a number of indices such as GDP, GNP, Production Output and Per Capita Income, but for the sake of simplicity and time constraints, this study adopted GDP Growth as the sole measurement of economic growth within Kazakhstan. Figures were obtained from the World Bank statistical website, and analysed against other indices in order to answer Hypothesis 2 and 3. Several studies found significant correlation between liberalisation and economic growth in developing countries (Kolodko, 1999; Fidrmuc, 2002), therefore this study decided to test this theory on Kazakhstan. Results derived from linear regression diagram in figure 2 show that GDP Growth and the Index of Economic Freedom are indeed highly related, as 77% of the change in GDP Growth could be explained through changes in Trade Liberalisation.

These results confirm previous empirical findings, and also answer another core question in this research, which is on the effect that market liberalisation, has on economic growth. From the analyses in Figure 2, it is obvious that for every increase in the economic freedom, there is a corresponding, equally steep increase in GDP Growth. Trade Liberalisation theoretically coincides with the development and liberalisation of financial institutions within the home market, therefore these findings confirm that of Rajan and Zingales (1998) who found a positive relationship between financial development and economic growth. It also confirms that of Kennedy (2002), who states that the manner in which a country pursues economic and political liberalisation determines its growth rate and development success. Kazakhstan has fully liberalised its market, whilst adopting democracy, and according to Salih (2005), democracies are effective in liberalising economies, whilst open markets are effective in expanding trade. Both of these working in harmony helps reduce protectionism, unfavourable foreign policies and ensures an influx of international trade.

These findings are also in accordance with those of Cukierman et al (2000), who found that countries that open up their markets to foreign trade, with little restrictions, witness positive economic growth. This is as a result of the multiplier effect that trade openness has on small businesses, employment and manufacturing output, all of which contribute towards GDP. However, Kolodko (1999) asserts that this is especially important for countries that have relevant infrastructure such as transitioning economies and industrialised nations, as they could more readily compete with other developing nations. For instance, Kazakhstan has developed relevant financial and manufacturing infrastructure over recent years, so even if foreign companies were to enter its market, its local industries would still be able to compete effectively. Also, Kazakhstan’s natural resource being natural gas attracts foreign oil companies the world over, to invest in infrastructure within its nation. These contribute significantly to the FDI growth, and GDP Growth, all of which are core economic growth parameters.

Therefore based on these findings, trade liberalisation in Kazakhstan has had a positive effect on human development and economic growth, especially over the past 10 years studied. These findings illustrate that transition economies that aim to expand trade within their borders, should open up their markets to international competition, allow the entry of foreign firms, and the subsequent export of domestic products, all of which could aid in promoting GDP growth and ensuring the country has more disposable revenue to fund capital expenditure projects. This scenario is similar to that of other countries such as India, China and some other countries in South East Asia, who liberalised their markets in recent years (especially China in 2001), and experienced astronomical GDP Growth as a result.

iii.Secondary Factors such as Corruption and FDI

If trade liberalisation in Kazakhstan has been beneficial for human development and economic growth, then what are the side effects it has had on secondary factors such as corruption, domestic savings and foreign direct investmentsAnswering this question entailed having a look through the literature and conducting analyses on data gathered. Results in Figure 3 in which the Corruption Perception Index of Kazakhstan was plotted against its Index of Economic Freedom, show that there is no significant relationship between both indices, therefore the corruption perception of a country is in no way influenced by its economic freedom, but more through internal controls and law enforcement as illustrated by Fries and Taci (2002). These findings contradict that of Foo (2005), who argued that as trade within a country opens to external parties, it gives government and custom officials less incentives to accept bribes, since import from other countries and entry by foreign companies are legalised.

Hypothesis 3 aimed to measure the impact that positive economic growth had on domestic savings and foreign investment flow, and the positive results derived, as shown in Table 4, illustrates that there is a directly proportional relationship between GDP Growth, Gross Domestic Savings and FDI Net Inflow. Thus illustrating that as Kazakhstan experiences more GDP growth, the domestic savings into financial institutions increases, whilst the amount of money received from foreign multinationals also increases. These findings confirm those of Fidrmuc (2002), who reported that in addition to pure economic growth, trade liberalisation also influences Investment Inflow, and Domestic Savings.

The impact on FDI Net Inflow and Domestic Savings has several benefits for the Kazakhstan citizen and economy as a whole. Firstly, an increase in FDI Net Inflow illustrates that more foreign companies are entering into the Kazakhstan market, which promotes competition within the market, lead to more employment and also introduce new goods and services. The introduction of competition would aid small and medium indigenous businesses to ramp up their operations and compete more effectively, thereby improving the business environment in Kazakhstan. These new companies would also employ more people, preferably skilled labour and pay them competitive salaries, thus increasing the average standard of living. The introduction of new products and services would improve the sorts of goods available to the average citizen, which could range from Broadband Services, to Private Banking facilities, all of which would promote better comfort amongst residents.

Secondly, an increase in Domestic Savings illustrates that more individuals and businesses have more expendable funds, which they want to deposit into banks as savings. An increase in domestic savings help commercial banks grow, enables them loan funds to businesses, and supports the investment industry within Kazakhstan by ensuring the average citizens have access to relevant investment vehicles. Commercial banks typically by accepting savings from individuals as a specified interest rate and lending them to other individuals and businesses at a higher interest rate, hence an increase in domestic savings, increases the interest gain to commercial banks, and their profit. Hence growth. It also enables them to loan funds to businesses, which allows these businesses to obtain capital to grow their businesses, thus supporting the entrepreneurial and commercial society within Kazakhstan, and lastly, disposable savings would create promote the stock market industry and other investment vehicles, as individuals have relevant funds to invest. All of these factors, are as a result of economic growth, and in turn support economic growth and human development further.

d. Conclusion

The main aim of this study has been to ascertain the effect of trade openness on economic growth and human development in Kazakhstan. Economic growth has been measured in terms of GDP growth, while Human Development has been depicted in the form of Human Development Index, calculated yearly by the United Nations. Results obtained from linear correlation and regression analysis have shown that trade liberalisation calculated in the form of Index of Economic Freedom is indeed directly proportional to GDP Growth, Human Development, FDI Net Inflow and Domestic Savings. However it has little or no relationship with the level of corruption within the country.

Based on these results, it could be concluded that trade liberalisation is indeed beneficial for transitioning economies as it positively influences human development and economic growth, this economic growth in turn promotes investment inflow and domestic savings within the country. Therefore transitioning economies intending to achieve these feats should deepen their liberalisation measures in order to gain considerable advantage in the international economy.

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