Human capital in Kazakhstan

O ne of the steps in the implementation of five institutional reforms of the Head of the State, Nursultan Nazarbayev, is to improve the quality of human capital based on the standards of OECD countries (Organization for Economic Co-operation and Development). Nowadays human capital is recognized as one of the key elements of national wealth, ensuring long-term growth of the economy. Today in Kazakhstan, the problem of strengthening and effective use of human capital must be solved both with economic means and those of non-economic nature.

What is human capital?

The competitive advantages of the leading countries are largely based on the accumulated reserve of high quality human capital. We under-

stand that “human capital” is storage of knowledge, skills and other qualities as a result of investments and accumulated by individuals which if practically used will generate new value and revenue streams. This concept was introduced in the scientific circulation by T. Schultz and G.

Becker in the 1960s and reflects the unique char

acteristics and the increasing role of knowledge in the emerging post-industrial Economy¹.

Table 1 shows the definitions of human capi

tal interpreted by various authors. The simplest definition defines human capital as only skills

and knowledge that assist individuals in obtaining additional income in the labor market. A wider interpretation of human capital, along with the innate abilities of individuals, takes into account non-market aspects of human ac- tivity².

Table 1

Unlike other forms of capital, human capital is embodied directly in individuals and is an integral part of them. Immaterial form of human capital complicates its measurement, therefore, in economic research there is a number of indirect indicators (proxy-variables), or the cost estimate of the accumulated human capital. A com-

mon drawback of all the used indicators is that they reflect only part of the skills and abilities

of individuals which can be attributed to human capital; Qualities such as:

– communication skills and abilities (including knowledge of foreign languages);

–quantitative thinking ability;

– personal qualities of the individual (motivation, learning ability, etc.);

– interpersonal quality of the individual (ability to work in a team, ability to cooperate and collaborate, leadership);

– level of health;

– level of education;

– other personal skills and qualities (ability to assimilate and use information, tacit knowledge, physical qualities, etc.).

Thus, today the concept of human capital has found a broad empirical support and has a profound impact on real economic policy in all countries. That is, human capital is not a metaphor but a tight term of the modern economic theory. Like any others investments, it suggests that the person sacrifices something less today in

order to get something more tomorrow. Naturally, one will do so if he hopes that his investments will pay off.

What has an impact on the growth of human capital? From the state side it is, above all, increased spending on education, training, health, better housing and other living conditions for the population and understanding the formation of these expenditures as necessary investments into a human being.

The tasks designated by the President of the country include the standard implementation by Kazakhstan of the quality of life in the countries of the Organization for economic cooperation and development. Today, the OECD includes 36 countries producing 60% of global GDP. According to the President, "all countries have created a way for deep modernization, have high rates of investments, scientific research, productivity,

business development and living standards for the population". The organization for economic cooperation and development is an international economic organization for developed countries that accept the principles of representative democracy and a free market economy.

How to measure human capital?

To assess the quality of human capital, the standard of living, literacy, education and longevity of the population, the state of medical care and GDP per capita are measured. These figures

are taken into account when calculating the Index of human capital development (HDI).

At the simplest rates it is possible to use various proxy variables reflecting the level of educa

tion or training level of individuals. The following rates are used most frequently³:

– literacy rates or education level of the population;

– school enrollment rates;

– average number of education years of the employed in the economy.

These rates are only approximate measures of human capital that limit their use in statistical estimates. Literacy rates reflect only the initial stage of education, i.e. only a small proportion of human capital that influences the efficiency of

labor. In addition, these rates are not practically applicable for the comparative analysis of the countries with developed education systems, as the literacy rate in them is close to one hundred percent.

Currently, many countries use the definition of

human capital based on the productive capacity of individuals. Most assessment methodologies, even among countries that use a broader defini

tion than the OECD, are based on the rates of formal education and economic income accumulated by the individual rather than on human capital in general, and all the benefits (economic and

non-economic, private and collective) related to investments in human capital. Giving the current state of knowledge this methodology seems to be a practical and reasonable starting point.

Based on this narrow concept, measurement activities in this area are focused on the development of total indicators giving simple natural substitutes for human capital (for example, the average length of schooling, level of education). Because the data requirements for the construction of such indicators are limited, the scope of such substitutes is also limited. As a result, recent evaluation research of human capital has been directed at the quantitative assessment of knowledge and cognitive skills of student-adults after finishing school. In recent times the development of systematic financial rates of human capital have produced an increasing interest.

Education is the key driver of investment in human capital. If we consider it as a 'sector', education accounts for about 6% of the GDP of the countries comprising the Organization for economic cooperation and development (OECD). A significant proportion of expenditure on education comes from public sources, and in recent years this percentage has been increasing. On average, countries belonging to the OECD spent about 13% of their total public expenditure on education in 2008, and in most countries this rate has increased since 1995 (OECD, 2011a)⁴. In the document "Plan for the nation - 100 concrete steps on the implementation of five institutional reforms" Nursultan Nazarbayev has put a specific emphasis on education with the aim of improving human capital. In particular, he explains the following steps that will be taken in the context of increasing the importance and value of education in the country: the Introduction of financing per capita in secondary school and the creation of incentives for successful schools.

Human capital in Kazakhstan

One of the important components of human capital is the standard of living in the country. In Kazakhstan, one of the most important problems is poverty which existed even in Soviet times, yet was particularly difficult during Kazakhstan's

transition to a market economy. But the severity of this was tempered with "free" health care and education.

In the report of the UNDP regional Bureau for European countries and CIS, prepared in 1998, it was noted that no region of the world had suffered in the 1990’s as much as the countries of the former Soviet Union, Central and Eastern Europe. A systemic economic crisis had led to the mainstreaming of poverty in the background of non-adaptability, within a significant part of

the population, to a market economy and social stratification of the society. The number of poor

in these countries increased by more than 150 million⁵.

When comparing the amount of poverty in Kazakhstan it makes sense to turn to international indices – the human development index and the human poverty index (poverty) (TIN, BIN).

The human development index is calculated as average arithmetic mean of three other indices: life expectancy at birth, level of education and income per capita. The index of the level of education is calculated on the basis of the indices of literacy (with a weight of two thirds) and availability of education (with a weight of one third). Four rates are in the basis of calculation indices, the tolerance range of which lies within the following limits:

Table 7. The components of HDI*

The use of HDI and the index of human de- in individual countries and globally to group velopment (HDI) allows one to give an analysis countries with high, medium and low level of and evaluation of the socio-economic situation HDI.

Table 8. Dynamics of the index of human development of the CIS countries for 1990 – 2014*

Currently the ranking of countries according to the HDI is divided into 4 groups:

▪ with a very high level of development (0,938-0,788);

▪ with a high level of development (0,784 0,677);

▪ with a medium level of development (0,669-0,488);

▪ with a low level of development (0,4700,140).

In the group of countries with a high HDI from among the States of the former USSR there are: Russia (57^th), Belarus (53^rd), Kazakhstan (70^th), Azerbaijan (76^th), Georgia (79^th), Ukraine (83^rd)

and Armenia (87^th). Other post-Soviet States are included in the group of countries with a medium level of development: Turkmenistan (103^rd place), Moldova (114^th place – the lowest rate in Europe), Uzbekistan (116^th), Kyrgyzstan (125^th), and Tajikistan (133^rd). Of all the States

of the former USSR only the Baltic States managed to enter the top group of countries with a very high human development: Estonia ranks 33^rd place, Lithuania – 35^th, Latvia – 48^th 6.

Thus, today Kazakhstan is among the countries with a high HDI, however, in the list, consisting of 188 countries, we are closer to the end of the first half.

The quality of life of the population in Kazakhstan

The official processes of stratification in

Kazakhstan is used by the Committee of RK for statistics (CS MNE RK) in the publication "Quality of life" (March, 2013) in which the subjective assessments of respondents are presented on the basis on which the stratification

of households was modeled. Based on the data of a qualitative nature, society is divided into 5 groups:

Poor: there is not enough money for food, clothing and shoes.

Not poor but not of middle class: there is enough to buy food, clothes and shoes, and to pay for services of housing and community, but difficulties with buying durable goods.

Middle class: no difficulties in buying food, essential non-food items and services, but there is not sufficient money for the acquisition of additional housing (apartments, houses, villas), expensive cars and so forth.

Upper middle class: consuming high quality food, living in comfortable conditions, having jobs, own businesses and/or property income, but there is not enough free time for rest and leisure.

Wealthy (rich): there are enough resources (knowledge, health, finances, property, time) for a comfortable life.

According to the statistical office, 4.2% of households are lower income, 52.2% of households are not poor but not of middle class, 41.9% of households are middle-class and 1.7%. are in the upper middle class.

The income of households that are not poor, according to official data, consists of a variety

of sources, including, besides others, interest on deposits, deposits and dividends from securities (shares, bonds) and money from rental of premises (residential and commercial). Sources of income for low-income Kazakhstan citizens are essentially subsidies from the state. Among households whose members were classified as

poor, savings are owned by 0.5%, and, compared with other categories, these savings are minimal.

The average monthly income of these households, representatives of which were classified

as poor, is on average between 20,000 to 50,000 tenge per month.

A lack of strong positions for large families is a serious problem for modern Kazakhstan. In general, in a situation where the total income of Kazakhstan families is not very large, this burden becomes a significant factor in lowering the

Table 6. The average monthly disposable income of different household groups in the Republic of Kazakhstan, 2013*

overall standard for the population.

In Kazakhstan from 2003 to 2012 the number of families with four or more children increased by 7%. In 2003 families with four or more children amounted 13% of the total number of families, in 2012 they became 20 %⁷. In accordance with the Law of the Republic of Kazakhstan "On the special state benefit in the Re

public of Kazakhstan" dated April 5, 1999 No. 365 large families are recognized with four or more cohabiting minor children.

Causes of poverty in modern Kazakhstan are:

1. The growth poverty in Kazakhstan is influenced by the process of marginalization of

the population. The increase in the number of marginalized groups mainly occurs due to rural migrants not adapting to the new conditions of cities, the unemployed, legal and illegal immigrants, refugees, members of the "social bottom" group (the homeless and beggars).

1. Currently a significant section of the pop-

ulation receive "under the table" income that is not recorded by official statistics. So, according

to expert estimates, quite a significant portion

of the population is employed in this "under the table" economy. For example, some experts assume that about 30% of workers employed in the economy are illegal. They do not participate the overall accounting of incomes. In addition there is a large army of workers employed in temporary and casual work and in most cases hide their income from taxation. These same citizens are conditionally allocated to the number of self-employed partly by helping the state to solve the unemployment problem constitute a risk group at the same time. By not paying any taxes or deductions, if necessary, the state may be unable to support them. Thus according to the research most of them don't do the voluntary pension savings which further aggravates the situation.

1. The social costs of market reforms undertaken after the collapse of the Soviet Union which were unavoidable and objectively justified led to the shutdown and bankruptcy of

many uncompetitive and unprofitable enter

prises under market conditions, and this, in turn, caused a rise in unemployment (involun-

tary unemployment). Market-based redistribution of money led to social differentiation and property polarization of society. As a result of reduced revenue from the state budget, employees, pensioners, etc. were put in a difficult situ

ation. These events largely contributed to the appearance of the poor. However, the structural non-adaptation of the Kazakhstan economy to the market, as the cause of poverty, is only one side of this phenomenon. On the other hand, an important factor in the reduction of the standard of life of Kazakhstan was that citizens were not ready for the new market economic relations. This led to the fact that in a market economy many people, even of working age, traditionally relied on social support from the state and were not able to solve their financial problems and

therefore moved into the category of the poor. However, over the last twenty years the mindset of the Kazakhstan citizens has changed in many ways. A significant part of the population hasadapted to the new economic conditions. This is confirmed by the statistics on development of small and medium-sized businesses. So, at the beginning of 2013 in Kazakhstan in the sphere of small business "the number of small businesses in the country amounted to 233,417 and has increased compared to the corresponding period of 2012 by 6.4%," as noted at the briefing by the head of the statistics agency of the RK, Alikhan Smailov, in March 2013⁸.

1. Lack of education and qualifications of the population is also one of the causes of poverty in Kazakhstan.

1. Low total incomes amidst high cost of goods and services. In particular, Kazakhstan has relatively low pensions and social benefits,

low wages yet high costs for services and utilities. In total all these aspects can be combined into a single group of causes for poverty associated with the low incomes of the population.

1. One of the main causes of poverty in Kazakhstan today is unemployment. In 2014 the number of unemployed, who were officially registered in employment offices amounted to

247.6 thousand persons or 3.9% of the working population of the country. However, it can be assumed that the true size of unemployment far exceeds the official one.

Moreover, poverty in Kazakhstan is also due to the following reasons:

• lack of competitiveness (primarily because

of the backward material and technical base) of a number of sectors and industries;

• low productivity and its poor organization;
• prevalence of low-paying jobs and a shortage of qualified personnel.

Thus, the occurrence of the poor in the country is natural, the emergence of which was due to structural and logical development of the Kazakhstan society. However, understanding the nature of poverty in Kazakhstan does not mean that the society can or should do nothing to eradicate it. On the contrary, at the present stage it is more important for the state to intensify activities aimed at increasing the overall living standards of all Kazakhstan people, and at solving the problems of those specific segments of the population which are currently in a difficult financial situation. Moreover, the necessary basic conditions for this have been created.

According to an expert survey, conducted in October 2012 in Almaty⁹, today there is a factor of polarization in society in the top three potential threats to the development of modern Kazakhstan.

Chart 1.

Despite official statistics that the gap in in

come has been gradually decreasing, in fact the level of polarization in the population is increasing which has been confirmed by the ex

perts, who study this topic.

In addition to sharp disparity between the rural and urban areas, regional disparity has increased in Kazakhstan: according to the statistics agency of Kazakhstan, the leading area, by average income per capita at the end of 2012, is the Atyrau region, Almaty city and Mangistau region where the indices of nominal monetary incomes of the population per capita exceed the average national level by up to 2.4 times. Among the lowest-income regions in August 2012, are South Kazakhstan, Zhambyl and Almaty regions in which the incomes of the population amounted to an average 60.3 % and 75.8% of the national level. However, the highest rates of growth of real money incomes of the population are found in the Mangistau and Aktyubinsk regions. The ratio between the maximum and minimum values of nominal incomes in these regions in August 2012 was 4.1 times (in August 2011 – 3.8 times)¹⁰.

Thus, the importance of this is explained by over-polarization, the excess of its “threshold” values (coefficient of funds, the income gap between 10% of the most and least affluent citizens) which is one of the leading factors in destabilization. Conversely, a moderate income gap lowers the potential for conflict. That is confirmed by the paradigmatic example of the role of numerous middle class as the social base of stability usually illustrated by the experience of developed countries.

In countries where the level of polarization is negligible the potential for conflict is lower,even with relatively low average incomes than in polarized societies with a relatively average standard of living.

Wealth inequality, unequal incomes of individuals and groups were studied in the survey of the statistics Agency of households in Kazakhstan "Standard of Living. Measuring of Welfare". According to the presented data the respondents from among the poor were identified with the following causes of poverty: low

wages (70,4%), impossibility to find permanent

job at the place of residence (21,7%), lack of

social support (low pensions) – 20.7%, insufficient level of education (18.2%) and others¹¹.

A comprehensive and effective solution of socio-economic problems is associated with the formation of innovation and the modernization of the economy.

It should be noted that real modernization of an economy is impossible without overcoming the poverty and inequality which brings destabilization into almost all areas of social life. Social policy is formulated at the Central level of government but to improve the efficiency of its

implementation it should be closer to a specific

person. The development and implementation of special programs and activities is required to improve the standard of life and reduce poverty.

Along with greater freedom in doing business, removing barriers, restrictions, approvals a special state policy is required. A classic example of effective measures of the state in the first period of the global economic crisis in his

tory is the policy of the "New Deal" by Franklin D. Roosevelt which lifted the US out of the Great depression of 1929 – 1933.

In response to the sharp drop in oil prices on the world market and, as a consequence, the reduction of budget revenues and the ruble devaluation in the fall of 2014 that adversely affected the real income and standard of living of citizens in Russia, it was decided to open the national welfare Fund for the strategic breakthrough in the development of the country. It was proposed to transfer the revenues of the national welfare Fund for the development of Siberia and the Far East and parts of the NWF for the infrastructure projects.

The regulatory role of the state, in reaction to the negative trends in external markets, has expanded employment for the development of infrastructure projects in 2008 – 2009 and in

2014 in Kazakhstan. Thus, in his annual message, President Nazarbayev spoke to the nation on November 11, 2014 "Nurly Zhol – Path to Future" and said:

"In the years when the situation in external markets was favorable and the price of oil and our export products were at a sufficiently high

level we sent the income from raw material exports to the National Fund. One of the main tasks of the National Fund is to increase the resistance of our economy to external shocks, including the reduction of the price for natural resources.

All of these years we have been depositing the income from the extraction of raw materials and their sales to this Fund. 10 billion dollars was sent to fight the crisis of 2007-2009. The

rest of the money we have not spent but saved and increased. Now it is high time for us to use these reserves once again. They will help to overcome uneasy times and stimulate growth in our economy. These resources are not intended for short-term measures. They will be aimed at further transformation of the economy. Namely, at the development of transport, energy, industrial and social infrastructure, and small and medium business"¹².

When we talk about poverty reduction in Kazakhstan we must consider that the causes of poverty of people of different ages living in different regions, in urban or rural areas, men and women differ in many ways. In this context, fighting poverty is a complex and multidimen

sional task. regard it is obvious that it is impossible to achieve serious positive effect only by providing direct financial aid to the indigents.

Social support of the needy is, of course, necessary, but in view of the diversity of causes of poverty, significant progress in the fight against

it can be achieved only if people are able to solve their material problems with a necessary level of income.

At the same time, to effectively fight pov

erty, it is necessary to know what problems people are facing in their daily lives and what the causes of their low standard of living are.

What resources are needed for a person to solve his problems related to welfare on his own? The main types of resources which could help (and their lack, respectively, could prevent) the advancement of the population are:

1. economic resource, that is the property that may be sold without too much damage to family life and converted into cash, the availability of savings sufficient to ensure that thefamily could live for at least one year;
2. qualifying resource which was calculated as the sum of rates of education and qualification;
3. social resource consolidating: 1) involvement of everyday contacts and support in a conventional informal network (the availability of friends and regular contacts with them, belief in the existence of their reliable support), 2) involvement in highly effective social networks which provide access to the most in-demand goods and resources, 3) involvement in formal networks (membership in clubs, parties, etc.);
4. powerful resource considering the ability of citizens to influence decisions made in the

scope of their whole enterprise or its subdivisions, their ability for themselves to have ac-

cess to power, their job status and self-esteem

in their social status according to their position at work;

1. cultural resource, there can be included, on the one hand, the characteristics of leisure behavior and the cultural requests of citizens and, on the other hand, indicators of the conditions of their socialization in childhood and adolescence (the place of residence at school age and their parents education);
2. personal resource the presence of achievable goals and a readiness to enhance labor activity to prevent the deterioration of their financial position, non-conformism, the absence of egalitarian attitudes, initiative, etc.;
3. biological resource which takes into account those features that enhance or, conversely, lower the chance for the citizens to practice favorable positions in the labor market – the level of health, gender and age¹³.

The specificity of the situation of the poor

is not simply their having "little money" but being a low-resource layer deprived not only of economic or qualifying capital that would allow them out of a difficult situation, but even

of basic social capital that would allow them to count on anyone's support except the state. Moreover, if one tries to calculate the integral rates of the resource profile of different segments of the population, the situation of lacking any resource in poor layers of the population will become even brighter and the understanding that no improvement of the economic situation of the country will improve the situation of poverty – will become clearer.

Thus, the struggle with real poverty not just with "income poverty" is specific to their costs, on the one hand, and to their available resources, on the other. This means that there is a need to study the causes of poverty which are far from homogeneous and entail fundamentally different implications for social policy.

The problem of poverty cannot be solved for a large part of the poor only by increasing their received funds (salaries, pensions, benefits, etc.) as in low-resource groups additional funds may be spent inefficiently and sometimes do not lead to any positive consequences.

Thus, the activation and effective use of human capital in Kazakhstan should be resolved in both economic and non-economic ways.

It is important to understand that sustainable development is impossible in a country where, according to some experts, a significant part of the population lives below the poverty line and resources are a primary sector of the economy. And due to pragmatic reasons it is important to recognize that at the present time our focus should be directed towards the struggle against poverty.

You must understand that you cannot build a rich, competitive country with poor citizens. Moreover – within the framework of a market economy – first there should be economically independent citizens, if not wealthy, and then there will be a rich country with developed human capital.

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