What industries and product niches should Kazakhstan focus on developing?

The Kazakhstani economy needs to diversify its exports, but an appropriate strategy based on empirical evidence still remains underdeveloped. The main question – "what industries and product niches should Kazakhstan's economy diversify into?" still remains open.

Development Bank of Kazakhstan JSC, Baiterek Holding subsidiary, has implemented a machine learning algorithm, which helped determine 50 potentially promising goods, the production and export of which can help diversify the country's export basket.

The Economic Complexity Index (ECI) measures the complexity of a country's production structure by combining information about the diversity of its exports and the ubiquity of its products. In 2019, Kazakhstan ranked 78th among 151 countries according to the ECI index, while among the CIS countries we are inferior to Russia, Belarus, Ukraine, and Kyrgyzstan.

The main reason for the low level of economic complexity in Kazakhstan is its poorly diversified export basket, where products that give us comparative advantage are, in most cases, commodities. Today, Kazakhstan’s economy is in dire need of export diversification, but the tools for developing an appropriate strategy are still undeveloped. To solve this problem, the Development Bank implemented a machine learning algorithm to identify promising industries and product niches. It has helped develop a list of 50 potentially promising goods, the production and export of which can contribute to the diversification of the country's export basket.

This algorithm is simple: first, it studies what products give the country comparative advantages, and then recommends similar products by analyzing the export baskets of other countries in the world.

Most of the identified goods belong to the industrial branch – 16 units, machinery and equipment – 12 units, chemicals – 8 units, and food – 6 units.

It should be noted that 43 out of 50 identified products have a positive Product Complexity Index (PCI). Values fluctuate within −4 to +4, which indicates the possibility of not only diversifying the export basket of Kazakhstan, but also increasing its complexity.

The results show that the best products to increase Kazakhstan’s economic complexity are products of the engineering industry (gas turbines, pumps and liquid lifts and their spare parts, fittings, fasteners, equipment for railway tracks, agricultural machines for processing and cultivating soil, electrothermal devices, machines for sorting, screening, separating, washing, crushing, grinding, or mixing soil; special vehicles not for the transport of passengers and goods; construction and mining machinery).

Potentially promising product niches also include iron or steel products, structures and structural elements (bridge sections, sluice gates, supports, roofs, door and window frames, drains, columns etc.) made of cast iron, steel and other metals.

In addition, promising products with a high level of complexity include manufactured goods, such as: ready-made fluids for hydraulic transmissions and antifreeze agents, other plastic plates, sheets, films and strips, textile fabrics or impregnated products, cotton wool, fabrics and products used in machines or installations.

Detailed research results are available on the analytical portal “Review of Foreign Trade of the Republic of Kazakhstan” in the section “Algorithm for determining promising industries and product niches” at the following link: https://www.kdb.kz/analytics/analytical-portal-foreign-trade-of-the-RK. Here you will find a detailed analysis for each product (its complexity, potential sales markets with the use of customs duties and distances between countries).

Here you will also find detailed information on:

– other countries’ indexes of economic complexity;

– goods which give other countries comparative advantage;

– 50 potentially promising goods, the production of which can contribute to the diversification of the export basket of Kazakhstan (low amount of these goods are produced in Kazakhstan or they are not produced at all);

– potential sales markets for promising goods, including information on import customs duties on goods and distances between Kazakhstan and potential sales markets;

– competitive environment in foreign export

markets for the sale of promising goods and goods in which Kazakhstan already has comparative advantage.

The purpose of the Development Bank's website is to provide potential investors, the business community, the government, and national and international development institutions with an accessible and convenient tool for identifying potentially promising industries and product niches. The data published on the website can play a key role in choosing certain goods in Kazakhstan, the production of which is currently undeveloped.

Additionally, in this section of the website https://www.kdb.kz/upload/iblock/49b/Analiticheskiy-otchet-_-rezultaty-algoritma.pdf you can find a detailed analytical report on the results of the algorithm implementation.