Kazakhstan: Problems of Managing Welfare Support during COVID-19

Yazar: Yrd. Doç. Dr. Assel Tutumlu – 17 July 2020

As a mineral-rich country, Kazakhstan has experienced a perfect storm with the falling of prices of liquid and solid minerals as a result of the ongoing pandemic coronavirus, severely impacting economic growth, and Although the government has been engaged in public relations campaigns reporting success in battling these challenges by buying pages in mainstream international newspapers, the country remains on par with Italy and Spain and its success, to date, in managing the crisis remains debatable.

According to the official government statistics, economic growth of the country in 2020 will fall by 1.75%, but the Applied Economic Research Institute echoing the World Bank places this figure at almost five percent. The problem is not solely statistical. The International Labor Organization (ILO) estimates that over 1.6 billion people worldwide lost 60% of their revenue in the first month of the quarantine. As people remain at home, their jobs and livelihoods begin to dwindle leaving families without any source of income. Interestingly, the governments around the world followed very similar strategies to those that were adopted during the global financial crisis in 2008. Kazakhstan is no exception to this. More specifically the country released funds to the tune of nearly 6% of its GDP to support the economy — introducing tax reductions, subsidies to large enterprises and distributing handouts of KZT42500 (around USD100) to all those who applied. While commendable at a first glance, these policies appear to have suffered from major inclusion and exclusion errors.

Inclusion error refers to any welfare scheme, which provides benefits to people who are outside the scope of the programme and are ineligible to receive the benefit. Inclusion errors can occur when the government cannot track conditions of the beneficiaries or permit those people to benefit from aid that did not belong to them. Exclusion error refers to the opposite condition, when a suitable beneficiary is unable to receive their benefit due to the inability to apply, take or use the benefit. Such impediments may be physical and/or procedural. During a quarantine for example, people may not be able to go outside and open up a bank account. Or they may not have adequate documents or access to internet in order to apply online for the benefit. Inclusion and exclusion errors can also apply to the macroeconomic policies when government distributes tax reliefs and subsidies to enterprises that should not be eligible for such state support.

In order to successfully implement welfare support, a government needs to consider several conditions. The amount of people with a regular bank account is one of the key benchmarks and was a major handicap for many Kazakhstanis. İndeed, while a major obstacle to many citizens benefitting from the Covid-specific welfare programmes, the Kazakh case also revealed the extent of the ‘gray’ and informal economy. Before COVID-19, thousands of poor and vulnerable people were mainly ‘self-employed’ and dependent on daily cash flow providing services to other people, such as transportation, non-food services, cleaning, and childcare. They did not need and did not have a bank account; neither did they pay social security or taxes to the state. However, when the Kazakh government announced that the financial support of $100 would be deposited directly to a bank account following the completing of an electronic form, the poorest people in the country who did not have access to internet were placed at a disadvantage and excluded from the much-needed financial support. The announcement also created long lines in banks with people breaking sanitary procedures to open a bank account as soon as possible. The reports showed that the police struggled to control the crowds and the tensions that led to brawling among the crowds. Moreover, the Kazakh policy also suffered from a serious inclusion error. In this regard, people who received government support for unemployment included those whose salary was sometimes 100 times higher than the benefit itself. Although such cases were officially denounced, the government retracted possible incriminations and denounced those with moral reprehensions.

Another interesting policy for anti-COVID measures included support for major enterprises. The initial list of companies was ridiculed by bloggers since it included support for non-essential services, such as car dealerships, amusement parks and hotels, which suffered, but did not employ significant numbers of people and/or significantly contributed to the economy. As a result, the list with gross inclusion errors was retracted and the government adopted a more sensible list of priority areas. This saw the introduction of tax breaks and forced the employers to make payments to workers who were at home due to the quarantine. Such measures were introduced in the context of a decision by the Supreme Court, which equated COVID-19 pandemic to “force major” incident and while the cuts and the breaks were favorably received, they nonetheless suffered from inclusion errors since those companies that continued to work and grow due to COVID, such as food producers, delivery services, and internet sales also qualified.

At the same time, the new tax measures suffered from several exclusion errors, since many enterprises were not registered as companies, but were operated by self-employed individuals. The dire situation faced by the Kazakh farmers are a case in point. Farmers in Southern Kazakhstan in particular suffered heavily since their produce decayed in the fields as a result of the quarantine measures stopping harvest.

Those farmers who managed to do so, faced multiple impediments to sell their produce due to roadblocks and inability to deliver to foreign markets in a timely manner. Many of them who took bank loans to grow the produce, hoping to pay the loan back with the harvested produce, now face an uphill battle; since they do not employ people and since their occupation is not registered as a company for tax purposes, they are not covered by the tax cuts or tax breaks. It is also important to note too that the Kazakh farming industry employs the second largest amount of people after retail and transport.

According to Darmen Sadvakasov, quarantine threatened the livelihoods of nearly 60% of labor force with 33% of them suffering the most due to being unskilled and/or daily laborers. Hence rather than applying the same methods that were used by the government during financial crises, a diversified welfare support strategy should have been chosen. Indeed, the Kazakh government would have been wise to have differentiated the labour market of nearly nine million people and identified those sectors that are the most vulnerable. Those who continued working and/or received full salaries on paid leave should have been automatically excluded from the support and those who received partial salaries and worked part-time should have been proportionately supported. The Government could have also provided mechanisms of support for people receiving the minimum wage during the quarantine. But most importantly a safety net was needed for people who lost their job or were sent on unpaid leave.

With the quarantine now extended for until mid-August, and with growing calls for further relief measures including debt relief, Kazakhstan will continue to face the challenge of a substantial economic shock. Therefore, it is important for the Kazakh policymakers to consider such issues of inclusion and exclusion in minimizing the economic as well as the societal impact from the health crisis.