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   Regional Development: Lessons from International Experience Applicable for Kazakhstan

                     Sebnem Akkaya, World Bank Country Manager for Kazakhstan



For over a century, countries around the globe have been attempting to influence the location
of economic development within their territories. Some of these efforts are aimed at slowing
migration to rapidly growing cities; others at stimulating growth in lagging regions or responding
to tensions in regions with minority populations. The World Bank has acquired considerable
experience in the course of advising governments on these issues. This has yielded three overall
findings.

 The first concerns the objective of regional development. International experience and the vast
literature on economic geography suggest that as Kazakhstan transforms itself from a middle
income country to a high income country, the spatial distribution of economic activity will
continue to be uneven. Growth will be concentrated in a few leading cities and regions, as firms
take advantage of agglomeration economies and workers migrate seeking higher wages.

As a result, attempting to slow the growth of cities or steer economic growth to lagging regions
could jeopardize economic growth. The objective of regional policy is therefore not to equalize
levels of economic activity throughout the national territory but rather to ensure the free flow
of labor and capital to regions where it is most productive. This does not mean that lagging
regions should be ignored. The Government needs to ensure that people in poor regions—as
well as rich ones--have the education and skills necessary to acquire productive jobs, either at
home or elsewhere. To this end, the Government may need to increase spending on education
and active labor market policies in lagging regions. The Government may also need to provide
an adequate social safety net for people in lagging regions who are too old (or young) to
migrate. Thus the Government will need to continue to fund pensions for the elderly in lagging
regions. And the Government needs to ensure that economic potential of lagging regions is fully
exploited, as I will discuss in a moment. But the Government should not attempt to make every
village another Silicon Valley.

The second finding concerns the instruments of regional policy. Much of the discussion of
regional policies focuses on the use of geographically-targeted subsidies or financing aimed at
encouraging investment in lagging regions. But the World Bank’s experience shows that this
emphasis is too narrow. The most important policies that affect the growth of a region may not
be those that are geographically targeted. Instead they may be policies that have no explicit
geographical objective at all. These can include national tariff policies, which can favor or
hamper sectors in which particular regions have a comparative advantage. They can include the
investment priorities of national sectoral ministries—particularly the agencies responsible for
transport investments. They may include the system of intergovernmental transfers, which
critically affects the ability of subnational governments—oblasts, cities, towns, and rayons--to
provide social services—particularly education--in poor regions.

The third finding concerns the design of regional development financing mechanisms. While
regional development grants play, at best, an ancillary role in the economic development of
lagging regions, they can be an important source of financing. Such mechanisms can take a
variety of forms. Central government sectoral ministries may operate grant programs for
subnational governments in their respective sectors. Special discretionary funds may be
available through the office of the national executive. Some governments create separate multi-
sectoral investment funds for subnational local government investments. The World Bank has

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financed large numbers of this last type of instrument, chiefly in the form of municipal
development funds—MDFs. These typically create a pool of funds to be on-lent or granted to
local jurisdictions for projects that meet specific criteria. Often, access to these funds also
requires broader institutional reforms on the part of the recipient local government.

What have we learned? First, we have learned that the project selection process is key. Project
funding decisions are always vulnerable to political pressures. To counter this pressure, project
selection criteria have to be precise. In World Bank-financed MDFs, funding is often limited to a
short ‘positive list’ of sectors: local road improvements, water supply and sewerage systems,
classroom construction, and so forth. Within each of these sectors, criteria for evaluation are
clearly spelled out, often in a manual. Economic, as well as engineering and financial evaluations
are required. This ensures that funds are directed toward projects with high economic returns;
for example toward paving the most congested segments of the secondary road network or
expanding the schools that have double or triple sessions.

Second, access to less rigorous sources of financing has to be restrained. An MDF will not be the
only source of potential funding for local investments. As I mentioned earlier, there may be
programs financed by central government sectoral ministries. There might be other municipal
infrastructure programs—either donor-financed or government-financed. If these funds are
available on less rigorous terms, the demand for funding from the new MDF will be limited. The
creation of a new form of financing for subnational investments may therefore require reforms
in the old ones as well.

Finally, the World Bank has learned that MDFs may require reforms at the local level. Local
governments vary in their capacity to prepare ‘bankable’ projects. Larger, richer local
governments have experience doing so—or can hire consultants to do it for them. Smaller,
poorer jurisdictions cannot. As a result, the Government will need to provide technical
assistance to the jurisdictions that require it.

But broader institutional reforms may also be required. Corruption can be a threat in some
environments. Procedures for handling money and tying disbursements to physical progress
have to be in place. But some World Bank projects have been too ambitious in linking access to
funds to broader institutional or procedural reforms. They required not only good projects and
sound financial controls, but also a ‘municipal development strategy’ or a long term financial
plan. Sometimes the only result has been a flurry of work for consultants, who produce reports
that are rarely used. Therefore, it is important to tailor the ambitions of a municipal
development fund to match the capacity of the clients.




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