There are a lot of countries undergoing structural transitions at the moment and, in many cases, these reflect the very big transition going on in China. This week I'm in Kazakhstan for the Astana Economic Forum, and one of the big themes is guaranteed to be economic diversification and the role that foreign investment could play.

Kazakhstan's economy is recovering from a banking crisis and is heavily reliant on oil, so seeking foreign investment in other sectors is an obvious solution. However, the reality is often not so straightforward. Kazakhstan has rightly identified agriculture as a sector with potential; however, recent land reforms to encourage investment ran aground after the public mood swung against land ownership by foreigners. With social media giving the public in less democratic countries like Kazakhstan a forum through which to be heard, policy reform will need to take social concerns into account more proactively than in the past. That's a lesson for potential investors, as well as governments seeking investment.

What are your ideas for how Kazakhstan could reduce its reliance on oil? Let me know via Twitter @Baptist_Simon or email on simonjbaptist@eiu.com.

Best regards,

Simon Baptist
Chief Economist

Kazakhstan ... Government makes concessions to defuse land protests

On May 5th Nursultan Nazarbayev, the president, announced a moratorium on controversial new provisions in Kazakhstan's Land Code and accepted the resignation of the economy minister, in an attempt to defuse protests that have broken out in various parts of the country in recent weeks over the amendments. Following these concessions we expect the protests to lose momentum, although it is possible that they could be sustained by rising underlying socioeconomic grievances. The demonstrations illustrate the weak feedback mechanisms between the regime and society. That the government made rapid concessions suggests that it is worried by the threat of social unrest. Both of these factors could hinder effective policymaking and make it less likely that the government will risk potentially disruptive political or economic reform.

Mr Nazarbayev said that a moratorium would be imposed on four controversial amendments to the Land Code that were approved in late 2015 and were due to come into force on July 1st: a provision allowing land to be sold at auction for the first time (sales were previously at the discretion of local authorities); a provision extending from 15 to 25 years the period for which foreigners can lease land; a provision under which existing leaseholders can buy land at 50% of its listed value; and a provision safeguarding the rights of landowners to regain ownership of land held as part of a commercial venture that becomes the subject of a dispute, or to acquire compensation. Mr Nazarbayev also accepted the resignation of the economy minister, Yerbolat Dosayev, and his deputy, Kairbek Uskenbayev.

The reforms sparked rare public protests by opponents who believe that the measures could provide foreigners with a backdoor route to acquiring land, since foreign nationals and companies would be able to participate in land ownership auctions in joint ventures with majority Kazakh partners. Protests, mainly small and spontaneous, took place in late April and early May in cities including Astana, the capital; Almaty; Atyrau and Aktobe in the oil-rich west; Oral in the north-west; Semey in the east; and Kyzylorda in the south. Some protesters voiced wider grievances over issues including unemployment, housing and corruption, indicating that the land protest movement threatened to develop into a wider protest movement against Mr Nazarbayev's rule. Civil society activists had been planning a national day of protests against land reform on May 21st, which the government undoubtedly hopes they will now cancel in the light of the concessions.

The government had previously sought to defuse the protests by arguing that the amendments were essential to the country's economic well-being, since they aimed to increase the use of farmland in Kazakhstan: at 11.4m ha, idle farmland amounts to some 43% of the country's 26.6m ha of total farmland stock. The government has also argued that the changes are required to boost investment in the under-performing agricultural sector, which has great potential but is highly inefficient. On May 5th Mr Nazarbayev acknowledged that the government had failed to communicate its message effectively to the public, and said that imposing a moratorium until an unspecified date next year would allow for a period of public discussion. He ordered the creation of a commission to be chaired by Bakytzhan Sagintayev, the first deputy prime minister, to study the question of land reform.

Underlying problems

The government's concessions reinforce our baseline forecast that the land reform protests are unlikely to grow into major social unrest. However, the protests illustrate a number of underlying issues in the political system and state-society relations.

First, the demonstrations illustrate the political potential of Kazakh nationalism in a country where public protests remain rare. The likelihood of a more general backlash against foreign involvement in the economy is relatively low. However, the issue of land ownership is particularly sensitive because of concerns that Chinese investment could be a precursor to territorial claims. Foreign investment in other sectors of the economy has to date not provoked major protests, but this could change. The government is eager to boost foreign investment, but is unable or unwilling to openly discuss public concerns over foreign ownership of parts of the economy. Given that China's economic footprint is likely to grow further in the coming years, the potential remains for further public protests.

Second, Kazakhstan's highly controlled media environment and the authoritarian political system mean that the government has few mechanisms to accurately assess public opinion. With the exception of Mr Nazarbayev himself, trust in the government and bureaucracy is generally low. As a result, the government struggles to communicate policy initiatives, or effectively respond to public concerns. The failure of the land reforms is not the first occasion that the government has been forced to withdraw reforms in the face of unexpected public opposition. In 2013 Mr Nazarbayev dismissed Serik Abdenov as labour and welfare minister following protests against planned pension reforms that would have raised the female retirement age.

Third, that the government quickly announced concessions in the face of relatively small-scale public protests suggests that the regime is extremely nervous about the risk of social unrest. Since the protests began, Kazakhstan's official media have carried a number of stories warning of the damaging social and economic consequences of public unrest and political protest. In a speech on May 1st Mr Nazarbayev himself invoked the spectre of a Ukraine-style civil war in Kazakhstan.

These factors—a lack of feedback mechanisms between the regime and society, and the regime's fear of social instability—strengthen our view that the government is unlikely to undertake disruptive economic or political reform in the coming years. In particular, we believe that the government's privatisation programme and ambitious overhaul of the state holding company, Samruk Kazyna, is likely to be scaled back.