Assel Tutumlu (Rustemova)

Assistant Professor in International Relations at Gediz Universiy

January 2015

Law in the Interest of the Few: Pension Reform in Kazakhstan 

Research that shows how authoritarian regimes adopt laws that are in the interests of the few is widely available for the African and Latin American governments. However, it failed to become a vibrant field within the scholarship on Central Asia, primarily because of the strict libel laws and arbitrary interpretation of legal provisions that resulted in elimination of opposition in Central Asian states and Kazakhstan in particular. Most of the literature on Central Asia that does address the workings of the law comes under the framework neopatrimonialism, a political system in which government officials treat their position of authority as a source of personal income. Neopatrimonialism explains the incentive structure that exists in most authoritarian regimes, which enables officials to adopt laws to their own advantage. The system is possible due to the lack of accountability to the people and instead accountability to the superiors and the ruler of a country. The resulting hierarchy provides opportunities for a merger between political power and economic wealth. Neopatrimonialism is a term that applies to most governments of Central Asia. Ruled by presidents who have been in power for decades, with the exception of Kyrgyzstan and Turkmenistan), these countries developed extensive networks of political figures who managed to accumulate substantial economic assets due to their privileged position of authority. Once these regimes solidified political and economic power, they were interested in adopting laws that suited their interests, rather than the interests of the common people per se.

Pension reform provides us with a domestic illustrative example of the official justification and implementation of the reform that benefitted the few.  On April 24, 2013 Government of Kazakhstan decided to merge several privately operated pension funds into a single government-managed entity State Accumulation Pension Fund (SAPF). The old pension system in Kazakhstan was heralded as one of the most progressive reforms in post-Soviet space back in 1997 when it was first adopted. Modeled after Chile, Kazakhstan introduced obligatory contribution of 10% from the salary income to pension funds of choice for management of these retirement assets by professional financial brokers who took small part of dividends and transferred the majority of profits to customers’ accounts. The reform was hailed progressive, because it enabled customers to receive much bigger profit by investing into safe assets avoiding inflation costs from investing into international stocks and bonds. Government of Kazakhstan guaranteed security of assets. By 2013 Kazakhstan had 11 pension funds with total capitalization of approximately 16.3 billion Euros or about 11% of the GDP. Of these, 10 private funds controlled about 80% of the total assets. As of January 1, 2013, around half of the population of Kazakhstan, or 8.4 million people, contributed money to these pension funds. Most of the funds were established by the largest banks in the country. Most assets were invested domestically into safe government bonds. Since most of the banks belong to members of presidential family or indirectly linked to specific government officials, it is important to evaluate this economic reform from a neopatrimonial perspective.

Officially, government cited several reasons for the merger. First, private funds took large commissions up to 15% on investment returns swallowing 0.6% of income per year. Merger will enable government to decrease commission expenses by half and transfer more profits to people’s accounts. As a result, the largest of the 11 funds (please see the table below) were given buy-out schemes. However, details of the mergers and negotiations over asset swaps rarely come under public scrutiny. Second, a devastating 2008 financial crisis in the United States and the following sovereign debt crisis in Europe proved to President Nazarbayev of Kazakhstan that international investment into what seemed to be reliable government bonds can lose value in a matter of days. Investments in local infrastructure and industrialization projects under the unified entity are to provide the foundations for the development of Kazakhstani economy and guarantee stability of return. Third, slow economic growth in key exporting partners of Kazakhstan resulted in decreasing economic growth, which in 2013 reached 5% a year in contrast to around 7% growth rate two years before that. In order to boost economic growth without raiding the National Fund, fund that accumulates revenues from oil and stores it by investing in foreign assets, government proposes to use assets from pension funds for domestic investment.

However, perspectives that use neopatrimonialism for policy analyses enable deeper understanding of law-making process in post-Soviet states. Application of neopatrimonialism to pension reform of Kazakhstan shows that the reform was largely created to alleviate private funds from unprofitable business enterprises by shoveling responsibility on government entity. Second, government obtained more pocket money from the newly established government entity that will distribute cash to various domestic enterprises. The merger of the pension funds does not avoid the growing problem of the difference between investment yield and official inflation rate. As a result, several years from now state pension fund will likely to ask for more state support to facilitate payment of pensions profitably and sustainably.

* Assel Tutumlu (Rustemova) is an Assistant Professor in International Relations at Gediz University-Izmir. Her research areas include political economy of post-Soviet authoritarian regimes and democratization practices.

Further Reading:

• Clare Nutall and Ben Aris (2013) “Kazakhstan Joins Growing List of State Pension Grabs”, Stratfor, February 22, available at http://www.stratfor.com/the-hub/kazakhstan-joins-growing-list-state-pension-grabs
• Kazakhstan Stock Exchange, www.kase.kz
• Government of Kazakhstan (2014) “Electronic Portal,” December 26, available at http://egov.kz/wps/portal/Content?contentPath=/egovcontent/social/soc_pe…