Increasing Regional Development Through High-Speedrailway Infrastructure in Kazakhstan

Increasing Regional Development through High-SpeedRailway Infrastructure in Kazakhstan

ERASMUS UNIVERSITY ROTTERDAM

Erasmus School of Economics

Urban, Port, and Transport Economics

Thesis Supervisor:Giuliano Mingardo

Name:BauyrzhanMurzamadiyev

Student Number: 327995

Email:

Abstract

Kazakhstanis a developing nation situated in Central Asia. Despite its vast natural resources, from the oil rich west and mineral rich east, suffers from regional disparity. Because of Kazakhstan’s relatively large area and low level of inhabitants,the population is concentrated in a few regions, causing large distances between cities. To help solve this problem this paper looks at the possibility of high-speed trains (HSTs) to create agglomeration economies. This is done through extensive review of literature on the academic side of transport and urban economics and also includes case studies where scholars review operational HST networks. The benefit of this is that the reader is presented with both a theoretical as well as empirical aspects in reviewing the possibility of introducing a HST in Kazakhstan. Despite the optimistic benefits stated by scholars for a successful investment and a positively impacting project on the regional scale, this paper concludes that HSTs do not have a place in Kazakhstan yet, due to the lack ofconditions and circumstances that have been responsible for significant economic impact in both literature and case studies.

Keywords: Transport Economics, Agglomeration, High-Speed Trains, Economic Growth, Kazakhstan, Regional Development

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Acknowledgements

I would like to personally thank Henk Nieboer and Ben-Jaap Pielage at Witteveen + Bos for their guidance and support. Also a thank you to my supervisor, Giuliano Mingardo, who has helped me refine my thesis. This thesis would not have been possible without these people and their tremendous knowledge in infrastructure development.

A special thank you to the employees of Witteveen + Bos for taking time out of their schedule to meet with me, your cooperation and insight is highly appreciated.

Rotterdam, February 2014

BauyrzhanMurzamadiyev

Preface

After years of my bachelor study, it finally comes to a conclusion with this paper. Studying Urban, Port, and Transport Economics has definitely found a place in my heart and opened my mind towards economic development, and more specifically regional development. Coming from Kazakhstan, which is a developing economy nation, strengthened my interests for this subject and led me to the topic of regional economic development, agglomeration economies, and transport infrastructure. I had the pleasure of interning at Witteveen + Bos to write this paper, who have graciously taken me under their wing. There I learned more about the railways industry in the Netherlands and the different players in the development of the infrastructure.

Disclaimer

This paper is intended for the benefit of Witteveen + Bos and is used as a bachelor’s thesis for the International Bachelor Economics and Business Economics (IBEB) program at Erasmus University of Rotterdam. The content is a reflection of the author’s interpretations and therefore does not necessarily reflect the views of Witteveen + Bos. Neither Witteveen + Bos nor the author accept any liability for any outcome of its use.

Table of Contents

Preface and Acknowledgements…………………...………………………………………………………………….ii

Abstract…………………………………..……………………………………………………………………………………….iii

Table of Contents……………………………………………………………………………………………………………..iv

Chapter 1: Introduction……………………………………………………………………..……………………….…….1

Chapter 2: Kazakhstan………………………………….………………………………………………..………………...3

2.1Kazakh Migration…………………..………………………….….…..…….…...…………………..….4

2.2Regional Disparity……....………………………………………………………..……………………….6

Chapter 3: Theoretical Framework.………………………………..………………………….………………….....8

3.1Agglomeration….………..………………..…………………………………………...………………….8

3.2Transport Economics…………..……………………………………..….…………..…………………. 9

3.3Transportation Network Proximity……………………………………………...... ……...10

3.4Underlying Conditions for Transport Investment………………….………....…..……...11

Chapter 4: Case Study……………………………………...... ….………………………………………………. 13

4.1Connecting Groningen to the Randstad……………………………..…..……..….………….13

4.2HSTs Around the World….……………………………………………………………....…..……...15

Chapter 5: Implementation of HSTs in Kazakhstan…….……………………….……………………………17

5.1Hub Cities……………………………………………………………………………………………..…....18

5.2Benefits of Agglomeration the Southeastern Region of Kazakhstan……………….20

5.2Limitations of Agglomeration………………………..……………………………………………..21

Chapter 6: Conclusions…….……………………………………………………………………………………………..23

Bibliography……………………………………………………………………………………………………………..….…25

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Chapter 1:Introduction

Whether it is building a roundabout to increase safety or planting trees to improve air quality, the betterment of living quality should be the primary objective of policy making. This mentality becomes imperative in infrastructure development, as it involves large financial investments. For example, there is an objective to increase mobility with an overpass, but the more optimal solution could actually be a tunnel, as it allows the utilization of the land above it for future development. With a persistent focus on the overpass, the mindset for a more beneficial project will be overlooked.

In Kazakhstan, one of the largest problems is the great distance between cities, causing other problems such as the disparities, poverty, and the lack of mobilityand services. One of the solutions to this problem is to create an agglomeration. But what is an agglomeration? An agglomeration is spatial concept where economic activity is clustered (DOTA, 2012), where the synergy of connecting cities will further develop and promote economic growth in those regions. This can be achieved in various ways, one of which is through high-speed trains (HSTs). Thisis actually quite interesting to evaluate because of the speed and capacity of HSTsbegin to compete with air travel within the relevant range (de Ruse, 2008). There are many successful examples of HSTs around the world, from France’s TGV services to Japan’s Shinkansen lines, displaying that a decrease in the travel time between cities can have many benefits.

Theobjective of this paper is to investigatethe impacts of HSTs on agglomeration, and more specifically, to answer the research question of “Whether HSTsare a viable solution tothe regional disparity in Kazakhstan”. This will primarily be done through aliterature reviewand case studies done on other HST developments around the world, most notably Japanand the Netherlands. With their experience and reputationin regards with HSTs, it allows for readily available data on this matter andto properly understand what went right and what went wrong with their the successes and failures.With this, the paper will go on to analyze the situation in Kazakhstan through the USAID disparity report,more specifically the Astana and Almaty regions, to examine whether a HST is beneficial in an economic, political, and social way.

To properly understand the train of thought and different elements of this paper one may imagine a lock, a key, and a hand. The problems in Kazakhstan can be seen as the lock, something restrictive and difficult to open. The key to that lock would be agglomeration, using agglomeration as a tool to unlock the issues at hand. But a lock and a key are rather useless without someone turning the key and unlocking the lock, this would be considered as a “trigger mechanism” (Banister and Berechman, 2001) and thus this study willattemptto trigger agglomeration through HSTs.

To follow the correct flow of this investigation, this paper will try to demonstrate that:

• Agglomeration indeed increases economic activity
• Investment in transport infrastructure influences agglomeration
• There is a need for improvement of the railroad infrastructure in Kazakhstan

The structure of this paper is as follows: Chapter 1 is the introduction that primes the reader for this thesis. Chapter 2 will concern the prominent problems in Kazakhstan. Chapter 3 will provide the theoretical framework, where key transport and regional economic theories will be assessed. Chapter 4 will review case studies, the first is on the Netherlands’ plan to connect the northern province of Groningen to the economic area of the Randstad and the second is an ex-post study on the successes and failures various HST. Chapter 5 will compile all the information for the analysis of whether it is truly beneficial to introduce HSTs into Kazakhstan. Finally, chapter 6 is the conclusion.

Chapter 2:Kazakhstan

Kazakhstan, being the ninth largest country in the world, is located in Central Asia. Although its large size, the population is similar to the Netherlands at 17.7 million people (CIA, 2014), but even this is misleading at first. The misconception is that Kazakhstan has plenty of land, this is technically true at 2.7 million square kilometers, it is approximately 64 times larger than the Netherlands (CIA, 2014), but once looking at the population densities of major urban cities, it can easily be said that some cities are overcrowded. This leads to a heavy concentrations of people around the urban areas, leaving the majority of the country’s land uninhabited, creating large distances between large cities.

Before we go into detail into the problems that Kazakhstan faces, it is important to understand the different economic regions. There are four main regions: the oil-rich regions, non-oil industry regions, administrative regions and agriculture regions (USAID, 2006), which can be better visualized in Figure I.

Figure I: Economic Regions of Kazakhstan

(Source: USAID, 2006)

The map in Figure I shows that the western regions of Kazakhstan are involved with the oil industry, represented in the dark grey, producing 99.97% of the crude oil in the country, the bulk originating from the northern part of the Caspian Sea. The non-oil industry in blue is mainly located in the central and eastern of Kazakhstan, where there is a strong concentration on the energy sector and mining for coal and for ferrous and non-ferrous metals. The administrative regions in red are Astana City and Almaty City, as they are the current capital and old capital respectively. Finally there is the agricultural sector in green, which is divided into the northern and southern regions. The agriculture consists of at least 20% of the added value in these regions and accounts for roughly a quarter of the employed people (ROK, 2011).

Taking a closer look within the city scope, Kazakhstan’s most populated cities are located in the southeast and northeast parts of the country, with the four most populated cities being Almaty, Astana, Shymkent, and Karagandy, all with a minimum population of approximately 475,000 (Brinkhoff, 2012). Distances between the large cities range from approximately 200 to 1200 kilometers. Keeping the distances in mind, the lack of an efficient connection between cities and provinces creates problems on the regional level. A prime example would be the Atyrau Province. Atyrau is located in the far west of Kazakhstan, almost 2000 kilometers away from Astana. While boasting the second-largest economy due to the hydrocarbon deposits, it has surprisingly the largest urban and rural poverty rate in Kazakhstan. Can Atyrau’s large distance or even isolation from the main cities be the source of its high poverty? When taking the national population into account, the Atyrau Province only accounts for 3.1% of the poor, where as the agricultural sector accounts for nearly half of the poor population (USAID, 2006).

2.1 Kazakh Migration

To better understand the poverty situation, especially in the agricultural sector, it is important to examine the migration of the population, proportion living in urban and rural areas, the self-employment factor, wages, and the labor markets, which are graphically represented in Figure II-IV.

Figure II: Change in Migration

Figure III: Regional Population

Figure IV: Regional Self-employment in Kazakhstan

With migration, the attractiveness of the new capital can be seen with the large influx of migrants, but this is done at the expense of the other cities, mainly Almaty City. This can be explained by the fact that the capital was moved from Almaty to Astana in 1996 and there was a slow progression moving all the administrative bodies to the new capital. It is also observable that, although migration to Almaty city has decreased with the switch of the capitals, Almaty city itself is still growing, this implies that people are moving from the smaller cities into the bigger ones. Closely related to the migration patterns are the regional population and the self-employment aspects, where there is an evident positive relationship between the regional rural population and the proportion of self-employed. Not only does a larger rural population subsequently result in a larger proportion of self-employment, but also large developed cities like Almaty and Astana exhibit signs of the opposite; having a very low or non-existent rural population and subsequently barely any self-employment. This is also reflected in the Atyrau and Mangystau provinces, where there is a high level of foreign investment. In a study done by Kulbosynova and Auezov, it showed that a growth in the self-employment, not only stagnates income growth, but also preserves levels of poverty to an extent (Kulbosynovna and Auezov, 2012).

Kazakhstan’s regional disparity displayed by the findings of USAID, 2006 is also consistent by the research and findings of Aldashev and Dietz, 2012, with both studies agreeing that the most devastated regions are the agricultural areas where almost three fourths of the population are in rural areas. Furthermore, Kazakhstan’s economy is seen as rather vulnerable as, despite the measures taken to diversify the economy, it is still highly dependent on its oil reserves. Unlike the USAID, 2006 report, Aldashev and Dietz, 2012 state that the income and living standard inequality, although high, surprisingly does not have indications of lowering over time.

Aldashev and Dietz, 2012, goes further by examining the mobility of people. In their study, they have found migration in Kazakhstan to be consistent with the classic migration theory where it is primarily determined by the income level, thus there would be a larger influx of people to regions where there are higher income levels. Because of the inverse relationship between distance and migration and the relatively high costs and risks of migration caused by underdeveloped infrastructure, further negligence to the transport infrastructure would only preserve regional disparity. This is why it is imperative to further invest in public transport, to have a more homogenous income level and standards of living.

2.2 Regional Disparity

As one might expect, the Gross Regional Product (GRP) per capita diverges significantly between provinces and this has worsened over the years of 1999-2004, causing large disparities throughout Kazakhstan (USAID, 2006). Aldashev and Dietz’s further validate this regional disparity, where in their study the trend is quite stable and actually continues well into 2010 with a GRP per capitacoefficient variation of 0.7 to 0.8 (Aldashev and Dietz, 2012). The GRP per capita coefficient variation is a way to measure variations calculated by the proportion of the standard deviation explained by the mean GRP, thus the larger coefficient, the larger the variation from the mean GRP. Being well above Eastern Europe’s and the EU15 nations GRP disparity levels by almost threefold, it is a very similar story with respects to wage inequality, implying that high paying work is regionally intensive.

With large distances between highly specialized regions, one might expect that services are not as abundant. This is exactly the case when looking into Kazakhstan, and it has actually worsened by more than 2% of the GRP from services over the 1999-2004 timeframe (USAID, 2006). This should be rather alarming; as services should undergo a rapid increase when there is a successful shift to a market economy. When investigating into the regional service sector, the results diverge even more by a 7-9% decrease, varying from different economic regions. Administrative regions experienced the only significant increase in services, where Astana felt a staggering 32.5% increase (USAID, 2006).

Although poverty and disparity is rather common in Kazakhstan, the transport infrastructure also makes the list of top problems in the country (WEF, 2013). The railroad is becoming ever more important as roads become congested, especially when Kazakhstan has a growing task as a transit country for China-Europe traffic (Akhmet, 2008). Chinese president Xi further emphasized Kazakhstan’s vital role in creating a “Silk Road Economic Belt” in his visit to the national capital (Stratfor, 2013). Therefore the need to improve the rail infrastructure is a priority, not only for regional agglomeration benefits, but also for the future strategic position of Kazakhstan.

Chapter 3: Theoretical Framework

The theoretical framework is part two of the necessary prerequisite material for the argumentation for the case in Kazakhstan. This chapter provides the theoretical basis for the analysis of the situation in Kazakhstan. Topics such as agglomeration, transport economics, and scientific findings will be reviewed here to, not only to provide academic relevance, but also prepare the reader for the next chapter where case studies will be reviewed, making these theories essential.

3.1 Agglomeration

Agglomeration is defined as the positive externality stimulated by clustering of economic activity (Graham, 2007). When dealing with infrastructure development, benefits of agglomeration are very challenging to measure because of the relative non-rivalrous and non-excludable nature of agglomeration, thus benefits would be quite fragmented and thus difficult to monetize the full effect. Banister and Berechman, 2001 display a very nice flow-chart that summaries the impact in Figure V.

Figure V: Transport Infrastructure and Economic Growth

(Source: Banister and Berechman, 2001)

Another important aspect to consider is that the development of transport infrastructure can consume a considerable amount of time, consequently delaying the benefits into the long-run timeframe. This leaves a large margin of error due to the many variable factors. As long-term investments comprise of long-term benefits, projects can easily become political, due the short-term mindset of policy makers. More and more this emphasizes the importance of conducting such a study, to facilitate the decision making process (Helder, 2014).

The main concept of agglomeration is to connect cities with fewer amenities to ones with many. The reasoning for agglomerations can be many. The general benefits are that all services become cheaper due to the increased accessibility. With cheaper services, there is an increase in consumption. Accessibility is also linked to the mobility increase of the masses, which would subsequently lead to a pooled labor market and knowledge spillovers. Agglomeration can also be negative in the sense of cannibalistic activity, where there is lose of services because of the better connection to the main city (Ruijgrok, 2014). Presently, agglomeration is strongly linked with the reduction of travel time, making transportation a central player in agglomeration (Department of Transport Australia, 2012).