Breaking the Middle-Income Trap: Why Fiscal Decentralization Matters for Kazakhstan

The Asian Development Bank–led study argues that Kazakhstan’s future growth depends on moving beyond commodity dependence by empowering regions through fiscal decentralization, stronger local revenues, and fair redistribution. By giving local governments more financial autonomy while using robust equalization to reduce regional gaps, Kazakhstan can escape the middle-income trap and achieve more balanced, resilient development nationwide.

Kazakhstan stands at a decisive moment in its development journey, according to a major study produced by the Asian Development Bank in partnership with the Government of Kazakhstan, the Economic Research Institute under the Ministry of National Economy, and researchers from the London School of Economics and Political Science. After more than three decades of strong but uneven growth since independence, the country now faces mounting risks linked to economic volatility, heavy reliance on commodities, and widening regional disparities. The report argues that without structural reforms, Kazakhstan could slip into a middle-income trap, where growth slows and convergence toward high-income status stalls.

Growth success, but built on shaky ground

Kazakhstan’s economic record since the 1990s is impressive. After a severe contraction during the transition from central planning, the economy rebounded strongly in the 2000s, powered by oil, gas, and mineral revenues. This resource-driven boom lifted incomes and helped Kazakhstan reach upper-middle-income status. Yet growth has been highly volatile, closely tracking global commodity prices. Outside the extractive sectors, productivity gains have been modest, and recent growth has lagged behind that of other middle-income countries. The report warns that continued dependence on hydrocarbons leaves the economy exposed to external shocks and limits the development of more innovative, knowledge-intensive activities.

Deep regional divides hold back national growth

One of the report’s strongest messages is that Kazakhstan’s growth problem is also a territorial one. Economic activity and well-being are concentrated in a few urban centers and resource-rich western regions, notably Almaty city, Astana, and Atyrau. In contrast, many southern and eastern oblasts struggle with weaker infrastructure, poorer education and health outcomes, and limited innovation capacity. These gaps are not just unfair; they are inefficient. Lagging regions represent untapped economic potential, and persistent inequality risks social discontent while dragging down overall national performance. The authors stress that balanced regional development is essential for sustained long-term growth.

Why fiscal decentralization matters

The report identifies fiscal decentralization as a key tool to unlock regional potential. Despite ambitious national goals under the Kazakhstan National Development Plan, subnational governments remain highly dependent on central transfers and have limited control over revenues and spending. Local authorities often lack the resources and flexibility to invest in infrastructure, skills, or business support tailored to local needs. By devolving greater fiscal powers, Kazakhstan could strengthen local accountability, improve public service delivery, and allow regions to pursue development strategies that reflect their own strengths. International experience from countries such as Brazil, the People’s Republic of China, and Germany shows that decentralization can support growth, but only when institutions are strong and rules are clear.

Making decentralization fair and effective

The report emphasizes that decentralization must go hand in hand with fiscal equalization. As regions gain more revenue powers, differences in fiscal capacity would otherwise widen. Drawing lessons from Australia, Canada, and Germany, the authors argue for a transparent, formula-based equalization system that ensures all regions can fund basic public services while still rewarding economic effort. They present several scenarios showing how transfers based on population, income, wellbeing, and development risks could significantly reduce regional disparities. The report also outlines practical steps, such as modernizing property taxation, allowing regions to retain a share of national taxes, devolving selected fees, and strengthening local administrative capacity.

Toward a new growth model

The report frames fiscal decentralization and equalization as central elements of a new growth model for Kazakhstan. Empowering regions to invest in people, innovation, and infrastructure, while ensuring poorer areas are not left behind, can help the country move beyond commodity dependence and build a more resilient, inclusive economy. Success will depend not only on technical tax reforms but also on stronger local institutions, better data, greater transparency, and sustained political commitment. If these conditions are met, Kazakhstan has a realistic opportunity to escape the middle-income trap and achieve more balanced, durable prosperity across all its regions.