Escaping the Middle-Income Trap: Why Regional Fiscal Reform Matters for Kazakhstan

The Asian Development Bank and its partners argue that Kazakhstan’s future growth depends on reducing its heavy reliance on commodities and empowering regions through fiscal decentralization, so local governments can invest in innovation, skills, and infrastructure. Paired with a strong fiscal equalization system, these reforms would help close regional gaps, avoid the middle-income trap, and create more balanced, resilient national growth.

Produced by the Asian Development Bank in partnership with Kazakhstan’s Economic Research Institute and researchers from the London School of Economics and Political Science, the report examines how Kazakhstan can sustain growth while avoiding stagnation and rising inequality. Since its independence in 1991, Kazakhstan has transformed its economy, rebounding strongly after the collapse of the Soviet system. Oil, gas, and mineral wealth fueled rapid growth in the 2000s, lifting the country into upper-middle-income status. However, this success has come with growing risks. Growth has slowed in recent years, remains highly dependent on commodities, and is vulnerable to global price shocks and regional instability. As Kazakhstan aims to double its GDP by 2029, the report argues that the current economic model is no longer enough.

Uneven Growth Across the Country

One of the report’s central findings is that economic growth in Kazakhstan has been deeply uneven. Prosperity is concentrated in a few major cities, such as Astana and Almaty, and in resource-rich western regions. Meanwhile, many southern and eastern regions continue to lag in income, job quality, education, health outcomes, and overall well-being. Using indicators like the Regional Wellbeing Index and the Development Trap Index, the report shows that some regions face a serious risk of long-term stagnation. These territorial gaps are not only unfair; they also weaken national growth by leaving large parts of the country’s potential untapped and increasing social and political tensions.

Why Innovation Needs Strong Regions

Kazakhstan’s National Development Plan to 2029 focuses on competitiveness, entrepreneurship, human capital, innovation, digitalization, and reducing regional inequalities. The report supports these goals but argues they cannot be achieved through centralized decision-making alone. Innovation and productivity growth depend on strong local ecosystems that combine skilled workers, good infrastructure, local firms, and effective institutions. Today, many regions lack the financial freedom to invest in these foundations. Local governments are responsible for delivering services like education and infrastructure, yet they have limited control over funding and priorities. Without stronger regional capacity, innovation risks remaining concentrated in a few urban centers.

Fiscal Decentralization as a Growth Tool

The report presents fiscal decentralization as a practical way to unlock regional potential. In simple terms, fiscal decentralization means giving local governments more control over revenues and spending. International examples, from Germany to China, show that when local authorities have a stake in economic growth, they are more motivated to attract investment, improve services, and support local businesses. In Kazakhstan, however, tax revenues are low by international standards and heavily centralized. Local budgets rely heavily on transfers from the national government, often covering more than half of their funding. The report explores several reform options, from improving property taxation to allowing regions to keep a share of national taxes like corporate income tax or value-added tax. Even modest changes, the analysis shows, could significantly strengthen local finances if well designed.

Why Equalization Matters

Decentralization alone is not enough. The report strongly emphasizes that stronger local revenues must be paired with a fair and transparent fiscal equalization system. Without this, richer regions would continue to pull further ahead, thereby widening inequalities. Drawing on systems used in Australia, Canada, and Germany, the report develops scenarios for Kazakhstan that redistribute funds based on factors such as population, income levels, well-being, and poverty. These models show that it is possible to reduce regional gaps while still encouraging regions to grow their own economies. The report concludes that fiscal reform must go hand in hand with stronger institutions, better data, improved tax administration, and greater political accountability, including planned direct elections for local leaders.

In the end, the report argues that fiscal decentralization and equalization are not just budget reforms. They represent a shift toward a new growth model, one that reduces dependence on commodities, spreads opportunity more evenly across the country, and gives every region a real stake in Kazakhstan’s economic future.