Kazakhstan’s oil boom, diversification strategies, and the service sector

Economic diversification and addressing challenges of non-oil producers are a common policy goal in many resource-exporting countries. This study’s contribution is in drawing policy makers’ attention to intermediate services, i.e., services used by firms together with other inputs in their production process. These services are increasingly important for enhancing manufacturing exports and productivity, as well as earning direct export revenues. Yet, there is limited research on how the intermediate service market performs in countries with large extractive industries. To understand complex dynamics between the resource and service sectors, we rely on the evidence from Kazakhstan, a large petroleum producer. Using panel data analysis, we find that, due to the very high service intensity of petroleum production, rising petroleum output leads to higher intermediate service prices and lower intermediate service output purchased by non-oil producers. To mitigate the oil boom’s crowding out of non-oil producers from the service market, we recommend service sector diversification policies.