scenarios that allow us to decompose the impacts. Tariff reform only is responsible for 0.4 percentage points of the gain in consumption. Improved market access accounts for 0.5 percentage points of the welfare gain. Combined VAT and local content reform in the oil sector results in a gain of welfare equal to 0.9 percent of consumption. We estimate the gains from FDI liberalization in services are 4.9 % of the value of Kazakhstan consumption, which amounts to over 70 percent of the total gains from Kazakhstan WTO accession. Thus, while improving its offer to foreign services providers within the context of the GATS may be a difficult aspect of Kazakhstan’s negotiation for WTO accession, our estimates suggest that the most important component of WTO accession for Kazakhstan in terms of the welfare gains is liberalization of its barriers against FDI in services sectors.

The crucial importance in the Kazakhstan context of liberalization of barriers to FDI reflects the starting point of the analysis; that is, we assess that Kazakhstan has done more to lower it tariffs on goods than it has to liberalize its barriers to FDI in services sectors. Telecommunications, banking services and transportation services provide crucial inputs to the manufacturing sector and are key to the development of a Kazakhstan economy capable of competing on the global marketplace. Given the external pressure that accompanies WTO accession, WTO accession represents a unique historical opportunity to not only commit to liberalization of the foreign direct investment regime, but also to implement complementary reform of the domestic regulatory framework in these sectors. Consequently, we also provide short policy notes suggesting the most important reforms in the key services sectors. Some of the key barriers or issues in these sectors are as follows.

In telecommunications, there is strong restriction on entry in some areas of services; incumbent operators have excessively long exclusivity rights in areas such as long distance and international telephone services and with respect to interconnection for mobile operators; foreign ownership of a company can’t exceed 49 percent; and cross ownership among the incumbents limits competition. The costs of long distance telephone services and broadband internet access are three to six times the costs of comparator countries such as Russia, selected EU countries, and Australia.

In banking, up to the end of 2005, branches of foreign banks were prohibited, and banks with foreign participation were limited to a maximum of 50 percent of the aggregate authorized capital of the sector. In addition, banks with foreign participation may be subjected to additional requirements, such as the type of business in which they may engage, reporting procedures and the makeup of their Board of Directors. In transportation services, railroad tariffs differentiate between imports, exports and domestic freight destinations. In addition, a major reform of the sector is planned, with the introduction of competition into freight and passenger services, while the network or infrastructure services are to be subjected to monopoly regulation. Existing railroad service, however, is quite slow, contributing to very long delivery times for external trade. In air transportation services, domestic route licensing is rather restrictive.

The ad valorem equivalence of the barriers to foreign direct investors in business services has been estimated specifically for this study, as explained below. These estimates were based on surveys we commissioned of specialized service sector institutes in Kazakhstan to obtain data on the regulatory environment in the key business services sectors and the application of recent econometric methodology for estimating barriers to FDI in services (see Findlay and Warren, 2000).

The paper is organized as follows. In section II we describe the model and the most important data. In section III we describe and interpret the central policy scenarios. In section IV we examine the impact of different modeling assumptions (or model closures) on the results and present the results of our piecemeal sensitivity analysis in which we examine the robustness of our results to parameter choice. In 4