**Input-output table.** The core input-output model is the 2003 table produced by the Statistical Agency of the Republic of Kazakhstan.  We use this table along with the data on tariff rates, estimates of the ad valorem equivalents of barriers to foreign direct investment, data on local content and VAT policies in the oil sector and data discussed above on services sectors to calibrate the model following the calibration procedure in Jensen, Rutherford and Tarr (2004). In all sectors except oil and gas, we calibrate an identical cost function for intermediate inputs for both national and multinational firms (in the absence of firm specific data). In the oil and gas sector, we calibrate separate cost functions for the national and the multinational firms as the VAT and local content policies affect their cost functions differently. We first calibrate identical cost shares for intermediate inputs (as in the other sectors). The incorporation of the twenty percent price preference then reduces the cost shares of domestic inputs purchased by multinational firms. The price preference (an ad-valorem subsidy) is then financed by an ad-valorem “tax” on output. The revenue of this “tax” equals the value of the subsidy to domestic inputs leaving output of the multinational firms unchanged. The incorporation of the discriminatory VAT finally increases the same cost shares by 15%.<sup>13</sup>

# **III.  Results**

In our general WTO scenario, we assume that barriers against foreign direct investment are reduced by 50 percent, except as indicated in table 4; basic metals and metal products, which are subject to antidumping actions in export markets receive slightly improved market access. This is implemented as an exogenous increase in their export price as shown in table 4; and the tariff rates of all sectors are reduced by 50 percent.<sup>14</sup> We first discuss (and present in table 5) our estimates of the impact of Kazakhstan WTO accession on aggregate variables such as welfare and the real exchange rate, aggregate exports, the return to capital, skilled labor and unskilled labor, and the percentage change in tariff revenue. In order to obtain as assessment of the adjustment costs, we estimate the percentage of labor and mobile capital that must change industries. The gains come from a combination of effects, so we also estimate the comparative static impacts of the various components of WTO accession in order to assess their relative importance.

First we discuss the comparative static results. We shall also consider the results of assuming the time frame is long enough for capital to adjust to its new long run steady state equilibrium in a scenario we call comparative steady state.

## **Aggregate Welfare Effects of WTO Accession**

We estimate that the welfare gains to Kazakhstan are equal to 6.7 percent of Kazakhstan consumption (or 3.7 percent of GDP) in the medium term. These gains derive from four key effects: (1) improved access to the markets of non-CIS countries in selected products; (2) Kazakhstan tariff reduction; (3) liberalization of barriers to foreign direct investment in services sectors; and, (4) the elimination of local content policies for multinational oil companies combined with VAT exemption on their input purchases from domestic sources (parallel treatment to the VAT treatment on imported inputs). We execute four scenarios that allow us to understand the relative impact of these various elements and the mechanisms through which they operate.

13 We understand that multinational oil firms prefer to deal with the same global suppliers for a number of reasons, including cost-savings from using the same suppliers in all the countries where they operate and a major concern for quality and safety standards that national firms may not be able to deliver. Our calibration procedure implies cost shares of domestic inputs purchased by multinationals close to the average of both national and multinational firms. We may therefore overestimate the “true” cost shares for multinationals and underestimate the same shares for national firms. We have not been able to identify that allows to verify this or to improve our calibration procedure. 14 Actual tariff reductions remain are part of the accession negotiations and are not known with certainty.

10