consumption necessary to achieve the higher level of investment and thus, is an upper bound estimate on the long run gains within the framework of the model assumptions.

# **Key Data**

# **Ad Valorem Equivalence of Barriers to Foreign Direct Investment in Services Sectors.**

Several of the business services sectors are crucial inputs into the manufacturing sector and efficient, competitive business services sectors are key to the development of a Kazakhstan economy that can compete in the increasingly integrated global marketplace. We have briefly summarized some of the key distortions and recommended reforms above and provide policy notes in the appendices for more details.

Estimates of the ad valorem equivalence of the barriers to FDI in services are key to the results. Consequently, we commissioned 20-page surveys from Kazakhstan research institutes that specialize in these sectors and our econometric estimates of these barriers are based on these surveys.

These questionnaires provided us with data and descriptions and assessments of the regulatory environment in these sectors.<sup>8</sup> Using this information and interviews with specialists in Kazakhstan, we estimated the ad valorem equivalence of barriers to foreign direct investment in several Kazakhstan sectors, namely in telecommunications; financial services, insurance and securities; and maritime and air transportation services. The process involved converting the answers and data of the questionnaires into an index of restrictiveness in each industry. We applied the methodology explained in the volume by C. Findlay and T. Warren (2000). More specifically we follow the methodology of Warren (2000) for telecommunications and Kimura (2004a, b) for transportation services and financial services. For each of these service sectors, authors in the Findlay and Warren volume evaluated the regulatory environment across many countries. The price of services is then regressed against the regulatory barriers to determine the impact of any of the regulatory barriers on the price of services. We assume that the international regression applies to Kazakhstan. Applying that regression and our assessments of the regulatory environment in Kazakhstan from the questionnaires and other information sources, we estimate the ad valorem impact of a reduction in barriers to foreign direct investment in these services sectors.<sup>9</sup> The results of the estimates are listed in table 4.<sup>10</sup> For details on the calculations, including the data, please see Appendix B.

> 8 This information was provided by Kazakhstan research institutes. We thank **Mr. Il (Иль) Kalimulin** , head of infrastructure and transport department at the Economic Research Institute under the Ministry of economy for his preparation of the questionairres on air transport, maritime transport and telecommunications; **Ms. Gulbakhyt Kalieva for her preparation of the banking questionnaire; Ms. Dinara Aldabergenov for preparation of the insurance questionnaire; and Ms. Altyn Jumanbaeva for preparation of the securities questionnaire.**

> 9 Warren estimated quantity impacts and then using elasticity estimates was able to obtain price impacts. The methodology of Kimura et al. that we employ are for “discriminatory” barriers against foreign direct investment. Kimura et al. also estimate the impact of barriers on investment in services that are the sum of discriminatory and non-discriminatory barriers.

10 Based on a homogenous product methodology, such as employed by Kimura et al (2004), we estimate that the price of mobile telecommunications is elevated 20%, the price of fixed line services by 15% and internet services are only 1% higher. This is a weighted average price increase of 16%. We believe that in telecommunications it is crucial to employ a differentiated product model to characterize competition between multinational and Kazakhstan telecommunications providers. This means that if the discriminatory tax on multinational service providers results in a 16% increase in the **composite price** of domestic and multinational service provision. Then the ad valorem tax on multinationals, say at rate x, must be above 16% since there is no discriminatory tax on domestic service providers and the composite price is a weighted average of domestic prices (which are untaxed) and multinational prices which are taxed at a rate x. More precisely, if x is the ad valorem equivalent of the barriers to multinational investment in telecommunications in Kazakhstan , s is the share of the market in Kazakhstan of multinationals, 16% is the amount 8