While still a republic of the USSR (prior to independence in 1991), Kazakhstan underwent rapid development of its agricultural and industrial sectors. Vast tracts of land were brought into cultivation with the expansion of irrigation under the USSR's "Virgin Lands" program, while within the industrial sector, development of its metallurgical, mining, and machinery industries were prioritized. Growth in these various economic sectors was fueled by a high labor-force-participation rate in the local population, especially among women, as well as the import of some skilled labor from Russia. By the 1980s, growing problems of inefficiency and inadequate technological development in the overwhelmingly dominant state sector resulted in a flagging rate of growth overall.
The region's industrial and agricultural development had, moreover, come at some high environmental costs. The structure of Kazakhstan's transportation and energy sectors clearly highlight the overall orientation of the economic base fostered under the Soviet regime; railroads and paved roads are clustered mainly in the north and the south, serving more to link Kazakhstan with Russia, Uzbekistan, and Kyrgyzstan than to integrate the republic itself. Similarly, electricity transmission networks facilitate the exchange of energy with different republics in the former USSR rather than between different parts of Kazakhstan.
Since sovereignty was declared in December 1991, Kazakhstan has been embarked on a process of economic restructuring aimed at establishing a market economy. In 2002, President Nazarbayev reported that Kazakhstan was recognized by both the EU and the United States as a market economy, and that 75% of the country's GDP was derived from the private sector. This transformation, substantial if incomplete, involved reform on many fronts: privatization; lifting of price, capital, and profitability controls; the elimination of subsidies; debt restructuring; tax, customs, and banking reform; creation of a securities and exchange commission; and trade and investment liberalization. The government made several policy changes in the late 1990s and early 2000s that left outside investors and auditors uncertain about the direction and stability of the economic regime.
Independent Kazakhstan appealed to numerous international agencies for assistance in restructuring its economy. The World Bank's aid program comprised both policy-based adjustment loans and investment projects in areas that included agriculture, energy, environment, finance, health, legal reform, roads, social protection, taxation, urban transport, and water supply and sanitation. The European Bank of Reconstruction and Development (EBRD) supported both private sector development and public sector projects such as ports, power, railways, and telecommunications. Technical assistance for enterprise and civil service reforms, food production and distribution, and human development have been provided by other UN agencies and the EU. The Islamic Development Bank (IDB) was active in the areas of health, transport, postal service, and water supply. Japan, the largest bilateral donor, provided significant balance-of-payments support and extended loans for the Astrana airport and the transport infrastructure. The United States provided assistance for privatization, tax and pension reforms, and social services. Other bilateral donors are Germany, Saudi Arabia, and Turkey.
In 1993, the government negotiated a far-reaching major contract to explore and develop the Tengiz oil field. Through mergers, acquisitions and sales, the shareholders in this venture as of 2003 were ChevronTexaco (50%), Exxon Mobil (25%), KazMunaiGas (20%, down from 45% from sales of 25% to Mobil, now ExxonMobil), and LukArco (5%).
In 2000, the Philip Morris Co. completed a $200 million greenfield cigarette factory in the Almaty region.
In seeking to achieve monetary stability, Kazakhstan in 1995 and 1996 entered into credit agreements with the IMF. In 1996 the president established a secret National Fund, into which he deposited the proceeds from the sale of shares in the Tengiz oil field. The existence of the National Fund was not revealed until 2001, and by 2002 most of the original $1 billion had reportedly been used in two major withdrawals—$480 million had been used in 1997 to pay off pension funds threatened with bankruptcy, and $400 million had been used in 1998 to cover budget deficits stemming from the collapse of the Russian ruble. While the secret fund seems to have cushioned the economy from external shocks, its existence raised serious questions about the transparency of the government's finances.
The government emerged from the financial crises of the late 1990s less committed to privatization and ready to dismantle some of its incentives for foreign investment. In 1999, the government halted or slowed privatization programs. There was also a shift in monetary policy. In February 2002 the government took another major step away from privatizing the oil and gas sector by announcing the establishment of a national energy conglomerate, KazMunaiGaz, combining the national oil company with the national oil and gas transport company for the stated purpose of being able to compete with the international oil companies. In late 2002, agreement was reached among Azerbaijan, Georgia, Turkey, Turkmenistan, and Kazakhstan on the route for the Baku-Tbilisi-Ceyhan (BTC) pipeline, and construction began in May 2003.