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A new blog on Central Asia, from Dmitriy Belyanin

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How EXPO-2017 affects tourism and government revenues in Kazakhstan

by Dmitriy Belyanin

The government of Kazakhstan is throwing a party, and the punch bowl costs billions of tenge. Prestige, infrastructure improvements, environmental solutions, macroeconomic stabilization and other doubtless benefits, may cost the country an arm and a leg.

From June 10 until September 10, Astana, the capital of Kazakhstan, will host an international exposition under the theme “Future Energy.” Kazakhstan is the first country in the Commonwealth of Independent States that the International Exhibitions Bureau has selected for EXPO. We will see that it is unclear that the Expo will pay off economically. We shall also assess the relevance of EXPO as an anti-crisis measure.

Parameters of EXPO-2017

More than 111 countries and 18 international organizations will take part in the exposition. Local companies have provided goods and services worth 492 billion KZT. Over 300 domestic businesses built and prepared facilities for EXPO. By around October 2016, the project had helped to create around 50,000 jobs, reports Kazinform. This is about 0.55% of Kazakhstan’s year 2016 workforce of 9,059,000 people, according to the CIA World Factbook.

To raise funds for EXPO-2017, the government relies on various sources. Over 2014-2016, expenditures from the budget were 433 billion KZT. (This is about 0.15% of the sum of government expenditures for each year during the period, according to IMF estimates.) The National Fund will lend 40 billion KZT to construct buildings. Overall, the government would spend roughly $1.5 billion on the Expo. The government has also been attracting sponsors, including multinational corporations, which kicked in about 125 million euro ($140.41 million, or 47.55 billion KZT) by October 2016, reports Forbes magazine.

Despite the expense, Astana’s shindig is relatively small. Organizers expect over 2 million visitors and 5 million visits. But the 2010 exposition in Shanghai attracted 73 million visitors. Each foreign visitor is expected to stay for about 4 days on average and spend around $1,500 per day, reports the Atameken National Chamber of Entrepreneurs.  Foreigners, mostly from the Commonwealth of Independent States and China, would account for 15% of visitors. Thus, from foreigners alone, revenues of $1.8 billion are expected.

Since most of the tourists will be Kazakhstanis, one may wonder whether the Expo will actually generate much revenue -- or merely divert them from other domestic hotels and  restaurants. But the expo website features advertisements of some hotels and restaurants in various cities of Kazakhstan. Also, advertisements will be placed near the EXPO site.  To be mentioned on the website, a hotel, restaurant, taxi station, or another service facility, must become a partner of the “Recommended by EXPO-2017” Program. A government commission assesses facilities for such characteristics as fluency of the personnel in English and access to Wi-Fi. Potential participants who had failed to comply with the Program’s requirements initially have an indefinite number of chances to re-apply. In preparing the “Recommended by EXPO-2017” Program, the organizers drew from the experience of Milan, Sochi, London and Shanghai, reports Tengri News. The government is taking precautions to ensure that the few foreign visitors receive a good impression of the country. Still, the government is interfering in the market, subsidizing promotion of firms asserted to provide better services.

Political benefits and externalities

The International Exhibitions Bureau selected Kazakhstan for EXPO-2017 in 2012, after years of lobbying. Of the 156 member states of the International Exhibitions Bureau, 103 voted for Astana. Leige in Belgium, the sole rival, received 45 votes.

Hosting the Expo serves political and economic purposes. Strengthening Astana’s infrastructure should improve the city’s reputation. Some people have had second thoughts about the wisdom of moving the capital from Almaty; land improvements in Astana may alter their opinions. Creating new jobs may attract domestic migrants to Astana. A higher population density may lead to knowledge spillovers, larger markets, and scale economies. President Nazarbayev earmarked 29 billion KZT to build an airport terminal and to reconstruct the runway, enabling Astana’s airport to receive 7.1 million passengers per year, compared with 3.5 million passengers now. Private direct investment in hotels, apartment buildings and so forth is estimated at $1 billion. For the airport, “Kazakhstan Temir Zholy,” 100% owned by the state “Samruk-Kazyna” National Welfare Fund, shelled out 14 billion KZT. Another 18 billion KZT will be borrowed, reports Forbes.

By spending on rail terminals and airports, the government may help its visa liberalization to pay off.  In 2015, the government deemed that citizens of the 34 OECD countries, as well as of Malaysia, Singapore and the United Arab Emirates, could stay in Kazakhstan for 30 days without a visa. Foreign workers at the Astana Financial Center (which will use Expo infrastructure) and their families will receive five-year visas.

The government’s role in financing airports is controversial, since airports encompass both private and public goods. For example, airports ensure security. The passport and customs control system in an airport prevents entry and exit of criminals, while flight dispatchers ensure flight safety. It is not possible to exclude those who do not pay for this service from receiving the protection. Neither is it possible to ration the service. Since a private airport cannot collect fees from all who benefit by the safety it provides, it would produce too little safety. On the other hand, comfort to passengers is a publicly provided private good. Those not using the airport do not get the benefit of its cafes and duty free shops, so these services can be provided privately.

What about the reduction of ill effects from production, like pollution? The EXPO facilities will rely on alternative sources of energy, such as photovoltaic panels, wind generators, and heat pumps, to demonstrate usage of geothermal energy. It is not clear whether their use after the EXPO will be efficient.

The EXPO as a tool of macroeconomic stabilization

Akmetzhan Yessimov, chairman of the EXPO-2017 board, had characterized the organization of EXPO as an anti-crisis measure, pointing out the number of jobs it created. By creating facilities, the government compensates for declining output in other industries.

By spending more or cutting taxes, governments hope to raise aggregate demand for a while, which would encourage firms to produce more, provide more jobs and eventually increase salaries. An increase in government expenditures has a more powerful effect than a tax cut, since people save part of the cut. The problem with fiscal expansions, however, is that workers may be forward-looking and demand wage increases shortly after an increase in prices, so the effect of the fiscal stimulus may be short-lived.

How forward looking are employers and employees in Kazakhstan? And how justified is it to stimulate aggregate demand now? Compared with developed countries, inflation in Kazakhstan has been high, so people anticipate price increases.

Also, the government may find it hard to push the unemployment rate much lower.  According to the IMF World Outlook Database, since 2014, unemployment in Kazakhstan has remained steady at a rate of 5.04%, even though real GDP growth slowed from 6% in 2013 to 1.16% in 2015 and is estimated at -0.75% for 2016.

How important is EXPO to expansionary fiscal policy? The table below illustrates changes in total government expenditures and expenditures on EXPO, during the period 2013-2016:

Subject Descriptor	2012	2013	2014	2015	2016
Expenditures on EXPO	0	20	45.5	154	233.5
General government total expenditures	6796.054	7130.917	8711.454	9590.892	9765.708
Expenditures on EXPO, % change	n/a	n/a	127.50%	238.46%	51.62%
General government total expenditures, % change	13.32%	4.93%	22.16%	10.10%	1.82%
Expenditures on EXPO/Total Expenditures, %	0.00%	0.28%	0.52%	1.61%	2.39%
Δ Expenditures on EXPO/ΔTotal Expenditures, %	n/a	5.97%	1.61%	12.34%	45.48%

Sources: Forbes magazine, the October 2016 International Monetary Fund World Economic Outlook Database, and author’s calculations

Change in expenditures on EXPO-2017, relative to total expenditures of the Government of Kazakhstan (2012-2016), bln. KZT

From the table, we can derive arguments both in favor and against EXPO as an anti-recessionary measure. Expenditures on EXPO increased the most during 2014 and 2015, when oil prices were declining. But their share in total expenditures remained small. Furthermore, oil prices have begun to rise, so the fiscal stimulus is not as necessary as before.

Experiences of other countries in international expositions

Since the first international exposition in 1851 at London’s Crystal Palace, many countries have hosted expositions that have made them more recognized worldwide. For example, according to a study of the Hanover expo, 73% of the countries participating in Expo 2000 participated mostly to improve the national image.

Countries may also hold expositions to improve macroeconomic performance. Dubai, selected for the 2020 EXPO, anticipates over 25 million visitors and 270,000 new jobs in case of winning. The government expects to earn between $25 billion and $35 billion, and it plans to spend $6.8 billion on new infrastructure, reports Quartz.

Attracting enough visitors to profit may be challenging. The Hanover expo attracted 18.1 million visitors, far less than the 40 million expected. The exposition lead to net losses of 2.4 billion DM ($1.13 billion), about $15 for every German man, woman and child, reports The Guardian. 

Though the Hanover expo did not make money, noted the Bureau of International Expositions website, it helped to develop the city by enlarging the streetcar network and creating a third airport terminal, a road network, and a rail station.

Some expositions had substantial side effects and expenses. The Shanghai World Expo 2010 cost $4.2 billion, according to government statistics; but the Chinese news media claimed that the cost of staging it exceeded $50 billion, more than for the 2008 Olympics in Beijing. The exposition resulted in many buildings that were not used after the event and could not be dismantled, said the New York Times. Shanghai revenues were relatively modest. Ticket sales came to $709 million, half of the exposition’s revenue. Food services and retailers earned $47.7 million, and sponsors gained $591 million, reported the Shanghai Expo website.

Some expositions were more successful. The one in Aichi Prefecture, Japan, generated accounting profits of $90 million, and much of the area was re-used. A park was created. The house for two characters of the animated film My neighbor Totoro was set up there. So was a center preserving the Kaisho Forest.

The key point is this: Accounting profits (the numbers on the books) are not economic profits (revenues minus true costs, which include values that could have been realized had the Expo not occurred). Since most visitors will be domestic, the event will divert revenues from other restaurants and hotels in Kazakhstan, so it may not benefit the country on net. If the Expo generates $500 million in revenues but diverts $200 million from tourism elsewhere in Kazakhstan, the country will gain no more than $300 million. It is not clear that the government has calculated such opportunity costs.

Obstacles to EXPO’s popularity

Instability or terrorism – like the Aktobe attack last June -- could cut revenues from the Astana gala. On the other hand, terrorist threats in Egypt and Turkey may induce Russian tourists to seek alternatives like Astana. Since Kazakhstan belongs to the Eurasian Economic Union, the Russian media is likely to laud the Expo to readers who can visit Kazakhstan without much red tape. The exhibition may also be popular among tourists from Iran, which has become more open thanks to sanctions relief and a new reformist Parliament. Westerners may to be more reluctant to visit; American and European tourists may be unwilling to spend pocket change on an authoritarian regime.

The magnitude of the event may discourage visitors and participants. For example, in 2016, Estonia informed Kazakhstan that it would not take part in EXPO. Participating in EXPO would have cost Estonia 2.2 million euros ($2.42 million, or 828.02 million KZT, based on the year 2016 tenge exchange rate), and its Ministry of Economy decided that the event was not worth participating in, reports Kazakhstan Today. In general, the exposition in Astana is a much less significant event than those in Shanghai and Milan. There will be fewer pavilions, participating countries, and visitors. 

Furthermore, the failure of similar events to attract enough tourists can make EXPO unpopular. People would not want to be are among the few attending. The organizers of the Universiade in Almaty, which took place in February, had expected about 30,000 tourists, but only 2,100 came, even though schoolteachers and schoolchildren had an additional spring vacation at that time, reports Kazinform. Unlike the Universiade, EXPO-2017 will take place during the summer, when most teachers and students will be on vacation.

Conclusion

EXPO-2017 Astana is an extravagant and prestigious project, but not necessarily a profitable one. The role of EXPO as an anti-crisis measure is also questionable.

Dmitriy Belyanin has a Master’s degree of Business Administration in Finance and a Bachelor of Arts degree in Economics from KIMEP University. Since 2007, he has been writing on issues in economics and finance ranging from stock markets to environmental economics. He is the associate editor of this blog.

  

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