Kazakhstan is once again debating industrial support. The money is there. The tools are familiar. Direct subsidies, grants, tax breaks, targeted aid to specific firms. The formula is old. And more often, the same question arises that Europe has been asking itself for several years now: why does a growing level of state support not make the economy stronger, and why do private investments fail to accelerate?
The main trend of recent years is simple and worrying. Support is expanding. Returns are not. Kazakhstan is now approaching exactly the same crossroads.
What Europe shows clearly
Over the past few years, industrial policy in Europe has changed sharply. The state became an active economic player. Business support reached levels not seen since the early 1990s. In 2022, state aid in the EU amounted to about 1.4 percent of GDP. By European standards, this is a lot. The reasons are obvious. The 2008 crisis. The pandemic. The energy shock. Geopolitics. The green transition. All of this pushed governments toward fast and direct intervention. But fast solutions almost always come with side effects.
The key fact often missed in public debates is simple: a high level of state aid does not automatically make an economy competitive. Europe already shows this clearly. Money flows in. Companies receive support. But productivity growth remains weak. Private investment often does not accelerate. In some cases, it is even crowded out by public money.
This is the exact mistake Kazakhstan is now dangerously close to repeating.
The core problem with direct subsidies
The European industrial policy model relies heavily on direct subsidies. Grants, cash payments, cost compensation. They are easy to administer. Easy to explain to the public. Politically attractive. But they have a fundamental flaw. They pay for existence, not for results. A firm receives money regardless of whether it became more efficient, invested more, expanded exports, or introduced new technologies.
For two decades, direct subsidies have remained the main state aid tool in the EU. Even in crisis years, when loans and guarantees temporarily increased, the absolute volume of grants kept rising. In 2020-2022, direct payments to business averaged around 1 percent of GDP per year, roughly two and a half times higher than in earlier decades. This did not produce a breakthrough in competitiveness.
Selective support and distorted competition
There is another detail rarely highlighted. In Europe, direct subsidies are distributed highly selectively. Support goes to specific firms, often large and already established ones. New entrants and small companies are left out. Competition becomes distorted. Markets start adjusting to subsidies, not to demand. Support ends up locking in the existing economic structure instead of renewing it.
This logic is very familiar to Kazakhstan. Support often concentrates around a limited circle of firms and projects. Decisions are made manually. Criteria are vague. Results are hard to measure. Formally, funds are disbursed. In reality, the economy receives a weak impulse. Private capital hesitates to enter markets already dominated by the state.
Crowding out private investment
In Europe, this has led to a systemic problem. State aid began to replace private investment. When firms know that a large share of costs will be covered by the budget, their incentive to risk their own capital weakens. This happens almost automatically. The economy ends up with fewer innovations than it could have had. Productivity grows slowly. Competitiveness lags.
The structure of support makes this clear. In the EU, direct subsidies consistently rank first among all instruments. Tax incentives come second. Loans, guarantees, and equity participation played a secondary role for a long time. Even after the pandemic, when loans and guarantees temporarily expanded, grants remained dominant by volume.
Why the US looks different
This is where Europe fundamentally differs from the US. In recent US industrial policy, the emphasis is not on direct payments, but on tax incentives. Firms receive support only if they invest, produce, and generate profits. Money does not arrive automatically. It is tied to action.
This design difference explains why private investment in clean technologies and manufacturing has grown faster in the US than in the EU, with lower direct budget spending. The European experience shows that the issue is not the size of support, but its structure. When the state pays upfront and without conditions, it weakens markets. When it rewards investment and results, markets become stronger.
Why this matters even more for Kazakhstan
For Kazakhstan, this lesson is especially important. The economy is smaller. Resources are limited. Design mistakes are more costly. If direct subsidies start replacing investment, the country loses years of growth. This is not a theoretical risk. European data already shows it. Despite massive green industry spending, the EU lags behind the US in private investment growth and project scaling.
There is a second layer to the problem. In Europe, most direct subsidies flow into mid-tech sectors: machinery, automotive, traditional industry. High-tech sectors receive a smaller share. The economic structure becomes fixed. A so-called middle-technology trap emerges. Output grows, but value added does not. Innovation remains fragmented.
Kazakhstan risks following the same path. Support often goes to sectors where quick results are easiest to show. Launch production. Report volumes. Close the accounting. Long-term effects are modest. Productivity grows slowly. Export complexity does not increase. Dependence on state support remains.
Structure always matters
European experience clearly shows that industrial policy is never neutral to economic structure. When support consistently flows into the same sectors, it locks in the status quo. The economy stops moving up the technology ladder. This happens even with good intentions and large budgets.
Another risk comes from fragmentation. In the EU, a large share of subsidies is allocated at the national level. Richer countries can afford more. Poorer ones fall behind. The single market gets distorted. For Kazakhstan, the analogy is different, but the logic is the same. When support is distributed based on influence and access rather than rules, efficiency declines.
The missing metric: private investment
One more crucial point is often lost in public debate. In Europe, subsidies are rarely tied tightly to private investment leverage. There is no strict requirement that every public euro should attract several euros of private capital. There is no systematic assessment of crowding-out effects.
Money is allocated. Money is spent. But what happened to investment without subsidies often remains unanswered.
For Kazakhstan, this is critical. If the state does not measure how much private capital follows public support, it cannot know whether it strengthened the market or weakened it. Europe shows that without such metrics, industrial policy turns into redistribution, not development.
Design, not generosity
It is important to stress one more fact. All successful economies used industrial policy. But all unsuccessful ones did too. This means support alone guarantees nothing. Design makes the difference. Europe realized this too late. Volumes increased, rules stayed the same.
The US made a different choice. Support is embedded in the tax system. It is broad-based and relatively neutral. Firms compete for results, not for access to budgets. The state does not pick winners upfront. It sets conditions. This reduces policy capture risks and lowers administrative burden.
Kazakhstan does not need to copy the US model mechanically. But the conclusion is clear. Direct subsidies should be the exception, not the rule. They are justified in crises, emergencies, and very specific cases. As a baseline tool, they slow development.
The real choice for Kazakhstan
Looking at Europe without illusions, the picture is clear. The state paid more. The economy took fewer risks. The private sector adapted to support. Competition weakened. Growth stayed weak. That is the price of poor design. Kazakhstan is now at a point of choice. One path is to keep expanding direct support and hope that scale will eventually deliver results. Europe has already shown where this leads.
The other path is to rebuild the toolkit. Focus on tax incentives, repayable instruments, co-financing, and strict links between support, investment, and exports. This is harder. It requires discipline. But only this way public money becomes a lever, not a crutch.
There is one final lesson especially relevant for Kazakhstan. Industrial policy should not try to solve everything at once. In Europe, under the banners of strategic autonomy and the green transition, subsidies spread across sectors. The outcome was diluted. For a smaller economy, this approach is even more dangerous. Support must be narrow in objectives and strict in conditions.
Europe’s experience is valuable precisely because it is so visible. The money, institutions, and expertise were all there. Without changing the logic of instruments, the impact remained limited. Kazakhstan is fortunate. It can learn from others’ mistakes without paying their full price.
The question is no longer whether the state will be involved in the economy. It already is. The real question is whether that involvement will strengthen the market or replace it. Direct subsidies almost always lead to the second outcome. Europe has already felt this. Kazakhstan should draw conclusions in advance.
Sultan Valikhanov, expert of the EconomyKZ.org portal
