The Jewel of Central Asian Republics: Double-Digit Growth, Single-Digit Inflation, a Reformed Financial System and Vast Oil Reserves Have Kazakhstan Poised to Become a Major Player in the World Economy. (World: Kazakhastan)

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It isn't every day that you see a former colony outperform its colonizer, let alone within 10 years of independence, but that's just what Kazakhstan seems to have done. When this vast land of steppes and mountains astride Central Asia recently marked the 10th anniversary of its existence as a modern state, it had a lot to celebrate. Having grown from a poverty-stricken backwater to a foreign-investment magnet, it boasts double-digit growth, single-digit inflation and an efficient and transparent financial system that Russia can only envy. With no history of independent trade, let alone capitalism, the Kazakhs have bounced back from the collapsed Soviet economy with unexpected skill and vigor.

"Kazakhstan is closing the first decade of its independence with 13 percent growth, just as it started at independence with a 13 percent fall of output," said Jean Lemierre, president of the European Bank for Reconstruction and Development, at a recent meeting of the country's Foreign Investors Council. And it's not just oil that's growing: "Kazakhstan has had a bumper harvest, and the chemicals, machine-building and food-processing industries are all booming," he says.

As the economy grew, the average monthly salary rose to $101, the highest in the former Soviet Union except for the Baltics. In the same time period, by comparison, Russia's economy grew 5 percent; its average salary is $86. This year, salaries will have risen 17 percent before inflation, which was 7 percent. The Kazakhstani economy should grow back to its precollapse 1990 level within four years, experts say.

"Though no paradise for the unwary, Kazakhstan is more investor-friendly than Russia," according to a senior U.S. lawyer here who asked not to be identified. "Unlike in Russia, where local authorities openly defy federal policy, the Kazakhstani government's decisions are carried out throughout the country, an advantage that foreign investors cite frequently," she says. On the other hand, major U.S. investors such as the former Chevron Corp. have been challenged on the stability of their contractual relationships in an area of the world where corruption is an ancient tradition.

Kazakhstan, notes Grigory Marchenko, the widely respected governor of the central bank, "is the only ex-communist country to have created a viable financial system independently. The Central Europeans were motivated to reform their banking systems because of the accession game -- accession to the European Union," he says. "The Baltics started by themselves, but now their banking sector is controlled by foreigners. Here foreigners control only 26 percent of it. We're the only ones who did it on our own."

By all accounts, Kazakhstan's road to financial improvement wasn't easy. In the chaos that followed independence, banks sprouted like mushrooms, peaking at 230 in 1993 -- more than twice as many as in the Netherlands. Risk management was minimal and most banks made their money speculating against inflation. When they did make commercial loans, the loans were small, short term, high interest and without adequate collateral.

President Nursultan Nazarbayev, in power since 1989, was a steel engineer-turned-Communist apparatchik with little knowledge of economics. He stuck with the Russian ruble for several years after Russian president Boris Yeltsin and his Byelorussian and Ukrainian counterparts dissolved the Soviet Union in late 1991 without consulting him. Kazakhstan floundered in imported hyperinflation that reached 1,600 percent in 1993.

Until 1994, says Marchenko, there was no difference between here and Russia. Then the tenge was introduced as the Kazakhstani national currency. To head the new central bank, the National Bank of Kazakhstan, Nazarbayev appointed a diminutive, gravel-voiced central planner and deputy prime minister named Daulet Sembayev. "It was Michel Camdessus who persuaded me to take the job," Sembayev recalled in a recent interview, referring to the then-head of the International Monetary Fund (IMF). …