ECONOMIC DEVELOPMENT IN COUNTRIES OF CENTRAL ASIA: PROSPECTS AND CHALLENGES

By

Kubat Umurzakov, Director, CAREC Institute

Saeed Qadir, Senior Research Officer, CAREC Institute

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TABLE OF CONTENTSABSTRACT...............................................................................................................................2

1. INTRODUCTION..............................................................................................................4

2. CENTRAL ASIA REGION: OVERVIEW, TRADE AND ECONOMIC GROWTH........5

2.1. AZERBAIJAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE............6

2.2. KAZAKHSTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE..........8

2.3. KYRGYZSTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE........10

2.4. TAJIKISTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE............12

2.5. TURKEMINSTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE. . .14

2.6. UZBEKISTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE..........15

2.7. GENERAL OVERVIEW OF THE CENTRAL ASIAN REPUBLIC TRADE POLICY AND ECONOMIC INTEGRATION....................................................................................16

i. THE SHANGHAI COOPERATION ORGANIZATION.............................................17

ii. EURASIAN ECONOMIC UNION..............................................................................18

iii. NEW SILK ROAD STRATEGY (NSRS)....................................................................19

iv) CAREC PROGRAM.....................................................................................................20

3. METHODOLOGY AND ANALYSIS..............................................................................22

4. CONCLUSION.................................................................................................................25

BIBLIOGRAPHY.....................................................................................................................27

APPENDIX 1 LIST OF FTAS OF KAZAKHSTAN AND AZERBAIJAN....................28

APPENDIX 2 ADB ECONOMIC FORECASTS FOR CENTRAL ASIAN COUNTRIES- GDP GROWTH RATE %.....................................................................................................30

APPENDIX 3 LOGISTIC PERFORMANCE INDICATORS FOR CAR -2016.................31

APPENDIX TABLE 4 GRAVITY MODEL ESTIMATIONS..............................................34

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ABSTRACT

Since the year 2000, countries of Central Asia Republics (CAR) were

comparatively fast growing (with some exceptions), some basic social indicators

improved as well. However, much needs to be done for achievement of better quality

of life, poverty reduction and reduced inequality, while situation in countries under

consideration differs a lot.In the paper, indicators of economic growth and social

development are analyzed. It may be noted that improvement in economic situation in

each country depends on the level of regional cooperation and integration, on

efficient utilization of regional resources, and on establishing economic links and

relations in the region. In the report, current level of foreign trade among countries

in the region, tariff and non-tariff barriers is considered, using different foreign trade

indicators analysis is made on existing opportunities for reducing cross-border costs

through six transport corridors.

With infrastructure development in the region, including transport infrastructure,

and strengthening of economic ties, opportunities are growing for regional

cooperation upgrading to the higher level through markets integration and

development of economic corridors in the region. In report, prospects for

establishment of economic corridors and clusters in Central Asia especially on the

pattern Almaty Bishkek Corridor Initiative are proposed under the CAREC Program

for deepening of economic cooperation and integration. Importance of closer regional

cooperation is stressed so that regional countries may gain benefits of efficient

markets and institutions.

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1. INTRODUCTION

The Central Asian Republics (CAR) countries are peculiar in nature that their transition to market based institutions and integration with global markets was abrupt and not evolutionary. The entire system of political, economic and social way of life underwent systemic change and shift on gaining independence in 1991. It was quite natural that in absence of market resource allocation systems, institution and culture, the political and economic institutions were not able to steer economy to optimal allocation of resources. The under-developed price signaling mechanism, lack of entrepreneurial and innovation market culture and linkages with global chain combined with birth pangs of independence hampered the smooth transmission of economic and political systems. Efficient economic exchanges entail developed market agents (interaction of household and firms in a competitive market structure and framework regulated by Governments); institutions (banking, financial and insurance) and infrastructure (both hard and soft infrastructure to facilitate trade and exchanges). At least at inception and in initial phase of the development of Central Asian Region Countries, the geography and location did offermyriad challenges and inherent disadvantages: connectivity constraints (landlocked in terms of access to sea and land routes, uneven terrain and longer distances) and higher trade costs due to under-developed market linkages.

In formative phase, the CAR was least prepared to insulate their economies from transmission effects (externalities) of global business cycles and shocks. However, after commodity prices boom (Oil prices boom) since 2000 till the 2008 financial crisis, “Central Asia grew much faster than the global economy, allowing incomes to increase and poverty to be substantially reduced. However, the performance of the countries was quite diverse in terms of their economic development levels and models, despite their similar histories and cultures.”( Asian Development BankInstitute, 2014). The commodity prices boom inculcated compliancy factor as their government made very little efforts to diversify by expanding manufacturing and services sectors; encourage small and medium entrepreneurs and introduce market regulatory framework to support competition and productivity.

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2. CAR: OVERVIEW, TRADE AND ECONOMIC GROWTH

The Central Asian Region (CAR) countries namely Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan became independent countries in 1991 after the break-up of former Soviet Union.1

The CARs are rich in natural and human resources but they can’t be grouped inone as per economic structure and endowments. CARs are quite diverse in terms of theirendowments and economic developmentalstagelevel. Following matrix will reveal the diversity of the region in terms of population, GDP, GDP growth, per capita income and Trade Openness:

Central Asia Republics

Population

(million)

Nominal GDP ($

billion)

GDP Growth

(%, 2011-15

Average)

GDP per Capita

(Current Prices, $)

Trade Openness

(Total trade %

as of GDP)

Azerbaijan 9.7 53 2.8 5492 79.3

Kazakhstan 17.5 184 3.9 10514 71.2

Kyrgyz Republic 6 6.6 4.5 1102 139.5

Tajikistan 8.5 7.8 6.4 926 90.6

Turkmenistan 5.4 37.3 9.5 6946 117.6

Uzbekistan 31.3 66.7 8.1 2131 60.5

CAR Region 78.4 355.4 5.86 4518 93.11

The Kazakhstan stands out in terms of endowment and resources. Azerbaijan, Turkmenistan and Uzbekistan fall some in the middle of income levels and Tajikistan and Kyrgyz Republic can be categorized as smaller economies. The varying level of development, endowments and population density within the CAR economies is an aspect thatstands out quite clearly. However, with the exception of Azerbaijan, in terms of GDPgrowth, all the other CARs have recorded impressive or moderate growth rates. With regard topurchasing power, the CARs display a wide range of per capita GDP, but on average theyare characterized by good market size. “In terms of

1CAR countries have been clustered on basis GDP, resource endowments and export composition for analysis and comparison.

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the structure of CARs economies, the services sector is the most dominantsector, except in the case of Turkmenistan, where manufacturing has the highest share inGDP. Manufacturing also remains a sector of significance in the GDP of other CARs. What isdisturbing to note in the macroeconomic indicators is a very high inflation rate, except inthe case of Turkmenistan. Savings and investment ratios are moderate, suggesting furtherroom for improvement that can have growth-inducing effects in future.The external sector shows very high trade openness; however, with the exception ofKazakhstan, the absolute level of trade is meager.”(UNESCAP -DAS, 2012)

2.1. AZERBAIJAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE

The Azerbaijan2 has a GDP (2015) of US$ 53 billionand GNI per capita of US$ 6560 (in current US$). Azerbaijan exchange rate has been moderately fluctuating. However, 2015 witnessed higher devaluation due to drop in oil prices. With drop in oil prices, its exportsalso plunged over the same period as oil and hydrocarbon contributes almost 81.28% of its total exports. Resultantly, Azerbaijan underwent steep devaluation of 20% against the US$ Azerbaijan’s currency like of other CAR currencies is linked to dollars in early 2015 and 32% devaluation in December 2015.

Source: IMF 2016 Exchange Rate Policies Though the economic vulnerabilities are inherent to structural composition of

Azerbaijan’s economy: highly concentrated export and narrow manufacturing base; the current woes though have been triggered by deeper dips in oil prices.Azerbaijan’s export vulnerabilities can been explained with change in exports with share of Oil at 81.28% (oil exports) by comparing with oil prices in the following graph- higher oil prices substantially increases exports and fall in oil prices dips the exports volumes:

2Azerbaijan has a population of 9.65 million with a total land area of approximately 86,600 square kilometers.

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Graph Azerbaijan Trade since 2005 Source: World Bank World Integrated Trade Solution

Azerbaijan’s trade statistics for the year 2015 reveals that the total value of exports (FOB) is US$ 11,327 million and imports (CIF) stands at US$ 9,211 million. The export basket of Azerbaijan is highly concentrated in few products clusters and country (trade partners): Raw materials exports = US$ 9,207 million (81.28% of total exports). Intermediate goods exports = US$ 457 million (4.04%)Consumer goods exports = US$ 1,383 million (12.21%) Capital goods exports = US$ 66 million (0.58%)Export Partners (2015) along share in total exports in percentagesItaly = US$ 2,414 million (21.31%); Germany = US$ 1,228 million (10.84%); Spain = US$ 1,085 million (9.58%); Indonesia = US$ 1,066 million( 9.41%); and Greece = US$ 774 million (6.84%).

The trade indicators namely Hirschman Herfindahl Market concentration index3 is 0.14 (which signifies very low export base) and Index of export market penetration is 0.14 (which signifies less number of trade partners) reveals the same story of narrow export base and trade partners.

The average tariff in 2015 hovers around 8.52% and trade weighted average trade is 5.19%. The maximum rate of tariff in percentage on any product is 15. However, non-tariff measures and logistic inefficiency ramps upthe Overall Trade Restrictiveness Index (OTRI) which is 0.03 for Applied Tariffs and 0.05 for MFN Tariff for the year 2009. The ease of doing business rank4 for Azerbaijan is 65. The

3Hirschman Herfindahl index is a measure of the dispersion of trade value across an exporter’s partners. A country with trade (export or import) that is concentrated in a very few markets will have an index value close to 1. Similarly, a country with a perfectly diversified trade portfolio will have an index close to zero.4Economies are ranked on their ease of doing business, from 1–189. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the aggregate distance to frontier scores on 10 topics,

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trade across border rank is 83. The World Bank Logistics Performance Index5 (LPI) 2014 ranks Azerbaijan at 125th out of 160 countries on six dimensions of trade - including customs performance, infrastructure quality, and timeliness of shipments - with overall LPI score of 2.45.

With above constraints, Azerbaijan’s competitiveness and productivity would require long-term efforts forstructural reforms (supply side) to diversify manufacturing, SME development and innovation promoting trade policies; pursuing free-float currency exchange rate system; and improving infrastructure connectivity within and beyond the country. Due to landlocked geographical constraint, the best scenario for Azerbaijan and other CAR countries would be to form a customs union -deeper regional integration- for increasing the market size(economies of scale and scope); reduce the cost of doing business and improving connectivity (improving logistic performance index)and market attractiveness vis-à-vis inducing FDI.

2.2. KAZAKHSTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE

Kazakhstan6is a transcontinental and world’s largest landlocked country with total area of 2.72 million square kilometers. Kazakhstan accounts for 60% of CAR GDP and has been endowed with large mineral and hydrocarbon resources. The GDP of Kazakhstan is US% 184 billion and GNI per capita (Current US $) is 11,390 in 2015. It total trade is US$ 76.52 billion with exports accounting US$ 45.95 bn. and imports worth of US$ 30.56 bn. in 2015. The raw-material (hydrocarbon based oil and gas and minerals) exports constitute almost 66% of the total exports amounting to US$ 30.36 billion. However, intermediate goods exports share is 22.63% (amounting to US$ 10.4 billion). The exports partners (exports) of Kazakhstan are Italy with a partner share of 17.71%; People’s Republic of China with a partner share of 12%; the Netherlands with partner share of 10.84%, Russian Federation with a partner share of 9.9% and France with partner share of 5.83%. The Kazakhstan’s import partners with percentage volumes of import for the year 2015 are Russian Federation (34.45%); China (16.64%); Germany (6.5%); USA (4.86%) and Italy (3.84%). The trade indicators namely Hirschman Herfindahl Market concentration index7 is 0.07 (which signifies very low export base) and Index of export market penetration is 0.07 (which

each consisting of several indicators, giving equal weight to each topic.5 LPI Score demonstrate comparative performance—the dimensions show on a scale (lowest score to highest score) from 1 to 5 relevant to the possible comparison groups—of all countries (world), region and income group.6Population in 2015 = 17,544,1267Hirschman Herfindahl index is a measure of the dispersion of trade value across an exporter’s partners. A country with trade (export or import) that is concentrated in a very few markets will have an index value close to 1. Similarly, a country with a perfectly diversified trade portfolio will have an index close to zero.

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signifies less number of trade partners) reveals the same story of concentration of export to limited marketsand product cluster mainly hydrocarbons and minerals. With steep fall in oil prices, Kazakhstan’s country growth tumbled by -21.968. Tariff rates (simple average tariff across all products is 6.91 and trade weighted average is 4.85%) do not reveal complete trade costs. However, the application of non-tariff measures (29 measures covering more than 2354 products or 44% of the product lines of HS20129 at 6 digits disaggregated level)indicate overall trade restrictive regime. The ease of doing business rank is 35 with trade across border rank of 119- not very impressive. Similarly, the World Logistic Performance Index (LPI) is 2.70 and with LPI rank of 88 indicates inefficient trade and border check point facilitation and systems. Thus, Kazakhstan needs to reduce its non-tariff measures and improve its logistic performance index to serve as a transcontinental bridge and gateway to Europe, Asiaand Russian Federation. Like most of the CAR Oil exporting countries; “Kazakhstan took a similar step by devaluing its currency in early 2014 by 19 percent. The Kazakh tenge has depreciated by an additional 45 percent against the dollar following adoption of a floating rate regime in August 2015.A depreciation of the Russian ruble over the period has offset changes in the values of most CCA currencies. Accordingly, both nominal and real effective ERs (NEER/REER) have experienced periods of appreciation during the past two years, particularly among CCA energy exporters.”( IMF Staff led by Natan Epstein, Mark Horton, Kevin Ross,and Hossein Samiei, 2016)

Though, Kazakhstan has more cushion to insulate itself from global business shocks; raw-materials (oil and mineral) prices vis-à-vis other CAR members; however, Kazakhstan and CAR would benefit more if they pursue deeper regional integration (customs Union with CAR) and FTAs with Russian Federation, EU, PR China. Improving its Competitiveness and productivity would entail long-term reform endeavorslike pursuing free-float currency exchange rate system; structural reforms (supply side) to diversify manufacturing, SME development and innovation promoting trade policies; improving infrastructure connectivity within and beyond the country to reduce the cost of doing business and trade facilitation (improving logistic performance index).

2.3. KYRGYZ REPUBLIC: MACROECONOMIC OVERVIEW AND TRADE PROFILE

8World Bank World Integrated Trade System –Country Profile of Kazakhstan9 The HS comprises approximately 5,300 article/product at HS 6 digit disaggregation level

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Kyrgyz Republic, like Tajikistan, can be categorized as two smallest economies of CAR region. These two economies rely heavily on expatriate remittance (27% and 48% of their GDPs, respectively) as both don’t have enough oil and gas revenue generating resources. The second systemic risk emerges from the fact that vast majority of their workforce which work in the Russian Federation is susceptible to Russian economic up and downs as witnessed in financial crises of 2008 and 2014-206. “Remittances growth has been strong, but economic deceleration in Russia poses clear risks,” says Alexander Plekhanov, senior economist at the EBRD10. Export basket is heavily concentrated on products mix (Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with share 40%) and market destination (8 countries buys more than 80% of the exports) are susceptible to commodity price shocks and global business cycles.

On Trade Facilitation and regulatory regime, Kyrgyz republic has been ranked by the World Ease of Doing Business at 75 out of the 190 economies with distance to frontier 65.17% for the year 2017.11 World Bank Logistic performance indicators ranking for Kyrgyz Republic (2014 data available) is 130 out of 151 countries with 2.3512 (LPI out of 4 scale–the best).

Source: http://www.doingbusiness.org/

KYRGYZ REPUBLIC TRADE PROFILE AT A GLANCEUS$ million

Exports (million US$) 2015 1441.5

Imports (million US$) 2015 4068.1

Balance (million US$) 2015 -2626.6

10https://www.gfmag.com/magazine/julyaugust-2013/regional-report-central-asia11The distance to frontier (DTF) score benchmarks economies with respect to regulatory practice, showing the absolute distance to the best performance in each Doing Business indicator. An economy’s distance to frontier score is indicated on a scale from 0 to 100, where 0 represents the worst performance and 100 the frontier. Source: Doing Business database.12http://siteresources.worldbank.org/TRADE/Resources/239070-1336654966193/LPI_2012_rankings.pdf

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Major trading partners (% of exports) 2015Switzerland (39.0), Kazakhstan

(15.8), Russian Federation (10.9)

Major trading partners (% of imports) 2015Russian Federation (31.3), China

(25.3), Kazakhstan (16.7)

With regards to policy consistency and capacity to handle global investments disputes, Kyrgyz Republic needs to ensure transparency and contractual obligation. A major dispute with a gold mining company “M/s Centerra Gold- Canadian mining firm that is the country’s largest investor. The government has tried three times over the past 10 years to renegotiate the terms under which Centerra operates Kumtor—a gold mine that provided 12% of the country’s GDP in 2011, and around half of total exports. The country scores a dismal 127 (out of 144 countries) in the World Economic Forum’s Global Competitiveness rankings, the worst in Central Asia—although Turkmenistan and Uzbekistan are not part of the survey.”13

World Economic Forum World Competitiveness Report14 on Kyrgyz republic ranks it at 102 out of 140 economies considered and outlines priorities areas for transitioning to balanced efficiency driven economic system:

Source: WEF http://www3.weforum.org/docs 1

Infrastructure and market size are two critical parameters that should be priority areas for the Kyrgyz development. Being landlocked and as a factor driven economic structure of economy, the optimal solution for the Kyrgyz republic is to enter into a

13https://www.gfmag.com/magazine/julyaugust-2013/regional-report-central-asia14 http://www3.weforum.org/docs/gcr/2015-2016/KGZ.pdf

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deeper economic integration (preferably Customs Union with CAR to enhance market size, economies of scale and scope) and improve regional connectivity and trade facilitation. Infrastructure gap can’t be solved by CAR region alone, so active engagement with Belt & Road Initiative, CAREC Program and Eurasian Economic Union would boost its chances for sustainable and rapid economic development of the country.

2.4.TAJIKISTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE

Tajikistan has a population of 8.5 million with GDP of US$ 7.8 billion (current US$) and per capita of US$ 928- lowest in the region. Tajikistan is growing at a moderate rate of 6.9% in 2016.15 Remittance contribute almost equivalent to half of its GDP. “In Tajikistan four in ten working-age adults have sought jobs abroad; in 2014 they sent home remittances equivalent to 42% of GDP, proportionally more than any other country in the world received.”16Tajikistan is the most heavily dependent of the CAR countries on remittances followed by the Kyrgyz Republic- the two smallest and poorest (in terms of per capita incomes) economies in the CAR. “The U.S. dollar value of remittances, about 80 percent of which originate from Russia, fell by 33 percent in 2015 and continued to recede by around 21 percent through mid-2016.” Fall in oil prices has indirect impact on these two countries as their remittances tend to fall proportionately.

Source: http://www.tradingeconomics.com/ 1

Tajikistan is endowed with hydro-potential. “The Kyrgyz Republic and Tajikistan

15 http://wits.worldbank.org/country-analysis-visualization.html16 The Economist

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are two countries in Central Asia endowed with some of the world’s most abundant clean hydropower resources with water cascading from the mountain ranges and filling the rivers every summer. A new electricity transmission system to connect all four countries, called CASA-1000, would help make the most efficient use of clean hydropower resources in the Central Asian countries by enabling them to transfer and sell their electricity surplus during the summer months to the deficient countries in South Asia. The CASA-1000 project would also complement the countries’ efforts to improve electricity access, integrate and expand markets to increase trade, and find sustainable solutions to water resources management.”17“Tajikistan is an intriguing country for hydropower activity. With an installed capacity of 5,190 MW, and an estimated hydropower potential of 527 billion kWh per year, there is significant scope for project activity in the coming years.”18 “The government is seeking finance for the proposed Rogun project, which, if completed, would become Tajikistan’s largest hydropower project at 3,600 MW, and would turn Tajikistan into a net exporter of electricity. Rogun would also be the world’s tallest dam, at 335 meters.” 19 Tajikistan and Kyrgyzstan can be regional interconnection under Central Asia South Asia (CASA)-1000 into a regional grid including Kazakhstan, Afghanistan, Uzbekistan and Pakistan. Such projects can create employment and alleviate poverty. These projects can spur private sector and allied services industry to foster innovation and competitiveness. “To date, Tajikistan has done a remarkable job in reducing poverty. During the period 1999 and early 2014, poverty fell from over 80 percent to about 31.3 percent. Tajikistan’s pace of poverty reduction over the past 15 years has been among the top 10 percent in the world. However, the country has done less well in reducing non-monetary poverty. Recently available micro-data suggests that limited or no access to education (secondary and tertiary), heating, and sanitation are the main contributors to non-monetary poverty. These three are the most unequally distributed services, with access to education varying by income level and heating and sanitation according to location. The Government of Tajikistan has set ambitious goals to be reached by 2020: to double GDP, to reduce poverty to 20 percent, and to expand the middle class. It has also recently adopted a new National Development Strategy covering 2016-2030, which envisages that Tajikistan will transform from a mainly agrarian based economy to an industrialized economy.”20

Export volume and composition of Tajikistan is stagnating and concentrated into few product and countries. In 2015, Tajikistan exports stood at US$ 911 million with Turkey (22%), Kazakhstan (18%), Switzerland (15%), Afghanistan (10%), Algeria

17http://www.casa-1000.org18https://www.hydropower.org/country-profiles/tajikistan19https://www.hydropower.org/country-profiles/tajikistan20https://www.adb.org/countries/tajikistan/economy#tabs-0-1

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(6%) and China (6%) as the major trade partners.Tajikistan’s import in the same period stood US$ 3.60 billion with China (50%), Russian Federation (21%), Kazakhstan (12%), Turkey (5%) and Kyrgyzstan (0.2%) as major import partners. With such a massive trade imbalance of almost 28.8%, Tajikistan need to explore its competitive edge as an energy and trade corridor with emphasis on improving its regional connectivity and trade facilitation measures. Tajikistan employs 20 non-tariff measures on 3227 at HS disaggregated 6 digit levels – almost 60% of products traded.21 Other trade facilitation indicators like the World Bank’s ease of doing business rank for Tajikistan (ranked at 128th) ; the trade across border rank (ranked at 144th ); Logistic Performance Index score (2.53) and LPI rank of 114 convey the same overall trade restrictive and inefficient trading networks and systems. Tajikistan as a gateway of South Asia and Central Asia need to improve its trading regime to facilitate cross border trade efficiently and smoothly to unlock benefits for the country and the regions. “To achieve these goals, Tajikistan needs to implement a deeper structural reform agenda designed to: (a) reduce the role of the state and enlarge that of the private sector in the economy through a more conducive business climate, thus increasing private investment and generating more productive jobs; (b) modernize and improve the efficiency and social inclusiveness of basic public services; and (c) enhance the country’s connectivity to regional and global markets and knowledge.The difficult environment for doing business in Tajikistan, as well as obstacles to foreign direct investment, have discouraged private investment and limited overall investment. Averaging about 15 percent of GDP annually since 2008, total investment is low by regional and international standards.”22

2.5. TURKEMINSTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE

Turkmenistan is characterized as middle income country with GNI per capita of US$ 7380 and GDP of US$ 40 billion in the Central Asian Republic region.23 The country is endowed with world’s fourth largest reserves of natural gas and substantial oil resources. Cotton production is mainstay of Agriculture sector, making the Turkmenistan as the world's ninth-largest cotton producer. Turkmenistan is competitively placed to benefit from (agri-) raw materials to enter into textile value added manufacturing sector and global value chain integration. The current export basket is heavily concentrated in mineral fuels, mineral oils and its products (US$ 9.0 billion- with 91% share) and Cotton with 5% (value US$ 490 million). Turkmenistan trade partners include Russian Federation worth US$ 1,029 million, with a partner

21 Trademap.org 22 https://www.adb.org/countries/tajikistan/economy#tabs-0-123 World Bank Country Databank @ http://data.worldbank.org/country/turkmenistan?view=chart

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share of 41.08 percent; Italy worth US$ 401 million, with a partner share of 16.02 percent; Iran, Islamic Rep. worth US$ 242 million, with a partner share of 9.66 percent; Turkey worth US$ 186 million, with a partner share of 7.42 percent and Ukraine worth US$ 165 million, with a partner share of 6.58 percent24. This narrow export base is reflected in Hirschman Herfindahl Market concentration indexand Index of export market penetration of 0.29. Despite falling energy prices, Turkmenistan Country Growth witnessed robust growthof 38.50%. Also, “Turkmenistan’s gross domestic product grew by 6.1% in the first half of 2016, albeit more slowly than the 9.1% recorded in the first half of 2015. The government continued to support the private sector, encouraging import-substitution and export-promotion outside the hydrocarbon economy, where most of the growth occurred. Expansion was greatest in services, which grew by 12.3%, reflecting gains of 9.9% in transport and 16.0% in trade. Agriculture grew by 6.9% and industry by 2.1%, with construction rising by 4.4%. On the demand side, fiscal consolidation prompted by the decline in revenue from oil and gas exports led the government to trim some public investment programs. Investment nevertheless grew by 5.7% in the period.”25

2.6. UZBEKISTAN: MACROECONOMIC OVERVIEW AND TRADE PROFILE

Uzbekistan is one of the largest Central Asian states and the only Central Asian state to border all the other four (except Azerbaijan). Uzbekistan also shares a short border (less than 150 km or 93 mi) with Afghanistan to the south. Uzbekistan is a dry, landlocked country. It is one of two doubly landlocked countries in the world (that is, a country completely surrounded by landlocked countries), the other being Liechtenstein26. Like Turkmenistan, cotton is mainstay of the Uzbek economy and ranks world's fifth largest cotton exporter and sixth largest producer. Uzbekistan economic growth has been driven by state-led investments in oil and gas sector; and exports of natural gas; gold and cotton. Almost 60% of the total exports originate from natural gas, minerals and other natural resources of total exports of US$ 6.12 billion. Its exports partners are also not very diverse: Switzerland (30% share), China (21% share), Kazakhstan (12% share), Turkey (12% share) and Russian Federation (9% share). Import profile of Uzbekistan also narrates its same dependency on few trade partners. Out of US$ 10.23 billion imports of Uzbekistan; the share of China and Russian Federation is 22%; South Korea is 13%; Kazakhstan is 9%; and Turkey and Germany with 5% share.

24http://wits.worldbank.org/WITS/WITS/MyOptions/OtherLinks/DataVizualizer.aspx?Page=DataVizualizer25 https://www.adb.org/countries/tajikistan/economy#tabs-0-026 https://en.wikipedia.org/wiki/Uzbekistan

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Since Uzbekistan is double landlocked country, the regional integration of CAR economies will facilitate trade and commercial exchanges within and beyond the region. Infrastructure and regional connectivity would enhance its competitiveness and productivity.

2.7. GENERAL OVERVIEW OF THE CENTRAL ASIAN REPUBLIC TRADE POLICY AND ECONOMIC INTEGRATION

Each of the CAR economy analyzed in the sections above reveals common fact that each one heavily rely on a single resource / factor– Kazakhstan, Uzbekistan, Azerbaijan and Turkmenistan- the resource-rich countries (energy and minerals exporters) are vulnerable to the commodities price fluctuations; and Tajikistan and Kyrgyzstan- depends on remittance and are vulnerable to Russian Market Business Cycles as majority of their expatriates work there. They all have common objective to diversify their resource base to spread their risk / vulnerabilities. Second important fact that Central Asian Republics should realizeis interdependency and need for theregional connectivity to fully realizing their economic and social potential within and beyond the region. “Central Asia lies in the heart of the Eurasian continental space, where Eurasiais defined to cover all of Europe and Asia, including the Middle East and Arab Peninsula. The opening up of China to the rest of the world in the early 1980sand the disintegration of the Soviet Union in the early 1990s tore down thepolitical barriers that had held back the continental economic integrationprocess of Eurasia. This meant that Eurasia could now catch up with theeconomic globalization process that had advanced rapidly in the rest of theworld after the Second World War. One indicator of the rapid integrationprocess of Eurasia is that today the largest share of world trade takes place between Eurasian economies.”(Linn, 2016). CAR has seen the phenomenon of emergence of a “spaghetti bowl” of regional institutions. Individual CAR member countries have on average signed more than 9 bilateral Free Trade Agreements with other economies including within the CAR members, as per following detail:Sr. No.

Name of CAR Countries

Bilateral FTA signed and in effect

Remarks

1. Azerbaijan 102. Kazakhstan 10 3 FTA are under negotiations and I

signed but not in effect yet.3. Kyrgyz Republic 10

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4. Tajikistan 85. Turkmenistan 66. Uzbekistan 10

Though most of CAR countries have either bilateral FTA or share Customs Union, yet not a single regional framework binds them into a formal trade and economic cooperation framework together. “Most of the regional organisations in Central Asia have been characterised by weak organisation and funding, with little or inconsistent engagement by key countries and national leaders, and none of them was able to affect decisively the way in which the countries of the region cooperated in the economic sphere” (Linn, Pidufala, 2008).“Four initiatives of regional cooperation were launched namely: i) TheShanghai Cooperation Organisation (SCO), led by China and Russia; ii) the Eurasian Economic Community, led by Russia; iii) recent initiatives focused on integrating Afghanistan with its neighbors, led by the United States and Europe; and iv) the Central Asia Regional Economic Cooperation programme(CAREC), led by the Asian Development Bank with the support of China.”(Linn, 2016)

i. The Shanghai Cooperation Organization

Originally organized as the Shanghai Five in 1996, the Shanghai Cooperation Organization (SCO) is an intergovernmental organization composed of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan founded in Shanghai in 2001. The main objectives of the SCO are to (i) strengthen relations among member states; (ii) promote cooperation in political affairs, economics and trade, scientific-technical, cultural, and educational spheres as well as in energy, transportation, tourism, and environmental protection; (iv) safeguard regional peace, security, and stability; and (v) create a democratic, equitable international political and economic order27. Agenda of the SCO have evolved from confidence-building forum to focus on regional economic cooperation like the recently announced integration of the China-led Silk Road Economic Belt and the Russia-led Eurasian Economic Union. “SCO has two new acceding members, Indian and Pakistan, four observer nations, and six dialogue partners.28 At the Ufa summit (July 2015) in Russia, member states adopted the SCO Development Strategy, which included bolstering finance, investment, and trade cooperation as a priority over the next ten years. Beijing has pushed the organization

27https://aric.adb.org//initiative/shanghai-cooperation-organization28http://www.cfr.org/china/shanghai-cooperation-organization/p10883

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to focus on economic cooperation with proposals like launching a development fund and a free-trade zone.”29With Belt and Road initiative, the regional connectivity and economic cooperation would be complemented. Now cargo trains from south China's Guangzhou can traverse more than 7,000 miles through Eurasia to reach Europe. “Loaded with 200 tonnes of cargo, a freight train leaving today will arrive in Moscow 18 days later, having traveled. The trip is two weeks faster than the journey by sea via Hong Kong, winding along the eastern Chinese coast and around the Korean peninsula to Vladivostok and then by rail again to the Russian capital. Another railway route, starting from nearby Dongguan, exits China from northwestern Xinjiang to Kazakhstan, connecting the world's manufacturing center with landlocked central Asia and on to Europe.”30 Since there is no formal trade integration program under the SCO framework and not all CAR countries are members, therefore remaining CAR nations need to gear up diplomatic efforts to become full members.

ii. Eurasian Economic Union

The Eurasian Economic Union is an international organization for regional economic integration. “The EAEU provides for free movement of goods, services, capital and labor, pursues coordinated, harmonized and single policy in the sectors determined by the Treaty and international agreements within the Union. The Member-States of the Eurasian Economic Union are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic and the Russian Federation.”31EEU has proposed FTAs with India, Pakistan, Singapore and Vietnam32(Asian DevelopmentBank , 2016). This is first such serious endeavor to form a joint deeper economic integration initiative in the region not covering CAR countries like Azerbaijan, Tajikistan, Turkmenistan and Uzbekistan. However, the EEU would be beneficial for all CAR countries. EEU should espouse “open regionalism” policy to bring in its fold all CAR member countries.

iii. New Silk Road Strategy (NSRS)

Under this initiative led by US (NATO), the aim is to bring “Afghanistan into a regional integration process that will help it to strengthen its economic development

29 Ibid30http://news.xinhuanet.com/english/2015-12/12/c_134908255.htm31http://www.eaeunion.org/?lang=en#info

32https://aric.adb.org/pdf/aeir/AEIR2016_complete.pdf

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and support its political stability. Based on a vision that sees Afghanistan as a “hub” or “roundabout” for Eurasian integration, and in particular for strengthening the North-South axis connecting South Asia with the rest of Eurasia (Starr and Kuchins, 2010), recent initiatives include the “New Silk Road Strategy” (NSRS) of the United States, the “Regional Economic CooperationConference on Afghanistan” (RECCA) and the “Northern Distribution Network”(NDN), which transfers nonlethal NATO supplies to Afghanistan.”(Linn, 2016) This initiative focuses more on Afghanistan than the economic integration of the region and no formal mechanism has been espoused yet.

iv) CAREC PROGRAM

The Central Asia Regional Economic Cooperation (CAREC)33 Program was established in 2001 and now stretches over 11 countries: Afghanistan, Azerbaijan, the People’s Republic of China (PRC), Georgia, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan. The CAREC program

33It emerged from a regional initiative for Central Asia started by the Asian Development Bank in the late 1990s

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focuses on regional infrastructure development and trade issues prioritizing the following areas of cooperation (i) energy, (ii) transport, (iii) trade facilitation, and (iv) trade policy34. Though, CAREC Program is not a formal Trade Integration arrangement or agreement but it aims to enhance regional economic cooperation through common infrastructure development and policy dialogue, supported by six multilateral institutions namely the Asian Development Bank, European Bank for Reconstruction and Development, International Monetary Fund, Islamic Development Bank, United Nations Development Programme, and the World Bank.“The CAREC Transport and Trade Facilitation Strategy 2020 seeks to accomplish three main tasks: (i) develop a multimodal corridor network comprising roads, railways, logistics hubs, and border crossings; (ii) improve trade and border crossing services—through customs reforms and modernization, coordinated border management, development of national single windows, and integrated trade facilitation; and (iii) strengthen institutions, policies, and operational effectiveness to better support road maintenance, road safety, and seamless rail connections.” (ADB 2014a)35The CAREC Program envisages a network of multimodal six transport corridors. “By 2015, substantial progress was made toward corridor implementation with the development of two ports, two logistics centers, three border crossings, and six civil aviation centers. As a result, CAREC projects contributed to building (or improving) 809 kilometers (km) of expressways or national highways, bringing cumulative progress to 7,229 km, or 93% of the target under the Transport and Trade Facilitation Strategy 2020. The ABCI Investment Framework was adopted at the 15th CAREC Ministerial Conference. The investment framework details the conceptual development plan for economic corridor in the region, comprising investments, policy reforms and institutional development. The two participating countries, Kazakhstan and the Kyrgyz Republic, are working to institutionalize Almaty-Bishkek economic corridor development by establishing a Corridor Development Authority with coordination at higher government levels. In 2014, CAREC started the Almaty–Bishkek Corridor Initiative (ABCI) between Kazakhstan and the Kyrgyz Republic, aiming to increase economic activity for creating jobs, diversifying the economy, and promoting sustainable development through an economic corridor linking the two cities. Technical and economic analyses have been completed and priority areas have been identified in education, heath, agriculture, agribusiness, tourism, disaster risk management, and information and communications technology. CAREC Program has also attained substantial progress

34http://www.carecprogram.org/uploads/docs/CAREC-Publications/2012/CAREC-2020-Strategic-Framework.pdf35https://aric.adb.org/pdf/aeir/AEIR2016_complete.pdf

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in respect other focus areas of trade facilitation, energy36, and trade policy. CAREC members have agreed to create six multimodal transport corridors in the region.” (Asian Development Bank , 2016)

Based on the above analysis of Trade Policy of the Central Asia Republics and other partners; it seems that a serious and conscious effort is needed to formally launch a deeper integration agreement among the CAR members. A diligent Cost benefit analysis entails more benefits than the costs as there are more complementarities benefit all the CAR member countries. Some of the macro-benefits are listed in the following chart:

3. METHODOLOGY AND ANALYSIS

The objective of this paper is to explore the dynamics of log-term sustained economic growth drivers in respect of six economies of the Central Asian Region (CAR), namely Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. The study is diagnostic in nature and will analyze CAR transition experience to market economy since 1991; diagnose structural and

36The completion of ADB projects in Azerbaijan, Mongolia,and Uzbekistan helped achieve long-term regionalenergy targets. In 2015, 923 km of transmission lineswere installed or upgraded, over 201 megawatts (MW) ofgeneration capacity added or rehabilitated, and almost785 mega volt amps installed or upgraded in substations.CAREC also made progress in the development of theCentral Asia-South Asia Regional Electricity Market, andpipes are being laid for the natural gas pipeline that willconnect Turkmenistan, Afghanistan, Pakistan and India.Activities are under way to complete the Turkmenistan-Afghanistan interconnection under the broaderTUTAP project.

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policy issues and challenges and suggest log-term sustained economic growth drivers for the CAR region. The study will analyze the pattern of economic growth of the CAR economies since their independence; resilience of economy to the exogenous shocks emerging from financial crises, falling oil prices and exchange rate fluctuation.

The growth dynamics of the Central Asian Economies as analyzed in chapter reveal that inherent37 characteristics of Central Asia Countries geography, resource endowments, climate, demography and proximity to trading partners /neighboring countries; supply side constraints and other structural (competitiveness and innovation) issues; less absorption capacity to insulate from the exogenous shocks (like International Financial Crisis and Business Cycles) and global markets monetary effects (translated into vulnerabilities of their exchange rate mechanism) hamper their macroeconomic stability and economic growth. In addition to above set of variables that creates vulnerabilities (uncertainties), regulatory policy likes lack of market friendly (to reduce cost of doing business); trade facilitation (reduction in non-tariff and inefficient border check points systems) stifle development of SMEs and innovation. The gravity trade model may not fully capture the effects of landlocked countries where regulatory policy hurdles are even harder to surmount than the physical barriers. Following tables demonstrate the time export the goods: on average it takes 203 days to export in 2016 and LPI score of 66. These time costs are highest from any standard and needs immediate attention to bring down the time to export the goods from Central Asian Republics.

37Inherent fault lines Narrow manufacturing base, limited export basket (export concentration) lack of market dynamics – also reflected in economic and political institutions- under-developed price signaling

mechanism- misallocation of resources over the years Land Locked ness- Natural Barriers to trade- Gravity Model – needs to factor in the higher trade costs faced due to

landlocked-ness and off-the grid impact (proximity matters) compounded by regulatory red-tape and poor connectivity / inefficient logistic performance and monitoring systems.

Language dummy might not explain as cultural and traditional trade links matters more here. Language was taken more as colonizing tools rather than a market link. Measurement Issues- economic variables and standards

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Source: ADB 2016

Source: ADB 2016 In an empirical analysis on “The Role of Trade Facilitation in Central Asia: A

Gravity Model”, the improving trade facilitation (Logistic Performance Indicators was proxy for trade facilitation) the impact of LPI for trade growth analyzed: the “overall trade in the Central Asian countries increases by 44% from improvements in LPI and such increase in intra-Central Asia trade doubles. Using a standard gravity model of bilateral trade flows, augmented to include a measure of trade facilitation, we show that trade facilitation has a positive and a statistically significant impact on bilateral trade flows. We also look at the different components of trade facilitation. Our results show that, on the exporter side, infrastructure has the greatest impact on trade flows; and on the importer side, customs efficiency has the greatest impact on trade flows38.” (Felipe & Kumar, 2010)The above analysis reveals that intra-regional trade facilitation and beyond is the key for the Central Asian Economies to develop and sustain economic growth over the long term.

38Please see table 4 for regression results.

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4. CONCLUSION

Central Asian Republic economies need to embark on a multi-pronged strategy where on the one hand need to holdand enforce the market fundamentals -back to basics policy paradigm whereby they pursuefundamental market institutional and structural reforms; foster innovation and entrepreneurial culture through SME development and integration with global market value chain. The second pillar of this strategy would be to pursue deeper economic integration (Central Asia Republic Customs Union) to enlarge their market size; economies of scale and scope and to improve trade facilitation within and beyond the region. There are no short-cuts to sustained market oriented self-resilient economic system. In chapter 2 and 3, this research demonstrated that without improving regional connectivity within and beyond region, the inherent disadvantages can’t be surmounted. It is optimal policy choice for CAR members to form a customs union and forge regional alliances with Belt & Road Initiatives; Eurasian Economic Union and adopt CAREC Corridors Initiatives under CAREC program. CAR should actively participate in all these regional initiatives and programs to bring competitiveness and connectivity to their region. Despite engaging in Bilateral FTAs (on average of 9 FTAs for CAR economies); the perennial problem of connectivity would not be resolved. It must be understood that the sudden delinking and shift of economic and political systems of CAR states from command economies to market economies, need sustained and long-term commitment for pursuing reform agenda to transform their economies into efficient and sustainable market systems. It would take time, conscious efforts, technical and financial assistance from international development partnersto evolve and gather self-sustaining momentum. State-owned enterprises need to be gradually exposed to market based competitive structures and incentive based systems. Competition and price signaling mechanisms optimize firm’s (both SOE and Private) efficiency by allocating resources efficiently (producing goods and services matching with consumer preferences and market demand). Oil Prices would be depressed and chances of their recovery are very bleak in medium to long-term as fall in oil prices, among other factors, isdue to technological shift and banking on future prospects of rebounding of these price would not be an optimal strategy. Energy mix is now changing globally and all countries are diversifying their energy production dynamics. Advances in solar technology; Clean and Renewable technologies will have far reaching impact on fossil fuels consumption/ prices in years to come. CAR has to tap

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their other energy resources including solar, hydro-power and other green technologies for recouping dip in their revenues. Tourism, agro-based production (especially integration with global chain) can open up new avenues of prosperity, employments and economic growth. “Growth is starting to recover, but these shocks have left the region with increased fiscal, external, and financial sector vulnerabilities, along with less policy space and weaker medium-term prospects. Policies should continue to support growth in the near term where policy space is available, while aiming to reduce vulnerabilities over time, including through the formulation of credible multiyear fiscal plans, modernization of monetary policy frameworks, and strengthening of financial supervision. Structural transformation to diversify away from commodities and reduce reliance on remittances is needed to improve medium-term growth prospects, boost job creation, and avoid deterioration in living standards.” (IMF, 2016) Good governance and urbanization (CAREC Almaty–Bishkek Corridor Initiative39 linking urban areas within CAR countries) and free movement of people within the CAR Customs Union can greatly improve productivity, competitiveness and economic development of the region.

39 “The Almaty–Bishkek Corridor Initiative (ABCI) is a bold vision to crystallize future drivers of sustainable growth for a spatially and economically integrated Almaty–Bishkek region across Kazakhstan and the Kyrgyz Republic. The integrated Almaty–Bishkek region, also known as the Almaty–Bishkek Economic Corridor, is envisaged as a major regional economy in Central Asia anchored on export oriented, knowledge-intensive, and creative services as a key growth driver, complemented by more conventional but modernized drivers like agribusiness and tourism. The region is defined here not in administrative terms but as an economic entity, encompassing these two major cities as well as their respective rural hinterlands and economically-linked urban centers, including Lake Issyk-Kul.” GROWING TOGETHER ALMATY–BISHKEK CORRIDOR INITIATIVE INVESTMENT FRAMEWORK October 2016, ADB and Joint Working Group headed by the vice-ministers of Economy of Kazakhstan and the Kyrgyz Republic and consists of deputy mayors and governors of Almaty, Bishkek.

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BIBLIOGRAPHY

Asian Development Bank Institute. (2014). Connecting Central Asia with Economic Centers. Tokyo: Asian Development Bank Institute.

IMF Staff led by Natan Epstein, Mark Horton, Kevin Ross, and Hossein Samiei. (2016). Exchange Rate Developments and Policies in the Caucasus and Central Asia. Washington: IMF.

Asian Development Bank . (2016). Asian Economic Integration Report 2016: What drives FDI in the Asia. Manila: ADB.

Felipe, J., & Kumar, U. (2010). The Role of Trade Facilitation in Central Asia: A Gravity Model. London: Levy Economics Institute.

IMF. (2016). Chapter 3 Caucasus and Central Asia: Is the Worst Over? In IMF, REGIONAL ECONOMIC OUTLOOK OCTOBER 2016 (p. 55). IMF.

Linn, J. (2016). Central Asian Regional Integration and Cooperation:Reality or Mirage? Eurasian Development Bank.

Lord, M. (2015). Regional Economic Integration in Central Asia and South Asia. Munich: Munich Personal RePEc Archive.

UNESCAP - DAS. (2012). The Central Asian Republics. In R. U. Das.

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APPENDIX 1 LIST OF FTAS OF KAZAKHSTAN AND AZERBAIJAN

Kazakhstan  (14 FTAs)

European Free Trade Association-Customs Union of Russia, Belarus, and Kazakhstan Free Trade Agreement  Negotiations launched

India - Eurasian Economic Union   Negotiations launched

New Zealand-Customs Union of Russia-Belarus-Kazakhstan Free Trade Agreement  Negotiations launched

Armenia-Kazakhstan Free Trade Agreement   Signed and In Effect

Azerbaijan-Kazakhstan Free Trade Agreement   Signed and In Effect

Commonwealth of Independent States Free Trade Area   Signed and In Effect

Economic Cooperation Organization Trade Agreement   Signed and In Effect

Eurasian Economic Union   Signed and In Effect

Kazakhstan-Georgia Free Trade Agreement   Signed and In Effect

Kazakhstan-Russia Free Trade Agreement   Signed and In Effect

Kyrgyz-Kazakhstan Free Trade Agreement   Signed and In Effect

Ukraine-Kazakhstan FTA   Signed and In Effect

Uzbekistan-Kazakhstan Free Trade Agreement   Signed and In Effect

Viet Nam - Eurasian Economic Union Free Trade Agreement   Signed and In Effect

Azerbaijan  (10 FTAs)

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1) Azerbaijan-Georgia Free Trade Agreement   Signed and In Effect

2) Azerbaijan-Kazakhstan Free Trade Agreement   Signed and In Effect

3) Azerbaijan-Moldova Free Trade Agreement   Signed and In Effect

4) Azerbaijan-Russia Free Trade Agreement   Signed and In Effect

5) Azerbaijan-Turkmenistan Free Trade Agreement   Signed and In Effect

6) Azerbaijan-Ukraine Free Trade Agreement   Signed and In Effect

7) Azerbaijan-Uzbekistan Free Trade Agreement   Signed and In Effect

8) Commonwealth of Independent States Free Trade Area   Signed and In Effect

9) Economic Cooperation Organization Trade Agreement   Signed and In Effect

10)Georgia, Ukraine, Azerbaijan, Moldova Free Trade Agreement   Signed and In Effect

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APPENDIX 2 ADB ECONOMIC FORECASTS FOR CENTRAL ASIAN

COUNTRIES- GDP GROWTH RATE%40

Country 2016 2017

Azerbaijan -2.5 1.0

Kazakhstan 0.1 1.0

Kyrgyz Republic 1.0 2.0

Tajikistan 3.8 4.0

Turkmenistan 5.5 5.5

Uzbekistan 6.9 7.3

Average 1.5 2.6

40https://www.adb.org/countries/tajikistan/economy#tabs-0-0

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APPENDIX 3 LOGISTIC PERFORMANCE INDICATORS FOR CAR -2016

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31

32

APPENDIX TABLE 4 GRAVITY MODEL ESTIMATIONS

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Source: Felipe and Kumar 1