Washington Report on Middle East Affairs, October/November 1998, pages 57-58

Central Asia

Central Asian States Find Neither Privatization Nor Political Reforms Correlate Exactly With Economic Growth

By Gordon Feller

The five states of Central Asia have chosen their own individual roads to reform in the post-Soviet era, and they have encountered success and failure in varying degrees.

One of the smaller states in the region, Kyrgyzstan, has made the boldest reform efforts, particularly in comparison with its neighbor Uzbekistan, which has been a gradualist in reform.

Since 1991, the Kyrgyz government has carried through wide-ranging privatization in industry and agriculture, prices have been freed, foreign trade liberalized, currency exchange controls abolished, and more.

According to Vladimir Mikhalev, senior research fellow at the U.N. University’s World Institute for Development Economics Research in Helsinki, Kyrgyzstan is sometimes called the most consistent and radical reformer in the whole of the former Soviet Union.

Its serious attitude to reform has naturally attracted support from international financial and aid institutions. There is strong involvement by the World Bank and International Monetary Fund, and by the European Union’s TACIS program and other agencies. Kyrgyzstan has received advice and assistance, and hundreds of millions of dollars in loans since independence.

On the political front, Kyrgyzstan can be counted as one of the most liberal countries of Central Asia. As to economics, the drastic shrinkage of the economy has been stopped, and last year there was growth of some 10 percent, on top of lower, but still solid, growth in 1996. But nearly all the ordinary people confront a struggle in their daily lives.

Kyrgyzstan can be seen as a microcosm of just how difficult transition to a market economy can be in societies which have had a totally different background. The size of the country’s gross domestic product (GDP) has shrunk by more than 50 percent since independence, compared with only about 25 percent shrinkage in Uzbekistan, the region’s laggard in reform. Why? The U.N. University’s Mikhalev gives his view:

“The country, like many in the former Soviet Union, has problems first of all in institution building, corporate governance, the creation of a legal basis for normal functioning of the market economy. These are very serious problems and success in overcoming them has been limited. Lack of institutional framework for normal functioning of the market is a major impediment to progress. That’s why foreign investment is not forthcoming on the scale desired.”

Mikhalev says the privatized state enterprises are mostly out of tune in the new era. They have not understood how to restructure and be profitable in the market economy. Many of the workers who still have jobs are only nominally employed, and must take second jobs like street vending to bring in money. In agriculture, the individual farmers who have replaced the collective farms don’t have access to capital or farm machinery, and thus the decline in the agriculture sector production has been severe.

In addition, the recent GDP growth has been mainly due to the impact of new exports of gold. As such, it is narrowly based and has little “trickle-down” effect to stimulate other sectors of the economy and thus raise living standards.

So what is the way out of the dilemma for Kyrgyzstan? Having undertaken the hard pro-reform decisions, must it go without reward? Mikhalev suggests adjustments, particularly in agriculture. “The road ahead for this country lies mainly in the resumption of agriculture, which is a major factor of the economy—60 percent of the economically active population is based in agriculture, so the country needs to find a way to organize its agricultural production, to help farmers, in terms of extra credit, technology, fertilizers and marketing of their products.”

He says there is now growing awareness of this in the government, and he says sound policies will be needed in this sector for the future. In addition, the World Bank now has an agriculture-related project for the years ahead which can be expected to improve the situation.

Silk Road Revival Planned

Armenia is to host a conference in October to discuss plans to revive the historic Silk Road, the ancient trading route that ran across the Caucasus and Central Asia linking the two civilizations of Rome and China.

The “Conference on the Revival of the Great Silk Road” will be staged in Yerevan from Oct. 14 to 18. It will focus on the practical and technical aspects of reopening the old trade route.

The event will be the second major Silk Road conference to be staged within a few weeks. Azerbaijan had already announced plans for a summit in Baku on Sept. 7 and 8 to bring together more than 30 delegations from almost all the countries that lie along the Silk Road or that have an interest in its development.

The organizers of the Yerevan conference say it will discuss a wide range of issues related to the development of multilateral cooperation between the Caucasus and Asian nations.

Organizers include the Armenia-Kazakhstan Society, Armenian Society of Cultural Communications with Foreign Countries, the National Academy of Sciences and Yerevan State University.

Topics for discussion include the cultural-historical roots of mutual relations between the peoples of the Caucasus and Asia; how to develop new communications channels across the region; and practical recommendations for stepping up regional cooperation.

The organizers say representatives from throughout the Caucasus and Asia region will be invited to Yerevan, although they do not list participants. (Armenia and its Caucasus neighbor, Azerbaijan, have been locked in a bitter conflict over the Nagorno-Karabakh enclave.)

Kazakhstan is expected to send high-level delegations to Yerevan from its Academy of Sciences and other organizations.

The original 6,400-kilometer Silk Road ran along caravan routes across Central Asia and the Caucasus and on to the eastern Mediterranean. A drive to establish a modern-day equivalent began after the 1991 collapse of the Soviet Union which saw the lifting of closed borders and the re-establishment of old trading patterns.

Caucasus and Central Asian governments are keen to establish a modern communications system—highways, railroads, airports—because the region is landlocked, lacking access to an open sea.

The Americans and Europeans back the idea of a new Silk Road because the Caspian is the site of rich oil and gas fields and needs better communications to get its energy exports to world markets. Their main interest is the route of proposed oil export pipelines.

The Yerevan event is expected to attract representatives of many Western firms wanting to do business in the area, as well as U.S. and European scientists interested in regional problems. It will include an international scientific conference; a trade fair including local handicrafts; roundtable discussions; and a cultural program including an exhibition reflecting the history of the Silk Road.

Participants will focus on the development of tourism in the region, and ways to revive and develop a sense of the rich cultural legacy of the peoples of the Caucasus and Central Asian region.

The “New Silk Road”

Analysts say a new EU-backed transport corridor across the Caucasus and Central Asia will make it easier for the countries of the region to access world markets, and enhance their economic and political independence.

The transport corridor—known as the new Silk Road—will run from Central Asia, through the Caucasus and Caspian, across the Black Sea, and then on to ports in Ukraine and the Mediterranean.

The EU wants the 21st century Silk Road—or Superhighway—to complement existing transport routes to Europe, including the traditional and often heavily overloaded outlet via Moscow.

Eventually, the goal is to create a fully integrated transport network—including upgraded highways, railroads, ports, and ferries—that will make it easier for the Central Asian and Caucasus countries to trade not only with each other but also with the Europeans.

The EU goal is to open up an energy-rich but landlocked region of the former Soviet Union long isolated behind a sealed frontier where roads and other transport links are limited or non-existent.

The new Silk Road project was launched at a conference in Brussels in May 1993 which brought together trade and transport ministers from the three Caucasus (Armenia, Azerbaijan, Georgia) and the five Central Asian (Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan) countries. The program was named Traceca (after “Transport Corridor Europe Caucasus Asia”).

The Brussels conference identified problems and deficiencies in the region’s trade and transport systems, and agreed to implement a number of EU-funded projects aimed at resolving them.

Many of the problems were a legacy of the Soviet era when the Central Asia and Caucasus countries were isolated from natural trade partners like Turkey and Iran by a sealed communist border.

But they were also cut off from each other because of a central planning system that put more emphasis on communications with the center—Moscow—than with their near neighbors.

A European Commission briefing sheet notes that the Brussels summit allocated an initial 15 million ecu to help the Central Asian and Caucasus countries diversify from their Moscow-centered trade and transport flows, and to open up trade routes to the West.

From the outset the EU strategy was dictated by two goals. First, the EU wanted to “support the political and economic independence of these countries by enhancing their capacity to access European and world markets through alternative transport routes.” Second, it wanted to encourage regional cooperation among the republics.

In launching the Traceca program, the EU wanted it to act as a catalyst to attract the support of international financial institutions and private investors. The EU also wanted the new Silk Road route to link up with trans-European transport networks.

Since the Brussels summit, Traceca has held four working group meetings in Almaty, Vienna, Athens and Tbilisi. Membership of the group has expanded to include Ukraine, Mongolia and Moldova. So far, the Traceca program has funded 22 technical assistance studies and five big projects to improve the transport infrastructure.