ECONOMIC INTERESTS OF CENTRAL ASIAN STATES: IDENTIFICATION PROBLEMS
Talaybek Kaychumanov, D.Sc. (Econ.), former minister of economics and finance, Kyrgyz Republic; professor, World Economy Department, Kyrgyz-Russian (Slavic) University (Bishkek, Kyrgyzstan)
In the book The Quality of Growth the World Bank published in 2001 it is pointed out that in the 1990s the developing countries became more open, the trade/GDP ratio increased, protectionism in many regions decreased after several rounds of international trade talks. The same period saw a decrease of average tariffs; in many cases decrease was considerable. The weighted-average tariffs in the East Asian countries dropped to 14 percent; in Latin America, to 10 percent; in Africa, to 20 percent.
In the majority of regions (with the exception of the sub-Saharan states) the non-tariff barriers lowered to a great extent—to 7, 5 and 45 percent, respectively. Analysts are convinced that this became possible because the governments acquired more trust in the market, because private entrepreneurship was more encouraged, because certain branches were privatized while the barriers in marketing and sales were lifted and because domestic markets were liberalized.
This is going on all over the world—the current globalization process will not let us disregard it. One has to admit that the share of countries with transitional economies is negligible: the industrially developed countries account for 65.3 percent of world economy; the developing countries, for 29.4 percent, while the countries with transitional economies, for 4.0 percent. The IMF forecasts about economic growth in the post-Soviet republics against the background of the expected worldwide slump suggest that these newly independent states will try to widen its niche. Their interests are not always identical while their foreign economic courses contradict one another; they are not shy of officially announcing economic expansion within the CIS. At first glance this looks natural: market invites competition or even fierce rivalry. But how one should treat their numerous alliances and the commonwealth?
Out of the numerous alliances existing in the post-Soviet expanse (the CIS, the Customs, today Eurasian Economic, Union, the CAEU, today the Central Asian Cooperation Organization, and the GUUAM) the Central Asian Economic Union formed in January 1994 is the most successful. It has already set up the Central Asian Development Bank and started crediting individual projects of mutual interest for the countries involved. This is how problems should be treated.
The positive examples apart the Central Asian countries have not yet traveled far along the road leading to integration. Like the CIS they have adopted a pile of documents a small number of which are taken into account, especially in the sphere of tariff and non-tariff regulation, unification of tax laws, removal of all sorts of bureaucratic barriers that prevent free movement of labor, goods, and services.
An analysis of the integration processes in the post-Soviet expanse and specific recommendations require a clear understanding of why (political considerations apart) these alliances (that so far remained ineffective) were created in the first place.
Why Economic Unions Appeared in the Post-Soviet Expanse
One can easily understand why unions of states are formed. The Central Asian countries, for example, inherited from the Soviet Union an interconnected industrial and economic potential (part of the single economic complex) whose productive forces, technologies and production organization could not be divided. In the disintegration frenzy it was destroyed together with the ramified network of economic ties—this inevitably caused economic decline in all newly independent states.
The efforts to preserve the single economic expanse failed because of liberalization of foreign economic activity and disintegration of the Soviet Union. In 1992-1999 the trade turnover between the CIS countries dropped more than three-fold; the indices of mutual trade dropped in practically all republics, with the exception of Russia and Tajikistan; it was revived in the mid-1990s but failed to justify optimistic hopes; the financial crisis of 1998 was followed by another economic decline. In the Central Asian countries the crisis was less destructive than in Russia yet the post-crisis situation in some of them remains unstable despite the growing GDP and bright prospects predicted by some of the experts.1
Those of the post-Soviet states (nearly all of them except Tajikistan and Belarus) that reoriented their foreign economic interests to the far abroad failed to achieve the desired results; their attempts to realize a new economic strategy, that is to seek economic development sources outside the former Soviet Union likewise produced no positive developments. The post-Soviet republics are mainly raw-material exporters that import consumer goods. At some point their markets were overflowing with goods imported from the far abroad while their own production facilities remained idle. Interstate cooperation was further impeded by all sorts of bureaucratic and economic barriers, protectionist measures and customs.
According to economists during the crisis production in the Central Asian countries dropped by 50 percent because of curtailed trade with the CIS members and by 20 percent because of lower solvent demand.
As could be expected failed economic policies and impoverishment of the majority of people led to greater social and political tension. Common people found it hard to understand that the drawbacks were caused by the processes inherent in the period of reforms. The governments responded with repeated attempts at integration—at least they officially announced this. These attempts, however, were strangely inert.
The Fruits of Economic Unions and Integration Problems
By late 1997 only 130 out of 880 joint documents adopted by the CIS countries were effective—integration was obviously not working. Experts have pointed out that the amorphous and inefficient nature of the CIS was responsible for its weak institutional and legal structure. The same, or nearly the same, can be said about the absolute majority of all other unions.
Probably time for integration has not come: the post-Soviet states have not yet learned the art of concessions. Even a superficial observer can say that there is an interest in using the advantages of interstate division of labor, specialization and production cooperation. Moving in this direction the Central Asian states could concentrate their limited material and financial resources in the priority spheres of mutual interest and elaborate a common strategy of economic integration.
To be able to address these tasks the countries should first identify their mutual interests and directions of economic reforms otherwise all decisions adopted “on top” will remain on paper. This is what we are watching now. Such decisions may even produce negative effects. This is confirmed by numerous letters from dissatisfied people, some of them being quite unexpected. The drivers from Kyrgyzstan that worked on the long-haul routes wrote to the government that “the Kazakh traffic police loved their country more than their Kyrgyz colleagues” because the foreign firms working on the long-haul routes had to pay lower tariffs in Kyrgyzstan than the local firms. The drivers found a paradoxical way out: “we should respond to their high tariffs with a ban to come to country and snatch jobs from us.” This letter published in the Vecherniy Bishkek newspaper is a good example of how hard it is to integrate and how easy it is to find oneself in a trap. Today, we are witnessing continued economic disintegration.
Nobody has any doubts that integration is needed and that the world is moving toward regional cooperation. The process, however, turned out to be slow and contradictory for several reasons.
On the “Greater Economic Openness—Greater Vulnerability” Dilemma
The 1998 financial crisis demonstrated once more that, on the one hand, the economies of the former Soviet republics remained intertwined and, on the other, that they greatly depended on the outside world. The crisis hit the Central Asian countries to different degrees—the fact that determined their further development and their integration potential. One can say that reforms required concerted efforts and that together it is easier to oppose economic pressure from outside. This has already been demonstrated when military-political challenges emerged on the horizon. The situation in the economic sphere is slightly different: each of the countries has already opted for its own variant of reforms; it looks at the neighbors and registers their failures and successes yet none of them can turn back.
The extreme approaches to reforms—the degree of economic openness—illustrated by Uzbekistan and Kyrgyzstan presuppose different degrees of impact of the crisis in Russia on their economies. Uzbekistan sustained the minimal losses among its Central Asian neighbors explained by the fact that its economic ties with Russia were loose. In 1998, its trade turnover with Russia amounted to about 15 percent. Its protectionist policy separated it from other CIS countries with numerous high barriers. In 1998, Uzbek economy grew, by late 1999 the growth reached 5 percent; positive dynamics is still obvious. The Russian crisis hit its hard currency market—the local currency, the sum, plunged down on the local black market. Other macro-indices remained virtually unaffected.
As distinct from Uzbekistan Kyrgyzstan is pursuing the most liberal foreign economic policy in the region: it is a member of CIS, the Central Asian Cooperation Organization, the EurAsEC, and the WTO since 1998. A large number of JVs and close economic ties predetermined an impact of the Russian crisis on the country’s economy. The securities market was the first to demonstrate the effects of the troubles in Russia: in September 1998 the turnover on the securities market dropped; non-residents fled the state bonds market; their yield and bank rate were climbing up thus sending the local currency exchange rate down. The banking crisis affected the country’s budget and its finances; export and production activity declined together with tax proceedings.
Experts of the Russian Institute of International Economic and Political Studies analyzed how the financial crisis in Russia affected the post-Soviet countries yet not all of their conclusions can be accepted without questions.2 They concluded that the Russian crisis delivered the heaviest blow at Kyrgyzstan’s foreign trade: compared with 1997 its export had dropped by 15.2 percent while import had increased by 17 percent increasing the negative trade balance still more. I think that this is not quite right: the worsened situation in foreign trade affected the financial sphere because the real sector had been ailing even before 1998. Plummeting export was one of the signs: the republic in crisis had to cut its ties with all CIS countries.
Kazakhstan is somewhere between Uzbekistan and Kyrgyzstan where economic openness and the radical nature of reforms are concerned. It is balancing between greater openness and protectionism, competition and support for its industry. Russia is its main foreign trade partner because Astana depends to a much greater extent than the other countries on what is going on in Moscow through the oil and gas, mining, metallurgical, energy and transport complexes technologically bound together. In 1998, Russia accounted for 40 percent of Kazakhstan’s export and import; the securities markets of both countries were also tied together. Despite the frantic efforts at the official level (the Antimonopoly Committee) to rebuff the impact of financial crisis in Russia crisis trends penetrated the republic through mutual trade: its foreign economic figures worsened; foreign trade turnover dropped by 12 percent, the negative balance of payments became even more pronounced, its debt to other countries increased. On the whole, Astana suffered less than Bishkek.
Tajikistan and its economy were greatly affected by the civil war: by its end the local economy was on the 1970 level. During the years of sovereignty the real volume of the state budget shrank by half; the share of state expenses topped 50 percent of GDP while a third of it was, until recently, spent on military purposes. The country’s foreign debt is comparable with its GDP. Today, the republic is actively cooperating with all large international financial institutions and is obviously reviving against the background of crisis phenomena in the majority of CIS members. The economic situation remains complex and highly unstable. The financial crisis in Russia left its imprint on the local economy; affected its balance of payments and complicated the macro-economic situation in general; the exchange rate of the local currency dropped by 20 percent.
I would like to conclude the above with saying that the degree of economic integration is an opposite value of resistance to outside influences—this is what probably taken into account when the integration issue is discussed. Economic instability drives the neighbors away from each other and retains their movements toward economic integration.
An analysis of shifts to the market economy and of their influence on inter-state integration shows that the influence is rooted in different approaches to reforms, different interpretations of their meaning, different speeds of reforms and the conditions in which they are carried out as well as different volumes of national resources. This probably explains why Turkmenistan is keeping away from the CIS countries and why its leaders are trying to preserve the old economic model. They obviously do not want to integrate with other CIS members.
On Identification of Interests
I have already written that the CIS adopted a vast number of integration documents the absolute majority of which remained unrealized, at least prior to 1998. Many issues have remained uncoordinated for years—they were mainly raised by economically weaker countries with a smaller share in the aggregate national product. To a certain extent this situation is created when alliances are formed. One can easily see that in the post-Soviet expanse it is large countries that form alliances based on certain previously discussed principles and conditions. Smaller countries join later and remain nominal members.
Here is an example. For several years certain CIS countries spoke about levying the VAT according to international practice—at the point of destination instead of the CIS practice of levying the tax at the point of origin. Several times the issue was removed from the agenda without clear explanations. Meanwhile, they were simple: large importers did not want it. As a result Kyrgyzstan that had assumed certain obligations to the IMF had to introduce the VAT at the point of destination to the damage of its own interests. Certain CIS countries refuse to take into account the interests of their partners therefore the neglected members had to seek understanding in the far abroad. Obviously, these artificial barriers can be removed with the advantage for all CIS members.
The list of mutual interests is long: higher prices on energy fuels; hydropower resources and the use of water, as well as many other daily problems.
Those of the politicians who have learned the bitter taste of ethnic conflicts do their best to avoid openness in dealing with conflict situations—problems pile up; mutual dissatisfaction accumulates and materializes in all sorts of trade barriers that hit those who live along the borders and the business community. This explains why the documents on simplified customs and other control procedures produce opposite effects. All sorts of barriers impede free movement of labor, goods, and services. Regrettably, the post-Soviet states have not created civilized methods of conflict settlement; have not yet learned how to enlist international organizations and experts despite varied and rich experience accumulated the world over.
The problem of protectionism deserves special mention. It is often said that successful integration calls for concessions. The same applies to gaining sovereignty, but in the period of transition the need to survive pushes economy and its problems to the forefront; these interests may vary from country to country. For example, let’s discuss Kyrgyzstan’s membership in the Customs Union and its later membership in the WTO. Bishkek cannot apply protectionist measures—something that other Union members would like it to do. It does not need them; what is more, such measures carry no threat to other economies. It is much wiser for other countries to move toward WTO membership that guarantees civilized economic and trade relationships among the partners. It seems that it will take other CIS members some time to realize that Kyrgyzstan was forced to join the WTO and that it was a correct decision. There is no need to look at it as a tragedy—it is much more profitable to realize that this (as well as introduction of the national currency) was another step toward market reforms.
On the whole, to speed up integration the CIS members should first identify their national interests irrespective of the type of unions and cooperation in the post-Soviet expanse. They have to identify the fields in which their interests coincide and in which they differ and start harmonizing their relationships. The process of identification should include not only a description of common features of their economic policies but also their divergencies.
It is important to emphasize that approximately equal economic potential of post-Soviet republics wishing to integrate and their desire to move in the same direction toward reforms are the key to success. Indeed, the desire to create a free market differs from a desire to build up a closed society. This says that the first step toward a union in the post-Soviet expanse consists in identification and harmonization of interests of the future members.
This process will bring to light the clearest and the most needed interests as well as the points and sectors in which such interests meet. They should be supported with adequate institutions therefore today we should develop the institutional possibilities of effective administration of integration processes.
As for harmonization of relationships one can say that the countries should recognize that they are advancing toward the market with different speeds, that the level of economic liberalization is different. There can be no wider regional cooperation without harmonized economic policies. This means that, first, the different level of liberalization demonstrates that some of them rely more on administrative methods of economic regulation (quotas, licenses, other limitations and preferences) than the others. This deprives such countries of competitiveness when their foreign economic ties are liberalized. The countries that are lagging behind others in their movement toward the market are afraid of free trade and competitiveness—they have grown accustomed to the “greenhouse” conditions of administrative regulation. Obviously the best possible treaties that would remove all sorts of trade barriers notwithstanding such countries will try to protect the conditions best suited to their domestic economic policies. This can be done if the state protects its industries, thus erecting barriers for foreign partners and slowing down regional developments. The above suggests a conclusion that successful regional cooperation calls for harmonization of economic policy, its liberalization and synchronization of economic reforms.
1 See: A. Oslund, “Burniy rost ekonomiki na postsovetskom prostranstve,” Obshchestvenniy reyting, No. 35 (108), 19-25 September, 2002.
2 See: Postsovetskie strany i finansoviy krizis v Rossii, Institut mezhdunarodnykh ekonomicheskikh i politicheskikh issledovaniy RAN, Vol. I, II, POZT Epikon, Moscow, 2000.