Encouraging transformations in Central Asia

A man walks along a snow-covered square in central Nur-Sultan, Kazakhstan November 28, 2019. REUTERS/Pavel Mikheyev - RC2BKD9QTRAE

Nearly 30 years ago, the countries of Central Asia emerged from decades of Soviet domination. The rapid disintegration of production and trade linkages established in the Soviet Union led to deep recessions, with per capita incomes falling to about half of their pre-independence levels by the middle of the 1990s. In 1997, the private sector accounted for less than one-half of GDP in the region and banks were heavily controlled, except in Kyrgyzstan. What the countries lacked in terms of income and connectivity to the world they had in natural resources and abundance of low-cost labor, and they spent much energy grappling with the challenge of how to best exploit these components of wealth.

Fast forward to 2019.

Where is Central Asia today and where is it going?

Has the region managed to integrate after the disintegration of the Soviet Union? The answer is simple: not much. The countries have integrated with the world economy through their natural resources, which account for about 65 percent of exports in Kyrgyzstan, Tajikistan, and Uzbekistan, and more than 90 percent in Kazakhstan and Turkmenistan. But integration within the region has been slow: Unlike the Association of Southeast Asian Nations (ASEAN), there is no single economic organization that brings Central Asia together. Kazakhstan and Kyrgyzstan are members of the Eurasian Economic Union and the World Trade Organization (WTO), Tajikistan just of the WTO, and Uzbekistan is still working to join the WTO.

Has Central Asia managed to diversify its exports—one of the main goals of the countries for 30 years now? Again, not much. Commodities dominate exports and remittances account for the bulk of foreign currency transfers from abroad. Trade between the countries is modest because of low complementarity of production and weak competitiveness.

What about the transition to market economy? The answer: not enough. Some progress was made during the early years of transition. But today, apart from Kazakhstan, the countries of the region are the lowest ranked among the states of the former Soviet Union on the extent of transition to market. The presence of the government and state-owned enterprises in the economy remains large, the private sector is often intertwined with the public one, and the risks of expropriation have remained elevated.

Have the countries transitioned from the rule of man to the rule of law? Again, not enough. Progress has been slow and governance weaknesses continue to undermine development. Even in the Kyrgyz Republic, the only democracy in the region, the rule of law is still shaky.

And what about incomes? The region has grown, led by near doubling of per capita income in purchasing power parity terms in Kazakhstan, Turkmenistan, and Uzbekistan since 1990 (Figure 1). At the same time, political turbulence combined with the civil war in Tajikistan and two revolutions in Kyrgyzstan have kept their real incomes largely unchanged. And this is the biggest challenge for these two countries: how to build on the past 30 years and take advantage of the growing opportunities around them to improve the well-being of their people.

Figure 1: Higher incomes in the bigger economies of Central Asia

Figure 1. Higher incomes in the bigger economies of Central Asia

Opportunities for Central Asia

What are these opportunities? There are four that deserve notice.

  1. Sudden change in Uzbekistan. Uzbekistan’s rise has been surprising and meteoric. The government launched ambitious reforms in 2017, with the intention of transforming the economy, society, and the government. Prices, the exchange rate, and trade tariffs have been liberalized. Taxes on businesses and households have been cut. And the role of government—still pretty pervasive—is being reduced. The impressive reforms have raised expectations of a more vibrant private sector and higher incomes and opportunities for Uzbekistan’s citizens. The changes also signify opportunities for Uzbekistan’s neighbors. As Uzbekistan frees up connectivity and trade, Central Asia can reinvigorate exports and investment in the region and beyond, radically improving conditions for Central Asia’s farmers, manufacturers, and traders.
  2. Growing connectivity between China and Europe. People usually associate this development with the Belt and Road Initiative (BRI), but it is a lot more. New pipelines, railroads, and roads are connecting the region with neighbors near and far, in contrast to the situation in the early 1990s, when all lines and roads led to Moscow. A recent World Bank report calculates that as a result of the BRI, exports of time-sensitive agricultural products from Central Asia are likely to increase by 9 percent and processed food by more than 17 percent. Infrastructure improvements from the BRI are likely to lead to an increase in foreign direct investment by more than 7 percent, leading to noticeable increases in GDP.
  3. Expanding links with South Asia. Linkages with South Asia provide another avenue for geographical diversification of exports of goods and services. When completed, the energy transmission line CASA 1000 will add to these opportunities. So will TAPI, the natural gas pipeline linking Turkmenistan, Afghanistan, Pakistan, and India that is currently under construction.
  4. Growing cooperation in the region. There is a noticeable increase in the appetite to tackle joint challenges such as the need to improve connectivity among the countries, strengthen regional trade, reconnect the regional energy grid and unleash the energy trade, de-risk the region, and remove obstacles to foreign investment. The recent meeting of heads of state of Central Asia held in Tashkent illustrated the new spirit of cooperation among the countries.

These are encouraging developments. A region often dismissed as a victim of geography because of its lengthy distances to the rest of the world, limited density, and a long list of divisions is becoming reinvigorated. It still faces many challenges, and the most binding one may be best described as “strong governments, weak governance.” Governments in Central Asia need to take advantage of the growing dynamism within the region and in the countries of South and East Asia to generate momentum for improved governance. They can do this in plenty of ways: from revamping the role of the state to allowing more economic freedom for people and companies to decide where they should locate and with whom they should do business; from investing in the region’s connective infrastructure to boosting outlays on education and health to build human capital and creativity.