Corresponding author: Marek Dabrowski ( marek.dabrowski@bruegel.org ) © 2017 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Batsaikhan U, Dabrowski M (2017) Central Asia — twenty-five years after the breakup of the USSR. Russian Journal of Economics 3(3): 296-320. https://doi.org/10.1016/j.ruje.2017.09.005
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Central Asia consists of five culturally and ethnically diverse countries that have followed different paths to political and economic transformation in the past 25 years since achieving independence from the Soviet Union. Kazakhstan and Kyrgyzstan have in relative terms made strides in market reforms, while Turkmenistan and Uzbekistan have not yet completed their transitions to market economies. Tajikistan represents an intermediate case. After experiencing more than a decade of growth based on hydrocarbon booms, Central Asian countries are faced with increasing challenges resulting from falling commodity prices, declining trade and lower migrant remittances. The main policy challenge is to move away from commodity-based growth strategies to market-oriented diversification and adoption of a broad spectrum of economic, institutional and political reforms. The major obstacles to political reform and structural diversification in the five Central Asian economies are internal and external geopolitical factors and deeply embedded institutional weaknesses within each country, particularly in areas where economic management interacts with authoritarian political systems and imperfect legal institutions.
Central Asia, post-communism, transition, economic policy analysis
At the end of 2016, the five countries of post-Soviet Central Asia — Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — celebrated the twenty-fifth anniversary of their independence after the breakup of the Soviet Union. It is a good occasion to examine where they stand now, the results of their transitions from centrally planned to market economies and the challenges the region faces. Central Asia also makes an interesting study because of its landlocked location and its historic legacy, including seven decades of communist rule and central planning. Moreover, Central Asia remains relatively understudied compared to other regions.
Despite their shared history and being referred to as a single region, the countries differ in their levels of political and economic development, cultural and ethnic composition and relations with the outside world.
In the 1990s, Central Asia experienced many of the same hardships of economic transition as Central and Eastern European and other formerly communist countries, such as skyrocketing inflation, partial de-industrialization and the collapse of Soviet-type welfare systems. Turkmenistan and Uzbekistan still have not completed their transitions to a market economy. Kazakhstan and Turkmenistan have joined the upper middle-income group, while Kyrgyzstan, Tajikistan and Uzbekistan remain in the lower-middle income category.
The countries of Central Asia are landlocked, although Kazakhstan and Turkmenistan border the Caspian Sea, which is not an open sea (
In addition, the decline in commodity prices in 2014 has challenged, through trade, migrant remittances and financial market channels, Central Asia's commodity-based growth strategies of 2000s and first half of the 2010s, creating new sources of social and political risks in individual countries.
In this paper, we analyze the socio-economic and political developments in Central Asia and the policy challenges faced by this region. In doing so, we will examine the historical background of the Central Asian transition (Section
Our paper is based on available cross-country comparable statistical sources, primarily those offered by the international organizations of the United Nations system. However, there are numerous data gaps, in particular for Turkmenistan and Uzbekistan, whose national statistical methodologies and data availability do not meet international standards. In those cases, we leave the gaps rather than try to present incompatible data.
In the nineteenth century, the Russian Empire conquered most of Central Asia except for the northern part of what is now Kazakhstan, which had been colonized by the Siberian and Orenburg Cossacks in the 17th and 18th centuries. Under Russian rule, Central Asia was split into the Governor-Generalships of Turkestan (with Tashkent as its capital) and Steppes (capital: Omsk). The Emirate of Bukhara and Khanate of Khiva remained autonomous under the Russian protectorate until 1920 when they were defeated by Bolsheviks.
In the 1920s and 1930s, under Soviet rule, the territorial division of Central Asia changed several times with the Soviet Union republic status of the five now independent states and their current borderlines emerging only in 1936.
Until the 1920s, the Central Asian economy retained its traditional agrarian/pastoral profile which reflected the largely nomadic and rural character of the region's population. Industrialization arrived in the Stalin era in the 1930s and was intensified during the Second World War when many industrial enterprises from the European part of the Soviet Union were evacuated to Central Asia. At the same time, large irrigation projects such as the Great Fergana Canal were implemented. Similarly to other parts of the Soviet Union, agriculture was forcibly collectivized in the early 1930s.
The human costs of the Soviet modernization of Central Asia were enormous. They included several rounds of famine in the 1920s and 1930s, repression and terror in the 1930s, the building of a large network of labor camps (the so-called Gulag system) where political opponents from the entire Soviet Union were imprisoned and perished in large numbers, and mass-scale resettlements (ssylka in Russian) of populations from the European part of the Soviet Union. The latter affected social groups such as the kulaks (better-off farmers) and included the deportation of entire ethnic groups in the 1940s, including Volga Germans, Chechens, Ingush, Crimean Tatars, Crimean and Caucasian Greeks, Meskhetian Turks, Koreans, Karachays and Poles.
After the death of Stalin in 1953 and the partial dismantling of the Gulag system, the Soviet-type forcible modernization and industrialization continued but with the use of less coercive methods. These included the conversion of pastures (“virgin land” or tselina in Russian) in northern Kazakhstan into large-scale wheat farms, the building of the Main Turkmen and Karakum canals, and the operation of the Semipalatinsk Nuclear Test Site and the Baikonur Cosmodrome (both in Kazakhstan). Many of those projects caused severe environmental damage (such as the disappearance of the Aral Sea and radioactive pollution over large areas of Kazakhstan) which has not yet been overcome.
Unlike the Baltic and Caucasus regions, the Central Asian republics were not at the forefront of the national emancipation movements in the late Soviet era. Until November 1991, their leaders participated in negotiations on a “renewed” Soviet Union agreement with the Soviet president Mikhail Gorbachev. However, once the Soviet Union was dissolved in December 1991, the local political elites (mostly former leaders of the republican structures of the Communist Party of the Soviet Union) grasped the opportunity and started to establish new authoritarian regimes (except Kyrgyzstan), based on national rather than communist ideologies.
The rapid and forcible industrialization of the Soviet era (with a strong focus on military needs) was associated with huge structural distortions and microeconomic ineffectiveness. After the dissolution of the Soviet Union, many industrial enterprises in Central Asia lost their previous markets and were unable to compete under the new market conditions. Partial de-industrialization in the post-Soviet period was thus no surprise.
After a painful transition period, growth picked up in 2000s, largely driven by growing exports of commodities such as oil and natural gas (Kazakhstan, Turkmenistan and Uzbekistan), aluminum (Tajikistan), gold (Kyrgyzstan), cotton (Tajikistan and Uzbekistan) and other metals (Kazakhstan).
Kazakhstan has the largest territory (2,724,900 sq. km —
For many reasons, geography and geopolitics in Central Asia are not helpful to the region's economic development.
First, the region is distant from the major centers of world economic activity: North America, Western Europe, and East and South East Asia.
Second, all countries are landlocked (Kazakhstan is the largest landlocked country in the world and Uzbekistan is double landlocked, i.e., it borders only landlocked countries) with limited transportation connections inside and outside the region. Major Central Asian transportation routes built during the Soviet era crossed and recrossed the borders of Soviet republics. The transformation of formerly intra-Soviet administrative borders into borders between newly independent Central Asian states, with border and custom controls and, quite frequently, visa requirements, created an enormous challenge to intra-regional trade and to the domestic movement of people and goods within individual countries, especially in the densely populated Fergana Valley shared between Kyrgyzstan, Tajikistan and Uzbekistan.
Third, on various occasions, Central Asian countries have suffered from political instability (underpinned by ethnic, sectarian, clan and regional conflicts and authoritarian regimes) and an even more unstable neighborhood. It is sufficient to mention the Tajik civil war in the 1990s, ethnic riots in Osh (Kyrgyzstan) in 1990 and 2010, the popular uprising in Andizhan (Uzbekistan) in 2005, two revolutions in Kyrgyzstan (2005 and 2010), and occasional incursions by jihadists from Afghanistan in the late 1990s and early 2000s. Political ambitions and personal animosities between authoritarian leaders have additionally limited the opportunities for intra-regional cooperation.
Central Asia's neighborhood also poses numerous security risks and therefore places limits on the potential for trade, transit, investment and tourism. Risks include the continuous civil war in Afghanistan (since the mid-1970s), the separatist movement in the Xinjiang region of China, the India-Pakistan conflict in Kashmir, frozen conflicts in the Southern Caucasus and the long-lasting economic and political isolation of Iran.
Fourth, the Central Asian countries are not ethnically homogenous. The dominant ethnic groups amount to 63 percent of the population in Kazakhstan, 72 percent in Kyrgyzstan and between 80 and 85 percent in Uzbekistan, Tajikistan and Turkmenistan.
Fifth, the region borders global and regional powers: Russia, China and Iran. Although Turkey does not border Central Asian countries, it seeks close economic, political and cultural links with them based on shared historical and language roots. The US as the global political and economic superpower has also been present in the region, especially at the time of the NATO-led combat mission in Afghanistan (2001–2014), when Kyrgyzstan, Tajikistan and Uzbekistan hosted US military bases and offered transit and logistic support to NATO troops.
While Russia clearly dominated the region for the last two centuries, in the last twenty years China has rapidly expanded its presence in Central Asia, especially in connection with large infrastructure investments (Box 1). As a result, Central Asian countries will face an increasingly difficult challenge in navigating between the two.
Exports and imports account for a substantial share of GDP of all the Central Asian countries (
Exports of goods as percentage of GDP, 1992–2016.
Source: IMF Direction of Trade Statistics, http://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85&sId=1409151240976
Imports of goods as percentage of GDP, 1992–2016.
Source: IMF Direction of Trade Statistics, http://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85&sId=1409151240976
Turkmenistan and Uzbekistan with their largely unreformed economic systems (see Section
In terms of geographic structure of exports and imports (
Main trading partners’ share in total exports and imports (%).
Note: Missing are intra-regional trade data for Tajikistan, Turkmenistan and Uzbekistan, exports of natural gas from Turkmenistan to Russia and large part of Uzbekistan exports of gold and cotton. Iran's data are for 2005 instead of 2008 and 2011, instead of 2015, for all countries.
Source: Bilateral trade data from Trade Map of the International Trade Centre, http://www.trademap.org/Index.aspx?AspxAutoDetectCookieSupport=1
Kazakhstan and Turkmenistan can benefit from the transit trade between China and Iran. In 2015, when sanctions on Iran were lifted, the first train from China arrived in Tehran after travelling through Kazakhstan and Turkmenistan, which took two weeks instead of one month for goods sent by sea.
The list of Central Asia's major trading partners reflects the geography and geopolitics of the region, as well as its institutional trade arrangements (
Trade and economic integration
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Recently, the EAEU has been negatively affected by geopolitical tensions related to the Russia–Ukraine conflict, such as the western sanctions imposed on Russia, Russia's trade countersanctions against the US and the EU (which have not been replicated by other EAEU members) and Russia's unilateral trade sanctions against Ukraine.
Overall, membership in the WTO and in EAEU helped their Central Asian members to modernize, to a certain degree, customs administration and technical standards, and reduce non-tariff barriers to trade and investment barriers.
The intergovernmental Economic Cooperation Organization (ECO) includes all Central Asian countries and their southern neighbors;
Interestingly, despite its increasing share of Central Asia's exports and imports, China has not advanced formal free trade arrangements with the region and trades with its Central Asia partners on WTO terms.
The EU concluded bilateral Partnership and Cooperation Agreements (PCAs) with each country, which offered the Most-Favoured Nation tariffs in bilateral trade relations, even before the accession of Central Asian countries to the WTO. In 2015, the new-generation Enhanced PCA between the EU and Kazakhstan was signed in Astana. Kazakhstan remains the most important economic and political partner of the EU in the region because of its role as an oil exporter. Tajikistan and Uzbekistan benefit from the Generalised System of Preferences (GSP), and Kyrgyzstan benefits from a more generous GSP+ scheme, granted to them by the EU on a unilateral basis.
The ancient Silk Road ran through Central Asia with Samarkand and Bukhara (today in Uzbekistan) being among the biggest and most prosperous trading centers along the route. Today, China is reviving the old trading route through its ambitious One Belt One Road project, which will develop infrastructure across Central Asia, South Asia and into Europe. Three major belts/roads have been proposed: North, Central and South. The North Belt will go through Kazakhstan and Russia to Europe. The Central Belt will go through Central Asia, Western Asia, the Persian Gulf and the Mediterranean. Finally, the South Road will stretch from China to Southeast Asia, South Asia and the Indian Ocean. All Central Asian countries, except for Turkmenistan, are members of the Asian Infrastructure Investment Bank, which will fund this project along with the Asian Development Bank and other sources.
Total trade between China and Central Asian countries has surpassed Central Asia's trade with Russia (
Central Asia's total trade with China and Russia ($ billion).
Note: Total trade is a sum of exports and imports.
Source: Trade Map of the International Trade Centre (data for Central Asian countries).
In the last decade, China has actively increased its presence in Central Asia through investments in energy and infrastructure. At the end of
2015, Chinese's FDI stock in Kazakhstan alone was equal to $21 billion (
Stock of Foreign direct investment in Central Asian countries from Russia and China ($ billion).
Note: Exact data on the Chinese FDI to other Central Asian countries is missing.
Source: Monitoring of Mutual Investments in CIS countries 2016, MIM CIS database of the Eurasian Development Bank Centre for Integration Studies, https://eabr.org/upload/iblock/ff3/investments_cis_2016_annual_report_presentation_en.pdf
China has been actively investing in oil and gas pipelines, roads and railways, and accompanying infrastructure (
Oil: China constructed the Kazakhstan–China oil pipeline, which came on stream in 2006; China's oil imports from Kazakhstan increased almost tenfold between 2005 and 2008.
Gas: China has completed the construction of a major gas pipeline from Turkmenistan. A second pipeline, Line D through Uzbekistan, Tajikistan and Kyrgyzstan, is
scheduled for construction, increasing China's gas imports from Turkmenistan even further (
Railways and other infrastructure: Kazakhstan is looking to cooperate with China on building a railway from Khorgos on the China–Kazakhstan border to the Aktau port on the Caspian Sea, including supplementary industrial and infrastructure projects in Khorgos as the hub. Another project, the China–Kyrgyzstan–Uzbekistan rail route, is also under discussion.
After the collapse of the Soviet Union and its economic system in 1991, economic transition in Central Asia started with a delay and has progressed slowly and unevenly since. One reason for the delay was the continuation of the common rouble area in 1992 and most of 1993 in which the single currency (Soviet rouble) was managed by several central banks (
As a result, macroeconomic stabilization and market-oriented reforms in Kyrgyzstan and Kazakhstan started only in 1994–1995. In Tajikistan, they started a few years later, after the end of its civil war (1997). Turkmenistan and Uzbekistan resisted market transformation for much longer and have tried to retain many of the instruments of a command economy.
EBRD Transition Indicators, 2014.
Note: The scale goes from 0 (no reforms) to 4.33 (reforms completed).
Source: European Bank for Reconstruction and Development. http://www.ebrd.com/cs/Satellite?c=Content&cid=1395245467784&d=&pagename=EBRD%2FContent%2FDownloadDocument
All Central Asian countries are doing poorly in the areas of governance and enterprise restructuring and competition policy, pointing to their limited progress in more complex institutional and legal reforms. This observation is confirmed by other available surveys and rankings.
According to the Heritage Foundation (HF) Index of Economic Freedom (
Heritage Foundation Index of Economic Freedom, world ranking, 2015.
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Corruption remains a major problem in the region, particularly in Turkmenistan and Uzbekistan (
Transparency International, Corruption Perception Index (100-very clean), 2015.
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When we disaggregate the summary HF ranking into individual policy fields (
Heritage Foundation Index of Economic Freedom by components, 2015.
Source: Heritage Foundation, http://www.heritage.org/index/explore?view=by-region-country-year
Kazakhstan and Kyrgyzstan have achieved some progress in building marketoriented financial sectors. Kazakhstan has attracted meaningful foreign investment into this sector. It also has the largest banking sector as measured by the ratio of credit to the private sector to GDP, which was 58.9 percent of GDP in 2007 but then declined as a result of the 2007–2008 banking crisis (
Domestic credit to private sector (percent of GDP).
Source: World Development Indicators of the World Bank (updated March 23, 2017). http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS?view=chart. Data for Tajikistan and Uzbekistan are missing.
The largely authoritarian character of the political systems in Central Asia is the main cause of their poor governance and business climate, and their insecure property rights and rule-of-law deficit. According to the
External parties could play a significant role in supporting reforms in Central Asia, as they did for central and eastern Europe. Unfortunately, a disadvantageous geographic location and geopolitics have limited these opportunities (Section
Although the two big powers directly bordering the Central Asian region — China and Russia— provide financial and development aid it largely serves their national and geopolitical interests. The same is true of investment from China and Russia, the major part of which is provided by state-controlled corporations or companies that are close to their respective governments. Often these projects lack transparency.
To lesser extent, the same is true of the two other regional players— Turkey and Iran. None of these neighbors is interested in supporting more political freedom or deeper institutional reforms in Central Asian countries.
The roles played by the US and EU in the region have remained limited. Both provide technical assistance, but its scale has reduced over time. US interest in the region declined after NATO's combat mission in Afghanistan ended. The extent of future US engagement under the Trump administration remains unclear.
The EU's interests are also limited. In the first period of post-communist transition, the EU through its external policy tried to follow a common regional approach to all CIS countries, including via the single development aid framework: the Technical Assistance to Commonwealth of Independent States (TACIS). With the start of the European Neighborhood Policy (ENP) in 2004, however, Central Asia, which remained outside this policy framework, was moved into a general basket of developing countries, also in terms of technical assistance program. The EU's relations with the region are governed by “The European Union and Central Asia: Strategy for a New Partnership” adopted in 2007
Occasionally, Kyrgyzstan and Tajikistan have received EU Macro-Financial Assistance (in the form of loans and grants) as a supplement to their International Monetary Fund program (see the next paragraphs). Given Kazakhstan's and Kyrgyzstan's membership in the Eurasian Economic Union, the EU cannot offer them negotiations on free trade agreements, as it has done with Georgia, Moldova and Ukraine. The same limitation in terms of opportunities for free trade arrangements with the EU applies to Turkmenistan and Uzbekistan, which are not WTO members and have not completed basic market reforms. Thus, the potential EU toolkit of policies that could support economic and political transition in Central Asia is limited.
In the context of the limited engagement of bilateral donors,
Overall, Kyrgyzstan and Tajikistan have received the largest amount of official development assistance (ODA) as a share of gross national income in the region (
ODA as a percent of Gross National Income.
Source: OECD DAC2a database. Note: The list of Least Development countries contains 48 countries (for more information, refer to http://www.oecd.org/dac/stats/documentupload/DAC%20List%20of%20ODA%20Recipients%202014%20final.pdf)
In the first half of the 1990s, Central Asian countries went through a painful process of correcting huge macroeconomic imbalances and structural distortions inherited from the Soviet era. They also had to adapt to the partial loss of the Soviet Union market (especially in the military-industrial sector) and the termination of direct and indirect transfers from Russia.
Growth recovery started in 1995–1997 (
Year-on-year GDP growth rate (%).
Source: World Development Indicators of the World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
GDP per capita in PPP terms, 1992–2015 (current international $).
Note: IMF staff estimates for Turkmenistan (2005–2015), Uzbekistan (2014–2015) and Tajikistan (2015). Source: IMF World Economic Outlook database, October 2016, https://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx
Other macroeconomic indicators have behaved similarly to growth rates. The turbulent 1990s, especially the first half, were characterized by threeor even four-digit inflation in Tajikistan and Turkmenistan (
Inflation, end of period, percent (logarithmic scale), 1995–2015.
Source: IMF World Economic Outlook database, October 2016, https://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx
General government gross debt, 1997–2015 (percent of GDP).
Source: IMF World Economic Outlook database, October 2016, https://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx
The period of the global commodity boom (2000–2008) was marked by high growth rates, annual inflation in the range of 8–10 percent, fiscal consolidation and growing international reserves. Then, the global financial crisis of 2008–2009 led to slower growth and some deterioration in fiscal accounts and balance of payments. Finally, the decline in commodity prices in 2014 further deteriorated the macroeconomic environment. The currencies of all Central Asian countries sharply depreciated (in particular, the Kazakhstani tenge), inflation went up, fiscal balances and balance of payments deteriorated, and growth slowed further (
Kazakhstan (since 2000) and Turkmenistan (since 2008) used the boom years to create oil and gas-related sovereign wealth funds; however, their transparency remains either low (Kazakhstan) or non-existent (Turkmenistan).
Despite its decreasing importance, agriculture continues to contribute around a quarter of the value added in Tajikistan and Uzbekistan (
Value added per sector (percent of GDP).
Note: Industry is disaggregated between (1) mining and quarrying, and (2) manufacturing. Comparative share of both sectors for Turkmenistan is missing for 2005 and 2015.
Source: World Development Indicators of the World Bank, http://data.worldbank.org/indicator/NV.IND.TOTL.ZS
Agriculture's share in total employment (Table
Employment by sectors, percent of total employment.
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Poverty headcount ratio at $1.90 and $3.10 a day (2011 PPP) (percent of population).
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China |
57.0 |
40.5b |
32.0d |
14.7e |
1.9 |
82.3 |
67.2b |
56.4d |
33.0e |
11.1 |
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Other socio-economic indicators.
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Remittances from migrants play an important role in the economies of Tajikistan, Kyrgyzstan and Uzbekistan (
Personal remittances received (percent of GDP).
Note: Earliest possible data for Tajikistan is 2002 instead of 1999.
Source: World Development Indicators of the World Bank, http://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS.
However, labor migration is not without social and economic costs. It involves loosening family ties, brain drain, migrants being employed below their skill levels and integration problems in the receiving countries. Individuals from remittancereceiving households are less likely to enter the labor market, putting additional pressure on the domestic labor supply (
As we have noted, the early years of transition from central planning in Central Asia involved substantial social hardship. In 1990s, in all Central Asian countries except Kazakhstan, the poverty headcount rates at $1.90 and $3.10 a day (in 2011 PPP) were high or very high (
Overall, cross-country differences in poverty statistics reflect differences in levels of GDP per capita (see
The first period of transition was also marked by increasing income inequalities (
Gini coefficient of income inequality.
Source: Standardized World Income Inequality Database (SWIID) by
Approximately half of the populations of Kazakhstan and Turkmenistan and slightly above 35 percent of the populations of Kyrgyzstan and Uzbekistan live in urban areas. In Tajikistan, this share is even smaller— 26.8 percent in 2015, having hardly changed since the beginning of the twenty-first century (
In the Soviet era, health services were provided largely by the state-owned health institutions and financed by the state budget, but informal out-of-pocket payments by patients and their families played an important role. After transitioning to a market system, healthcare is financed from three major sources — out- of-pocket financing by households, general budget financing and social health insurance systems (
Despite attempts to legalize and cap the amounts of patients’ co-payments for healthcare services, the practice of informal payments and bribes remains widespread in the region (
Public health insurance financed by mandatory contributions from employees and employers was introduced in Kyrgyzstan in 1996, and Kazakhstan in 2016 (
Since the beginning of the 2000s, male and female life expectancy have increased, especially in Kazakhstan, Kyrgyzstan and Tajikistan (see
Overall, Central Asia's high share of population under the age of 14 and continued population growth (which is rapid in some countries) point to favorable demographic perspectives with an ample supply of young labor in the coming decades (in contrast to other former Soviet Union countries, Europe and East Asia). Moreover, Central Asian secondary education enrollment is high (
Education— gross enrollment ratios (%).
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The decline in the prices of oil, natural gas, metals and agricultural raw materials in the second half of 2014 meant that Central Asia suffered a huge adverse shock. The vulnerability of Central Asian economies to changes in the world commodity markets was exposed and the need for their structural diversification towards more manufacturing and services became even more urgent (see
In any economy, policies aimed at structural diversification are not easy to conceptualize, coordinate and implement. The right approach is to rely on market forces, including international trade and investment, rather than administrative dirigisme, government planning and public investment (except in infrastructure, where public authorities have an important role to play). In Central Asia, however, where memories of central planning and dominant public ownership are relatively fresh, there is a natural temptation towards etatism and dirigisme (often associated with corruption and favoritism). This is particularly the case for reform laggards Turkmenistan and Uzbekistan. Going in the direction of more state control would mean welfare losses and would further the region's marginalization in the world economy.
Market-oriented diversification requires a supportive macro- and microeconomic environment. The decline in commodity prices led to the nominal and real depreciation of Central Asian currencies, especially the Kazakhstani tenge. In theory, this could improve the international competitiveness of the non-commodity sector. Given the geographical structure of non-commodity exports (to Russia and Kazakhstan, however, whose currencies depreciated more than those of other Central Asian countries), this did not happen. In some countries, policies to keep official exchange rates over-appreciated at the cost of foreign exchange restrictions (Section
Looking at the microeconomic environment, economic agents in non-commodity sectors must be able to develop and expand their businesses with minimum administrative obstacles, low transaction costs and protection of their property rights. This requires, in turn, improvements in the business climate and governance, which means adopting a broad spectrum of economic, institutional and political reforms.
The list of required reform measures differs between countries but also contains a common agenda for the entire region.
Turkmenistan and Uzbekistan must complete basic market reforms: domestic price liberalization, reducing explicit subsidies for food, energy and water, and cross-subsidization (in public utilities), unification of the exchange rate and current account convertibility, trade liberalization, WTO accession, greater privatization and elimination of barriers to private entrepreneurship, both domestic and foreign, and building financial market infrastructures.
On the other hand, all Central Asian countries, including Kazakhstan and Kyrgyzstan where reforms are more advanced, face the same challenges of oppressive and predatory post-Soviet states.
Closer intra-regional cooperation would also improve the business and investment climate. Given the region's remote geographical location, its complicated borders, infrastructure inherited from Soviet times and cultural proximity (Section
Overall, our analysis suggests some general policy lessons, which may also apply to countries outside the Central Asia region:
Geography matters. Central Asia's remote geographic location (far from major centers of world business activity), landlocked situation and underdeveloped transportation infrastructure do not help the region's integration into the world economy and therefore their economic development, even if a given country/ region is well-endowed with natural resources and educated labor force.
Geopolitics also matters. Geographic disadvantage matters even more if it is associated with adverse geopolitical factors— an unstable neighborhood with unresolved conflicts, limited appetite for intra-regional cooperation, assertive policies of regional powers and limited interest from the two global powers (the US and EU) that traditionally support democratic and market reforms.
Importance of institutional legacy. The total absence of the traditions of modern capitalist economies, political freedom and democracy in Central Asia has not helped its political and economic transition since independence; however, such a historical background cannot be seen as the fatal factor that will be in force forever. Good policies can help overcome poor institutional legacies, as occurred, for example, in some Asian countries.
Authoritarianism does not help in economic reforms. Our analysis suggests that there is a correlation between progress in political and economic reforms in the Central Asia region, as is true elsewhere in transition economies (see
Natural resources are both a blessing and a curse. The presence of mineral resources, especially hydrocarbons, helped Central Asian countries to grow rapidly, eradicate poverty and start large infrastructure projects, despite their geographic, geopolitical and institutional disadvantages and, in some cases (Turkmenistan), in the absence of genuine market reforms. Resource booms have their limits, however, as shown by the impact of the 2008–2009 global financial crisis and the 2014– 2015 decline in commodity prices. Furthermore, the presence of large natural resource rents creates obstacles (via the real appreciation of the exchange rate) to the development of internationally competitive manufacturing and service sectors. It also encourages corruption and helps to consolidate authoritarian regimes.
The authors would like to thank Giuseppe Porcaro for creating maps, Stephen Gardner for editorial support and Roman Mogilevsky, Ben Slay, Simone Tagliapietra, Georg Zachmann, Suman Bery, Guntram Wolff, other Bruegel researchers and participants of the XVIII April International Academic Conference on Economic and Social Development organised by the Higher School of Economics, Moscow, April 11–14, 2017, for their comments on earlier versions of this paper.
The legal status of the Caspian Sea and its territorial delimitation are the subject of international controversy. Russia and Iran consider it a lake rather than a sea (see Janusz-Pawletta, 2015).
2012–2014 census data for all except Uzbekistan, where 1996 is the most recent data available.
Hypothetically, the Shanghai Cooperation Council consisting of Russia, China and four Central Asian countries (all except Turkmenistan) should ease potential tensions and facilitate political, security and economic cooperation in the region; however, the actual role of this organization remains limited.
With the exception of Japan, which financed some infrastructure projects in Kyrgyzstan and Tajikistan on concessionary terms.
The same challenge is shared by other former Soviet countries, including Russia and Ukraine.