More regional integration for sustained growth: Central Asia and Caucasus
By Arthur Bayhan
In the last 10 years the regional economic integration expanded geographically and intensified substantively. Efforts have been undertaken by governments to establish free-trade areas, customs unions and common markets. The regional economic integration is the unification of economic policies, including rules and regulations between different countries in the region through the partial or full abolition of tariff and non-tariff restrictions on trade among them prior to their integration. This framework leads to lower prices for distributors and consumers and increases productivity, further develops innovation activities and enhances competitiveness of the economies in the region.
The long-term economic growth prospects of the energy and mineral deposit rich region of Central Asia and Caucasus will depend on more economic integration, the price of oil and minerals on the world market, the location of new oil and gas pipelines in the region and the region's firm commitment to invest its energy income to promote growth in non-energy sectors of the economy so that it can generate employment and reduce poverty.
The sectors important to the region's long-term economic growth are agriculture, manufacturing, telecommunications and tourism, which have the potential and competitive advantage to grow. The crucial sector is agriculture, which is the second largest sector of the region's economy after energy.
Central Asia has one of the largest arable land areas in the world and produced 25.6 million tons of wheat in 2008 (4% of world wheat production). Kazakhstan is a major producer of grain in the region, while cotton is the main export for both Turkmenistan and Uzbekistan. The energy sector is still the main driver of the region's economic development and growth specifically, in Kazakhstan, Azerbaijan and Turkmenistan, and minerals are the main exports for the Kyrgyz Republic and Mongolia.
Several reports drawn up by international organizations, including the OECD report on competitiveness and private sector development for 2011, identify challenges of the region, including the deteriorating human capital, lack of access to finance for SMEs and inadequate investment promotion policies.
Indeed, a significant decline in spending on education and vocational training affects the quality of education and does not provide the skills required for the market. The SMEs, which are the region's backbone for growth and job creation, are facing enormous challenges for obtaining loans due to higher interest rates and the requirement of a collateral.
The current investment policy and promotion require improvements for promoting more investment in non-energy sectors. This includes improving land ownership regulations and a review process of the systems restricting FDI. As the investment in hydrocarbons has its own contractual arrangements, foreign direct investment (FDI) in non-energy sectors will have to play a crucial role in energizing the region's economy. Its contribution must not be limited to providing much-needed capital; more important are the non-financial contributions that come along with FDI, including the transfer of state-of-the-art technology, integration of domestic production into worldwide production and marketing chains, and linking domestic businesses through upstream and downstream stages of production.
The international competitiveness rankings of some countries in the region remain another challenge. The World Economic Forum's Global Competitiveness Report (GCR) is one of the most influential rankings of a country's competitiveness and ranks the countries in the period 2012-2013 as follows: out of the 144 economies assessed, Azerbaijan ranked the highest among the transition economies and is at the 46th ranking. Kazakhstan follows at 51. Georgia ranked at 77, Armenia 82, Mongolia 93, Tajikistan ranked at 100 and, Kyrgyz Republic ranked 127th. Uzbekistan and Turkmenistan are not included in the report or have not participated in the report's surveys. The WEF Global Competitiveness Report for 2013-2014 is due to be published on September 4.
Although the region has continued to attract significant foreign investment in the last 10 years, weak regulatory and institutional reforms and the high costs of cross-border transactions continue to hinder investment outside the energy and minerals sectors. In the last decade the countries in the region tried to improve their rankings in the World Bank and the IFC's (International Finance Corporation) "Ease of Doing Business" report. Ease of Doing Business Report of 2013, out of 185 economies, ranked the countries in the region as follows: Kazakhstan 49, Azerbaijan 67, Kyrgyz Republic 70, Mongolia 76, Tajikistan 141, and Uzbekistan at 154. Turkmenistan is not included into or has not participated in the surveys of the report.
The membership of the countries in the region in the World Trade Organization (WTO) is crucial for greater market access and for influence in global forums. The region's key trading partners are WTO members and are progressively updating laws and regulations based on WTO requirements. To do so, the countries in the region need to improve their trade policies, remove trade and non-trade barriers, build well-functioning trade facilitation, promote exclusive institutions and improve regulatory policies. The WTO and other international and regional trade agreements can promote critical national reforms that promote good economic management and growth. The countries in the region specifically Kazakhstan and Azerbaijan are in the final stage of the negotiations to become the members of the WTO, but, still not members. Uzbekistan is an observer and Turkmenistan's government is still in the initial stage of preparation for an observer status.
The countries in the region are interdependent and need close collaboration to boost regional economic integration and growth: most of the countries are transit countries for the oil and gas supply as well as recipients so of energy (mostly gas); the countries share some of the regional natural resources such as water. Turkmenistan and Uzbekistan are using unlimited volumes of the water that flows into them from Kyrgyzstan. Kyrgyzstan also supplies water to Kazakhstan through the Canal Ahmed and Tajikistan supplies water to Uzbekistan; the analyses show that the countries also share similar features in terms of natural resources and labor market flexibility that they share in education, common regional languages and similar or common traditions that are the main competitive advantages across the region for economic integration.
Therefore, and with a view of long term vision of the world emerging globalized markets, Central Asia and Caucasus policy makers may wish to start a policy dialogue to explore the economic, social and institutional drivers underpinning the regional economy. The Association of South-East Asian Nations (ASEAN) is one of the best examples of this effort.
Arthur Bayhan is senior advisor on economic growth and competitiveness with more than 20 years of project implementation experience in the areas of investment and trade facilitation, sector competitiveness, and public-private partnership development. He worked as chief of party for USAID, head of private sector development at OECD, and as advisor at the EU Commission and has been engaged in the highest levels of governments and the private sector to improve framework conditions for business enabling environments and developed sustainable economic institutions in Central Asia, Caucasia, Russia and in other transition economies as well as in South- and Southeast Asia. He is a German national and can be reached at: [email protected]