Seven Pillars of Prosperity—Diversifying Economic Growth in the Caucasus and Central Asia

IMF Blog, May 5, 2011

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Medium-term economic growth prospects in the Caucasus and Central Asia region are strong.
The region comprises eight countries: Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
After some countries were hit hard by the global financial crisis, growth across the region recovered, averaging just over 6½ percent in the most recent year.
Growth even exceeded 7 percent in the three Central Asia oil and gas exporters—Kazakhstan, Turkmenistan, and Uzbekistan.
The strong recovery is expected to continue in 2011 and beyond, although at a somewhat slower pace—5 to 5½ percent over the medium term.
The global recovery and high growth in China and Russia are expected to provide a boost through remittances and capital flows.
The pickup of oil and gas production is expected to moderate in Kazakhstan and to reverse in Azerbaijan, the region’s two largest economies.
Pre-crisis (the eight years before the global crisis) growth averaged 10.7 percent in the oil and gas exporting countries (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and 8.3 percent in the importing countries (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan).

Much of the pre-crisis growth was driven by external factors: strong growth in Russia and China, favorable commodity prices, remittances from Russia, and other foreign inflows (FDI, bank borrowing).
These forces were volatile or unsustainable, and commodity exports provided relatively few jobs.
Governments used fiscal stimulus during the crisis (raising spending or cutting taxes), but as this stimulus wanes, growth will require other drivers.
Poverty remains high across the region, especially in Tajikistan, the Kyrgyz Republic, and Uzbekistan.
Income inequality, unemployment, and underemployment are significant concerns.
A sizable youth population in some Central Asian countries will enter the job market in large numbers in just a few years.

reduce the role of the state;
greater openness to new domestic and foreign firms;
develop a more competitive and effective banking sector;
strengthen governance and the quality of institutions;
other improvements to the business environment—like reducing the cost of procedures for trade (critical given high transport costs), the time needed for permits, and the frequency and variety of tax payments;
improve transport and telecommunications infrastructure; and,
improve regional trade and investment links.

Total trade among these countries is considerably lower than would be expected based on the size of the economies and their geographical proximity.
Only about 5 percent of their total exports or imports are destined for or come from other countries in the region, and this ratio has been declining.
Most intraregional trade consists of agricultural commodities.
Causes for low intraregional trade:
- Transition away from the Soviet system left countries highly specialized in a few commodities, disrupting previous trade and financial flows.
- Severe shocks and frictions (most notably, the Russian financial crisis of 1998) disrupted trade and transportation links and hindered the development of labor, energy, and capital markets.
- Frictions and tense relations between some countries in the region.
Surprising observations:
- Despite substantial reductions in tariff and nontariff barriers, intraregional trade remains low.
- Despite broadly shared institutions, language, and history, investment flows within the region are small, with just a few local banks or companies active in other countries.
Remaining impediments are mostly institutional and reflect relatively poor business environments, including lengthy and cumbersome export or import procedures.

Moving forward on each of the seven pillars will help address impediments to diversification and intraregional integration.
Improvements in governance and the business environment across the region would help attract investment both from within and outside the region.
Increased investment and better trade links should lead to more trade and more jobs.

Source: Seven Pillars of Prosperity—Diversifying Economic Growth in the Caucasus and Central Asia (David Owen, May 5, 2011).

Семь основ процветания — диверсификация экономического роста в странах Кавказа и Центральной Азии
- Семь основ процветания — диверсификация экономического роста в странах Кавказа и Центральной Азии (Markdown version)
- Семь основ процветания — диверсификация экономического роста в странах Кавказа и Центральной Азии (PDF)