Economic Changes in Central Asia and Indian Responsetc

In this paper an attempt has been made to understand economic changes in the Central Asian region in the last one decade. These changes have coincided with the Indian liberalisation process. It is described that although the countries of Central Asia have integrated in the global economy, their economic relations with India have declined significantly. Despite having close political relations, India is also absent from many of the new regional economic initiatives in the region. The paper ends with the assessment of Central Asian economic reforms and suggestions for improving Indian economic presence in the region.

Since the collapse of the Soviet system, the five Central Asian countries Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan are witnessing transformation of their economic systems. All these countries have moved along this transformation to varying degrees. Despite having a very complex legacy (of central planning, dissolution of the USSR, distorted economic structures, ethnic problems), the region has made some progress in market reforms. Due to certain specific features (natural resources, strategic location, political systems and background of political elite) the region has used both standard as well as non-conventional strategies of economic transformation. The Soviet era leaders in more or less non-competitive regimes have tried to pursue economic stability while securing their

*Dr. Gulshan Sachdeva, Associate Professor, Centre for Russian, Central Asian & East European Studies, School of International Studies, Jawaharlal Nehru University, New Delhi.

own dominance in the new political system. They have also tried to learn a few lessons from the Chinese model of development

In the early years, the break-up of the Soviet Union hit the region very badly for many reasons. Trade and transit was interrupted with new borders, increased transportation costs, illegal check points and collapse of traditional markets. Industrial and agricultural production was hurt due to disruption in access to inputs and markets. There was loss of subsidies for budgets, enterprises and households which were paid earlier directly or indirectly through social payments, as well as through below market prices on transport and energy. There was also loss of administrative structures and skilled labour as traditional Soviet administration collapsed and many Russians left the region. The access to secure water and energy resources was also lost in the region which was key for the agriculture, industry and household requirements. Countries in the region were left with large environmental burdens (including the Aral Sea ecological disaster, as well as industrial, nuclear and biological waste). Above all, there were also ethnic tensions and civil war (especially in Tajikistan).1 All these were added complications to the ‘normal’ transformational problems faced by any country moving from a centrally planned economy to a market economy.

Despite a common historical and cultural background, including more than seven decades of Soviet legacy, the five Central Asian republics have had different abilities to cope with the transformation challenges.2 As a result they have adopted different strategies. Even a quick view at the vast transformation literature, one could find “early and late reformers” as well as “radical” and “gradualist” reformers in Central Asia. The transition strategies adopted by these countries have also been influenced greatly by the political environment in the region and in their particular countries. Uzbekistan adopted a gradual and cautious approach to market reforms, while Kazakhstan and Kyrgyz Republic followed a relatively more aggressive approach. Turkmenistan and Tajikistan have cautiously joined later. These different policies have led to different macroeconomic outcomes as well as different policy environments.

The countries of Central Asia in the first decade of their transformation displayed some common trends and some significant variations. However, output decline in all the countries in the region was very deep and longer. Recovery in some of the countries was further derailed with the fiscal financial crisis in the Russian Federation in 1998. According to the World Bank, Central Asia had an average of

1989=100

about seven years of declining output in the first ten yeras, resulting in loss of almost 41 per cent of the initial measured output. The highest loss of output was in Kyrgyzstan and lowest in Uzbekistan.3 This “transformation recession” is now over the region is on a path of recovery.

Overall, the success of market-oriented structural and institutional reforms has shown mixed progress in Central Asia. According to different methodologies and classifications developed by major multilateral organisations as well as other independent agencies to measure reform progress in transition economies, Kazakhstan and Kyrgyzstan have progressed much faster. Similarly, Uzbekistan and Turkmenistan have been classified as countries which have achieved less progress in establishing market institutions. According to widely used indicators developed by the European Bank for Reconstruction and Development (EBRD), level of reforms concerning prices, foreign exchange and external trade, privatisation, enterprise reforms and banking sector is high in Kazakhstan and Kyrgyz Republic. In some cases it is comparable to Russia and Poland. Tajikistan has also made significant progress in price reforms, external sector reforms and small privatisation. The level of reforms in Uzbekistan and Turkmenistan is low, particularly in the external sector and enterprise and banking sector reforms. Except Kazakhstan, other Central Asian countries are quite low in Euromoney risk ratings.4 The reform process in agriculture has resulted in (1) corporate units created by reconfiguration of shares inside the former collective shell (2) successor farm (stay as is) created by keeping the share in the former collective (3) individual farms established by withdrawal of shareholders. Despite all these changes, in reality very little has changed in the form of farm restructuring in Central Asia.5

Central Asian economies inherited state-controlled foreign trade, which was subordinated to the central planning.6 Within the integrated economic structure of the Soviet Union, Central Asian region has strong dependency on imports of energy, food and consumer goods. The production structure of the region was heavily oriented towards agriculture and mineral extraction. Because of lack of diversification, and high import dependency these countries were vulnerable to adverse trade shocks.

Progress with Transition: EBRD 2002 Indicators
(Average transition Score from 1 to 4)

Infrastructure

sation

External economic reforms in the region have covered five areas: liberalisation of foreign trade prices, reform of the trade system, market diversification, phasing out of barter trade and currency reforms.7 Progress on these reforms has varied across the region. Although the role of state in foreign trade has been reduced throughout the region, progress has been more pronounced in Kazakhastan and Kyrgyzstan. Uzbekistan and Turkmenistan are more gradual with foreign trade liberalisation, particularly in the foreign exchange market. In the last one-decade, exports have grown and significant diversification of trade has taken place.

The Central Asian experience with external trade could be classified in distinct phases. The first phase between 1991 and 1994 was a period of adjustments to the shocks of sudden dissolution of the USSR and sharp fall in mutual trade. During this period, all regional economies (except Turkmenistan) incurred sizable and persistent external current account deficits. The man reason for this were (1) the inherited economic structures (agricultural, industrial and households sectors) were highly energy intensive; (2) the demand for investment goods to replace this structure was high (3) imports demand for western consumer goods was very high. The second phase was between 1995 and August 1998. During this period attempts were made to keep reasonable trade relations with traditional partners and to enlarge trade ties with the rest of the world. In the third stage, which starts from August 18, 1998, the region faced many negative impacts of Russian and Asian economic crises. With the sharp devaluation of Russian rouble, competitiveness of Central Asian commodities in traditional markets was affected. However, many of the negative impacts are eased since 2000 with strong recoveries in Russia and Central Asia.

Share of trade within CIS countries has declined in the region. However, as a result of some regional trade initiatives (discussed below) mutual trade in the region was increased, particularly in the initial years of transition. Since 1994, the share of trade with the non-CIS countries has been growing fast in both exports and imports. In the last few years about 70 percent of Uzbekistan’s trade has been with non-CIS countries. Although Russia is still an important partner at the regional level, the geographical distribution of trade has shifted from CMEA to EU (Germany UK), East Asia (China, South Korea, Japan), North America (USA), and middle East (Iran, Turkey). China has been bale to make some significant trade partnership with Kazakhstan and Kyrgyzstan. The commodity structure of Central Asian exports is mainly

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

(%) (%)

consists of mineral resources and agricultural raw materials. The main exports has been oil and gas products, ferrous and non-ferrous metals and grain in Kazakhstan; cotton fibers, gold, natural gas and non-ferrous metals in Uzbekistan; gold, tobacco and wool in Kyrgyzstan; aluminum and cotton fibers in Tajikistan; and natural gas, cotton fibers and oil and oil products in Turkmenistan. Import composition in the region has been changing. In the initial years imports consisted mainly of food products and other consumer goods. This structure of imports has been changing in favour of machinery and equipment etc.

Due to landlocked location and remoteness from major world markets, small domestic markets, rational use of water and energy resources and to integrate themselves with the global economy, the Central Asian countries have taken many regional and international trade and other economic co-operation initiatives. It is realised that developing regional markets would save large transport costs, exploit scale economies, and yield gains from trade, including those based on resource complementarity.8 In the past, however, developing regional cooperation involving all five countries in the region has been difficult at the political level. Two big countries Kazakhstan and Uzbekistan have competed for the position of regional leader. As a manifestation of its declared policy of neutrality, Turkmenistan has resisted in participation in many regional forums.

All central Asian republics are important members of the Commonwealth of Independent states (CIS). On the economic affairs, the CIS has not implemented a customs Union or a free trade area covering all member states. In 1995, Kazakhastan and Kyrgyzstan formed a Customs Union with Belarus and the Russia. Tajikistan later joined this union in 1999. In October 2000, the Customs Union was transformed into Eurasian Economic Community (EEC). Its objectives include broadening of the co-ordination of economic social, industrial and financial policy of member countries.

In 1994, Kazakhastan, Kyrgyzstan and Uzbekistan also formed the Central Asian Union (CAU). The aim was to create a single economic region with improvements in payments arrangements and reduction in tariffs among member countries. In 1995, principle of free trade among member states was approved. A Central Asian Bank for Co-operation and Development was also created. In 1998, Tajikistan also became member of this grouping. During the same year the organization was renamed as Central Asian Economic Community (CAEC). In 2001, the CAEC was transformed into Central Asian Cooperation Organisation (CACO). Russia, Ukraine, Georgia and Turkey have been given observer status in CACO. All five have joined Economic Cooperation Organization (ECO), which also includes Afghanistan, Azerbaijan, Iran, Pakistan and Turkey. The main objective of ECO is to develop and improve economic infrastructure and transportation system in the region. All five have also become members of Organization of Islamic Conference (OIC), an intergovernmental organization with 56 members, established in 1971 in Saudi Arabia. Its aim is to promote Islamic solidarity by improving cooperation in the political, economic, social and cultural and scientific fields. Uzbekistan also became member of the GUUAM Group in 1999, a sub-regional formation of Georgia, Ukraine, Azerbaijan, and Moldova and Uzbekistan. The Group was formally founded as a political, economic and strategic alliance designed to strengthen the independence and sovereignty of these former Soviet Union republics. Some scholars have analysed GUUAM as product of the clash in American-Russian interests in the region. It was also considered an organisation to counterbalance EEC and to reduce Russian economic and political control in this region

Kyrghystan has become member of the WTO and all others have shown interest in becoming its member. The European Union (EU) has granted Central Asian countries access to Generalized System of Preferences (GSP). It allows tariff reductions on manufactured products and ceratin agricultural goods. To encourage regional cooperation in the region, in 1997 Asian Development Bank initiated a programme called Central Asia Regional economic Cooperation (CAREC). The operational strategy of the CAREC is to finance infrastructure projects and improve the policy environment for promoting cross-border activities in the areas of trade energy and transportation. The United Nations also started a Special Programme for the Economies of Central Asia (SPECA) in 1997. The objective of the programme is to strengthen regional cooperation in order to both stimulate their economic development and facilitate their integration into Europe and Asia. Another international initiative to promote poverty reduction, growth and debt sustainability in seven low-income CIS countries is also in operation . the seven CIS countries are: Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Uzbekistan and Tajikistan. Along with these 7 CIS countries, the initiative brings together, the four sponsoring organizations: ADB, EBRD, IMF and IDA (WB) and a group of bilateral creditors/donors. Currently 24 countries participate in the CIS 7 Initiative and in addition 6 organizations/countries hold the observer title. These include Canada, China, EU, OECD, Islamic Development Bank, France, Germany, Italy, Japan, Russia, Turkey, UK and USA. At the technical level, some other regional initiatives include the Inter-governmental Commission on Central Asian Sustainable Development, the Inter-State Water Commission, the Central Asians Energy Advisory Group and regional Electricity Grid.The following table summarizes major regional economic cooperation initiatives in Central Asia

(ADB) Initiative

CIS- Commonwealth of Independent states (with Armenia, Azerbaijan Belarus, Georgia, Maldova, Russia, Ukraine).

EEC - Eurasian Economic Community, ex Customs Union (with Russia and Belarus)

CACO - Central Asian Cooperation Organisation, ex Central Asian Economic Community

ECO - Economic Cooperation Organisation (with Iran, Pakistan, Turkey and Afghanistan).

OIC- Organisation of Islamic Conference ( total 56 members, established in 1971)

CAREC (ADB)- Central Asia Regional Economic Cooperation (with Azerbaijan, Mongolia and Xinjiang Autonomous Region of China; Turkmenistan is also expected to join soon)

SCO - Shanghai Cooperation Organisation (with Russia and China). SCO began as a forum for discussing border delineation issues. As a result of threat of terrorism in the region it has latelt focussed more on security issues. Economic cooperation is also envisaged among members.

CIS-7- An International initiative to promote poverty reduction, growth and debt sustainability in seven low-income CIS countries: Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Uzbekistan, Tajikistan

As a result of these initiatives, the Central Asian countries have made some modest gains. In the beginning of transition, mutual trade among Central Asian countries played an important role. Although regional trade has clearly developed in Central Asia, its growth has been uneven at best. The potential for expanding intra-regional trade remains considerable . Despite the common interest toward increasing trade, all the countries in the region have trade-restricting policies and practices. There are the barriers of tariffs, public policies, procedures and regulations, and weak financial systems. Some other policy-related constraints to trade include import quotas, export licensing requirements and transport restrictions. Arbitrary and often corrupt bureaucracies throughout the region administer regulations that are archaic and frequently conflicting.. There are slow, difficult border procedures, multiple cargo inspections within a single country and prohibitions that prevent vehicles from transporting goods between countries. Other barriers to trade include transit fees and the costs of dealing with corrupt border officials and local police. Trade is also restricted by such practices as requiring importers to register contracts and currency conversion restrictions. In no country is there a healthy financial system that provides modern services to facilitate trade. Most of the trade is in fact conducted through inefficient cash transfers or barter.9

India’s major initiative in the region so far has been Indian-Iranian cooperation in building North-South trade corridor. The main transport projects undertaken under this programme will be development of a new port complex at Chah Bahar on the coast of Iran, from where a road goes north to the border with Afghanistan. India will build a link from Zaranj on the Iran-Afghan border to Delaram from where all major cities in Afghanistan and further north Central Asian republics are connected. Another transport project involves the linking of the Chah Bahar port to the Iranian rail network which is connected to Central Asia and Europe.10 When materialise, this initiative means speeding the flow of goods, especially energy, from Central Asia to Iran to India. Still the shortest route from India to the Central Asian republics is through Pakistan and Afghanistan.

It is evident from the above analysis that most of the regional initiatives in Central Asia are are either grouping to recreate lost linkages among the former Soviet republics or initiatives by multilateral organisation to strengthen regional linkages in the areas of trade, energy, water resources, infrastructure and communications. These are largely affairs within the former Soviet space. Other countries like China, Iran, Turkey, Pakistan and Afghanistan have also been able to create some formal structures for closer interactions, which will become useful in the long run. India is totally absent from any meaning regional economic initiative. India should now seriously pursue extending SAARC to Afghanistan and the Central Asian region. Because of the past result of the SAARC, if Central Asians are not interested in this grouping, then India should seriously consider creating another independent organisation involving India and some of the countries in the region.

During the first half of 1990s, Central Asia was considered highly risky because of breakdown of the trade and payments mechanisms and economic decline. As a result, the region had to depend on official bilateral and multilateral sources of financing new projects. Later, there was marked increase in private capital flows in the form of commercial bank lending and FDI, particularly in the traditional export oriented, resource based industries. All countries in Central Asia have tried to encourage FDI flows through far reaching reforms in their foreign investment laws11 . Table 9 shows that these flows have grown (with some disruptions during 1998 crisis in Russia). On the whole, however, aside from Kazakhastan’s oil and gas sector, FDI flow has been low, in large measures because of foreign investment climate. Turkmenistan has received about US$ 1 billion since independence, primarily in the oil sector. Kyrgyszstan has received some modest FDI flows, connected largely to gold mines project. There has been some improvement in FDI flows to Uzbekistan in the last few years. The United States has been major investor in the region which has been followed by Europeans. Some modest investments have been made by Chinese (in oil sector) and South Korean companies.

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

During the Soviet period, all contacts with the republics of the USSR were through Moscow only. The nature and character of the then Indo-Soviet trade and economic relations largely determined these relations. In the post-socialist period, like other CIS countries, economic relationship with the Central Asian region has also declined considerably. The official two way annual trade between India and the region has been about US$ 100 million in the last few years. Apart from Kazakhstan and Uzbekistan, economic relations with other countries are minimal. This relationship is also restricted mainly to traditional items. The main commodities being exported from India are pharmaceuticals, tea, readymade garments, woollen goods, leather goods, jute manufacturers, cosmetics, cotton yarn, machinery, machine tools, rice, plastic products, machinery and instruments, electronic goods, chemicals etc. Imports from the CAR are restricted to raw cotton, Iron & steel, zinc etc.

97 98 99 00 01 02 03

To give impetus to bilateral trade, economic and scientific co-operation, bilateral inter-governmental Joint Commissions have been set up with the countries in the region. A number of high level visits have also taken place.12 India has also extended credit lines ranging from $5 million to $10 million to almost all countries in the region. It has signed many agreements with these countries for technical economic co-operation under International Technical and Economic Cooperation (ITEC). So far about 1000 candidates from the region have come to India of these countries have come to India and under the programme in various disciplines, such as, diplomacy, banking, finance, trade, management, small industry promotion, etc. ONGC Videsh has also been active in Kazakhstan. Despite all these developments, economic linkages between India and the region have been much below its potential. The main reasons are lack of information and connectivity. Lack of economic and financial sector reforms in the region could also have discouraged many Indian companies.

Co-operation in the energy sector is an obvious potential area.Since this region has great tourism potential, co-operation in the tourism related services would also be useful Information technology is another area where Indian services could be in great demand particularly when this region is undergoing a major transformation in the financial and other sectors. There is great scope for co-operation as some of these countries are blessed with high quality human resources. Indian consultancy companies could also play a very major role in the ongoing modernisation process in the region. Another area of major interest to Indian businesses would be to take part in the continuing privatisation process in the region. Compared to Russia and other east European countries, the region is still in the middle of privatising their huge state sectors. This could provide a huge opportunity for India as is shown by an NRI company Ispat International which has bought the 6.5 million tonne capacity Karaganda steel plant, a linked power plant and 15 coal mines in Kazakhstan. This deal has become one of the major success story in the region. Ispat could turn around this loss making plant into a profit making venture. It has a work-force of 67, 000 local workers. Some other Indian companies like Punj Lyyod has also participated in oil pipeline projects in Kazakhstan

Despite having a very complex legacy, the region has made significant progress in market reforms. The region has used both standard as well as non-conventional strategies of economic transformation. It has been successful in some economic stability. However, success with structural and institutional reforms is mixed. The inflation has been reduced, GDP is rising and production and trade has been diversified. Yet reforms have not been consolidated and the region is still vulnerable to external shocks. FDI in the region has been mainly concentrated in the energy sector and only Kazakhstan has been able to attract significant FDI. Most of the regional economic arrangements in the region are either grouping to recreate lost linkages among the former Soviet republics or initiatives by multilateral organisation to strengthen regional linkages in the areas of trade, energy, water resources, infrastructure and communications.

India’s economic relationship with the Central Asian region has declined considerably in the post-socialist period. The official two way annual trade between India and the region has been about US$ 100 million in the last few years. The main reasons have been lack of information, connectivity, economic decline of the region and lack of economic and financial sector reforms in some of the countries. As these economies have picked up in the last few years, this is the right time to give a big boost to economic relations. However a strong network of information regarding Central Asian economies is a must.

India is also totally absent from any of the regional economic initiative . India should now seriously pursue extending SAARC to Afghanistan and the Central Asian region.

1. See Johannes Linn, “Central Asia: Ten Years of Transition”, Talking points for Central Asia Donors’ Consultation Meeting, Berlin, Germany, March 1, 2002. www.worldbank.org.

2. For details see Gulshan Sachdeva, “ Understanding Central Asian Economic Models” in Nirmala Joshi (ed), Central Asia: The Great Game Replayed: An Indian Perspective, New Delhi: New Century, 2003.

3. The World Bank, Transition: The First Ten Years: Analysis and Lessons for Eastern Europe and Former Soviet Union, (Washington DC: The World Bank, 2002).

5. For details of these reforms see, Zvi Lerman, Csaba Csaki and Gershan Feder, Land Policies and Evolving Farm Structures in Transition Economies (Washington DC: The World Bank, 2002).

6. For a comprehensive analysis of external economic relations in a socialist economy see chapter 14 in Janaos Kornai, The Socialist System: The Political Economy of Communism (Oxford, Clarendon Press, 1992).

7. For details see Jimmy McHugh and Emine Gurgen “External Sector Policies” in Emine Gurgen et.al, Economic Reforms in Kazakhastan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan, IMF Occasional paper No. 183 (Washington: International Monetary Fund, 1999), pp. 35-47.

8. See Renata Dwan and Oleksandr Pavliuk, Building Security in the New States of Eurasia: Subregional Co-operation in the Former Soviet Space, (London: M E Sharp, 2000); R Sampat Kumar, “Central Asian Economic Integration: Emerging Trends” Economic and Political Weekely, May 2, 1998, pp1013-1017; Heribert Ddeter, “ Regional Integration in Central Asia: Current Economic Position and Prospects” Central Asian Survey, Vol.15, Nos. 3-4, 1996, pp. 369-386.

10. For details see C Raja Mohan, “India, Iran Unveil Road Diplomacy” The Hindu, 26 January 2003; Sudha Ramachandran, “India, Iran, Russia Map out Trade Route” The Asia Times, 29 June 2002 and Stephan Blank, The India-Iranian Connection and its Importance for Central Asia, Eurasianet.org, 3/12/03

11. Detals about FDI laws could be found in Jimmy McHugh, “ Capital Flows and External Debt”in Emine Gurgen et., op.cit, p.54.

12. For details of these visits see S D Muni, “India & Central Asia: Towards a Cooperative Future” in Nirmala Joshi (ed), Central Asia: The Great Game Replayed: An Indian Perspective, New Delhi: New Century, 2003.