A sea of troubles

Economic transition in Central Asia
Richard Pomfret’s book, The Central Asian Economies Since Independence, is a clear and reasonably up-to-date account of the economic developments in the first 15 or so years since the collapse of the Soviet Union thrust independence upon the five former Soviet republics—Kazakhstan, the Kyrgyz Republic, Uzbekistan, Turkmenistan and Tajikistan—that comprise the Central Asian region. Taking into account both the similarities and differences in their starting positions, Pomfret outlines the distinctive policies adopted by each of the new countries in response to common political and economic disruptions, and tries to relate these policies to the subsequent economic performance and prospects of each.

The broad picture
At the start of transition in 1991, the Central Asian countries inherited a number of shared features. They:

• began with very similar economic and political systems, based, respectively, on central planning and the constitutionally enshrined leading role of the Communist Party;
• were among the poorest republics in the Soviet Union, with around 30-50% of households living below the poverty line in 1989 (defined as a monthly income of less than Rb75), compared with a figure of 5% for the Russian republic;
• had relatively high levels of human capital for their income levels;
• had functioned as suppliers of primary products and minerals; and
• had a low indigenous capacity for economic management.

In addition, they faced a number of common deficiencies, disruptions and shocks, including:

• a lack of experience of independent nationhood, so that attempts at nation-building had to go hand in hand with attempts at economic reform, complicating reform;
• economic disorganisation, which was brought on by the shift from central planning and the split of the single Soviet economic unit;
• disruption of inter-republican trade links by new national borders; and
• the stoking of hyperinflation by the attempt to maintain the rouble zone, with prices in all five countries exceeding 50% per month in 1992.

These were the main factors behind the very steep output falls across the region at the start of the transition process, although other factors may be expected to have exaggerated or ameliorated the impact on living standards. First, there are valuation problems linked to the nature of the transition itself that make measurement difficult. For example, it is hard to value products for which demand dried up following the introduction of market mechanisms, or to account for changes in product quality or the introduction of new kinds of products. Second, the impact of output falls on living standards was likely to have been exacerbated by the cessation of transfers from the central Soviet authorities, as well as by the widening of income inequality. Third, in the Soviet economy energy products were undervalued and manufactures overvalued, so that a change in the terms of trade brought about by a shift to world market prices might have been expected to favour energy producers such as Kazakhstan and Turkmenistan. Fourth, in Tajikistan, the exceptionally steep falls in output were the result of the destruction of the centrally planned economy by two bursts of civil war, which only came to an end in 1997.

In tandem with these steep falls in output, all of the new central Asian states suffered a loss in budgetary revenue, not only absolutely, but also relative to declining GDP, creating dilemmas of how to achieve both macroeconomic stability at the same time as maintaining social programmes (in most cases, this was not possible).

Bearing in mind that the region suffers from a number of common international trade data deficiencies, in 1994-97 the foreign trade of the Central Asian economies began to recover from the initial transitional shocks and disruptions, and, with high trade to GDP ratios, all may be said to have quickly developed into open economies.

A closer view
The Kyrgyz Republic. Policy choices: The Kyrgyz Republic embraced the standard Western advice concerning stabilisation and reform (often referred to as the "Washington consensus"), for which it received extensive multilateral support. Price liberalisation and enterprise reform took place rapidly. Later on, in 1998, the country was rewarded for its choice by becoming the first of the former Soviet countries to be allowed to join the Word Trade Organisation (WTO).

Stabilisation: The Kyrgyz Republic introduced a national currency, the som, in 1993 as a prerequisite to asserting macroeconomic control, and it was the first country to curb hyperinflation, bringing the average rate of monthly price increases below 50% in 1995.

Output performance: Description. As a result of the economic disruptions and shocks that affected the whole region in the early phases of transition, output in the Kyrgyz Republic fell by a cumulative 45% in 1991-95. Manufacturing output also dropped sharply, and the increase in the contribution of agriculture to GDP in these years is probably explained by the migration of the newly unemployed from the cities to the countryside to look for work. Following the years of recovery from the low base so created—that is, in 1996-97—economic growth has been moderate and subject to wide fluctuations.

Explanation. The radical reform and stabilisation policies probably contributed to the steepness of the fall in output in the Kyrgyz Republic in the early transition era. The failure of the expected gains of its radical policy choices to materialise is perhaps explained the republic’s paucity of readily tradable resources, in contrast to some of its neighbours. Also, low levels of initial income and human capital, exacerbated by emigration of skilled (often Russian) staff, perhaps hindered the establishment of well-functioning market institutions. The fluctuations in GDP output are linked to an overreliance on gold production of the Kumtor mine.

Budget and debt: Anxious to maintain its social programmes, in the 1990s the Kyrgyz government did not allow expenditure to fall as far as revenue, keeping the government deficit fairly wide, at about 4% of GDP at least, until the early 2000s. To avoid inflationary financing, the authorities plugged the gap by borrowing from international financial institutions, building up a large external debt, which rose from zero at the start of transition to the equivalent of 139% of GDP in 1999, according to the World Bank. This was a negative development for at least two reasons: first, the borrowing was not used to invest in productive ventures that could later generate earnings from which government revenue could accrue and the original borrowing be repaid; second, debt repayments on the accumulated sum have acted as an ongoing drain on scarce public funds ever since.

Foreign trade: After a recovery, total trade turnover fell in 1997-2002.