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p. 12 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia Kazakhstan Kyrgyz Republic Tajikistan and Turkmenistan Uzbekistan Mongolia People’s Republic of China Southeast Asia South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Central Asian Republics, Azerbaijan, and Mongolia

The group of countries comprising the Central Asian republics, Azerbaijan, and Mongolia all face challenging geographic and economic circumstances, including the relatively small size of their economies; remoteness from world markets; long-term isolation from global technology and capital flows; heavy dependence on primary production of energy, minerals, and other commodities; continuing vulnerability to external shocks arising from volatility in international oil and commodity prices; dependence on the Russian economy (which is still the single largest market for their exports); and an industrial structure from the Soviet era that is hardly compatible with an open economy. These formidable economic challenges are further exacerbated by problems of systemic transition and the severance of Soviet fiscal subsidies that have resulted in a sharp decline in human development indicators and emergence of widespread poverty. Recently, the appearance in some of these countries of social, religious, and ethnic strife, which perhaps lay dormant under the strictures of the earlier centrally controlled regime, has added to the uncertainty, affecting the investment climate and growth prospects of these economies.

Faced with such adverse circumstances, the various governments have implemented a large-scale and wide-ranging program of structural reforms, though with significant variations across countries. On the basis of these reforms and with external circumstances finally turning favorable in 1999, most of these economies—with the exception of Mongolia—are now recovering from the economic downturn that lasted, for most of them, from the breakup of the former Soviet Union until the mid-1990s when the decline in GDP was arrested and positive growth was achieved. This recovery was nearly derailed as a result of the Russian crisis of August 1998 that followed in the wake of the Asian financial crisis.

The improvement in the Russian economy since 1999 and the rise in international energy prices have helped generate strong aggregate GDP growth of nearly 5 percent in 1999 for these countries as a whole; this growth improved further to almost 8 percent in 2000. The growth performance would have been better if the agriculture sector had not suffered a severe drought that affected the cotton crop, a major export item, and food grain production in some countries.

More creditably, the improved growth performance has been achieved along with overall macroeconomic stability. The aggregate level of inflation in these seven countries remained high at around 15 percent in 2000. This reflected the positive effects of exchange rate stability and tighter monetary policies. Higher revenues from the oil sector and efforts at improving public expenditure management and tax administration have seen the countries’ fiscal balances improve. Taking advantage of high international oil and gas prices and greater access to pipelines and other supply outlets, the export earnings of the group increased from virtually zero to about 25 percent in 2000 (excluding Azerbaijan and Turkmenistan). This enabled some of these countries to improve their external account balances as reflected in the buildup of international reserves and the significant improvement in external debt-service ability. The Kyrgyz Republic and Tajikistan, though, face an unsustainable external debt-service burden in the short term. This has prompted a multilateral review of their external debt liability and bilateral negotiations for rescheduling their debt-service flows.

Although the positive aggregate economic performance hides wide variations across countries, the economic outlook for this group is upbeat. Economic growth will remain positive, though lower than in 2000 as oil prices are expected to soften and demand from the Russian Federation and other countries in the Commonwealth of Independent States slackens as a result of a slowing of these economies. Agricultural performance is expected to remain weak if the adverse weather forecasts for the next two years are proved right. Even with strong and sustained GDP growth as achieved in the last two years, per capita income levels in these countries are not expected to return to the levels of the late 1980s for the next few years. Determined policy efforts will be needed to ensure that market-based economic growth does not cause equity disparities to rise further and that growth is inclusive.

For generating sustained growth in per capita incomes and for reducing poverty levels, the countries, to greater or lesser degrees, need to vigorously pursue their structural reform programs. The focus has to be on generating pro-poor growth while maintaining macroeconomic stability. This will require liberalizing the economies further, in keeping with individual country conditions; removing any significant price distortions and controls on the current account; privatizing state enterprises and setting up a regulatory mechanism to ensure fair competition and consumer protection; establishing the institutional framework for private sector-led growth; ensuring that the poorer segments of society participate in the growth process; and putting in place a social safety net that will protect the poor and vulnerable from the adverse impact of cyclical economic downturns.

The seven economies continue to be characterized by a weak banking and financial sector. This prevents the effective mobilization of investment resources. The small and medium-sized enterprise sector—often the most dynamic sector for creating new competitive industrial capacities and trading ventures —especially suffers from a relative lack of access to financial resources. Particular attention is needed for the development of the financial sector to facilitate the emergence of small and medium-sized enterprises and to help in channeling resources to the rural sector, both of which contribute to pro-poor growth. Human resources development now requires a combination of public and private sector initiatives and resources for meeting the needs of a market economy.

In each of these countries, the government may need to actively intervene to try and diversify the economy so as to reduce its vulnerability from volatility in international energy and commodity prices and to generate employment. Given the geographic isolation of these economies and their relatively small size, any strategy for sustained growth, rapid industrialization, and economic diversification will be facilitated with the emergence of a subregional market. This requires an active program of economic cooperation that will promote the free flow of goods and services and permit the establishment of viable and internationally competitive production capacities. The infrastructure, which was developed in the past to connect these economies individually to the Russian markets, also needs to be revamped so as to permit more efficient resource allocation.

Recognizing these imperatives, and because of the collapse of the Soviet trade system, the various governments have actively searched for viable cooperation ventures among themselves. The establishment of the Interstate Council of Kazakhstan, Kyrgyz Republic, and Uzbekistan (later joined by Tajikistan) is a notable example. In addition, most of the governments have conducted negotiations on the trade in energy, and have taken steps toward cooperating on resolving the environmental problems of the Aral Sea area. These activities reveal an underlying commitment to economic cooperation, and an understanding and appreciation by the governments that solutions to their common problems must be found.

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