Regions and Countries

	Table of Contents
p. 3 of 22 BACK | NEXT I. Summary II. Background and Rationale A. The Need for Economic Cooperation in Central Asia B. The Soviet Legacy in Infrastructure—A Connecting Thread throughout the Region C. Present Day Borders Cross Economic Zones D. Regional Responses to Regional Needs III. The ADB Initiative Towards Economic Cooperation in Central Asia IV. Sector Priorities and the Proposed Program 2001-2003 V. Addressing Poverty and Governance and other Cross-Cutting Concerns VI. Issues and Challenges

Central Asian Regional Economic Cooperation : II. Background and Rationale

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A. The Need for Economic Cooperation in Central Asia²

6. Strengthening regional economic cooperation is especially important for realizing the development aspirations of the countries in the region known as Central Asia, an area with deeply rooted traditions of economic interaction. Situated along the historic Silk Road, the people living in this region engaged in extensive commerce and trade from as early as 3000 BC. In the twentieth century, geopolitical factors reduced the exchange of goods and services within the region. The deteriorating relationship between the Soviet Union and the People's Republic of China (PRC) resulted in the closing of most border crossings in the 1960s. With the collapse of the Soviet Union and the opening of PRC to trade in the early 1990s it became possible to once again develop economic linkages in the region.

7. The CARs face daunting constraints to economic development. Since the break-up of the Soviet Union in 1991, the newly independent republics in the region have had to develop new institutions, policies, and skills to function in the modern world—a process made more difficult by the severe economic contraction associated with this break-up. During this period, markets for their raw materials and industrial products, once controlled by Moscow, quickly evaporated. Real gross domestic product fell by 30 to 50 percent; inflation reached over 1,000 percent per year; and unemployment soared. The banking systems remain weak, and savings and investment have dropped precipitously. Moreover, the former Soviet republics are sparsely populated and have very low per capita incomes, which means that internal markets for domestically produced goods and services are limited.

8. Economic growth of the CARs depends largely on developing new trading relations within the region and new trading partners and transport links to markets in industrialized countries. This cannot be over emphasized: the failure to expand trade within the region and between the region and other markets will frustrate any hope for significant, sustainable economic growth in Central Asia. Of course new trading relations are no substitute for needed institutional development and reform. They are, however, part and parcel of any successful transition to a market-oriented economy.

9. Developments after independence have been further complicated by the outbreak of the Russian economic crisis in 1998. Prior to the Russian crisis, the former Soviet republics had begun to recover from the economic downturn of the early 1990s. Inflation had been reduced with monetary stabilization programs and currency controls; gross domestic product was rising; and production and trade were gradually recovering, if not to previous levels. The privatization of major industries and services has provided a foundation for new investment and economic activity.

10. However, the CARs economies have been severely affected by the Russian crisis through its adverse impact on the volume of merchandise trade, inflows of foreign investment, stability of exchange rates, and external debt service obligations. As a result, economic growth of the region has been dampened, the stabilization process has been interrupted, and the efforts for structural reform have been hampered. The economic situation in the CARs is expected to remain precarious. Moreover continuing political instability south of the region, particularly in Afghanistan, limits access to trade routes through the Indian Ocean and is a source of potential instability within Central Asia.

11. Xinjiang Uygur Autonomous Region (Xinjiang, PRC) in the PRC’s western region, has extensive cultural affinities with the CARs. Even more important than these ethnic and historic ties, however, are the potential resource and market complementarities among the CARs and Xinjiang, PRC. Currently, reflecting the existing state of industrial and farm restructuring in the CARs, primary commodities (including hides and skins, cotton, petroleum, and steel) flow from the CARs to the PRC, and labor-intensive light industrial goods (shoes, garments, textiles, and processed food and beverages) flow in the reverse direction. As industrial and service sector development takes place, the mix of commodities traded can be expected to grow more complex and inter-country trade could show increased flows of higher value-added goods and services.

12. Until recently, the PRC economy grew by more than 10 percent each year with commensurate increases in productive capacity, aggregate demand, and personal income. Development in Xinjiang, PRC was particularly rapid, based on extensive development of mineral resources and a widening of the agricultural and industrial base. Continuing economic reforms, initiated in the late 1970s provided wider scope for enterprises to grow. Most recently, Premier Zhu Rongji has proposed to expand investment in the western regions of PRC, including Xinjiang, PRC. Proposals being discussed would provide for higher levels of state investment, but also increased incentives for foreign direct investment in the region. These policies are being examined as part of a special study under the 10 th Five-Year Plan (2001-2005).

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