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"We have to be patient"
ADB Review [ October 2005 ]

Regional cooperation is a long-term process, says Simon Kenny, World Bank’s regional program coordinator in Almaty, Kazakhstan

By Ian Gill, (igill@adb.org)
Principal External Relations Specialist

Do recent events in Central Asia underscore an urgent need for countries to cooperate more with each other?

Let us first dispel the myth that they have not been cooperating. The Central Asian republics have been cooperating for years; they are not living in isolation. With the fall of the Soviet Union, it was natural for them to look after their national interests in terms of security, the economy, and so on. Nonetheless, we have seen an increase in regional trade in recent years; similarly there is ongoing negotiation and cooperation in the water and energy sectors, even if there is room for improvement.

But there are major obstacles. In transport, for example, there are now borders where there were none before independence.

Borders have appeared, along with customs regimes, that make it hard for commercial people to move goods. There are also different tariff levels that distort the overall picture. And being landlocked countries, there is the physical challenge of getting goods to the market. But it was a natural consequence of the fall of the Soviet Union that made countries look to the interests of their own people, their employment prospects, and the industries that they want to protect. Slowly, we trust these barriers will be lifted and there will be freer options for trade.

There is not much that can be done to overcome the fact that these countries are remote and landlocked.

The huge distances and their landlocked nature put Central Asian countries at a disadvantage: for example, physical costs can add up to 50% of a good’s export value. You cannot reduce the physical distance, but you can reduce the costs associated with transport by investing in good infrastructure and by modernizing the rolling stock (the railways). Then you can address the nonphysical barriers like tariffs, customs barriers, long delays, and corruption that can add 10–15% to the value of goods.

Why are some countries liberalizing faster than others?

The Kyrgyz Republic has been more open to external trade because, arguably, it has less to lose and more to gain from opening up to, for example, the People’s Republic of China (PRC) to buy goods they are not able to produce themselves. On the other hand, Uzbekistan is a large country with huge interests in cotton production and natural gas options; it wants to protect its markets and is therefore slower to liberalize. Kazakhstan, with its proximity to Russia, has a different economic base, with oil being its main means of economic growth, and by default it wants to trade with the outside world. Tajikistan is essentially still recovering from civil war and has high poverty levels. So, despite impressive growth rates over the past few years, liberalization is naturally slow. Turkmenistan has strong trade links with Russia, its main product being gas, but seems less interested in cooperating with its neighbors.

To what extent is the prospect of joining the World Trade Organization (WTO) a spur to regional cooperation?

The Kyrgyz Republic has joined WTO and Kazakhstan is well on the way to joining. All the countries have concerns about protecting their goods and competing with the outside world, so it is a slow and long-term process. One potential hindrance to WTO accession is the recent proliferation of preferential trade and customs union agreements that have been established under the various regional cooperation forums, e.g., the Eurasian Economic Community, Central Asia Cooperation Organisation, etc.

What impact is the PRC having on Central Asian cooperation?

The PRC’s growth and need for energy resources make it a growing force in Central Asia that also counterbalances Russia’s interests. But a legitimate concern of its Central Asian neighbors is that the PRC’s massive population and ability to produce goods cheaply might also threaten their own domestic markets.

The need for cooperation is greatest in sharing water and energy resources, but this is also the most challenging area, is it not?

It is complicated but in simple terms, the downstream countries, Kazakhstan and Uzbekistan, need water to irrigate their crops whereas the upstream countries, the Kyrgyz Republic and Tajikistan, have less land for agriculture but have the water to produce hydropower. Under the Soviet system, there was a massive expansion of irrigation to grow cotton and wheat downstream. They ran the two major rivers in an irrigation mode, with 75% of the water released in summer, and the upstream countries would receive fossil fuels, coal, and gas for heating purposes in winter. For all intents and purposes, everyone was happy. But as soon as the Soviet system collapsed, that centrally managed system fell apart.

Why is it so difficult for the countries to reach a new power trading agreement?

Partly because delays in signing annual water-sharing agreements, and also because of the delays in receiving fossil fuels from Kazakhstan and Uzbekistan, the Kyrgyz Republic has increasingly had little option but to increase reservoir discharges in winter to meet its domestic heating needs. This means less water stored for the summer, and therefore less water for crops for the downstream countries—and this has led to a breakdown in the old cooperative system. Throughout the 1990s, there have been efforts to rereach agreement on this cooperation, based on the premise that if the Kyrgyz Republic is not to release water in winter for heating, they need alternatives.

Another factor is that people say water should be free. The international community suggests that the water can be free but its storage and transmission cost money. Therefore, upstream countries should be compensated for the costs of maintainingits reservoirs, dams, etc.

Yet another factor is that hydropower is the main natural resource and potentially the main revenue generator for the Kyrgyz Republic and Tajikistan. So, both want to develop their potential to sell electricity to neighboring countries, not necessarily to Central Asia.

How feasible is this latter goal, given their budgetary constraints?

There is an existing regional electricity network. If power trade agreements were in place, it could extend electricity trading to Russia and down to Afghanistan and, political constraints aside, to India and Pakistan. One problem is that the grid’s infrastructure is decaying after years of lack of investment, so we come back to the cooperation issue. Without funding to rehabilitate and augment the transmission system, and without the guarantee of surplus electricity being bought, either within or outside the region, the options for countries like the Kyrgyz Republic become fewer and fewer. Similarly, the costs of developing new hydropower options are enormous and beyond the budgetary capacity of the Kyrgyz Republic and Tajikistan. They therefore need to attract external investment, both public and private sources of funding.

Are you optimistic that a power trade agreement will be reached?

You have to be optimistic. There is no question that, for the upstream countries, their best option is to export hydropower as a source of revenue. However, if, for example, a bilateral agreement cannot be reached between Tajikistan and Uzbekistan to provide transmission system access, then it is inevitable that exporting countries find other ways of bypassing the existing transmission network such as by extending transmission lines from Tajikistan, through the Kyrgyz Republic, Kazakhstan, and on to Russia.

Is it that simple?

There are also domestic reforms that need to take place regarding the subsidies provided for energy and the need to treat electricity as a commercial commodity. In Tajikistan, for instance, the domestic charges need to rise in the order of 300% just to break even. These are hard political decisions to make but once they are sorted out, external trade of electricity becomes more viable.

What has to happen for regional cooperation to accelerate?

More political will or, put another way, a reduction in vested interests. The political elite has a lot to lose in terms of increased liberalization. But we also have to recognize this is a long-term process. There is a tendency within the donor community to want to see big changes in the way that countries deal with each other. But we forget that it is only just over a decade since these countries gained independence and they have certain fears of losing that independence or of being dominated by other countries.

So how long will it take to establish more meaningful cooperation?

We are not looking at resolving regional cooperation issues overnight. Regional cooperation is a long-term process. We have to be patient and find ways of selling cooperative options as win-win solutions, not as “you win, we lose.” You can look at water and energy as exactly that. By investing in hydropower in upstream countries, there is a chance of producing more power that can be sold at competitive prices, thus raising much-needed revenue for economic investment and reducing the incentive for the Kyrgyz Republic to release water in winter.

Why do we need to wait such a long time?

The region has been thrown into a globalizing world. It no longer has the protective subsidies that it used to receive from Moscow; it has to compete with the outside world. It also has to go through a transition from centralized planning to market economies, which is a slow and often painful process. At the same time, it is exposed to the noneconomic results of liberalization, such as illicit trade in drugs and the threat of terrorism and fundamental thinking that challenge the political base. But regional cooperation is happening even in these areas and countries realize they cannot tackle these issues on their own.

What is your take on the recent political developments in the Kyrgyz Republic and Uzbekistan?

There has been a lot of talk about whether recent events in the Kyrgyz Republic and Uzbekistan are connected to what happened in Georgia and Ukraine, and the role of the West in supporting this. Whether or not this is the case is not for me to say, but what I do believe is that, where you have highly populated areas, such as the Ferghana Valley—where people’s livelihoods are under pressure from natural resource constraints, where a large majority live in poverty and are not employed, and where people are not receiving basic education and health services—then inevitably people are more likely to be swayed by more hardline views. The consequences speak for themselves.

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