This occasional paper provides an overview of the economic reform experiences of the Central Asian states of the former Soviet Union since their independence at the turn of the decade. The choice of countries reflects not only a geographical grouping, but also similarities in the types of transition challenges faced by these countries notwithstanding considerable variations in their sizes, ethnic composition, resource endowments, and economic structures. The paper attempts to identify a number of key macroeconomic and structural areas where the slower reformers in the group might benefit from the experience of the faster reformes.
At the outset of their transition to a market economy, the social and economic indicators in the Central Asian states of the former Soviet Union—Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—generally fell short of the standards of the region as a whole. Notably, per capita incomes ranged from just over 50 percent (Tajikistan) to about 90 percent (Kazakhstan) of the Soviet Union average, while social indicators, such as life expectancy, infant mortality, health facilities, and housing conditions, were considerably worse in most cases. All five Central Asian states—landlocked and distant from world markets—depended heavily on an intricate Soviet system of trade routes and energy pipelines for essential input supplies and exports. Rich agricultural, mineral, and fuel resources of the region, though, made it a potentially attractive outlet for foreign investors. Following a long period of isolation and catering to the needs of the Soviet Union, these countries faced the tough challenge of how to exploit more effectively their natural resources to improve living standards, while simultaneously introducing the systemic changes needed to achieve a market framework and to integrate their economies with the rest of the world.
The five former states of Soviet Central Asia—Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—extend from the Caspian Sea in the west to China in the east, and from central Siberia in the north to Afghanistan and the Islamic Republic of Iran in the south, covering a combined area equivalent to just over one-fifth of Russia’s total land area. The region is rich in natural, agricultural, mineral, and fuel resources. Since the beginning of the 1990s, all five countries in the region have worked toward exploiting their resources more fully while moving their economies toward a market framework. Their progress with economic reforms has been influenced to a considerable extent by their political structures, ethnic characteristics, and remoteness from major world markets.
The differences in resource endowments and initial economic conditions influenced attitudes toward economic transformation in the Central Asian states. In 1992, Saparmurat Niyazov campaigned for the presidency of Turkmenistan on the platform that the country’s rich gas and oil resources would turn it into the Kuwait of Central Asia. Economic reforms were postponed largely on the expectation that sharp initial gains in the terms of trade and subsequent opening up of new export markets for the country’s energy resources would allow for a gradual pace of reform. Likewise, Uzbekistan’s preindependence specialization in cotton and gold, and its self-sufficiency in energy, may have contributed to its reliance on a more gradual and state-led approach to economic transformation.1 While cotton and gold exports were successfully redirected to new markets, a fall in the world price of gold forced the authorities to rethink their strategy and to introduce a comprehensive reform package in 1994, which became stalled by 1996. By contrast, Kazakhstan, the third most resource-rich state in Central Asia, refrained from over-reliance on a single product (oil) and pursued a more decisive approach to transformation. In addition, its close economic ties to Russia and a significant Russian population within its territory made it advantageous for Kazakhstan to reform at a comparable and, in some areas, at an even faster rate than Russia, in order to minimize the disruptions to economic relations between the two countries.
This Background Paper and Statistical Appendix for Turkmenistan examines the developments since November 1993, when the manat was introduced as the national currency. Developments in the real sector and systemic reforms are discussed. Fiscal policies, monetary and credit policies, external developments, and the exchange and trade system are described. The paper highlights that over the medium term, the path toward sustainable growth clearly includes the development of alternative routes for the shipment of gas outside the territory of the Former Soviet Union.
This paper reviews economic developments in Georgia during 1990–96. Following the implementation of tight financial policies and the liberalization of prices, trade, and the exchange system, growth resumed in 1995 and accelerated in 1996, against the background of a stable exchange rate and declining inflation. At the same time structural reform continued to advance, laying the ground for increased private sector activity and sustained growth in the medium term. Following the introduction of the lari in October 1995, a gradual remonetization of the economy took place, and gross international reserves were replenished.
The public sectors of the Central Asian states still exhibit many of the characteristics of the former Soviet Union. Although the measured size of the public sector, relative to GDP, has been reduced in all countries, governments continue to exert a strong influence on most aspects of economic activity through traditional budgetary operations (central and local budgets as well as various extrabudgetary funds); quasi-fiscal operations performed by the state-owned financial and nonfinancial enterprises; extensive regulation of several aspects of economic and social activity; and informal links enabling government administrators to influence and guide decisions by state enterprise managers and many seemingly privatized enterprises.1 The relative size of the general government sector in these economies was curtailed by the persistent decline in the revenue base (see Section VIII), limited capacities of these countries to access foreign funding, and the need to contain fiscal deficits to levels compatible with restrained financial policies, rather than by discrete measures to contain government operations.
The economic reform experiences of the Central Asian states during 1992–98 indicate considerable progress in the region, as a whole, toward establishing a sound macroeconomic environment, but mixed success with structural reforms. Several important lessons can be drawn from the diverse experiences of the five countries in meeting the challenges posed by transition.
Following independence in 1991, the states of the former Soviet Union continued to operate essentially within the framework of the monetary and financial system inherited from the Soviet era.1 The Central Bank of Russia took over the role of the now defunct Gosbank as the bank of emission, and the newly independent states continued to use the ruble as their currency. To many of the countries, the main attraction of being a part of the ruble area was the possibility of continued access to Central Bank of Russia credit to finance trade deficits with Russia. In January 1992, the Central Bank of Russia established correspondent accounts with the central banks of the individual states through which it provided credit, thus supplying rubles to settle interstate payments. The individual central banks also established correspondent accounts bilaterally.
Under the centralized planning system, the Central Asian states developed highly specialized and closely integrated economic relationships with the rest of the Soviet Union, notably characterized by a strong dependency on imports of energy, food, and consumer goods. During 1987–89, the region incurred trade deficits with the rest of the Soviet Union, averaging about 12 percent of GDP annually. The region’s production structure was heavily oriented toward agriculture and mineral extraction, which left little room for growth of import-substituting industries. The export bases of the Central Asian states, therefore, lacked diversification, and import dependency was high, making these countries particularly vulnerable to adverse trade shocks. During the Soviet era, prices for energy and raw materials were far below world prices, so that the net importer countries in the region benefited from sizable trade subsidies. Turkmenistan—the only net exporter, whose primary export is natural gas—was an exception. Following independence, the Central Asian states (with the exception of Turkmenistan until 1997) continued to incur sizable and persistent external current account deficits (Table 6.1). Three main factors accounted for this. First, the agricultural, industrial, and household sectors inherited from the Soviet era were highly energy intensive. Second, the demand for investment goods to replace obsolete capital was high. Third, after years of repressed consumption, import demand for western consumer goods surged. Hence, imports from non-traditional markets grew rapidly, despite strenuous attempts (notably by Turkmenistan and Uzbekistan) to restrain imports, mostly through foreign exchange restrictions.