After the breakup of the Soviet Union, the CIS-7 faced exceptional challenges in building new states, democratic institutions, and market economies. All of the CIS-7 started from a situation of complex dependency on the Soviet Union, including massive transfers and subsidies and the trade arrangements of the Council for Mutual Economic Assistance (CMEA). The shocks associated with the breakup—notably the disruption of economic relations with established regional partners, termination of large fiscal transfers, and severe energy price adjustments—compounded the problems of severe structural rigidities and weak institutions.
More effective integration into the world trading system is part of the transition from central planning to markets. Based on market forces, international trade promotes more efficient resource allocation and increased productivity and growth—necessary conditions for sustainable poverty alleviation. The low-income CIS-7 countries started the transition with different resource endowments but with similar protectionist policies that isolated their economies from the rest of the world and created large distortions in prices and resource allocation.
David Kennedy, Samuel Fankhauser, and Martin Raiser
Energy and water have emerged as critical issues for the CIS-7 countries—Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan—and their neighbors for at least two reasons. The first is that energy and water constitute the region’s main natural resources, and the exploitation of both was and still is a key to these countries’ mode of production. The second is that the distribution of these resources is very unequal across countries. Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan benefit from rich energy reserves, while Armenia, Georgia, the Kyrgyz Republic, and Tajikistan have substantial water resources. This unequal distribution gives rise to potential gains from trade but it is also the source of recurrent conflict between neighboring states in the region. Energy and water issues are closely linked given that the latter can be used, inter alia, for hydropower generation and/or irrigation. Use of water in the municipal sector is not discussed in this chapter. Replenishment of the Aral Sea as an alternative to irrigation is consistent with increased winter hydro generation, discussed below under “Unlocking the Benefits from Trade.”
Mr. Thomas Helbling, Mr. Ashoka Mody, and Ms. Ratna Sahay
With the exception of Azerbaijan, which is a net energy exporter, the other low-income CIS countries—Armenia, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan—face serious external debt problems.1 From a situation of virtually no debt in 1992, a meteoric increase in debt levels occurred thereafter. In particular, multilateral (IMF and World Bank) lending contributed to the high and increasingly unsustainable levels of debt, despite close monitoring by these institutions undertaken through their conditionality. The CIS-7 experience contrasts with that of other transition economies, which have managed the transition without similar debt accumulation, and is more akin to that of the poorer, highly indebted countries that are heavily reliant on official credit.2
Without doubt, the collapse of the communist bloc and the dissolution of the Soviet Union during 1989–1991 represented the largest regime change experienced in the world since the 1940s. In terms of economic policy, the countries that emerged from the Soviet bloc faced major challenges in terms of re-molding institutions and markets to deliver growth and prosperity for their citizens. The scale of the adjustment problem was most acute for the countries in the former Soviet Union. These countries had economic structures that were directed toward fulfilling specialized roles within the Soviet central planning system: for this group, the challenge of building self-functioning market-based economies was especially severe.
This chapter analyzes the role of structural reform in the transition experience of the CIS-7 countries. The seven countries share many common features, beginning with their depressed income levels. All are landlocked, apart from Georgia, with its Black Sea access. Six are small in population, with between 4 and 8 million; Uzbekistan is the exception, with 25 million people (Table 4.1). More than half the population of the Kyrgyz Republic, Moldova, and Tajikistan is rural; Azerbaijan and Georgia also have rural shares above the former Soviet average. Most of the CIS-7 countries are resource abundant, but with differing specializations, and in most cases the benefits have still to be fully realized.
All of the CIS-7 countries underwent difficult economic transitions during the 1990s, with gross domestic product (GDP) contracting sharply. As these countries restructured their economies and squeezed spending to fit within the much reduced budget envelopes, the share of public expenditure in national income fell substantially. Price subsidies and subsidies to state-owned enterprises have been reduced or eliminated. Large public sector investment programs, particularly in infrastructure, have been slashed. The size of the public sector has been reduced through privatization and initial reductions in wider public sector employment following reforms and the elimination of some services, such as preschool education. At the same time, wages and operating costs have declined significantly in real terms, in line with the contraction of overall public sector revenues.
This chapter examines the evolution and current status of living standards and welfare following a decade of transition in seven of the poorest countries of the former Soviet Union (the CIS-7). At independence, the CIS-7 countries inherited high levels of human capital. Education and health care were universal and provided free at the point of delivery, and there were extensive social services and transfers. High social spending was supported by large budgetary transfers from Moscow. In the late 1980s and early 1990s, such transfers were worth as much as a third of gross domestic product (GDP) in Armenia and more than a fifth in Moldova.1 However, the republics of the Soviet state inherited economic structures that were heavily dependent on Soviet supply and trade networks. The Russian Federation was the main source of inputs and the main market for outputs. Transport and other infrastructure were designed with a view to meeting these trade needs and not necessarily those of the local economy.
Louise Cord, Ramon Lopez, Monika Huppi, and Oscar Melo
Rural poverty is a major problem in the CIS-7 countries, exceeding urban poverty in four of the seven countries. The high rates of rural poverty are partially a historical phenomenon, but they also reflect the immense dislocation experienced by the rural sector following the breakup of the Soviet Union. Production and marketing structures, the incentive framework, social services, and farm and nonfarm employment opportunities were profoundly affected by the breakup of state and collective farms and the switch to a market economy.
Several key political obstacles to economic reform have been identified in what has become a burgeoning literature on the political economy of reform. The overriding focus of this literature is on how political leaders can implement and sustain economic reforms in the face of formidable opposition from those who will lose the most from these reforms initially—usually the population at large and strong sectoral and organized interest groups. The recommended remedies are aimed at reducing or eliminating popular opposition to reform, often by sequencing reforms to identify winners and compensate losers or by building coalitions of winners (Table 8.1).