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.