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Chapter 2. The CCA Growth Experience

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
April 2014
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Over the past two decades growth in the CCA region has been strong, but volatile, uneven, and narrowly based. Success in raising income per capita has varied across countries and seems tied to natural resource endowments. Growth has been largely driven by commodity and labor exports and has not been supported through significant economic diversification or by regional economic integration. CCA countries exhibit a mixed performance on the inclusiveness of growth. While these countries have benefitted from improvements in total factor productivity, the sources of growth have varied substantially across countries. In the next decade, the CCA countries should strive to achieve stable and sustainable growth through the pursuit of reforms that would allow many of these countries to join the world’s dynamic emerging markets.

Successes and Challenges

CCA countries grew more rapidly during 1996–2011 than other comparable groups of countries.4 Average real GDP growth totaled 6.4 percent for oil and gas importers and 7.7 percent for oil and gas exporters bringing the CCA region’s average growth to 7.5 percent. High growth largely reflects strong initial physical and human capital, untapped natural resources, and a rebound from transition.

Figure 2.1.Average Real GDP Growth

(1996–2011)

Figure 2.2.Volatility of Real GDP Growth

(Standard Deviation) 1996–2011

At the same time, growth in the region has exhibited more ups and downs than in most other countries. This volatility is explained by: (i) the specialized structure of the economies they inherited from the Soviet period, which were no longer connected to each other in a large, open and integrated economic space; (ii) close economic ties to Russia—which has exhibited even greater volatility than the CCA—during much of the transition; and (iii) their reliance on volatile commodity exports and on remittances.

Figure 2.3.Price Volatility

(Standard deviation 1996–2011, Index 2005=100)

Source: World Economic Outlook Global Assumptions.

Success in raising per capita income has varied, in large part reflecting natural resource endowments. For example, output per capita increased by three and a half times in Azerbaijan during this period while it increased by only half in the Kyrgyz Republic. The strong performance of Azerbaijan, Turkmenistan, and Kazakhstan is perhaps not surprising given their dynamic energy sectors and rapid increase in energy exports. Similarly, the relatively strong performance of Armenia and Georgia among energy importers likely reflects their relatively strong economic policy frameworks, which have helped them to achieve low inflation, keep debt down, and attract substantial FDI. Developments in nominal GDP per capita followed a similar pattern.

Figure 2.4.Real GDP Per Capita 2011/Real GDP Per Capita 1996

Figure 2.5.Per Capita Nominal GDP

Growth in the region has been driven by commodity and labor exports, leaving many CCA economies highly undiversified. Commodity exports constitute over 60 percent of total exports in Kazakhstan, Azerbaijan, and Turkmenistan, and fiscal revenues from these exports are over 40 percent of total revenues. This has created vulnerabilities that include heavy reliance on exports of commodities that have volatile prices and fiscal revenues that depend heavily on the energy sector. Armenia, Kyrgyz Republic, and Tajikistan are vulnerable to possible fluctuations in remittances due to volatile growth in Russia.

Figure 2.6.Remittances, 2012

(Percent of total exports of goods and services)

Source: WEO.

Figure 2.7.Commodity Exports 1/, 2012

(Percent of total exports of goods and services)

Sources: Country authorities, staff estimates, and WEO.

1/ Includes oil, gas, precious metals, aluminum, copper, other metals, metal by products, and cotton.

Figure 2.8.Commodity Revenue, 2012

(Percent of total revenue)

Sources: Country authorities, staff estimates, and WEO.

CCA countries have also exhibited mixed performance in achieving inclusive growth.5 Income inequality has decreased only marginally, or has even increased, despite high growth, as illustrated by the Gini coefficient, with Armenia and Uzbekistan being notable exceptions. Poverty reduction has faced mixed success, with dramatic improvement observed in Azerbaijan and Kazakhstan and less progress in Armenia, Georgia and Tajikistan (Figure 1). Poverty headcount rates in the CCA middle-income countries (MICs) are below the MIC average, though poverty rates remain high in Armenia and Georgia. Labor force participation rates in CCA MICs are around or above the MIC average. The situation differs in the CCA low-income countries (LICs).6 Labor force participation rates are low and poverty rates remain stubbornly high when benchmarked against all LICs or against LICs with similar “high” LIC incomes (Figure 2.13).

Figure 2.9.Intra-CCA Trade

(Share of CCA countries in total exports and imports of goods)

Source: IMF Directions of Trade statistics.

Figure 2.10.TFP in CCA Countries

Figure 2.11.Sources of Economic Growth in CCA Countries

(1998–2011, percent)

Figure 2.12.CCA Countries: Gini Coefficient, Poverty Rate, and Labor Force Participation Rate

Source: World Bank.

MICs: Middle-income countries.

Figure 2.13.CCA Low-Income Countries: Poverty and Labor Force Participation Rates

Source: World Bank.

LICs: Low-income countries.

Upper-LICs: LICs with GDP per capita above USD700.

And good growth performance has not been supported by greater regional integration (see also Trade Linkages in Chapter 8). To the contrary, over the last two decades intra-CCA trade has markedly declined. The share of exports going to CCA economies in total exports of goods fell from 12.9 percent in 1996 to 6.8 percent in 2001 and 4.9 percent in 2011. One could in part attribute this fall to massive energy exports to new markets by CCA energy exporters. However, the share of CCA imports in total goods imports followed a very similar declining trend, pointing to remaining barriers to trade and a general weakening of regional economic ties.

Most CCA countries enjoyed positive total factor productivity (TFP)7 growth over the last decade, though sources of economic growth differed across countries. The evolution of TFP in CCA economies between 1998 and 2011 shows that while there were substantial increases in TFP in Georgia, Kazakhstan, and Tajikistan, TFP experienced a declining trend in Armenia and was relatively stable in Uzbekistan.8 A decomposition of aggregate output growth by sources reveals that economic growth was accounted for by different factors in each economy. On average, TFP contributed to economic growth most in Georgia and least in Armenia.9

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