IX Past Lessons and Future Challenges
Author: Emine Gürgen1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

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.

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.

  • It is clear that the faster reformers—Kazakhstan and the Kyrgyz Republic—have progressed much further than the other three countries in moving toward a market framework and overcoming the inertia of implementing difficult structural measures, with some positive initial results already in evidence.

  • The experiences of Kazakhstan and the Kyrgyz Republic illustrate that perseverance with reforms considerably augments their effectiveness and promotes their acceptability. The reform process, once firmly in motion, becomes self-reinforcing and sends the right signals both domestically and abroad.

  • While each country in the group is unique, the experiences of Kazakhstan and the Kyrgyz Republic could provide useful guidance to the other three countries, where reform efforts started later and displayed more of a start-stop nature with mixed results, notwithstanding some contributing special factors.

  • It is important for all of the countries in the group to ensure that reforms are binding, in the sense that the measures legislated or decreed are actually implemented, so that the changes introduced make a real impact.

  • The group, as a whole, could benefit from the experiences of those transition economies inside and outside the region that have weathered similar challenges and considerably advanced their reforms.

For the slower reformers—Tajikistan, Turkmenistan, and Uzbekistan—it will be important to switch from crisis management to a deliberate pursuit of policies aimed at containing macroeconomic imbalances and laying the groundwork for sustainable growth. Such a shift requires the formulation and determined implementation of comprehensive and internally consistent economic stabilization and reform programs. This is already in evidence, to some extent, in Tajikistan. For the countries that are more advanced in their reforms—Kazakhstan and the Kyrgyz Republic—the major challenge will be to avoid re-igniting inflationary and balance of payments pressures through undue easing of fiscal and monetary policies, while at the same time deepening and building upon the structural changes introduced so far. In all of the countries reviewed, the success of the adjustment and reform programs adopted will depend crucially on the extent to which the governments concerned take responsibility for them, as well as on broad endorsement of the programs by influential groups outside of the government.

Essentially, further action is needed in five key areas:

  • enhancing the quality of fiscal adjustment;

  • strengthening financial intermediation and institutions;

  • improving external debt management;

  • increasing the depth and scope of structural reforms; and

  • addressing governance and corruption issues.

These areas are briefly discussed and the policy implications are outlined below.

In the Central Asian states, as in most other transition economies, the brunt of fiscal adjustment has, thus far, mostly been borne by expenditure cuts and/or arrears, with insufficient attention paid to the level and quality of government expenditure on social services (notably health and education), basic infrastructure, and operations and maintenance. Efforts to raise revenue have been thwarted by tax administrations that are ill equipped to enforce tax collections, the prevalence of domestic payments arrears (including by governments), and flourishing underground economies that largely escape taxation. Future efforts will need to be directed at considerably raising tax revenue collections—which will also benefit from the strengthening of the economic recoveries under way—and better prioritizing of expenditure, including through civil service reforms, the curtailment of nonproductive spending, and the adoption of public investment programs. Progress in these areas will be the most effective way of avoiding the recurrence of payments arrears in these countries, and of dismantling the widespread system of mutually offsetting expenditure and tax arrears, which has further weakened payments discipline and reduced the transparency of government operations. Also, as reforms take hold and many of the present distortions arising from a mixture of controls and liberal policies are removed, underground economies can be expected to shrink, allowing for more effective and equitable taxation.

Notwithstanding some cross-country differences, the banking systems of the Central Asian states are still at a fairly elementary stage of development, with considerable further scope for institutional strengthening and improvements in banking practices. A few large state banks continue to account for the bulk of transactions, acting more as agents of the state than independent financial intermediaries. An important task ahead for these countries will be to restructure their banking systems with a view toward strengthening the effectiveness of monetary policy and supporting the economic recoveries already under way. Action in this area will also be needed to safeguard against protracted structural lending to bail out failing banks and enterprises, arrest currency substitution, and promote an efficient and solvent banking system. Such action will entail improving the functioning of legal and accounting frameworks, adopting effective prudential regulations, and strengthening bank supervision. While the countries in the group have made considerable progress in these areas with technical assistance from abroad, more needs to be accomplished to enhance public confidence in the financial systems and to align the systems closely with the needs of a modern market economy.

External borrowing by the Central Asian states has grown rapidly during the period reviewed, primarily to finance budget deficits, meet growing import bills, and benefit from a cheaper source of finance, given the large differentials between foreign and domestic interest rates that were not fully offset by exchange rate depreciations. For the most part, borrowing strategies were formulated on the basis of short-term considerations, with insufficient attention to medium-term debt sustainability issues. The funds borrowed were, therefore, not always channeled to uses that would generate the earnings needed to service the debt. The institutional arrangements for the management and monitoring of the external debt, moreover, were generally weak and not clear. Given these shortcomings and the risk that excessive reliance on foreign borrowing could postpone fiscal and structural reforms and trigger debt-servicing difficulties, the Central Asian states need to keep their borrowing strategies under close review, formulate such strategies within a medium-term framework, and strengthen the institutional arrangements for external debt management and monitoring. They need to keep in mind, moreover, that benefits from official and private capital inflows will be greater to the extent that such funds are channeled toward productive investment.

While all Central Asian states have begun implementing structural reforms, the depth and determination with which this has been done has varied considerably across countries. For the slower reformers, it will be essential to give priority to catching up in key areas such as privatization and enterprise restructuring. For those countries that have made substantive progress in these areas, the next stage might usefully be to extend their efforts to reforming the labor market, the civil service, and the trade and regulatory systems, while also more aggressively pursuing sectoral (notably agrarian) reforms. At the same time, to strengthen the confidence of private savers and investors, continued modification of state intervention in economic activity will be needed. This can best be achieved by limiting the functions of the state essentially to the provision of reliable public services, the establishment of a simple and transparent regulatory framework, and the enforcement of property rights and a fair judicial system.

Finally, firmly tackling governance and corruption issues will be an important challenge for the Central Asian states, where such problems have frequently arisen, as it has in many other transition economies. There is considerable empirical evidence that corruption, or the abuse of public power for private benefit, is harmful to sound economic performance because it tends to be associated with lower investment, reduced economic growth, concentration of government spending on less productive activities, and a greater incidence of income inequality and poverty.1 The most effective way of dealing with governance and corruption issues lies in structural, institutional, and legal reforms. Such reforms, by better balancing the roles of the state and market and clearly establishing the rules of law, can be expected to limit the conditions that breed corruption, promote private sector activity, and help restore confidence that is essential to attracting foreign capital needed to strengthen the economic recoveries under way in the Central Asian states.

Bibliography

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