III Growth, Employment, and Real Incomes
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Abstract

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.

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.

Apart from differences in initial conditions, the economic transformation and growth experiences of the Central Asian states reflected divergences between states that started economic reforms early and pursued bold adjustment programs (Kazakhstan and the Kyrgyz Republic) and states that were late reformers and less consistent in their adjustment efforts (Uzbekistan, Turkmenistan, and Tajikistan). Success in bringing inflation under control, coupled with the early introduction of systemic changes, played an important role in promoting economic recoveries. In addition to the predictable disruptions to input supplies and production associated with the initial phase of transition, there were some special factors involved, such as civil conflict in Tajikistan and strong reliances on preindependence trade routes (notably by Kazakhstan and Turkmenistan on the Russian-controlled regional energy pipelines), which constrained exports and adversely affected growth performance.

Growth Experience of the Central Asian States

The years following independence were characterized by a sharp deterioration in growth performance in all five Central Asian states (Table 3.1 and Figure 3.1). During 1992–96, real GDP declined—on average, by 37 percent cumulatively in these countries—somewhat less than the average 44 percent for the Commonwealth of Independent States (CIS). There was considerable variation across countries, however, with the cumulative drop in real GDP ranging from 16 percent in Uzbekistan to almost 60 percent in Tajikistan. By 1996, Kazakhstan, the Kyrgyz Republic, and Uzbekistan achieved positive growth, followed by Tajikistan in 1997 and Turkmenistan in 1998. These last two countries had started their recovery from very low levels of output. The recovery process suffered a setback in the aftermath of the financial turmoil in Russia in August 1998. The magnitude of the external shock led to a noticeable slowdown in economic activity throughout the region, particularly in Kazakhstan and the Kyrgyz Republic, as exports to Russia and other affected countries fell.

Table 3.1

Growth and Inflation

(In percent)

article image
Sources: National authorities; and IMF staff estimates
Figure 3.1.
Figure 3.1.

Developments in Real GDP

(Index. 1991 = 100)

Sources: National authorities; and IMF staff estimates.

Growth Performance and Underlying Factors

Recent empirical studies2 indicate that the speed at which inflation is reduced and the pace and depth of structural reforms are important influences on the growth performance of transition economies. During the initial years of transition (1990–93), output decline was minimized in those countries that either implemented substantial reforms or attempted to preserve the status quo, while intermediate reformers suffered sharp output declines. In the later years of transition (1994–98). bold reform efforts taken in the earlier period paid off and growth strengthened. Unlike the asymmetric effect of structural reforms, bringing inflation under control was beneficial for growth throughout the transition.

By way of illustrating the importance of stabilization and structural reforms on growth in the Central Asian states. Figure 3.2 plots the average real GDP growth rates for 1990–98 against average inflation (top panel) and an average reform index3 (bottom panel) for 25 transition economies in Central and Eastern Europe, and for Russia, the Baltics, and other countries of the former Soviet Union (BRO countries). The straight lines represent simple ordinary least squares regression fits. While the exercise should be regarded as no more than indicative, given the data deficiencies and the usual difficulties associated with cross-country comparisons, some broad conclusions can be drawn. The bottom panel of Figure 3.2 illustrates that growth in Kazakhstan, the Kyrgyz Republic, and Tajikistan have been approximately in line with the prediction regarding the impact of structural reforms on growth. Uzbekistan and, to a lesser extent, Turkmenistan appear not to follow this pattern, indicating a weaker link between their reform efforts and growth performance. In the top panel, the implications of inflation performance for growth are similar. For all the countries, except Uzbekistan, the relationship between growth performance and inflation is close to what was predicted; Uzbekistan displays higher growth rates than would be supported by its progress with stabilization. The discrepancies for Uzbekistan may be explained by the momentum arising from the favorable initial conditions noted earlier, while overall growth performance in Turkmenistan during the period appears to have been influenced predominantly by the wide annual swings in gas exports associated with the access to pipelines and the payments difficulties of trading partners.

Figure 3.2.
Figure 3.2.

Impact of Inflation and Reform on Growth

Sources: GDP growth and inflation: National authorities and IMF staff estimates; Reform index: de Melo and others (1996) for 1990–93 and rescaled EBRD transition indicators for 1994–98.

Outside of this broader framework, some evidence suggests that specific variables—such as success in reallocating resources to sectors with comparative advantage, the ability to sustain domestic investment and attract foreign investment, improvements in factor productivity, and progress with trade liberalization—-influenced growth in the Central Asian states.

In Kazakhstan, following a cumulative decline in real GDP of more than 30 percent during 1992–95, modest growth was recorded during 1996–97, but output fell by 2.5 percent in 1998 owing to the impact of the Russian crisis. Apart from macroeconomic instability, limited transport capacity for oil exports and serious inefficiencies in the state enterprise sector contributed to the earlier adverse growth performance. In the Kyrgyz Republic, after a cumulative contraction of 45 percent during 1992–95, growth averaged about 8 percent annually during 1996–97 and dropped to 2 percent in 1998. The initial poor growth performance was associated with the failure to reallocate resources to sectors with comparative advantage due to structural rigidities. Subsequent recovery reflected success in overcoming such problems, with the agricultural and gold mining sectors emerging as the key contributors to growth. By contrast, Uzbekistan’s growth performance was disrupted less at the outset of independence. Real GDP declined cumulatively by only 17 percent during 1992–95, with a modest but progressive recovery during 1996–98. A recent study 4 indicates that the less pronounced transitional recession experienced by Uzbekistan, despite the inadequacies in macroeconomic and structural policies, may have been attributable partly to favorable initial conditions, notably a low level of industrialization and a dominant cotton sector. At the same time, Uzbekistan was not dependent on energy imports and did not have to rely on energy exports to nonpaying regional markets. Industrial production could, therefore, be sustained through cheap energy supplies and subsidies financed partly by agricultural exports.

Economic recovery in Tajikistan was delayed by a civil conflict that persisted from shortly after independence in 1991 until the signing of a peace agreement in mid-1997. The cumulative drop in real GDP nearly reached 60 percent during 1992–96, before recovery started in 1997 following peace and the start of a comprehensive reform program. In Turkmenistan—where growth performance was heavily influenced by developments in access to export markets for natural gas and its trading partners’ reduced ability to make payments—real GDP declined each year during 1992–97, resulting in a cumulative contraction of nearly 60 percent in this period. The largest single drop (26 percent) occurred in 1997 when gas exports were discontinued in response to deteriorating payments. Inefficiencies in the agricultural sector also contributed to the adverse growth performance. Growth finally resumed in 1998. although from very low output levels, reflecting favorable harvests and buoyant oil production, which were partly in response to increased investments in these sectors.

Investment declined sharply in the early years of transformation in all five Central Asian states, but rebounded subsequently in most of them, although not always fully to earlier levels. In Kazakhstan, the investment ratio declined from about 26 percent during 1991–93 to 12 percent in 1996, and recovered to 15 percent in 1997. Investment by the state sector suffered the largest cutbacks, while investment by the nonstate sector held steady in real terms, and even rose in transportation, communication, and industry (with a major reallocation in industry toward oil and gas extraction activities and nonferrous metallurgy). In Uzbekistan, the investment ratio fell sharply during 1992–94. but rebounded in 1995–97 on the strength of government-led investment in priority sectors with foreign financing (oil refineries) or joint ventures with foreign investors (electronics, gold mining, and telecommunications). The government also invested heavily in hotel construction and the restoration of tourism sites, although there was very little investment in agriculture, despite its importance to the economy. In the Kyrgyz Republic, the investment ratio fell steadily during the first few years of transition, from about 20 percent of GDP in 1992 to 9 percent in 1994, but then almost doubled in 1996. mostly reflecting construction activity related to the Kumtor gold mine. Investment in Tajikistan collapsed after independence, mainly because of the civil conflict. In contrast to other Central Asian states, Turkmenistan’s investment ratio appears not to have decreased much following independence, reflecting heavy government investment (partly foreign—financed) in major infrastructure projects with low returns (such as hotels, monuments, palaces, airports, and aircraft), but also investment in the oil and gas sector. Ongoing sizable foreign investment in a major oil refinery is expected to further boost output and exports of oil products in the near future.

The reform process in Kazakhstan was aided by significant foreign direct investment (FDI) during 1992–98, mainly in the energy and metallurgical industries (see Section VII). This reflected the establishment of a framework for FDI early in the transition period, the implementation of an ambitious privatization program, and an attempt to bring in foreign management and technological expertise through management contracts. By contrast, Uzbekistan attracted relatively little FDI, mainly for a few large projects, such as gold mining and car production. FDI flows, which rose from $9 million in 1992 to $100 million in 1995, dampened in 1996 in response to restrictive foreign exchange and trade policies. In the Kyrgyz Republic, FDI strengthened during 1994–97 to a cumulative total of almost $280 million, mainly due to the Kumtor gold project. The shortage of mineral resources in the Kyrgyz Republic and long distances to developed markets, though, were major obstacles to FDI. Foreign investors also showed little interest in the country’s privatization program. FDI flows into Turkmenistan remained well below levels the country is capable of attracting, given its rich resource base, because of limited markets for its energy exports and an unstable economic environment. Nevertheless, cumulative FDI reached over $600 million during 1994–98, reflecting foreign investment in the oil sector (aided by a new petroleum law) and, to a lesser extent, in the textile industry. With civil unrest and political and economic instability, FDI in Tajikistan has been confined to modest investment in gold mines.

Improvements in factor efficiency appear to have contributed to output recovery in some Central Asian states. In Kazakhstan, increased efficiency associated with the reallocation of resources has played a significant role in the recent resumption of growth. Total factor productivity is estimated to have risen by 1,5 percent in 1996 and by 4 percent in 1997, following sharp declines in the preceding years. By contrast, in Uzbekistan, the reallocation of resources has been limited, reflecting the slow pace of structural reforms, and there do not appear to have been notable efficiency gains outside of the new service sector and joint ventures with foreign partners. There is some evidence that efficiency has not improved in state-owned agriculture, where yields per hectare and per livestock unit have either stagnated or fallen. In the Kyrgyz Republic, agriculture was the first sector to benefit from the reallocation of resources and contributed to the resumption of growth in 1996. The distribution of land-use rights to individual farmers early in the transition process improved incentives and attracted idle resources from other sectors. Although marginal efficiency in agriculture remained low by international standards, it was higher than in other sectors of the Kyrgyz economy, with the efficiency of private farms exceeding that of cooperative and state farms. Very little resource reallocation has taken place in Turkmenistan, given the general lack of reforms. Some improvements have occurred in agricultural yields (cotton and grain) following the provision of inputs, fertilizers, and financing to farmers under a land-lease program launched in late 1996. Finally, in Tajikistan, available data suggest a sharp decline in efficiency, with labor productivity plummeting in all sectors of the economy and agricultural yields falling, except in wheat production, which benefited from some early privatization.

Trade liberalization (see also Section VI) was another important factor influencing growth in the Central Asian states. Progress with trade liberalization contributed significantly to growth in Kazakhstan, as most new investment was in the import-intensive energy sector. Similarly, maintenance of a liberal trade regime (even after joining the customs union with Russia, Belarus, and Kazakhstan) greatly assisted the Kyrgyz Republic in promoting exports. Uzbekistan’s import regime was partly liberalized in late 1995 and the first half of 1996, and access to foreign exchange was simultaneously eased. The resulting increase in imported consumer goods contributed significantly to the expansion of the service sector and to the overall recovery of the economy. A later tightening of exchange controls in response to emerging balance of payments pressures, however, reversed this trend. Likewise, in Turkmenistan, where there are no formal trade restrictions, foreign trade is essentially conducted by state enterprises under close government control and access to foreign exchange is limited to priority sectors. There has, therefore, been little impetus for growth through trade liberalization. There may also have been some hindrances from exchange controls, which triggered shortages of imported inputs and consumer goods. Trade liberalization in Tajikistan may have helped to slow the pace of economic decline in two distinct ways. First, the liberalization of grain imports helped develop a dynamic private sector to replace the inefficient state bread complex: liberalization combined with the initial land reform boosted domestic grain production. Second, foreign suppliers provided inputs to cotton farmers following the liberalization of cotton marketing, thereby strengthening cotton production and exports.

The Emerging Private Sector

There is clear evidence of emerging nonstate or private sector activity in the Central Asian states, although the extent of transformation varies considerably among countries. According to recent EBRD estimates (based on both official and unofficial sources), private sector shares in GDP ranged from 20 percent in Tajikistan to 60 percent in the Kyrgyz Republic in 1997, with percentage shares in Kazakhstan and Uzbekistan closer to the upper end of the range and Turkmenistan nearer the lower end. Estimates that only include companies with majority private ownership indicate much lower shares (e.g., 35 percent in Kazakhstan compared with 55 percent given by EBRD estimates). A great deal of uncertainty is also related to these estimates, because of the lack of reliable and comprehensive statistics on private sector activity, and possible differences in definitions. For example, in Turkmenistan, official data indicate an 18 percent private sector share compared with 25 percent in EBRD estimates, and World Bank estimates put the private sector share at 10–15 percent. In Kazakhstan, there appears to be conflicting information on the share of the private sector. Nevertheless, the private sector is generally gaining importance in the Central Asian states, particularly in those countries where reforms have firmly taken hold and where structural changes that are conducive to a favorable business environment are being implemented, such as in Kazakhstan and the Kyrgyz Republic.

Employment and Real Incomes

In the Central Asian states, sharp output declines during transition were not matched by growth in officially recorded unemployment, although data covering unemployment suffer from serious deficiencies. For example, unemployed persons who received benefits for more than six months are excluded from the statistics in Kazakhstan, and persons not actively seeking employment are not captured in the official unemployment statistics in Turkmenistan. The official figures, moreover, do not account for disguised unemployment. Beyond statistical shortcomings, however, guaranteed state employment continues to constitute an integral part of the social safety net in these countries.5 Labor hoarding is particularly severe in agriculture, where families work either on leased plots of land or in cooperatives. State-owned industrial enterprises also refrain from labor layoffs in times of output contraction. Therefore, only a very small portion of the economically active population is officially registered as unemployed. Even after allowing for data deficiencies and disguised unemployment, it seems unlikely, though, that the drop in employment in the Central Asian states during transition has been of similar orders of magnitude as their declines in real GDP.

With sharp declines in output following independence, and little or no open unemployment, real wages in the Central Asian states typically plummeted in the early years of transition (Table 3.2 and Figure 3.3). Real wages fluctuated considerably but began to recover after mid-1995, reflecting moderation in inflation as reform programs took hold. The exceptions were Turkmenistan, where the recovery came later, and Tajikistan, where real wages, after declining sharply through early 1996, recovered slightly and remained more or less flat because of the civil conflict and the associated delay in reforms. Measured in dollar terms, wages showed a similar pattern. At the end of the third quarter of 1998. dollar wages were the highest in Kazakhstan ($127), followed by Uzbekistan ($58) and Turkmenistan ($54), the Kyrgyz Republic ($37), and lastly, Tajikistan ($12).

Table 3.2.

Real Wages1

(1993: QI = 100)

article image
Source: IMF staff estimates.

Nominal wage index deflated by the consumer price index.

Figure 3.3.
Figure 3.3.

Wage Developments

Sources: IMF staff estimates; and IMF Staff Country Reports.

Average real and dollar wages, however, do not give a complete description of real incomes in the Central Asian states. Workers generally hold more than one job and often receive supplemental in-kind income and services such as housing and child care from their primary employers (up to 20 percent of the base wage in the Kyrgyz Republic). Government employees often have very generous leave allowances. Moreover, incomes continue to be augmented in all five Central Asian states by consumer subsidies on basic food staples as well as utilities and transportation. For example, in late 1997, direct food subsidies in Turkmenistan accounted for more than 15 percent of the average wage, while total consumer subsidies were estimated to be equivalent to the average wage. So far, only in Kazakhstan and the Kyrgyz Republic have price subsidies mostly been eliminated (see Section VIII). State-provided education and medical care are still in place in these countries, although the quality has dropped significantly, and household incomes are often supplemented by one or more types of social benefits, including pensions. Generally, these benefits tend not to be well targeted, resulting in large groups of the population receiving relatively low benefits.

Finally, given the substantial size of the unofficial economy in these countries, it is likely that real incomes are much higher than real wages, even after adjustment for in-kind payments, consumer subsidies, and social benefits. For example, it has been estimated that the unofficial economy has produced goods and services equivalent to 34 percent of GDP in 1995 in Kazakhstan, and 7 percent of GDP in Uzbekistan.6 Official estimates put the size of the informal sector in Turkmenistan at 12-18 percent of GDP.

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1

See Zettelmeyer (1998) on the Uzbek growth experience.

3

Derived from the EBRD transition indicators.

5

In Turkmenistan and Tajikistan each citizen is still officially guaranteed employment.