Kyrgyz Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
07 Mar 2003
eISBN:
9781451821413
Language:
English
Keywords:
ISCR; CR; Kyrgyzstan; export; VAT; cost; rate of depreciation; role of the TFP; gross investment ratio; output ratio; labor ratio; Total factor productivity; Agricultural sector; Productivity; Capital productivity
Download PDF (436.6 KB)

This Selected Issues paper examines figures related to the key policy areas for the Kyrgyz Republic. Specifically, the paper studies the sources of growth, the cost competitiveness of export, and trade restrictions in the region, which are all linked to the achievement of the growth and poverty reduction targets of the National Poverty Reduction Strategy. It addresses the issues of agricultural taxation and fiscal aspects of the environment. The paper also focuses on a specific structural problem in taxation, and analyzes the fiscal aspects of environmental protection.

Abstract

This Selected Issues paper examines figures related to the key policy areas for the Kyrgyz Republic. Specifically, the paper studies the sources of growth, the cost competitiveness of export, and trade restrictions in the region, which are all linked to the achievement of the growth and poverty reduction targets of the National Poverty Reduction Strategy. It addresses the issues of agricultural taxation and fiscal aspects of the environment. The paper also focuses on a specific structural problem in taxation, and analyzes the fiscal aspects of environmental protection.

II. Sources of Growth1

7. In the Kyrgyz Republic, like in other transition countries, output declined sharply during the initial period of moving from plan to market. Real GDP growth resumed only in 1996. This chapter analyzes the sources of growth in 1996-2002 in a growth accounting framework (Box 1).

Growth Accounting Framework

We model the production process with a Cobb-Douglas production function:

(1 )                                            Yt=AtKtα(Lt)1−α

where K is the physical capital stock and L is labor input. A is total factor productivity (TFP) which captures anything not explained by K or L.

Taking logarithms and differentiating, we obtain the following growth accounting equation:

(2)dYY=dAA+αdKK+(1−α)dLL

Equation (2) decomposes the growth rate of output into the growth rates of the capital stock, labor, and TFP. The capital stock K was calculated recursively by the perpetual inventory method:

(3)Kt+1=It+(1−δ)Kt

where I is the level of real fixed capital formation and δ is the rate of depreciation of the existing capital stock.

We assume that the rate of depreciation was 5 percent, which is within the range of 4-10 percent used in similar studies. The initial capital stock was estimated based on Easterly and Fischer (1995). In particular, we assume that the 1990 capital stock as a share of net material product (NMP) was identical to the capital stock as a share of GDP in the same year. NMP was increased by a factor of 1.3, as is customary to correct it for a GDP estimate to include the services sector. The time series data for real GDP (Y), real fixed capital formation (I), the capital stock (K), and labor (L) between 1992 and 2006 are presented in. Table II-1. The income share of capital α is assumed to be 0.3, which is in line with similar studies.

Table II-1.

Kyrgyz Republic: Real GDP and Factor Inputs, 1992-2006

(In billions of soms; unless otherwise indicated)

article image
Source: Authorities; World Economic Outlook, and Fund staff estimates.

A. Growth Dynamics in 1996-2002

8. In 1996-2002, the Kyrgyz economy grew at an average rate of 4.7 percent a year. Following four years of output contraction, growth rebounded in 1996 and peaked at 10 percent in 1997. Economic activity slowed with the 1998 Russian financial crisis, but accelerated to over 5 percent in 2000 and 2001. In 2002, real GDP declined slightly for temporary reasons. First, a large landslide in the Kumtor gold mine prevented access to high grade ore reducing the value added of mining by 37 percent.2 Second, energy production fell by 7 percent as demand for water from the Kyrgyz reservoirs for irrigation was exceptionally low in the neighboring countries.3 Agriculture, industry, and the services sector have been driving the growth in 1996-2002. Within agriculture, the output of grain, tobacco, fruit and vegetable grew by more than 10 percent a year while animal husbandry expanded only little. In industry, gold production rose rapidly with the new Kumtor gold mine, manufacturing of construction materials recovered, but machine building, light industry, and food processing remained stagnant. The volume of services began to grow in 1996 with an average rate of growth of 5.4 percent since.

Growth by Sector, 1996-2002

(Volume, in percent)

article image

9. Growth accounting suggests that the capital stock has declined each year since independence, contributing negatively by 1.2 percentage point to growth in 1996-2002. The gross investment ratio—19.7 percent of GDP on average during this period—has not been sufficient to replace the depreciation of capital. Capital declined despite extensive investment in gold production and infrastructure, the latter under a donor-financed Public Investment Program (PIP) which peaked at 9.4 percent of GDP in 1999. Under the PIP, main projects have been in road building and energy. Nongold, non energy industrial investment remained very low until 1999 followed by a strong recovery in 2001, especially in food industries. Similarly, investment in agriculture have increased significantly since 1998.

uA02fig01

Sources of Growth, 1996-2002

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A002

10. Employment started to recover in 1996, increasing by an average rate of 1.2 percent since and contributing 0.8 of one percentage point to real GDP growth. Employment increased mainly in agriculture and the services sector absorbing the decline in the construction and industrial labor forces. Employment growth in agriculture and services—more than 200,000 employees—was, however, larger than the decline in other sectors suggesting that a large part of the increase came from hidden unemployment because open unemployment did not diminish. While the exact level of hidden unemployment is not known, some estimates suggest the true unemployment to be as high as 20 percent compared to a 3-4 percent official unemployment rate, or about 8 percent as measured according to the methodology recommended by the International Labor Organization (ILO).

Employment by Sector, 1992-2002

(In thousands)

article image

11. Improving total factor productivity was the main source of growth as the impact of rising employment has been offset by a declining capital stock. Indeed, 4.3 percentage points of the 4.7 percent average growth can be attributed to TFP growth. This growth pattern is consistent with the standard analysis of a transition country’s production possibilities curve.4 During the transition period, the Kyrgyz Republic has been below its production frontier because of widespread inefficiencies inherited from the Soviet planning economy. Moving towards the production frontier reflects mainly efficiency gains as the contribution of factor inputs has been relatively small. In this respect, however, the applied employment data may overstate the role of the TFP because the presumed reduction in hidden unemployment excluded from labor input.

12. There are several specific factors—some temporary, others permanent—that explain the recovery in TFP growth. First, the production structure has become more productive. Although usually a reallocation of resources from industry to agriculture and services is associated with a deceleration of productivity growth, in the Kyrgyz case the opposite appears to be the case. A large part of the industry used to be linked to the Soviet military complex which became nonviable overnight. Finding alternative uses for such capacity has not been easy and, as restructuring of these enterprises has proceeded slowly, the aggregate productivity growth in industry has remained low or even negative in many branches. A continuous decline of machine building and other heavy industries suggest that restructuring is still taking place. Thus, the resource transfer to agriculture and services has spurred economy-wide productivity growth.

13. The Kyrgyz land reform has laid a permanent foundation for TFP gains in agriculture. Abstracting from the expansion of arable land and the two bad harvests, productivity growth in agriculture has been robust throughout 1996-2002. For example, yields in grain cultivation improved by 13 percent between 1995 and 2000. During the same period, yields improved by 14 percent in tobacco growing, 52 percent in vegetable farming and 33 percent in fruit cultivation. These efficiency gains resulted from the privatization of state and collective farms and allowance of private land ownership. New peasant farms together with household plots produced almost 90 percent of total agriculture output in 2000 although they covered only about 60 percent of the arable land. Collective farms, in contrast, produced less than 8 percent of total output with more than 20 percent of the arable land.

14. While the aggregate capital stock has declined, it has become more efficient as old vintages of capital were replaced through new market-determined investment Between 1995 and 2002, the capital output ratio declined from 5.8 to 3.9, a decline common to transition economies. In industry, where most of the dismantling of obsolete capital supposedly took place, investments of more than $200 million a year in 1995-96 in the Kumtor gold mine with new technology have been an important factor boosting TFP growth. In the energy sector, high exports to Uzbekistan and Kazakhstan were reflected in TFP growth although the sector has remained inefficient with domestic tariffs far below cost recovery levels, low cash collection, and high technical and commercial losses. Higher energy investments in 1999 and 2000, in part reflecting increased donor financing, have slowed the deterioration of the supply network, however.

B. Requirements for Sustained Growth

15. The authorities project real GDP to increase by 5 percent a year during 2003-06. This is expected to be achieved through a 4 percent TFP growth while labor and capital would each contribute one-half of one percentage point to growth. In 2003 and perhaps in 2004, Kumtor should contribute positively to growth but in 2005, gold production would start declining with lower availability of are and weakening quality of deposits. To achieve the medium term growth target, the negative impact of the declining gold production needs to be offset by other industries, mainly nongold, nonenergy manufacturing, agriculture, and services, in particular tourism. In this respect, it is encouraging that real GDP excluding gold and energy, increased already by 3.5 percent in 2002.

uA02fig02

Projected Sources of Growth, 2003-2006

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A002

16. On the supply side, a 5 percent growth requires continued improvements in TFP based on higher capital efficiency. A continuation of the recent investment trends at about 20 percent of GDP with an incremental capital-output ratio (ICOR) of about 4, as experienced in 1996-2002 on average, would be consistent with the 5 percent growth target. The medium-term saving-investment balance analysis foresees private investment to be the driving force of capital accumulation as the foreign financed PIP will be streamlined. The increase in national savings by 3 percentage points of GDP in 2003-2006 would reflect further fiscal adjustment and improving enterprise profitability as real wages are expected to grow less than productivity in view of the high (hidden) unemployment. The share of foreign savings to finance investment would increase by 1.3 percentage points of GDP. Overall, the projected increase in total savings at 4 percentage points would allow a similar increase in the investment ratio implying that the capital stock would start growing in 2004. This would lead to a capital deepening as capital growth would outpace labor growth. In this case, the 5 percent growth target could be achieved even if the ICOR would decline somewhat in 2003-2006.

uA02fig03

ICOR, 1996-2006

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A002

17. A more efficient use of labor provides another source of TFP growth. The fact that employment has responded very sluggishly to output variations suggest significant rigidities in the labor market. The high hidden unemployment in part reflects the lack of financial discipline in enterprises, in part an ineffective social safety net, including a poor unemployment insurance system, and prohibitively high separation compensations. These are key impediments to better labor mobility and more efficient use of labor.

18. In the medium-term, growth should follow a more standard pattern with stronger labor productivity gains than total factor productivity growth. In 1996-2001, growth reflected strong TFP growth with such gains surpassing improvements in labor productivity as the use of capital become more efficient. In response to the new market-based incentives, the capital-labor ratio declined as obsolete capital was substituted by new capital. As the capital-output ratio converges to a more stable level, labor productivity gains should accelerate and overcome TFP growth by 2005. This would be due to the expansion of the capital stock, starting in 2004, accompanied by a reallocation of labor to more efficient uses, reflecting a reduction of hidden unemployment and increased capital-labor ratio. This assumes further structural reforms conducive to improvement in the investment climate and flexible labor markets.

uA02fig04

Capital-Labor Katie and TFP Growth, 1996-2006

Citation: IMF Staff Country Reports 2003, 053; 10.5089/9781451821413.002.A002

19. On the demand side, foreign trade data for 1996-2002 suggest that growth has been largely supported by import substitution (see Chapter III) while net exports have remained negative. In the medium term, the stronger supply capacity should translate into higher export growth provided that the cost competitiveness can be maintained. As discussed in Chapter IV, reducing trade restrictions imposed mainly after the 1998 Russian crisis by the neighboring countries is also an important condition for achieving the 5 percent medium term growth target.

References

  • Easterly, W. and S. Fischer, “The Soviet Economic Decline,” World Bank Economic Review, 9(3), September 1995, pp. 341- 371.

  • Havrylyshyn, O., et al., “Growth Experience in Transition Countries, 1990-98,” IMF Occasional Paper No. 184, 1999 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
1

Prepared by Joerg Zeuner with contributions from Paulo Medas.

2

In 2001, Kumtor accounted for 9.0 percent of GDP.

3

The electric energy generated by water release is exported under barter trade arrangements.

4

See, e.g., Havrylyshyn,. et al. (1999).

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Kyrgyz Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 053
Publisher:
International Monetary Fund
ISBN:
9781451821413
ISSN:
1934-7685
Pages:
98
DOI:
https://doi.org/10.5089/9781451821413.002

Sources of Growth, 1996-2002

Projected Sources of Growth, 2003-2006

ICOR, 1996-2006

Capital-Labor Katie and TFP Growth, 1996-2006