Dialogue  October - December, 2004 , Volume 6  No. 2

Economic Changes in Central Asia and Indian Response
Dr. Gulshan Sachdeva

In this paper an attempt has been made to understand economic changes in the Central Asian region in the last one decade. These changes have coincided with the Indian liberalisation process. It is described that although the countries of Central Asia have integrated in the global economy, their economic relations with India have declined significantly. Despite having close political relations, India is also absent from many of the new regional economic initiatives in the region. The paper ends with the assessment of Central Asian economic reforms and suggestions for improving Indian economic presence in the region.

Since the collapse of the Soviet system, the five Central Asian countries Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan are witnessing transformation of their economic systems. All these countries have moved along this transformation to varying degrees. Despite having a very complex legacy (of central planning, dissolution of the USSR, distorted economic structures, ethnic problems), the region has made some progress in market reforms. Due to certain specific features (natural resources, strategic location, political systems and background of political elite) the region has used both standard as well as non-conventional strategies of economic transformation. The Soviet era leaders in more or less non-competitive regimes have tried to pursue economic stability while securing their own dominance in the new political system. They have also tried to learn a few lessons from the Chinese model of development

In the early years, the break-up of the Soviet Union hit the region very badly for many reasons. Trade and transit was interrupted with new borders, increased transportation costs, illegal check points and collapse of traditional markets. Industrial and agricultural production was hurt due to disruption in access to inputs and markets. There was loss of subsidies for budgets, enterprises and households which were paid earlier directly or indirectly through social payments, as well as through below market prices on transport and energy. There was also loss of administrative structures and skilled labour as traditional Soviet administration collapsed and many Russians left the region. The access to secure water and energy resources was also lost in the region which was key for the agriculture, industry and household requirements. Countries in the region were left with large environmental burdens (including the Aral Sea ecological disaster, as well as industrial, nuclear and biological waste). Above all, there were also ethnic tensions and civil war (especially in Tajikistan).1  All these were added complications to the ‘normal’ transformational problems faced by any country moving from a centrally planned economy to a market economy.

Despite a common historical and cultural background, including more than seven decades of Soviet legacy, the five Central Asian republics have had different abilities to cope with the transformation challenges.2  As a result they have adopted different strategies. Even a quick view at the vast transformation literature, one could find "early and late reformers" as well as "radical" and "gradualist" reformers in Central Asia. The transition strategies adopted by these countries have also been influenced greatly by the political environment in the region and in their particular countries. Uzbekistan adopted a gradual and cautious approach to market reforms, while Kazakhstan and Kyrgyz Republic followed a relatively more aggressive approach. Turkmenistan and Tajikistan have cautiously joined later. These different policies have led to different macroeconomic outcomes as well as different policy environments.

The countries of Central Asia in the first decade of their transformation displayed some common trends and some significant variations. However, output decline in all the countries in the region was very deep and longer. Recovery in some of the countries was further derailed with the fiscal financial crisis in the Russian Federation in 1998. According to the World Bank, Central Asia had an average of

Table 1

Source: European Bank for Reconstruction and Development (EBRD).

about seven years of declining output in the first ten yeras, resulting in loss of almost 41 per cent of the initial measured output. The highest loss of output was in Kyrgyzstan and lowest in Uzbekistan.3  This "transformation recession" is now over the region is on a path of recovery.

Overall, the success of market-oriented structural and institutional reforms has shown mixed progress in Central Asia. According to different methodologies and classifications developed by major multilateral organisations as well as other independent agencies to measure reform progress in transition economies, Kazakhstan and Kyrgyzstan have progressed much faster. Similarly, Uzbekistan and Turkmenistan have been classified as countries which have achieved less progress in establishing market institutions. According to widely used indicators developed by the European Bank for Reconstruction and Development (EBRD), level of reforms concerning prices, foreign exchange and external trade, privatisation, enterprise reforms and banking sector is high in Kazakhstan and Kyrgyz Republic. In some cases it is comparable to Russia and Poland. Tajikistan has also made significant progress in price reforms, external sector reforms and small privatisation. The level of reforms in Uzbekistan and Turkmenistan is low, particularly in the external sector and enterprise and banking sector reforms. Except Kazakhstan, other Central Asian countries are quite low in Euromoney risk ratings.4  The reform process in agriculture has resulted in (1) corporate units created by reconfiguration of shares inside the former collective shell (2) successor farm (stay as is) created by keeping the share in the former collective (3) individual farms established by withdrawal of shareholders. Despite all these changes, in reality very little has changed in the form of farm restructuring in Central Asia.5 

Central Asian economies inherited state-controlled foreign trade, which was subordinated to the central planning.6  Within the integrated economic structure of the Soviet Union, Central Asian region has strong dependency on imports of energy, food and consumer goods. The production structure of the region was heavily oriented towards agriculture and mineral extraction. Because of lack of diversification, and high import dependency these countries were vulnerable to adverse trade shocks.

Table 2

External economic reforms in the region have covered five areas: liberalisation of foreign trade prices, reform of the trade system, market diversification, phasing out of barter trade and currency reforms.7  Progress on these reforms has varied across the region. Although the role of state in foreign trade has been reduced throughout the region, progress has been more pronounced in Kazakhastan and Kyrgyzstan. Uzbekistan and Turkmenistan are more gradual with foreign trade liberalisation, particularly in the foreign exchange market. In the last one-decade, exports have grown and significant diversification of trade has taken place.

The Central Asian experience with external trade could be classified in distinct phases. The first phase between 1991 and 1994 was a period of adjustments to the shocks of sudden dissolution of the USSR and sharp fall in mutual trade. During this period, all regional economies (except Turkmenistan) incurred sizable and persistent external current account deficits. The man reason for this were (1) the inherited economic structures (agricultural, industrial and households sectors) were highly energy intensive; (2) the demand for investment goods to replace this structure was high (3) imports demand for western consumer goods was very high. The second phase was between 1995 and August 1998. During this period attempts were made to keep reasonable trade relations with traditional partners and to enlarge trade ties with the rest of the world. In the third stage, which starts from August 18, 1998, the region faced many negative impacts of Russian and Asian economic crises. With the sharp devaluation of Russian rouble, competitiveness of Central Asian commodities in traditional markets was affected. However, many of the negative impacts are eased since 2000 with strong recoveries in Russia and Central Asia.

Share of trade within CIS countries has declined in the region. However, as a result of some regional trade initiatives (discussed below) mutual trade in the region was increased, particularly in the initial years of transition. Since 1994, the share of trade with the non-CIS countries has been growing fast in both exports and imports. In the last few years about 70 percent of Uzbekistan’s trade has been with non-CIS countries. Although Russia is still an important partner at the regional level, the geographical distribution of trade has shifted from CMEA to EU (Germany UK), East Asia (China, South Korea, Japan), North America (USA), and middle East (Iran, Turkey). China has been bale to make some significant trade partnership with Kazakhstan and Kyrgyzstan. The commodity structure of Central Asian exports is mainly

Table 3

Kazakhstan                ..                 ..          3.231           5.250          5.911          6.497       5.436          5.592        9.126           8.647

Non-CIS              1.398          1.501          1.357           2.366          2.732          3.515       3.266          4.100        6.750           6.015

Kyrgyzstan         0.317          0.396          0.340           0.409          0.505          0.604       0.514          0.454        0.505           0.476

Non-CIS              0.077          0.112          0.117           0.140          0.112          0.285       0.283          0.271        0.297           0.308

Tajikistan            0.193          0.350          0.492           0.749          0.770          0.746       0.597          0.689        0.784           0.652

Non-CIS              0.109          0.227          0.399           0.497          0.439          0.473       0.394          0.374        0.411           0.440

Turkmenistan             ..                 ..          2.145           1.881          1.682          0.751       0.594          1.190        2.500           2.700

Non-CIS              0.908          1.049          0.494           0.951          0.610          0.300       0.442          0.700        1.200           1.300

Uzbekistan                 ..                 ..          2.549           2.821          4.211          4.026       3.218          3.200        3.230           3.110

Non-CIS              0.869          0.721          0.966           1.712          3.321          2.689       2.425          2.250        2.090           2.050

Source: UNECE.

Table 4

Table 5.1

Table 5.2