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The unfinished reforms in theThe unfinished reforms in the Caucasus and Central Asia: What
Next?
Gerard Roland
UC Berkeley
Introduction
• Not easy to speak about CCA region as a whole Different conditions history culturewhole. Different conditions, history, culture, size, endowments, geopolitical conditions…
• Commonalities: landlocked , ethnically fractionalized, Soviet legacy, autocratic past, history of external and/or internal conflict, dangers of spillovers from instability in otherdangers of spillovers from instability in other countries, danger of resource curse in resource-rich countries.
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Introduction
• CCA might seem to cumulate many disadvantages…disadvantages…
• … but extremely high upside potential.• Many very positive changes have been taking
place already, and this needs to be better know to the outside world.
• Wealth of natural resources is enormous t it if h dl d llopportunity if handled well.
• CCA is on the verge of becoming a thriving economic powerhouse, overcoming all the disadvantages inherited from geography and history.
Some general lessons from transition.
1. The transition is not just about eliminating central planning and free market forces it iscentral planning and free market forces, it is about creating institutions to support development of the market economy, not only the rule of law and protection of property rights but also effective government, low corruption and high stategovernment, low corruption and high state capacity. Early transition failures and the prolonged slump of the nineties were very much related to institutional weaknesses.
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Some general lessons from transition.
2. There is not one set of institutions or only one path of transition There is a big differencepath of transition. There is a big difference between the economic success of China and Poland, and success in one country cannot necessarily be replicated in other countries.
3. What appears as unfinished reforms are often divergent institutional paths What is at stake isdivergent institutional paths. What is at stake is not whether or not to finish reforms but what institutional model is to be chosen.
Some general lessons from transition.
4. There is a strong advantage for countries in transition to have a “role model” to aspire to transition to have a role model to aspire tobecause it gives a) good sense of direction, b) strong benchmarking, c) can improve accountability. Countries in Central Europe had the EU institutions as model and as condition of accession; China had Taiwan, Singapore and Hong Kong, and other East Asian countries. Russia has not had such a role model. CCA countries have choices of possible “role models”: Turkey, Kazakhstan, Abu Dhabi, EU,…
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5. Misguided emphasis on privatization of large SOEs relative to entry of competitive SMEs;relative to entry of competitive SMEs;
6.Political support for reforms is needed within the population but also within the government administration. Experience of China versus Russia.
7. Economic openness is fundamental. Participation and competition in world markets is key, but also openness to FDI and technical expertise in all sectors (not just naturalFDI and technical expertise in all sectors (not just natural resources), without “selling out” natural resource endowment. Openness in education also fundamental for optimal human capital investment.
Reforms and institutional change in the CCA region
• Reform surge in early nineties but never quite completed Lower reform effort in Turkmenistancompleted. Lower reform effort in Turkmenistan and Uzbekistan.
• No convergence in political institutions. Only Georgia, Armenia and Kyrgyz Republic are recognized as democracies.
• Big variation in political stability, but stability inBig variation in political stability, but stability in non democracies often more fragile than it seems.
• Large variation in quality of government.
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3
3.5
4
EBRD Average Scores
1
1.5
2
2.5
0
0.5
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Kazakhstan Uzbekistan Turkmenistan Azerbaijan
Tajikistan Kyrgyz Republic Armenia Georgia
4
6
8
POLITY Score
-6
-4
-2
0
2
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-10
-8
Kazakhstan Uzbekistan Turkmenistan Azerbaijan
Tajikistan Kyrgyz Republic Armenia Georgia
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0 40
-0.20
0.00 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
World Bank Worldwide Governance Indicators: Rule of Law
-1.40
-1.20
-1.00
-0.80
-0.60
-0.40
-1.80
-1.60
Kazakhstan Uzbekistan Turkmenistan Azerbaijan
Tajikistan Kyrgyz Republic Armenia Georgia
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2011 2012
Singapore (1)Hong Kong (2)
Singapore (1)Hong Kong (2)Hong Kong (2)
Georgia (12)Armenia (50)
Kazakhstan (56)Azerbaijan (66)
Turkey (68)Kyrgyz Republic (69)
China (91)Russia (118)
Hong Kong (2)Georgia (9)
Armenia (32)Kazakhstan (49)Azerbaijan (67)
Kyrgyz Republic (70)Turkey (71)China (91)
Russia (112)Tajikistan (147)
Uzbekistan (168)Tajikistan (141)
Uzbekistan (154)
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Turkey
Uzbekistan
ethnic homogeneity
Azerbaijan
Georgia
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Turkey
ethnic homogeneity
0 0.2 0.4 0.6 0.8 1
Armenia
j
Uzbekistan
state weakness (Brookings)
Azerbaijan
Georgia
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Turkey
0 1 2 3 4 5 6 7 8
Armenia
j
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14000
16000
GDP per capita in 2012 ($)
0 2000 4000 6000 8000
10000 12000 14000
nia jan gia
ta
n ta
n ta
n ta
n ke
y ta
n
Armeni
Azerb
aija
Georgi
Kazakh
sta
Kyrgy
zsta
Tajikist
a
Turkm
enista
Turkey
Uzbekis
ta
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16
18
20
% of Popula on Living Below $2/day
0
2
4
6
8
10
12
14
16
0
Kazak
hstan
Uzbekis
tan
Turkm
enistan
Azerb
aija
n
Tajiki
stan
Kyrgy
z Republic
Armenia
Georgia
What next?
• CCA shows diverse picture of institutional and i f C t i leconomic performance. Countries can learn
from each other, on their own initiative.
• What main lessons and recommendations for the future?
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1. State capacity.
• No successful market economy can emerge without a minimum state capacity and effective governance. There is, however, not necessarily only one way to get there.
• Georgia versus Kazakhstan. • Georgia was thoroughly corrupt with low state
capacity, and implemented impressive anti-corruption campaign. K kh k d b ildi ffi i• Kazakhstan worked at building an efficient government apparatus, productively using oil revenue to diversify, modernize and enhance public good provision. Relative internal peace despite high ethnic fractionalization and openness towards foreign experience and global institutional standard.
Using the resource rent productively.
• The resource curse is not a fatality. There are iti i N Q t Abpositive experiences: Norway, Qatar, Abu
Dhabi, Kazakhstan in the region.
• Resource rent can and should be used to diversify and modernize, build infrastructure, education and encourage thriving private g g psector. Diversification programs are key to economic development.
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Using the resource rent productively.
• Several conditions needed: Internal and external peace– Internal and external peace
– Openness to trade, foreign capital, foreign labor (skilled and unskilled), tolerance and respect.
– Collaboration across the region. Stable and low customs costs, sharing of infrastructure projects (rail, roads, pipelines), learn from each other.
• This might seem naïve but European countries managed to overcome historical enmities to create economic and monetary Union in atmosphere of peace, openness and mobility.
Conclusion.
• CCA region, despite variable performances, is doing better than the outside world knowsdoing better than the outside world knows.
• Many positive experiences despite the disadvantages of geography and history.
• Resource wealth is not fatality but opportunity.
• Leadership is a key factor. Leaders will either be p ypraised in history for bringing their country to the 21st century or blamed for failing to seize the opportunities.
