Domestic policies and institutional reforms are key to sustained recovery in the Eurasia Region
Johannes F. Linn, Vice President, The World Bank
The countries of Central Asia and the Caucasus («Eurasia Region») are characterized by great variety of economic, social and political conditions. Hence generalization is difficult. Some cross-cutting observations are nonetheless useful.
Four factors determine future economic outlook in the region: (1) external economic conditions (e.g., Russia, oil prices, etc.); (2) domestic political and security situation; (3) domestic economic policies and institutional reforms; and (4) regional cooperation in trade and investment. Here the focus is mostly on (3) with also some brief comments also on (4).
Domestic policies and institutional reforms are key to sustained recovery in the Region, and they are under the control of governments. Much progress has been made in many countries in the region since independence. But the unfinished agenda is still large in all countries. In the end, only actions count, words are not enough.
There are five key areas for action:
Unleash the forces of domestic entrepreneurship and foreign investment:
• In Central Europe, growth of new firms, esp. small and medium enterprises (SMEs), has been key to rapid economic growth. This requires freedom to enter, exit and function without undue government interference.
• In Eurasia, there are too many obstacles to private entrepreneurship, esp. SMEs: excessive regulations, inspections, licensing requirements. Survey reports show that 40% of firms are frequently asked to pay bribes (amounting on average to 5% of sales). Competition is limited through «state capture» - as 1/4 of firms report they’re paying bribes in public procurement, and 10% of firms report paying for changes in rules, laws and regulations. Non-transparent privatization discourages foreign direct investment.
Reform the Public Sector:
• Government structures are too complex and too large. They need to be simplified and cut back.
• Government employment is excessive, with poor pay, lack of accountability, poor skills and training. Civil service reform is needed.
• Judicial and legal reform is needed, with better courts and enforcement.
• Effective regulation and privatization of natural monopolies is required.
• Proper budgeting, accounting, auditing is needed.
Reform the Energy Sector: Focus is here on domestic energy sector (power, gas district heating), not on oil/gas extraction and transport.
• Non-transparency of these sectors and their finances is major source of economic distortions and dislocations.
• Non-payment for services and bribes for access and for underpayment are wide-spread.
• Energy enterprises are therefore financially unviable and increasingly undercapitalized.
• There is no separation of regulatory and operating authority and hence conflict of interest in service delivery.
• Waste, poor service and increasingly lack of access by the poor are prevalent (e.g., Azerbaijan power shortage and blackouts).
• The energy sectors is at the heart of a lack of payments discipline country-wide.
Reform of the Agriculture Sector: Agriculture is very important in Eurasia as it employs 50% of the labor force.
• Comprehensive land reform is far advanced and quite successful in some of the countries of Eurasia.
• But land rights and registration are still weak
• Input and output markets are not yet liberalized, competitive and undistorted (including rural credit and water).
• The is a need for improved rural infrastructure.
Strengthen Human Capital: Eurasia, like other CIS countries, have had a good base to start with in health and education indicators, but they seriously at risk and protecting them is a major challenge and necessary of long-term growth and poverty reduction.
• Declines in education enrollment are widespread (esp. in rural areas). Kindergarten enrollment is also way down, limiting early childhood development and creating difficulties for women in the labor force.
• Steep bribes are frequently exacted from patients in the health sector, combined with under-utilization, over-capacity and overstaffing.
• Education and health sectors need to be reformed, including proper efficiency, targeting and financing measures.
Regional cooperation is necessary for long-term economic benefits:
• trade and transport
• oil and gas pipelines
Progress with regional cooperation needs strategic commitment from the political leadership in the Region.
Conclusion: This is not an easy agenda. But with proper domestic policies and regional cooperation (and with reasonable external economic conditions, political stability and security), the Region can grow at 5-10% per year. Without such policies, it will stagnate or decline and become mired in poverty and debt. The choice is stark and clear.
Table of contents
The place and role of Eurasia in the Third Millennium Nursultan A. Nazarbayev
The attraction of investment into the country is a well thought-through choice of economic development of Kazakhstan Kasymzhomart Tokaev
Chairman of the Agency of the Republic of Kazakhstan on Investment, answers questions of our magazine Dulat Kuanyshev
Domestic policies and institutional reforms are key to sustained recovery in the Eurasia Region Johannes F. Linn
Economic Outlook for the Central Asian and Caucasus Region John Odliing-Smee
Preventing and rooting out corruption: factor determining a proper framework of private sector development Johannes F. Linn
Reforms and developments in Kazakhstan’s power sector Oraz Jandosov
NOVA ZINC DRIVES TO SUCCESS Mukhit Zhanasov
Kazakhstan’s Securities Market in 2000: Opportunities and Expectations Aidan Karibzhanov
It is necessary to study potential investment markets and make practical steps toward investors Banu Babaeva
New Labour Law Abylkhair Nakipov, Akhmetzhan Abdullayev