The FINANCIAL - Stronger Economic Integration Needed to Boost Growth in the Caucasus and Central Asia

Stronger Economic Integration Needed to Boost Growth in the Caucasus and Central Asia

For the first decade of the 21st century, the economic story of the Caucasus and Central Asia (CCA) region was, for the most part, a successful one. Growth was strong, inflation was down, and meaningful progress was being made toward reducing poverty.

But since 2014, that story has changed as the region’s economic model—which has traditionally been based on oil and gas production, remittances, mining, and public spending—proved unable to assure long-term prosperity in the face of lower commodity prices, weaker remittances, and a slowdown in trading partners’ growth. The result has been lower growth, rising financial sector vulnerabilities, and higher public debt.

The CCA region received some welcome news in 2017, with its 4.1 percent growth rate exceeding expectations, according to the IMF’s newly released Regional Economic Outlook.
However, as the outlook makes clear, this momentum will not be sustained for long, which is why the region must focus its attention on developing a dynamic private sector and diversifying its economy. If well managed, opportunities for greater economic integration—such as those presented by the Belt-and-Road Initiative which aims to connect China to Europe through Central Asia, and Uzbekistan’s opening up—would help kick-start that economic transformation.

Along with its economic outlook for the region, the IMF this month published a paper examining the importance of openness and trade—and what steps countries in the CCA region should take to transform their economies.

Some are making progress, but the overall trajectory is not encouraging. Since 2008, trade openness has gone down, and the region’s integration with the rest of the world remains far too low. Consider this: non-oil exports by countries in the region amount to around $500 on a per capita basis, roughly half the average of that in emerging markets, a clear indication that vast trade opportunities remain untapped.

Countries are also not pursing trade opportunities within the region nearly as much as they should. In recent decades, intra-regional trade has dipped significantly as a result of regional tensions and the global financial crisis. Currently, only five percent of trade for oil exporters and 15 percent for importers is conducted within the region—low figures by international standards.

So how can CCA countries forge a new future where robust private sectors are the engines of integrated economies?
For starters, countries must strengthen their macroeconomic frameworks.

Reducing public debt and rebuilding rainy day funds in growth-friendly ways will position CCA countries to withstand future adverse conditions that are sure to come and send positive signals to foreign investors. A close eye will also need to be kept on public debt, ensuring that it remains sustainable as more public investments begin and countries open their markets. This will require careful planning and oversight over public investment projects and broader budget policies.

Also important are policies that keep inflation low and stable, an effort that will require strong political commitment, institutional capacity, and efforts to strengthen financial stability and intermediation. That means improving the health of bank balance sheets that remain beset by high levels of non-performing loans, winding down the use of dollars in the domestic banking system, and modernizing capital markets.

Countries should also look for opportunities to improve the basic structures of their economies in ways that will boost productivity and facilitate economic integration. This should include reforms that improve infrastructure, enhance business environments, boost governance, and develop skills of workers that are in demand in the global labor market, such as information technology and critical thinking.

All of this should be done while working to open the region’s economies to trade, which would provide countless benefits to both oil-exporting and importing countries—from more choices at lower prices for consumers and businesses to increased productivity.

Boosting the region’s trade potential will require a range of policy actions. Greater participation in the World Trade Organization, which provides mechanisms to defend the interests of members when improper trade practices are waged as well as technical assistance in trade-related matters, could prove critical. Some countries have long been members in the WTO, but others have not yet joined.

Besides seeking to lower tariffs, countries should also look for opportunities to take part in regional initiatives that eliminate non-tariff barriers and exemptions and improve customs administration. The Eurasian Economic Union provides examples of the benefits that come with such efforts, offering members a new customs code and a common labor market.

These reforms will not happen overnight, and some will not be easy. But with a shared commitment to greater integration and openness, there is no doubt that the next chapter in the story of the CCA region can be one of greater growth and economic prosperity for all.



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