Reprinted with permission from Nezavisimaya Gazeta, March 3, 2000.
Reprinted with permission from Nezavisimaya Gazeta, March 3, 2000.
Throughout the former Soviet Union, people are dissatisfied with the standard of living and corruption. This is not surprising. Why did the communists nationalize everything? Because they did not what capitalism to come back. Why did they concentrate all power in the hands of the Nomenklatura? Because they did not want democracy to rise. The communists placed as many poison pills as they just could to sabotage any future development of a normal society. Therefore, the transition is pretty difficult all over the former Soviet Union, and the relevant questions are if a country has turned around and how it is doing in comparison with other post-Soviet countries.
Contrary to what people in Kyrgyzstan tend to think, Kyrgyzstan comes out pretty well on most accounts. First, on average, official gross domestic product has fallen by 53 percent in the Commonwealth of Independent States (CIS) from 1989 to the nadir. The decline in Kyrgyzstan, however, was comparatively moderate with 47 percent, although Kyrgyzstan lost particularly large central budget subsidies from Moscow and had few exports previously. This number is of course a gross exaggeration, as much economic activity goes unmeasured now, while communism exaggerated production and produced many useless goods. Second, Kyrgyzstan was among the countries to return to growth relatively early in 1996. Third, since 1996 Kyrgyzstan has maintained a strong growth of an average of almost 6 percent a year. The right sectors have developed. The service sector was always neglected and has now taken form. Clearly, Kyrgyzstan has comparative advantages in agriculture, which is the engine of the new growth.
This growth performance places Kyrgyzstan among the top performers in the CIS. A natural comparison is the wealthier Kazakhstan which has barely had any growth these years. Russia has had some decline these years. The problem of poverty was inherited from communism, and the change is that it is not openly discussed. The alleged decline in the standard of living does not seem very credible, considering that infant mortality has fallen significantly and higher education has expanded greatly. While the Kyrgyz are right in not being satisfied, nobody else in the region is actually doing better.
The reason for these positive economic developments are that Kyrgyzstan has undertaken the most far-reaching economic reforms in Central Asia. Several features stand out. First, Kyrgyzstan has the most liberal foreign trade and has managed to join the WTO. This means that the Kyrgyz can buy cheap products from all over the world, in spite of being a land-locked country. A large number of people can live from engaging in foreign trade. Second, prices in Kyrgyzstan are really free. Excellent competition has developed. As a result, cheap products of all kinds can be found. A well-functioning market also means that producers are encouraged, because they see that they can sell and what the market demands, while poor producers fail to sell their substandard produce. Third, Kyrgyzstan has a very large number of small entrepreneurs, official or in the underground. In fact, about half the GDP is coming from small enterprises. This is an extraordinary achievement. In Russia, the number used is about 20 percent of GDP. Entrepreneurship and innovation in the modern world come essentially from small enterprises, and it is a sign of health that they exist. It is often complained that two thirds of these enterprises "only" trade and that they are subsistence activities. However, trade should develop first. Similar complaints were expressed in Poland in 1992, when the economy was really taking off. Only when the market has started functioning reasonably, as it now has in Kyrgyzstan, can you expect entrepreneurs to know what new production to initiate.
It is true that enterprises in Kyrgyzstan suffer from a great deal of corruption and arbitrary interventions by state officials, but that is a historical and systemic inheritance. Moreover, liberalization tends to lead to some initial increase in corruption, as more officials dare to demand more bribes. However, the government in Kyrgyzstan has undertaken repeated sharp cuts in government staff and undertaken a far-reaching reorganization of the state. Ukraine and Russia have three times as many tax inspectors per capita as Kyrgyzstan. Therefore, growth is strong in Kyrgyzstan, while it is still absent in Ukraine and Moldova, with much larger bureaucracies. If society remains open, however, the very competition and openness drive down bribes. We already see that more an more enterprises emerge. The all-dominant complaint of Kyrgyz businessmen is taxation and that is how it should be in a market economy. Other forms of state intervention come far down.
Kyrgyzstan's state structures require further reforms, and these are being undertaken one after the other. This year, Kyrgyzstan is getting a parliament based on a party structure. That is a good means to render the parliament more structured, disciplined and professional. Kyrgyzstan has a buoyant free press that rightly criticizes all kinds of government abuses. That is what the press should do, and its criticism has positive effects. While there are justified complaints about infringements in the election process, Kyrgyzstan is without doubt the most free, open and democratic country in Central Asia, and this freedom is an important check on those part of the elite that indulge in corruption.
Because of its openness and its successful economic reforms, Kyrgyzstan has attracted substantial support from abroad, especially from the international financial institutions. You can say that the problem is that they love Kyrgyzstan too much. Too large amounts of money have been granted, and even if almost all the financing is highly concessional with interest rates of about 1 percent a year, the external debt is piling up. This is the biggest immediate economic problem the government is facing. Fortunately, most of the problem can be solved rather easily, by reducing the excessive public investment program, which is financed with loans from the World Bank and the Asian Development Bank. While it is good to undertake public investment, you must not do more than you can afford. With a sharp cut in the not most important public investments, most of the problem with the budget deficit and the external debt can be sorted out. A reduction in the budget deficit will also improve the trade balance.
Obviously, most of the Kyrgyz population is poor, but Kyrgyzstan is maintaining compulsory schooling and a pension system for all, which is rare for countries at this level of economic development. Kyrgyzstan is the country in the CIS that has undertaken far-reaching health care reforms, which have adjusted the health care system to the needs of the population. The share of GDP devoted to health care and education has not been allowed to slip but has even been increased, which most neighboring countries have experienced a real collapse. The social means are limited, but the Kyrgyzstan government has managed to maintain them reasonably large, while cutting on enterprise subsidies and bureaucracy, and it has improved their social efficiency, as evident from improving health indicators.