Challenges for Economic Development of the Kyrgyz Republic and Central Asia

Dr.Otorbaev began his presentation by stressing that the future success of the Kyrgyz state depends on maximizing the human potential. Given Kyrgyzstan’s lack of natural resources and other goods, the creative energy of its people is the most valuable commodity for the global community.

Before the collapse of the Soviet Union, the lack of a large internal market and natural resources have caused a major economic dependence of the Kyrgyz state on the economy of the USSR. In the post-Soviet world, an economic transition via shock therapy was a positive step for Kyrgyzstan. These reforms have saved the Kyrgyz Republic from major social disturbances.

In the past few years, the Kyrgyz Republic has been actively involved in various international programs, including the IMF’s Poverty Reduction and Growth Facility (PRGF) program, which Kyrgyzstan has just completed. The international borrowing will be reduced to 3% of the GDP, and mainly invested in infrastructure. The country is experiencing sustained growth of GDP, on overage of 5-6% per year. Foreign direct investment has increased by 50%. For the first time since the collapse of the USSR, the Kyrgyz Republic is experiencing a construction boom. Real estate is rising by three-four times in major cities. School graduates are also becoming more involved in business, and a new generation with a new mentality and new ideas is taking over.

The concept to understanding post-Soviet political and economic proceedings rests in viewing them as a struggle between the old boys’ club (i.e. the oligarchs) and the young generation of entrepreneurs (i.e. small business owners and members of a growing middle class). The same type of struggle is found in the Kyrgyz Republic where the success of the small businesses will determine the ability of entrepreneurs to acquire capital and advance progress. Even if it may seem as a one-step-forward-two-step-back progress at times, it should be seen as isolated cases of local tensions between the forces of the oligarchs and small businesses.

During the years of independence, there has been a dramatic development of the most competitive service sector class among all of the former Soviet republics. Today, the Kyrgyz Republic is the largest service provider of the Central Asian region. This development indicates that there are positive economic developments, and they are creating hope for a financially stable future.

In reference to trade developments in the Kyrgyz Republic, the neighboring countries, unfortunately, have never tried to create an atmosphere that was conducive to trade. With the complete closing of Uzbekistan’s borders, there has been a dramatic increase of unofficial trade, which continues to hurt the economies of the surrounding countries. More importantly, however, it continues to severely affect the economy of Uzbekistan itself, since no taxes are collected off the revenue of this trade. There has also been a rise in de facto trade with China in commodities such as metals.

This unofficial trade continues to block accurate accounts of the Kyrgyz Republic’s economic state, indicating that if all trade was to be recorded accurately, the actual GDP of the country could increase by three hundred percent. There is also a difficulty to collect taxes off legitimate businesses since corruption of state tax inspectors is widespread. Kyrgyzstan lacks a creative tax system that would be successful in demonstrating the transparency and benefits returning to society. Today, even vital social institutions such as healthcare and education are facing financial difficulties due to the lack of tax reserves in the Kyrgyz state.

The Kyrgyz social lattice lacks a culture of sharing, which is necessary to make a tax program successful and effective. The economic constrains that are imposed by the international institutions often limit the amount of actions that the Kyrgyz government can take to combat shortcomings of the current system, which are perpetuated by the corruption chain and tax inspectors who maintain such an environment. A gradual introduction of a ‘culture of sharing’ is a vital part of developing stable economic policies.

The Kyrgyz government has already been successful at introducing a lump sum tax to businesses whose assets and revenues are hard to control, such as casinos, car parking, restaurants, saunas and billiard parlors. After this tax was introduced, the tax revenue increased five times. International organizations, particularly the IMF, however, have resisted the introduction of this tax in other sectors of the economy.

This year, the Kyrgyz government is introducing a presumptive tax. The structure of this tax follows a similar logic as the lump sum tax, in which the tax is independent of the revenue of the business, but there are slight differences in rhetoric and some details. This tax would be introduced in the shops, hotels, and pharmacies, and would be treated in terms of zoning guidelines under which there would also be a coefficient corresponding to a particular type of business, such as number of tables at a restaurant, location, or square footage. This is the first step in introducing the ‘culture of sharing’ into the formal business sector. This will be a gradual process, which will later evolve into a transition to normal tax collection procedures. It must be remembered that the service sector constitutes almost 80 % of the GDP of the Kyrgyz Republic. In order for the government to be efficient at providing social services to its people, the tax collection must be improved dramatically and posses the capability to collect revenue from such a dominant economic sector. It is hopeful that the success of this program will allow the Kyrgyz Republic to become a model for economies of comparable size and similar problems.

Dr. Otorbaev also addressed the importance of the political environment of the upcoming two years in which both the parliamentary and presidential elections will take place. He acknowledged that a stable economic state is a better environment for political transitions, but warned against political instability in the wake of such important economic developments.

During the question and answer session, Dr. Otorbaev was asked about the public’s perception of the need of introducing ‘the culture of sharing’. He replied by stating that there is a clear fear of corruption and that the population understands that strong measures are needed. The gradual nature of the process should make it a safe transition, which would be reinforced by ongoing communication between government officials and the public.

Dr. Otorbaev was also asked about Kyrgyz relations with the neighboring countries, such as China, Russia, Iran and Afghanistan. He identified Russia, Kazakhstan, and China as the strongest trade partners and the main players in Kyrgyz internal market. He also identified six regions that have foreign direct investment in Kyrgyz Republic as North America, Europe, Turkey, Iran, China, and Russia. Dr. Otorbaev noted that the current trade relations with Russia and Kazakhstan are blossoming, while the relations with China require further development of basic infrastructures, such as roads. This development has already taken off in Kyrgyzstan with the Asian Bank of Development’s construction of a highway from Kyrgyzstan to China, which would allow a traveler to reach either destination in only five hours.

Nevertheless, to sell Kyrgyz goods to China remains a difficult task since China’s goods are extremely competitive. Trade relations with Russia, however, are extremely favorable. Kyrgyz merchants go to Siberia and sell agricultural as well as processed goods such as textiles. Russian enterprises remain a viable investment and are expanding their presence in the Kyrgyz market with high quality goods. Trade relations with Afghanistan are not as positive due to impeding logistics, although the Afghanis have been buying lots of Kyrgyz construction materials recently. Trade relations with Iran are hindered by the distance that separates the two countries, and the various tariffs that are imposed at border crossings. Thus, no official bilateral trade is going on between Iran and Kyrgyzstan.

Dr. Otrorbaev was also questioned regarding the increased investment of Kazakhs in the Kyrgyz economy. He replied by stating that although Kazakh nationals constitute one of the largest investor groups in the Kyrgyz Republic, there is no one major investor but lots of diversification is present. Dr Otorbaev also stated that the presence of Kazakh investment is advantageous for the Kyrgyz Republic since it establishes a Kyrgyz lobby in Kazakhstan, and that trade relations between the two countries have improved significantly. Dr. Otorbaev made a reference to the Swiss’ economic approach of an open door policy as the key to their economic success, stating that same strategy should work for the Kyrgyz Republic as well.

Summary prepared by Alina Tourkova, Junior Fellow with the Russian and Eurasian Program at the Carnegie Endowment for International Peace.