Central Asia's Economy: Mapping Future Prospects To 2015

ERD Working Paper No.
80
MAPPING
CENTRAL ASIA: FUTURE PROSPECTS
TO
2015
MALCOLM DOWLING
AND
GANESHAN WIGNARAJA
April 2006
Malcolm Dowling is Visiting Professor at the Singapore Management University; Ganeshan Wignaraja is Senior Trade Economist in the Office of Regional Economic Integration, Asian Development Bank. The authors thank Carmela Espina, Bernadette Agustin, and Mary Jane David for efficient research assistance; Christina delos Santos and Emmalou Guillarte for secretarial help; and Yolanda Fernandez for preparing the Mongolia appendix. The study benefited from suggestions from many individuals within and outside ADB as well as from seminar participants at ADB and the first CAREC Regional Business Roundtable in Bishkek. The views expressed in this paper reflect those of the authors and not of their affiliated institutions.
CENTRAL ASIA: MAPPING FUTURE PROSPECTS TO 2015 MALCOLM DOWLING AND GANESHAN WIGNARAJA
Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics 2006 by Asian Development Bank April 2006 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank.
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FOREWORD
The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books.
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CONTENTS
List of Abbreviations Abstract OVERVIEW Recent Economic Revival Short-term Prospects (20052007) Prospects to 2015 Approach to Scenario Planning for the CARs I. II. INTRODUCTION CURRENT STATUS OF ECONOMIC DEVELOPMENTS IN THE CARs A. B. C. D. E. F. G. III. Introduction Economic Growth Structural Change and Reforms Inflation External Sector Developments Poverty Short-term Prospects (20052007) vii ix 1 1 2 2 4 5 7 7 7 9 11 11 13 15 15 15 17 25 27 28 28 28 28 30
MAPPING THE FUTURE: 2015 A. B. C. D. E. F. Introduction Scenario 1: Business as Usual Scenario 2: Closing the Gap Scenario 3: Falling Behind Risks Summary
IV.
BENCHMARKING INDUSTRIAL COMPETITIVENESS A. B. Introduction Recent Industrial Performance
C. D. V.
Comparisons with Transition Economies Explaining Industrial Competitiveness
32 34 37 40 45 49 57 59 63 66 67
CONCLUSIONS Appendix 1: Appendix 2: Appendix 3: Appendix 4: Appendix 5: Appendix 6: A Snapshot of the Region Macroeconomic Policies and Trends Forecasting Method and World Outlook Country and Regional Rankings, TEMECI 2003 Mongolia: Economic Assessment Xinjiang Uygur Autonomous Region of the Peoples Republic of China: Economic Assessment Appendix 7: Transition Indicatotors, 2005 References
LIST OF ABBREVIATIONS
ADB ATC CAREC CARs CSB EBRD EIU FDI GDP ICT IMF MDGs MFA MVA OEF OPEC PRC SEATCs TEMECI UNCTAD UNDP WTO XUAR Asian Development Bank Agreement on Textiles and Clothing Central Asia Regional Economic Cooperation Central Asian Republics Central and Southeastern Europe Baltics European Bank for Reconstruction and Development Economic Intelligence Unit foreign direct investment gross domestic product information and communication technology International Monetary Fund Millennium Development Goals Multi-Fibre Agreement manufacturing value added Oxford Economic Forecasting Organization of Petroleum Exporting Countries Peoples Republic of China Southeast Asian Transition Countries Transition Economies Manufacturing Export Competitiveness Index United Nations Conference on Trade and Development United Nations Development Programme World Trade Organization Xinjiang Uygur Autonomous Region
ABSTRACT
The growth performance of small, land-locked Central Asian economies has been among the worlds fastest since the 1990s due to high-priced commodities (including oil and natural gas), strategic location, reasonable infrastructure, and human capital. The short-term economic prospects of Central Asian economies appear bright but long-term prospects may be less certain with a growing divergence between oil exporters (Azerbaijan, Kazakhstan, and Turkmenistan) and non-oil exporters (Kyrgyz Republic, Tajikistan, and Uzbekistan). This paper reviews their recent economic performance, projects key economic variables to 2015 against a constant global background, and discusses policy implications. Exploring various scenarios (business as usual, closing the gap and falling behind), the paper highlights the importance of policies in determining the future development path of the Central Asian economies. The findings show that if these economies embrace policy reform, regional cooperation, and industrial competitiveness, then economic prosperity will continue to be enhanced.
OVERVIEW
Central Asia has emerged as one of the worlds fastest growing regions since the late 1990s and has shown notable development potential. This is significant for a region comprising largely small, landlocked economies with no access to the sea for trade. Among the advantages of the region are its high-priced commodities (oil, gas, cotton, and gold); reasonable infrastructure and human capital as legacies of Soviet rule; and a strategic location between Asia and Europe. Furthermore, many Central Asian Republics (CARs) have embarked on market-oriented economic reforms to boost economic performance and private sector competitiveness. This paper considers the regions economic prospects to 2015. It charts recent economic performance, highlighting economic revival. It also synthesizes recent forecasts and constructs scenarios for future economic variables against a constant global background. Projections include, among others, gross domestic product (GDP), manufactured exports per head, GDP per capita, and poverty. A special theme chapter develops a manufacturing competitiveness index to compare the CARs with other transition economies, and explores the impact of economic reform and supply-side factors (e.g., foreign investment and human capital) on industrial performance.
Recent Economic Revival

Following a prolonged period of slow and negative growth, the region (Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan) seems to have turned the corner during the last few years and an economic recovery seems under way. Some features include: (i) (ii) Economic growth (9.9% per year in 20022004) has accelerated to historically unprecedented levels. Growth has been driven by high commodity pricesparticularly oil and natural gas and buyout demand, increasing inward investment and improving macroeconomic management and infrastructure development. There are signs that oil sector-led and gas sector-led growth has stimulated the development of the services sector (construction and banking) as well as some manufacturing activities. The industrial recovery is linked to the performance of manufactured exports, which have grown at about 10% per year. Manufactured exports per head in the CARs as a whole rose to $57.1 per head in 2003. An upturn in agriculture was visible in non-oil CARs due to high prices for cotton and wheat, good weather, and some agricultural reforms. There are indications that economic prosperity has been accompanied by job creation and some reduction in poverty to around 41% of the total population in the CARs. The regions GDP per head rose to $889 in 2004, placing it within the category of the worlds low-income economies.
(iii)
(iv)
(v) (vi) (vii)
(viii)
There are signs of a divergence in living standards between oil exporters and nonoil exporters.
Short-term Prospects (20052007)

For 20052007, economic growth in the CARs will be in the range of 9% per year. Although inflation will rise somewhat, growth in oil exports will continue to be propelled by a combination of high oil and gas prices, buoyant international energy demand, inflow of foreign direct investment (FDI), and investments in modern infrastructure. In the non-oil exporters, growth will be somewhat slower. Favorable prices for non-oil export commodities (e.g. cotton, gold, aluminum, and other metals); expansion in the services sector; continued agricultural performance; and economic reforms underlie growth in the non-oil exporters. A mild recovery is expected in Kyrgyz Republic fostered by higher gold prices, continuation of a pro-growth economic reform program, and higher foreign aid. Increased foreign investment in the natural gas sector in Uzbekistan as well as implementation of measures for private sector development (e.g., stronger legal protection for enterprises and banking sector liberalization) is expected to contribute to growth.
Prospects to 2015
The pressing question facing the CARs is whether the boom that started in the late 1990s will continue until 2015. While this is impossible to predict with certainty, we offer three possible scenarios for the CARs against a constant global background (see Box 1 for details of scenario planning approach used here). The scenarios are distinguished by the extent of action on the domestic policy front in regard to economic policy reform, competitiveness strategy for the industrial sector, and regional cooperation. Scenario 1: Business as Asual. This assumes a moderate policy reform agenda, relative lack of any industrial competitiveness strategy, and intermittent implementation of regional cooperation initiatives. The main results under Scenario 1 are: (i) (ii) Real GDP growth will be at least 5% in all the CARs during 20052015. Oil and gas will be the mainstay of future economic development but economic diversification will continue and the manufacturing sector will expand. Manufactured exports per head for the CARs as a group will increase to $126.0 in 2015. Poverty will decline to 25.1% of total population in the CARs. GDP per capita will rise to $1,871 placing the region on the threshold of todays middleincome countries. The divergence in living standards between oil and non-oil exporters will grow.
(iii) (iv) (v)
Scenario 2: Closing the Gap. In this scenario, there is strong commitment to implement further policy reforms, develop a market-friendly competitiveness strategy, and pursue aggressive implementation of regional cooperation initiatives. Scenario 2 suggests the following: (i) (ii) 2 Real GDP growth in all the CARs will be between 12% higher than Scenario 1. The pace of economic diversification and manufactured export expansion will be higher than in Scenario 1. The value of manufactured exports per head in Scenario 2 will be
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OVERVIEW
about $165.6 compared with $126.2 in Scenario 1. Exports of labor-intensive goods and processed food will expand in non-oil CARs. (iii) (iv) (v) Poverty (20.9% of total population in the CARs) will decline more than in Scenario 1 (25.1%). GDP per capita will rise further to just under $2,000, placing the region within the ranks of todays middle-income countries. The disparities in living standards between oil and non-oil exporters will narrow.
Scenario 3: Falling Behind. This assumes a moderate level of internal political instability, some backsliding of the policy reform agenda, a more inward-orientation of policies towards industry, and limited regional cooperation. (i) (ii) GDP growth in all the CARs will be 1-2% less than Scenario 1 and much less than Scenario 2. The dependence on the oil and gas sector will grow with little sign of economic diversification. Manufacturing expansion and exports will be limited. For instance, in Scenario 3, manufactured exports per head will reach $89.5 compared with $126.2 in Scenario 1 and $165.6 in Scenario 2. The extent of reduction in poverty (to 29.9% will be smaller than Scenarios 2 and 3). With a per capita income of about $1,667, the region will be far from the threshold of todays middle-income economies.
(iii) (iv)
The analysis suggests that policies are important in determining the future path of development in the CARs and that policymakers face stark choices. If the region continues on its present path (Scenario 1) there will some gains but divergences between countries will intensify. If the region decides to follow policies that promote national self interest and rent seeking (Scenario 3) then economic prosperity will be adversely affected. If, on the other hand, the region embraces policy reform, regional cooperation and industrial competitiveness (Scenario 2) then economic prosperity in all the CARs will be significantly enhanced. For the oil economies, much will depend on how the oil and gas windfalls are harnessed. All countries in the region will gain if these resources are used for the development of individual countries as well as regional cooperation. For the nonoil exporters, the development of manufacturing competitiveness and regional cooperation are key components of a successful strategy. A cautionary note needs to be added. The projections contained in this study are designed to be only one guide to the direction for economic growth and development in Central Asian economies and of several inputs into the future policy decision framework. There are many internal and external risks that could impact upon the forecasts for the CARs.
Approach to Scenario Planning for the CARs

Forecasting the future of the CARs, particularly a decade ahead, is a daunting task in view of uncertainties in the world economy and the region as well as questions about the reliability of national statistics. Not surprisingly, there have been few previous attempts to do so. Fortunately, future studies and scenario planning is an expanding international field. The worlds leading
multinational corporations and economies undertake such exercises on a regular basis as an input into business planning and long-term policy development. In line with this literature, this paper aims to provide a simple big picture type of overview of the future economic landscape of the CARs as an aid to national policy making. This study examines the economic revival of the CARs since the late 1990s focusing on economic growth performance, structural change, and poverty reduction. It then considers short-term (20052007) economic prospects for the CARs using forecasts made by the Asian Development Bank (ADB) country economists in ADBs annual publication Asian Development Outlook (ADB, various years). Finally, it constructs indicative scenarios of how the region might evolve in the future and projects key economic variables to 2015. The long-term projections for the CARs rely on a combination of econometric modeling, reduced form estimation, and policy analysis. The analysis of future prospects for the CARs was based on certain assumptions about the world economy. The world outlook is constructed with the aid of a world econometric model developed by Oxford Economic Forecasting (OEF). Assumptions regarding the global background are as follows. Growth in the world economy during 20052015 will depend upon a number of interrelated factors including the price of oil and developments in industrial economies. Our baseline predicts that the world economy will grow at an average annual rate of around 3.2% for the next decade. This is closer to the historical rate of growth in the world economy than the rapid rate of growth of 4% achieved in 2004. In the energy market, adjustments in both supply and demand suggest that prices for oil will retreat from 2006 levels to the range of $40$45 per barrel over the next decade. Other commodity prices (gold, cotton, aluminum, natural gas) are also expected to be favorable. The Peoples Republic of China (PRC) and India will increase in strength as regional economic powers. Both economies are projected to continue their robust economic performance, growing at average rates of close to 8% and 7%, respectively, over the next decade. The outlook further assumes that investor confidence will be growing and that FDI flows to developing regions (including the CARs) will increase. This assumption is consistent with a continuation of the agenda of policy reforms that has already begun. Finally, relative political stability will continue in the CARs and throughout the world. These key variables form the global macroeconomic background for our analysis of future prospects of the CARs. The starting point for the long-term projections for the CARs is the 2005 2007 forecasts from ADBs Asian Development Outlook (ADB various years). For 20082015, these forecasts were adjusted based on expectations about the intensity of policy reforms, regional cooperation, and industrial competitiveness strategy. Reduced form estimation was used to derive key variables such as GDP growth, manufactured exports for the CARs per capita, GDP per capita, and poverty. Each of the scenarios reflect different expectations of the intensity of policy reforms, regional cooperation, and competitiveness strategy against the constant global background outlined above. Country-level forecasts by the International Monetary Fund and Economist Intelligence Unit were considered in the process of formulating forecasts in the CARs.
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I. INTRODUCTION
unique blend of economic, political, and geographical features, which influence its economic development experience, has increasingly focused academic and policy interest on Central Asia. Four of these are worth highlighting at the outset. First, the region contains a significant base of the worlds natural resources (including oil, natural gas, gold, and other metals) and hence its economic prospects are closely linked to international commodity prices. Second, it is strategically positioned as a gateway between Europe and Asia and offers extensive potential for trade, investment, and growth. Third, the region spans a vast geographical area, with widely differing natural conditions. Many economies are landlocked and have harsh climates, both of which impose large transaction costs on economic activity (Appendix 1). Fourth, all the economies have had a legacy of socialistoriented economic policies and several have embarked on market-oriented reforms emphasizing macroeconomic stabilization, trade openness, and private sector development. In the aftermath of transition, the Central Asian Republics (CARs) witnessed a period of prolonged slow and negative growth and a rising incidence of poverty.1 Many factors have been put forward to explain the difficult transition experience including disruption in production and marketing relations with the former Soviet Union, collapse of aid from the former Soviet Union, a nascent private sector, lack of capital markets, limited institutions required for a market economy, and gaps in infrastructure. Nevertheless, Central Asia seems to have turned the corner during the last few years. Economic growth, which accelerated to historically unprecedented levels, has been driven by high commodity pricesparticularly oil and natural gasand buyout demand, increasing inward investment, improved macroeconomic management, and development of infrastructure. 2 There are signs that oil and gas sector-led growth has stimulated the development of services sector (construction and banking) as well as some manufacturing activities. There are also indications that economic prosperity has been accompanied by job creation and some reduction in poverty. There is optimism in policy circles in Central Asia, with some even predicting that some of countries of the region will join the ranks of middle-income countries within a decade or so. Against this backdrop, this study reviews recent economic performance of the CARs and analyzes their economic prospects to 2015. It aims to provide a simple big picture type overview of the future economic landscape of the CARs as an aid to policy making. Forecasting the future of the CARs, particularly a decade ahead, is a daunting task in view of uncertainties in the world economy and the region as well as questions about the reliability of national statistics. Not surprisingly perhaps,
1
A plethora of literature exists on the economic record and reform experience of Central Asia during the first decade of transition to a market economy. For a selection see Fischer and Sahay (2000), Trushin and Trushin (2000), Pomfret and Anderson (2001), Campos and Coricelli (2002), Svejnar (2002), World Bank (2002), Zhukov (2002), Linn (2004), Loukoianova and Unigovskaya (2004), and Dowling and Wignaraja (2005). In its first regional economic outlook for the Middle East and Central Asia, the International Monetary Fund (IMF) notes that A favorable external environment combined with generally sound economic policies to produce strong macroeconomic performance for the countries of the Middle East and Central Asia in 2003 and early 2004. Prospects are for continued strong performance through 2005" (IMF 2004b, 2).
there have been few previous attempts to do so.3 Fortunately, future studies and scenario planning is an expanding international field. Hence, there is a growing body of work on mapping the future of other countries and regions, which provides useful technical insights.4 In line with other futures studies, the present study hopes to make a modest contribution to national-level scenario planning exercises in the CARs. In particular, it seeks to guide CARs policymakers by suggesting the direction of future economic performance as well as indicating key policy issues. The review of recent economic performance in the CARs looks at macroeconomic developments (growth in gross domestic product [GDP] and structural change, inflation and external developments) and at poverty. Section IV develops a special theme on industrial performance and competitiveness of the region. Drawing on this analysis, the outlook for the CARs for the next 10 years is projected against a background of global prospects. As long-run forecasts can change in response to external events, the risks to the CARs outlook are also highlighted. A cautionary note needs to be added to the use and interpretation of the forecasts contained in this study. These projections are designed to be a guide to the direction for economic growth and development in Central Asian economies based on the best information and analysis available at the time of writing. As such they are purely indicative of future trends and one of several inputs to guide policymakers in the region. The study is laid out as follows. Section II deals with recent macroeconomic developments and poverty and income distribution in the CARs. It reviews economic growth and structural transformation, inflation, external sector developments, poverty, and short-term prospects (2005 2007). Section III maps the future for the CARs to 2015. It draws on the analysis of the previous chapter against a background of regional and global developments. It does so in the form of three scenarios showing alternative outcomes distinguished by domestic policy initiatives with regard to policy reforms, regional cooperation, and industrial competitiveness strategy. Section IV assesses the recent competitiveness record of the industrial sector in the CARs. A simple transition economies manufacturing export competitiveness index (TEMECI) is developed to benchmark the CARs performance against other transition economies; and key factors influencing competitiveness, including economic incentive regime, industrial technology, skills, and infrastructure are examined. Section V concludes and reviews policy implications for oil- and non-oil-exporting CARs. This study covers the Central Asia Regional Economic Cooperation (CAREC) members and Turkmenistan with focus on the CARs.5 Given the importance of oil and gas resources for Central Asias economic development, this study draws a distinction between oil exporters (Azerbaijan, Kazakhstan, and Turkmenistan) and non-oil exporters (Kyrgyz Republic, Tajikistan, and Uzbekistan). Oil exporters are those CARs that are major exporters of oil and gas to international markets, typically using foreign direct investment (FDI) to assist resource exploitation.6 We also review the performance of Mongolia and Xinjiang Uygur Autonomous Region (XUAR) in the Peoples Republic of China (PRC).
3 4 5 6
A notable example is Zhukov (2000) who provides economic forecasts for the CARs to 2015. IMF country reports (IMF 2004c, 2004d, and 2005) also make projections for some CARs but mostly to 2010. These exercises on medium- and long-run forecasting for policy purposes includes ADB (1997), Economic Intelligence Unit (2004), Oxford Economic Forecasting (2004), National Intelligence Council (2004), and PIRA Energy Group (2004). On the CAREC initiative and ADBs role, see ADB (2004b). As Appendix 1 shows, Uzbekistan is recognized to have significant natural gas reserves and small oil reserves. However, it has witnessed modest annual gas production growth by avoiding Russias pipeline system and by concentrating on the domestic market and on exports to its immediate neighbors. Hence, in line with IMF (2004b) and ADB (2004b), this study includes it among the non-oil exporters.
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II. CURRENT STATUS OF ECONOMIC DEVELOPMENTS IN THE CARS A. Introduction
This section deals with recent developments in the CARs highlighting the turn around in economic performance since the late 1990s. It reviews economic growth and structural change, inflation, external sector developments, and poverty.
B.
Economic Growth
After a period of dismal economic performance following the breakup of the Soviet Union, the CARs have put together a booming economic performance since 1997 (see Table 1).
TABLE 1 GDP GROWTH (%)

AVERAGE, 19921996 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARsb
a 19992001. b Weighted average,
AVERAGE, 19972001
AVERAGE, 20022004
2002
2003
2004
2005
-15.3 -7.0 -9.3 -10.6 -15.2 -3.4 -8.0
9.5a 5.2 10.2 5.3 5.9 4.4 6.1
10.6 9.5 21.3 4.7 10.1 5.2 9.9
10.6 9.8 19.8 0.0 9.5 4.0 9.3
11.1 9.2 23.0 7.0 10.2 4.1 10.0
10.2 9.4 21.0 7.1 10.6 7.7 10.4
26.4 9.4 10.0 0.6 6.7 7.0 9.8
GDP weights. Sources: 19921996 from EBRD (2004); 19972005 from Asian Development Outlook 2005 (ADB 2005a), ADO 2005 Update (ADB 2005b), and Asian Development Outlook 2006 (ADB 2006).
From 1997 to 2001, annual GDP grew by 6.1% per year in Central Asia as a whole compared with negative growth (-8.0) in the previous five years. In 20022004, growth rebounded to a spectacular 9.9%. Although coming from a low base, the regions performance is the highest in the post-transition period for any group of countries in the Soviet sphere and compares favorably with the fastest- growing economies in Asia and the rest of the developing world.7 In 2005, the regions growth was well over 9%, reflecting high commodity prices, buoyant international demand, and other country-specific factors discussed below.
According to EBRD (2004), real GDP growth in all transition economies as a group was only 0.4% per year during 1992 2003. World Bank (2005) shows that high-performing East Asian economies grew at 7.2% during 1990-2003, South Asian economies at 5.5%, Latin American and Caribbean economies at 2.7%, and African economies at 2.7%.
High energy prices and investments in the oil and gas sector, including petrochemicals, were the main growth drivers in the three oil exporting economies of Azerbaijan, Kazakhstan, and Turkmenistan. In Azerbaijan, oil field and pipeline investment, natural gas development, and a booming construction sector have contributed to a strong growth environment. GDP growth accelerated from 9.5% in 19972001 to 10.6% in 20022004. Accelerating economic growth in Kazakhstan (9% since 2002) is associated with oil and natural gas investments, good macroeconomic management, and investments in infrastructure. In addition, economic diversification has begun recently as food processing, machinery, oil refining, and chemicals showed strong growth. Turkmenistans high growth rate in 20022004 is based on official figures.8 The country is the weakest reformer in Central Asia but has benefited from natural gas exports, a construction boom, and foreign investment from Turkey in the textiles sector. Among the non-oil economies, growth in Kyrgyz Republic averaged around 5% beginning in 20022004 and 7% in 2003 and 2004 due to a buoyant minerals sector led by gold exports and a rebound in the agricultural sector. Uzbekistans economy grew steadily at just over 5% as agricultural production benefited from restructuring and privatization, as well as from favorable cotton prices. In Tajikistan, the end of civil war aluminum exports, remittances from migrant workers, and foreign aid served as the main impetus for expansion as GDP growth averaged about 10.1% during 20022004. Per capita income in Central Asia has also grown as population growth has been low (see Table 2). By 2004, the regions per capita income (US$) increased to $889 (up from $606 in 1997 2001). Despite these recent gains in income growth, per capita income in the CARs remains low by international standards as they are categorized as low-income countries (except Kazakhstan, which is a middle-income country. The three oil-exporting countries have significantly higher per capita incomes than the non-oil exporters, indicating a divergence in prosperity within the region. This divergence between oil exporters and non-oil exporters is also visible in figures for per capita income in purchasing power parity dollars (Table 2). Furthermore, several CARs have surpassed pre-crisis 1991 levels of per capita income, which is creditable (see ADB 2005b for details). TABLE 2 GDP PER CAPITA (US$)
AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARs 2002 2003 2004 PPP$, 2004
600.0 1,345.3 604.7 312.1 180.8 592.2 606
763 1,659 961 320 190 383 713
865 1,995 1,236 344 207 389 389
1,029.4 2,723.9 1,250.7 432.4 323.1 461.2 889
4,174.63 7,493.97 7,021.03 1,928.46 1,193.31 1,870.96 3947
Note: PPP$ means purchasing power parity dollars. Source: World Bank World Development Indicators Online (World Bank 2006).
8
IMF (2004e) constructs alternative GDP estimates for 20012003 suggesting that official GDP estimates are overstated. The official GDP estimate for 20012003 is 19.0% compared with an IMF alternative estimate of around 11%.
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C.
Structural Change and Reforms
This boom has been driven primary by developments in the oil and gas sector. There have also been structural changes in the economies resulting in a shift toward production of industrial goods and minerals and away from agriculture. This shift is particularly marked in the major oil and gas exporting CARs. Between 1997 and 2004, the share of industry in GDP rose in Azerbaijan and Kazakhstan and remained constant in Turkmenistan (see Table 3). Among the non-oil economies, Tajikistan witnessed a rise in the share of industry in GDP but Kyrgyz Republic and Uzbekistan saw a decline. While oil and gas continue to drive the industrial sector (Appendix 1), manufacturing and the rest of the industrial sector also grew. Chapter 4 indicates that manufacturing value-added (MVA) grew at 25% per year in Azerbaijan and 10% per year in Kazakhstan between 1998 and 2003. Manufacturing value-added per capita also increased. By 2003 Kazakhstan had the largest manufacturing base in Central Asia while the Kyrgyz Republic had the smallest. The remaining CARs fall in between these extremes.
SECTOR SHARES
TABLE 3 AGRICULTURE, INDUSTRY, AND SERVICES SECTOR, 1997 AND 2004 (% OF GDP)
OF
1997 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Tajikistan Uzbekistan
a b
AGRICULTURE 2004
1997
INDUSTRYb 2004
SERVICES 1997 2004
21.7 13.4 20 49.8 31.8 21.3
12.3 7.9 22.5a 50.9b 24.2 28.6b
39.9 30.5 44.3 25 25.6 18
55.4 37.1 42.4a 17.2b 28.1 15.8b
38.3 51.6 35.7 25.2 42.6 60.7
32.3 55.0 35.1a 31.9b 47.1 41.9b
2002. 2003. Sources: Asian Development Outlook (ADB 1998 and 2005), Key Indicators (ADB 2002 and 2005).
The recent industrial recovery in the CARs is closely linked to the performance of manufactured exports that grew about 10% per year for the region a while between 1998 and 2003 (for more details see Section 4). Both oil and non-oil exporters had respectable manufactured export growth although the former (11.0%) was somewhat higher than the latter (7.8%). The structure of manufacturing and manufactured exports varies from country to country. Textiles and garments comprise over 80% of manufactured exports in Tajikistan and Turkmenistan (driven in part by foreign investors from Turkey and Republic of Korea [henceforth Korea]), and about 37% of the Kyrgyz Republics manufactured exports. Meanwhile, Kazakhstans manufactured exports are dominated by iron and steel with some focus on chemicals and plastics as well as machinery and transport equipment. Azerbaijan also has a mix of iron and steel, chemicals, and machinery. Structural change and industrial progress in the CARs are associated with the pace of economic reforms that have occurred, at different levels of intensity, in the region according to the transition
indicator scores presented in EBRD (2005) and reproduced in Table A7.1.9 These scores range from 1 to 4+, with 1 representing little or no change from a rigidly planed economy, and 4+ representing the standards of an industrial market economy. On this basis, Azerbaijan, Kazakhstan, and Kyrgyz Republic are regarded as the most reform-minded CARs. Kyrgyz Republic has the most open trade regime in the regime and in 1998 became the only CAR to have joined the World Trade Organization (WTO).10 Liberalization of prices, trade, and foreign exchange systems have typically improved the most in reform-minded CARs along with privatization of small- and medium-scale industries. However, privatization of large-scale industry, competition policy, and reforms in banking and finance have proceeded at a more moderate pace. Tajikistan and Uzbekistan have begun to make recent progress in price liberalization and small-scale privatization but other key reform areas remain largely unaddressed. Turkmenistan remains largely unreformed with little prospect of adopting market-oriented reforms in the near future. Since the late 1990s, an upturn in agriculture was visible in the non-oil exporting CARs (particularly Kyrgyz Republic and Uzbekistan) arising from generally favorable weather conditions, high world prices for cotton and wheat, and some agricultural reforms (see Rozelle and Swinnen 2004). Some productivity gains were also achieved in collective farms producing cotton and wheat. Kyrgyz Republics wide-ranging agricultural reforms emphasized privatization of collective farms and an estimated 70% of farm land is now privately owned. Moreover, price and quantity controls were largely removed, public monopoles dismantled, and public investment in the rehabilitation of irrigation systems was increased. Uzbekistan, however, undertook limited agricultural reform. In an attempt to improve food security, small garden plots to grow fruits and vegetables were granted to peasants in the early 1990s through presidential decree. In the late 1990s, privatization took the form of replacing agricultural cooperatives (known as shirkats) with individual farmers who receive land leases that are conditional on using the land in accordance with state orders. State control remains pervasive in Uzbekistan in the areas of agricultural purchasing, pricing, subsidies, distribution, and provision of inputs. In spite of progress in economic reforms, a significant unfinished policy reform agenda remains in both oil and non-oil CARs (ADB 2005a, EBRD 2005, IMF 2004a). Furthermore, there are major institutional constraints to future growth in the region, which also required to be addressed. The long list of such institutional constraints in the CARs include: a nascent private manufacturing sector with little exposure to international markets or technology best practices; underdeveloped banking and financial systems; lack of modern technology and export marketing support institutions; inefficient regional energy market; high transport and transit costs due to land-locked geographical conditions and fragmented transport systems; lack of an appropriate legal and regulatory system for a market economy; and variable levels of administrative capacity to design and implement market-oriented economic policies.
The EBRD Transition Indicator Scores are based on the perceptions of its country economists. Many economists regard qualitative perception data about progress in reform as being less reliable than quantitative indicators (e.g., effective rates of protection and effective rates of assistance). Given concerns about the quality and reliability of data in the CARs, however, these indicators offer a useful albeit impressionistic measure of reform progress. See Fischer and Sahay (2000) and Trushin and Trushin (2002) for other assessments of reform progress in the CARs. 10 See Mogilevsky (2004) for details of the trade regime and the WTO accession process in the Kyrgyz Republic.
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D.
Inflation
Macroeconomic stability, proxied by inflation, has improved. Inflation rates have fallen significantly throughout the region over the past few years indicating improved macroeconomic stability (see Table 4). Average inflation for the CARs as a group declined from 20.4% to 6.9% between 1997 2001 and 20022004. Furthermore, both oil exporters and non-oil exporters were typically able to contain inflation at lower levels in 20022004 than in 19972001. This may be partly the result of greater fiscal and monetary discipline as well as greater stability in the exchange rate and moderate inflation worldwide. The Kyrgyz Republic had the lowest inflation among the CARs with 3% in 2002 2004 while Tajikistan, with double-digit inflation, had the highest. In 2005, inflation in the CARs rose moderately rise to 7.3% as strong demand driven by oil export income exerted upward pressure on prices. TABLE 4 INFLATION (%)
19972001 AVERAGE Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARs
a
20022004 AVERAGE
2002
2003
2004
2005
-0.5 10.9 15.0a 19.1 46.0 32.1 20.4
3.9 6.5 6.8 3.0 11.2 9.7 6.9
2.8 5.9 8.8 2.0 10.2 21.6 9.0
2.2 6.6 6.5 3.0 16.4 3.8 5.6
6.7 6.9 5.0 4.0 7.1 3.7 6.0
9.6 7.6 7.0a 4.4 7.1 7.8 7.3
Estimate. Sources: Asian Development Outlook 2005 (ADB 2005a), ADO 2005 Update (ADB 2005b), and Asian Development Outlook 2006 (ADB 2006).
E.
External Sector Developments
External sector performance has generally improved compared with the past as exports have grown more rapidly. This improved trade performance, particularly since 1997, has been driven by developments in the minerals and metals sector in oil-exporting countries and by prices for gold and cotton in the non-oil exporting economies. 11 In addition, as Section IIC discussed, manufacturing has also been buoyant and the overall performance has improved from a decade ago. Between 1997 and 2004, overall export growth from the oil-exporting CARs was strong, averaging about 18% per year (see Table 5). For the non-oil exporting countries in the region, export performance accelerated after 2001. By 2004, export growth in Kyrgyz Republic, Tajikistan, and Uzbekistan averaged over 20%. In the Kyrgyz Republic, export growth has fluctuated from negative to strong growth, primarily because of movements in gold prices and exports of gold and petroleum products. In Tajikistan, exports of cotton and aluminum steadily increased as the economy continues
11
See Freinkman et al. (2004) for an analysis of trade performance of the CARs as well as other CIS economies.
11
to recover. In Uzbekistan, export growth picked up strongly in 2003 and 2004 on the back of higher prices for gold and cotton. Weakness in the US dollar has resulted in deteriorating terms of trade for the CARs. Nevertheless, strong export earnings facilitated import growth, primarily of consumer goods and fueled economic growth and investment in goods related to major oil and natural gas. In this connection, import growth was particularly strong in the oil-exporting economies. The lumpiness and timing of these investments created some mismatches between import demand and the foreign exchange earnings required to finance them. Despite this lack of synchronization import finance has not been a problem due to capital inflows, which financed some oil and natural gas investments, and to buoyancy of exports. TABLE 5 MERCHANDISE EXPORT GROWTH (%)
AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARs VALUE OF VALUE OF MANUFACTURED EXPORTS, 2004 EXPORTS, 2003 ($ MILLIONS) ($ MILLIONS)
2002
2003
2004
25.4 9.6 27.9 -1.1 -1.9 -6.4 8.9
12.7 12.3 9.0 3.7 7.3 -8.4 8.2
13.9 31.6 10.7 18.5 14.3 29.1 25.0
31.5 53.7 9.0 23.8 15.4 22.3 38.9
3,452 20,291 3,444 731 922 3,961 32,801
134.4 2117 225 193.1 250.1 785 3,704.6
Sources: Asian Development Outlook 2005 (ADB 2005a) and Table 18 in this paper.
The trade balance for the oil-exporting CARs has been positive for the past few years primarily because of the strong trade surplus of Kazakhstan and, to a lesser extent, Turkmenistan (Appendix 2). Aside from Uzbekistan that accumulated a small trade surplus, the non-oil exporting countries of the region had small deficits on their trade accounts. On the capital account, oil-exporting countries accumulated large deficits in some years as they made substantial investments in gold, oil, and natural gas projects. The non-oil exporting countries accumulated somewhat smaller current account deficits. Despite large foreign-funded investments in the minerals sector, the current account deficit for the region as a percent of GDP was still within acceptable limits at around 3% of GDP in 2003. Inflows of FDI generally offset the current account deficit, in most cases leaving the overall balance either in surplus or small deficit. The boom has increased government revenue and has helped fiscal performance and reduced reliance on external borrowing. As a result, the total debt for the CARs has typically fallen as a percent of GDP. In 2004 the total debt of the region (aside from Kazakhstan) was just over $8 billion; it has not increased substantially since the late 1990s and has fallen relative to the late 1980s (Appendix 2).
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OF
IN THE
SECTION II CAR S
There are also signs that foreign investors are beginning to take greater interest in the CARs. This is reflected by strong inflows into the oil-rich exporters (refer to Appendix 2). This is a classic example of natural resource seeking FDI (mainly from European Union [EU], Russia, and United States) and has brought with it capital, foreign technology, and western management expertise to facilitate the efficient development of oil and gas exports. Most of Central Asias FDI since the mid-1990s has gone to Kazakhstan. Such FDI is concentrated in the oil and gas industry but has gradually spilled over into electricity, metals, manufacturing, and banking. In the last 2 years, however, FDI flows to Azerbaijan dramatically increased to the extent that by 2003, FDI of $2.3 billion slightly exceeded that in Kazakhstan ($2.2 billion). It is striking that FDI in the three non-oil exporting CARs is negligible, amounting to only $107.5 million in 2003. A lack of natural resources, high transactions costs due to landlocked terrains, vast distance from markets, and perceived political risk are among the explanations for limited FDI in non-oil-exporting CARs.
F.
Poverty
There seems a general consensus that between 1991 and 1995, poverty in the CARs increased. As ADB (2004b, 12) notes: the major cause of poverty was the transition shock that resulted in large-scale loss of employment, income, and purchasing power in all CARs. Underlying factors included the breakdown of Council for Mutual Economic Assistance production and distribution network, the collapse of the social security system, higher inflation caused by disruption in production of key goods and loss of control over the money supply, civil strife in several countries, and migration of skilled Russians. Although the data is very sketchy and there are issues of data consistency and reliability, national poverty line estimates suggest a decline in poverty in all CARs where data are available (see Table 6). Nevertheless the pace of decline has been slow and poverty remains quite high at about 40% of total population in the CARs as a group.12 Lower inflation rates, stronger growth, creation of new external trade linkages, restoration of social and political stability, and the upturn in agricultural production and incomes have been contributing factors to the decline in poverty in the CARs.
12
On the broader issue of achieving the Millennium Development Goals (MDGs), the CARs have made progress but there is an unfinished agenda. To quote an authoritative study: the countries of greatest concern are Tajikistan, Uzbekistan, Kazakhstan, and Armenia. The first two have high and increasing rates of malnutrition. Education standards have also slipped and the virtual collapse of the social sector in some countries has resulted in a general deterioration of health indicators (UNESCAP-UNDP-ADB 2005, 3). The study calls for a reshaping of national and local institutions involved in service delivery to achieve the MDGs. Key issues include making services available, improving quality, reducing barriers to accessing services, and broadening the range of providers.
13
POVERTY
TABLE 6 AND I NCOME D ISTRIBUTION
NATIONAL POVERTY INCIDENCE (POPULATION BELOW POVERTY LINE, %) EARLIEST Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARs Others Thailand Malaysia Indonesia Mongolia LATEST GINI INDEX
SHARE OF BOTTOM 20% OF INCOME RECIPIENTS
68.1 (1995) 34.6 (1996) 51.0 (1997)
49.6 (2001) 27.9 (2002) 29.9 (1998) 47.6 (2001) 56.6 (2003) 27.5 (2000) 39.9 9.8 (2002) 7.5 (1999) 18.2 (2002) 33.1 (1995)
36.5 (2001) 31.3 (2001) 40.8 (1998) 29.0 (2001) 34.7 (1998) 26.8 (2000) 33.2 43.2 49.2 34.3 44.0 (2000) (1997) (2002) (1998)
7.5 8.2 6.1 9.1 8.0 9.2 8.0 6.1 4.7 8.4
13.1 (1992) 15.7 (1996) 36.3 (1995)
means not available.

Sources: ADB (2004a) and World Bank (2005).
The latest estimates of national poverty lines show the following: (i) (ii) (iii) (iv) (v) Poverty is generally higher in the non-oil exporters than the oil exporters. With poverty incidence in excess of 50%, Tajikistan is the poorest CAR. Azerbaijan (an oil exporter) and Kyrgyz Republic seem to have high poverty incidence in excess of 45%. In Kazakhstan, poverty levels are somewhat lower at around 28%, having come down from over 40% in the late 1990s. Uzbekistan and Turkmenistan (an oil exporter) also appear to have low poverty levels.
Rural poverty seems to be a significant problem in some CARs as the sector has absorbed many urban unemployed. Income disparities and poverty are more pronounced in some subregions (e.g., the Ferghana Valley and border regions of Kazakhstan, Kyrgyz Republic, and Tajikistan). Despite these regional inequalities, overall income distribution figures suggest that income is reasonably equally distributed in the CARs with an average Gini coefficient of 33.2%. Furthermore, the share of the poorest 20% of the population at 8% is higher when compared with countries in Southeast Asia such as Malaysia and Thailand (see Table 6).
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SECTION III F UTURE: 2015
G.
Short-term Prospects (20052007)
The short-term prospects for the CARs seem bright indicating a continuation of the economic revival of recent years. According to the Asian Development Outlook 2005 Update (ADB 2005b), for 20052007, economic growth in the CARs will be in the range of 9% per year. The highest growth rates in 20052007 are likely to be visible in the oil-rich economies (see Tables 1 and 8). Accordingly, Azerbaijan is projected to grow at 18.5%, Kazakhstan at 8.2%, and Turkmenistan at 7.8%. Although inflation will rise somewhat, growth in the oil exporters will continue to be propelled by a combination of high oil and gas prices, buoyant international energy demand, inflow of FDI, and investments in modern infrastructure. In the non-oil exporters, growth will be somewhat slower. Growth in the non-oil economies is projected to be in the range of 4.5% to 6.9% (see Table 8).13 Favorable prices for non-oil export commodities (e.g., cotton, gold, aluminum, and other metals); expansion in the services sector; continuation of agricultural growth; and economic reforms underlie economic growth in the non-oil exporters. A mild recovery is expected in the Kyrgyz Republic fostered by higher gold prices, continuation of a pro-growth economic reform program, and higher foreign aid. Increased foreign investment in the natural gas sector in Uzbekistan as well as implementation of measures for private sector development (e.g., stronger legal protection for enterprises and banking sector liberalization) is expected to contribute to growth.
III. MAPPING THE FUTURE: 2015 A. Introduction
The pressing question facing the CARs is whether the boom that started in the late 1990s will continue beyond the next three years (20052007). While this is impossible to predict with certainty, we offer three possible scenarios for the CARs against a global background (see Box 1 and Appendix 3 for further details regarding the global background and forecasting method). The indicative scenarios are distinguished by the extent of action on the domestic policy front with regard to economic policy reform, competitiveness strategy, and regional cooperation. Such a comprehensive set of policies is required to address major policy impediments and institutional constraints to long-run growth in the CARs. The former include persistence of trade barriers, pervasive state ownership in manufacturing, and weak financial sectors. Included among the latter are high transport and transit costs, uncompetitive private manufacturing enterprises; an inefficient regional energy market, lack of modern export marketing/technology institutions, and lack of an appropriate legal system for a market economy. The indicative scenarios are described as follows: (i) Scenario 1: Business as Usual. This scenario assumes a moderate policy reform agenda, relative lack of any competitiveness strategy, and intermittent implementation of regional cooperation initiatives.
13
Our estimates for 20052007 are of similar magnitude to IMF estimates for 20052007, which were 7% for Kazakhstan, 5.5% for Kyrgyz Republic, and 7% for Tajikistan. See IMF (2005c, 2005d, and 2005e).
15
(ii)
Scenario 2: Closing the Gap. There is strong commitment to implementation of further policy reforms, development of market-friendly competitiveness strategy, and aggressive implementation of regional cooperation initiatives. Scenario 3: Falling Behind: This assumes a moderate level of internal political instability, some backsliding of the policy reform agenda, a more inward-orientation of policies toward industry, and limited regional cooperation.
(iii)
The remainder of this section discusses each of these scenarios and outlines some of the risks to the forecasts. To relate the forecasts to recent developments, Table 7 provides a summary of current performance of the CARs.
A SUMMARY
TABLE 7 OF CURRENT PERFORMANCE
REAL GDP GROWTH, MANUFACTURED GDP PER CAPITA, POVERTY INCIDENCE 19972004 EXPORTS PER HEAD, 2004 (POPULATION BELOW (% P.A.) 2003 ($) ($) NATIONAL POVERTY LINE, %) Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan All CARs
a b c d e f
10.0a 6.8 14.3 5.1 7.4 4.7
16.4 142.1 46.9 38.2 39.7 30.7 57.1
1,029 2,724 1,251 432 323 461 889
49.6b 27.9c 29.9d 47.6b 56.6e 27.5f 39.9
19992004. 2001. 2002. 1998. 2003. 2000. Sources: Estimated from Asian Development Outlook (ADB various years) and World Development Indicators (World Bank various years).
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BOX 1 GLOBAL BACKGROUND

Growth in the world economy over the next decade will depend upon a number of interrelated factors including the price of oil and developments in industrial economies. Our baseline predicts that the world economy will grow at an average annual rate of around 3.2 percent for the next decade. This is closer to the historical rate of growth in the world economy than the rapid rate of growth of 4 percent achieved in 2004. In the energy market, adjustments in both supply and demand suggest that prices for oil will retreat from current levels to the range of $40$45 per barrel over the next decade. Other commodity prices (gold, cotton, aluminum, natural gas) are also expected to be favorable. The PRC and India will increase their strength as regional economic powers. Both economies are projected to continue their robust economic performance, growing at average rates of close to 8% and 7%, respectively, over the next decade. The outlook further assumes that there will be growing investor confidence and that FDI flows to developing regions (including the CARs) will increase. This assumption is consistent with a continuation of the agenda of policy reforms that has already begun. Finally, relative political stability will continue in the CARs and throughout the world.
B.
Scenario 1: Business as Usual
Economic policy reform will continue in both oil and non-oil exporters at a moderate pace. This means that there will be changes in some areas but gaps in others. In the oil economies, this means that reform of trade relations with the rest of the world and WTO membership will proceed over time. Small-scale privatization will also be gradually implemented while large-scale privatization and corporate governance will make less progress. Financial sector liberalization and development will lag. In the non-oil economies, variable progress will be made in trade reform and price liberalization but financial sector liberalization and competition policy will lag. Regional cooperation initiatives in transport, trade, and energy will be implemented intermittently. In the area of transport, harmonization of transport regulations and cross-border trade will continue gradually while the development of a modern railway system and integration of the road network will proceed albeit at a moderate pace. In trade facilitation, improvements will be visible in customs codes and clearance over time but less progress will be observed in implementing best practice trade facilitation such as a uniform information system and single window inspection. Residual nontariff measures (e.g., technical barriers to trade and sanitary and phytosanitary measures) on intraregional trade will remain. In the energy sector, structural reform to unbundled components of the power sector (e.g., transmission generation and distribution) will be slow. Tariff reform including transfer pricing issues such as shadow pricing of water will be constrained by political factors. Rehabilitation of regional energy infrastructure particularly cross-border lines will take place on a bilateral basis. Competitiveness policies will be generally underemphasized. The details of the forecast are presented in the remainder of this section.
17
1.
Growth
GDP growth in the region is likely to be robust, exceeding 5% per year in all the CARs in 2005 2015. Within the CARs, there will be increased divergence in economic performance as the three oil-rich economies grow more rapidly than the non-oil economies. Azerbaijan is expected to grow the fastest at around 10% annually and Uzbekistan the slowest (about 5% per year). In between these, Kazakhstan is likely to grow at 7.1%; Tajikistan 6.0%, Turkmenistan 5.6%, and Kyrgyz Republic 5.6% (see Table 8). These long-range forecasts and the theme of divergence between oil and nonoil exporters are consistent with those of the International Monetary Fund (IMF) and earlier ADB work.14 This is a strong performance for developing countries in general and even by comparison with Asian transition economies such as Cambodia, Laos, and Viet Nam. There will be significant potential for structural changes and a number of opportunities for trade and international investment in manufacturing and in the booming oil and gas industry. In the non-oil CARs, the agricultural upturn, dating back to the late-1990s, will continue due to favorable prices for agricultural goods and implementation of reforms in this sector. Private sector participation in agricultural activities is expected to rise and influence the growth in non-oil CARs.
SCENARIO 1: REAL
COUNTRY Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan
TABLE 8 GDP BASELINE GROWTH FORECASTS

20052015
TO
2015 (%)
20052007
10.3 7.1 5.6 5.6 6.0 5.2
18.5 8.2 7.8 4.5 6.9 5.8
Sources: Asian Development Outlook 2005 (ADB 2005a) for estimates from 20052007. ADB staff estimates for remainder of forecast period.
The total population in the CARs will be around 75 million by 2015 (see Table 9), which is about 10 million more than in 2004. Uzbekistan (with 28.1 million people) will remain the most populous country in Central Asia, followed some way behind by Kazakhstan (18.1 million) and Azerbaijan (9.7 million). Population growth in the CARs is likely to be quite slow during 20032015. During the Soviet era, family planning birth control and abortion were used to maintain a modest rate
14
Under Scenario 1, our simple average GDP growth forecasts (20052015) for oil and non-oil exporters are about 8.2% and 5.7%, respectively. This confirms the trends in ADB (2004b), which projected real GDP growth of 8.1% per year in oil-rich CARs and 4.1% per year in non-oil CARs during 20022015. Our annual average GDP growth forecasts for Kazakhstan (7.8%) and Tajikistan (6.5%) for 2005-2010 are also in the same range as the International Monetary Fund (IMFs) medium-term projections (20052010) of 7.5% for Kazakhstan and 5.6% for Tajikistan. However, our forecast for Azerbaijan (14.3%) for 20052010 is lower than the IMF figure of 21.8%. The difference in the case of Azerbaijan reflects different assumptions about the impact of the oil sector on overall economic growth. For details of IMF forecasts, see IMF (2004c, 2004d, and 2005).
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of population growth. These practices have continued. Combined with an aging population and some outmigration of younger people, birth rates and population growth remain low. Population projections vary from 1 percent growth in non-oil exporters to between 1.5 percent and 2.3 percent in oil exporters. This compares with higher rates of around 2% for many other low- and mediumincome developing countries.15 These demographic trends highlight several economic implications for the CARs. On one hand, growth in incomes can be more effectively translated into higher per capita income. On the other hand, domestic markets may grow slowly in the future, reflecting a small base of consumers and producers. Regional cooperation and multilateral liberalization offer opportunities to access more dynamic markets. There may also be skills shortages as the demand for skilled manpower in key industries exceeds limited supplies, already exacerbated by outward migration. This could lead to calls for liberalization of labor markets to attract adequate supplies of skilled labor. Furthermore, as the population ages, more attention needs to be paid to social security provision. TABLE 9 POPULATION FORECAST TO 2015 (MILLIONS)
COUNTRY Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan Total
Note:
2004
2015
8.2 14.9 4.9 5.0 6.3 25.6 64.9
9.7 18.1 6.3 5.6 7.0 28.1 74.8
Population projection is based on trend line estimate of population growth. Kazakhstans population estimate for 2015 was adjusted upward to reflect expected inward migration. Sources: World Development Indicators Online (World Bank 2006) for historic data and ADB staff estimates for forecasts.
Average per capita income for the CARs of $1,871 in 2015 will place the region within the ranks of todays middle-income economies (see Table 10).16 However, there will be significant variation within the region with the oil-rich economies, led by Kazakhstan, having per capita incomes nearly six times higher than those of the non-oil economies. With a per capita income of $4,807 by 2015, Kazakhstan will approach the status of an upper middle-income country. For the other two oil-rich economies, per capita income will be comparable to the current per capita income of Russia and Thailand. Tajikistan (per capita income of $552) will remain the poorest CAR and be among the ranks of the todays low-income countries ($450 per head). With around $700 per head, the Kyrgyz Republic and Uzbekistan will be somewhat higher and will have graduated out of the category of low-income countries. Nevertheless, they will remain relatively poor countries in terms of per capita income levels. These forecasts highlight the impact of successful exploitation of oil
15
In Table 10 of ADB (1997, 154), the growth rate of the active population for other Asian regions is projected to be around 2.9% in Southeast Asia and South Asia between 1995 and 2025. 16 Zhukov (2000, 254) states that to restore income to 1990 levels, the CARs will have to grow at between 4.5% and 5% per year until 2015.
19
and gas resources and indicate that divergence in the economic prosperity between oil and nonoil rich economies will increase. They also underline the likely emergence of Kazakhstan as a regional growth pole with the potential to drive expanded trade and investment relationships with other CARs.17 Kazakhstan and the two oil-rich economies will also increasingly become a magnet for labor migration from poorer CARs. For the non-oil economies of Kyrgyz Republic, Tajikistan, and Uzbekistan, there will be a continued need for external assistance to raise incomes and reduce the impact of poverty. TABLE 10 CAPITA FORECAST
2004
SCENARIO 1: GDP
PER
TO
2015 (US$)
2015
1029 2724 1251 432 323 461 889
2602 4807 1790 739 552 733 1871
Source: Table A1.1 (World Bank 2006) for historic data and ADB staff estimates based on GDP and population forecasts in previous tables.
2.
Structural Change
Structural changes will occur as a result of increased exploitation of the mineral resource base and the process of industrialization that is projected to continue. By 2015, total oil and gas exports from the oil-rich CARs will amount to about $32 billion, a nearly threefold increase from an export value of about $12 billion today.18 Oil and gas exports will continue to be the main drivers of economic growth and dynamism in the three oil-rich economies (see Table 11). Proven reserves of oil and natural gas should be sufficient to maintain current and projected future rates of extraction for between 25 and 60 years in the three oil-exporting economies. Growth in oil and gas exports will be strongest in Azerbaijan, following the opening of the Baku-Tbilisi-Ceyhan (BTC) pipeline to Turkey. This pipeline opens up the European oil market to Azerbaijan and potentially also to Kazakhstan. The BTC pipeline will provide an alternative oil shipment route to Europe avoiding the high transit charges levied by the Russian Federation. Oil sector growth will slow somewhat in the medium term as prices for oil and gas stabilize at around $40$45 per barrel and output growth slows as existing pipeline capacity is more fully utilized. Nevertheless, the oil and gas sector will grow faster than GDP in all oil-exporting countries.
17
ADB (1997) projects much higher growth between 1995 and 2025 under an open economy policy regime. For example, per capita income growth in Southeast Asia is 5.1% versus 2.9% in an open economy policy regime versus a closed policy regime. 18 These projections were based on forecasts of oil prices, production capacity, proven reserves, and anticipated developments in transportation (e.g., pipelines).
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SCENARIO 1: OIL
COUNTRY Azerbaijan Kazakhstan Turkmenistan Total
AND
GAS
TABLE 11 EXPORTSPROJECTION
2003 2.25 7.02 2.94 12.21
TO
2015 (BILLION US$)

2015 6.40 21.19 4.74 32.33
Sources: IMF (2004b), IMF (2004d), and IMF (2005a) for historic data. ADB staff estimates for forecasts.
Economic diversification will continue at a more rapid pace through the expansion of manufactured exports (see Table 12). Total manufactured exports will nearly treble by 2015 to about $9.4 billion.19 This is equivalent to about one third the value of oil and gas exports of the region. The regions manufactured export base will continue to be dominated by Kazakhstan ($4.8 billion) and Uzbekistan ($2.5 billion). Kazakhstan will continue to have the highest manufactured exports per head. Turkmenistan comes next. Azerbaijan remains the smallest exporter in terms of manufactured exports per head. Capital-intensive petroleum products like plastics and petrochemicals, metal products, engineering goods, and some textiles and garments are likely to underlie this manufactured export growth. Agricultural exports and processed food products are likely to become prominent in the export structures of non-oil CARs. There is also likely to be diversification of export markets away from Russia as demand from the PRC and India grow rapidly. Industrialization and structural change will result in a wider variety of products being produced for regional and international markets, boost per capita income, and result in job creation.
SCENARIO
Note:
TABLE 12 1: MANUFACTURED EXPORTSPROJECTION
TO
2015
MANUFACTURED EXPORTS PER HEAD, 2015 (US$)
MANUFACTURED EXPORTS, 2003 (MILLION US$)
MANUFACTURED EXPORTS, 2015 (MILLION US$)
134.4 2,117.0 225.0 193.1 250.1 785.0 3,704.6
345 4,822 831 333 589 2,518 9,437
37.4 299.5 136.2 57.4 83.0 82.3 126.0
Manufactured exports per head in 2015 based on projections using most recent exports estimates and staff estimates of elasticities of manufactured export growth with respect to GDP growth. Source: Table 18 in this paper for historic data and ADB staff estimates for forecasts.
19
The projections for manufactured exports and manufactured exports per head in 2015 were derived using historical estimates of elasticities of manufactured exports with respect to GDP growth. The non-oil economies typically have a higher elasticity owing to their comparative advantage in labor-intensive manufacturing production along with lower factor costs.
21
3.
External Sector
The external sector projections focus on the three non-oil exporting countries (Kyrgyz Republic, Tajikistan, and Uzbekistan). This is because the external sector accounts for the three oil-producing countries are dominated by oil and gas. As a result, these countries have considerably high incomes and sufficient FDI to go to capital markets for additional resources. They are not potential borrowers from the multilateral institutions as their financing gaps, if any, can be met by private sector borrowing. The current account deficit is projected to increase in the Kyrgyz Republic and Tajikistan. These current account deficits will be modest in size, ranging from $200 million per year in the Kyrgyz Republic to $70 million in Tajikistan for the period 20112015. This is because imports demand growth, needed to meet various infrastructure and manufacturing project requirements as well as for some consumer goods, is projected to be somewhat stronger than the expansion of exports proceeds (see Table 12). Growth in the current account deficit will be constrained by already high levels of external debt and limited sources of finance for the Kyrgyz Republic and Tajikistan. In Uzbekistan, the current account balance is projected to remain in surplus over the forecast period as a result of stronger export growth to the PRC market and continued slow growth in imports. Structural factors and a restrictive policy environment that discourages trade liberalization will also inhibit more rapid import growth. Foreign direct investment is expected to rise slowly as the external policy environment improves in the Kyrgyz Republic and (to a lesser extent) in Tajikistan (see Table 13). Annual FDI inflows of $125 million in the Kyrgyz Republic and $75 million in Tajikistan, while modest in size by international standards, will help offset the rising current account deficit and should contribute to growth technology transfer and productivity gains in industry. In spite of slower reforming policy environment, Uzbekistan is expected to keep inflows of FDI growth to around $120 million per year. This is in large part due to FDI in the countrys natural gas sector.
TABLE 13 SCENARIO 1: EXTERNAL ACCOUNTSPROJECTIONS

KYRGYZ REPUBLIC TAJIKISTAN
TO
2015
UZBEKISTAN
INDICATORS
BALANCE OF BALANCE OF BALANCE OF PAYMENTS PROJECTIONS PAYMENTS PROJECTIONS PAYMENTS PROJECTIONS 2000 2005 2011 2002 2005 2011 2001 2005 2011 2004 2010 2015 2004 2010 2015 2004 2008 2015
Current Account Balance (million $) Foreign Direct Investment (net) (million $) Financing Gap (-) (million $) Total Outstanding Debt as % of GDP
-45.8
-108.3 -200.0
-29.3
-55.7
-70.0
432.8
558.8
400.0
31.8 0.0 75.4
60.0 -60.5 54.7
125.0 75.0 45.0
29.3 0.0 69.3
48.3 1.1 53.9
75.0 33.0 40.0
73.4 -152.4 40.0
87.5 -48.0 29.5
120.0 80.0 22.0
Sources: IMF estimates and ADB staff estimates.
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Total outstanding debt as a percent of GDP is expected to decline slowly in the Kyrgyz Republic and Tajikistan and more rapidly in Uzbekistan (see Table 13). The drivers for debt reduction are increased inflows of FDI in all three non-oil economies, debt restructuring in the Kyrgyz Republic and possibly Tajikistan, remittances in Tajikistan, and the use of some trade and current account surplus to reduce external debt in Uzbekistan.
4.
Poverty
Rapid growth in income will facilitate a sustained reduction in poverty in the CARs over the forecast period. As a whole, the incidence of poverty will fall from 40% today to about 25.1% in 2015 (see Table 14). This means that around 11 million more people will be taken out of poverty as a result of strong economic performance. While still high, this rate of poverty is around the current level of poverty in Poland today and slightly less than the current rate of poverty in the Russian Federation. Non-oil economies will be relatively more responsive to changes of income than oil exporters due to elasticity effects.20 The poorest countries in 2015 will remain to be Azerbaijan, Kyrgyz Republic, and Tajikistan (with about a third of their population below the poverty threshold). These are followed by the other three CARs that have been able to bring poverty down to the range of 1822%. In all the CARs, rural poverty will remain higher than urban poverty while pockets of urban poverty are likely to persist. The analysis of future trends in poverty suggests that high rates of rural poverty will continue to stimulate rural to urban migration and that international migration is likely to continue at a significant rate. Even though poverty reductions will be substantial, the poorer non-oil CARs will need to devote more resources to reducing poverty by expanding current programs to fight poverty and developing new programs to address the needs of specific target groups. Developing labor-intensive sectors such as agriculture and tourism would also contribute to poverty reduction particularly in the non-oil CARs.
20
A crucial aspect of the poverty projection for 2015 was the elasticity of poverty reduction with respect to GDP growth. The reported poverty estimates are somewhat conservative considering the development experience of other Asian economies. Oil-exporting countries were assumed to have lower poverty elasticities due to the capital intensity of oil sector and industrial production. Meanwhile, non-oil exporting countries are assumed to have higher elasticities due to the laborintensive nature of production. This means that non-oil economies will be relatively more responsive than oil exporters to changes of income. Remittance income from overseas workers in the non-oil economies are also taken into account in making poverty assessments for the future. These projections were based on historical information for the CARs, staff estimates of structural change in the poverty-income relationship over time, and poverty elasticities for other Asian countries. For other Asian countries and other developing countries in general, see Dowling and Valenzuela (2004) and Adams and Page (2004).
23
SCENARIO
a
TABLE 14 1: POVERTY BASELINE FORECAST
TO
2015
FORECAST POVERTY INCIDENCE 2015b
YEAR OF NATIONAL POVERTY ESTIMATE
POVERTY INCIDENCE IN BASE YEARa
2001 2002 1998 2001 2003 2000
49.6 27.9 29.9 47.6 56.6 27.5 39.9
29.7 18.0 21.9 30.1 33.2 17.8 25.1
National Poverty Lines. Poverty incidence in 2015 based on projections using most recent poverty line estimates and staff estimates of elasticities of poverty reduction with respect to income. Source: ADB (2004a) for historical data and ADB staff estimates for forecasts.
b
In order to facilitate comparisons with other possible outcomes, which are discussed as Scenarios 2 and 3 below, Table 15 summarizes Scenario 1 outcomes in the performance of the CARs in four aspects: GDP growth, GDP per capita in 2015, poverty incidence in 2015, and US dollar value of manufactured exports per head in 2015. These variables can be compared with historical performances reported in Table 7.
SUMMARY
REAL GDP GROWTH, 20052015 (% P.A.) Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan All CARs
OF
TABLE 15 SCENARIO 1BUSINESS

MANUFACTURED EXPORTS/PER HEAD, 2015 ($)
AS
USUAL
GDP PER CAPITA, 2015 ($) POVERTY INCIDENCE, 2015 (POPULATION BELOW NATIONAL POVERTY, %)
10.3 7.1 5.6 5.6 6.0 5.2
35.5 266.4 131.9 59.4 84.2 89.6 126.2
2,602 4,807 1,790 739 552 733 1,871
29.7 18.0 21.9 30.1 33.2 17.8 25.1
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C.
Scenario 2: Closing the Gap
Economic policy reforms will accelerate in all the CARs and evidence of a market economy will be widespread. In the oil economies, an implementation schedule for WTO membership will be generally agreed and adhered to. An open trade regime with each other and the rest of the world will also be maintained. Visible progress in large-scale privatization, corporate governance, and financial sector liberalization will be observed. In the non-oil economies, there will be a strong shift toward an export promotion strategy and relevant incentives and institutions will be created. Significant efforts will be made on interest rate liberalization, reform of state-owned banks, and institutional development of capital markets. A vibrant private sector will emerge as privatization deepens and business procedures are reformed. In the non-oil CARs, progress in reform will be especially visible in the agricultural sector including removal of quantity and price controls, dismantling of public monopolies, increased investment in rehabilitation of irrigation systems, and rationalization of agricultural subsidies. There will be a coherent and cohesive development of the CARs as a region through a number of initiatives in regional cooperation including transport, trade, and energy. An integrated rail and road network system will be implemented. Customs codes will be harmonized, border procedures will be streamlined, and best practices information and inspection systems will be adopted. The prevalence of nontariff measures on regional trade will be significantly reduced as a result of improvements in institutions. An efficient regional energy market and system will emerge through implementation of structural reforms, tariff reforms, and significant investments in regional energy infrastructure. This will be accompanied by greater transparency and more rational pricing in line with market conditions. Industrial competitiveness strategy will be emphasized to promote economic diversification throughout the region.21 These include strong emphasis on attracting FDI, linking enterprises in the CARs into global value chains according to comparative advantage, upgrading supplier development, investing in industry-relevant skills, and restructuring technology institutions. National partnerships between government and private sector institutions will be forged for developing and implementing competitiveness policies. These policies will be particularly significant in the non-oil economies. The outcome of Scenario 2 in Table 16 can be compared with Scenario 1 to show the anticipated effect of accelerating progress in policy reforms, regional cooperation, and industrial competitiveness strategy. All four performance indicators improve. The oil exporters benefit from regional cooperation initiatives and a regulatory environment that will manifest in a better integrated transportation network, fewer losses, and greater efficiency as a result of price and tariff reforms. Non-oil exporters benefit from industrial competitiveness strategy and the diversification of industrial development as well as greater regional cooperation. In terms of GDP growth, the oil exporters show a further small increase in GDP. The gains for the non-oil producers are somewhat higher as GDP growth accelerates by more than a percentage point in all three countries. This represents an average upward
21
It is recognized that Dutch Disease (whereby the increased demand for nontradables forces the non-oil tradable sector to contract) may affect the development of an internationally competitive manufacturing sector in the oil-exporting CARs. However, as Hausmann et al. (2005) note in the case of oil-rich Kazakhstan, a range of appropriate policy and institutional responses (including particularly prudent fiscal policy, an inflation-targeting scheme with a flexible exchange rate, financial market development, and strengthened financial sector regulation and a transparent industrial policy to promote economic diversification) can be used to mitigate the effects of the problem on industrial development.
25
movement in growth of about 20% and results from a deepening of policy reforms, greater regional cooperation, and intensified efforts to develop a more competitive environment for the private sector. Manufactured exports per head also increase, particularly in the non-oil exporters. For example, in Tajikistan and Uzbekistan, manufactured exports per head increase in excess of 60%. Laborintensive manufactures (e.g., textiles and garments) as well as processed food and other agro-industrial goods will become the mainstay of exports in non-oil CARs. The incidence of poverty also falls further in this scenario as the implementation of policy reforms, agricultural modernization, and regional cooperation accelerate the pass-through of growth to the poorer segments of society. The impact is most dramatic among the non-oil exporters. In the Kyrgyz Republic and Tajikistan, poverty falls a further 10 percentage points to around 23% while the poverty rate in Uzbekistan declines to just over 12%, a remarkable achievement given poverty incidence in Uzbekistan of 27.5% at present. Poverty was slightly reduced in the oil exporting CARs, although the pass-through of policy reforms is not as dramatic due to the capital-intensive economic structures of these economies. Our finding of the potential economic gains for Central Asia through better economic policies thus confirms the findings of the path-breaking UNDP Human Development Report for Central Asia (UNDP 2005). Using a general equilibrium approach, UNDP concludes that the regions GDP could be 50% to 100% higher in 10 years following a comprehensive program of regional cooperation and integration. Such a program would include reduction in trade costs through better transit arrangements, better coordination of water use and flood control, more efficient energy pricing and management, and cooperation in education and knowledge sharing. UNDP suggests that the cumulative gains would be even higher if this highly dynamic regional economy becomes fully integrated with its neighbors and the world economy. UNDP (2005) also indicates that the smaller and poor economies of the region (Kyrgyz Republic and Tajikistan) would benefit even more. As the report states: the benefits from regional cooperation are likely to be distributed in a way that on average helps the poor more than the better off (UNDP 2005, 207).
TABLE 16 SCENARIO 2CLOSING

REAL GDP GROWTH, 20052015 (% P.A.) Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan All CARs
THE
GAP
GDP PER CAPITA, 2015 ($) POVERTY INCIDENCE, 2015 (POPULATION BELOW NATIONAL POVERTY, %)
MANUFACTURED EXPORTS PER HEAD, 2015 ($)
10.7 7.5 5.6 6.7 7.1 6.3
42.0 295.3 149.1 72.4 136.8 154.2 165.6
2,655 4,918 1,790 829 620 822 1,939
29.3 17.6 21.9 20.7 23.7 12.3 20.9
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D.
Scenario 3: Falling Behind
This scenario suggests that a slowdown in efforts toward policy reform, regional cooperation, and the development of an industrial competitiveness regime. There will also be a moderate level of internal disruption and political instability, e.g., protests, strikes, terrorist incidents. Policy reform will take a backseat and further progress in key areas such as WTO membership, privatization, agricultural modernization, and financial sector reforms will be limited. Efforts to foster further regional cooperation will be few and far between and existing arrangements will be half-heartedly implemented. For instance, inconsistencies in transport regulations will remain and infrastructure development will be limited. In energy, rent-seeking monopolies will persist and efforts to rehabilitate regional energy infrastructure will be few, even on a bilateral basis. State intervention in the industrial sector will become more pervasive throughout the region and private sector initiatives will be increasingly stifled. The outturn of Scenario 3 in Table 17 can be compared with Scenario 1 to show the anticipated effect of the slow progress in policy reforms, regional cooperation, and industrial competitiveness strategy. The result of falling behind is a more modest macroeconomic performance, slower progress in reducing poverty, and significantly less progress in establishing a manufacturing base. Growth in GDP among the oil exporters falls by around 1% or more. This is because the lack of implementation of reforms and a breakdown in regional cooperation reduce efficiency in production and in transportation. It also weakens further the agenda for reducing energy losses and rationalizing prices. In the nonoil CARs, the results are similar, as implementation of structural reforms and the movement toward a competitive industrial base flounders. In absolute terms, the impact of falling behind on GDP growth is anticipated to be generally the same for all the CARs. However, in relative terms, the impact will be much greater for the non-oil exporters. All three of these economies will suffer more than a 20% reduction in growth, from the range of 56% to 45%. GDP per capita also falls. The impact of falling behind on poverty and manufactured exports will also be greater in the nonoil producing CARs. Poverty incidence increases relative to the business-as-usual Scenario 1 by as much as 10 percentage points in Tajikistan and 8 points in the Kyrgyz Republic. As a result,
TABLE 17 SCENARIO 3: FALLING BEHIND

REAL GDP GROWTH, 20052015 (% P.A) Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan All CARs MANUFACTURED EXPORTS PER HEAD, 2015 ($) GDP PER CAPITA, 2015 ($) POVERTY INCIDENCE, 2015 (POPULATION BELOW NATIONAL POVERTY, %)
9.0 6.2 4.3 4.3 4.7 4.0
28.3 201.0 79.5 45.4 65.5 55.9 89.5
2,290 4,387 1,555 644 482 645 1,667
31.2 18.8 23.4 37.2 43.3 21.8 29.3
27
poverty levels in 2015 will be over 37.2% in the Kyrgyz Republic and 43.3% in Tajikistan. The impact is smaller in the oil economies because of the nature of their production structure. For the CARs as a whole, manufactured exports per head in 2015 fall from an average of $126 in Scenario 1, and $165.6 in Scenario 2, to $89.5 in Scenario 3. This result demonstrates the critical importance of implementing good policies to establish a vibrant manufacturing sector.
E.
Risks
There are two kinds of risks that could impact upon the forecast for the CARsrisks to the global economy and risks to the CARs. See Box 2 for a discussion of these risks.
F.
Summary
This section has highlighted the importance of policies in determining the future path of development in the CARs. Policymakers face stark choices. If the region continues on its present business-as-usual path (Scenario 1) there will some gains, but divergences between countries will intensify. If the region falls behind by deciding to follow policies that promote national self-interest and rent seeking (Scenario 3) then economic prosperity will be adversely affected. If, on the other hand, the region closes the gap and embraces policy reform, regional cooperation, and industrial competitiveness (Scenario 2) then economic prosperity in all the CARs will be significantly enhanced. For the oil economies, much will depend on how the oil and gas windfalls are harnessed. All countries in the region will gain if these resources are used for the development of individual countries as well as for promotion of regional cooperation. For the non-oil exporters, the development of manufacturing competitiveness and regional cooperation along with agricultural development are key components of a successful strategy.
IV. BENCHMARKING INDUSTRIAL COMPETITIVENESS A. Introduction
In the wake of globalization, policymakers in the CARs are increasingly emphasizing a competitive industrial sector as an engine of growth, economic diversification, and job creation. Kazakhstan adopted an innovative industrial strategy in 2003 while Azerbaijan and Uzbekistan are reviewing their policy framework for competitiveness. A systematic assessment of industrial competitiveness in the region can highlight the performance of the industrial sector and guide future policy development. Using selected industrial performance indicators for the CARs in a comparative context with other transition economies most readily captures the industrial competitiveness record of the region, highlights performance gap, and suggests policy options. Referred to as benchmarking, this approach reduces and transforms industrial performance indicators into a single number for a sample of transition countries. It also permits analysis of influences on industrial competitiveness in transition economies.
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BOX 2 RISKS
Risks to the global economy. A number of risks to the forecast could result in lower growth and poor economic performance of the world economy. Persistent higher oil prices are the most immediate threat, particularly to oil-importing countries that are also intensive users of petroleum products, such as the United States. (See ADB 2005b for an assessment of the consequences and challenges for the Asian and Pacific economies presented by higher oil prices.) Higher oil prices will slow down growth in the worlds largest economy, which will have an adverse effect on the rest of the world through international trade. Global financial imbalances could intensify as the US current account deficit continues to widen, and public sector debt increases in Japan and the European countries. The combination of gradually rising interest rates and the elimination of tax cuts could also affect the real estate and industrial sectors, creating the likelihood of a more abrupt slowdown in the US economy. Higher interest rates and slower growth will also affect industrialized countries international liquidity and put pressure on developing countries that have large financing needs. If adjustments to these liquidity conditions were smooth, weaknesses would become apparent in some markets that have benefited from an environment of great risk taking and low interest rates. A more abrupt increase in interest rates and liquidity would lead to recession in industrial countries. Much of the income added to the world economy in the past few years was from the PRCs rapid growth, a trend that is built into our forecast. If the PRC is not able to slow its growth gradually, a sharp economic slowdown that could have serious repercussions on world growth and the rest of Asia could result. Risks to the CARs. There are several risks to the outlook for the CARs. Some of these risks relate to the outlook for the world economy. These include sluggish world growth or a collapse in energy prices and/or weakness in the major commodity exports of the CARs (including cotton, aluminum, and gold). Terrorism is a continuing potential threat to the region, particularly where ethnic tensions could surface. More generally, political instability and poor governance pose considerable risks to the CARs outlook. There seems to be increasing pressure for democratization in some CARs. Particularly relevant in this vein is the prospect of prolonged political and economic uncertainty in the Kyrgyz Republic following the sudden change of government in 2005, escalating tensions in Uzbekistan in the aftermath of the Andijan events, instability in Kazakhstan since the presidential election, and a possible resumption of civil strife in Tajikistan. To this list can be added increased tension between Azerbaijan and Armenia. The economic impact of these uncertain political developments is hard to forecast. Moderate political instability would have a relatively modest economic impact. Severe political instability, however, would further dampen the growth projections and raise poverty compared to the levels envisaged in Scenario 3. At the policy level, the timing of structural and policy reforms envisaged in the outlook could be delayed. These reforms include regional cooperation arrangements in the oil and natural gas sector that would increase revenue and reduce transit taxes as well as general regional cooperation measures to deal with trade and transit bottlenecks. Reforms in the non-oil economies that would lift productivity contribute to diversification of the industrial base; increased efficiency may also be delayed. Slower economic growth or slower implementation of initiatives to address social sector and agricultural modernization issues would also have an adverse impact on anticipated reductions in poverty. The overall impact of these developments on the performance of the CARs has been outlined in Scenario 3.
29
This section has three parts: (i) recent industrial competitiveness record of the CARs; (ii) a manufacturing export competitiveness index (TEMECI) for the CARs and other transition economies; and (iii) key factors underlying the competitiveness record of the CARs and other transition economies.
B.
Recent Industrial Performance
By way of background to the benchmarking exercise, a brief look at some aspects of industrial performance in the CARs and the composition of manufactured exports (Table 18 and Table 19) would be useful. The CARs vary significantly in their level of industrialization. In 2003, MVA per capita in the oil exporters ($189.4) was nearly four times higher than the non-oil exporters ($49.7), indicating that a vibrant oil and gas sector has stimulated manufacturing development. Kazakhstan (MVA per capita of $295.5) has the largest industrial base among the CARs while the Kyrgyz Republic had the smallest. Compared to industrial development, there seems less variation in manufactured export development among the CARs. In 2003, manufactured exports per capita in non-oil exporters as a whole ($33.2) were about a third of that of the oil exporters ($88.8).22 Kazakhstan has the largest export base in the region (with manufactured exports per capita of $142.1).
SELECTED INDICATORS
OF
TABLE 18 INDUSTRIAL PERFORMANCE
IN
CENTRAL ASIA
MANUFACTURED EXPORTS PER CAPITA, 2003 ($) 88.8 16.4 142.1 46.9 33.2 38.2 39.7 30.7 57.1
COUNTRY Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan Total CARs
a
ANNUAL MVA MANUFACTURED AVERAGE MVA PER CAPITA, EXPORTS, GROWTH,a 2003 2003 19982003 (%) ($) (MILLION $) 10.4 25.2 10.6 -2.8 -5.9 -1.0 6.8 -8.0 4.4 189.4 138.8 295.5 134.0 49.7 25.4 56.8 66.9 129.2 2,476.5 134.4 2,117.0 225.0 1,228.2 193.1 250.1 785.0 3,705.0
ANNUAL AVERAGE MANUFACTURED EXPORT GROWTH,a 19982003 (%) 11.0 11.2 10.1 23.0 7.8 5.4 7.4 8.5 9.9
Current $, compound growth rate. Sources: ADB (2005), IMF (2005a), IMF (2004c), IMF (2004e), National Statistics Committee of the Kyrgyz Republic, World Development Indicators Online (World Bank 2006).
22
It is worth noting that the regions manufactured export base is highly concentrated and linked to country size. Kazakhstan (50%) and Uzbekistan (21.3%), the two largest economies, dominate the total value of manufactured exports in the CARs ($3.7 billion in 2003). Meanwhile, the Kyrgyz Republic had 12.3%, Tajikistan 6.8%, Turkmenistan 6.1%, and Azerbaijan 3.5%.
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SECTION IV BENCHMARKING INDUSTRIAL COMPETITIVENESS
TABLE 19 COMPOSITION
AZERBAIJAN VALUE ($ 000) % Total Textiles Garments, Footwear Wood and Wood Products Raw Leather, Rubber Nonmetals, Cement Others Paper Chemicals, Plastics Iron and Steel Metal Manufactures Machinery, Equipment Transport Equipment
a
OF
MANUFACTURED EXPORTS, 2003

KYRGYZ REPUBLIC VALUE ($ 000) % TAJIKISTAN TURKMENISTANa VALUE VALUE ($ 000) % ($ 000) % 100 92.3 0.0 0.5 0.0 0.2 1.9 1.1 3.9 171,658 102,671 39,325 597 880 269 11,183 219 1,369 967 14,178 100 59.8 22.9 0.3 0.5 0.2 6.5 0.1 0.8 0.6 8.3
KAZAKHSTAN VALUE ($ 000) %
134,385 7,568 142 589 105 35 9,648 531 50,410 27,474 1,207 27,900 8,776
100 2,117,130 100 193,082 5.6 0.1 0.4 0.1 0.0 7.2 0.4 37.5 20.4 0.9 20.8 6.5 7,746 5,089 0.4 0.2 69,904 682 358 5,355 26,181 3,850 1,427 22,745 19,828 28,232 14,520
100 250,600 36.2 0.4 0.2 2.8 13.6 2.0 0.7 11.8 10.3 14.6 7.5 231,200 100 1,300 100 500 4,800 2,800 9,800
195 0.0 65,788 3.1 4,232 0.2 26,173 1.2 7,114 0.3 258,044 12.2 1,470,584 69.5 41,480 2.0 157,516 7.4 73,169 3.5
For 2000 only. Sources: For Azerbaijan, Kazakhstan, and Turkmenistan, International Trade Statistics (International Trade Centre 2006); for the Kyrgyz Republic and Tajikistan, National Statistics Committee.
These data suggest that the CARs differ considerably in their manufactured export structures.23 Some CARs seem to have an export structure oriented toward simple labor-intensive industries while others are dominated by more complex capital- and technology- intensive industries. Countrylevel export patterns reflect comparative advantage, incentive policies, and historic connections with overseas markets. Textiles and garments comprise over 80% of manufactured exports in Tajikistan and Turkmenistan (driven in part by foreign investors from Korea and Turkey) and about 37% of the Kyrgyz Republics manufactured exports. Meanwhile, Kazakhstans manufactured exports are dominated by iron and steel with some focus on chemicals and plastics as well as machinery and transport equipment. Azerbaijan also seems to have a mix of iron and steel, chemicals, and machinery. Machinery and transport equipment exports are an indicator of structural change and greater technological sophistication of exports. Higher shares of machinery and transport equipment exports are associated with improved export competitiveness in high-technology industries. In terms of export shares, Tajikistan and Turkmenistan seem to have the least machinery and transport equipment exports while the rest have higher shares.
23
Reliable and up-to-date information on manufactured exports for the CARs is difficult to obtain. The present study uses a combination of data from the UNCTAD/WTO International Trade Centre for Azerbaijan, Kazakhstan, and Turkmenistan; and national sources for the Kyrgyz Republic and Tajikistan. The data in Table 8 for Turkmenistan are for 2000. Recent disaggregate data were not available for Uzbekistan.
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C.
Comparisons with Transition Economies
Information on the CARs recent industrial performance presented above can be conveniently summarized into an index of industrial competitiveness performance. This index, known as TEMECI, was computed to benchmark 23 transition economies in 2003. TEMECI is a composite index made up of three variables (MVA per capita, manufactured exports per capita, and machinery and transport equipment per capita) and takes values between 0 and 1. Higher values of TEMECI indicate a greater level of competitiveness.24 The main features of the TEMECI are presented in Appendix 4, Box A4.1. The benchmarking exercise using TEMECI allows individual CARs to assess their industrial competitiveness performance in relation to (i) transition countries at a similar level of development, or of similar characteristics, which the CARs would like to outperform; and
(ii) transition countries at a higher level of development, whose performance the CARs wish to emulate, and whose policy strategies they could learn from. Studies of the economic development of the CARs sometimes include Russia and Central and Southeastern Europe Baltics (CSB) economies as comparators given their legacy of Soviet rule, common institutions developed under socialism, and adoption of market-oriented economic reforms. This study follows suit and includes Russia and 12 CSB economies in the benchmarking exercise. It also includes four Southeast Asian Transition Countries (SEATCs) comprising Cambodia, Lao Peoples Democratic Republic, Mongolia, and Viet Nam. Intra-Asian comparisons of industrial competitiveness experience during transition seem rare in the literature. Figure 1 shows the ranking of the TEMECI for the 23 transition economies while Table A4.1 provides the underlying data values. The leading economies are the CSB while Russia is ranked 12th. Toward the low end of the scale, the CARs span a narrow range from rank 13 to 21. It comes as little surprise that oil- and gas-rich Kazakhstan leads the CARs in terms of industrial competitiveness. It has also undertaken macroeconomic stabilization and some market-oriented economic reforms to foster private industrial enterprises. Furthermore, the oil exporters do somewhat better as a group than non-oil exporters. The findings on the country-level rankings are reflected in the pattern of regional competitiveness. Figure 2 shows regional TEMECIs for 2003 estimated from (ii) GDP weighted averages of country-level TEMECIs for each region and (ii) simple averages of country-level TEMECIs for each region. Both methods display a similar pattern across the four regions. Taking the more accurate GDP-weighted average, the CSB region (0.81) has the best performance among the four regions. Russia (0.55) comes out at about two thirds the level of the CSB region while the CARs (0.35) and SEATCs (0.32) are at about one third. Interestingly, the GDP-weighted TEMECI puts the CARs slightly ahead of the SEATCs while the simple average TEMCI suggests a somewhat bigger difference between the two regions (Appendix 4).
24
The development of TEMECI draws on the benchmarking methodology developed by the World Industrial Development Report 2004 (United Nations Industrial Development Organization 2004), Wignaraja and Taylor (2003), Wignaraja and Joiner (2004), and Lall and Weiss (2004).
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FIGURE 1 TRANSITION ECONOMIES MANUFACTURING EXPORT COMPETITIVENESS INDEX, 2003

0.00 Slovenia Czech Republic Hungary Slovak Republic Estonia Lithuania Poland Croatia Romania Latvia Bulgaria Russia Kazakhstan Vietnam Albania Turkmenistan Cambodia Uzbekistan Azerbaijan Tajikistan Kyrgyz Republic Mongolia Lao PDR 0.20 0.40 0.60 0.80 1.00 1.20
FIGURE 2 REGIONAL AVERAGES OF TEMECI, 2003

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 CARs CSB Weighted Average (GDP) Russia Simple Average SEATCs
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D.
Explaining Industrial Competitiveness
Ranking of industrial competitiveness performance leads to an examination of key factors associated with high and low performance in the CARs and other transition economies. Four factors have a considerable effect on industrial competitiveness performance: reforming the economic incentive regime, acquiring industrial technology upgrading skills, and building infrastructure. These factors represent major aspects of economic incentive regime and the supply side of the economy, and their interaction drives industrial competitiveness. The remainder of the section attempts to assess the CARs against the comparator economies (CSB economies, Russia, and the SEATCs) on the basis of the four factors noted above.
1.
Reforming the Economic Incentive Regime
A market-friendly economic incentive regimecharacterized by macroeconomic stability, low import protection, and streamlined bureaucratic proceduresis fundamental to competitive manufacturing activity. Such a regime enables industrial enterprises to reap benefits of competition, a predictable environment for investment, economies of scale in production, and low transaction costs. Three measures of different aspects of the economic incentive regime for the CARs and other transition regions are shown in Table 20 namely, annual average inflation, average tariffs on manufactured products, and number of days required to start a business.
TABLE 20 FACTORS AFFECTING COMPETITIVENESS IN TRANSITION ECONOMIES

CARs Economic Incentive Regime 1. Annual average inflation (20012003) 2. Average tariffs on manufactured products (%) latest 3. Duration of starting a business, latest (days) Industrial Technology 4. Annual average FDI per capita, $ (20012003) 5. Research and development expenditure per capita, $ latest Skills 6. Tertiary technical enrolment per 1,000 population, latest Infrastructure 7. Railways, 2002 (total kilometers per million population) 8. Telephone lines, 2003 (per 1,000 population)
Note:
CSB
RUSSIA
SEATCs
10.9 7.5 51.0
5.6 6.3 42.3
17.0 10.1 36.0
5.1 11.6 92.0
61.1 8.7
248.4 90.4
16.4 56.0
16.1 n.a
5.0
10.4
28.0
4.9
351.6 79.3
799.0 305.5
597.7 242.2
331.0 28.7
CARs means Central Asian Republics. CSB means Central and Southeastern Europe Baltics. SEATCs means Southeast Asian Transition Countries. Sources: UNCTAD (2004), UNESCO (2006), World Bank Doing Business (World Bank 2006), World Development Indicators Online (World Bank 2006) , WTO (2004), CIA (2005).
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Economic reforms implemented by some CARs suggest that economic incentives have typically become more market-oriented than at the start of the transition process in the early 1990s. Insufficient progress in some areas, however, has meant that the region as a whole seems to fall short of the achievements of more competitive transition economies. Import tariffs on manufactured goods in the CARs of about 7.5% are fairly low by the standards of other transition economies like Russia and the SEATCs. Nevertheless, import tariffs in the CSBs are somewhat lower than CARs levels, suggesting that there is still some room for tariff reform. Furthermore, it takes more days to start a new business in the CARs (51 days) than in the CSB economies and Russia, suggesting that streamlining of business procedures can reduce transaction costs for business and improve economic efficiency.
2.
Acquiring Industrial Technology
Access to the latest technological information, organizational methods, and production technologies is critical for creating competitiveness in manufacturing enterprises. Industrial technology can be acquired by attracting FDI from abroad or by investing in domestic technological effort (particularly research and development activities). In practice, both are complementary rather than substitutes. FDI is probably the most effective vehicle for obtaining the latest international technologies while domestic technological effort is often required to learn about imported technologies, adapt them to local conditions, and improve upon them over time. Foreign investment per capita and R&D expenditures per capita capture the two aspects of industrial technologies (see Table 20). On a per capita basis, the CARs ($61.1) seem to get more foreign investment than Russia and the SEATCs. Nevertheless, FDI inflows per capita are much lower in the CARs than the CSBs. Furthermore, as discussed in Section 2, FDI inflows in the CARs are highly concentrated in the oil exporters (particularly Azerbaijan and Kazakhstan) that account for the bulk of inward investment. Azerbaijan and Kazakhstan seem to be at the forefront of research and development (R&D) efforts in the CARs.25 However, in terms of R&D per capita, the CARs ($8.7) rank considerably below both the CSBs and Russia.
3.
Upgrading Skills
A strong base of productive human capital is recognized as the basis for industrial innovation and competitiveness. Tertiary-level technical skills (i.e., math, science, engineering, and information technology) are particularly vital for absorbing fast-paced modern technologies from abroad and economic diversification from resource-based industries to technology-intensive industries. Tertiary technical enrollment in the CARs (5 per 1,000 population) is half the levels of the CSB economies and one fifth Russian levels (see Table 20). This suggests that the CARs are deficient in tertiarylevel technical skills compared to more competitive transition economies. National level data suggest that Kazakhstan leads the CARs in terms of tertiary-level technical enrolments.26
25
UNESCO only provides data on R&D expenditures per head for three CARs: Kazakhstan ($13.8), Azerbaijan ($7.6), and Kyrgyz Republic ($4.6). 26 The available tertiary-level technical enrolment ratios for the CARs were Kazakhstan (6.9), Kyrgyz Republic (5.8), and Tajikistan (2.3).
35
4.
Building Infrastructure
Efficient and cost-competitive physical infrastructure (roads, railways, and air transport) allows businesses to compete in the global market without constraint. For landlocked economies like the CARs, modern information and communication technology (ICT) infrastructure allows countries to stay abreast of the latest production technologies and access markets. Total railway kilometers per million population and telephone lines per 1,000 people are provided in Table 20 to capture physical and ICT infrastructure. On both measures of infrastructure, the CARs perform better than the SEATCs but less well than the CSB economies and Russia. Within the CARs, the oil-exporting economies seem to have higher railway and telephone densities relative to their population than the non-oil exporting economies (see Figure 3). This underlines the role of oil and gas revenues in financing large-scale infrastructure projects. As expected, Kazakhstan has the highest railway and telephone densities among the oil exporters. Turkmenistan comes next in terms of railway densities while Azerbaijan is second on telephone densities. Uzbekistan seems to have relatively low infrastructure indicators given the size of its economy. Indeed, Central Asia as a whole faces massive infrastructure needs and a funding challenge. A conservative ADB estimate suggests that around $23 billion per year is needed in 20052010 to fund new infrastructure in the region.27 The figure excludes energy sector investments and includes transport, telecommunications, and water supply needs. Even this figure will need a doubling or tripling of current infrastructure expenditure in Central Asia on these items of around $1 billion.
FIGURE 3 RAILWAY AND TELEPHONE DENSITIES

950 900 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan
Railway Density (per million pop.)

27
Telephone Density (per 1,000 people)
Based on projected infrastructure to GDP ratios in 20052010 for low- and middle-income East Asian economies; see ADB et al. (2005).
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36
SECTION V CONCLUSIONS
V. CONCLUSIONS
This study seeks to guide CARs policymakers by suggesting the direction of future economic performance as well as indicating key policy issues. The review in Section II demonstrated that the region has made a dramatic turnaround from negative growth in the years just after the beginning of transition. This transition started in the late 1990s and continues today. In Section III a detailed description of the challenges and opportunities in the manufacturing sector highlighted the scope for further expansion of the sector and the policy environment required to achieve more rapid growth. The future scenarios described in Section IV demonstrates the importance of implementing policy reforms and intensifying efforts to improve regional cooperation. As seen in Scenario 2 of Section IV, appropriate policy reform and greater regional cooperation result in more rapid growth in both the level of income and per capita income, as well as in the expansion of manufactured exports and reduction in poverty. The overall outlook for Central Asia up to 2015 reviewed in Section IV is positive under Scenario 1 but even more so under Scenario 2. In this, the most optimistic scenario, the region seems set to join the ranks of middle-income countries driven by robust GDP growth of more than 7 percent in 3 CARs and in excess of 6% annually in five of the six CARS. The region as a whole will have GDP per capita of nearly $2,000 per capita by 2015. Furthermore, poverty will fall to about 21% of the regions in Scenario 2. For the region, the oil and gas sector will underlie economic prosperity alongside an emerging private manufacturing sector. At the same time, some outstanding challenges will remain. In spite of rapid growth, poverty levels will be unacceptably high in several countries. The nascent manufacturing sector, particularly private enterprises, need to be supported by business-friendly policies. Slow population growth means that the domestic market and skill base will have to be enhanced by regional cooperation and labor migration. Divergence in economic performance between oil-exporting and non-oil exporting CARs will persist. Comparisons of Scenarios 1 and 2 with Scenario 3 highlight the importance of policies in determining the future path of development in the CARs. In a very real sense, policymakers face stark choices. If the region continues on its present path (Scenario 1) there will some gains but divergences between countries will intensify. If the region decides to follow policies that promote national self interest and rent seeking (Scenario 3) then economic prosperity of all the CARs will be adversely affected. If, on the other hand, the region embraces policy reform, regional cooperation and industrial competitiveness (Scenario 2) then economic prosperity in all the CARs will be significantly enhanced. The realization of this more optimistic outlook will depend upon a number of factors. Some are driven by external influences while others are within the realm of policymakers. It is beyond the scope of this study to provide detailed policy agenda for individual countries, sectors, and enterprises. Nevertheless, based on the analysis, the main policy priorities seem to be as follows (see also Table 21): (i) Economic Reform and Prudent Macroeconomic Management. A liberal, low-inflation policy environment is fundamental to growth, poverty reduction, and development. Key aspects include effective budgetary management, further development of monetary instruments and monetary policy, and maintenance of a competitive real exchange rate. In addition to these, oil-rich economies will need to maintain a prudent balance of incentives and investments to ensure resources to develop both oil and non-oil sectors.
37
EXAMPLES
CATEGORY Macroeconomic Management and Economic Reform
OF
POLICY
TABLE 21 PRIORITIES FOR OIL
AND
NON-OIL EXPORTERS
NON-OIL EXPORTERS Liberalizing restrictions on foreign trade Promoting competitive real exchange rate Strengthening tax collection
OIL EXPORTERS Promoting prudent fiscal management Targeting monetary policy to address inflation Managing the oil fund with transparency Completing reforms for WTO membership Modernizing the national railway system Integrating the regional road, rail, and air transport systems Reforming telecommunications Reforming water pricing Developing oil and gas pipelines Promoting environmental management Attracting FDI for the manufacturing sector Streamlining business procedures
Cost-competitive Infrastructure
Upgrading air transport system Building roads Reforming electricity tariffs Integrating the regional road, rail, and air transport systems Formulating an energy sector strategy
Oil and Gas
Creating Export Competitiveness
Promoting small business start-up Providing low-cost finance for small and medium enterprises (SMEs) Supporting SME technology Reforming the health care system Targeting female educational enrollment Agricultural reform and credit
Poverty Reduction and Agricultural Development
Increasing expenditure on health and education Investing in rural water supply and sanitation Harmonizing customs systems and border procedures Reducing barriers to regional trade and investment Resolving disputes over waterenergy nexus
Regional Cooperation
Harmonizing customs systems and border procedures Reducing barriers to regional trade and investment Resolving disputes over waterenergy nexus
(ii)
Cost-competitive Infrastructure. Given the distance from international markets, improving infrastructure is critical. Some of the projects could include improving the internal and external road network; expanding, harmonizing and modernizing the railway network; investing in ICT infrastructure; and ensuring free and flexible air transport. As discussed in Section 4, the region would have to double infrastructure spending to $2 billion3 billion a year in 20052010 to meet infrastructure needs. Oil and Gas Resources. This sector is likely to remain the lynchpin of the region for the foreseeable future, thus it is important to nurture this sector effectively. A transparent, predictable policy environment is associated with continued inward investment. Moreover, key factors in successful energy sector development need to be considered such as rationalizing power prices to reflect cost considerations, developing pipelines, investing judiciously on energy resources, and promoting environmental management in line with best international standardsall key factors in successful energy sector development.
(iii)
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SECTION V CONCLUSIONS
(iv)
Creation of Manufacturing Competitiveness. An internationally competitive manufacturing base will bring many developmental benefits including increased exports, rapid technology transfer, and employment. Proposed key priorities include promoting small- and medium-enterprise development through financial and nonfinancial support; attraction of export-oriented foreign investment through competitive incentives and more aggressive promotion; streamlining of business procedures; and encouraging spillovers from oil and gas industries. Attention to nontraditional trading partners, particularly toward the PRC and India, may expand trade and investment opportunities. Poverty Reduction and Agricultural Development. The persistence of poverty requires special attention in future economic strategy. Possible measures might include providing targeted provision for groups at risk, expanding the provision of microfinance, and increasing expenditure on social sectors and education of women. The development of labor-intensive sectors such as agriculture and tourism would also contribute to poverty reduction. The following measures would support agricultural development: removal of price and quantity controls, dismantling of public monopolies, rehabilitation of irrigation systems, and expansion of micro-finance and agricultural credit. Regional Cooperation. Small and segmented domestic markets, high infrastructure development costs, transit bottlenecks, and dispersed resource endowments make regional cooperation crucial to future prosperity. Some proposed initiatives include reducing barriers to regional trade and investment, harmonizing regional customs administration, resolving disputes over the water-energy nexus, and promoting further cooperation to resolve problems in transport of energy via pipelines.
(v)
(vi)
The differential thrust of these initiatives between oil economies and non-oil economies will vary depending on initial conditions, current policy environment, implementation capacity, and quality of entrepreneurial skills. A policy matrix with examples of selected policy priorities is shown in Table 21. The items contained in the table are meant to be indicative and should be tailor-made to the circumstances of individual CARs.
39
APPENDIX 1 A SNAPSHOT OF THE REGION

Appendix Figures A1.1 to A1.3 provide data on the population, geographical area, and gross domestic product (GDP) for the Central Asian Republics (CARs). A. GDP, Population, and Geography
Although the individual CARs are quite small economies, the total population of the region (about 65 million) and total GDP (about US$72 billion) is similar to that of medium-size economies like Egypt, Philippines, or Viet Nam (see Figure A1.1).1 This provides for a reasonable regional market. Achieving economies of scale in production and distribution associated with a regional market is thus a key imperative for regional cooperation. The geographical size of the CARs, however, is disproportionate to its population size. A total surface area of 4,081,000 square kilometers (km2) in the CARs is similar to that of the whole of Western Europe or India, which can be counted among the worlds largest regions. The population of the CARs is typically concentrated in the main cities and there are vast tracts of sparely populated rural areas. Although Uzbekistan has the largest population, Kazakhstan dominates the region both in geographical size and level of income. Kazakhstan has about 70% of the land area compared with other countries in this region and generates nearly 50% of income in the region. Using its abundant natural resources of oil and natural gas, it has the potential to serve as an engine of growth for the rest of the region, particularly in facilitating the flow of materials to Peoples Republic of China (PRC), Europe, and Russia. The region is rich in minerals and has a strong agricultural base. Much of the recent growth in the region has been achieved as a result of higher prices, increased production, and further investment in the minerals and agricultural sectors. These include gold mining in the Kyrgyz Republic; gas and oil investment, production, and export from Azerbaijan and Turkmenistan; petroleum exports and petrochemical production in Kazakhstan; and cotton production and exports from Uzbekistan. B. Natural Resources: Resource Profile
The CARs are blessed with abundant natural resources of oil, natural gas, gold, and other minerals. Historically, these resources were exploited and developed when these countries were a part of the former Soviet Union. After independence their appropriate use and development became a key component in the economic growth strategy for the region. It is necessary to understand the natural resource profile of the CARs to appreciate the importance and scope of these resources for the economic development of the region. Natural resources, particularly oil and natural gas and (to a lesser extent) gold and aluminum, represent a significant proportion of exports of the region as well as the major source of government tax receipts. These tax revenues, in conjunction with FDI and some domestic private savings, are the funding source for the buildup of industrial capacity and provide resources for social sector spending on education and health. If natural resources are developed in an effective and efficient way, the region can grow quickly. New technology that will result in diversifying the industrial base can de developed.
1
The Philippines has 83 million people and a GDP of $86.4 billion in 2004, Viet Nam has 82.2 million people and a GDP of $45.2 billion, and Egypt has 68.7 million people and a GDP of $75.1 billion (World Development Indicators Online [World Bank 2006]).
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As growth accelerates, poverty can be reduced and a virtuous upward cycle of growth and development can begin. If these resources are squandered, the region has virtually no chance of achieving rapid development and significant strides in reducing poverty. To begin this natural resource profile, consider a quick sketch of proven reserves and production of oil and natural gas in 2004 using British Petroleum (see Tables A1.1 and A1.2). The oil-exporting CARs are major exporters of both oil and natural gas. Both Kazakhstan and Turkmenistan have more than 1% of proven reserves of natural gas, and Uzbekistan and Turkmenistan produce more than 2% of the world total. Kazakhstan ships 1.6% of world oil produced and Azerbaijan, Kazakhstan, and Turkmenistan all have proved reserves of more than 500 million barrels. According to British Petroleum (2005), Kazakhstan has particularly significant oil reserves. In terms of current exports, all three oil-exporting CARs have sufficient reserves to maintain production at the current rate for more than three decades. Breaking down the region by resources, we see from Table A1.1 that the CARs are resource-rich in the sense that they derive most of their export earnings and government revenue from these natural resources. They are the three oil exporters to which we could add the Kyrgyz Republic, which mines and exports gold. The remaining two CARs (Tajikistan and Uzbekistan) depend on cotton for the bulk of their exports although Uzbekistan has the potential to be an oil exporter.
FIGURE A1.1 POPULATION, 2004 (MILLIONS)

Azerbaijan 8.2
Uzbekistan 25.6 Kazakhstan 14.9
Turkmenistan 4.9
Kyrgyz 5.0 Tajikistan 6.3
Source: World Development Indicators Online (World Bank 2006).
41
FIGURE A1.2 GDP SHARES IN CARS, 2004 (%)

Uzbekistan 17.0 Azerbaijan 12.0
Turkmenistan 9.0
Tajikistan 3.0 Kyrgyz 3.0 Kazakhstan 56.0
FIGURE A1.3 GEOGRAPHICAL SIZE, 2004 (KM2)

Uzbekistan 447,400 Azerbaijan 86,600
Turkmenistan 488,100
Tajikistan 143,100 Kyrgyz 199,900 Kazakhstan 2,724,900
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TABLE A1.1 OIL ENDOWMENTS AND PRODUCTION, 2004

PROVEN RESERVES Azerbaijan Kazakhstan Turkmenistan Uzbekistan Saudi Arabia Iran Iraq Russia World OIL RESERVES (BILLION BARRELS) 7.0 39.6 0.5 0.6 262.7 132.5 115.0 72.3 1188.6 OIL PRODUCTION (MILLION BARRELS) 318 1295 202 152 10584 4081 2027 9285 80260 SHARE OF TOTAL WORLD OIL RESERVES (%) 0.6 3.3 0.042 0.05 22.1 11.1 9.7 6.1
ANNUAL PRODUCTION Azerbaijan Kazakhstan Turkmenistan Uzbekistan Saudi Arabia Iran Iraq Russia World
SHARE OF TOTAL WORLD OIL PRODUCTION (%) 0.4 1.6 0.3 0.2 13.1 5.2 2.6 11.9
Source: Statistical Review of World Energy (British Petroleum 2005).
43
NATURAL GAS
PROVEN RESERVES Azerbaijan Kazakhstan Turkmenistan Uzbekistan Iran Saudi Arabia Qatar Russia US World
TABLE A1.2 ENDOWMENT AND PRODUCTION, 2004

SHARE OF TOTAL WORLD GAS RESERVES (%) 0.8 1.7 1.6 1.0 15.3 3.8 14.4 26.7 2.9
GAS RESERVES (TRILLION CUBIC METERS) 1.4 3.0 2.9 1.9 27.5 6.8 25.8 48.0 5.3 179.5 GAS PRODUCTION (BILLION CUBIC METERS) 4.6 18.5 54.6 55.8 589.1 542.9 2691.6
ANNUAL PRODUCTION Azerbaijan Kazakhstan Turkmenistan Uzbekistan Russia US World
SHARE OF TOTAL WORLD GAS PRODUCTION (%) 0.2 0.7 2.0 2.1 21.9 20.2
Source: Statistical Review of World Energy (British Petroleum 2005).
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APPENDIXES
APPENDIX 2 MACROECONOMIC POLICIES AND TRENDS

A. Monetary Policy
There was rapid growth in the money supply in several CARs (see Table A2.1). This increase in the money supply did lead to some upward price pressure in Tajikistan, Turkmenistan, and Uzbekistan. In Tajikistan, monetization of the economy has remained quite low as lingering memories of the civil war disruption, poor government performance, large budget deficits, and high inflation in the early 1990s remain. Combined with continued rapid monetary growth, this has resulted in higher inflation rates than in other CARs (see Table 3). Monetary expansion did not generally lead to acceleration in the rate of inflation in the remaining countries for several reasons. Firstly, there was a growth in the rate of monetization of the CARs as these economies returned to a more stable macroeconomic footing. The rate of monetization of the economy increased in Azerbaijan, Kazakhstan, and Turkmenistan beginning in the mid-1990s. In particular, Kazakhstan has had a credit boom in the last few years as economic growth has accelerated. Secondly, there was an increase in the amount of credit extended by the banking system in response to expansion in the minerals sector, particularly in Azerbaijan and Kazakhstan. Thirdly, there was also a buildup in unsterilized foreign assets that did not necessarily contribute to an excess demand for goods.
MONEY
COUNTRY Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Memo Items Russian Federation Hungary
AND
QUASI
TABLE A2.1 MONEY (M2) AS

2002
PERCENTAGE
OF
GDP
2004
AVERAGE, 19982001
2003
12.0 12.0 13.0 12.0 5.0 19.0 43.0
13.0 17.0 14.6 8.2 23.0 45.0
14.3 18.6 17.5 8.7 26.0 46.0
17.9 20.6 7.1
Sources: World Development Indicators Online (World Bank 2006) and Key Indicators 2005 (ADB 2005d).
B.
Fiscal Policy
Strength in the minerals sectors of many of the CARs has contributed to improved fiscal performance in the past 5 years. Overall budget deficits accumulated in the mid-1990s have turned into fiscal surpluses in some countries and reduction in deficits in others (see Table A2.2). The oil-exporting economies had budget deficits less than 2.5% of GDP. For an analysis of the effects of oil windfalls on government revenues and the issue of transparency of budget processes in oil-exporting CARs, see Makhmutova (2005). Among non-oil exporters, the Kyrgyz Republic deficit came down slowly to 4.3% of GDP while deficits in the other non-oil exporters fell to less than 1% of GDP. These improvements in budget performance were achieved through generally stable expenditure
45
policies that kept spending at a fairly even level as a percent of GDP. At the same time, revenues as a percent of GDP increased slightly as tax revenues on mineral producers increased with higher production volumes and firmer prices for oil, natural gas, gold, and aluminum.
FISCAL BALANCE
19972001 AVERAGE Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan
OF
TABLE A2.2 CENTRAL GOVERNMENT

2002
AS A
PERCENTAGE
OF
GDP
2005a
2003
2004
-2.4 -2.4 -0.5 -9.1 -2.2 -1.6
-2.1 -0.3 0.2 -5.4 0.7 -0.8
-3.1 -1.0 -1.0 -5.1 1.1 -0.4
-2.0 -0.3 -1.0 -4.3 0.3 0.8
-1.1 -1.2 -4.3 -0.5
means not available. a Estimate. Source: Asian Development Outlook 2005 (ADB 2005a).
C.
Trade and Current Account Balance
The trade balance for the oil-exporting CARs has been positive for the past few years primarily because of the strong trade surplus of Kazakhstan and, to a lesser extent, Turkmenistan (Table A2.3). Aside from Uzbekistan, which accumulated a small trade surplus, the non-oil exporting countries of the region had small deficits on their trade accounts. On the capital account, oil exporting countries accumulated large deficits in some years as they undertook substantial investments in gold, oil, and natural gas projects. (Please refer to Table A2.4.) The non-oil exporting countries accumulated somewhat smaller current account deficits.
TRADE
AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan
TABLE A2.3 BALANCE (US$
MILLION)
2002
2003
2004
-236.1 604.7 -28.9 -56.1 -78.8 184
482.0 2,301.0 736.0 -54.0 -124.0 324.0
-98.0 4,171.0 918.0 -134.0 -204.0 835.0
44.0 7,006.0 546.0 -171.0 -290.0 878.0
Source: Asian Development Outlook 2005 (ADB 2005).
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Despite large foreign-funded investments in the minerals sector, the current account deficit for the region as a percent of GDP was still within acceptable limits at around 3% of GDP in 2003 and 1.7% of GDP in 2004 (see Table A2.4). Inflows of FDI generally offset the current account deficit in most cases, leaving the overall balance either in surplus or with a small deficit.
TABLE A2.4 CURRENT ACCOUNT BALANCE AS A PERCENTAGE
OF
GDP
CURRENT ACCOUNT BALANCE, 2004 ($ MILLION)
AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan CARs
2002
2003
2004
2005a
-14.3 -2.4 -3.6 -10.3 -6.0 -1.0
-12.3 -4.2 0.5 -2.2 -2.7 1.2 -3.5
-28.3 -0.9 -4.0 -1.3 8.7 -2.9
-30.7 1.3 -5.2 -3.9 10.1 -1.7
-20.0 3.0 -6.0 -4.2 -1.7
-2,613.0 682.2 -115.0 -46.0 961.0 -1,131
means not available. a Estimate. Sources: Asian Development Outlook 2005 (ADB 2005a) and ADO 2005 Update (ADB 2005b).
D.
External Debt
Kazakhstan has accumulated significantly more foreign debt than any of the other CARs. It stood at nearly $26.6 billion in 2004. The total debt for the rest of the region was just over $8 billion and it had not increased substantially since the late 1990s. The latest figures, which are sometimes delayed by several years, show the debt service ratioas a percentage of exports of goods and services (see Table A2.5)has been falling in three CARs and rising in two. The debt service ratio was highest in Tajikistan and Kazakhstan at 49% and 26%, respectively, in 2004. A worrisome development in Uzbekistan is that the debt service ratio has been increasing steadily from a modest 17.5% in 19972001. In Tajikistan, debt service stood at 18.3% in 19972001. The debt service ratio in the Kyrgyz Republic has fallen somewhat during the period. The debt service ratio in Azerbaijan is less than 5%, and figures for Turkmenistan are not up to date.
47
DEBT SERVICE RATIO

AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan
means not available. a 2003 figure. Source: ADO 2004 Update (ADB 2004).
TABLE A2.5 (% OF EXPORTS OF
GOODS AND SERVICES)
2002
2003
2004
VALUE OF EXTERNAL DEBT 2004 ($ MILLION)
4.1 29.2 34.4 23.7 18.3 17.5
4.4 35.2 20.7 22.9 23.4
5.0 35.0 21.8 17.9 22.0
3.7 26.6 19.8 49.2
1,625.0 26,580.0 2,028.0 822.0 3,815.0 a
E.
Foreign Direct Investment
Inflows of FDI have been strong in the oil-exporting CARs as foreign investors have taken an interest in developing oil and gas resources (see Table A2.6). This is a classic example of natural resource-seeking FDI (mainly from the United States, European Union, and Russia) and has brought with it capital, foreign technology, and western management expertise to facilitate the efficient development of oil and gas exports. Most of Central Asias FDI since the mid-1990s has gone to Kazakhstan, which has by far the largest potential for further economic development. Such FDI is concentrated in the oil and gas industry but has gradually spilled over into electricity, metals, manufacturing, and banking. In the last 2 years, however, FDI flows to Azerbaijan dramatically increased to the extent that by 2003, FDI of $2.3 billion slightly exceeded that in Kazakhstan ($2.2 billion). It is striking that FDI in the three non-oil exporting CARs is negligible, amounting to only $107.5 million in 2003. A lack of natural resources, high transaction costs due to landlocked terrains, vast distance from markets, and perceived political risk are among the explanations for limited FDI in non-oil exporting CARs.
TABLE A2.6 FOREIGN DIRECT INVESTMENT (US$

AVERAGE, 19972001 Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan 2002
MILLION )
2003
2004
601.0 1,612.4 118.2 47.8 19.4 117.2
1,392.0 2,590.0 100.0 5.0 36.0 65.0
3,285.2 2,088.0 100.0 46.0 32.0 70.0
4,769.0 4,269.0 150.0 77.0 272.0 140.0
Source: World Investment Report (UNCTAD 2005).
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APPENDIX 3 FORECASTING METHOD AND WORLD OUTLOOK

A. Forecasting Method and Interpretation
Forecasting the future of the CARs, particularly a decade ahead, is a daunting task in view of uncertainties in the world economy and the region as well as questions about the reliability of national statistics. Not surprisingly, there have been few previous attempts to do so. Fortunately, futures studies and scenario planning is an expanding international field. The worlds leading multinational corporations and economies undertake such exercises on a regular basis as an input into business planning and long-term policy development.2 In line with this literature, this study aims to provide a simple big picture type of overview of the future economic landscape of the CARs as an aid to national policy making. This study examines the economic revival of the CARs since the late 1990s focusing on economic growth performance, structural change, and poverty reduction. It then considers short-term (20052007) economic prospects for the CARs using forecasts made by ADB country economists in ADBs annual publication Asian Development Outlook. Finally, it constructs indicative scenarios of how the region might evolve in the future and projects key economic variables to 2015. The three indicative scenariosBusiness as Usual, Closing the Gap, and Falling Behindand the projections are discussed in Section III. These projections rely on a combination of econometric modeling, reduced form estimation and policy analysis. The analyses of future prospects for the CARs were based on certain assumptions about the world economy. These are as follows (see subsection C below for more details). Growth in the world economy over the next decade will depend upon a number of interrelated factors including the price of oil and developments in industrial economies. Our baseline predicts that the world economy will grow at an average annual rate of around 3.2% for the next decade. This is closer to the historical rate of growth in the world economy that the rapid rate of growth of 4 percent achieved in 2004. In the energy market adjustments in both supply and demand suggest that prices for oil will retreat from current levels to the range of $40$45 per barrel over the next decade. Other commodity prices (gold, cotton, aluminum, natural gas) are also expected to be favorable. The PRC and India will increase their strength as regional economic powers. Both economies are projected to continue their robust economic performance, growing at average rates of close to 8% and 7%, respectively, over the next decade. The outlook further assumes that there will be growing investor confidence and that FDI flows to developing regions (including the CARs) will increase. This assumption is consistent with a continuation of the agenda of policy reforms that has already begun. Finally, relative political stability will continue in the CARs and throughout the world. The World Outlook is developed with the aid of a world economic model developed by Oxford Economic Forecasting 3 (OEF) and the International Monetary Fund (IMFs) forecast for the World Economic Outlook 2004 (WEO). The Economic Intelligence Unit (EIU), World Bank, and ADB use the OEF model to analyze future prospects for various regions of the world as well as the world economy. The IMF uses the WEO forecast in its policy discussions with member nations.
2 3
These exercises on medium- and long-run forecasting for policy purposes includes ADB (1997), Economic Intelligence Unit (2004), OEF (2004), National Intelligence Council (2004), and PIRA Energy Group (2004). For more details on the OEF model, see OEF (2005).
49
Both the OEF and WEO models are global econometric models. To forecast the future, structural models for a number of countries are fitted using historical data. These models are then used to develop future world and regional growth scenarios. These forecasts are based on certain assumptions about the exogenous variables in the model. These exogenous variables, along with the equations in the structural models determine the time profile of forecasts of the endogenous variables. Both the OEF and WEO frameworks incorporate models for a wide variety of industrial countries and developing countries and link them together using flows of international trade to develop a global forecast. Both models are updated regularly. The OEF model is revised periodically to reflect the evolving pattern of global economic activity. Within the IMF, the assumptions and forecasts are reviewed twice a year at different levels to assure consistency and accuracy of the forecasts. OEF and IMF use these models to generate forecasts up to 2009. The trends and analytical work from these two global models form the basis of our own projections to 2015. The main forecast variables used in the analysis of the world economy are world GDP growth, world inflation, and rate of growth of international trade. To forecast GDP growth, we used the average of the OEF and IMF forecasts for 20052009. These projections were then used to prepare forecasts for 20102015 using a simple time series regression technique with a factor built in to reflect the growing share of world GDP generated by developing countries that are growing somewhat faster than the average (the PRC and India). To forecast inflation in the world economy, we used the trend rate of global inflation over the past decade and determined that there was virtually no trend or a slight downward trend in inflation. This analysis was supported by the OEF and IMF forecasts for 20052009. Therefore, we assumed that the level of inflation in 20102015 would be similar to the trend level observed in the decade from 19942004. To forecast the rate of growth in international trade, we reviewed its rate of growth over the past several decades. We noted that during periods of slower growth in the global economy the rate of growth in world trade fell to much lower levels than in periods of sustained growth. There also seemed to be a rebound in trade growth following these periods of slower growth. Looking at these trends and using the assumption that a long growth slowdown in the next decade would be unlikely, we projected world trade growth to be close to the level achieved in the 1990s, a period of steady growth in the world economy. Implicit in this analysis was a period of slower growth sometime before the end of this decade to reflect a possible slower period of global growth. These key variables form the global macroeconomic background for our analysis of the future prospects of the CARs. The starting point for the long-term projections for the CARs is the 20052007 forecasts from ADBs Asian Development Outlook. The Asian Development Outlook for 2005 and Update (ADB 2005a and 2005b) makes forecasts for the period 20052007 for the CARs using a review process similar to that used by the IMF to vet its global forecasts. These ADO 2005 forecasts for the CARs were prepared by country economists and are subjected to a multilevel review process in ADB. For 20082015, these forecasts were adjusted based on expectations about the intensity of policy reforms, regional cooperation, and industrial competitiveness strategy. Reduced form estimation was used to derive key variables for the CARs such as GDP growth, manufactured exports per capita, GDP per capita, and poverty. Each of the three scenarios (Business as Usual, Closing the Gap, and Falling Behind) reflects different expectations of the intensity of policy reforms, regional cooperation, and competitiveness strategy against the constant global background outlined above. Of these, the Closing the Gap Scenario expects the strongest commitment to implementing policy reforms, to developing market-friendly competitiveness strategy and to furthering comprehensive regional cooperation initiative. Country-level forecasts by the IMF and Economist Intelligence Unit were considered in the process of formulating forecasts for the CARs. A cautionary note needs to be added. These projections are designed to be a guide to the direction for economic growth and development in the region based on the best information and analysis available at the time of writing. As such they are purely indicative of future trends and one of several inputs to guide policymakers in the region. As Section IIIE suggests, both risks to the global economy and risks to CARs could affect the forecasts for the CARs.
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B.
World Business Cycles and US Growth
The National Bureau of Economic Research determines business cycles in the United States. It defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesaleretail prices. In the postwar era, beginning in 1947, there have been eight cycles, averaging 10 months from peak to trough and 52 months from trough to peak. In the last 25 years, the expansion has dominated the contraction phase. In that period, the US economy experienced little more than a year of recession. The expansion phases of these two business cycles were the longest in history lasting from 1982 to 1990, and from 1991 to 2001. Each of the two recessionsfrom mid-1990 to March 1991, and March 2001 to November 2001lasted barely 8 months each. Both recessions were relatively short and mild. Therefore, the world forecast, to the extent that it is responsive to movements in the US economy, need not include a recessionary period in its growth scenario. C. World Outlook Assumptions 1. Growth Outlook
Preliminary estimates suggest that the 5% global income growth achieved in 2004 was the most rapid in the last 20 years. This brisk pace of economic expansion reflected the synchronization of the upswings in the growth cycles in the US; several other major industrial countries; and the emerging markets of the PRC, India, Russia and some Latin American economies. It also represents the culmination of a continuing expansion that began when world growth reached a low of 1.5% in 2001. This rate of economic expansion is unlikely to continue at such a rapid pace. Estimates from both the OEF and WEO models suggest that aggregate activity in the next year or so will only be slightly more than 4% due to tightening policies and significant increases in consumer debt in some economies. Nevertheless, this projected growth is still robust compared to the rate of expansion achieved in the late 1980s and in the 1990s (Table A3.1).
GROWTH
IN
GDPORGANISATION
2002 2005 2.6 5.8 1.4
FOR
TABLE A3.1 ECONOMIC CO-OPERATION

2003
AND
DEVELOPMENT
2005
AND THE
WORLD
2010 2015 3.1 6.0 3.3
1994 2001 OECD Rest Worlda 3.0 4.6 2.7
2002
2004
2006 2009 3.0 5.8 3.2
1.6 4.7 1.8
2.1 6.1 2.8
3.6 6.6 4.0
2.9 5.9 3.3
a Measured using exchange rate method. Sources: World Economic Prospects (OEF 2004 and 2005b), EIU (2004), World Economic Outlook (IMF 2004f), and ADB staff estimates.
2.
Trade Outlook
Growth in world trade has consistently exceeded the growth in income for the last decade. As a result, there has been a dramatic increase in the share of traded goods as a share of total production. There has also been a significant increase in the contestability of markets and a resultant increase in competitiveness and economic efficiency. Growth in trade was most pronounced among developing countries, averaging over 10% growth from 2001 to 2005. These positive trends in trade are expected to continue in the projected forecast period. Industrialized countries are expected to continue to have strong trade growth at around 6% per year, while
51
developing countries will have even stronger trade growth of around 10%. Although the CARs are landlocked and have historically depended on the Russia Federation for trade linkages, the growing forces of globalization will be increasingly important for the future trade prospects for this region. In addition to increasing linkages with the PRC and India, and continuing trade with Russia, the CARs will become more closely integrated into the global economy through WTO accession. This will provide further opportunities for trade with European, North American, and other Asian economies. 3. Commodity Outlook
A number of interrelated factors will impact the outlook for oil. These factors include the political situation in Iraq and other Middle Eastern countries, the demand for oil in spite of higher prices and availability of alternate sources of energy, the response of the Organization of Petroleum Exporting Countries (OPEC) to price volatility, and the supply from non-OPEC members. Further exploration and development of alternative sources of energy will also have an impact on prices in the long run. Oil markets have always been sensitive to expectations in supply as well as actual movements of supplies. All these reasons contribute to the wide confidence interval in any oil price forecast. Many forecasters, including the US Energy Administration, International Energy Agency, IMF, and private forecasters like PIRA Energy Group and OEF are all predicting higher oil prices of around $50 per barrel through 2006. There are mixed views about oil prices in the long run with some predicting oil prices of around $60 per barrel in 20062010 and others an era of high oil prices but with a gradual moderation after 2006. There are several reasons for this latter prediction. The forecast for the world economy shows a moderate slowdown in aggregate demand for 2005 and 2006. This in turn could result in a pullback in growth of demand for oil. In 2004, the PRC and North America were responsible for half of the increase in the demand for oil. For 2005, the rate of expansion for these two countries as well as Europe is projected to moderate. While demand in the PRC remains strong, the country is also undertaking structural changes to conserve energy particularly in the areas of electricity generation using coal. And if oil prices remain high, energy switching is likely to continue in several economies. Nevertheless, demand will remain robust in other rapidly developing country markets, particularly Brazil and India, where fuel efficiency is still low. On the supply side, both OPEC and other non-OPEC suppliers such as Russia, the CARs, and Africa are expected to increase production in response to higher prices. Therefore, our forecast is that demand and supply will remain in relatively close alignment, while prices come to rest at a higher average rate than was expected before the unprecedented price increases in 2004. Prices of Brent crude are likely to rise further to $53 in 2005 and $55 in 2006. Thereafter oil prices are expected to remain high somewhat to $45$50 in 2006 2009 and $40$50 in 20102015. The international market for cotton is dominated by a few large exporters, namely, French Africa, Australia, Kazakhstan, and US, and the outlook for cotton will be dependent on the variations in supply from these countries and the pace of growth of the global consumption of textiles. Prices have fluctuated, with the business cycles of the world economy falling below $0.50 a pound in 2001 and 2002 before rebounding to over $0.60 a pound in 2003 and 2004. Future demand depends largely on whether cotton producers like Brazil, PRC, India, and Turkey will rely more on imports rather than from their own domestic production. With the lapse in the Multi-Fibre Agreement (MFA), export markets should be able to respond more effectively to changing supply and demand conditions. Textile demand in developing country markets is still relatively income-elastic, but the potential spread of genetically modified crops is likely to increase the supply of cotton (Box A3.1). Our forecast shows a continued modest strengthening of cotton prices for the next few years before a softening in the latter years for the forecast (Table A3.2).
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In addition to the interplay of supply and demand for cosmetic and industrial purposes, the gold market is subject to a host of other factors. Investors often turn to gold as investment in times of uncertainty. Historical experience indicates a correlation between the strength of the US dollar and the price of gold. When the dollar is weak, the price of gold becomes strong. Unfortunately, these historical trends are not always consistent and the correlation weak. Nevertheless, recent years have seen the price of gold strengthen as the US dollar weakened. Both the Oxford Forecasting Model and the IMF WEO model project a continued increase in the size of the US current account deficit and weakening of the US dollar. This in part accounts for the relatively strong forecast for the price of gold, even as its price descends slowly from a high of over $400 per ounce in 2004 (Table A3.2) In the past, when investors confidence in other assets fluctuates, the gold market experiences volatility. For this reason, our forecast is subject to possible variations and a wide margin of confidence.
PRICES
2000 Oila Cottonb Goldc
a b c
FOR
TABLE A3.2 OIL, COTTON,

2003 28.8 63.3 363
AND
GOLD
2004 38.3 63.6 421 2005 53.0 63.3 375 2006 2009 4550 60 310 2010 2015 4045 58 320
2001 24.5 48 271
2002 25 46.2 310
28.5 59.2 279
US dollars per barrel; Brent crude. US cents per pound. US dollars per troy ounce. Sources: World Economic Prospects (OEF 2004 and 2005b), EIU (2004), World Economic Outlook (IMF 2004f), and ADB staff estimates.
4.
Outlook for PRC, India, and Russia
The Russian economy has become highly dependent on oil. The energy sector continues to be the main growth engine, accounting for about one third of GDP and over half of foreign exchange earnings. Russia is also exporting more oil in response to higher prices resulting in accelerated economic growth in recent years. Constraints in pipeline capacity and port facilities limit the pace of expansion, while reforms in industry and financial sectors are not sufficient to result in higher growth in the non-oil sectors. These facts suggest that the Russian economy will continue to be driven largely by energy and other minerals. As prices for these products are expected to moderate only slightly in the forecast period, our growth projections are for Russia to level out to around 6% (Table A3.3).
GROWTH
2000 Russia Peoples Republic of China India 10 8 3.9
IN
TABLE A3.3 GDPPEOPLES REPUBLIC OF CHINA, INDIA,

2001 5.9 7.5 5.1 2002 4.7 8.3 5.0 2003 7.3 9.1 7.2 2004 7.0 9.0 6.4
AND
RUSSIA
2005 6.6 7.6 6.9 2006 2009 6.0 7.8 6.8 2010 2015 6.0 7.7 7.0
Sources: World Economic Prospects (OEF 2004 and 2005b), EIU (2004), World Economic Outlook (IMF 2004f), and ADB staff estimates.
53
COTTON, MFA,
AND THE
BOX A3.1 ROLE OF
THE
PRC
AND I NDIA
Aside from oil, natural gas, and other minerals, cotton is the most important primary export in the CARs. Cotton also provides livelihood for a large section of the rural communities in Tajikistan, Turkmenistan, and Uzbekistan. Uzbekistan is the biggest cotton producer among the CARs, ranking fifth in the world in terms of area planted and in production of lint cotton, and second only to the US in terms of lint exports. Tajikistan produces much less cotton than Uzbekistan (0.5 million tons versus 3.5 million tons). Still it is the ninth largest exporter of cotton fibers, which comprise one fourth of total exports, and cotton is grown on roughly 40% of its arable land. In both Uzbekistan and Tajikistan, cotton production and sales provide the livelihood for majority of the rural population. In Turkmenistan, cotton is a much smaller component of export earnings at 6% than in Uzbekistan or Tajikistan. Nevertheless, it accounts for about 25% of GDP and employs about half the labor force. There are a number of important policy issues in the cotton sector in these three CARs. These include (i) accelerating the transition to the private sector including land reform, private farming, and safe property rights; (ii) reducing state interference in the sector including setting production quotas and prices that are below world market levels; and (iii) allowing farmers to select what crops they want to produce based on competitive conditions where prices are set by market forces in international markets. Turning to the international market for cotton products, global textiles and apparel (T&A) trade has been affected by the MFA and other trade restrictions for many years. Under the Uruguay Rounds Agreement on Textiles and Clothing (ATC) and the gradual phaseout of the MFA quotas by the end of 2004, there are significant shifts in the pattern of world trade in T&A. These developments also impact the pattern of trade for cotton. With the phaseout of the MFA, the T&A market will become much more competitive. The overall impact on different countries and on cotton and T&A trade and prices will be complicated. Some developing countries have maintained trade barriers for T&A and these barriers as well as barriers erected by industrial countries will fall. There will be greater opportunities for developing countries to export to developed countries. However, their textile industries could also face import competition in their home markets as they have to abide by the provisions of the ATC. To appraise the impact of these developments, a number of studies have been carried out, primarily by researchers in the United States, using computable general equilibrium models. These models are then combined with agricultural sector models of different economies. This framework enables researchers to assess the impact of the ATC on the output and prices of T&A and cotton as well as the production vectors for a number of countries. While these studies come to somewhat different conclusions depending upon data bases used and differences in assumptions and analytical frameworks, several general conclusions can be drawn from this work. One paper1 pays particular attention to the PRC and, to a lesser extent, India. We focus on these results because they have particular relevance for the cotton-exporting CARs. The phaseout of the MFA is simulated in the model by improving the efficiency of the T&A exports from countries
continued.
1 As a result of the existing restrictions, cotton farmers are probably worse off now in these three countries than they were under the Soviet system. Where market forces have been allowed to operate, such as in Kazakhstan and the Kyrgyz Republic, cotton farmers are better off, cotton yields have risen, and prices are linked to world prices (Mac Donald et al. 2004).
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BOX A3.1. CONTINUED.

and regions restricted by MFA. This is combined with assumptions that other trade barriers to T&A trade are relaxed for all countries. The resulting simulation shows that the PRCs T&A production and exports increase and that the demand for cotton fibers also increases proportionally. The PRC agricultural sector is also modeled to reflect changing production of different products as a result of changing demand for fiber (cotton, wool, and polyester) input. The results of the CGE simulation show a worldwide increase in textile and apparel trade growth by about 8% per year on average up to 2014 compared with the baseline forecast as a result of the phaseout of the MFA. Textile exports increase somewhat more slowly than apparel, which is more laborintensive and responsive to the MFA phaseout in developing countries. The PRC and India both increase their apparel exports as do all Asian countries that did not have preferential trading agreements with the United States. Exports of textiles show a similar pattern to exports of apparel. In both textile and apparel simulations, the PRCs increase is about the average for a developing Asian country. Korea and Taipei,China are able to exploit their investment ties with the rest of developing Asian economies to export more capital-intensive textiles as an input for the growing apparel market. The cotton market is also affected by the implementation of the ATC.2 The PRC consumes more cotton than it produces and cotton imports will increase as a result. However, because domestic production will also increase, the simulation shows only a 1% increase in annual cotton imports over the baseline. These results are somewhat lower than the result of another study by Fang and Babcock (2005) that shows cotton imports growing by 2% or more. Cotton imports from India will also likely increase, although these were not studied. There is a positive impact on cotton prices in international markets coming out of the various CGE models. In the long run, the impact is moderateabout a 4% increase over the baseline. The implications of the analysis of the phasing out of the MFA and adoption of ATC in these CGE models for the cotton-exporting countries of Tajikistan and Uzbekistan are for generally stronger exports of cotton to the PRC and India as well as for firmer cotton prices over the next decade. For further discussion of policy issues in the cotton sectors of the CARs, refer to International Crisis Group (2005).
Much of the CGE analysis is meant to be indicative of future trends rather than sharp point estimates. Furthermore, the level of cotton production in the PRC will be affected by the rate of adoption of recently introduced genetically engineered cotton Bt plants (from Bacillus thuringiensis, which allows plants to produce a toxin to protect them from certain insects. Use of Bt cotton can reduce insecticide costs and increase yield) as well as structural and weather factors in the agricultural sector.
Economic growth in the PRC has been quite strong for the past few years and there are rising concerns that the economy is overheating. Investment in equity markets and property has increased, as prices in some sectors, including consumer durable goods and property, have been rising. With excess capacity in those sectors and no inflationary tendencies yet apparent, there is concern that the investment bubble could further erode the quality of banking sector loans as well as corporate solvency. The government has adopted a number of measures to slow the pace of investment and credit growth that we expect to be effective. Growth is projected to slow to 8% or less in the next 3 years before recovering slightly in the remainder of the forecast period (Table A3.3). This should create enough of a slowdown to prevent a potential investment bubble despite businesses
55
having excess capacity, including several state-owned enterprises being negatively impacted. These sectors, including some durable and consumer goods, and the property sector will experience greater competition and downward price pressure. India is rapidly changing as the impacts of liberalization measures continue to percolate through the economy. Nevertheless, agriculture still accounts for a quarter of GDP and an even higher share of employment. As a result, forecasts of GDP growth are subject to unforeseen weather conditions and predicated on normal weather and monsoon patterns. Services stand out as the most rapidly growing sector, fueled by the growth of call centers and other technology-based but labor-intensive services such as documentation of human resource, legal, and medical records. Manufacturing will continue to attract foreign investment mainly through subcontracting arrangements rather than through FDI. This modality allows foreign firms to skirt the bureaucratic procedures that still typify the Indian market. The industrial sector will also benefit from infrastructure development programs that facilitate and improve efficiency, particularly in road transport (Table A3.3).
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APPENDIX 4 COUNTRY AND REGIONAL RANKINGS, TEMECI 2003

BOX A4.1 THE TRANSITION ECONOMY MANUFACTURING EXPORT COMPETITIVENESS INDEX (TEMECI)
The TEMECI emphasizes the ability to produce manufactures competitively in transition economies. This is a simple composite index made up of three variables: MVA per capita, manufactured exports per capita, and machinery and transport equipment exports per capita. This compact design allows for wide country coverage despite the lack of data in transition economies. The first variable represents the size of the manufacturing base scaled by population and, hence, the level of industrialization. Larger values of MVA per capita imply higher levels of industrialization. The second captures actual performance of manufacturing in world markets scaled by population. Larger values of manufactured exports per capita indicate better performance on world markets. The third looks at the composition of manufactures by technological intensity taking machinery and transport equipment as a proxy for technology-intensive exports. Larger values of machinery and transport equipment exports suggest an export structure that is oriented toward technologically advanced production. TEMECI focuses on actual industrial performance and uses quantitative data rather than qualitative or survey information. The few industrial performance variables and the use of hard data facilitate transparent interpretation of country rankings. It contrasts with other indices developed by the World Economic Forum and Institute for Management Development that mix a large number of quantitative and qualitative variables and give rise to rankings of countries that are hard to interpret. TEMECI takes a value for each country between 0 and 1 where higher values in the TEMECI indicate a greater level of competitiveness. Thus, Hungary with a value of 0.81 is perceived as being more competitive than Albania with 0.27. Calculations were performed to give each country a value of between 0 and 1 for each of the three variables, and these were then equally weighted to produce a final index figure for each country, which could be then ranked.1
For methodological details of index computation, see Wignaraja and Joiner (2004).
57
OVERALL
OVERALL RANK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 AVERAGE INDEX 1.00 0.97 0.92 0.89 0.87 0.78 0.76 0.75 0.68 0.65 0.61 0.55 0.45 0.35 0.32 0.28 0.24 0.23 0.22 0.18 0.18 0.15 0.08
TABLE A4.1 TEMECI RANKING, 2003

MANUFACTURING VALUE-ADDED PER CAPITA 2,609.3 1,833.1 1,235.2 1,155.9 1,050.8 947.8 857.6 843.0 725.7 559.7 374.3 532.5 295.5 89.7 124.4 134.0 57.6 66.9 138.8 56.7 25.4 21.6 57.3 MANUFACTURED EXPORTS PER CAPITA 4,749.4 4,296.3 2,937.3 2,292.3 2,312.2 930.3 880.2 795.9 504.3 573.0 445.7 160.8 142.0 103.6 89.8 46.4 86.8 31.0 16.4 39.7 38.2 65.2 20.9 MACHINERY EXPORTS PER CAPITA 2,376.3 2,393.4 2,594.9 1,935.1 1,231.0 547.3 524.2 409.2 170.8 113.6 125.7 64.5 15.5 16.5 4.9 3.2 2.2 8.4 4.5 2.0 8.5 2.1 0.4
COUNTRY Slovenia Czech Republic Hungary Slovak Republic Estonia Lithuania Poland Croatia Romania Latvia Bulgaria Russia Kazakhstan Vietnam Albania Turkmenistan Cambodia Uzbekistan Azerbaijan Tajikistan Kyrgyz Republic Mongolia Lao PDR
Note: Where 2003 data were unavailable, 2002 or 2001 data were used. Sources: Table 18 in this paper for the CARs, World Development Indicators Online (World Bank 2006).
TABLE A4.2 TEMECI

WEIGHTED AVERAGEa CARsc CSBd Russia SEATCse
a b c d
AND
COMPONENTS
BY
REGION, 2003
MANUFACTURED EXPORTS PER HEAD 55.6 1318.9 160.8 96.0 MACHINERY EXPORTS PER HEAD 8.5 869.6 64.5 13.2
SIMPLE AVERAGE 0.26 0.77 0.55 0.20
MANUFACTURING VALUEADDED PER CAPITAb 129.0 1077.7 671.0 92.7
0.35 0.81 0.55 0.32
GDP weights. Where 2003 data are not available, levels are computed using same rates as in 2002. CARs: Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Central and Southeastern Europe and Baltics (CSB): Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia. e Southeast Asian Transition Countries (SEATCs): Cambodia, Lao Peoples Democratic Republic, Mongolia, and Viet Nam. Source: Table 18 in this paper.
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APPENDIX 5 MONGOLIA: ECONOMIC ASSESSMENT4

A. Introduction
Mongolia is a landlocked country sharing borders with the PRC and the Russian Federation. It occupies a geographical area that is half the size of India with a total population of 2.5 million. These geographic and demographic facts result in an extremely low population density of two persons per square kilometer. Almost 1 million people live now in Ulaanbaatar, the capital city, while the rest reside in aimag (province) and soum (district) centers, or are nomadic herders. Low population densities in rural areas and the small size of towns impose challenges to cost-efficient and reliable delivery of public goods and social services. The Mongolian economy is very narrowly based with copper, gold, and cashmere being the major sources of income and trade. The mainstay of the rural population is herding, an activity subject to the shortcomings of the Mongolian harsh climate with short summers and extreme winters. The lack of economic diversification exacerbates the countrys vulnerability to variations in weather and international prices. The country began its transformation from a centrally planned economy to a market-based economy in 1991. Mongolia seems to have experienced a more limited transition shock (i.e., a smaller decrease in national output and lower inflationary pressures) than other transition economies. This performance could be explained by favorable noneconomic initial conditions as well as economic factors, particularly the early adoption of appropriate adjustment policies and market-oriented reforms that contributed to growth recovery. In addition, large inflows of foreign aid since the first years of the transition have played a key role in economic recovery. Since 1991, Mongolia has achieved commendable progress in privatization and structural reforms in many areas, and has established the basic institutions and policy framework to enable private sector development, currently accounting for 85% of the economy. B. Economic Growth
The first years of the transition were characterized by falls in output (GDP recorded a cumulative loss of 22% of output from 19911993), and escalating inflation (that peaked at 325% in 1993). But the crisis was shortlived and the economy quickly overcame the shock with positive growth and inflation control in response to tight monetary policies. The economy returned to positive growth in 1994, largely reflecting efficiency gains from the market-oriented reforms and favorable movements in the terms of trade triggered by higher international cashmere and copper prices. Growth peaked in 1995 when GDP grew at 6.3% fostered by upward copper prices but slowed down in 1996 (2.4%), a year of exceptionally low copper prices. Growth reached 4.0% in 1997 but moderated again in a declining trend. The variability in the growth rate during the period is largely explained by movements in the terms of trade, mainly induced by swings in copper prices. In 2000 the country entered a short phase of stagnation. Affected by exogenous factors, severe natural shocks and declining prices of the key imports, the economy remained below its growth potential. In 20002001 GDP grew 1%. The losses in the livestock subsectorreeling from the ill effects of two successive harsh winters (dzud) and a severe outbreak of foot-and-mouth diseasewere estimated at 10% of the countrys total herd. As
The historical data contained in this appendix are from Asian Development Outlook (ADB various years), while the forecasts for growth and poverty are staff estimates. This Mongolia appendix was prepared by Yolanda Fernandez.
59
a result, agricultural output, which still accounts for about one fourth of GDP, posted an alarming two-digit decline that was, however, offset by the good performance of industry and services. In 20022003, after 2 years of stagnation, economic prospects improved due to the recovery in gold and copper prices, and the effect of milder winters on agriculture that returned to positive growth in 2003, lifting overall GDP growth up to 5.5%. GDP growth in 2004 was the highest posted since economic transition started. Surging commodity prices, particularly gold and copper, and the positive effect of a milder winter on agriculture increased overall GDP growth from 5.5% in 2003 to 10.6% in 2004, exceeding all targets and projections. This robust growth originates mainly from two-digit growth in agriculture due to the rapid development of the husbandry industry, and from the mining sector expansion following the increase in copper and gold international prices and the start of mining exploitation by new foreign investors. C. Structural Change
As discussed above, the pattern of growth in Mongolia is still reliant on agriculture. Although agricultures contribution to GDP has declined since 1999, it was the main engine of the countrys recovery in the second half of the 1990s (see Figure A5.1). The industrial sectordominated by mining, manufacturing, and constructionis small but has increased since 2000. The tertiary sector (dominated by telecommunications, financial services, transportation, and wholesale retail trade) has turned into the main source of growth since the late 1990s, currently accounting for about half of GDP.
FIGURE A5.1 STRUCTURE OF OUTPUT, SELECTED YEARS (% OF GDP)

100 90 80 70 60 50 40 30 20 10 0 1991 1993 1995 1998 2000 Industry 2001 2002 Services 2003 2004 Agriculture
Source: National Statistical Office of Mongolia.
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D.
Inflation
One of the notable features of Mongolias transition experience is the governments commitment to restoring macroeconomic stability by implementing monetary and fiscal policies under the guidance of three consecutive IMF stabilization programs. Monetary policy was accommodating in the first 3 years of the transition to absorb the initial price liberalization at the unavoidable cost of high inflation. In 1995, money supply tightened and successfully contributed to overall monetary stabilization by focusing on maintaining stable inflation and exchange rates, while ensuring adequate money supply. In recent years, money supply has risen at a significant rate (triggered by a fast-growing demand and normal monetization of the economy following the recovery) but has not unduly affected inflation. High international prices of oil and local food prices increased inflation in 2004 to 10.6% from 4.5% in the previous year. Monetary tightening in 2004 led to moderation in the money supply and M2 slowed down to 16.5% from 49.8% in 2003. The decrease in the monetary aggregate growth indicates that price-insensitive money demand and monetization of the economy is slowing down after 3 years of fast-growing bank deposits and credit stemming from restored public confidence in the banking system. E. External Sector Developments
Trade played an important role during the transition. More favorable terms of trade and an impressive reorientation of the trade pattern helped absorb the shock left by the collapse of the former Soviet Union and the Council for Mutual Economic Assistance. In the mid-1990s, trade with new export markets (PRC, Japan, Korea, US) and rising copper prices boosted exports and normalized imports. Nevertheless, the trade balance has remained negative throughout the period, underscoring the vulnerability of the external sector to international prices volatility of the three key exports: copper, gold, and cashmere. The persistent trade deficit has dominated the current account, while the capital account clearly shows the substitution of the former Soviet transfers by abundant flows of official development assistance. Foreign direct investment has been minimal and remains modest but in the last years, promising new gold mines are beginning to attract foreign investors, mainly from the PRC. A WTO member since 1997, Mongolia enjoys at present a high degree of trade liberalization and pursues a flexible exchange rate policy applied through recourse to intervention that maintains the national currency fairly stable. Foreign trade increased over the period, but exports suffered the volatility of international commodity prices. Declining world prices of copper and cashmere brought exports down from 18% in 2000 to negative growth in 2001. On the contrary, rises in gold and copper prices in 2004 helped exports to grow 36.0%. Imports followed a similar pattern and grew 22.3% in 2004. As a result, the trade deficit improved significantly, containing the current account deficit to 8.1% of GDP. The overall balance of payments remains in surplus reflecting the inflow of external assistance and growing remittances from overseas workers. The reform process has been underpinned by significant inflows of foreign aid including balance of payments and direct budgetary support with increasing emphasis on technical assistance. As a consequence, debt accumulation accelerated in the mid-1990 and external debt doubled since 1996, raising some concerns on debt sustainability issues. Since most of the debt consists of loans from multilateral or bilateral sources on concessional terms, the debt situation remains manageable. Total external debt stock increased to 88.3% of GDP from 81.2% in 2000, while debt service reached 8.2% of exports from 4.5% in 2000. F. Poverty and Unemployment
The transition process was accompanied by increasing poverty. Following the collapse of the socialist institutions, a range of services deteriorated, including health care, education, transportation, sanitation, and water supply. Poverty remains persistent both in rural and urban Mongolia, and 36% of the population live below the national poverty line ($0.75). Continued growth is helping lift living standards but the benefits are not equally distributed among the population, as revealed by income inequality and poverty incidence. Rural poverty is significantly higher than urban poverty, with Western Mongolia being the most seriously affected region while the capital
61
city has the lowest level of poverty in the country. These results are broadly in line with the observed changes in the GDP sectoral composition with industry and services expanding fast while agriculture has been falling. Not surprisingly, the outcome is a significant migration from the countryside to the major urban centers. Growing social differentiation, a phenomenon particularly visible in the capital city, strengthens the inequality. High unemployment (14.2%) or underemployment due to a mismatch of skills is also a major cause of poverty. The tertiary sector is the main source of employment in Mongolia followed by agriculture and industry. However, the pattern is completely different in urban and rural areas. While services account for 75% of the employed in urban centers, these employ only 5% of the rural labor force, which is mainly engaged in livestock and farming activities. G. Economic Outlook
Economic growth is constrained by Mongolias remoteness from major international markets and by the countrys heavy dependence on climatic conditions and commodity production and trade. Mineral products, cashmere, and textiles account for more than 80% of Mongolias total exports. This narrow base makes the economy highly vulnerable to external shocks, limiting the countrys long-term prospects of economic development. In Mongolia, any projections about the economy depend on strong assumptions about climatic shocks and international commodity prices. This outlook relies on the following assumptions: (i) growing external demand; (ii) increasing prices of gold, copper, and cashmere; (iii) favorable weather conditions; (iv) continued growth in the PRC and the Russian Federation; and (v) internal political stability. Given these assumptions, economic growth in Mongolia is projected to reach an average 6% in the 20052010. Milder winters and improved breeding techniques will continue to foster animal husbandry production although increases in the arable production are less certain as the sector needs restructuring and investment. The boom in investment in the mining and mineral sector is expected to continue given the good prospects for new explorations in the Gobi Desert and the PRCs continued demand for minerals, particularly copper. Manufacturing is expected to decrease as textiles production might slow down following the phaseout of the Multi-Fibre Agreement. Construction and services are projected to grow in line with rapid development in the capital city and growing demand for new services. Tourism, which currently accounts for 10% of GDP, is expected to expand following the success of the government to attract every year a growing number of visitors, and recent developments of the tourist infrastructure. The growth forecast (20052010) is likely to translate into a reduction in income poverty to around 30% by 2010.
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APPENDIX 6 XINJIANG UYGUR AUTONOMOUS REGION OF THE PEOPLES REPUBLIC OF CHINA: ECONOMIC ASSESSMENT5
A. Background
Xinjiang Uygur Autonomous Region (XUAR) of the PRC lies in the northwest part of the PRC, with the Tibet Autonomous Region to its south and Gansu and Qinghai provinces to the southeast. It has a 5,000-kilometerlong (km) border that it shares with seven countries.6 It has a total land area of 1.66 million square kilometers (km2) accounting for one sixth of the Chinese mainland. It has an arid climate with an annual average of 150 centimeters (cm) of rain and large areas covered by the Taklimakan and Gobi deserts. Of the total 2003 population of 19.34 million (1.5% of the total of PRC population), about 45.9% were Uygurs, and the rest a mixture of Hans (39.9%), Kazaks (7.0%), Mongolians, Kyrgyz, Tajiks, Russians, Manchus, Uzbeks, and another 35 ethnic groups. This ethnic multiplicity has been a long tradition formalized in the formation of the XUAR in 1955. About 25% of the population is urbanized. Majority of the population follows Islam, which came to the region in the 9th and early 10th century from central Asia. Islam replaced Buddhism as XUARs main religion in early 16th century. Buddhism was the predominant religion before Islam, arriving from India via Kashmir in first century BC and spreading extensively. B. Growth and Structural Change
GDP at the end of 2003 was reported at CNY187.8 billion or $22.7 billion. GDP growth, in line with the PRCs overall economic growth, has been about 9% annually for 20012003, pushing per capita annual incomes from CNY166 in 1952 to CNY9,700 ($1,172) in 2003 (Figure A6.1). The primary, secondary, and tertiary economic sectors contributed 22.0%, 42.4%, and 35.6% of GDP in 2003, respectively (Table A6.1). XUAR of the PRC appears to be self-sufficient in its food grain requirements with an annual output of about 8 million tons. It has become the PRCs largest producer of cotton, hops, and tomato sauce and a major livestock breeding center. The region has been characterized by relatively low inflation that averaged 2% per year n 1996200 (Figure A6.2). From a high of 10.5% in 1996, prices declined to 0.6% in 1999. Inflation was posted at 0.4% in 2003. The provinces industrial strength is based on its vast hydrocarbon reserves, which began to be exploited only after 1955. In 2001, XUAR produced 19.47 million tons of crude oil from the Tarim Basinone of the worlds
TABLE A6.1 GDP GROWTH IN XUR (%

19962000 GDP, Annual Growth (%) Agriculture Industry Services 8.0 5.8 8.9 9.0 20012003 9.0 5.3 9.7 10.1
PER YEAR)
2002 8.1 5.0 8.4 9.3
2003 10.8 8.5 12.1 10.5
SECTORAL SHARES, 2003 (% OF GDP) 100.0 22.0 42.4 35.6
5 6
The assessment is largely based on data from the Statistics Bureau of XUAR (2004). The bordering countries are Afghanistan, Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, Russia, and Tajikistan.
63
FIGURE A6.1 GDP PER CAPITA IN XUR, 19962003 (US$)

1400.0 1200.0 1000.0 800.0 600.0 400.0 200.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003
FIGURE A6.2 INFLATION RATE IN XUR, 19962003 (% PER YEAR)

12 10 8 6 4 2 0 -2 -4 1996
1997
1998
1999
2000
2001
2002
2003
largest single oilfieldswhich started production in 1994. Under the policy of transporting western natural gas and oil eastwards, the Tarim oil and gas fields are now connected by a 6,000 km-long pipeline to the eastern coast of the PRC with an estimated investment of almost $14 billon, most of which is FDI. Foreign investment in the oil and gas sector was permitted in 1993 and has seen a substantial inflow of FDI since then. The province also produced 27 million tons of coal and 23.5 billion kilowatt-hours of electricity in 2003. The industrial structure has become quite diversified over time with production of steel, cement, chemical fertilizers, sugar, and cotton yarn. The hydrocarbon reserves and the governments policy of turning XUAR into the countrys largest petrochemical base have spurred growth in related industries since the mid-1990s. Infrastructure is well developed, with 3,361 km of railway lines connecting XUAR with the rest of the PRC, Almaty, Kazakhstan, and Russia. The province reportedly has a road network of 80,900 km, but only 428 km of
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that is expressway. The highway running across the Taklimakan Desert is a graded highway. XUAR has 11 airports, with its capital Urumqi connected to Almaty, Tashkent, Moscow, Islamabad, and 64 major cities in the PRC including Beijing and Shanghai. The telecommunications network is well developed, with a digital network connecting Urumqi with all other parts of the PRC and an optical fiber linked to Xian and other western cities. A mobile phone network is also in place. It had about 2.9 million users in 2001. Merchandise exports have grown from $549.8 million in 1996 to $2.5 billion in 2003 (see Figure A6.3). Export expansion has been partly driven by manufactured exports that accounted for $2.2 billion in 2003 (up from $385 million in 1996). The bulk of XUARs manufactured exports are destined for the CARs and Russia. Hence, XUAR acts as a gateway in the PRCs trade relations with Central Asia. Tourism also contributes nearly $100 million annually to foreign exchange earnings. Economic development in the XUAR of the PRC has benefited from resource transfer from the central budget. During 19952000, public investment amounted to more than 53% of total investment of more than CNY500 billion. Since 1996, XUAR received large fiscal subsidies from the central budget under the governments strategy to develop the western provinces. Subsidies increased from CNY5.9 billion in 1996 to CNY18.4 billion in 2001. The World Bank has financed 22 projects with loans of about CNY41.8 billion and ADB has financed three investment projects with a total commitment of $5 million. Other foreign bilateral financial assistance has amounted to 5.41 million Yuan in 68 projects.
FIGURE A6.3 EXPORT PERFORMANCE IN XUR, 19962003 (US$ MILLION)

3000.0 2500.0 2000.0 1500.0 1000.0 500.0 Manufactured Goods Manufactured Goods 0.0 1996 1997 1998 1999 2000 2001 2002 2003 Merchandise Exports
C.
Social Development
Illiteracy was below 2% among the young and middle-aged in 2003. A system of compulsory education for the first 9 years of school is enforced, ensuring almost universal access to elementary education. The number of schools has increased steadily and now the province has 26 institutions of higher learning with an enrollment of more than 100,000. Health facilities have expanded steadily but actual health indicators are not available. In 2003, the province had 1,471 hospitals offering 36.1 hospital beds per 10,000 people as compared to 1.6 in 1949. A three-tier health system at the county, township, and village levels has been put in place with the number of doctors and medical workers above the national average. The coverage of pregnant and lying-in women under systematic health care has reached 90% in urban and 50% in rural areas. Seventy percent of children in urban areas and 30% in rural areas are covered under organized health schemes. Almost half the population (8.1 million) has access to piped drinking water.
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APPENDIX 7 TRANSITION INDICATORS, 2005

The EBRD has computed indicators that reflect the pace of reforms in the CARs. These transition indices range from 1 to 4+, with 1 representing little or no change from a rigidly planed economy and 4+ representing the standards of an industrial market economy. These indicators are reported in Table A7.1 below.7
TABLE A7.1 TRANSITION INDICATOR SCORES, 2005

ENTERPRISES GOVERNANCE LARGE- SMALLAND SCALE SCALE ENTERPRISE PRIVAT- PRIVAT- RESTRUCIZATION IZATION TURING MARKETS AND TRADE TRADE AND PRICE FOREIGN LIBERAL- EXCHANGE IZATION SYSTEM FINANCIAL INSTITUTIONS INFRASTRUCTURE
COMPETITION POLICY
BANKING SECURITIES REFORM AND MARKETS AND INTEREST RATE NONBANK INFRALIBERALFINANCIAL STRUCTURE IZATION INSTITUTIONS REFORM
Oil Exporters Azerbaijan Kazakhstan Turkmenistan Non-oil Exporters Kyrgyz Republic Tajikistan Uzbekistan Memo Items Russia Hungary Slovenia
2 3 1
44 2
2+ 2 1
4 4 3-
4 3+ 1
2 2 1
2+ 3 1
22+ 1
2 2+ 1
42+ 3-
4 4 3
2 22-
4+ 43-
4+ 3+ 2
2 22-
2+ 2 2-
2 1 2
21+ 2-
3 4 3
4 4+ 4+
2+ 43
4 4+ 4
3+ 4+ 4+
2+ 3 3-
2+ 4 3+
34 3-
343
Note: For a detailed breakdown of each of the areas of reform, see the methodological notes on EBRD (2005, 202). Source: EBRD (2005).
For a detailed breakdown of each of the areas of reform, see methodological notes of EBRD (2005, 2023).
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Practices of Poverty Measurement and Poverty Profile of Bangladesh Faizuddin Ahmed, August 2004 Experience of Asian Asset Management Companies: Do They Increase Moral Hazard? Evidence from Thailand Akiko Terada-Hagiwara and Gloria Pasadilla, September 2004 Viet Nam: Foreign Direct Investment and Postcrisis Regional Integration Vittorio Leproux and Douglas H. Brooks, September 2004 Practices of Poverty Measurement and Poverty Profile of Nepal Devendra Chhetry, September 2004 Monetary Poverty Estimates in Sri Lanka: Selected Issues Neranjana Gunetilleke and Dinushka Senanayake, October 2004 Labor Market Distortions, Rural-Urban Inequality, and the Opening of Peoples Republic of Chinas Economy Thomas Hertel and Fan Zhai, November 2004 Measuring Competitiveness in the Worlds Smallest Economies: Introducing the SSMECI Ganeshan Wignaraja and David Joiner, November 2004 Foreign Exchange Reserves, Exchange Rate Regimes, and Monetary Policy: Issues in Asia Akiko Terada-Hagiwara, January 2005 A Small Macroeconometric Model of the Philippine Economy Geoffrey Ducanes, Marie Anne Cagas, Duo Qin, Pilipinas Quising, and Nedelyn Magtibay-Ramos, January 2005 Developing the Market for Local Currency Bonds by Foreign Issuers: Lessons from Asia Tobias Hoschka, February 2005 Empirical Assessment of Sustainability and Feasibility of Government Debt: The Philippines Case Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas Quising, February 2005 Poverty and Foreign Aid Evidence from Cross-Country Data Abuzar Asra, Gemma Estrada, Yangseom Kim, and M. G. Quibria, March 2005 Measuring Efficiency of Macro Systems: An Application to Millennium Development Goal Attainment Ajay Tandon, March 2005 Banks and Corporate Debt Market Development Paul Dickie and Emma Xiaoqin Fan, April 2005 Local Currency FinancingThe Next Frontier for MDBs? Tobias C. Hoschka, April 2005 Export or Domestic-Led Growth in Asia? Jesus Felipe and Joseph Lim, May 2005 Policy Reform in Viet Nam and the Asian Development Banks State-owned Enterprise Reform and Corporate Governance Program Loan George Abonyi, August 2005 Policy Reform in Thailand and the Asian Development Banks Agricultural Sector Program Loan George Abonyi, September 2005 Can the Poor Benefit from the Doha Agenda? The Case of Indonesia Douglas H. Brooks and Guntur Sugiyarto, October 2005 Impacts of the Doha Development Agenda on Peoples Republic of China: The Role of Complementary Education Reforms Fan Zhai and Thomas Hertel, October 2005
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Growth and Trade Horizons for Asia: Long-term Forecasts for Regional Integration David Roland-Holst, Jean-Pierre Verbiest, and Fan Zhai, November 2005 Macroeconomic Impact of HIV/AIDS in the Asian and Pacific Region Ajay Tandon, November 2005 Policy Reform in Indonesia and the Asian Development Banks Financial Sector Governance Reforms Program Loan George Abonyi, December 2005 Dynamics of Manufacturing Competitiveness in South Asia: ANalysis through Export Data Hans-Peter Brunner and Massimiliano Cal, December 2005
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Trade Facilitation Teruo Ujiie, January 2006 An Assessment of Cross-country Fiscal Consolidation Bruno Carrasco and Seung Mo Choi, February 2006 Central Asia: Mapping Future Prospects to 2015 Malcolm Dowling and Ganeshan Wignaraja, April 2006
ERD TECHNICAL NOTE SERIES (TNS) (Published in-house; Available through ADB Office of External Relations; Free of Charge)
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Contingency Calculations for Environmental Impacts with Unknown Monetary Values David Dole, February 2002 Integrating Risk into ADBs Economic Analysis of Projects Nigel Rayner, Anneli Lagman-Martin, and Keith Ward, June 2002 Measuring Willingness to Pay for Electricity Peter Choynowski, July 2002 Economic Issues in the Design and Analysis of a Wastewater Treatment Project David Dole, July 2002 An Analysis and Case Study of the Role of Environmental Economics at the Asian Development Bank David Dole and Piya Abeygunawardena, September 2002 Economic Analysis of Health Projects: A Case Study in Cambodia Erik Bloom and Peter Choynowski, May 2003 Strengthening the Economic Analysis of Natural Resource Management Projects Keith Ward, September 2003 Testing Savings Product Innovations Using an Experimental Methodology Nava Ashraf, Dean S. Karlan, and Wesley Yin, November 2003 Setting User Charges for Public Services: Policies and Practice at the Asian Development Bank David Dole, December 2003
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Beyond Cost Recovery: Setting User Charges for Financial, Economic, and Social Goals David Dole and Ian Bartlett, January 2004 Shadow Exchange Rates for Project Economic Analysis: Toward Improving Practice at the Asian Development Bank Anneli Lagman-Martin, February 2004 Improving the Relevance and Feasibility of Agriculture and Rural Development Operational Designs: How Economic Analyses Can Help Richard Bolt, September 2005 Assessing the Use of Project Distribution and Poverty Impact Analyses at the Asian Development Bank Franklin D. De Guzman, October 2005 Assessing Aid for a Sector Development Plan: Economic Analysis of a Sector Loan David Dole, November 2005 Debt Management Analysis of Nepals Public Debt Sungsup Ra, Changyong Rhee, and Joon-Ho Hahm, December 2005 Evaluating Microfinance Program Innovation with Randomized Control Trials: An Example from Group Versus Individual Lending Xavier Gin, Tomoko Harigaya,Dean Karlan, and Binh T. Nguyen, March 2006
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ERD POLICY BRIEF SERIES (PBS) (Published in-house; Available through ADB Office of External Relations; Free of charge)
No. 1 No. 2 Is Growth Good Enough for the Poor? Ernesto M. Pernia, October 2001 Indias Economic Reforms What Has Been Accomplished? What Remains to Be Done? Arvind Panagariya, November 2001 Unequal Benefits of Growth in Viet Nam Indu Bhushan, Erik Bloom, and Nguyen Minh Thang, January 2002 Is Volatility Built into Todays World Economy? J. Malcolm Dowling and J.P. Verbiest, February 2002 What Else Besides Growth Matters to Poverty Reduction? Philippines Arsenio M. Balisacan and Ernesto M. Pernia, February 2002 Achieving the Twin Objectives of Efficiency and Equity: Contracting Health Services in Cambodia Indu Bhushan, Sheryl Keller, and Brad Schwartz, March 2002 Causes of the 1997 Asian Financial Crisis: What Can an Early Warning System Model Tell Us? Juzhong Zhuang and Malcolm Dowling, June 2002 The Role of Preferential Trading Arrangements in Asia Christopher Edmonds and Jean-Pierre Verbiest, July 2002 The Doha Round: A Development Perspective Jean-Pierre Verbiest, Jeffrey Liang, and Lea Sumulong, July 2002 Is Economic Openness Good for Regional Development and Poverty Reduction? The Philippines E. M. Pernia and Pilipinas Quising, October 2002 Implications of a US Dollar Depreciation for Asian Developing Countries Emma Fan, July 2002 Dangers of Deflation D. Brooks and Pilipinas Quising, December 2002 Infrastructure and Poverty Reduction What is the Connection? Ifzal Ali and Ernesto Pernia, January 2003 Infrastructure and Poverty Reduction Making Markets Work for the Poor Xianbin Yao, May 2003 SARS: Economic Impacts and Implications Emma Xiaoqin Fan, May 2003 Emerging Tax Issues: Implications of Globalization and Technology Kanokpan Lao Araya, May 2003 Pro-Poor Growth: What is It and Why is It Important? Ernesto M. Pernia, May 2003 PublicPrivate Partnership for Competitiveness Jesus Felipe, June 2003 Reviving Asian Economic Growth Requires Further Reforms Ifzal Ali, June 2003 The Millennium Development Goals and Poverty: Are We Counting the Worlds Poor Right? M. G. Quibria, July 2003 Trade and Poverty: What are the Connections? Douglas H. Brooks, July 2003 Adapting Education to the Global Economy Olivier Dupriez, September 2003 Avian Flu: An Economic Assessment for Selected Developing Countries in Asia Jean-Pierre Verbiest and Charissa Castillo, March 2004 Purchasing Power Parities and the International Comparison Program in a Globalized World Bishnu Pant, March 2004 A Note on Dual/Multiple Exchange Rates Emma Xiaoqin Fan, May 2004 Inclusive Growth for Sustainable Poverty Reduction in Developing Asia: The Enabling Role of Infrastructure Development Ifzal Ali and Xianbin Yao, May 2004 Higher Oil Prices: Asian Perspectives and Implications for 2004-2005 Cyn-Young Park, June 2004 Accelerating Agriculture and Rural Development for Inclusive Growth: Policy Implications for Developing Asia Richard Bolt, July 2004 Living with Higher Interest Rates: Is Asia Ready? Cyn-Young Park, August 2004 Reserve Accumulation, Sterilization, and Policy Dilemma Akiko Terada-Hagiwara, October 2004 The Primacy of Reforms in the Emergence of Peoples Republic of China and India Ifzal Ali and Emma Xiaoqin Fan, November 2004 Population Health and Foreign Direct Investment: Does Poor Health Signal Poor Government Effectiveness? Ajay Tandon, January 2005 Financing Infrastructure Development: Asian Developing Countries Need to Tap Bond Markets More Rigorously Yun-Hwan Kim, February 2005 Attaining Millennium Development Goals in Health: Isnt Economic Growth Enough? Ajay Tandon, March 2005 Instilling Credit Culture in State-owned Banks Experience from Lao PDR Robert Boumphrey, Paul Dickie, and Samiuela Tukuafu, April 2005 Coping with Global Imbalances and Asian Currencies Cyn-Young Park, May 2005 Asias Long-term Growth and Integration: Reaching beyond Trade Policy Barriers Douglas H. Brooks, David Roland-Holst, and Fan Zhai, September 2005 Competition Policy and Development Douglas H. Brooks, October 2005 Highlighting Poverty as Vulnerability: The 2005 Earthquake in Pakistan Rana Hasan and Ajay Tandon, October 2005 Conceptualizing and Measuring Poverty as Vulnerability: Does It Make a Difference? Ajay Tandon and Rana Hasan, October 2005 Potential Economic Impact of an Avian Flu Pandemic on Asia Erik Bloom, Vincent de Wit, and Mary Jane Carangal-San Jose, November 2005 Creating Better and More Jobs in Indonesia: A Blueprint for Policy Action Guntur Sugiyarto, December 2005
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SPECIAL STUDIES, COMPLIMENTARY (Available through ADB Office of External Relations)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Improving Domestic Resource Mobilization Through Financial Development: Overview September 1985 Improving Domestic Resource Mobilization Through Financial Development: Bangladesh July 1986 Improving Domestic Resource Mobilization Through Financial Development: Sri Lanka April 1987 Improving Domestic Resource Mobilization Through Financial Development: India December 1987 Financing Public Sector Development Expenditure in Selected Countries: Overview January 1988 Study of Selected Industries: A Brief Report April 1988 Financing Public Sector Development Expenditure in Selected Countries: Bangladesh June 1988 Financing Public Sector Development Expenditure in Selected Countries: India June 1988 Financing Public Sector Development Expenditure in Selected Countries: Indonesia June 1988 Financing Public Sector Development Expenditure in Selected Countries: Nepal June 1988 Financing Public Sector Development Expenditure in Selected Countries: Pakistan June 1988 Financing Public Sector Development Expenditure in Selected Countries: Philippines June 1988 Financing Public Sector Development Expenditure in Selected Countries: Thailand June 1988 Towards Regional Cooperation in South Asia: ADB/EWC Symposium on Regional Cooperation in South Asia February 1988 Evaluating Rice Market Intervention Policies: Some Asian Examples April 1988 Improving Domestic Resource Mobilization Through Financial Development: Nepal November 1988 Foreign Trade Barriers and Export Growth September 1988 The Role of Small and Medium-Scale Industries in the Industrial Development of the Philippines April 1989 19. The Role of Small and Medium-Scale Manufacturing Industries in Industrial Development: The Experience of Selected Asian Countries January 1990 20. National Accounts of Vanuatu, 1983-1987 January 1990 21. National Accounts of Western Samoa, 1984-1986 February 1990 22. Human Resource Policy and Economic Development: Selected Country Studies July 1990 23. Export Finance: Some Asian Examples September 1990 24. National Accounts of the Cook Islands, 1982-1986 September 1990 25. Framework for the Economic and Financial Appraisal of Urban Development Sector Projects January 1994 26. Framework and Criteria for the Appraisal and Socioeconomic Justification of Education Projects January 1994 27. Investing in Asia 1997 (Co-published with OECD) 28. The Future of Asia in the World Economy 1998 (Copublished with OECD) 29. Financial Liberalisation in Asia: Analysis and Prospects 1999 (Co-published with OECD) 30. Sustainable Recovery in Asia: Mobilizing Resources for Development 2000 (Co-published with OECD) 31. Technology and Poverty Reduction in Asia and the Pacific 2001 (Co-published with OECD) 32. Asia and Europe 2002 (Co-published with OECD) 33. Economic Analysis: Retrospective 2003 34. Economic Analysis: Retrospective: 2003 Update 2004 35. Development Indicators Reference Manual: Concepts and Definitions 2004 35. Investment Climate and Productivity Studies Philippines: Moving Toward a Better Investment Climate 2005 The Road to Recovery: Improving the Investment Climate in Indonesia 2005 Sri Lanka: Improving the Rural and Urban Investment Climate 2005
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OLD MONOGRAPH SERIES (Available through ADB Office of External Relations; Free of charge)
EDRC REPORT SERIES (ER)

No. 1 No. 2 ASEAN and the Asian Development Bank Seiji Naya, April 1982 Development Issues for the Developing East and Southeast Asian Countries and International Cooperation Seiji Naya and Graham Abbott, April 1982 Aid, Savings, and Growth in the Asian Region J. Malcolm Dowling and Ulrich Hiemenz, April 1982 Development-oriented Foreign Investment and the Role of ADB Kiyoshi Kojima, April 1982 The Multilateral Development Banks and the International Economys Missing Public Sector John Lewis, June 1982 Notes on External Debt of DMCs Evelyn Go, July 1982 Grant Element in Bank Loans Dal Hyun Kim, July 1982 Shadow Exchange Rates and Standard Conversion Factors in Project Evaluation No. 9 Peter Warr, September 1982 Small and Medium-Scale Manufacturing Establishments in ASEAN Countries: Perspectives and Policy Issues Mathias Bruch and Ulrich Hiemenz, January 1983 A Note on the Third Ministerial Meeting of GATT Jungsoo Lee, January 1983 Macroeconomic Forecasts for the Republic of China, Hong Kong, and Republic of Korea J.M. Dowling, January 1983 ASEAN: Economic Situation and Prospects Seiji Naya, March 1983 The Future Prospects for the Developing Countries of Asia Seiji Naya, March 1983 Energy and Structural Change in the AsiaPacific Region, Summary of the Thirteenth Pacific Trade and Development Conference Seiji Naya, March 1983 A Survey of Empirical Studies on Demand for Electricity with Special Emphasis on Price
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Elasticity of Demand Wisarn Pupphavesa, June 1983 Determinants of Paddy Production in Indonesia: 1972-1981A Simultaneous Equation Model Approach T.K. Jayaraman, June 1983 The Philippine Economy: Economic Forecasts for 1983 and 1984 J.M. Dowling, E. Go, and C.N. Castillo, June 1983 Economic Forecast for Indonesia J.M. Dowling, H.Y. Kim, Y.K. Wang, and C.N. Castillo, June 1983 Relative External Debt Situation of Asian Developing Countries: An Application of Ranking Method Jungsoo Lee, June 1983 New Evidence on Yields, Fertilizer Application, and Prices in Asian Rice Production William James and Teresita Ramirez, July 1983 Inflationary Effects of Exchange Rate Changes in Nine Asian LDCs Pradumna B. Rana and J. Malcolm Dowling, Jr., December 1983 Effects of External Shocks on the Balance of Payments, Policy Responses, and Debt Problems of Asian Developing Countries Seiji Naya, December 1983 Changing Trade Patterns and Policy Issues: The Prospects for East and Southeast Asian Developing Countries Seiji Naya and Ulrich Hiemenz, February 1984 Small-Scale Industries in Asian Economic Development: Problems and Prospects Seiji Naya, February 1984 A Study on the External Debt Indicators Applying Logit Analysis Jungsoo Lee and Clarita Barretto, February 1984 Alternatives to Institutional Credit Programs in the Agricultural Sector of Low-Income Countries Jennifer Sour, March 1984 Economic Scene in Asia and Its Special Features Kedar N. Kohli, November 1984 The Effect of Terms of Trade Changes on the Balance of Payments and Real National Income of Asian Developing Countries Jungsoo Lee and Lutgarda Labios, January 1985 Cause and Effect in the World Sugar Market: Some Empirical Findings 1951-1982 Yoshihiro Iwasaki, February 1985 Sources of Balance of Payments Problem in the 1970s: The Asian Experience Pradumna Rana, February 1985 Indias Manufactured Exports: An Analysis of Supply Sectors Ifzal Ali, February 1985 Meeting Basic Human Needs in Asian Developing Countries Jungsoo Lee and Emma Banaria, March 1985 The Impact of Foreign Capital Inflow on Investment and Economic Growth in Developing Asia Evelyn Go, May 1985 The Climate for Energy Development in the Pacific and Asian Region: Priorities and Perspectives V.V. Desai, April 1986 Impact of Appreciation of the Yen on Developing Member Countries of the Bank Jungsoo Lee, Pradumna Rana, and Ifzal Ali, May 1986 Smuggling and Domestic Economic Policies in Developing Countries
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A.H.M.N. Chowdhury, October 1986 Public Investment Criteria: Economic Internal Rate of Return and Equalizing Discount Rate Ifzal Ali, November 1986 Review of the Theory of Neoclassical Political Economy: An Application to Trade Policies M.G. Quibria, December 1986 Factors Influencing the Choice of Location: Local and Foreign Firms in the Philippines E.M. Pernia and A.N. Herrin, February 1987 A Demographic Perspective on Developing Asia and Its Relevance to the Bank E.M. Pernia, May 1987 Emerging Issues in Asia and Social Cost Benefit Analysis I. Ali, September 1988 Shifting Revealed Comparative Advantage: Experiences of Asian and Pacific Developing Countries P.B. Rana, November 1988 Agricultural Price Policy in Asia: Issues and Areas of Reforms I. Ali, November 1988 Service Trade and Asian Developing Economies M.G. Quibria, October 1989 A Review of the Economic Analysis of Power Projects in Asia and Identification of Areas of Improvement I. Ali, November 1989 Growth Perspective and Challenges for Asia: Areas for Policy Review and Research I. Ali, November 1989 An Approach to Estimating the Poverty Alleviation Impact of an Agricultural Project I. Ali, January 1990 Economic Growth Performance of Indonesia, the Philippines, and Thailand: The Human Resource Dimension E.M. Pernia, January 1990 Foreign Exchange and Fiscal Impact of a Project: A Methodological Framework for Estimation I. Ali, February 1990 Public Investment Criteria: Financial and Economic Internal Rates of Return I. Ali, April 1990 Evaluation of Water Supply Projects: An Economic Framework Arlene M. Tadle, June 1990 Interrelationship Between Shadow Prices, Project Investment, and Policy Reforms: An Analytical Framework I. Ali, November 1990 Issues in Assessing the Impact of Project and Sector Adjustment Lending I. Ali, December 1990 Some Aspects of Urbanization and the Environment in Southeast Asia Ernesto M. Pernia, January 1991 Financial Sector and Economic Development: A Survey Jungsoo Lee, September 1991 A Framework for Justifying Bank-Assisted Education Projects in Asia: A Review of the Socioeconomic Analysis and Identification of Areas of Improvement Etienne Van De Walle, February 1992 Medium-term Growth-Stabilization Relationship in Asian Developing Countries and Some Policy Considerations Yun-Hwan Kim, February 1993 Urbanization, Population Distribution, and Economic Development in Asia Ernesto M. Pernia, February 1993 The Need for Fiscal Consolidation in Nepal:
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The Results of a Simulation Filippo di Mauro and Ronald Antonio Butiong, July 1993 A Computable General Equilibrium Model of Nepal Timothy Buehrer and Filippo di Mauro, October 1993 The Role of Government in Export Expansion in the Republic of Korea: A Revisit Yun-Hwan Kim, February 1994 Rural Reforms, Structural Change, and Agricultural Growth in the Peoples Republic of China Bo Lin, August 1994
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Incentives and Regulation for Pollution Abatement with an Application to Waste Water Treatment Sudipto Mundle, U. Shankar, and Shekhar Mehta, October 1995 Saving Transitions in Southeast Asia Frank Harrigan, February 1996 Total Factor Productivity Growth in East Asia: A Critical Survey Jesus Felipe, September 1997 Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications Ashfaque H. Khan and Yun-Hwan Kim, July 1999 Fiscal Policy, Income Distribution and Growth Sailesh K. Jha, November 1999
ECONOMIC STAFF PAPERS (ES)

No. 1 International Reserves: Factors Determining Needs and Adequacy Evelyn Go, May 1981 Domestic Savings in Selected Developing Asian Countries Basil Moore, assisted by A.H.M. Nuruddin Chowdhury, September 1981 Changes in Consumption, Imports and Exports of Oil Since 1973: A Preliminary Survey of the Developing Member Countries of the Asian Development Bank Dal Hyun Kim and Graham Abbott, September 1981 By-Passed Areas, Regional Inequalities, and Development Policies in Selected Southeast Asian Countries William James, October 1981 Asian Agriculture and Economic Development William James, March 1982 Inflation in Developing Member Countries: An Analysis of Recent Trends A.H.M. Nuruddin Chowdhury and J. Malcolm Dowling, March 1982 Industrial Growth and Employment in Developing Asian Countries: Issues and Perspectives for the Coming Decade Ulrich Hiemenz, March 1982 Petrodollar Recycling 1973-1980. Part 1: Regional Adjustments and the World Economy Burnham Campbell, April 1982 Developing Asia: The Importance of Domestic Policies Economics Office Staff under the direction of Seiji Naya, May 1982 Financial Development and Household Savings: Issues in Domestic Resource Mobilization in Asian Developing Countries Wan-Soon Kim, July 1982 Industrial Development: Role of Specialized Financial Institutions Kedar N. Kohli, August 1982 Petrodollar Recycling 1973-1980. Part II: Debt Problems and an Evaluation of Suggested Remedies Burnham Campbell, September 1982 Credit Rationing, Rural Savings, and Financial Policy in Developing Countries William James, September 1982 Small and Medium-Scale Manufacturing Establishments in ASEAN Countries: Perspectives and Policy Issues Mathias Bruch and Ulrich Hiemenz, March 1983 Income Distribution and Economic Growth in Developing Asian Countries J. Malcolm Dowling and David Soo, March 1983 Long-Run Debt-Servicing Capacity of Asian Developing Countries: An Application of Critical Interest Rate Approach Jungsoo Lee, June 1983 External Shocks, Energy Policy, and Macroeconomic Performance of Asian Developing Countries: A Policy Analysis William James, July 1983 The Impact of the Current Exchange Rate System on Trade and Inflation of Selected Developing Member Countries Pradumna Rana, September 1983 Asian Agriculture in Transition: Key Policy Issues William James, September 1983 The Transition to an Industrial Economy in Monsoon Asia Harry T. Oshima, October 1983 The Significance of Off-Farm Employment and Incomes in Post-War East Asian Growth Harry T. Oshima, January 1984 Income Distribution and Poverty in Selected Asian Countries John Malcolm Dowling, Jr., November 1984 ASEAN Economies and ASEAN Economic Cooperation Narongchai Akrasanee, November 1984 Economic Analysis of Power Projects Nitin Desai, January 1985 Exports and Economic Growth in the Asian Region Pradumna Rana, February 1985 Patterns of External Financing of DMCs E. Go, May 1985 Industrial Technology Development the Republic of Korea S.Y. Lo, July 1985 Risk Analysis and Project Selection: A Review of Practical Issues J.K. Johnson, August 1985 Rice in Indonesia: Price Policy and Comparative Advantage I. Ali, January 1986 Effects of Foreign Capital Inflows on Developing Countries of Asia Jungsoo Lee, Pradumna B. Rana, and Yoshihiro Iwasaki, April 1986 Economic Analysis of the Environmental Impacts of Development Projects John A. Dixon et al., EAPI, East-West Center, August 1986 Science and Technology for Development: Role of the Bank Kedar N. Kohli and Ifzal Ali, November 1986
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Satellite Remote Sensing in the Asian and Pacific Region Mohan Sundara Rajan, December 1986 Changes in the Export Patterns of Asian and Pacific Developing Countries: An Empirical Overview Pradumna B. Rana, January 1987 Agricultural Price Policy in Nepal Gerald C. Nelson, March 1987 Implications of Falling Primary Commodity Prices for Agricultural Strategy in the Philippines Ifzal Ali, September 1987 Determining Irrigation Charges: A Framework Prabhakar B. Ghate, October 1987 The Role of Fertilizer Subsidies in Agricultural Production: A Review of Select Issues M.G. Quibria, October 1987 Domestic Adjustment to External Shocks in Developing Asia Jungsoo Lee, October 1987 Improving Domestic Resource Mobilization through Financial Development: Indonesia Philip Erquiaga, November 1987 Recent Trends and Issues on Foreign Direct Investment in Asian and Pacific Developing Countries P.B. Rana, March 1988 Manufactured Exports from the Philippines: A Sector Profile and an Agenda for Reform I. Ali, September 1988 A Framework for Evaluating the Economic Benefits of Power Projects I. Ali, August 1989 Promotion of Manufactured Exports in Pakistan Jungsoo Lee and Yoshihiro Iwasaki, September 1989 Education and Labor Markets in Indonesia: A Sector Survey Ernesto M. Pernia and David N. Wilson, September 1989 Industrial Technology Capabilities and Policies in Selected ADCs Hiroshi Kakazu, June 1990 Designing Strategies and Policies for Managing Structural Change in Asia Ifzal Ali, June 1990
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The Completion of the Single European Community Market in 1992: A Tentative Assessment of its Impact on Asian Developing Countries J.P. Verbiest and Min Tang, June 1991 Economic Analysis of Investment in Power Systems Ifzal Ali, June 1991 External Finance and the Role of Multilateral Financial Institutions in South Asia: Changing Patterns, Prospects, and Challenges Jungsoo Lee, November 1991 The Gender and Poverty Nexus: Issues and Policies M.G. Quibria, November 1993 The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case Jason Brown, December 1993 The Economic Benefits of Potable Water Supply Projects to Households in Developing Countries Dale Whittington and Venkateswarlu Swarna, January 1994 Growth Triangles: Conceptual Issues and Operational Problems Min Tang and Myo Thant, February 1994 The Emerging Global Trading Environment and Developing Asia Arvind Panagariya, M.G. Quibria, and Narhari Rao, July 1996 Aspects of Urban Water and Sanitation in the Context of Rapid Urbanization in Developing Asia Ernesto M. Pernia and Stella LF. Alabastro, September 1997 Challenges for Asias Trade and Environment Douglas H. Brooks, January 1998 Economic Analysis of Health Sector ProjectsA Review of Issues, Methods, and Approaches Ramesh Adhikari, Paul Gertler, and Anneli Lagman, March 1999 The Asian Crisis: An Alternate View Rajiv Kumar and Bibek Debroy, July 1999 Social Consequences of the Financial Crisis in Asia James C. Knowles, Ernesto M. Pernia, and Mary Racelis, November 1999
OCCASIONAL PAPERS (OP)

No. 1 Poverty in the Peoples Republic of China: Recent Developments and Scope for Bank Assistance K.H. Moinuddin, November 1992 The Eastern Islands of Indonesia: An Overview of Development Needs and Potential Brien K. Parkinson, January 1993 Rural Institutional Finance in Bangladesh and Nepal: Review and Agenda for Reforms A.H.M.N. Chowdhury and Marcelia C. Garcia, November 1993 Fiscal Deficits and Current Account Imbalances of the South Pacific Countries: A Case Study of Vanuatu T.K. Jayaraman, December 1993 Reforms in the Transitional Economies of Asia Pradumna B. Rana, December 1993 Environmental Challenges in the Peoples Republic of China and Scope for Bank Assistance Elisabetta Capannelli and Omkar L. Shrestha, December 1993 Sustainable Development Environment and Poverty Nexus K.F. Jalal, December 1993 Intermediate Services and Economic Development: The Malaysian Example Sutanu Behuria and Rahul Khullar, May 1994 Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience Carlos J. Glower, July 1994 Some Aspects of Land Administration in Indonesia: Implications for Bank Operations Sutanu Behuria, July 1994 Demographic and Socioeconomic Determinants of Contraceptive Use among Urban Women in the Melanesian Countries in the South Pacific: A Case Study of Port Vila Town in Vanuatu T.K. Jayaraman, February 1995 Managing Development through Institution Building Hilton L. Root, October 1995 Growth, Structural Change, and Optimal Poverty Interventions Shiladitya Chatterjee, November 1995 Private Investment and Macroeconomic Environment in the South Pacific Island
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Countries: A Cross-Country Analysis T.K. Jayaraman, October 1996 The Rural-Urban Transition in Viet Nam: Some Selected Issues Sudipto Mundle and Brian Van Arkadie, October 1997 A New Approach to Setting the Future Transport Agenda Roger Allport, Geoff Key, and Charles Melhuish, June 1998 Adjustment and Distribution: The Indian Experience Sudipto Mundle and V.B. Tulasidhar, June 1998 Tax Reforms in Viet Nam: A Selective Analysis Sudipto Mundle, December 1998
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Surges and Volatility of Private Capital Flows to Asian Developing Countries: Implications for Multilateral Development Banks Pradumna B. Rana, December 1998 The Millennium Round and the Asian Economies: An Introduction Dilip K. Das, October 1999 Occupational Segregation and the Gender Earnings Gap Joseph E. Zveglich, Jr. and Yana van der Meulen Rodgers, December 1999 Information Technology: Next Locomotive of Growth? Dilip K. Das, June 2000
STATISTICAL REPORT SERIES (SR)

No. 1 Estimates of the Total External Debt of the Developing Member Countries of ADB: 1981-1983 I.P. David, September 1984 Multivariate Statistical and Graphical Classification Techniques Applied to the Problem of Grouping Countries I.P. David and D.S. Maligalig, March 1985 Gross National Product (GNP) Measurement Issues in South Pacific Developing Member Countries of ADB S.G. Tiwari, September 1985 Estimates of Comparable Savings in Selected DMCs Hananto Sigit, December 1985 Keeping Sample Survey Design and Analysis Simple I.P. David, December 1985 External Debt Situation in Asian Developing Countries I.P. David and Jungsoo Lee, March 1986 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part I: Existing National Accounts of SPDMCsAnalysis of Methodology and Application of SNA Concepts P. Hodgkinson, October 1986 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part II: Factors Affecting Intercountry Comparability of Per Capita GNP P. Hodgkinson, October 1986 No. 9 Survey of the External Debt Situation in Asian Developing Countries, 1985 Jungsoo Lee and I.P. David, April 1987 A Survey of the External Debt Situation in Asian Developing Countries, 1986 Jungsoo Lee and I.P. David, April 1988 Changing Pattern of Financial Flows to Asian and Pacific Developing Countries Jungsoo Lee and I.P. David, March 1989 The State of Agricultural Statistics in Southeast Asia I.P. David, March 1989 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1987-1988 Jungsoo Lee and I.P. David, July 1989 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1988-1989 Jungsoo Lee, May 1990 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 19891992 Min Tang, June 1991 Recent Trends and Prospects of External Debt Situation and Financial Flows to Asian and Pacific Developing Countries Min Tang and Aludia Pardo, June 1992 Purchasing Power Parity in Asian Developing Countries: A Co-Integration Test Min Tang and Ronald Q. Butiong, April 1994 Capital Flows to Asian and Pacific Developing Countries: Recent Trends and Future Prospects Min Tang and James Villafuerte, October 1995
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ERD Working Paper No.

CENTRAL ASIA: FUTURE PROSPECTS

ERD WORKING PAPER SERIES NO. 80

BENCHMARKING INDUSTRIAL COMPETITIVENESS A. B. Introduction Recent Industrial Performance

Comparisons with Transition Economies Explaining Industrial Competitiveness

Recent Economic Revival

(v) (vi) (vii)

Short-term Prospects (20052007)

(iii) (iv) (v)

Approach to Scenario Planning for the CARs

ERD WORKING PAPER SERIES NO. 80

II. CURRENT STATUS OF ECONOMIC DEVELOPMENTS IN THE CARS A. Introduction

TABLE 1 GDP GROWTH (%)

-15.3 -7.0 -9.3 -10.6 -15.2 -3.4 -8.0

9.5a 5.2 10.2 5.3 5.9 4.4 6.1

10.6 9.5 21.3 4.7 10.1 5.2 9.9

10.6 9.8 19.8 0.0 9.5 4.0 9.3

11.1 9.2 23.0 7.0 10.2 4.1 10.0

10.2 9.4 21.0 7.1 10.6 7.7 10.4

26.4 9.4 10.0 0.6 6.7 7.0 9.8

ERD WORKING PAPER SERIES NO. 80

600.0 1,345.3 604.7 312.1 180.8 592.2 606

763 1,659 961 320 190 383 713

865 1,995 1,236 344 207 389 389

1,029.4 2,723.9 1,250.7 432.4 323.1 461.2 889

4,174.63 7,493.97 7,021.03 1,928.46 1,193.31 1,870.96 3947

Structural Change and Reforms

SERVICES 1997 2004

21.7 13.4 20 49.8 31.8 21.3

12.3 7.9 22.5a 50.9b 24.2 28.6b

39.9 30.5 44.3 25 25.6 18

55.4 37.1 42.4a 17.2b 28.1 15.8b

38.3 51.6 35.7 25.2 42.6 60.7

32.3 55.0 35.1a 31.9b 47.1 41.9b

-0.5 10.9 15.0a 19.1 46.0 32.1 20.4

3.9 6.5 6.8 3.0 11.2 9.7 6.9

2.8 5.9 8.8 2.0 10.2 21.6 9.0

2.2 6.6 6.5 3.0 16.4 3.8 5.6

6.7 6.9 5.0 4.0 7.1 3.7 6.0

9.6 7.6 7.0a 4.4 7.1 7.8 7.3

External Sector Developments

ERD WORKING PAPER SERIES NO. 80

25.4 9.6 27.9 -1.1 -1.9 -6.4 8.9

12.7 12.3 9.0 3.7 7.3 -8.4 8.2

13.9 31.6 10.7 18.5 14.3 29.1 25.0

31.5 53.7 9.0 23.8 15.4 22.3 38.9

3,452 20,291 3,444 731 922 3,961 32,801

134.4 2117 225 193.1 250.1 785 3,704.6

ERD WORKING PAPER SERIES NO. 80

TABLE 6 AND I NCOME D ISTRIBUTION

SHARE OF BOTTOM 20% OF INCOME RECIPIENTS

68.1 (1995) 34.6 (1996) 51.0 (1997)

13.1 (1992) 15.7 (1996) 36.3 (1995)

means not available.

SECTION III F UTURE: 2015

Short-term Prospects (20052007)

III. MAPPING THE FUTURE: 2015 A. Introduction

ERD WORKING PAPER SERIES NO. 80

TABLE 7 OF CURRENT PERFORMANCE

10.0a 6.8 14.3 5.1 7.4 4.7

16.4 142.1 46.9 38.2 39.7 30.7 57.1

1,029 2,724 1,251 432 323 461 889

49.6b 27.9c 29.9d 47.6b 56.6e 27.5f 39.9