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Speeches & Transcripts

Central Asian countries need to identify new and sustainable drivers of growth

July 4, 2012

Mr. Saroj Kumar Jha

Transcript

“Exclusive Interview” from the “Economic Review” magazine:Mr. Saroj Kumar Jha, newly appointed World Bank Regional Director for Central Asia.

– Taken your office you visited all countries of the region. What are your impressions?

– After taking over as a Regional Director of the World Bank in Central Asia region, I have visited Tajikistan, Kyrgyz Republic, Uzbekistan, Kazakhstan and Turkmenistan. I had introductory meetings with the respective governments, the core groups of ministers and development partners, and donor community, and discussed the issues of strategic partnership between the countries of Central Asia and the World Bank. These meetings gave me an opportunity to discuss challenges the countries in Central Asia face, the reform agenda for economic growth that the countries are pursuing, and how the World Bank is assisting the countries to realize their longer term development goals. The meetings in Dushanbe, Bishkek, Tashkent, Astana, and Ashgabat were very productive in terms of exchange of views and sharing ideas on our further cooperation. Our partner countries need high quality and timely advice on a range of development issues, and as a global institution we are committed to bringing global good practices in our technical and financial assistance to address these challenges.

– Now, there are raising fears concerning global economy perspectives. What about your forecasts for global economy future? How stable are the Central Asian economies to the external shocks?

– Uncertainty and vulnerability related to Eurozone debt problems and weakening growth in large emerging economies will continue to cloud global growth prospects. Capital flows to developing countries have declined by almost half as compared with last year. The World Bank is projecting global growth at 2.5 and 3.1 percent for 2012 and 2013, respectively, versus the 3.6 percent projected in June 2011 for both years. Developing country growth has been revised down to 5.4 and 6.0 percent versus 6.2 and 6.3 percent in earlier projections.

The growth outlook for Central Asia is broadly positive. Growth is supported by high commodity prices in energy exporting countries (Kazakhstan, Uzbekistan and Turkmenistan). The economic rebound in Russia and in other resource rich neighboring countries is supporting growth in countries with a strong dependence on regional trade and remittances (the Kyrgyz Republic and Tajikistan).

However, growth may be negatively affected in all Central Asian economies through a reduction in demand for exports as well as through deterioration in external financing conditions, weakening of international capital flows, and rise in borrowing costs. A possible reduction in commodity prices could negatively affect commodity exporters. Secondary negative effects on the countries that rely heavily on migrant remittances could also put pressure on their current accounts.

Like in other parts of the world, Central Asian economies have less fiscal space available for economic stimulus to cope with a sharp deterioration in global conditions as compared with 2008 -2009. With the remaining uncertainties and vulnerabilities, Central Asian countries need to focus on identifying new and sustainable drivers of growth which would require addressing fundamental structural problems.

– Economies of the region are differed both by their format and provision with sources. This difference should explain advantage in interchange which is historically observed here. However, current trade and economic relations between regional economies and foreign partners are developing more active now than between each other. What are the factors promoting such tendency? Are there objective preconditions for intraregional trade and economic interaction? What is the role of the WB in this area?

– Since the early 2000s, economic growth in Central Asian countries has been fueled by a commodity boom which has led to an increase in exports to the European Union and to fast-growing markets including China. Expanding trade turnover with those markets is important to sustain high levels of growth and taking advantage of Central Asia’s strategic location.

Despite the existence of free trade agreements in the region, Central Asia has not been able to take advantage of intra-regional trade at its full potential. WB analysis highlights that regional trade is below its potential due to considerable non-tariff barriers and problems related to trade facilitation.

The World Bank provides Central Asian countries with policy advice, analytical, technical and operational support on trade directly and through various forums, including the Central Asia Regional Economic Cooperation (CAREC). Recent analysis by the World Bank has focused on the issues related to the impact of the Customs Union (CU) on CA economies and highlighted the importance of resolving trade facilitation bottlenecks and removing non-tariff barriers for taking full advantage of regional trade agreements. Examples of operational support include financing of infrastructure projects in most countries of the region, projects in the area of Customs modernization (Kazakhstan), and in the area of quality infrastructure and WTO compliance (the Kyrgyz Republic).

– Saying about necessity for economic consolidation of Central Asian countries, what stimulus and priorities they need to be based on? In particular, markets of which countries may be considered as the basic one for regional demand? What about specialization of other counties and by what items? What are the most effective segments for regional cooperation?

– The Central Asia region as a whole has a considerable potential for trade diversification. A free trade regime among these countries; a rich resource base; dynamic growth of income; a young and growing population; proximity to fast growing markets; historical, cultural and economic connections; geographical proximity; and the complementary nature of five diverse economies provide ample opportunities for regional trade cooperation. The differences between the five Central Asian countries in income level create significant challenges for smooth circulation of goods and services, but these differences also present considerable opportunities.

Regional trade cooperation historically has been important to the region as most Central Asian countries are economically small and landlocked. In this context, deeper regional integration is not only important to secure market access in neighboring markets, effectively increasing the market size for any country in the region and allowing the realization of economies of scale, but also to encourage foreign investments (FDI) to enable these countries to specialize in particular stages of a good’s production sequence and achieve higher sales in global markets.

FDI is essential for building long-term capabilities and diversification. Economically and politically stable environments can be more attractive to foreign investors. In this context, the case of Kazakhstan is quite impressive in terms of FDI performance. Between 2004 and 2009, gross FDI inflows were growing in Kazakhstan at almost 32 percent a year on average, reaching US$19.7 billion in 2009. However, low income countries can capitalize on several competitive advantages to provide competitive goods and services to rapidly growing demand of the neighboring markets. Those comparative advantages include relatively low cost of labor and energy and favorable climatic and cultural conditions for tourism and agriculture. Capitalizing on these complementarities can potentially attract investors and may result in developing the regional value chains for operation and sales in the regional markets with a potential for sales to global markets. A long-term benefit could be more and better paid jobs, a narrowing income gap between the countries and the people, and more stability to the region.

A promising area to explore could be the liberalization of trade in services which could become a powerful driver for growth in Central Asia. The gains from liberalization of trade in services as a rule are larger than the gains from liberalization in merchandise trade. First, since many sectors have traditionally been government controlled and shielded from competition, the liberalization of services trade should generate substantial efficiency gains. Second, most trade barriers for services come in the form of behind-the-border policies and thus the liberalization of services trade involves broad domestic reforms. Third, most trade in services takes place through commercial presence and thus entails significant foreign investments flows and knowledge spillovers.

– Now Kazakhstan joins the Custom’s Union, Tajikistan and Kyrgyzstan are intend to participate in economic integration with Russia, Kazakhstan, and Belarus. How will it influence upon perspectives of economic cooperation in Central Asian region?

– Central Asian trade policy landscape is undergoing significant changes. Some important developments include: (i) Russia’s admission to the WTO in December 2011 after 18 years of negotiations (NB: Russia has to ratify its decision to become a WTO member by July 2012); (ii) Kazakhstan moving toward deep integration with Russia and Belarus with the Customs Union (CU) as a first step towards development of a Common Economic Space between Kazakhstan, Russia, and Belarus; and (iii) Kazakhstan and Tajikistan negotiating accession to the WTO. These changes call for pro-active and supportive actions to take full advantage of those changes and help CA’s rapid regional and international trade integration.

The Customs Union between Belarus, Kazakhstan and Russia is another level of regional trade integration. But the CU has also brought additional costs for its members, particularly for Kazakhstan which had to increase its external tariff to join the CU. In addition, the higher common external tariffs will have efficiency costs in a resource-exporting country, where diversification is reliant on international integration.

This cost could potentially be overcome and the customs union could produce a net benefit for Kazakhstan, provided the union can successfully outcome the lingering issues in the area of trade facilitation and non-tariff barriers.

Both for the countries within the CU and for the countries outside the CU a potential benefit lies in a committed approach to reducing non-tariff barriers and trade facilitation costs, which has to comply with the WTO provisions. There is an ample room for strengthening border controls, focused reforms in complying with quality standards, identification of win-win trade policies that benefit both the CU member states and their small neighboring trading partners which would lead to reaching agreements on simplified export procedures for certain goods and services. The establishment of a Single Economic Space for the Customs Union member countries will have more important implication for the Kyrgyz Republic and Tajikistan than that of the CU due to the high dependence of those countries on remittances.

– World Bank pays great attention to infrastructure development. How do you assess its state and development in the Central Asian countries? Does it need an upgrade and modernization? What is the World Bank doing in this regard now and what is planning to do for perspective?

– Much of the transport infrastructure in Central Asia was constructed during the Soviet era well over two decades ago. Since the break-up of the Soviet Union, many countries have not been able to provide adequate maintenance to the transport infrastructure, particularly in rural areas. As a result, many rural areas have poor transport infrastructure, especially roads. Most governments have focused on the international/republican roads, and these are in a reasonable condition for roads connecting the major urban areas. The World Bank has focused on strengthening the capacity of transport agencies to improve planning and management of infrastructure, as well as safety of users.

Speaking about modernization, new technologies, and our efforts to implement them widely across the region I might share one example of our inter-regional projects in the energy sector. As part of our energy infrastructure projects development, we are ensuring that Fiber optic wires are provided as part of all transmission lines funded by the Bank. Given the advantage of very low incremental cost for using higher capacity fiber cables, the spare capacity in these Fiber cables (over and above utility’s needs) could be used as a significant capacity data highway. The benefits from such telecom capacity have been realized in several developed and developing countries. Under the proposed CASA-1000 project, the project design envisages provision of high capacity fiber (OPGW) wires as part of the High Voltage DC transmission lines connecting Tajikistan with Afghanistan and Pakistan; and between the Kyrgyz Republic and Tajikistan through 500 kV AC line. This would help connect the four countries of Central Asia and South Asia (CASA-1000), with a telecom highway, besides the benefits of electricity projects.

– There are many reports about Great Silk Road project recovery. A number of new transport corridors were opened but analytics suppose that transit potential is not fully realized. How do you assess transport communications in the region in a view of current demands? Which transport corridors are the most perspective for the region? What support does the WB render in this sphere and what areas will be priority one for the perspective?

– The CAREC transport corridors have been defined to improve the flow of goods between Europe and Asia through the Central Asia region. The Western Europe – Western China International Transit Corridor in Kazakhstan is part of this effort and is being financed by the Government of Kazakhstan with the support of several International Financial Institutions, including the World Bank. The World Bank is also financing the road corridor in the Kyrgyz Republic that will improve transport between Osh – Batken – Isfana. Finally, the World Bank has carried out a major review of the impediments to transport in the region through the Trade and Transport Facilitation study measuring the time and cost of transporting goods through several corridors within Central Asia. The major issue identified is the need to improve the passage of freight and passengers at border crossings, and in some countries, the need to remove unofficial inspections of vehicles along road corridors.

– Irrigate farming is widely spread in the region, and state of irrigation systems is of high importance for regional economies, especially Uzbek one. What do you think of current irrigation systems in the region? Do they need to be deep upgraded? What does the WB do in this direction?

– Irrigation is of critical importance in Central Asia. Irrigated agriculture produces a significant segment of GDP and employs a large number of people. For example, in Uzbekistan the irrigated agriculture production is rapidly growing in absolute terms, though its relative significance in the economy is gradually going down due to rising shares of industry and services. The irrigated agriculture in Uzbekistan accounts for about 17 of GDP, and around 25 percent of foreign exchange receipts and employment. As a result, operation and maintenance costs are high, and agricultural productivity levels and incomes are low.

The World Bank finances a number of irrigation and drainage projects that are under implementation or preparation. All projects aim to (i) rehabilitate irrigation and drainage infrastructure, (ii) pursue institutional reforms, including the establishment of water users associations and more user involvement in water management, (iii) strengthen capacities of stakeholders to improve the quality of irrigation service delivery, and (iv) help farmers improve agricultural production and income. In addition, projects contribute to improved water resources management by improving the efficiency of water use and reducing wastage.

– The sharpest issue in the region is the water and energy relations. Selling electricity promotes increasing in gains. But this may influence upon agricultural incomes of other regional economies and promote growth in energy prices inside the region including in exporting countries. What is your point of view regarding the most optimal decision to resolve water problems in the region, in particular your position regarding construction of big hydropower stations in the upper reach countries?

– There is not one answer to resolving water problems in Central Asia. It requires a combined effort to: (i) improve water productivity in downstream countries; (ii) reduce winter energy shortages in upstream countries; and (iii) strengthen the conditions for cooperation. Construction of large water infrastructure — be it hydropower stations or irrigation reservoirs — must address any appreciable harm to downstream countries. At the same time, the potential benefits of water storage must be considered, especially in the face of increasing hydrologic variability due to climate change. Downstream countries also have a responsibility to manage water resources effectively to reduce pressure on this precious, collective resource.

The World Bank analysis confirms that there are several opportunities of mutual gains for the Central Asian countries by better cooperation on energy and water trade, even without any new investments. These benefits would be in saving gas and coal used for power generation, which could be exported; higher agricultural productivity with coordination on water flows when needed; and reducing the power cuts.

– What are your main outputs from the visits across regional economies? What problems do you consider as the most acute ones? What are the ways of their resolving? What activities of the WB will be considered as the perspective one in the region for the nearest future?

– In every country of the Central Asia region we have discussed country specific issues.

In course of the visit to Uzbekistan, we discussed with the Government accelerated implementation of the World Bank’s new Country Partnership Strategy.

In Tajikistan, we discussed the Government priorities for a tentative allocation of up to US$ 100 million in highly concessional International Development Association (IDA) resources in the next two years.

In the Kyrgyz Republic, we have discussed the assistance of the World Bank in implementation of projects aimed to improve Osh city infrastructure as well as the plans and priorities of the Kyrgyz Government for the next 3 years, in particular, effective public finance management and fighting corruption.

In Kazakhstan, discussions covered ongoing preparation of the new Country Program Strategy for 2013-2017. Also we touched upon key issues in diversification, public financial management, and financial sector development agenda. The transfer of cutting-edge knowledge driven by Kazakhstan’s needs and priorities will remain the main premise of the Bank’s assistance strategy.

During the visit to Turkmenistan, the discussions were focused on the cooperation between Turkmenistan and the World Bank in the framework of the proposed strategy to deepen cooperation in key areas, including development of financial, transport and other infrastructure.

Apart from country specific issues some of our Central Asia partners expressed concerns that they may experience major flooding during the coming spring. We informed the governments that the World Bank is committed to provide expertise and financial assistance to help mitigate the flood impacts. A team from the Bank’s disaster risk management unit will be mobilized to assess the risks and provide advice and support in advance of a possible emergency.

To conclude, the World Bank’s mission in Central Asia is to improve the economy and provide a better quality of life for people in the region, and we are very keen to strengthen our relationship and cooperation with the governments, development partners, and civil society organizations in Central Asia. The international experience brought to Central Asia countries by our institution would remain the strongest contribution for knowledge exchange on global best practices in economic growth, employment creation, social modernization, and sustainable development to significantly accelerate implementation of key country reforms. And our Central Asia Regional Team will continue supporting the countries in addressing challenges, as well as helping them implement their ambitious economic and social agendas.

Saroj Kumar Jha is the World Bank Regional Director for Central Asia, based in Almaty, Kazakhstan. Jha joined the Kazakhstan office in February 2012. Prior to this position, Jha worked as the World Bank’s Global Manager for Disaster Risk Management Practice and served as head of the Global Facility for Disaster Reduction and Recovery (GFDRR), which he established in 2006 working with donors, governments, the United Nations and civil society organizations. It is now the world’s largest global fund for disaster prevention and post-disaster recovery operations . In addition, he has led international response efforts to many global catastrophic disasters.


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