Kyrgyz Economy More in Need of Reform Than Aid

Even before the events of September 11, the Kyrgyz economy was one of the bleakest in Central Asia. Investments into the country until that date had dropped almost 30 percent in 2001's first nine months. Now that Kyrgyzstan has welcomed American troops and embraced the war on terrorism, its government is hoping for a meaningful boost in foreign aid. To that end, President Askar Akayev, who had begun to suppress dissent in 2001, has made two speeches in January calling for substantial reform. But unless the government follows this talk with real changes in its approach to taxation and commerce, increases in aid will do little to heal its economy.

The steps Kyrgyzstan must take, while painful, are practical. First, Kyrgyzstan needs to develop revenues to offset its unsupportable debt. The external debt of Kyrgyzstan amounts to $1.5 billion, which overwhelms the national GDP. Although the central bank had managed to reschedule its entire debt to Turkey and part of its debt to Russia in April 2001, debt service had become nearly impossible to maintain. These high debts also cramped the country's ability to attract new aid and investment.

As a result, international observers urge Kyrgyzstan to develop its own industry. But barriers to industry are high. The landlocked country's main natural resource is water, for which downstream states like Uzbekistan pay inconsistently. [For more information see the EurasiaNet Environment archive.] It cannot export oil or gas, and has an inadequate domestic market and infrastructure. This makes it hard for Kyrgyz entrepreneurs to connect with foreign investors. To overcome these problems and develop a durable economy that will not be dependent on foreign aid, Kyrgyzstan has, firstly, to develop an attractive business climate.

But this requires tearing down some corrupt structures. Askar Akayev, the country's president since its inception, has signaled his awareness of some of these problems. Addressing a national antipoverty forum in Bishkek on January 16, Akayev assailed the banking sector for embezzlement and less obvious forms of economic subterfuge. "I want to state again that the work of the commercial banks is developing in the wrong way in our country. They neither provided credits nor carried out their functions of saving money honestly," he said.

But this call will be hard to convert into visible investment results. Because Kyrgyzstan is so small, remote and poor, it will need to generate wealth more ethically than its neighbors; it will also need to do so more efficiently. According to David Grant, Team Leader of the European Union's TACIS Small and Medium Enterprises Development Program in Kyrgyzstan, the country has to put on a flawless display for international investors precisely because its resources are hard-won mining and agricultural products rather than flowing fuels. Without an inviting business climate there is little reason to invest in Kyrgyzstan and the mere creation, recently, of a Coordination Council for Attracting Foreign Investment will hardly change this.

Rather, Kyrgyzstan should stimulate small and medium sized enterprises. This means reforming the cumbersome, corrupt and huge bureaucracy. Kyrgyz bureaucrats steal - the press reported on January 23 that Interior Ministry officials had stolen $640,000 (or the average annual income of 2.560 Kyrgyz) since independence - and block legitimate businesses. Akayev has lately disavowed these evils. After firing the Interior Minister, he apologized on January 24 for having emphasized bureaucracy at the economy's expense. "We have to change fundamentally the current system of values in the state apparatus and to put people's interests and their demands at the center of the activities of the state," the president said. He also spoke of establishing "structures aimed at protecting consumers."

The structures that grow out of antiterrorist aid, though, will probably not create much public benefit unless the government courageously blots out corruption. Indeed, more aid could reduce the incentive to reform. Akayev's latest plum - the siting of a United Nations antiterrorist center in Bishkek - may create jobs, but it may also aggravate bureaucracy and corruption among security services.

The antiterrorism center, however, offers the Kyrgyz government a good chance to pursue another critical goal. This is to enhance regional cooperation. Regional economic cooperation is important for all of the Central Asian countries but especially for Kyrgyzstan, whose small domestic market buckles under its own poverty. The Eurasian Economic Community (joining Belarus, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan) has provided a good start to enhance such cooperation. But observers say that the organization will only become effective if its leaders take concrete steps to promote cross-border trade. So far, an opposite trend seems to be at work. The Asian Development Bank noticed in its updated 2001 outlook for the region that "barriers to flows of trade and services within the subregion appear to have increased." One of the immediate consequences of the war in Afghanistan was, indeed, the closure of the Uzbek-Kyrgyz border in the Ferghana Valley, which effectively shut down the small trickle of cross-border trade.

Foreign aid can help Kyrgyzstan create a good business climate, stimulate local businesses and enhance regional cooperation - especially with regard to its infrastructure. But to receive sustained support, the Kyrgyz government must show that it is truly committed to sustaining political and economic reforms. At the moment, many observers inside and outside the country gravely doubt that the government has this commitment. Since 1995, Kyrgyzstan has become less visibly committed to reforms. Since the beginning of 2002, dissidents have staged hunger strikes over the jailing of a former public official - not the sort of publicity Akayev needs. If he can isolate corrupt bureaucrats and realistically address protest, Akayev stands a chance of converting the current war into long-term improvements.