INTRODUCTION

The ex-Soviet countries of Central Asia have the least known and, by general agreement, the least successful group of economies among the more than two dozen that have emerged from Communist rule during the last 20 years. Independent states for the first time in history, they continue to be governed by authoritarian, super-presidential regimes with considerable state direction of resources and poor records for economic freedom and human rights. On the most recent European Bank for Reconstruction and Development (EBRD) scale for nine dimensions of reform ranging from 4.3 for market economy to 1 for no reform, Kazakhstan was rated at 3.0, Kyrgyzstan 2.9, Tajikistan 2.4, Uzbekistan 2.3, and Turkmenistan at 1.3. And yet these five economies have recovered from their transitional recessions and have begun to grow at respectable rates. How this has been achieved is the main focus of this survey, which will also explore the effects on their economic structures and distribution of income of their economic reform efforts.

To begin, my brief descriptions of the five ex-Soviet Central Asian states rely on the only two comprehensive accounts of the region to be published recently (Ofer and Pomfret, 2004; Pomfret, 2006) and on annual surveys published by the EBRD. After country surveys, which deal with the initial situation of the 1990s and the countries' internal and external strategies, I turn to specific issues of the region: distribution of costs and benefits, the role of resource rents, external strategy, and growth prospects. Throughout I consider materials published since 2000 only.

ECONOMIC BACKGROUND AND BASIC DATA

Central Asia is no longer a single, unified region of five ex-Soviet republics, but a set of increasingly disparate states with different resource endowments, growth strategies, and reform results. All the countries of the region are 'low-income' or 'lower-middle income', as defined by the World Bank, but because of their differing export staples, they may be divided into three categories: petro-dependent Kazakhstan and Turkmenistan, other-dependent Tajikistan and Kyrgyzstan, and independent Uzbekistan(Spechler, 2004).

As shown in Table 1 and displayed in Figure 1, the three groups have had different trends in their real growth since independence in 1991. Kyrgyzstan and war-torn Tajikistan lost around half of their aggregate outputs, partly owing to population declines, and did not start to recover until the late 1990s. As of 2006, their real GDPs had not recovered to 1991 levels. Kazakhstan and Turkmenistan lost about one-third of their aggregate product in their transition recessions and began their recoveries with the energy boom of 1999/2000. By 2006, they are well ahead of their pre-independence positions, and Kazakhstan has by far the highest income per head, adjusted for the cost of living. Uzbekistan had the mildest recession – only about 20% of its 1991 level – began to grow by 1997, and has continued steady expansion, achieving a GDP that is about a third above pre-independence levels by now. Uzbekistan has the fastest-growing population in Central Asia, aside from Turkmenistan at 1.7% annually, and so per capita income barely increased at all over the whole period. Kazakhstan, Kyrgyzstan, and Tajikistan have experienced the most substantial out-migration, some of it permanent. The three groups also differ markedly in the importance of foreign assistance. In 2004, Uzbekistan's development assistance added only 2.1% to its GNI, as compared with more than 12% in dependent Kyrgyzstan and Tajikistan. Kazakhstan and Turkmenistan received less than 1% (World Bank, 2005).

Figure 1.

Growth of GDP in Central Asia (index with 1989=100).

Full figure and legend (66K)

Table 1 - Basic economic data for Central Asian States.

Full table

Although all figures offered by international agencies rely on official data, some adjustments for proper deflation were made by the IMF in the 1990s, and levels during the disrupted first half of that decade must be treated with special caution. Central Asian governments may overstate their output achievements, of course, but rates of growth are less likely to be exaggerated than their achieved levels, estimated in dollars. Contrariwise, expansion of widespread informal business may be undercounted because of the desire to avoid taxes or other exactions. Attempts to estimate output by electricity use have not been notably successful, owing to sharp changes of industrial structure, as well as underground activities (Alexeev and Pyle, 2003). Hence, we must accept these figures or nothing at all.

COUNTRY SURVEYS

Kazakhstan

The larger and more important of the two petro-reliant states in Central Asia, Kazakhstan is today an example of 'state-led' capitalism. Thanks to increasing revenues from oil leases and exports at high world prices, GDP growth rates of almost 10% have been registered since the year 2000, and Kazakhstan's population has apparently stopped shrinking following the emigration of many Europeans who sought employment in Russia and elsewhere (Becker et al., 2005). Western oil companies have helped build facilities for exploitation of deposits within and around the north of the Caspian Sea. Rising foreign exchange receipts have strengthened the convertible tenge and helped reduce domestic inflation, too. A newly rich class has appeared, along with their luxury automobiles and hotels they frequent, but low incomes and unemployment are frequent in rural areas.

Transition strategy

Privatisation has proceeded farther in Kazakhstan than nearly any other Central Asian country, with two-thirds of all firms already in the private sector by 2006 according to the EBRD. Prices are almost completely market based. Banking and other financial institutions are much better established than elsewhere in the region. Large state-owned companies continue, however, in energy, transportation, communication, and other 'strategic' industries. In 2004, such state enterprises, led by KazMunaiGaz, the giant oil and gas company, accounted for one-sixth of gross fixed investments (Charman, 2007). Despite official welcomes, other private and foreign investments, outside of banking, real estate, and energy, have often suffered from an unstable and corrupt system of regulation and law enforcement, as well as from incompetent personnel (Kalyuzhnova, 2003; Pomfret, 2006). By 2005, Kazakhstan ranked 107th of 158 countries in the Corruption Perception Index of Transparency International, although the 2005 Business Environment and Enterprise Performance Survey, commissioned by EBRD, has shown some improvement in these areas since 2002 (www.info.worldbank.org/governance/beeps).

The government has built an expensive new capital in Astana, more than a thousand kilometres north of the former political and commercial capital of Almaty. In 2000, Kazakhstan's rulers also formed a multi-billion dollar national fund from oil revenues. The fund is to be invested in low-risk foreign securities and be audited by a foreign firm. Its assets may reach $100 billion in 2007, but the public is largely unaware of the fund and its possible impact (Kalyuzhnova, 2006). Long-time President Nursultan Nazarbaev is the chair of the management committee. His presidential administration has considerable power relative to parliament, for example, in overseeing civil service reform and most ministries. With many ex-Communist officials involved in business, media, and real-estate deals as well, no middle class has yet emerged to challenge the ruling family and its associates (Gleason, 2003; Murphy, 2006; Pomfret, 2005b).

Results

Experience since 1991 differs sharply across this huge country of 1.05 million square miles, an area comparable to that of Western Europe. The many one-factory towns and coal mines in the northeast region, where many Russians are settled, have been disadvantaged by the strong exchange rate since 2002. On the other hand, the oil-producing region in the far west near the Caspian Sea has boomed. Long-established animal husbandry and grain farming throughout the vast countryside were severely affected during the 1990s by lack of fertiliser and credit, organisational disruption, and low procurement prices (Suleimenov and Oram, 2000; Kalyuzhnova, 2003). Price subsidies and investment programmes announced more recently have not improved the situation. Consequently, the share of manufacturing and agriculture in Kazakhstan's aggregate production in 2004 has declined to 24% (see Table 1) from 36% in 1990. Construction is booming in Almaty, and many of the estimated 400,000 migrants work in that sector or in the cotton fields of south Kazakhstan (The Economist, 2007). Government expenditures are about a quarter of GDP, but programmes to reduce poverty, estimated at 16% of the population in 2003, and to improve health and public education have reportedly faltered badly.

Turkmenistan

This large but sparsely populated country of 5 million people has the 11th largest reserves of natural gas in the world. Exports of gas and some oil and cotton account for half of GDP. As these exports now command world prices instead of those dictated by Moscow, Turkmenistan's exit from the USSR resulted in a considerable improvement in its terms of trade. Nevertheless, the country lost more than half its output to trade disruptions and lost agricultural subsidies. Thanks to growing gas exports and higher prices this decade, though, Turkmenistan has more than regained its Soviet-era levels of output.

Transition strategy

Turkmenistan's natural riches have facilitated arbitrary rule, together with corruption, low taxes, and an overwhelming state sector (Gleason, 2003). Up to his death in late 2006, the country was dominated by President Suparmurat Niyazov, whose careless and profligate management created budgetary deficits, double-digit inflation, and an inconvertible currency, the manat, whose dollar value on the black market was a small fraction of the official one. The state provides cheap fertiliser, as well as free water, gas, electricity, and salt to the population. Numerous small service establishments operate freely. Besides this, Turkmenistan has always been rated the least reformed economy in Central Asia. Even more than elsewhere in the region, investors have needed proteksia (protection) to get projects approved and contracts honoured. The dictator's grandiose plans to create natural gas pipelines to other potential customers, as well as a huge 'Golden Lake' with scarce Amu Darya river water, were not realised. Niyazov's successor, Gurbanguly Berdymukhameddov, has amended the country's isolationist 'positive neutrality' by agreeing to new gas pipelines to Russia and China.

Results

Turkmenistan's non-energy economy has yet to benefit from its gas revenues. A huge textile plant and an oil refinery were financed by export revenues but are of dubious efficiency. Agriculture is heavily regulated to guarantee food sufficiency and cotton exports, but yields have fallen by half and output is not growing (Repkine, 2004). Cumulative foreign direct investment was only $1.6 billion by 2005, consisting mostly of small-scale oil deals, as the leading international financial agencies have only limited contacts in the country, reflected in low credit ratings. The foreign debt has been reduced to around $1 billion.

The Kyrgyz Republic

One of the two Central Asian economies heavily dependent on outsiders for financial support, this small and mountainous country of five million people is deeply divided by its physical and human geography. The capital region around Bishkek is cut off from the populous and poorer south by mountains virtually impassable during the long winters. In the Soviet period, the frontier Kirgiz SSR was a major producer of military goods for the Red Army. With political independence, the Kyrgyz Republic lost this market and most of its CIS customers for hay balers and processed Cuban sugar. Unemployed and discouraged workers returned to the countryside. Among the Central Asian countries, the Kyrgyz economy experienced one of the sharpest initial declines in their transition-era GDP, approximately 45% at its nadir in 1995–1996, accompanied by triple-digit inflation.

Transition strategy

Immediately after independence, Kyrgyzstan pursued a policy of neo-liberal reform at the behest of international donors, on whom it depended for support. In 1992, half of its 17% budget deficit was covered by international assistance, and this pattern has persisted, although at somewhat reduced levels. With generous outside help, the state could still devote about 5% of its income to education, quite remarkable for a low-income country, and 2.3% to public health. In 1995, Kyrgyzstan was the first in the region to have a freely convertible currency, to join the World Trade Organization in 1998, to privatise agricultural land and its utilities, and to pursue voucher privatisation, all with paltry results. Tariffs are modest, and so foreign products enter freely. Fully three-quarters of the economy is now in the private sector (EBRD, 2006), but the individuals who obtained privatised enterprises often had little experience or investable funds, and government officials frequently intervened to set production goals (Mogilevsky and Hasanov, 2004). Entry regulations, corrupt inspections, and burdensome social security taxes all handicapped the small- and medium-sized business sector, according to USAID and World Bank surveys (Babetskii et al., 2003). Asset stripping was common. Despite a number of Western-style laws, often amended, enforcement of contracts has been unreliable and misappropriations are still widespread. Businesses complain of high taxes and corrupt administration.

Amidst charges of illicit enrichment, Askar Akaev was replaced as president by Kurmakbek Bakiev after a disputed election and widespread demonstrations in 2005. Kyrgyzstan's early liberalisation has now been partially reversed, but the new government has not yet established its authority throughout the country nor taken meaningful measures to decrease unemployment of around 10% (Marat, 2006, p. 118).

Results

Bank failures and the ruble devaluation of 1998 further handicapped the Kyrgyz economy. Since that time, recovery has proceeded slowly with only a brief pause. The 1989 level of per capita incomes has not yet been recovered, even though consumption was somewhat shielded by generous foreign aid and loans. Income inequality increased more sharply than anywhere else in the region (Grûn and Klasen, 2001). The country also experienced a decline in local public services despite high tax rates. Consequently, an increasing share of health and education expenditures must now be defrayed by citizens themselves, further aggravating inequality in the country.

Poverty rates have been high until quite recently. An estimated 21.4% of the population lived below the $2/day international poverty line, as reported for 2003, down from 34% in 2000. Because of this poverty and a lack of jobs, an estimated 500,000 Kyrgyz of about 5 million have left to work outside the country. Their $100 million or more in net remittances, at least 5% of GNP, supports some one-fifth of the population and easily covers the current account deficit (IMF, 2005; EBRD, 2006). Despite a tolerant language policy, many Russians have left the country permanently. Those remaining, mostly excluded from political and economic institutions and lacking resources, have not formed a distinct commercial class (Commercio, 2004).

Recent growth has allowed Kyrgyzstan to reduce its external debt burden. Nevertheless, the government has had to devote three-quarters of its meagre privatisation receipts to debt repayment. Debt at the end of 2005 was down to $2.1 billion, nearly half to the World Bank, as Moscow wrote off half of Kyrgyzstan's obligations to Russia. Precious metals and minerals provide almost half of the country's exports. The one notable success in attracting outside private investment is the Kumtor gold mine, which accounts for more than one-sixth of total output and 40% of industrial output in this diminutive country. The original mine is nearing depletion, and new ones have yet to open. As Kumtor and others remit profits, net foreign investments are now negative. Total capital formation has not been sufficient to keep the non-gold capital stock intact.

Despite the many infrastructural projects funded by the Asian Development Bank (ADB), EBRD, and World Bank, Kyrgyzstan's disappointment with the amounts and results of Western assistance has led them to court Russian and Kazakhstani investment in agro-processing, banking, and other sectors, as well as security assistance. Russia has promised to invest $2.5–3 billion in the construction of hydroelectric power stations and an aluminium smelter using the electricity produced.

Tajikistan

Another poor, mountainous, and dependent country, Tajikistan suffered a disastrous civil war soon after independence. The country lost more than half its output and equipment, and a majority of skilled Russian-speaking workers left the country. Many Tajiks went back to their villages, where private plots and growing remittances keep them alive in this poorest of all transition countries. Perhaps thanks to a weak government, this politically fractious country has a relatively unregulated economy, including rampant black market and drug-smuggling activity.

Transition strategy

Since the hostilities ended in 1997 with the help of Russian and Uzbek troops, transition has been slow. Until recently, the private sector's share had been one of the smallest in the region. During 2005–2006, though, more than 8,000 small- and medium-sized enterprises were privatised; this brought the private sector's share to 55% (EBRD, 2006) and prices are mainly free. Enterprise inspections and regulations by some 22 different organisations can delay starting new businesses by up to 2 months, however (Medea, 2007). Credit is frequently extended on the basis of political criteria, not profit expectations. Privatisation of larger enterprises has been very slow and some of their assets have been stolen (Shiells and Sattar, 2004). The country does have a large state-owned aluminium combine that uses hydroelectric energy that is cheaply available. Most of the large-scale industry remains unreformed, uncompetitive, and dependent on the support of officials (Umarov and Repkine, 2004). Agriculturists suffer from avaricious regional officials and distortionary taxes. Cotton yields fell more than 40% since 1990 because of the deterioration of irrigation and drainage systems (Zaurbekov, 2007).

Results

With desperately poor mountainous regions and one of the region's lowest per capita incomes – close to half the population of 6 million still lives on less than $2 per day – it is hardly surprising that the disparity in incomes is also among the worst in the region, with a Gini coefficient of 0.326. According to President Imomali Rakhmon, 300,000 Tajiks working abroad remit $310 million net annually, an amount sufficient to finance the country's trade deficit. A recent World Bank study estimates that remittances amounted to 20% of Tajikistan's GDP in 2004, the second highest in the CIS, next to Moldova. Like Kyrgyz migrants, however, nearly all Tajikistanis abroad think they will return home, according to survey questions (Mansour and Quillin, 2007).

The export levy on cotton is an important source of tax revenue, but the government has borrowed heavily and runs inflationary deficits despite relatively high income tax rates. Poverty has meant that the government can afford to spend only less than 1% of GDP on health care and only 2.2% on education. With a rising and under reported incidence of HIV infections owing to the drug trafficking protected by officials at all levels, this paltry spending can hardly safeguard public health (Engvall, 2006).

Hydroelectric projects could exploit Tajikistan's huge water resources. Construction has begun on Sangtuda-1, a dam to be financed by $500 million from Russia's Unified Energy Systems . This project is supposed to allow export of electricity to Afghanistan or northwards to the Russian grid. Rusal, the Russian aluminium combine, will modernise a major smelter and construct a new plant for Tajikistan's crucial state-controlled aluminium industry, its staple export. Aside from these promised investments and debt forgiveness in exchange for basing rights, however, Russia has been able to provide little as development support. Iran and China are building infrastructure projects. Much as Tajikistan has tried to attract private investment with quite liberal legislation on profits, ownership, and foreign exchange accounts, the unstable and opaque legal regime as well as the country's remoteness hinder private investors from abroad. According to one geographer's estimate, landlocked countries suffer an 80% reduction in trade volume below what would be expected from their distance to markets, and this does not include the extra charges and occasional closings imposed by Uzbekistan on Tajikistan's border (Raballand, 2003).

Uzbekistan

With 27 million citizens, the most populous of the Central Asian states is Uzbekistan, whose capital Tashkent was the main Soviet outpost in the region. Double landlocked, it is the only Central Asian state that borders all the others. Thus, Uzbekistan's exports must traverse at least two other countries to reach salt-water ports.

Transition strategy

Having experienced the negative effects of Soviet domination, imposed cotton monoculture, and the ecological disaster of the Aral Sea, President Islam Karimov decided on a development model largely independent of outside aid. To assure autonomy and political stability, his new Uzbekistani regime replaced its significant Soviet-era subventions by increasing and switching its cotton exports, still some 40% of export revenues, from Soviet to Western markets at much improved prices and by investing in energy and food self-sufficiency. Heavy taxes on its staple exports of cotton, natural gas, and gold have allowed the state to retain its revenue base, unlike Kyrgyzstan and Tajikistan. For example, in 1996 government revenue in Uzbekistan was 34% of GDP, according to World Bank figures, while Tajikistan could raise only 12%, Kyrgyzstan 16%, and Kazakhstan only 17% in that period. At first, Uzbekistan devoted the proceeds from export taxes to subsidies for household energy and bread, then to investments in heavy industry, an international airline, a new Daewoo automobile plant, and other projects. Several of these, notably the agricultural machinery joint ventures with Case, have been producing well below capacity (World Bank, 2003). To be sure, Uzbekistan has suffered from unstable prices for cotton and gold, but the country requires no foreign experts to continue to exploit these resources.

Uzbekistan embarked on a number of gradualist reforms from 1992 to 1996, (Spechler, 2007; Gervers, 2007) when lower cotton and gold prices caused a balance of payments crisis. In 1995, Uzbekistan's EBRD transition rating of 2.4 was better than Kazakhstan's, and yet while Kazakhstan and Kyrgyzstan continued to liberalise, Uzbekistan fell back and has since recovered only in part, thanks to improved current account convertibility and conversion of collective farms to leaseholds (EBRD, 2004, 2005). Privatisation of larger enterprises and banks has been very slow, and corporate governance is hindered by powerful industrial associations and unpredictable taxes.

Results

Uzbekistan experienced the shallowest recession in output of all the states of the former Soviet Union, only about one-fifth of its pre-independent output, and has recorded steady 4% or more real growth each year since 1996. Thus, it became the first CIS state to exceed its pre-independence level of output, owing in part to institutional strength (Spechler et al., 2004). Besides these factors, it has been asserted that 'production of goods mainly for domestic use made the Uzbek economy potentially less vulnerable to outside shocks' (Ruziev et al. (2007) citing Plyshevskii, 1995). However, the facts that the UzbekSSR was 'heavily reliant on the importation of consumption goods', (Ruziev et al., 2007, p. 19), exported 1.7 billion roubles (net) of light industrial products in 1988, according to the IMF figures, and had major defence plants throw doubt on this addition to the accepted explanation. Uzbekistan avoided a strong negative shock and began to recover after 1996 with almost no outside private support, although the ADB and World Bank have financed some infrastructure projects. In 2005–2006, Russia and China began to invest in the energy and telecommunications sectors.

During the seven lean years of inconvertibility, 1996–2003, bureaucratic controls impaired Uzbekistan's economy. Many people, particularly European minorities, complained of a worsening economic situation (Radnitz, 2006). Others, especially Uzbekistanis from environmentally afflicted Karakalpakstan and the depressed Fergana Valley, found seasonal work in southern Kazakhstan and Siberia, and have continued to do so. About 85,000 Uzbekistanis emigrated permanently in 2003, according to official figures (Paramonov et al., 2006). Small businesses multiplied, as everywhere else in the region, but were subject to arbitrary and discriminatory taxes (Verme, 2006) and even takeovers by privileged individuals.

In late 2003, a strong austerity programme allowed the country to restore its soum currency to convertibility for trade purposes. Even so, the country remains protectionist, except for machinery and some foodstuffs. Like the other Central Asian states, Uzbekistan has officially welcomed foreign investors from the developed capitalist states. It has been notably reserved, however, about outsider involvement in its energy sector. Non-transparent policies and persistent controls on currency withdrawals hinder private foreign investment, aside from the mining and hotel sectors. In the absence of much investment from abroad, Uzbekistan has invested heavily in its textile, chemical, and tourist businesses using state-guaranteed bank loans. Uzbekistan's self-sufficiency in food and energy and booming export surpluses since 2003 have enabled the government to rely entirely on its own military for defence. As in Russia and Kazakhstan, the recent boom in commodity prices has made internal reform less pressing.

Along with unknown but substantial expenditures on internal and external security, Uzbekistan spends a relatively high share of its national income on education and public health. Its child mortality rate is among the best in the region despite a per capita income at purchasing power parity in 2005 of approximately $1900. An estimated 26% of the population lived below the international poverty line of $2/day in 2003 (EBRD, 2006). This figure fluctuates from report to report, though. Uzbekistan's relatively low Gini coefficient of 0.268 for 2000, the lowest of the five Central Asian states, has now been raised by the World Bank to a more likely 0.368, using a 2003 survey (see Table 1). This California-size country's main cities are clearly better off than its villages. Access to improved water sources is one of the best in the region, however. Street crime is under control and beggars are uncommon. People mostly own their apartments and get utilities at nominal prices. Furthermore, based on personal observation, conspicuous consumption by the rich and by highly placed politicians is less obtrusive in Uzbekistan than in the petro-dependent states.

Uzbekistan has switched its primary foreign orientation several times since 1991. Uzbekistan quietly takes a small amount of aid and seeks investment from all sides, thus preserving its strategic independence. Foreign direct investment in Uzbekistan was only $187 million in 2004 (EBRD, 2005). In practice, if not in rhetoric, the country has been reluctant to participate in regional schemes for trade, joint projects, and the regulation of international water resources. With strengthened foreign reserve, current account, and budgetary positions, as well as a docile and isolated population, Uzbekistan can weather outside criticism of its poor human rights record and pressure for renewed liberalisation, at least for a while.

Reasons for slow liberal reforms

All five Central Asian states have been among the slowest reformers among the approximately 27 post-Communist states to have embarked on market transition. As of 2003, Kyrgyzstan and Kazakhstan had achieved a 3.0 rating and Tajikistan 2.4, leading the IMF economist Oleh Havrylyshyn to describe them as 'economies with reasonably functioning markets'. Uzbekistan (2.2) and Turkmenistan (1.3) were categorised by him as having moved 'only marginally from the regime of socialist central planning' (Havrylyshyn, 2006, p. 123). No one would deny outlier status to Turkmenistan nor dispute the early liberalisation attempts of the Kyrgyz, and yet there is merit in considering them together for obvious geographic and cultural reasons. Moreover, they all have hesitated or failed to develop the 'phase two' institutional reforms, such as governance and competition policy, financial liberalisation, and privatisation of large and strategic industries.

A number of attempts have been made to explain why these five states have lagged in their liberalisation of their economies, relative to most of the rest. Valerie Bunce (1999) theorised that 'the best predictor of economic reform...is the outcome of the first election'. Ex-communist apparatchiks won the first, unfree, elections in Kazakhstan, Uzbekistan, Tajikistan, and Turkmenistan. The exception that proves the rule was academician Askar Akayev, first president of Kyrgyzstan. Similar cases confirming Bunce's rule are Belarus, Serbia, and Azerbaijan. In general, the degree of constitutional democracy is strongly related to the degree of market reform (EBRD, 2003).

Another theory is that the 'weak' nationalism meant delay in stabilisation, an unquestioned precondition for the transition. Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, all units created by 20th-century Soviet policy, are said to have weak nationalisms, along with Belarus (Kraft, 2000). One might add Tajikistan. Among these, only the Kyrgyz Republic had much early success in ending hyperinflation. But the strength of nationalism, like 'commitment to liberalism' and 'visionary leadership', widely admired in Akayev's early years, are admittedly vague notions (Havrylyshyn, 2006). After all, strong nationalism in nearby Armenia, Georgia, and Azerbaijan contributed to violence and postponement of reform.

The 'state-capture' model of Hellman and Schankerman (2000), according to which a small number of private industrialists come to control government policy, does not work well for Central Asia, probably because the families and close associates of the presidents directly and secretly benefit from enterprises operating within their borders. In the best test of this model, Uzbekistan is given an implausibly low index of state capture, and there is no figure for Tajikistan or Turkmenistan at all. Kyrgyzstan has a high index, about the same as Russia and nearly twice that of low Kazakhstan (Hellman et al., 2000).

Finally, in accounting for the failure to liberalise, one should not forget the obvious point that all the Central Asian populations still have much less exposure to Western culture: fewer relatives abroad, fewer students studying in the USA and Europe, fewer tourists, less access to foreign-language television other than Russian and the Internet, and the great distances to any part of the outside world. Thus, the demonstration effect that so plainly prompted East German, Estonian, Polish, Slovenian, and other populations to want to re-establish their European connections is almost totally absent in this remote region.

NATURAL RESOURCE CURSE?

Two of the Central Asian countries surveyed above have clearly shown the advantages of easily exportable natural resources, at least in terms of aggregate GDP, when prices have been favourable, as they have been for cotton, gold, natural gas, and oil since 2000–2003. Kazakhstan and Turkmenistan recovered sharply from their stagnation in the 1990s when energy prices jumped from about $10 per barrel and some $40 per thousand cubic metres of gas to $40 and $100 or more, respectively. Given the relatively constant cost of transportation and/or new pipelines, the profits to the governments increased even more than proportionally. On the other hand, Kyrgyzstan and Tajikistan have lacked these resources or the ability to exploit them. Hence natural resources have not been a curse, but the blessings have not always been widely shared, either. Like Nigeria and Venezuela, the Central Asian states of Turkmenistan and Kazakhstan, ruled by autocrats and their families and associates, have suffered from corruption and waste. During the boom times since 2003, reform has slowed in both, as it has in Uzbekistan, which relies on non-ferrous metals as well as on cotton. This institutional failure has reduced the benefits from resource abundance that such democratic countries as Norway, Canada (Alberta province), and Australia have shared widely with their citizens. These democratic states have moderated the effects of price volatility on world markets by accumulating a fund of diversified assets to use in times of low prices for their mineral exports.

The effects of resource abundance have been studied most closely for Kazakhstan.

As elsewhere, the influence of oil exports on the tenge/dollar exchange rate and the consequent profitability of non-energy exports, the classic 'Dutch disease', has been examined and downplayed. Yelena Kalyuzhnova et al. (2004) dismiss the effect of high resource prices for the years 1988–2000 on the ground that little viable manufacturing industry existed in Kazakhstan then and that no significant lagged correlation between oil exports and non-oil products could be found. Of course, this period was before the great oil price spike. They add, however, that abundant natural resources provide an alternative strategy 'because it is probably easier to implement. [consequently]...a potential manufacturing and services sector is prevented from emerging'. Resource dependency provides a temptation 'to follow bad policies'. It can lead to state capture and neglect of basic education, although the latter can hardly account for slower growth in the 1990s (Kronenberg, 2004). Easily collected royalties avoid the necessity of agreeing on broad-based taxes with the population.

Provocatively, Kalyuzhnova and her co-authors argue that Kazakhstan's abundant and incompletely surveyed reserves of oil and gas, relative to annual extraction, could justify a high rate of consumption. Indeed, that is exactly what has happened there, with a major construction boom in progress with borrowed foreign funds. Kazakhstan has lately encountered rising inflation, despite budget surpluses, a more restrictive monetary policy, and tenge appreciation (EBRD, 2006).

For some years, both Kazakhstan and Uzbekistan have formed special reserve funds to absorb some resource receipts and save them for future projects. Despite pledges of transparency and audits, however, the ultimate use of these assets depends on top executive decisions. Turkmenistan's former president, the megalomaniac Suparmurat Niyazov, formed his own private fund from oil and gas revenues. His successor seized the fund, at least in principle if not in fact, and has also pledged to have audits of its use.

WHO BENEFITS? WHO LOSES?

The distribution of benefits and costs from the transition process in Central Asia is obviously important for public support for, or opposition to, market processes, even when the authoritarian regime and its elite cohorts are committed to them. The best systematic studies of distribution rely on the World Bank's Living Standards and Measurement Study, conducted during the mid- to the late 1990s in four of the five countries (Anderson and Pomfret, 2002, 2003). Turkmenistan's results from this effort have not been released and Uzbekistan's covered only a smaller sample from the Fergana Valley. These studies measured expenditures plus homegrown food, but excluding vehicles so as to circumvent underreporting of income, tax evasion, and wage arrears during the survey period. In their multivariate regressions, Kathryn Anderson and Richard Pomfret found that college education, more than vocational training, had the highest return in all four societies. They interpret this as confirming the money value to general-purpose education over the specialised technical training previously provided in the USSR. It may also reflect unmeasured family status and serve as a marker of general ability and motivation. Remarkably, having a male head of the family provided no advantage; in the Kyrgyz Republic, females with college education have done especially well.

Returns to education have been quite robust, particularly for women, as shown in another study of Kazakhstan (Arabsheibani and Musserov, 2007). The state sector there seems to reward university-educated females most highly (Verme, 2000). At the other extreme, job losses in rural Uzbekistan have thrown rural women back on inadequate land allocations by collectives, in which they are increasingly marginalised (Kandiyoti, 2003).

In the Anderson–Pomfret studies, rural residents had much lower expenditures than urban ones, as expected, except in Tajikistan, despite much lower spending in mountainous Gorna-Badakshan. Bishkek, Dushanbe, and Almaty (by 2002) had markedly higher expenditure levels than their hinterlands. These effects still expressed themselves when the lower per capita expenditures were registered for families with more children. The cost of children has risen because more educational and health costs have been shifted from the state to parents. As noted above, this privatisation of welfare spending has occurred in several Central Asian states. But older citizens, many receiving pensions and living with adult relatives, did not reduce family per capita incomes so much at all. Anderson and Pomfret interpret the large and significant locational variable as reflecting labour's unwillingness to migrate to the more prosperous capital regions, but it could also result from the need for residence permits and much more expensive housing there.

The current generation of Central Asians is not the only stakeholder in the development process of their region. If, as many think, 'Central Asia's stock of natural capital is degrading' because of salinisation of the soil, pollution of the air and water, desertification around the Aral Sea, and destruction of biodiversity, then future generations will suffer, even if they avoid 'decline' (Sievers, 2003). If, in addition, educational and scientific quality has declined, independent progress will be held back.

INTERNATIONAL ISSUES

In place of their tight, subsidized integration or 'welfare colonialism' under Soviet rule (Spechler, 1979), the Central Asian states have all chosen what might be called an external strategy of 'export globalism'. This means that each government has continued to control and rely upon a small number of staple exports – oil, natural gas, gold, cotton, aluminium, and electricity – to be sold on the world market in exchange for capital and select consumer goods. To a greater or a lesser extent, the trade and investment sectors remain state-controlled in preference to the multilateralism of the WTO, to which only Kyrgyzstan has acceded, with little effect, or to regional cooperation. Encouraged by the ADB and others, numerous regional preferential trade agreements have been signed by heads of state to considerable fanfare, but governments have so far failed to implement them (Spechler, 2002).

Nominally, all these countries have low tariffs, but various unofficial exactions at the borders and in transit, not to mention high costs of overland transportation from this land-locked region, make international trade less important than would be anticipated in small transition economies (Barlow, 2006). All the Central Asian states besides Turkmenistan have now adopted flexible exchange rates to manage their convertible currencies in the presence of significant and variable inflation, as well as unpredictable world prices and capital inflows from investments and remittances (von Hagen and Zhou, 2005).

As membership for Central Asia in the EU is out of the question and not yet considered in ASEAN (Spechler, in press), and as efforts at CIS integration repeatedly been frustrated (Byrd, 2006), the only international commitment that might influence economic liberalisation would be WTO accession for the main countries. WTO negotiations with Kazakhstan, when concluded, will likely make few demands on its economy, however, because developing countries are not usually pressed to expose their infant industries to world competition. Resource trade is not directly involved in tariff reductions. Uzbekistan, Tajikistan, and Turkmenistan are far from the serious stage in negotiations with the WTO. Curiously, the World Bank, IMF, and EBRD, all of which have been active in the region, have not demonstrably exercised their influence by refusing financing or by offering it on conditions favouring liberalisation.

PROSPECTS

All the five Central Asian states are authoritarian regimes, and all are growing at respectable rates, with the two petro-dependent states experiencing a boom since 2001. What can be said scientifically about their futures? Research has shown that authoritarian states can be just as successful as democratic ones in the early stages, characterised by extractive industry, agriculture, and simple manufacturing (Przeworski, 1991; Gat, 2007). Whether they can proceed to develop information-age manufacturing is another question. Cotton and energy exports, on which these countries depend, are subject to price fluctuations and long-term depletion. Were substantial US and EU cotton subsidies removed, as was discussed in the Doha Round, Tajikistan and Uzbekistan would benefit by about 5% of their GDP, not counting whatever incentive effects on production were allowed to pass through to producers (Pomfret, 2005a). Natural gas and electricity can be sold only to customers who have invested in pipe or transmission lines. Such sales depend also on successful negotiation of contracts with much more powerful neighbours.

The expected positive effects of partial liberalisation and mostly small-scale privatisation have been difficult, if not impossible, to demonstrate in Central Asia and the Caucasus, probably because of weak supporting institutions (Megginson and Netter, 2001; Zinnes et al., 2001). The Transition Progress Index of the EBRD has not proved to be a robust variable in economic growth regressions for the 1990s, once stabilisation and simultaneity of growth and reforms are taken into account (Radulescu and Barlow, 2002; Popov, 2006). Initial conditions were more important during the first decade of independence or even longer; the structural and institutional problems of the transition economies appear to be different from developing market economies elsewhere (Campos, 2001). Among all transition economies examined, Central Asia was in the group with the 'worst starting points' (Falcetti et al., 2002, p. 234). Nonetheless, a more recent study by EBRD economists has forcefully re-asserted the robust influence of lagged reforms if indicators are properly chosen. They also include oil prices and unreported fixed effects that may explain why 'some less reform-minded countries have grown strongly in recently years' (Falcetti et al., 2006). In my opinion, the success of liberal reform variables in reduced form or simultaneous growth equations for CIS economies seems to depend on the lags and particular elements of liberalisation, restructuring, or institutional reform included. Recovery from war has a positive effect, evidenced by the rapid recovery in Tajikistan, Armenia, and Azerbaijan. However, considering the sophistication of possible econometric approaches and wide choice of data points, the independent effect of liberal reforms, such as the rule of law, or lack thereof, is still debatable and probably awaits future experience in the CIS.

Since 2000–2003, aggregate growth seems to depend on receipts from resource exports. For the time being, according to the latest EBRD projection, Turkmenistan's growth probably can continue at 7% or so for the medium term, and Kazakhstan is expected to grow at an 8.5% rate (EBRD, 2006).

Besides the disappointing economic results of the partial liberalisation that has occurred, sustained democratisation has failed to develop owing to domestic opposition by large-scale asset holders, indigenous values, and holdover Soviet institutions now manned by nationalist politicians (Gleason, 2003). Undoubtedly, this political stasis has retarded institutional progress in the economy. For a few radicals, like the environmental lawyer Eric Sievers, globalisation and international aid agencies are mostly to blame. Indeed, as many working in these countries have observed, the need for IFIs to work with existing governments imposes an apolitical stance that 'implicitly supports the existing political agenda' (Verme, 2006). Sievers is less understanding. 'Economics', he judges, 'is exceedingly insular' (Sievers, 2003, p. 210). He recommends a kind of international trusteeship for the region, probably administered by environmental lawyers.

Since 1945, nearly all East Asian, southern European, and Latin American states that were once authoritarian have democratised, thanks to the influence of west European and American models and maybe of affluence itself, expressed in the growth of a technologically adept and sophisticated middle class. New owners may create pressures to protect property rights and law enforcement, but perhaps the wealthier among them, particularly if they are insiders emerging from the nomenklatura or through illicit deals, will favour limits to competition (Polischuk and Savvateev, 2004). The Russian theorist Konstantin Sonin (2003) reminds us that the very rich can buy private security, legal protection, and even pliable politicians. To those ploys, he might have added marriage into ruling families, as in medieval Europe. Only small- and medium-sized enterprises have a strong interest in disinterested enforcement of property rights, and in Central Asia they may depend instead on clan protection, hiding their activities, or simple bribery.

China and Russia present new models of oligarchic, state-directed capitalism on the borders of Central Asia. In East Asia, considerable growth has proceeded before full democratisation, but this can be credited to high savings and investment rates, rather than to crony capitalism. In East–Central Europe, rapid economic transition and democratic consolidation have gone together, while several of the Central Asian and other CIS states have experienced deterioration of their human rights and democracy scores after a more promising start. The character of the coming new generation of leaders in the latter states will be crucial, but is unpredictable.

Russian and émigré observers tend to be pessimistic about this post-colonial Central Asia. For Boris Rumer, an experienced writer on the region, socio-economic development there requires a 'US-Russian consortium' to 'block the dissemination of radical Islam' (Rumer, 2002; McFaul, 2002). Some Russians point to the lack of experienced and capable cadres in their ex-colonies. (Linkevich and Shvydko, 2005). Of course, all writers can be caught at a turning point, failing to perceive the possibilities of the next few years. (Olcott, 2005) Thus, as Havrylyshyn (2006) has judged about the future before us, 'any categorical interpretations are mistaken'.

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