Friday, October 11, 2024
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HomeInsightsHarnessing the power of integration: A path to prosperity in Central Asia

Harnessing the power of integration: A path to prosperity in Central Asia

  • In Bishkek on my first visit to the Kyrgyz Republic, in the heart of Central Asia.

By Bo Li

This region has been at the crossroads of civilizations for millennia. It is a mosaic of a rich cultural heritage, diverse peoples, and natural endowments that include spectacular mountains, lakes, rivers, and a rich biodiversity. It is also located very favorably at the crossroads of Asia and Europe. Needless to say, it is quite truly a unique region!

As we gather here today to discuss the economic possibilities for the Caucasus and Central Asia (CCA) region, we all recognize that the world is changing rapidly, and this is a pivotal moment.

It reminds me of another time of momentous opportunity when the region gained independence in the 1990s. Since then, the CCA countries have made remarkable progress by unleashing their first wave of market-oriented reforms, generating higher growth and improving living standards.

But new and unprecedented challenges have emerged. The Covid-19 pandemic and its aftermath are only just in our rear-view mirrors, as the region confronts emerging challenges from climate change to regional conflicts. The global economy has also shifted with geoeconomic fragmentation emerging as a key risk.

The theme of my remarks today is simple: in this changing world, raising living standards in the CCA region requires bold, concerted action.

We must strengthen stability and resilience, promote regional integration, and launch a new wave of reforms. This is how we can unleash the full economic potential of the region and its vibrant young populations, accelerate growth, create jobs and open-up opportunities for generations to come.

Building on macroeconomic stability

It is important to remind ourselves of the global context as we consider what is needed to propel the region to the next level of economic growth and prosperity.

The world economy has shown remarkable resilience in the face of the pandemic, the war in Ukraine, and an inflation surge. Global growth bottomed out at 2.3 percent in 2022 and is expected to rebound to 3.2 percent in 2024 and 3.3 percent in 2025. Initial fears of recession and uncontrolled wage-price spirals fortunately did not materialize and there is less economic scarring from the pandemic than anticipated.

However, medium-term growth projections remain below historical averages. Persistence of inflation in parts of the world, geopolitical conflicts, and the gaps in structural reforms needed to promote efficient resource allocation remain critical challenges. Global inflation is projected to decline to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to inflation targets before emerging market and developing economies.

The risks to the outlook are still considerable. Notably, geopolitical tensions and regional conflicts pose downside risks, potentially causing new price spikes. Other risks include rising trade protectionism, increasing inequality, and financial market volatility. At the same time, the fact that this year saw the hottest day on record for the planet serves as a stark reminder of daunting challenges due to climate change.

Policymakers in the CCA region deserve full credit for navigating their economies through these turbulent times and maintaining macroeconomic stability. Rapid COVID virus containment, decisive policy actions, and robust international support have led to a swift recovery, with the region growing at 4.9 percent in 2023.

Inflation fell in most CCA countries, including in the Kyrgyz Republic, amid exchange rate appreciations and a decline in commodity prices. Inflation remained more persistent in Kazakhstan and Uzbekistan due to strong domestic demand, elevated inflation expectations, and energy price reforms in Kazakhstan.

In the April Regional Economic Outlook, we projected a growth slowdown to 3.9 percent in 2024, but inflows of income, capital, and migrants from Russia, and rerouting of trade through the region have again boosted growth to impressive high single digits so far this year in oil importing CCA economies, including the Kyrgyz Republic. In Kazakhstan, on the other hand, growth is expected to slow to 3.1 percent in 2024 before picking up to 5.6 percent in 2025 as production increases from the Tengiz oil fields.

Over the medium term, growth in the region is expected to moderate to under 4 percent and inflation stabilize in mid-single digits. Escalation of the war in Ukraine and the Gaza conflict, however, could cause commodity price volatility and a reversal of the recent trade patterns.

Achieving macroeconomic stability is just a beginning. It is not sufficient to meet the aspirations of current and future generations.

Now is the time for us to come together and take bold steps to unleash a new wave of reforms that will durably raise growth, create more jobs, and improve living standards. This requires reforms to increase productivity, strengthen resilience to shocks, and expand markets.

While this is ambitious, it is within our reach as long as there is consensus to move ahead on this path. The current favourable macroeconomic conditions offer a promising window of opportunity because, as our research shows, structural reforms yield greater growth dividends during economic expansions.

From stability to prosperity

Historically, this region has been a vital link between Europe and Asia, serving as a conduit for trade, culture, and innovation.

Today, regional integration can once again harness this potential. It can facilitate the freer movement of goods, services, capital, and people, increase market size and economic efficiency, and promote inclusive prosperity.

Moreover, deepening ties within the region and global markets can foster stability and peace. Regional integration is therefore not just an opportunity, but an economic necessity.

Reducing non-tariff trade barriers, boosting infrastructure investment, and enhancing regulatory quality could increase trade by up to 17 percent on average in the CCA region, as our research shows. They can also improve market access and foster diversification.

Transportation networks, such as roads, railways, and ports are essential to facilitate cross-border trade. The planned construction of the China-Kyrgyzstan-Uzbekistan railway is an illustration of cross-country cooperation to improve connectivity between the East and the West, supporting the region’s ambition to regain its historical role.

You have abundant renewable energy resources in the region, including hydro, solar and wind power. Enhanced energy cooperation will help develop regional energy markets, ensure security, and create export opportunities. Collaborative projects, such as Kambarata-1, can help diversify the energy mix and reduce dependency on fossil fuels. Critically, it can also improve water availability for neighboring countries.

Both of these investments – the railway and Kambarata,1 -hold enormous potential for regional development and connectivity. Collective effort in mobilizing expertise and financing is essential for full realization of this potential while sustaining macroeconomic stability that has been a hallmark of the region’s recent achievements.

This brings me to the importance of regional cooperation in addressing the risks of climate change, which requires immediate and resolute actions from all of us.

A path to a low-carbon future

The CCA region is highly vulnerable to climate change. Temperatures are rising fast, and droughts and floods have become more frequent and severe, causing immense damage to crops, infrastructure and livelihoods. We estimate that unabated climate change could cause a loss of annual output of nearly 6.5 percent in the region by 2060.

The good news is that these losses could be substantially reduced by joint actions to cut emissions, adapt to climate change, and manage the risks of transition to a low-carbon economy.

The region must collaborate to promote green technologies, improve energy efficiency, and manage natural resources sustainably. Scaling back energy subsidies and introducing carbon-pricing mechanisms can contribute to global mitigation efforts. In this respect, the Kyrgyz Republic’s commitment to raising electricity tariffs and gradually eliminating energy subsidies is a shining example.

Such decisive measures can enhance resilience to climate change and create higher-paying jobs–green jobs that pay 7 percent more on average.

Reforms for enhanced growth and stability

To fully realize the benefits of regional integration, structural reforms are essential. Our research finds that such reforms could lift output by 5-7 percent in the next 4 to 6 years.

Let me highlight a few key areas where structural reforms can help achieve this boost:

A vibrant private sector is the engine of growth. Strengthening governance, property rights and the rule of law, and reducing the state footprint in the economy by simplifying regulations, fostering competition, and combating corruption will build confidence and attract private investment.

Importantly, we find that governance reforms yield the highest growth dividends and amplify the positive impacts of other reforms. The implication is clear: governance reforms should be prioritized and accompanied by other reforms.

Prudent management of state-owned enterprises (SOEs) is also critical. While some SOEs serve essential public-policy objectives and should remain in public hands, it is crucial that they operate efficiently and do not crowd out the private sector.

In most cases, however, the private sector is more efficient in delivering goods and services and creating jobs. Therefore, privatization of non-essential SOEs can lead to more dynamic and competitive markets, enhancing growth and resilience.

Investments in education, health, and digital infrastructure are vital to boost productivity. The full potential of the region’s young and dynamic population can only be unleashed through high-quality education and healthcare.

Enhancing digital infrastructure also offers vast opportunities for productivity growth, especially in a region with young people eager to embrace new technologies.

As the CCA starts to reap the benefits of these reforms, it is equally important to ensure that growth benefits all segments of society, and the vulnerable are shielded from the impacts of energy subsidy reforms and climate change. Well-targeted social assistance is essential for reducing poverty and inequality.

Benefits work best when they incentivize work and are targeted and timely to support adversely affected households during economic downturns but scale back when the recovery takes hold. Empowering women and promoting gender equality can unlock significant economic potential and contribute to more inclusive growth.

IMF’s commitment to CCA stability and growth

The IMF has been a steadfast partner of the CCA region since its initial days of independence. We provide policy advice, financing, and technical assistance to help our members in the region stabilize their economies, develop sustainable growth, and reduce poverty.

The IMF stands by all its member countries in both prosperous and challenging times. For example, our assistance during the COVID-19 pandemic helped our membership weather the crisis and lay the groundwork for recovery.

To better support our member in the CCA, the IMF established the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center. This center provides technical assistance and training to help countries in the region build stronger institutions and implement sound economic policies. It also represents our long-term commitment to the region’s development.

Conclusion

Let me conclude. Since its early days of independence, the CCA region has shown tremendous perseverance in laying the foundation of a prosperous, peaceful society.

Today, you are confronting new global challenges that test the resilience and adaptability of your economies. Embracing continued market-oriented reforms is the most effective strategy to strengthen your economies. Now is the time to forge ahead with bold spirits.

The IMF will continue to support your efforts, working in partnership for the benefit of all people in this region and beyond.

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