Globalization in the Minds

19 march 2015

Central Asian Countries and Eurasian Economic Integration

Ivan Safranchuk is an associate professor at the Department of Global Political Processes of the Moscow State Institute of International Relations (MGIMO). He holds a Doctorate in Political Science.

Resume: Russia proposes an integration project that envisages the strengthening of external economic borders to stimulate re-industrialization. Central Asian states are interested in the Customs Union and Common Economic Space, but they do not want to impose tighter control on their external economic borders.

Until quite recently it was customary for expert and political circles in Central Asia to claim that Russia had no coherent strategy towards countries of the region. This statement revealed an additional undertone after the European Union had adopted a Central Asia strategy in 2007: “Even the EU has a strategy for Central Asia, but Russia…” The phrase was completed in various ways, but the bottom line remained unchanged, underscoring Russia’s lack of a long-term political and economic plan for the region.

Indeed, for quite a while Russia’s foreign policy was largely declarative in giving priority to former Soviet republics (including Central Asia). Yet now we can state with confidence that such strategy has emerged in the form of a Eurasian economic integration project encompassing the Customs Union, the Eurasian Economic Community and the Common Economic Space. Central Asian countries play an extremely important role in this project.

HOW BIG IS CENTRAL ASIA’S INPUT?

Central Asian countries can significantly contribute to scaling up the Common Economic Space, with Kazakhstan’s Gross Domestic Product worth $203.5 billion and a population of 16.8 million, Kyrgyzstan’s GDP worth $6.4 billion and a population of 5.5 million, Tajikistan’s GDP worth $6.9 billion and a population of eight million, and Uzbekistan’s GDP worth $51.1 billion and a population of 29.8 million. Consequently, their aggregate contribution could amount to $267.9 billion and a population of 60.1 million, i.e. it would add more than 13 percent of GDP to the Russian economy (or 20 percent by purchasing power parity) and more than 40 percent of population. The figures look more modest without Uzbekistan’s input, yet their significance is still obvious: without Uzbekistan, Russia’s economy would still grow by some 15 percent of GDP (in terms of purchasing power parity), while the population increase would exceed 20 percent.

But in the emerging Common Economic Space, Central Asian countries are important not only because of the aggregate size of their economies and population. Economic development should necessarily involve re-industrialization as its most major component. This is necessary in order to generate economic growth in non-resource sectors, and create enough jobs to respond to a potential increase in population. Re-industrialization, however, will require measures to reduce competition from China.

This means that reinforcement of the economic border with China will be an important condition for further economic growth. The Customs Union’s experience shows that customs duties on Chinese goods are growing. But this tendency has been balanced out by large “gaps” on the Kazakh-Chinese customs border. There is a striking difference between Chinese and Kazakh trade turnover statistics which cannot be explained solely by the use of different methods of calculation or by some other technical reasons such as “goods misdescription.” Similar “gaps” also exist on the border between Kazakhstan and Kyrgyzstan.

Immediately after the launch of the Customs Union in 2011, one could observe bizarre scenes on the Kazakh-Kyrgyz border where cargoes were transferred from one truck to another. To make life easier for the people engaged in small business, the authorities allowed them to take up to 50 kilograms of duty-free goods across the border for personal needs. As a result, the trucks coming from China arrived with goods already packed into 50-kilogram sacks. The vehicles would stop on the border, and organized groups of locals would take the packaged goods across the border line. On the Kazakh side the goods were immediately loaded into new trucks.

The Chinese goods crossing the Customs Union border therefore escaped new, higher duties, and were in fact duty-free. The customs control on the Kyrgyz-Kazakh border was replete with such operations in the winter of 2011-2012. Later the situation normalized, and uncontrolled duty-free truck-to-truck transshipment is gone. Yet, while Chinese exports to Kyrgyzstan have been growing over the years, there has been no matching increase in the collection of customs duties on the Customs Union border. The question is: Where did all these imported goods go? It is no secret that Kyrgyzstan has become a transshipment point for the Chinese goods bound for Tajikistan and Uzbekistan. But a sizable portion of Chinese goods is still delivered to Kazakhstan, that is, it continues to cross the Customs Union border. So the problem of “gaps” persists.

Obviously, the volume of smuggled goods will decrease as the Customs Union gradually tightens border control with China. It is a matter of time. Yet it is also obvious that the project will also extend the Customs Union border with China when Kyrgyzstan and Tajikistan join the organization.

The talks on Kyrgyzstan’s accession to the Customs Union continued throughout 2013 and 2014, ending with the signing on December 23, 2014 of the membership agreement effective from 2015. Tajikistan’s admission is a matter of a more distant future. However, as with Kyrgyzstan, Tajikistan’s problem is essentially the same. Over the years of independence, both countries spontaneously produced a model of economic survival and development that will require a dramatic revision when it comes to making the decision on joining the Customs Union.

The key sectors of Kyrgyzstan’s official economy that account for the bulk of budget revenue are ore mining and hydro-electric power generation. However, they do not provide enough jobs, and 47-48 percent of the population derive their income from farming. The largest unofficial sector of the economy is trade and intermediary services. Kyrgyzstan quickly found its niche in regional trade. The key facilitating factors were the country’s liberal legislation, weak law-enforcement practice, and unbridled corruption. The goods come from China and then go to Kazakhstan, Uzbekistan and Tajikistan.

According to expert estimates, the turnover of the two largest markets through which a major portion of re-exported goods passes – Dordoi in Bishkek and Kara-Sukhu in Osh – exceeded the country’s GDP in their prime day (preliminary figures indicate a decrease in their turnover in 2014). In fact, the re-export of Chinese goods generated a second, “shadow” GDP. The volume of this business compares with the revenue generated by the whole legal economy ($6.4 billion GDP) and remittances from labor migrants (some four billion dollars). The re-export of Chinese goods has become a systemic factor in the Kyrgyz economy.

No wonder the concept of “transit future” has become quite popular in the country. The idea is that Kyrgyzstan, located at a crossroads of major trade routes, should strengthen its position as a regional transportation and trade hub. But in actual fact the hub is oriented to China-made goods, which fits poorly into the Customs Union basic concept. During negotiations on Kyrgyzstan’s membership in the Customs Union, a “roadmap” was worked out listing various groups of commodities (more than 1,000 items in all) subject to preferential treatment in order to cushion the effect from a decrease in the re-export of Chinese goods. Yet even with such preferences, the decision to join the Customs Union does not come easy to the local elite that is comprised of numerous small groupings. They will have to change the pattern of thinking. It is hard to comprehend and accept the idea that the future of the country lies in re-industrialization, not in resale of Chinese goods.

Tajikistan is not joining the Customs Union within the next few years. But when it comes to that, making the decision will be just as difficult for Dushanbe. It will necessitate tougher customs regulations on the border with China (which will push popular consumer goods prices up), but most importantly, it will require much tighter control on its southern border with Afghanistan. In the past decade, Tajikistan has invested tremendous effort in developing trade with its southern neighbors. Five bridges have been built across the river Panj to Afghanistan, and border passes for people and goods have been opened. Free economic zones are emerging in these places to stimulate trade not only with Afghanistan, but also with Pakistan via Afghanistan. Pakistan already supplies more than half of all cement to the Tajik market, and it is also a major supplier of some foodstuffs such as potatoes.

Over time, the ideas of “southward turn” and integration in the southern economic space gained popularity in Tajikistan. Instability in Afghanistan creates some uncertainty, of course, but the prevailing viewpoint among Tajik politicians, officials and experts is that Afghanistan should be regarded as an opportunity in the first place, even though some risks exist.

Opting for the Customs Union was easier for Kazakhstan. Back in the 2000s, Kazakh President Nursultan Nazarbayev oriented the country’s political elite and officialdom to re-industrialization. Despite the country’s natural riches, a population of 16.8 million is too large to live off them alone. Kazakhstan has a large metallurgical and mining industry, and Nazarbayev envisions his country’s future as a competitive industrialized state. Kazakhstan, with its re-industrialization programs, needs foreign markets, above all the closest ones, such as Russia and Belarus.

Therefore, the Customs Union is an association of states committed to re-industrialization, larger markets and common economic borders to increase the scale of their economies. Joining it would be a real challenge for those countries which over the past 25 years have become used to trading and intermediating as the main way of their development.

In this sense, the Customs Union should be of interest to Uzbekistan which has been implementing one of the most successful and ambitious re-industrialization programs in the post-Soviet space. Its commencement and initial implementation have been secured by a vast domestic market of almost 30 million people. But its possibilities will be exhausted sooner or later. And as the significance of industrial exports grows, access to close and big foreign markets will become an absolute priority for Uzbekistan in the foreseeable future.

OPEN AND “CLOSED” INTEGRATION

The establishment of a regional integration association is consonant with the general tendency where regionalization is taking over globalization.

The concept of globalization has been extremely popular in the past two decades in Central Asia. Some entertained the illusions that Central Asian countries would tread in the footsteps of the Asian Tigers, which were viewed as an example to follow in the 1990s. But Central Asian countries are locked inside the continent. Primary goods, such as oil, gas and gold, easily enter the world market and become part of global trade, even if they come from the depth of Eurasia. But for a broad range of manufactured goods the market is limited. It is basically regional, not global (since access to the global market is too expensive and competition is too tough there) or national as the capacity of national markets is quite insufficient.

Globalization began to be scaled back in 2008 with more protectionist measures and restrictions on the movement of people, capital and goods being introduced. The World Trade Organization is in crisis. Simultaneously, regionalization tendencies are gaining momentum as large economically active and intensively trading regions come into play with their own regional rules taking precedence over global ones. And this has triggered competition between regions.

The establishment of the Customs Union and the Eurasian Economic Community fits into the general trend. Those who staked on globalization and cooperation with non-regional players find it hard to change their basic approaches. It would be a real challenge for them to tighten control on the economic borders of a regional integration association after so many years of counting on globalization. That is why even Kazakhstan, a country with vested interest in the Customs Union and the EAEC, keeps reiterating that integration should not be a thing with impenetrable borders and that Kazakhstan supports an “open model” of integration.

Kazakh officials repeat American theses. It is the United States that has been advancing an “open integration model” in Central Asia in the recent years. The prevailing opinion in the U.S. government is that Central Asia’s key problem is a lack of connectivity, there is not much trade or cooperation between Central Asian states, and therefore they need to lower the barriers to trade and movement of people. Ideally, they could abolish internal borders in the region altogether while preserving their full national sovereignty. The region should also have transparent economic borders with China, Afghanistan, and Iran.

This would make it an open region actively trading on the domestic markets as well as with South Asia, China, and the Middle East. However, such a transit/transportation vision of its future obviously suggests that the region mostly exports natural resources and imports industrial goods. Consequently, it leaves open the issue of creating enough jobs in Central Asia to secure an acceptable rate of employment for the growing local population.

The employment issue is currently addressed through mass labor migration to Russia, where the total number of guest workers is unofficially estimated at four to five million people, i.e. 10 percent of Central Asia’s population. The factor of labor migration to Russia is particularly significant for Kyrgyzstan and Tajikistan. However, Russia is likely to tighten access to its labor market for migrants by introducing additional restrictions. Besides, the economic crisis has already caused an outflow of foreign workers from the country. 

Thus, Russia is trying to launch a new project facilitating regional integration within the Common Economic Space through the Customs Union by strengthening external economic borders to stimulate re-industrialization, which means making them quite tight. This approach contrasts sharply with the U.S. plans for Central Asia, which suggest its complete economic openness. Central Asian states are interested in the Customs Union and Common Economic Space, but they do not want to impose tighter control on their external economic borders.

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