Economic Development and International Financial Trilemma in

Transcription

Economic Development and International Financial
Trilemma in Central Asian Countries
A dissertation presented
by
Jasur Karshibaev
to
The Department of Economic Systems
of the Graduate School of Economics
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy (Ph.D.)
in
Economics
Kyushu University
Japan
May 2015
© 2015 – Jasur Karshibaev
All rights reserved.
i
Dedication
This dissertation is dedicated to my Father (Karshibaev Hazratkul Kilichievich)
and my Mother (Karshibaeva Gulchekhra Ruzimbaevna).
Acknowledgement
The successful completion of this dissertation could not have been possible without
guidance and support of many scholars, individuals and institutions.
First and foremost, I would like to express my gratitude and appreciation to my
principal supervisor Professor Kenji Iwata for kind and helpful guidance during the
study in doctoral program, and continuous support all through my stay in Japan. I am
also grateful to my supervisors Professor Kazushi Shimizu and Associate Professor
Shigemi Kagawa for insightful comments and advices that helped to finalize this
dissertation.
This study is possible due to my selection as a MEXT (Ministry of Education,
Culture, Sports, Science and Technology of Japan) scholar by the Embassy of Japan in
Tashkent, Uzbekistan. Therefore, I would like to express my sincere appreciation to the
MEXT and Embassy of Japan in Uzbekistan.
My life in Japan was significantly facilitated due to kind support and assistance of
lecturers and staff of Kyushu University International Student Center and Students’
Affairs Section 4, SQI and SQA in Graduate School of Economics. Especially, I would
like to express my gratitude to Yukari Matsuoka from SQA, and my Japanese language
instructors Hiroko Yoshikawa, Kyoko Takada, Fumiko Kikuchi, Aya Takashima and
many others. Equally, I am grateful to my colleagues and friends whom I met in Japan.
Particularly, I enjoyed fruitful discussions with Yuji Takahashi, Ryuji Maeda, Daiken
Mori, Dahiru Bala, Hiroshi Tajika, Haruka Takasaki, Diogo Porto da Silva and many
others.
Finally, I would like to thank my parents and family members for encouraging and
supporting me throughout my research. I am grateful to my father Hazratkul Karshibaev
and my mother Gulchekhra Karshibaeva for inspiration and insightful advices.
Similarly, I appreciate support from my sister Nargiza Karshibaeva, my brother
Jahongir Karshibaev and his wife Umida Karshibaeva, and my niece Marjona.
Completion of this dissertation became possible thanks to my wife Yulduz Karshibaeva
and my son Sardorbek who supported and helped me face all the challenges during the
course of my study in doctoral program.
Jasur Karshibaev,
May 2015
i
Declaration
I certify that this dissertation does not incorporate without acknowledgment any
material previously submitted for a degree or diploma in any university, and that to the
best of my knowledge it does not contain any material previously published or written
by another author where due reference is not made in the text.
Jasur Karshibaev,
May 2015
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Table of Contents
Table of Contents
List of Tables ................................................................................................................ iv
List of Figures ............................................................................................................... vi
List of Boxes ................................................................................................................. ix
List of Appendices ......................................................................................................... x
List of Abbreviations .................................................................................................... xi
Introduction .................................................................................................................... 1
Chapter 1 Development Strategies in Central Asia ..................................................... 13
1.1 Introduction............................................................................................................... 13
1.2 Area Profile ............................................................................................................... 13
1.3 Structural Economic Transformations .................................................................. 16
1.3.1 Structural Changes in Economic Activity ..................................................... 18
1.3.2 Alterations in GDP by Expenditure ............................................................... 24
1.4 Foreign Trade ........................................................................................................... 29
1.4.1 Structure and Geography ................................................................................. 29
1.4.2 Structural Changes in National Exports ........................................................ 44
1.4.3 Trade Balance and External Debt .................................................................. 47
1.5 Foreign Direct Investments .................................................................................... 47
1.5.1 Annual Flows and Stocks ................................................................................ 49
1.5.2 Sectoral Distribution ........................................................................................ 55
1.5.3 Investment Climate and Prioritized Sectors.................................................. 60
1.6 Concluding Remarks ............................................................................................... 65
Chapter 2 Financial Openness and Capital Liberalization in Central Asia ................. 67
2.1 Introduction............................................................................................................... 67
2.2 Capital Mobility Measures ..................................................................................... 68
2.3 Financial Openness in Central Asian Countries .................................................. 72
2.3.1 De Facto Capital Flows ................................................................................... 74
2.3.2 KAOPEN indices ............................................................................................. 74
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Table of Contents
2.3.3 Disaggregated indices ...................................................................................... 77
2.4 Liberalization of Financial Regulations ................................................................ 78
2.5 Sequence of Capital Liberalization........................................................................ 81
2.5.1 IMF: Institutional View ................................................................................... 81
2.5.2 Capital Liberalization Sequence in Central Asian Countries ..................... 83
2.6 Sequenced International Financial Liberalization Index .................................... 86
2.6.1 Methodology ..................................................................................................... 86
2.6.2 Correlation with Other Indices ....................................................................... 88
2.6.3 SIFLI in Central Asian Countries .................................................................. 88
2.7 Concluding Remarks ............................................................................................... 90
Chapter 3 Exchange Arrangements and Monetary Frameworks in Central Asia ........ 91
3.1 Introduction............................................................................................................... 91
3.2 Central Banks in National Legislations ................................................................ 92
3.3 Exchange Arrangements ......................................................................................... 94
3.3.1 De Facto Classification.................................................................................... 95
3.3.2 Developments in Nominal Exchange Rates.................................................. 96
3.3.3 Developments in Real Effective Exchange Rates ...................................... 106
3.4 Monetary Policy Frameworks .............................................................................. 107
3.4.1 De Facto Classification.................................................................................. 107
3.4.2 Developments in Inflation and Interest Rates............................................. 113
3.5 Concluding Remarks ............................................................................................. 113
Chapter 4 Determinants of Export Growth in Central Asian Countries .................... 115
4.1 Introduction............................................................................................................. 115
4.2 Data and Descriptive Statistics............................................................................. 116
4.3 Methodology and Model Specifications ............................................................. 122
4.4 Empirical Results ................................................................................................... 123
4.4.1 Model Specification (1) ................................................................................. 123
4.4.2 Model Specification (2) ................................................................................. 130
Chapter 5 Paths in International Financial Trilemma ................................................ 133
5.1 Introduction............................................................................................................. 133
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Table of Contents
5.2 International Financial Trilemma Dimensions................................................... 135
5.2.1 Trilemma Dimensions in Previous Studies ................................................. 135
5.2.2 Trilemma Dimensions in Current Study ..................................................... 136
5.3 Paths in International Financial Trilemma ......................................................... 139
5.4 Development Strategies and Financial Priorities in Central Asia ................... 144
5.4.1 Transition Models and Financial Liberalization ........................................ 146
5.4.2 Development Strategies and International Financial Trilemma ............... 147
5.5 Recent Developments in Central Asian countries ............................................. 149
5.5.1 Priority Change in Kazakhstan ..................................................................... 149
5.5.2 Policy Priorities in Uzbekistan ..................................................................... 153
5.5.3 Developments in Kyrgyzstan, Tajikistan and Turkmenistan.................... 156
Conclusion ................................................................................................................. 161
Appendices ................................................................................................................. 165
Bibliography .............................................................................................................. 175
iii
List of Tables
List of Tables
Table 1.1
Basic indicators.
Table 1.2
Basic indicators.
Table 1.3
FDI sectoral distribution.
Table 2.1
De jure capital mobility measures.
Table 2.2
De facto capital mobility measures.
Table 2.3
FDI outflows as a share of GDP.
Table 2.4
Portfolio equity net inflows as a share of GDP.
Table 2.5
KAOPEN indices.
Table 2.6
Disaggregated capital mobility indices.
Table 2.7
Legal acts on exchange arrangements and capital regulations.
Table 2.8
International capital liberalization experience.
Table 2.9
Capital liberalization in Central Asia.
Table 2.10
Capital regulations in Central Asia since 1996 .
Table 2.11
Correlation with other capital measures
Table 2.12
Sequenced international financial liberalization indices.
Table 3.1
Central banks.
Table 3.2
National currencies and exchange regularity bodies.
Table 3.3
Exchange arrangements since 1996.
Table 3.4
Monetary policy frameworks since 2000.
Table 4.1
Data specification.
Table 4.2
Descriptive statistics.
Table 4.3
Correlation coefficients.
Table 4.4
Results of statistical analysis.
Table 4.5
Table 4.6
Table 4.7
Table 4.8
Table 4.9
iv
List of Tables
Table 4.10
Table 4.11
Result of statistical analysis.
Table 4.12
Table 4.13
Table 4.14
Table 4.15
Table 5.1
International financial trilemma dimensions coding.
Table 5.2
Central Asian countries in international financial trilemma.
Table 5.3
Economic developments in Central Asian countries.
Table 5.4
Development patterns in Central Asia.
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List of Figures
List of Figures
Figure 1.1
Map of Central Asia.
Figure 1.2
Real GDP growth rates.
Figure 1.3
GDP breakdown by economic activity in Kazakhstan.
Figure 1.4
GDP breakdown by economic activity in Kyrgyzstan.
Figure 1.5
GDP breakdown by economic activity in Tajikistan.
Figure 1.6
GDP breakdown by economic activity in Turkmenistan.
Figure 1.7
GDP breakdown by economic activity in Uzbekistan.
Figure 1.8
Manufacturing as a share of GDP.
Figure 1.9
GDP breakdown by expenditure in Kazakhstan.
Figure 1.10 GDP breakdown by expenditure in Kyrgyzstan.
Figure 1.11 GDP breakdown by expenditure in Tajikistan.
Figure 1.12 GDP breakdown by expenditure in Turkmenistan.
Figure 1.13 GDP breakdown by expenditure in Uzbekistan.
Figure 1.14 Total trade as a share of GDP.
Figure 1.15 Export revenues in absolute figures.
Figure 1.16 Developments in natural gas price.
Figure 1.17 Developments in crude oil price.
Figure 1.18 Foreign trade structure of Kazakhstan.
Figure 1.19 Foreign trade geography of Kazakhstan.
Figure 1.20 Foreign trade structure of Kyrgyzstan.
Figure 1.21 Foreign trade geography of Kyrgyzstan.
Figure 1.22 Foreign trade structure of Tajikistan.
Figure 1.23 Foreign trade geography of Tajikistan.
Figure 1.24 Foreign trade structure of Uzbekistan.
Figure 1.25 Foreign trade geography of Uzbekistan.
Figure 1.26 Export concentration indices.
Figure 1.27 Current account balances.
Figure 1.28 External debt stocks.
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List of Figures
Figure 1.29 Annual FDI inflows as a share of GDP.
Figure 1.30 Annual FDI inflows as a share of GFCF.
Figure 1.31 Annual FDI net inflows and FDI stock in Kazakhstan.
Figure 1.32 Annual FDI net inflows and FDI stock in Kyrgyzstan.
Figure 1.33 Annual FDI net inflows and FDI stock in Tajikistan.
Figure 1.34 Annual FDI net inflows and FDI stock in Turkmenistan.
Figure 1.35 Annual FDI net inflows and FDI stock in Uzbekistan.
Figure 1.36 Sectoral distribution of FDI stock in Kazakhstan.
Figure 1.37 Sectoral distribution of FDI stock in Kyrgyzstan.
Figure 1.38 Sectoral distribution of FDI stock in Tajikistan.
Figure 1.39 Sectoral distribution of FDI stock in Uzbekistan.
Figure 2.1
KAOPEN indices.
Figure 2.2
Disaggregated capital mobility indices.
Figure 2.3
Integrated approach by IMF.
Figure 2.4
Sequenced international financial liberalization indices.
Figure 3.1
Developments in Kazakh Tenge against US Dollar exchange rates.
Figure 3.2
Developments in Kyrgyz Som against US Dollar exchange rates.
Figure 3.3
Developments in Tajik Somoni against US Dollar exchange rates.
Figure 3.4
Developments in Turkmen Manat against US Dollar exchange rates.
Figure 3.5
Developments in Uzbek Sum against US Dollar exchange rates.
Figure 3.6
International reserves.
Figure 3.7
Developments in real effective exchange rates (2007 base year).
Figure 3.8
Developments in interest rates in Kazakhstan.
Figure 3.9
Developments in interest rates in Kyrgyzstan.
Figure 3.10 Developments in interest rates in Tajikistan.
Figure 3.11 Developments in interest rates in Uzbekistan.
Figure 3.12 Developments in inflation rates.
Figure 4.1
Developments in Export, LFCF, FDI and REER in Kazakhstan.
Figure 4.2
Developments in Export, LFCF, FDI and REER in Kyrgyzstan.
Figure 4.3
Developments in Export, LFCF, FDI and REER in Tajikistan.
Figure 4.4
Developments in Export, LFCF, FDI and REER in Turkmenistan.
Figure 4.5
Developments in Export, LFCF, FDI and REER in Uzbekistan.
vii
List of Figures
Figure 5.1
Path in international financial trilemma: Kazakhstan.
Figure 5.2
Path in international financial trilemma: Kyrgyzstan.
Figure 5.3
Path in international financial trilemma: Tajikistan.
Figure 5.4
Path in international financial trilemma: Turkmenistan.
Figure 5.5
Path in international financial trilemma: Uzbekistan.
Figure 5.6
Path alternatives in international financial trilemma: Kazakhstan.
Figure 5.7
Path alternatives in international financial trilemma: Uzbekistan.
Figure 5.8
Path alternatives in international financial trilemma: Kyrgyzstan.
Figure 5.9
Path alternatives in international financial trilemma: Tajikistan.
Figure 5.10 Path alternatives in international financial trilemma: Turkmenistan.
viii
List of Boxes
List of Boxes
Box 1.1 Commodity revenues.
Box 1.2 Industrial Policy in Uzbekistan.
Box 1.3 Automobile industry in Uzbekistan.
Box 1.4 History of automobile industry establishment in Uzbekistan.
Box 5.1 Industrial and Innovative Development Program of Kazakhstan
for 2010-2014.
Box 5.2 Industrial and Innovative Development Program of Kazakhstan
for 2015-2019.
Box 5.3 Program of Actions of the Government of Uzbekistan.
ix
List of Appendices
List of Appendices
Appendix 1
Changes in FDI Flow Regulations.
Appendix 2
Changes in Portfolio Investment Flow Regulations.
Appendix 3
List of Sequenced International Financial Liberalization Index
Components.
Appendix 4
IMF De Facto Classification of Countries’ Monetary Frameworks.
Appendix 5
IMF De Facto Classification of Countries’ Exchange Arrangements.
x
List of Abbreviations
ADB
Asian Development Bank
ADBI
Asian Development Bank Institute
AREAER
Annual Report on Exchange Arrangements and Exchange Restrictions
BOP
Balance of Payments
BP
British Petroleum p.l.c.
CAB
Current account balance
CAC
Central Asian Countries
CBT
Central Bank of Turkmenistan
CBU
Central Bank of Uzbekistan
CIS
Commonwealth of Independent States
EBRD
European Bank for Reconstruction and Development
EFTA
European Free Trade Association
FDI
Foreign Direct Investments
FERF
Foreign Exchange Reserve Fund
FIE
Foreign Investment Enterprises
FOR
Foreign Ownership Restriction Index
FRD
Fund for Reconstruction and Development
GDP
Gross Domestic Product
GFCF
Gross Fixed Capital Formation
GM
General Motors
GNI
Gross National Income
IFI
International Financial Institution
IMF
International Monetary Fund
IMS
International Monetary System
JSC
Joint Stock Company
JV
Joint Venture
KAOPEN
Financial Openness Index
KGS
Kyrgyz Som
KZT
Kazakh Tenge
LFCF
Local Fixed Capital Formation
LMF
International Financial Integration Index
xi
MED
Ministry of the Economy and Development
MFER
Ministry for Foreign Economic Relations
MOF
Ministry of Finance
NBK
National Bank of Kazakhstan
NBKR
National Bank of Kyrgyz Republic
NBT
National Bank of Tajikistan
NFRK
National Fund of the Republic of Kazakhstan
NIC
National Investment Corporation
NIE
Newly Industrialized Economies
NKRTsB
National Securities Market Commission
NSC
National Securities Commission
OECD
Organization for Economic Co-operation and Development
REER
Real Effective Exchange Rate
SIFLI
Sequenced International Financial Liberalization Index
TJS
Tajik Somoni
TMM
Turkmen Manat
UN
United Nations
UNCTAD
United Nations Conference on Trade and Development
UNDP
United Nations Development Program
UN ESCAP
United Nations Economic and Social Commission for Asia and the
Pacific
UNICEF
United Nations Children's Fund
UNPFA
United Nations Population Fund
USD
United States Dollar
UZS
Uzbek Sum
WB
World Bank Group
xii
Introduction
Introduction
Research theme
In the dissertation, capital flow regulations, monetary policy frameworks and exchange
arrangements in five Central Asian countries are examined with the view to reveal their
paths in international financial trilemma in conjunction with development strategies
since the beginning of transition to market economy in 1991. Incompatibility of
monetary policy autonomy, fixed exchange rate regime and high capital mobility
simultaneously compels the state authorities to choose combination within international
financial trilemma with the view to achieve objectives of economic policy. In view of
that, the research is to uncover the positions and paths of Central Asian countries in
international financial trilemma as a reflection of economic development strategies.
Objectives and methodology
Growing capital mobility in twentieth and twenty first centuries, and international
financial trilemma restrains necessitate in-depth study of optimal combination of
financial openness, exchange arrangements and monetary policy frameworks with the
view of ensuring long-term macroeconomic stability and sustainable growth.
Reoccurring financial crises in different regions and in the global economy increase the
topicality of on-going discussions on policy priorities in every stage of evolution both
for advanced and emerging countries. The urgency of such study increases in respect
to Central Asian countries, where transition from centralized planned system to market
economy began at the end of twentieth century. Fundamental changes of the ground
rules in the economic activity predetermined dramatic volatilities in all areas of socioeconomic life in this region. Despite a number of studies on transition economies, still,
little is known about actual policy priorities and paths of Central Asian countries in the
international financial trilemma; and their relationship with transition models and
development strategies in the region.
1
Introduction
Acknowledged financial openness measures indicate to the presence of substantial
controls on capital movements in the region and absence of notable financial
liberalization in the last 20 years. However, Central Asian countries significantly vary
from each other on adopted transition models, and therefore sequence of liberalization.
Consequently, it is essential to examine deregulation processes in the region and to
reveal actual financial openness in each country since the start of transition to market
economy.
Different development strategies require unlike economic policy and financial
regulations. Particularly, given international financial trilemma restrains, policy
priorities affect the positions and paths of the countries as a reflection of the trade-off
between high capital mobility, exchange arrangements and monetary policy autonomy.
Consequently, given different transition and development strategies, there is a strong
need for examination of Central Asian countries paths in international financial
trilemma and their correspondence to policy priorities.
In addition, studies indicate that financial crises had contradictory impact on the
countries due to dissimilar level of financial integration into global economy,
macroeconomic structure, available reserves, policy prudency, etc. Not infrequently,
negative impacts of the crises result in policy changes. In view of that, examination of
the financial crises effect on Central Asian countries and consequent policy responses
can be revealed and displayed through position alterations within international financial
trilemma.
Thus, exploration of Central Asian economies’ paths in international financial
trilemma in conjunction with transition and development strategies is to demonstrate
how countries’ pursued macroeconomic goals and faced economic challenges through
choosing different combinations of financial regulations, exchange arrangements and
monetary policy frameworks.
The study is to outline countries’ priorities in international financial trilemma and
their compliance with economic development strategies in Central Asian countries. The
dissertation aims to carry out comprehensive study of capital flow regulations,
monetary policy frameworks and exchange arrangements with the view to define
Central Asian economies’ paths in international financial trilemma since 1990s.
2
Introduction
Furthermore, with the view to unveil correspondence of countries’ paths to the
development strategies, country-specific development patterns in Central Asian
countries are exposed through detailed examination of transition models, structural
changes, foreign trade, and FDI.
In addition, revealed paths are to demonstrate how global and regional financial
crises effected the countries’ economic priorities that are reflected in the positions
within international financial trilemma.
Therefore, with the view to clarify specifics of development strategies in Central
Asian countries, following study tasks are defined:
 To outline transformations in the real economy through examination of adopted
transition models in view of country-specifics;
 To reveal actual structural changes in the economy as the result of conducted
economic reforms since 1990s;
 To scale the share, structure and geography of foreign trade transactions of
Central Asian countries since 1990s;
 To discover trends in economic concentration/diversification through
examination of structural changes in national exports and export concentration
indices;
 To examine foreign direct investment inflows and stocks into Central Asian
region in order to outline the role of FDI in the development of each country;
 To observe sectoral distribution of inward FDI stocks among the sectors of
national economies with the view to reveal most perspective and attractive
sectors for foreign investors;
 To explore investment climate and investment programs, prioritized sectors for
FDI inflows and their expected role in economic transformations and long-term
development.
In view of revealed development strategies, developments in financial regulations,
monetary policy frameworks and exchange arrangements are addressed in order to
disclose alterations in international financial trilemma components in Central Asian
countries. For this, subsequent research activities are outlined:
 To study acknowledged capital mobility indices and calculation methodologies
to size financial openness of the countries with the view to reveal advantages
and short-comings in measuring financial deregulation processes;
 To calculate capital mobility indices of Central Asian countries based on widely
used capital mobility measures;
3
Introduction
 To examine national legislations on financial regulations and liberalization
programs in order to outline current state of affairs and perspectives of capital
flow deregulations in Central Asian countries;
 To develop a new capital mobility measure that reflects sequenced international
financial liberalization trends;
 To disclose overall developments in exchange arrangements and monetary
frameworks in Central Asian countries since 1990s;
 To examine national legislations with the view to define the objectives of
Central banks;
 To explore developments in nominal exchange rates, real effective exchange
rates, inflation rates, and interest rates.
Bearing in mind development specifics and dissimilar financial openness,
monetary policy frameworks and exchange arrangements in Central Asian countries,
the impact of FDI, local fixed capital investments, real effective exchange rates and
possession of energy resources on export growth is examined statistically with the view
to clarify export determinants corresponding to revealed development strategies.
With the view to disclose the paths of Central Asian countries in international
financial trilemma, and unveil the interrelationships between the paths and
development strategies following research tasks are to be pursued:
 To develop international financial trilemma dimensions coding taking into
account country-specifics in financial regulations;
 To construct the paths of Central Asian countries in international financial
trilemma based on previous findings;
 To explore the paths of Central Asian countries in international financial
trilemma in conjunction with development strategies.
In addition, the study of recent developments in the Central Asian countries is
carried out with the view to show dissimilar impact of global economic and financial
crisis on policy priorities and corresponding positions in international financial
trilemma. And finally, future challenges in Central Asian countries are to be deliberated
in view of revealed findings.
Data sources
Reliable statistical data is a crucial component of academic research that can affect the
quality of findings. Therefore, most statistical data referred in the research sourced from
specialized international organizations’ statistical databases, annual and special reports.
The merit of such data is in comparability, which is important in studies that cover
4
Introduction
several countries. Thus, data on economic growth, structural changes, financial flows
and trade diversification is mostly based on UNCTAD Statistics and World Bank
databases. However, detailed figures on trade geography, trade structure and allocation
of capital flows are also grounded on publications and databanks of countries’ statistical
agencies, ministries or corresponding government bodies in Uzbek, Russian or other
languages of Central Asian countries.
Capital mobility, exchange arrangements and monetary policy frameworks data are
based on de facto classification in Annual Report on Exchange Arrangements and
Exchange Restrictions and other related IMF reports and publications. Capital mobility
indices referred in the research are grounded either on data that is available in
corresponding studies or calculated by author according to corresponding
methodologies.
National legal acts on financial regulations, exchange regulations, central bank
policies and other related issues are grounded on available official sources in Uzbek,
Russian or other languages of Central Asian countries.
Other statistical data are originated from UNPFA, UNICEF, UNESCAP, OECD,
ADB, CIS and analogous specialized international institutions.
Literature review
Numerous studies on transition economies comprehensively examine different socioeconomic aspects of the transformations aimed at establishing market system in a vast
territory of countries with planned economies. Particularly, detailed review of
implemented approaches and results of structural reforms in Central Asian countries in
early stages indicate to dissimilar transition models that vary both on pace and paths
(World Bank, 1996). Country-specific challenges and policy priorities that reasoned to
adopt contrary transition models are discussed in details in speeches and works by
national leaders (Каримов (Karimov), 1995; Назарбаев (Nazarbaev), 1996, etc).
Recent developments in Central Asia indicate that in 2000-2012 the region grew at
higher rates than world economy (ADBI, 2014). Overall assessment to the
transformations and latest challenges are also discussed in EBRD Transition Report
(2013). Despite similar past, the countries significantly differed in further economic
development strategies (Karshibaev, 2014b). Significant prices’ upsurge for energy
5
Introduction
resources and metals reasoned in increase in export proceedings, at the time when other
countries benefited from it due to increase in transfers from migrant workers. However,
considerable commodity export concentration is observed in Central Asian countries
with some exceptions (Karshibaev, 2014b). However, despite a large number of studies
on particular aspects of transition and development in the region, there is a lacking in
comparative analysis of development strategies and policy priorities in Central Asian
economies through the prism of on-going discussions in development theories.
Major task in choosing an economic system is to find proper combination of market
and state in view of different types and magnitudes of market and government failures
for different cultural heritages and stages of development (Hayami and Godo, 2005).
The sequence of paradigms for policy choice in different regions demonstrated merits
and demerits of developmental and liberal approaches. Particularly, developmental
policy aimed at catching-up with advanced economies brought to success in importsubstitution industrialization in Latin America and export-oriented industrialization in
Newly Industrialized Economies (NIE) at different stages followed by their failure and
consequent introduction of “Washington Consensus” and “Post-Washington Consensus”
liberal paradigms (Hayami and Godo, 2005).
Development patterns in NIE indicate to the specific set of tools in trade and
investment policies and financial regulations associated with catch-up industrialization
(Suehiro, 2008). Particularly, import-substitution policy and commodity export with
the view to currency accumulation for technologies import in early stages of
industrialization followed with export-oriented industrialization aimed at export
structure changes in favor of industrial products (Suehiro, 2008).
Another aspect of NIE experience was unveiled during East Asian financial crisis,
which demonstrated the impact of financial flows and exchange arrangements on
manufacturing industries in the region (Suehiro, 2008). Consequently, financial
regulations and exchange arrangements influenced economic development strategies
through the structural changes in real economy. Accordingly, countries paths in
international financial trilemma can be considered in conjunction with economic
development strategies and policy priorities. However, little is known about the
relationship between economic development and countries’ priorities given
international financial trilemma restrains.
6
Introduction
International experience indicate that catch-up is achievable, however, any adopted
strategy cannot be perfect for all times and all economies. Crisis in every stage of
development is to lead to the new stage of evolution (Hayami and Godo, 2005).
Consequently, the combination of government and market is to be modified.
Accordingly, financial regulations and priorities are to correspond to the new strategy,
which would reflect in the paths of the countries in international financial trilemma.
Mundell (1963) implies that under perfect capital mobility monetary policy has no
impact on employment under fixed exchange regime, at the time when fiscal policy is
of little help under flexible exchange rates. The trade-off exists between achieving
exchange rate stability, monetary independence, and capital account openness
simultaneously. Obstfeld et al (2004) found that constrains implied by the international
financial trilemma are widely supported by historical data. Aizenman et al (2008)
developed new metrics for measuring international financial trilemma components,
taking into account changes in international reserve sizes for most countries since post
Bretton Woods system period. The indexes for wide range of countries also supported
the presence of trade-off between components of international financial trilemma.
Underpinning constrains imposed by international financial trilemma as a
cornerstone in the development of international monetary system, Eichengreen (1996)
relates international monetary system development with the increasing mobility of the
capital, specifically, with further internationalization of capital markets. Theoretical
frameworks and empirical findings of imposing capital restrictions in vast number of
studies are observed in Dooley (1995), Ariyoshi et al (2000), Eichengreen (2001) and
Henry (2006). Regarding Central Asian countries, Johnston and Tamirisa (1998)
explored the motivations of imposing controls based on analysis of statistical data for
45 countries (incl. Kazakhstan and Kyrgyzstan) and concluded that balance of
payments, macroeconomic management, institutional and market evolution, size and
economic development are significant for capital restrictions.
Numerous studies explore financial openness and liberalization issues through
capital mobility measures. Particularly, a variety of indices that size either actual
financial flows or capital controls introduced in Quinn (1997), Miniane (2004), Glick
and Hutchison (2000), Mody-Murshid (2005), Kraay (1998), Edison and Warnock
(2001), Chinn and Ito (2007), Aizenman et al (2008), Obstfeld et al (2004), Lane and
7
Introduction
Milesi-Ferreti (2001, 2003), Potchamanawong (2007), etc. The indices vary
significantly on comprising components and calculation methodologies, consequently,
indicate to dissimilar outcomes. Particularly, Chinn and Ito (2007) and Aizenman et al
(2008) point to substantial capital flow controls and absence of notable financial
liberalization in Central Asian countries except Kyrgyzstan, at the time when IMF
AREAER signals on deregulation trends in the region.
Monetary policy and exchange arrangements being a part of international financial
trilemma are addressed in a considerable number of academic literature. International
financial trilemma restrains suggest that under perfect capital mobility independent
monetary policy and fixed exchange regime are incompatible (Mundell 1963).
Consequently, transition from fixed exchange regimes system towards floating regime
system in the second half of twentieth century caused by increasing capital mobility in
the global economy (Eichengreen, 1996). However, Bordo and Flandreau (2003) imply
that even under classical gold standard domestic monetary autonomy was considerable.
Calvo and Reinhart (2000a, 2000b) found that under modern float, there could be
limited monetary autonomy, and Williamson (2001) argues that BBC exchange regime
provides some scope for the independent policy.
A great amount of papers discuss exchange rate regime choice problem and
monetary frameworks relating with macroeconomic performance (Ghosh et al, 1997;
Bleaney and Fielding, 2002; Domaç et al, 2001; De Grauwe and Schnabl, 2004; Bailliu
et al, 2003), financial imbalances (Eichengreen and Hausmann, 1999), Optimum
currency area theory (Hagen and Zhou, 2002; Bayoumi and Eichengreen, 1998),
political system (Edwards, 1996; Walker, 2004), monetary unions (De Grauwe, 2009;
Pelkmans, 2006), international reserves and central banks’ activities (Steiner, 2010;
Obstfeld et al, 2007), etc. However, attempts to uncover empirical regularities in how
countries choose their exchange rate regimes were not successful and, taken as a whole,
the literature is inconclusive (Juhn and Mauro, 2002). These generally pessimistic
findings do not necessarily imply that it is impossible to trace how a given country
arrived at its current exchange arrangement, nor do they imply that the choices made
along the way were unwise. Rather, particular circumstances may have led the
authorities to choose a new regime for good reasons; subsequently they may have
maintained it, because within a limited time horizon the costs of changing an exchange
8
Introduction
rate regime may outweigh the benefits of doing so (Juhn and Mauro, 2002).
Consequently, the findings are to be interpreted as “no exchange arrangement is optimal
for all the economic systems for all times”.
Related studies on Central Asian economies indicate that Optimum currency area
considerations provide relevant guidance for the exchange rate regime choices in
Europe and the CIS after 1990 (Hagen and Zhou, 2002). Moreover, it is reported that
exchange arrangement choice was influenced by inflation rates, cumulative inflation
differentials, and the availability of international reserves. That is, macroeconomic
stabilization and the ability to commit to a credible exchange rate peg play important
roles in the determination of exchange arrangements. Overall, the CIS countries have
shown a stronger preference for flexible exchange rate regimes than the Central and
East European countries. This may reflect the desire of the latter to tie themselves more
strongly to the European Union, to whose currency they peg in practice. The CIS
countries seem to pay less attention to reserve adequacy in their regime selection than
the non-CIS countries (Hagen and Zhou, 2002).
Мерзляков (Merzlyakov) (2011) found that in the export oriented economies, the
choice depends on elasticity of national export on exchange rates. If the exchange rate
fluctuations have sensible effects on export volumes than managed floating is found
more preferable, at the time when money supply regulation by central bank is
suboptimal. In case of small elasticity of export volumes on exchange volumes money
supply regulation is considered better option. Hakura and Billmeier (2008) reported that
trade elasticities in Central Asian economies differ from each other being lower in oilexporting countries.
Examining state exchange regulation and foreign trade issues in Uzbekistan,
Сирожиддинов (Sirajiddinov) (1998, 2004) found that in long-term state exchange
regulation efficiency is low. Olimov and Sirajiddinov (2008) suggested that the real
exchange rate volatility and misalignment have depressing effects on the volume of
trade, mainly on exports from Uzbekistan. Мирзатиллаев (Mirzatillaev) (2004)
examined exchange arrangements in transition economies and concluded that exchange
rate regimes are mainly associated with inflation. Gissy (2009) found that the changes
in exchange arrangements in Kazakhstan were motivated with a combination of
changes in foreign reserve holdings and previous regime behavior. Theoretical and
9
Introduction
empirical analysis of exchange rate arrangements and monetary policy in Central Asian
countries are also observed in Сагдуллаев (Sagdullaev) and Мусаев (Musaev) (2003),
Намозов (Namozov) (2002), etc.
A survey of literature indicates that there is a great number of previous studies
related to research theme of the dissertation. The studies include comprehensive
research on transition models and development strategies, financial openness and
capital restrictions, exchange arrangements and monetary frameworks in different
economic systems and regions. However, previous studies uncover particular aspects
of countries’ choice in international financial trilemma trade-off reasoned with specific
economic challenges. At the time, little is known about the paths of Central Asian
countries in international financial trilemma, pursued goals and argumentations for
adopted policy priorities. Moreover, there is a lacking of studies examining
development strategies in connection with paths in international financial trilemma.
Particularly, existing literature is inconclusive in exploring development strategies and
economic challenges in Central Asian countries and their reflection on trajectories in
international financial trilemma.
Original contribution
Original contribution of the dissertation is in determining the paths of Central Asian
economies in international financial trilemma through the examination of financial flow
regulations, exchange arrangements and monetary policy frameworks in connection
with countries’ development strategies. Results serve to shed light into countries
positions and paths in international financial trilemma, and thereby, display
correspondence of unlike paths to dissimilar development strategies in Central Asian
countries. Particularly, dissimilar patterns revealed in development strategies and
transition models in Central Asian countries reflected in unlike pace of financial
liberalization, adopted exchange arrangements and monetary policy frameworks that
brought to contrary paths in international financial trilemma.
In addition, despite restrictive capital regulations reported in commonly used capital
mobility indices, gradual financial liberalization in Central Asian countries has been
discovered grounded on the study of national legislation.
10
Introduction
Furthermore, the study discloses dissimilar impact of global economic and financial
crisis on Central Asian countries and consequent policy changes that reflected in
countries’ positions within international financial trilemma.
Findings contribute to the existing literature by enhancing the understanding of
country-specific economic development patterns and policy priorities in Central Asian
countries through the prism of international financial trilemma restrains.
Structure of the dissertation
Dissertation consists of introduction followed by five chapters, conclusion, appendices
and bibliography.
Introduction discloses the research theme, its topicality, pursued objectives and
tasks. It also comprises data sources and methodologies, literature review, original
contribution of the research, and the structure of the dissertation.
Chapter 1 explores developments in real economy in Central Asian countries with
the view to display development patterns and overall economic progress in the region.
It encompasses detailed description of country-specifics, implemented models and
principles of transition to market economy in each country. Economic growth rates and
structural transformations are explored since 1990s. In addition, the study explores
export diversification through corresponding export concentration indices, foreign
trade geography and structure. The role of long-term capital flows in Central Asian
countries is observed through exploring actual annual FDI flows and stocks, FDI
sectoral distribution, investment climate and prioritized sectors of economy.
Chapter 2 discloses financial openness in Central Asian countries through
comprehensive study of de facto financial regulations and corresponding capital
mobility indices. Commonly used capital mobility indices are examined in respect to
Central Asian countries along with exposition of international practices of financial
liberalization sequencing. With the view to reveal actual financial liberalization
processes in the region, national legal acts in Central Asian countries on capital
regulations are studied in details. New capital mobility measure based on sequenced
financial liberalization is introduced to display actual financial deregulation processes.
Chapter 3 examines exchange arrangements and monetary frameworks in Central
Asian countries through the study of national laws and regulations on central banks, de
11
Introduction
facto exchange rate regimes and monetary policy frameworks, developments in
nominal and real exchange rates, inflation and interest rates since 1990s.
Chapter 4 encompasses statistical analysis of real export growth determinants in
Central Asian region. Particularly, the statistical significance and impact of FDI, local
investments, real effective exchange rates and available natural resources are examined
in respect to countries grouped according to development strategies.
Chapter 5 puts together findings in previous sections of the dissertation on financial
openness, exchange arrangements and monetary policy frameworks in Central Asian
countries with the view to construct the positions and paths of these countries in
international financial trilemma since 1990s. The paths in international financial
trilemma are examined in connection with development strategies. In addition, recent
developments in Central Asian countries are discussed considering priority changes and
policy alternatives in view of global economic and financial crisis.
In Conclusion, summarized key findings are supplemented with academic issues to
be addressed in future studies in view of perspective challenges in the region.
12
Chapter 1 Development Strategies in Central Asia
1.1 Introduction
In this chapter, developments in real economy, trade and investment flows in Central
Asian countries since early 1990s are explored with the view to reveal main
macroeconomic trends and structural transformations in the region. For this purpose,
recent common history and implemented transition models in each country are briefly
discussed in Area profile. Sections 1.3 displays achieved growth rates and overall
macroeconomic progress based on detailed investigation of changes in the structure of
national economies in 1991-2011. Foreign trade structure and geography are addressed
in section 1.4 to present economic internationalization and trade diversification in Central
Asian countries. Bearing in mind significance of foreign trade structure as the reflection
of competitiveness of the national economies, export diversification and concentration
issues are examined in details. Inflows, stocks and sectoral distribution of FDI in Central
Asian countries are examined in section 1.5 with the view to reveal most attractive
industries for foreign investors and prioritized sectors by the state authorities. Main
conclusions on development strategies based on revealed macroeconomic trends and
structural transformations in Central Asian countries are summarized in section 1.6.
1.2 Area Profile
Central Asia is central region of Asia, extending from the Caspian Sea in the west to the
border of western China in the east.1 The region encompasses five countries: Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan (Figure 1.1). Central Asian
countries are rich in natural resources, which are unevenly distributed. Furthermore,
countries significantly differ in territory, population, size of economy and income per
capita (Table 1.1).
1
Britannica Online Encyclopedia, http://www.britannica.com/.
13
Figure 1.1 Map of Central Asia.
Source: Britannica Online Encyclopedia, http://www.britannica.com/.
Uzbekistan is the mostly populated country in Central Asia, at the time when
Kazakhstan is the largest country in terms of territory in the region and ninth largest
country in the world. Kazakhstan is rich in oil, at the time when there are significant
reserves of natural gas and other mineral resources in Uzbekistan and Turkmenistan.
Tajikistan and Kyrgyzstan have substantial water resources.
Half of the 62 million people population of Central Asian region lives in Uzbekistan,
which had 1.5 % population annual growth rate in 1990-2012 (Table 1.2). Meanwhile,
16 million people population of Kazakhstan underwent little change in corresponding
period with the growth rate 0 %. Other Central Asian countries grew with annual rates
1 %-1.9 % with the highest population annual growth rates observed in Tajikistan. Given
population growth rates, Uzbekistan is expected to maintain its position of mostly
populated country of the region in near future. Noteworthy advantage of these countries
is high rates of literacy and scientific potential comparable with advanced economies.2
Назарбаев Н.А. (1992), “Стратегия становления и развития Казахстана как суверенного
государства”, Алматы: РГЖИ «Дəуip».
2
14
Total adult literacy rate in all countries is over 99% with increasing number of internet
users indicate to highly qualified labor force with significant IT involvement in Central
Asian countries (Table 1.2).
Table 1.1 Basic indicators.
Country
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Population
(mln. ppl.),
2010
Territory
(th.sq.km),
2010
15,8
5,6
2 715,9
199,9
7,1
5,2
143,1
488,1
GDP per
capita
Natural
(PPP, USD), Resources
2010
196,4
12602,9
Oil
12,0
2248,5 Gold, Water
GDP
(PPP, bln.
USD), 2010
14,7
36,9
1935,2
6784,9
Water
Gas
Uzbekistan
27,8
447, 4
85,8
3039,2 Gold, Gas
Total
61,5
3 547,00
345,9
Source: UNFPA (2010), “State of World Population 2010”, New York: United
Nations Population Fund.,
IMF (2011) “World Economic Outlook”, World Economic and Financial
Surveys, Washington, D.C.: The International Monetary Fund.
Central Asian countries have common past of experiencing centralized planned
economy in the USSR and enduring its further political and economic collapse, but vary
in pathway of carried out economic reforms since independence in 1991. After
proclaiming independence, country-specific factors also reasoned authorities of the
region to select paths, that differed in pace and manner of conducting reforms. Uzbekistan
adopted gradual (step-by-step) transition model from centralized planned economy to
market economy providing social protection to the population under leading role of the
government. The liberalization processes were to be carried out along with establishment
of related legislative base and readiness of population. This specific way of gradual
transition was called as “Uzbek model”. 3 Key features of this transition model to the
market economy and approaches to further economic advance is associated with Asian
(developmental) approach that pursues catch-up with advanced economies. However,
Uzbek model is unique in its approach as it is developed with a focus on transition from
centralized planned economy to market economy; consequently, it encompasses larger
scales of reforms and transformations. Still, in view of pursued macroeconomic goals of
Каримов И.А. (1995), “Ўзбекистон: ижтимоий-иқтисодий ривожланитиришнинг асосий
тамойиллари”, Тошкент: Ўзбекистон.
3
15
catching up with advanced developed countries based on industrialization and economic
diversification, Uzbek model corresponds to Asian developmental approach that assumes
active role of government regulations in favor of industrialization.4
Kazakhstan and Kyrgyzstan were among the countries that carried out reforms in
more rapid pace. In these countries, foreign investors were actively attracted into most
privatization processes since early stages of conducting reforms. This transition pattern
corresponded to Anglo-Saxon approach associated with market liberalism. However, in
late 1990s Kazakhstan announced its own way that combines the features of Asian and
Anglo-Saxon models. 5 Turkmenistan demonstrated moderate approach to economic
reforms. Consequently, the leading role of the government in most economic processes
were maintained.6 Transition period in Tajikistan was additionally complicated with the
tense domestic political processes and civil war in 1992-1997.
Table 1.2 Basic indicators.
Total adult
Internet users
literacy rate (%),
(per 100 population),
2008-2012
2012
Kazakhstan
99.7
53.3
Kyrgyzstan
99.2
21.7
Tajikistan
99.7
14.5
Turkmenistan
99.6
7.2
Uzbekistan
99.4
36.5
Source: UNICEF Online Statistics, http://www.unicef.org/.
Population annual
growth rate (%),
1990-2012
0
1
1.9
1.6
1.5
1.3 Structural Economic Transformations
Central Asian countries used to be a part of isolated economic system until 1991 when
transition from central planned economy to market economy started in the region. .
Though the long-term goals of transition are the same as that of economic reforms
elsewhere, during transition reforms must penetrate to the fundamental rules of the game,
to the institutions that shape behavior and guide organizations. This makes it a
Hayami, Yu. and Godo, Yo. (2005), “Development Economics: From the Poverty to the Wealth of
Nations”, 3rd Ed., New York: Oxford University Press.
5
Президент Республики Казахстан (1997), “Послание Президента Республики Казахстан
Н.А.Назарбаева народу Казахстана. Октябрь 1997г.”, Официальный сайт Президента Республики
Казахстан, http://www.akorda.kz/.
6
World Bank (1996), “World Development Report 1996: From Plan to Market”, New York: Oxford
University Press.
4
16
profound social transition as well as an economic one. Other reform programs pale in
comparison to the scale and intensity of the transition from plan to market.7 Accordingly,
during transition, especially in early stages, countries suffered from severe stagnation and
negative trade balances as the result of collapse of economic ties with subsequent drop in
production and export, at the time when the amount of import of consumption goods
increased significantly
However, Central Asian countries varied in scales of economic recession reasoned
with the adopted approach to transition and economic structure at that time. Thus, in some
years, GDP dropped to more than 20% in Kyrgyzstan and Tajikistan, at the time when in
energy rich Kazakhstan and Turkmenistan experienced over 10% downturns (Figure 1.2).
Data indicates that Uzbekistan suffered considerably less in comparison with other
countries of Central Asia in early stages of transition.
Figure 1.2 Real GDP growth rates.
Source: UNCTAD statistics, http://unctadstat.unctad.org/.
Along with establishing new economic system and denationalization process through
conducting wide privatization and attracting foreign investments, national economies
began to recover in the middle of 1990s (Figure 1.2). However, due to country-specifics,
dissimilar reforms and economic policies, recovery in Central Asian countries and further
economic growth rates as well as structural changes varied from country to country.
7
Ibid.
17
In 2000s, Central Asian countries demonstrated very high level of economic growth
and slowed down during economic and internal political crises. Thus, followed by
economic stagnation, Kazakhstan gradually moved forward at the end of 1990s. In 2000s,
Kazakhstan advanced at 7%-13% annual GDP growth rates slowing down to 1%-3% in
2008-2009. Kyrgyzstan experienced cyclic economic development after recovery in 1996.
High economic growth rates in Kyrgyzstan followed by slowing downs and occasional
economic recessions which were associated with internal political crises and economic
uncertainties in global economy. Tajikistan and Turkmenistan demonstrated high
economic growth rates after recovering from large-scale economic stagnation in the
beginning of 1990s. On the contrary, national economy of Uzbekistan grew gradually
accelerating from 4%-5% at the end of 1990s to 7%-9% in 2000s. Notably, Uzbekistan
and Turkmenistan demonstrated high economic growth rates even during global
economic and financial crisis at the end of 2000s.
1.3.1 Structural Changes in Economic Activity
Undiversified economic system based on natural resources appendage was the most
common description of Central Asian economies in the eve of independence. Therefore,
on a par with the economic liberalization and privatization, structural changes with the
view to ensuring sustainable development through industrial modernization and
economic diversification were determined as one of cornerstone points in conducting
structural reforms.
GDP breakdowns by economic activity display structural changes in the national
economies in last 20 years since the beginning of transition towards market economy.
Findings show that countries differently succeeded in pursuing economic diversification
goals. Figure 1.3 displays GDP breakdown of Kazakhstan. In 1992, industrial sector used
to be the largest sector and made up 41.1% of national economy. This share underwent
little change accounting 41.9% in 2010. Consequently, it signposts of proportional growth
of industrial sector against GDP. However, data shows that growth in industrial sector
was associated with non-manufacturing sectors (Figure 1.8). Structural changes in
economic activity notably affected services and agricultural sectors. Agricultural sector
of the economy significantly decreased from 22.3% down to 4.5% of GDP in observed
period. Accordingly, the share of services increased from 36.6% up to 53.4% of GDP.
18
Figure 1.3 GDP breakdown by economic activity in Kazakhstan.
Figure 1.4 GDP breakdown by economic activity in Kyrgyzstan.
19
Figure 1.5 GDP breakdown by economic activity in Tajikistan.
Figure 1.6 GDP breakdown by economic activity in Turkmenistan.
20
Figure 1.7 GDP breakdown by economic activity in Uzbekistan.
Figure 1.8 Manufacturing as a share of GDP.
21
These structural changes in national economy of Kazakhstan indicate that significant
GDP growth rates in Kazakhstan since 1990s were mostly achieved due to industrial and
services sectors expansion, meanwhile agricultural sector was affected by economic
recession in early 1990s. Taking into account that transition to market economy in
Kazakhstan had a rapid pace with active attracting FDI into most privatization processes
and available considerable oil reserves, increasing share of industry in the structure of
GDP are mostly associated with fuel-energy sector of the economy.
In Kyrgyzstan, GDP structure underwent analogous changes in part o services sector.
In 1992-2010, services sector increased its share from 23.0% up to 53.1% (Figure 1.4).
Consequently, industrial and agricultural sector decreased their shares in national GDP
by 12.9% and 20% accordingly. Substantial drop in industrial sector was observed in the
first half of 1990s, when the cooperation links with other countries were lost, and
transition to market economy just began. Agricultural sector of Kyrgyzstan was relatively
less affected by economic recession, therefore, its share increased by 1995. However,
agricultural sector gradually decreased its portion in the structure of national GDP since
then. Thus, growth in services sector was the main source of economic development in
Kyrgyzstan in 1992-2010.
GDP breakdown in Tajikistan indicates to the decrease of services sector in early
1990s. However, it recovered in following years making up 50.1% of national GDP in
2010 (Figure 1.5). Similar to Kyrgyzstan, in the early stages of transition, agricultural
sector was relatively untouched by economic downturn. Agricultural sector increased its
share in the structure of GDP helping to survive substantial stagnation. However, its share
gradually decreased afterwards. The share of industry in the structure of GDP notably
decreased throughout observed period. At the time when it used to make up 49.7% of
GDP in 1992, it reduced to 28.3% in 2010. Observed significant downturn in the economy
of Tajikistan associated with rupture of economic ties and internal political crisis in early
stages that brought to destruction of industrial facilities, and did not recover reasoned
with insignificant FDI inflows afterwards.
Figure 1.6 displays GDP breakdown by economic activity in Turkmenistan. It shows
that industrial sector made up 78.7% of GDP in 1992, indicating to the key role of this
sector for the economy of the country. However, its share substantially decreased in
following years making up 37.8% in 2005 partially recovering by 2010 up to 48.4%. The
22
shares of services and agricultural sectors increased in 2010 by 26.3% and 4%
accordingly. Similar to other countries, agricultural sector increased its portion in the
structure of GDP in 1990s followed by gradual decline in 2000s. On the contrary, the
share of industrial sector continued diminishing up to 2005 and partially recovered since
then. Similar to Kazakhstan, Turkmenistan is rich in energy resources (gas) and fuelenergy sector of the economy dominates in the structure of the economy. Consequently,
developments in industry are mostly associated with energy prices volatility and FDI
inflows, which reflect trends in global economy.
Economic structure by activity in Uzbekistan underwent gradual changes along with
realizing national model of step-b-step transition to market economy. Therefore,
structural changes were carried out gradually without shocks and abrupt changes.
Industrial sector as a share of GDP experienced gradual decline in 1990s followed by
further recovery making up 34.8% in 2010. At the time when services sector increased its
share up to 42.1% by 2010, share of agricultural sector in the structure of GDP decreased
from 34.8% to 23.0% (Figure 1.7).
Along with structural transformations in GDP, developments in industrial sector of
the economy, particularly in manufacturing require more detailed study. Related
academic literature on developmental approach refer to the share of manufacturing
industry in national GDP (export) and GDP per capita as a valid sign and most indicative
evidence of pursued industrialization.8
Figure 1.8 presents the share of manufacturing in GDP of Central Asian countries. It
shows that manufacturing industry significantly dropped in all observed countries in early
stages of transition, especially in Kyrgyzstan, Tajikistan and Turkmenistan where it
amounted significant share of GDP in the beginning of 1990s. However, further
developments indicate to contrary trends. Particularly, in Kazakhstan (1992 - 17.1%,
2002 – 15.4%, 2012 – 11.9%), Kyrgyzstan (1992 - 37.3%, 2002 – 14.2%, 2012 – 13.9%)
and Tajikistan (1992 – 47.3%, 2002 – 36.6%, 2012 – 16.2%) it decreased. However, in
Kazakhstan and Kyrgyzstan there were periods when manufacturing industry
demonstrated an increase. Still, data shows that economic progress in these countries was
achieved mostly due to non-manufacturing sectors.
Suehiro, A. (2008), “Catch-Up Industrialization: The Trajectory and Prospects of East Asian Economies”,
in translation by Tom Grill, Singapore: NUS Press.
8
23
In Turkmenistan (1992 – 73.7%, 2002 – 32.4%, 2012 – 39.3%) and Uzbekistan (1992
– 26.5%, 2002 – 13.9%, 2012 – 21.9%) manufacturing started to recover in 2000s
indicating to industrialization process. However, this process significantly differed as
discussed in following sections.
Thus, GDP breakdowns in Central Asian countries show that the share of agricultural
sector reduced in Kazakhstan, Kyrgyzstan and Uzbekistan, at the time when it remained
unchanged or enlarged in Tajikistan and Turkmenistan. In all countries except
Kazakhstan, agriculture constituted weighty part of national production with considerable
shares in GDP structure. Changes in industrial sector in Central Asian economies varied
country by country. At the time when in Kyrgyzstan and Tajikistan, its share decreased
significantly and did not recovered to the initial level; in Kazakhstan, Turkmenistan and
Uzbekistan the authorities were able to turn this tendency back in following years.
However, the share of manufacturing industry in national GDP indicates that economic
progress in Kazakhstan, Kyrgyzstan and Tajikistan was achieved based on nonmanufacturing sectors, while Uzbekistan and Turkmenistan demonstrated increased share
of manufacturing industry in GDP. Services portion increased in all countries of the
region being one of the key sectors of economic development and the largest segment in
the structure of national GDP in the region.
1.3.2
Alterations in GDP by Expenditure
At the time when GDP breakdown by economic activity sheds light on state of
macroeconomic structure in Central Asian countries, GDP breakdown by expenditure
reveals the role of households’ consumption, government expenditures, general capital
formation and foreign trade for the national economies. Taking into account that in
centralized planned economy the authorities used to be monopolistic owner, investor and
agent of foreign trade, study of changes in each of these segments reflects conducted
structural transformations in these countries.
Findings show that countries underwent dissimilar changes in GDP components by
expenditure. Figure 1.9 displays GDP breakdown of Kazakhstan. It shows that
households’ consumption made up over 60.9% of GDP in 1992, increased by 10.2% in
1995 followed by further decrease down to 42.2% in 2010. Government expenditures in
Kazakhstan kept around 10% of GDP in observed period displaying the role of the
24
government in the economy. Gross capital formation made up 27.8% in 1992 and
significantly decreased in 1990s, however, it recovered up to 25-30% in 2000s. Foreign
trade transactions made up substantial shares in GDP structure of Kazakhstan in 1992
with negative trade balance, which occasionally turned to positive in 2000s.
In Kyrgyzstan, GDP structure by expenditure shows that households’ consumption
was the main segment making up 65%-85% of GDP in different years (Figure 1.10).
Government expenditures and gross capital formation were around 20%. Foreign trade
increased its share significantly in observed period; however, trade balance kept being
negative. Import as a share of GDP expanded from 47.6% up to 89.2%, at the time when
export increased from 35.6% up to 57.7%.
Figure 1.11 shows that households’ consumption increased from 59.5% in 1992 up to
111.2% in 2010 in Tajikistan, at the time when government expenditures decreased
significantly from 37.1% down to 9.7% of GDP. Gross capital formation’s share in GDP
structure considerably decreased in 1990s following by partial recovery in 2000s. Foreign
trade transactions underwent extensive fluctuations abruptly increasing in 1990s and
decreasing in 2000s with significant negative trade balance in observed period. Export
and import transactions made up accordingly 62.3% and 64.0 % of GDP in 1992, 121.6%
and 162.1% in 1995, 15.2% and 54.5% in 2010.
GDP structure of Turkmenistan (Figure 1.12) indicates to gradual fluctuations of
households’ consumption and government expenditures as a share of GDP in range of
36.5%-52.3% and 8.4%-14.2% accordingly. Gross capital formation decreased notably
from 42.6% down to 14.2%. At the time when foreign trade transactions increased
substantially up to over 140% of GDP in 1990s with negative trade balance, it turned
positive and gradually decreased in 2000s.
Figure 1.13 displays GDP breakdown by expenditure in Uzbekistan. In 1992-2010,
households’ consumption and government expenditures’ shares fluctuated in range of
45.3%-61.9% and 17.3%-22.3% of GDP accordingly. Shares of gross capital formation
and foreign trade transactions notably decreased in the structure of GDP in early 1990s,
gradually recovered and stabilized in 2000s. Negative trade balance observed in early
stages of transition turned to positive in 2000s.
25
Figure 1.9 GDP breakdown by expenditure in Kazakhstan.
Figure 1.10 GDP breakdown by expenditure in Kyrgyzstan.
26
Figure 1.11 GDP breakdown by expenditure in Tajikistan.
Figure 1.12 GDP breakdown by expenditure in Turkmenistan.
27
Figure 1.13 GDP breakdown by expenditure in Uzbekistan.
Thus, Central Asian countries’ GDP breakdowns show that foreign trade is significant
segment of GDP in the region, especially in Kyrgyzstan, where its share kept increasing
in all observed years. In early 1990s, negative trade balance observed in all countries
because of abrupt increase of imported consumption goods, turned to positive in
Turkmenistan and Uzbekistan. However, in Kazakhstan, Kyrgyzstan and Tajikistan
continued to experience the negative trade balance (Figure 1.27). At the time when in
Kyrgyzstan trade deficit was caused due to outpacing growth of import compared to
export, in Tajikistan, negative current account balanced resulted because of prompt
reduction of export observed since the middle of 1990s. Share of government
expenditures in Central Asian countries was stable indicating to corresponding fiscal
policy in these countries. Except Tajikistan, where it dropped significantly in 1990s
because of collapse of economic and financial ties in the region. The shares of government
expenditures in Kyrgyzstan and Uzbekistan are higher in comparison with other Central
Asian countries. Gross capital formation in the structure of GDP decreased in all observed
countries in early 1990s, when savings were mainly directed to compensate temporary
28
shrinking of income. However, increasing amounts of foreign capital inflows and internal
investments brought to gross capital formation recovery in 2000s.
1.4 Foreign Trade
Foreign trade transactions make up significant share of national GDP in Central Asian
countries (Figure 1.14). At the time when in Kazakhstan, Kyrgyzstan, Tajikistan and
Turkmenistan total trade amounted over 100% of GDP in different years, in Uzbekistan
it had comparably less but considerable share in the economy. Further in-depth study of
export-import transactions, foreign trade structure and geography is to shed light on
transformations within the economy and the role of these countries in global economy
and international division of labor.
1.4.1 Structure and Geography
Foreign trade is very competitive; consequently, national export demonstrates
effectiveness of national economies in comparison with other countries. Given that, the
structure of export signals on absolute and comparative advantages of the country in
global economy. Findings show that corresponding to economic structure, Central Asian
countries significantly vary on foreign trade composition and geography.
Figure 1.15 displays national export from Central Asian countries in absolute figures.
It shows that export of Kazakhstan substantially exceeds all other Central Asian countries’
export. The figure indicates that national export from Kazakhstan started increasing
abruptly in early 2000s followed by temporary fall in 2009 and further recovery. National
exports from other Central Asian countries’ also underwent gradual increase in 2000s in
absolute figures, especially, exports from Uzbekistan and Turkmenistan demonstrated
major increase in 2000s. This increase concurred with substantial increase of prices for
fuel-energy resources observed since 2000s.
Figure 1.16 and 1.17 display developments in prices for natural gas and crude oil since
1990s. Detailed examination of developments in prices for energy resources and export
of Kazakhstan in absolute figures signal on their concurrence. Both alterations and shape
of graphs of prices for energy resources and export revenues of Kazakhstan exactly match.
That is to say, at the time prices for energy resources were mostly stable experiencing
minor fluctuations around the major price in 1990s, export revenues of Kazakhstan in
29
absolute figures also demonstrated insignificant variations. When the prices for crude oil
and natural gas started to rise in the beginning of 2000s, export proceedings of Kazakhstan
also increased. Energy prices also explain drop in export revenues observed in 2009 and
further its recovery. This notable interrelationship between prices for crude oil and natural
gas and export proceedings indicates to significant share of energy resources in the
composition of national export of Kazakhstan (Figure 1.18).9 Similar tendencies in the
export revenues of Turkmenistan and Uzbekistan also signal about the presence of energy
resources in the structure of export in these countries (Figure 1.24). Rise in commodity
prices in 2000s brought to impressive economic growth and significant reserves
accumulation due to substantial capital inflows and excessive revenues from commodity
exports. 10 However, excessive energy prices also brought to undiversified economic
structure and associated risks in the region.
Import to Kazakhstan is more diversified (Figure 1.18). Half of import to Kazakhstan
in 2011 mainly composed of machinery and equipment for further development of fuelenergy complex and extractive industries. Other major import items included chemical
products, livestock products and food, metals and others. Import geography shows that it
is more evenly distributed between Commonwealth of Independent States (CIS) and NonCIS countries in comparison with export geography. Thus, in 2011 import from CIS
countries amounted over 14.7 billion US Dollars, at the time when Non-CIS countries
exported to Kazakhstan over 16.1 billion US Dollars. In export, the share of Non-CIS
substantially prevailed CIS (Figure 1.19). Particularly, main trade partners in part of
export from Kazakhstan in 2012 included China, Italy, Netherlands, Russia, France,
Switzerland, Austria, Turkey, Canada, Romania, and other countries; at the time when in
part of import Kazakhstan cooperated with Russia, China, Ukraine, Germany, the United
States of America , Italy, South Korea, Japan, Uzbekistan, Turkey and other countries.11
Figure 1.20 displays the structure of export and import of Kyrgyzstan in 2011. It
shows that 55% of national export of Kyrgyzstan amounted metals, at the time when other
major export items included food, mineral products, textile, machinery and equipment.
Thus, export of Kyrgyzstan heavily depended on natural resources.
9
Reasoned with data unavailability, in this section data on foreign trade varies on cover periods,
classification and sources.
10
See Box 1.1.
11
ADBI (2014), “Connecting Central Asia with Economic Centers”, A Study of the Asian Development
Bank Institute, Tokyo: Asian Development Bank Institute.
30
Figure 1.14 Total trade as a share of GDP.
Figure 1.15 Export revenues in absolute figures.
Source: World Bank Dataset, http://data.worldbank.org/.
31
Figure 1.16 Developments in natural gas price.
Source: BP Statistical Review of World Energy, http://www.bp.com/.
Figure 1.17 Developments in crude oil price.
Source: BP Statistical Review of World Energy, http://www.bp.com/.
32
Box 1.1 Commodity revenues.
Commodity Revenues in Central Asia.
Unprecedented rise in commodity prices in 2000s brought to impressive economic growth
and significant reserves accumulation due to substantial capital inflows and excessive revenues
from commodity exports. Prompted by devastating East Asian financial crisis and excessive
commodity revenues, accumulation of foreign official reserves resulted in foundation of National
Fund of the Republic of Kazakhstan (NFRK) in 2000. 12 Increasing scales of reserves in
Kazakhstan additionally reasoned institution of Joint-Stock Companies “Samruk” and “Kazyna”
in 2006 13 with further merger into Joint Stock Company Sovereign Wealth Fund “SamrukKazyna” in 2008.14 Additionally, a number of other financial institution were designed to manage
international reserves in 2000s, including National Investment Corporation (NIC) founded in
2012 by National bank of Kazakhstan. 15 In 2013, total assets under management of these 3
sovereign wealth funds amounted 182,5 billion USD (Samruk-Kazyna - 101,5 billion USD,
NFRK - 62 billion USD, NIC - 20 billion USD).16
In Uzbekistan, commodity revenues have been generally redistributed through the budget,
and excessive proceeds have been accumulated in the Fund for Reconstruction and Development
(FRD) of Uzbekistan since 2006.17 By 2016, its charter capital is expected to amount 16 billion
USD. 18 Furthermore, international reserves have been accumulated in Central bank of
Uzbekistan. Extra-budgetary funds in Turkmenistan have been accumulated in Foreign Exchange
Reserve Fund (FERF). In 2008, additional Stabilization Fund was founded. 19 However, no
reliable data regarding their amounts and regulations is available open sources.
Source: Prepared by author.
Президент Республики Казахстан (2000), “Указ Президента Республики Казахстан от 23 августа
2000 года №402 “О Национальном фонде Республики Казахстан”, Информационно-правовая
система нормативных правовых актов Республики Казахстан, http://adilet.zan.kz/.
13
Президент Республики Казахстан (2006), “Указ Президента Республики Казахстан от 28 января
2006 года №50 “О мерах по дальнейшему обеспечению интересов государства в управлении
государственным сектором экономики”, САПП Республики Казахстан, 2006г., №3, ст.16,
Информационно-правовая система нормативных правовых актов Республики Казахстан,
http://adilet.zan.kz/.
14
Президент Республики Казахстан (2008), “Указ Президента Республики Казахстан от 13 октября
2008 года №669 “О некоторых мерах по обеспечению конкурентоспособности и устойчивости
национальной экономики”, САПП Республики Казахстан, 2008г., №41, ст.454, Информационноправовая система нормативных правовых актов Республики Казахстан, http://adilet.zan.kz/.
15
National Bank of Kazakhstan (2012), “Resolution of the Board of National Bank of Kazakhstan №180
from May 25, 2012 on “The Approval of Creation of «National Investment Corporation of National Bank
of Kazakhstan» the Joint-Stock Company”, Astana: National Bank of Kazakhstan.
16
ESADEgeo (2013), “Sovereign Wealth Funds 2013”, Center for Global Economy and Geopolitics,
http://www.esade.edu/.
17
Президент Республики Узбекистан (2006), “Указ Президента Республики Узбекистан от 11 мая
2006 года №УП-3751 “О создании Фонда реконструкции и развития Республики Узбекистан”,
Собрание законодательства Республики Узбекистан, 2006г., №19, ст.161; 2009г., №8, ст.76, №22,
ст.257; 2012г., №11, ст.113; 2014г., №29, ст.356, Национальная база данных законодательства
Республики Узбекистан, http://www.lex.uz/.
18
Президент Республики Узбекистан (2012), “Постановление Президента Республики Узбекистан
от 9 марта 2012 года №ПП-1725 “О мерах по дальнейшему совершенствованию деятельности Фонда
реконструкции и развития Республики Узбекистан”, Собрание законодательства Республики
Узбекистан, 2012г., №11, ст.114, Национальная база данных законодательства Республики
Узбекистан, http://www.lex.uz/.
19
EBRD (2014), “Strategy for Turkmenistan”, Document of the European Bank for Reconstruction and
Development, http://www.ebrd.com/.
12
33
Figure 1.18 Foreign trade structure of Kazakhstan.
Source: Customs Control Committee of Ministry of Finance of Kazakhstan,
http://www.customs.kz/.
34
Figure 1.19 Foreign trade geography of Kazakhstan.
Source: Агентство Республики Казахстан по статистике (2011), “Казахстан за
годы независимости 1991-2010: Статистический сборник”, Астана:
Агентство Республики Казахстан по статистике.
35
Figure 1.20 Foreign trade structure of Kyrgyzstan.
Source: Национальный статистический комитет Кыргызской Республики (2011),
“Внешняя торговля Кыргызской Республики 2007-2011: Статистический
сборник”, Бишкек: Национальный статистический комитет Кыргызской
Республики.
36
Figure 1.21 Foreign trade geography of Kyrgyzstan.
Source: Национальный статистический комитет Кыргызской Республики (2011),
“Внешняя торговля Кыргызской Республики 2006-2010: Статистический
сборник”, Бишкек: Национальный статистический комитет Кыргызской
37
Import to Kyrgyzstan in 2011 composed of mineral products, machinery and
equipment, food, textile, metals and others displaying more diversified distribution
(Figure 1.20).
Foreign trade geography of Kyrgyzstan points to even distribution of export-import
transactions between CIS and Non-CIS countries in observed period (Figure 1.21).
Particularly, in 2012, main trade partners of Kyrgyzstan in part of export included
Switzerland, Kazakhstan, Russia, Uzbekistan, China, Turkey, Tajikistan, Afghanistan,
Germany, United Arab Emirates and other countries; at the time when in part of import
Kyrgyzstan cooperated with Russia, China, Kazakhstan, the United States of America,
Japan, Germany, Turkey, Belarus, Ukraine, South Korea and other countries.20
Foreign trade structure of Tajikistan shows that the main export item in 2011 was
cotton fiber, at the time when imported goods included oil and fuels, cereals, natural gas
and others (Figure 1.22). However, data provided by statistical agency of Tajikistan does
not itemize major portion of transactions. ADBI reported that significant shares of export
from Tajikistan included non-ferrous metals, metalliferous ores and metal scrap,
vegetable and fruits, and other commodities.21
Foreign trade geography indicates that export to Non-CIS countries dominated, while
import from CIS exceeded Non-CIS (Figure 1.23). Particularly, in 2012, main trade
partners of Tajikistan in part of export included Turkey, China, Iran, Afghanistan,
Bangladesh, Kazakhstan, Russia, Italy, Norway, the United States of America and other
countries; at the time when in part of import Tajikistan cooperated with China, Russia,
Kazakhstan, Turkey, Iran, Turkmenistan, United Arab Emirates, Uzbekistan, Ukraine,
Lithuania, and other countries.22
The main export items of Turkmenistan included natural gas, oil and oil products and
cotton. Particularly, in 2011 the export of natural gas is reported to amount 90% of its
total volume.23 In 2012, export also included Petroleum, petroleum products, and related
materials, textile yarn, fabrics, made-up articles.24 Main trade partners of Turkmenistan
21
Ibid.
22
Ibid.
23
Ministry of Economic Development of Russian Federation, http://www.ved.gov.ru/.
24
20
38
in 2012 in part of export included China, Ukraine, Italy, United Arab Emirates, Turkey,
Afghanistan, Iran, Russia, Bangladesh, Bermuda and other countries; at the time when in
part of import Turkmenistan cooperated with China, Turkey, Russia, United Arab
Emirates, Germany, the United Kingdom, Iran, Ukraine, Belarus, Italy and other
countries. 25
Figure 1.24 presents export composition of Uzbekistan in 2011. It shows more
diversified structure that contains oil products and fuels, services, cotton fiber, food,
machinery and equipment, metals, chemical products and others. Export geography
indicates that export to Non-CIS countries to some extent exceeds trade with CIS
countries (Figure 1.25). Particularly, main trade partners of Uzbekistan in 2012 in part of
export included China, Turkey, Kazakhstan, Russia, Ukraine, Bangladesh, Kyrgyzstan,
Turkmenistan, Iran, Japan and other countries. 26
Import structure of Uzbekistan is more diversified with significant share of machinery
and equipment in 2011. Other items included import of food, chemical products, oil
products and fuels, metals, services and others. Import geography also points to exceeding
of import from Non-CIS countries compared to import from CIS countries (Figure 1.25).
Particularly, main trade partners of Uzbekistan in 2012 included Russia, China, South
Korea, Kazakhstan, Germany, Turkey, Kyrgyzstan, the United States, Italy and other
countries. 27
Study shows that foreign trade structure and geography in Central Asian countries
varied from country to country. At the time when import of goods and services from CIS
and Non-CIS countries are distributed more or less evenly in all countries, export
geography of each country is different depending on export structure. However, in all
countries the share of export to Non-CIS countries exceeded the share of CIS countries.
This spread is less in export of Kyrgyzstan and Uzbekistan, which have more diversified
composition of export; and more obvious in other Central Asian countries’ export, which
heavily depend on export of natural resources. Import structure of Central Asian countries
is comparably diversified with remarkable shares of machinery and equipment in import
structure indicating to the industrialization process in the region.
25
Ibid.
Ibid.
27
Ibid.
26
39
Figure 1.22 Foreign trade structure of Tajikistan.
Source: Agency on Statistics under President of Tajikistan, http://www.stat.tj/.
40
Figure 1.23 Foreign trade geography of Tajikistan.
Source: Агентство по статистике при Президенте Республики Таджикистан
(2010), “Таджикистан в цифрах, 2010: Статистический сборник”,
Душанбе: Агентство по статистике при Президенте Республики
Таджикистан.
41
Figure 1.24 Foreign trade structure of Uzbekistan.
Source: State Committee of
http://www.stat.uz/.
the
Republic
42
of
Uzbekistan
on
statistics,
Figure 1.25 Foreign trade geography of Uzbekistan.
Source: State Committee of
http://www.stat.uz/.
the
Republic
43
of
Uzbekistan
on
statistics,
1.4.2 Structural Changes in National Exports
Diversified and competitive economic system in the global market that ensures long-term
sustainable economic growth were among the final goals of structural reforms and
transition to market economy. Study revealed that Central Asian countries have actively
integrated into global economy through expanding foreign trade within the region and out
of its boundaries.
Foreign trade structure of these countries point to certain level of export concentration,
especially in Kazakhstan, Tajikistan and Turkmenistan, where commodity trade amounts
substantial shares of national exports. Therefore, detailed examination of relevant export
concentration indices in respect to Central Asian countries is to display actual state of
affairs and alterations in concentration of national exports.
Data indicates to bidirectional trends in national exports’ concentration in Central
Asian countries. Figure 1.26 displays export concentration indices 28 of Central Asian
countries for 1995-2011. Indices point to consistency of preliminary findings regarding
export concentration in several Central Asian countries. Particularly, concentration
indices for Kazakhstan show that there is an evidence of national export concentration. It
increased from 0.2 in 1995 up to 0.61 in 2011 (Figure 1.26). Indeed, the oil and gas
industry played a vital role in the Kazakhstan’s GDP structure and export in observed
period. Its share in the structure of national GDP increased from 10.9% in 2001 up to
28.3% in 2010.29
In Kyrgyzstan, little change in export concentration is observed. Export concentration
rate of 0.14 in 1995 remained the same in 2010. However, the indices underwent
considerable fluctuations in 1998-2001 with peak of 0.34. Sizable share of gold and
precious metals in Kyrgyzstan`s export served for its concentration30, at the time when
export of inorganic chemical products, clothes, fruits and vegetables, and other export
items made export structure more diversified.
28
Export concentration index shows how exports of individual countries are concentrated on several
products or otherwise distributed in a more homogeneous manner among a series of products.
Concentration index, also named as Herfindahl-Hirschmann index, is a measure of the degree of market
concentration. It has been normalized to obtain values ranking from 0 (a more equal distribution of market
shares among exporters) to 1 (maximum concentration).
29
Ernst & Young Advisory LLP (2011), “Kazakhstan Oil and Tax Guide 2011”, http://www.ey.com/.
30
Национальный статистический комитет Кыргызской Республики (2012), “Кыргызстан в цифрах:
Статистический сборник”, Бишкек: Национальный статистический комитет Кыргызской
44
Figure 1.26 Export concentration indices.
Export concentration indicators for Tajikistan display considerable level of export
concentration. Indices rose from 0.46 in 1995 up to 0.50 in 2011. In Tajikistan, the highest
concentration of national export was observed in 2006-2007 achieving 0.71-0.72.
Turkmenistan’s indices also indicate to substantial concentration amounting 0.55 in 2011,
at the time when it was 0.49 in 1995. However, in 2001-2008 indices demonstrated the
highest value ranging from 0.64 to 0.71 followed with insignificant decrease afterwards.
In contrast to other Central Asian countries, the concentration indices for Uzbekistan
demonstrated significant and explicit decrease from 0.59 in 1995 down to 0.24 in 2011.
The developments signals on gradual export diversification and industrial policy pursued
in Uzbekistan since early stages of transition period. The new export items from
Uzbekistan varied from automobiles to textile, chemical products, energy resources,
others.31 Considerable export diversification was achieved in Uzbekistan partly due to
newly established industry of vehicles’ production in 199632, export of services, textile,
food and other products. Another distinctive feature in export diversification is the
decreasing portion of cotton fiber in export, which is mostly processed in the country.
31
32
Ministry for Foreign Economic Activity, Investments and Trade of Uzbekistan, http://www.mfer.uz.
See Box 1.3-1.4.
45
Figure 1.27 Current account balances.
Source: IMF (2014), World Economic Outlook, http://www.imf.org/.
1.28 External debt stocks.
Source: WB (2014), International Debt Statistics, http://data.worldbank.org/.
46
1.4.3 Trade Balance and External Debt
Current account balance reflects the role of given country in foreign trade indicating to
its competitiveness and success of adopted development strategy, at the time when
volumes and developments in external debt stock of the countries signals on financial
sustainability and default risks associated with these economies.
Figure 1.27 displays current account balances in Central Asian countries. It shows
that despite significant oil export concentration, Kazakhstan experienced significant
negative CAB, at the time when Turkmenistan and Uzbekistan demonstrated positive
CAB (net exporter). Kyrgyzstan and Tajikistan experienced on-going negative CAB in
observed period.
Figure 1.28 displays external debt stocks in Central Asian countries. It shows that
despite significant decrease of debt stocks in comparison with late 1990s, Kazakhstan,
Kyrgyzstan and Tajikistan still have high debt stocks as a share of GNI. On the other hand,
Turkmenistan and Uzbekistan significantly decreased their debt in 2000s and currently
exhibit low external debt stocks.
1.5 Foreign Direct Investments
Long-term capital flows such as FDI are crucial for economic development of any country
as a source of advanced technologies, capital and managerial skills. Especially, for
Central Asian countries, which started transition to market economy and structural
reforms with a view to ensure long-term growth through industrialization and economic
diversification. Therefore, even with dissimilar approaches to path of economic reforms
and short-term capital flow regulations since 1991, all Central Asian countries intend to
attract more FDI.33
Historical examples indicate that macroeconomic goals determined the regulations of
financial flows in different regions and times. Widely known example of imposing largescale capital restriction goes to the Post World War II period, when “Bretton Woods
system” was established. Financial markets were regulated to channel credit toward
Karshibaev, J. (2014b), “FDI and Export Diversification in Central Asian Economies”, Gulistan State
University Bulletin, No 2014/2, pp.76-80.
33
47
strategic sectors.34 Temporary capital restrictions were justified by utter economic and
financial destructions. Meanwhile, most countries significantly liberalized their financial
system to utilize compelling benefits, bearing in mind that international financial
liberalization are largely inevitable and irreversible. 35 Whereas significance of FDI
inflows to economies are widely admitted in academic stage, International Monetary
Fund’s Institutional view states that in order benefits overweight costs further financial
liberalization should be properly timed and sequenced according to institutional
development.36
Despite its significance, little is known on FDI inflows and stocks, sectoral
distribution and economic priorities announced by the authorities of Central Asian
countries. In this section, actual flows of FDI are being examined with the view to outline
their role in the development of each country and in future perspectives of Central Asian
region.
Investment climate and FDI inflows into Central Asian countries are addressed in a
variety of reports, research papers and observations. Specifically, Shiells (2003)
examined capital flows into the Commonwealth of Independent States and found that FDI
inflows had generally been associated with natural resource extraction or energy
transportation infrastructure projects, large privatization transactions, and debt/equity
swaps to pay for energy supplies. OECD (2013) states notable increase of FDI into
Central Asian countries. However, there is untapped potential to rise both in volumes and
in quality in comparison to other emerging and developing countries in case of further
improvement of investment climate. ADBI (2014) also points to the recent considerable
upsurge of FDI inflows into energy, transportation and infrastructure sectors. With the
view to ensure long-term economic stability through export and industry diversification
policy, taking steps are recommended including attraction of FDI inflows into
manufacturing and other sectors.
Eichengreen, B. (1996), “Globalizing Capital: A History of the International Monetary System”, New
Jersey: Princeton University Press.
35
Eichengreen, B. (1999), “Towards a New International Financial Architecture: A Practical Post-Asia
Agenda”, Washington, D.C.: Institute for International Economics.
36
IMF (2012), “The Liberalization and Management of Capital Flows: An Institutional View”,
Washington, D.C.: The International Monetary Fund.
34
48
1.5.1 Annual Flows and Stocks
Central Asian countries highly welcome FDI inflows widely providing preferences and
tax exemptions. The authorities develop long and mid-term investment programs with a
view to attract greenfield investments into key sectors of the national economy. As a
source of new technologies and advanced managerial skills, FDI are considered as a
crucial in governments’ economic development strategies.37
With the view to reveal actual role of FDI in the development of Central Asian
countries, shares of annual FDI inflows in the structure of national GDP and gross fixed
capital formation (GFCF) are examined. Figures 1.29 shows that FDI inflows amounted
different portions in the structure of GDP varying from country to country. Particularly,
in Kazakhstan, inward FDI flows served as a significant source of economic growth
amounting from 3% to 13% of GDP in various years. Consequently, FDI composed from
one third to half of GFCF of the country in different years (Figure 1.30). Bearing in mind
that Kazakhstan adopted rapid transition model, which assumed fast privatization of
production capacities with wide attraction of foreign investors into all sectors of economy,
substantial amounts of FDI and portfolio flows in the structure of GFCF corresponded to
applied strategy.
Despite similar to Kazakhstan strategy of transition to market economy, lesser amount
of FDI inflows is observed in Kyrgyzstan. Its share varied from 1% to 9% of national
GDP in different years. However, FDI inflows even dropped down to 0% in 2000-2002.
Accordingly, foreign direct investments amounted insignificant shares of GFCF except
several years.
In Tajikistan and Turkmenistan, FDI inflows abruptly enlarged in exceptional years
and amounted 1%-5% in other years. However, in Turkmenistan significant growth of
FDI flows into national economy is being observed in the second part of 2000s.
Remarkably, despite global economic and financial crisis that occurred in late 2000s, FDI
inflows to Turkmenistan significantly increased both in GDP and in GFCF. FDI
composed significant part of GFCF of Tajikistan in different years demonstrating
considerable fluctuations from year to year. In late 2000s, FDI inflows dropped down to
insignificant portion of GDP and GFCF of Tajikistan accordingly.
37
49
Figure 1.29 Annual FDI inflows as a share of GDP.
Figure 1.30 Annual FDI inflows as a share of GFCF.
50
Figure 1.31 Annual FDI net inflows and FDI stock in Kazakhstan.
Figure 1.32 Annual FDI net inflows and FDI stock in Kyrgyzstan.
51
Figure 1.33 Annual FDI net inflows and FDI stock in Tajikistan.
Figure 1.34 Annual FDI net inflows and FDI stock in Turkmenistan.
52
Figure 1.35 Annual FDI net inflows and FDI stock in Uzbekistan.
The shares of inward FDI flows in GDP and GFCF of Uzbekistan gradually increased.
Despite relatively less portion of FDI in the structure of GDP and GFCF, there is
increasing tendency throughout the observed period.
FDI inflows and their stocks in absolute figures display actual inward long-term
capital movements in Central Asian countries. Figures 1.31-1.35 present annual FDI net
inflows and FDI stocks in five Central Asian countries. Kazakhstan is among the regional
leaders in attracting FDI in absolute figures. FDI inflows gradually increased throughout
development of the country from 100 million US Dollars in 1992 up to 13 billion US
Dollars in 2011 (Figure 1.31). Abrupt increase in FDI inflows is observed since the
middle of 2000s up to occurrence of global economic and financial crisis in 2008.
However, even during this period inward FDI flows amounted weighty volumes of the
national economy. FDI stock increased gradually and total amount achieved over 93
billion US Dollars in 2011. Noteworthy that the trend of annual net FDI inflows also
matches the trajectory of prices for crude oil (Figure 1.16). In addition to previous
findings on apparent link between export revenues of Kazakhstan and prices for crude oil,
which is explained with significant portion of oil related products in the structure of
export, annual FDI net inflows also clearly associated with crude oil prices. Furthermore,
53
existing relationship between FDI inflows, export revenues and energy prices are also
supported with export concentration indices in Kazakhstan. Hence, oil prices upsurge
improved attractiveness of fuel-energy complex of Kazakhstan for foreign investors.
Considerable FDI inflows directed into extractive and oil related industries resulted in
extension of these industries procuring increase of oil export volumes and consequently
high economic growth rates in Kazakhstan. Thus, oil related industries in the economy of
Kazakhstan enlarged their portion both in GDP and in national export. However, oilexport based development increased associated risks related to commodity price volatility
and undiversified economic structure.
FDI flows into economy of Kyrgyzstan experienced significant fluctuations both in
absolute figures and as a share of GDP (Figure 1.32). In absolute figures, the peak of
inward FDI (700 million US Dollars) was achieved in 2011 amounting 12.2% of national
GDP (Figure 1.29). Accordingly, FDI stock underwent both increases and decreases in
different years, which points to considerable bidirectional capital flows in Kyrgyzstan. In
2011, total amount of FDI stock made up over 1.2 billion US Dollars.
Annual foreign direct investment inflows into Tajik economy remained insignificant
until 2004, when its volume sharply increased up to 272.7 million US Dollars
(Figure 1.33). In 2000s, capital inflows underwent abrupt fluctuations. Thus, inward FDI
flows amounted over 300 million US Dollars annual inflows in 2006-2008 and dropped
down to 16.7 million US Dollars in 2008. As a result, FDI stock in Tajikistan amounted
1 billion US Dollars in 2011.
Similar to Kazakhstan’s case, FDI inflows to Turkmenistan are widely associated with
fuel-energy complex of the economy. Taking into account that main export item of
Turkmenistan is natural gas; corresponding prices must have had larger effect on capital
flows. Thus, in absolute figures and as a share in GDP, FDI inflows gradually increased
in 2000s. However, significant increase in inwards FDI to the national economy began
since 2007-2008 (Figure 1.34). In absolute figures, in 2008-2011, annual net FDI inflows
into Turkmenistan amounted 3-4 billion US Dollars. Consequently, FDI stock in 2011
amounted over 16.6 billion US Dollars.
Based on principles of step-by-step transition to market economy, in Uzbekistan the
volume of attracted FDI gradually increases into national economy both in absolute
figures and as a share of GDP. Government provides preferences and wide range of tax
54
exemption opportunities to the foreign investors.38 Significant FDI flows in Uzbekistan
is observed since the middle of 2000s achieving 1.6 billion US Dollars of annual FDI
inflows in 2010. Thus, FDI stock in 2011 amounted over 6.7 billion US Dollars
(Figure 1.35).
1.5.2 Sectoral Distribution
Sectoral distribution of FDI39 in the economy signals on attractive sectors for the foreign
investors. It also points to long-term intentions of the government, which stimulate capital
flows into specific areas by means of fiscal incentives. FDI is a source of industrialization
and modernization, and therefore, FDI sectoral distribution can be considered as an
indicator of development strategy. Table 1.3 presents FDI sectoral distribution in Central
Asian countries.
Sectoral distribution of FDI stock in Kazakhstan indicates that in 1993-1999 major
portion of FDI was invested into oil and gas (54%) and ferrous metals (20%) sectors. 40
However, FDI stock distribution among industries in 1991-2011 shows that the share of
extractive industries remains significant and amounted 72 % of overall FDI (Figure 1.36).
Major share of FDI was directed into extractive industries, thereby providing further
support to the supposition on Kazakhstan’s development model, which is mainly based
on extracting and exporting mineral resources. However, development strategy of
Kazakhstan states that oil revenues are to be directed into non-oil sectors of economy
with a view to achieve significant diversification and compatibility improvement. By
2020, Kazakhstan intends to be in the World top 50 most competitive countries. 41
UNCTAD states that investors from developed countries, primarily from the United
States, the United Kingdom, the Netherlands and Italy, dominated in investing FDI in
“UZINFOINVEST” the Information Support & Foreign Investments Promotion Agency,
http://www.uzinfoinvest.uz/.
39
Reasoned with data unavailability, in this section data on sectoral distribution varies on cover periods,
classification and sources.
40
UN ESCAP (2003), “Investment Climate in Kazakhstan: Country Report”, Bangkok: The United Nations
Economic and Social Commission for Asia and the Pacific.
41
Президент Республики Казахстан (2010), “Указ Президента Республики Казахстан от 1 февраля
2010 года №922 “О Стратегическом плане развития Республики Казахстан до 2020 года”, САПП
Республики Казахстан, 2010г., №10, ст.115, Информационно-правовая система нормативных
правовых актов Республики Казахстан, http://adilet.zan.kz/.
38
55
Kazakhstan. Among the developing economies, Russia and China also directed
significant amounts of FDI into Kazakhstan.42
In Kyrgyzstan, sectoral distribution of FDI stock for 1995-2001 (Figure 1.37)
evidences that weighty part was invested into mining (55%) and retail trade, catering and
services (21%). However, developments in inward FDI in 2007-2011 states that
manufacturing, financial services and real estate operations were main sectors of
economy for FDI.43 UNCTAD states Canadian Kumtor Operating Company (mining and
quarrying), German Reemstsma Kyrgyzstan (tobacco) and Canadian Kyrgyz petroleum
Company (Petroleum) among the largest industrial investors in 2000s. The largest
investors in financial sectors were financial institutions from Turkey, Russia and EU.44
Sectoral distribution of Inward FDI stock for 1993-2001 (Figure 1.38) evidences that
in early stages of development Tajikistan mostly attracted foreign investments into textile
(45%) and mining (42%) sectors, at the time when recent figures state that Tajikistan has
attracted most of its FDI into hydropower as well. 45 In 2007-2009, largest shares of
investments went into energy, civil construction, banking services and communications.46
In Turkmenistan FDI inflows are mostly associated with fuel-energy extraction,
processing and transportation. In 2012, main source countries of FDI included China,
Russia, Canada, Turkey, Persian Gulf countries and other economies.47
The leading sectors for FDI in Uzbekistan were coal, oil and gas, chemicals,
telecommunications, transportation, financial services, textiles, metals, pharmaceuticals,
tobacco and other sectors. From the standpoint of FDI allocation by business activity in
2003-2014, manufacturing, extractive industries, telecommunications, construction, sales,
marketing and support sectors dominated (Figure 1.39).
UNCTAD (2002), “FDI Brief: Kazakhstan”, United Nations Conference on Trade and Development,
http://unctadstat.unctad.org/.
43
Национальный статистический комитет Кыргызской Республики (2012), “Кыргызстан в цифрах:
Статистический сборник”, Бишкек: Национальный статистический комитет Кыргызской
44
UNCTAD (2002), “FDI Brief: Kyrgyzstan”, United Nations Conference on Trade and Development,
http://unctadstat.unctad.org/.
45
UNCTAD (2009), “Investment Guide to the Silk Road”, Geneva: United Nations Conference on Trade
and Development.
46
State Committee on Investments and State Property Management of the Republic of Tajikistan (2010),
“Tajikistan: Investment Opportunities”, Dushanbe: State Committee on Investments and State Property
Management of the Republic of Tajikistan.
47
42
56
Table 1.3 FDI sectoral distribution.
Kazakhstan
FDI most
attracted
sectors
Turkmenistan
Kyrgyzstan
Oil-gas,
Fuel-energy sector,
Ferrous metals,
Telecommunications
Telecommunications
Mining,
Retail trade,
manufacturing,
Financial services,
Real estate operations
Metallurgy,
Oil-gas machinery,
Food processing
Construction
materials,
Textile,
Transport,
Tourism
Electric power,
Mining,
Agriculture,
Tourism
Manufacturing,
Telecommunications,
Transport,
Modernization of
construction and
industry
Tajikistan
Textile,
Mining,
Hydropower,
Construction, banking
services,
Communications
Uzbekistan
Automobile industry,
Mining, tobacco,
Oil-gas,
Light industry,
Telecommunications,
Chemicals.
Energy,
Light industry,
Mining,
Construction materials,
Chemical industry,
Automobile industry,
Construction
Electro-technical
Prioritized
materials,
industry,
sectors
Light industry,
Food processing,
Food industry,
Tourism,
Food processing,
Chemical industry
Transport,
Tourism
Source: State Committee on Investments and State Property Management of the Republic of Tajikistan (2010), “Tajikistan: Investment Opportunities”,
Dushanbe: State Committee on Investments and State Property Management of the Republic of Tajikistan;
Embassy of Turkmenistan in Armenia, http://turkmenistanembassy.am;
Ministry for Foreign Economic Activity, Investments and Trade of Uzbekistan, http://www.mfer.uz;
UNCTAD Statistics, http://unctadstat.unctad.org;
“UZINFOINVEST” the Information Support & Foreign Investments Promotion Agency, http://www.uzinfoinvest.uz;
Президент Республики Казахстан (2010), “Указ Президента Республики Казахстан от 1 февраля 2010 года №922 “О Стратегическом
плане развития Республики Казахстан до 2020 года”, САПП Республики Казахстан, 2010г., №10, ст.115, Информационно-правовая
система нормативных правовых актов Республики Казахстан, http://adilet.zan.kz/.
57
Figure 1.36 Sectoral distribution of FDI stock in Kazakhstan.
Source: OECD (2012), “Investment Policy Reviews: Kazakhstan 2012”, OECD
Publishing.
Figure 1.37 Sectoral distribution of FDI stock in Kyrgyzstan.
Source: UN ESCAP (2003), “Investment Climate in Kyrgyzstan: Country Report”,
Bangkok: The United Nations Economic and Social Commission for Asia and
the Pacific.
58
Figure 1.38 Sectoral distribution of FDI stock in Tajikistan.
Source: UN ESCAP (2003), “Investment Climate in Tajikistan: Country Report”,
Bangkok: The United Nations Economic and Social Commission for Asia and
the Pacific.
Figure 1.39 Sectoral distribution of FDI stock in Uzbekistan.
Source: Financial Times Ltd (2014), “FDI into Uzbekistan: January 2003 to June
2014. Trends Report”, FDI Markets, http://www.fdimarkets.com/.
59
By source countries, most FDI into Uzbekistan were attracted from Russia, South
Korea, the United States of America, Germany, Singapore, China, the United Kingdom,
Turkey and other countries. British-American Tobacco, Daewoo Corp (automobile
manufacture, trading, and textiles), General Motors (automobile manufacture), Case New
Holland (agricultural machinery), CNPC, LUKOIL and Gazprom (oil and gas), MTS,
Teliasonera and VimpelCom (telecommunications) have made sizeable foreign
investments.48
1.5.3 Investment Climate and Prioritized Sectors
Central Asian countries highly welcome FDI inflows widely providing preferences and
tax exemptions. As a source of new technologies and advanced managerial skills, FDI are
considered as a crucial in governments’ economic strategy.
In pursuit of the Industrial development and innovation strategy of Kazakhstan for
2003–2015, the following clusters were identified as priorities for investments:
metallurgy; oil and gas machinery; agriculture and food processing; construction
materials; construction; textiles; tourism; and transport and logistics.49
OECD policy framework for investment reports that Kazakhstan has deployed
significant efforts to improve its investment environment.50 Investment promotion and
facilitation are set as a priority for the government. By 2020, Kazakhstan intends to be in
World top 50 most competitive countries with favorable business climate, which is
expected to attract significant foreign investments into non-raw-materials branches of the
economy.51 However, findings indicate major share of attracted FDI are still directed into
extractive industries, at the time when considerable portion of economic growth is
sourced from fuel-energy complex development.
The current priority sectors for investment in Kyrgyzstan are stated to be energy
(electric power), mining, agriculture, and recreational and tourist complexes. 52 UN
UNDP (2009), “Investment Guide to Uzbekistan”, United Nations Development Program..
and Development.
50
OECD (2012), “Investment Policy Reviews: Kazakhstan 2012”, OECD Publishing.
51
Президент Республики Казахстан (2010), “Указ Президента Республики Казахстан от 1 февраля
2010 года №922 “О Стратегическом плане развития Республики Казахстан до 2020 года”, САПП
Республики Казахстан, 2010г., №10, ст.115, Информационно-правовая система нормативных
52
and Development.
48
49
60
ESCAP reported that Kyrgyzstan welcomes FDI, realizing that it plays a vital role in the
development of the country’s economy. Government’s goal is to establish an open and
liberal regime for FDI.53
UN ESCAP states that, the government policy in Tajikistan strongly favors FDI,
realizing that it plays a vital role in the development of the country’s economy.
Government puts emphasis on foreign investment as a means to develop new industrial
activities as well as to modernize existing ones. Another priority for economic
development in the medium term is the need to ensure the economy’s diversification to
get away from heavy dependence on exports of aluminum and cotton.54 Tajikistan has
adopted the National development strategy until 2015, prioritizing energy, mining,
chemical industry, civil construction, manufacturing of construction materials, light
industry and food industry, agriculture, processing of agricultural products, transport, and
communication, tourism.55
FDI inflows to Turkmenistan are widely associated with fuel-energy complex of the
economy. However, the government intends to attract foreign investments for the purpose
of structural changes in the economy through transnational projects, development of
manufacturing, telecommunications and transport, modernization of industrial and
construction sectors.56
The government of Uzbekistan prioritizes the following sectors for FDI inflows57:
light industries, including silk; construction materials production; automobile industry58;
agriculture processing; chemical industry; exploration of mineral deposits; tourism and
electro-technical industry.59
“UZINFOINVEST” the Information Support & Foreign Investments Promotion
Agency states that Uzbekistan formed favorable investment environment, broad system
UN ESCAP (2003), “Investment Climate In Kyrgyzstan: Country Report”, Bangkok: The United Nations
54
UN ESCAP (2003), “Investment Climate in Tajikistan: Country Report”, Bangkok: The United Nations
55
State Committee on Investments and State Property Management of the Republic of Tajikistan (2010),
“Tajikistan: Investment Opportunities”, Dushanbe: State Committee on Investments and State Property
Management of the Republic of Tajikistan.
56
Embassy of Turkmenistan in Armenia, http://turkmenistanembassy.am/.
57
and Development.
58
See Boxes 1.3-1.4.
59
See Box 1.2.
53
61
of legal guarantees and privileges for foreign investors.60 Besides them, fiscal incentives
are provided to the foreign investors such as reducing the taxed amount of profit and
property taxes in case of investing into expansion or modernization of production,
exporting of produced goods and services; value added tax and customs duties exemption
in case of importing equipment and raw materials, etc. Moreover, additional tax
exemption and other fiscal incentives are available in case of investing into special
economic
zones,
such
as
special industrial
zone "Angren",
special industrial
zone "Jizzakh" or free industrial economic zone “Navoi”.
Box 1.2 Industrial Policy in Uzbekistan.
Industry policy since 1991.
Industrial sector is the leading sector of the national economy. Its development is associated
with the exploration of available natural and economic resources, and effective use of a rapidly
growing population.
The industry is diversified and based on national labor forces. Currently, in Uzbekistan there
are about 11 thousand companies. Sectoral structure of industry in Uzbekistan has improved and
takes the shape of an interconnected complex.
Ginning, machinery, textile, gas, non-ferrous metals, precious metals, electronics,
instrumentation, petroleum, automobile, processing of agricultural products, chemical and
petrochemical, power, metallurgy, construction materials, light and others are considered the
leading industries of Uzbekistan.
Special priority in the implementation of structural policies aimed at the development of
import replacement industries. A lion share of products previously imported from other regions
are produced locally. In terms of production volumes, largest industries are the fuel-energy, light
and food industry. Construction materials, woodworking and pulp and paper industries also have
been developed recently.
With the collapse of the administrative- planned economic system in 1991, all cooperation
links and production processes between the republics of the former Soviet Union stopped.
Consequently, the process of formation of national economies had dissimilar directions.
Particularly, in Uzbekistan, economic development had 3-stage of structural reforms:
 In 1991-1995: Accelerated development of basic industries in order to achieve energy
and food security;
 In 1996-2005: Development of the national economy through import substitution
industrialization;
 Since 2005: Ensuring high rates of economic growth with the priority of export-oriented
industrialization.
The main challenges and priorities for the development of industry in the republic 2011 2015 years pursues the purpose of sustainable , dynamic and balanced development of the industry
of the republic, deepening structural reforms aimed at diversifying its major industries and the
growth of export potential to further enhance the efficiency and competitiveness of industries,
complexes and industrial enterprises on the basis of their modernization, technical and
technological renovation of production.
Source: Government Portal of the Republic of Uzbekistan, http://www.gov.uz/.
http://www.uzinfoinvest.uz/.
60
62
Box 1.3 Automobile industry in Uzbekistan.
Industry development status
Currently, "Uzavtosanoat" JSC enterprises are producing:
- «Chevrolet» cars such as Malibu, Captiva, Lacetti, Nexia, Spark, Matiz and Damas models.
Manufacturer - «GM Uzbekistan» CJSC;
- Light trucks, medium trucks, and «Isuzu» buses. Manufacturer - «SamAuto» company
- Heavy trucks «MAN». Manufacturer - «JV MAN Auto-Uzbekistan» JV LLC;
- Engines for "Chevrolet" cars. Manufacturer - «GM Powertrain Uzbekistan» CJSC;
- Spares - Manufacturers - "Jizzakh battery plant" OJSC, "Uz-Tong Hong Ko" JV, "UzKodji"
CJSC "Uz-SeMyung Co." JV, "Uz-Coram" CJSC JV, "East Butterfly» JV, "Uz-Dong Yang"
CJSC JV, "Avtooyna" OJSC, "UzDongDzhu Paint" JV, "Zenith Electronics" JV,
"UzEraeKabel" LLC and "Uz-Hanwa" JV;
In the field of agricultural machinery, following works are implemented:
- Joint venture «Uz CLAAS Agro», which produces combine harvesters Dominator 130,
Tucano 430, arable tractor under brands Axos 340, Arion 630S, Axion 850, forage harvester
Jaguar 850, balers Markant 55 was established at "Tashkent Tractor Plant" OJSC ("TTP"
OJSC) together with «CLAAS» and «CLAAS Central Asia Investment GmbH» Company
(Germany) in February 2010.
- «LEMKEN Chirchiq» JV was established at «Chirchiqqishloqmash» OJSC together with
«LEMKEN GmbH & Co. KG» (Germany) in December 2011 to produce tillage machinery
and other LEMKEN agricultural machinery
Target parameters for further industry development
As part in Monitoring of the progress of investment projects, program of modernization,
technical and technological re-equipment of production up to 2014, of a program of measures to
establish a Free Industrial economic Zone "Navoi", on development of industrial potential of
Kokand, projects for the localization of production in the automotive components in Namangan
and Ferghana regions, programs for creation of enterprises with foreign investment is set up by
"Uzavtosanoat" JSC as a part of implementation of the Resolutions of the President of the
Republic of Uzbekistan dated on 15 December 2010 № PP-1442 "On the priorities of industrial
development of Uzbekistan in 2011-2015" and on December 27, 2011 № PP-1668 "On the
investment program of the Republic of Uzbekistan for 2012".
Production of new modern car models that meet international safety, quality and
environmental standards performance is one of the main priorities of the Uzbekistan’s automotive
industry development is the. In order to better meet the demand for automotive products in the
domestic market and to increase the country’s export potential a number of projects for the
development of new cars models based on the advanced high-throughput technologies are
implemented.
It is suspected to produce on the basis of «LEMKEN Chirchiq» JV the universal mounted
reversible plows of “EurOral 73 +1” model, rotary harrows with active working apparatus of
“Zirkon 8/250” model, rotary tillers “Smaragd 9/300” and soil sealants “VarioPack 110 WDP70”.
Source: “UZINFOINVEST” the Information Support & Foreign Investments
Promotion Agency, http://www.uzinfoinvest.uz/.
63
Box 1.4 History of automobile industry establishment in Uzbekistan.
JSC «UZAVTOSANOAT» and it’s enterprises
November, 1992
May, 1993
March, 1994
May, 1995
May, 1996
May, 1996
September, 1996
June, 1996
December, 1996
February, 1997
May, 1997
October, 1997
May, 1998
October, 1998
December, 1998
March, 1999
October, 1999
August, 2004
August, 2008
December, 2008
September, 2009
March, 2010
July, 2010
August, 2010
September, 2010
November, 2010
May, 2011
September, 2011
March, 2012
September, 2012
November, 2013
March, 2014
April, 2014
– Decree of the Cabinet of Ministers of the Republic of Uzbekistan “On
establishment of JV “UzDaewooAuto”.
– establishment of JV«UzDEUelectronics».
– establishment of Uzbek Association of Automobile manufacturing
“Uzavtosanoat".
– establishment of JV ”Uz-Coram Co.” (bumpers and dashboards) and JV
"Uz-TongHong Co." (car seats).
– establishment of JV "UzDongJuPaint Co." (enamels, adhesives, paints).
– signing of agreement on JV "SamKochavto" establishment.
– creation of the network of internal trade – JSC “Uzavtotexxizmat"..
– establishment of JV "Uz-DongYang Co." (elements of interior finish).
– establishment of JV "Uz-DongWon Co." (mufflers, exhaust pipes, shockbeam) and JV "Uz-SeMyung Co." (fuel tanks).
– creation of "Uzavtosanoat" Association’s foreign trade network.
– participation in Minsk International Auto Show.
– gold medal at Siberian Fair "For promotion of modern cars of own
production on Siberian market".
– membership of "Uzavtosanoat" Association in OICA at the General
Assembly of the International Organization of Motor Transport
Manufacturers in Paris.
– establishment of JSC "Avtooyna" (automobile glass).
– establishment of JV "UzEksayd" (batteries for cars, trucks, buses and
tractors).
– official presentation of JV "SamKochavto".
– establishment of JV "UzKodji" (electroplaits for vehicles).
– reorganization of "Uzavtosanoat" Association into Joint-Stock Company.
– official presentation of Foreign Enterprise "DaiichiAutoParts".
– beginning of JV «GM PowertrainUzbekistan» construction.
– establishment of JV "UzChasis" on production of outdoor lighting
(headlights and lamps for vehicles) in Namangan.
– 3 new plants in Fergana region: "Ferrae" (stamped components),
"UzdongYang Fergana" (plastic components), "Fergana Autoglass”
(encapsulated glass).
– establishment of JV "UzIraeAlternator" (generators and compressors) in
FIEZ "Navoi".
– establishment of JV "UzIraeCable" (electric wires) in FIEZ "Navoi".
– production of auto components on JV “UzMinda” in FIEZ "Navoi".
– production of noise insulation materials at the “UzHanvu” joint venture.
– "MAN Truck & Bus AG" and "Uzavtosanoat" Joint-Stock Company began
the construction of a new plant in Uzbekistan for production of heavy
commercial vehicles.
– the beginning of a big-block assembly of the updated Chevrolet Captiva
vehicle.
– the beginning of a big-block assembly of the Chevrolet Malibu vehicle.
– the start of series production of Chevrolet Cobalt car.
– the beginning of the production of Lacetti II (Gentra).
– the start of production of the car Chevrolet Orlando.
– the release of the two millionth car.
Source: Joint Stock Company «UZAVTOSANOAT» , http://uzavtosanoat.uz/.
64
1.6 Concluding Remarks
Study of macroeconomic trends and structural transformations in Central Asian countries
show that transition and development strategies varied significantly in the region.
Particularly, two distinct development patterns in Central Asian region were revealed:
commodity export based development strategy and export-oriented industrialization
development strategy.
The first pattern represented by Kazakhstan where rapid transition to market economy
with significant economic liberalization is observed. Current development approach
corresponded to the market liberal paradigm in transition period. In view of substantial
natural resources, this strategy brought to forming the development model based on
commodity export. Accordingly, high economic growth rates and major share of FDI are
associated with extractive industries and commodity exports. Increase in export revenues
and FDI flows linked to commodity prices brought to accumulation of considerable
reserves. However, commodity export based development resulted on undiversified
economic structure and significant export concentration, consequently, substantial
dependence on commodity price volatility and associated risks.
Alternative development strategy observed in Uzbekistan is associated with gradual
transition with leading role of government and step-by-step economic liberalization.
Export diversification is pursued through gradual increase of FDI inflows along with
substantial internal investments with the view to establish new industries and develop
manufacturing sector. This strategy corresponded to the developmental paradigm of
economic advance based on import-substitution industrialization in early stages followed
by export-oriented industrial development.
Accordingly, foreign trade structure and geography in these economies displayed
different patterns. The export structure in Kazakhstan mainly composed of oil, while
Uzbekistan had more diversified export composition including manufactured products.
Consequently, the portion of Non-CIS countries in export geography of Kazakhstan made
up major shares, while in Uzbekistan export was more evenly allocated between CIS and
Non-CIS countries. Export concentration indices indicate that Kazakhstan extended
principally owing to commodity export intensification, at the time when export
concentration decreased in Uzbekistan due to corresponding industrialization and
economic diversification policy.
65
66
Chapter 2 Financial Openness and Capital Liberalization in Central Asia
Chapter 2 Financial Openness and Capital Liberalization in
Central Asia
2.1 Introduction
The Mobility of capital is a key issue in international financial system being a cornerstone
of transformations in international monetary system. 61 High mobility of capital is
associated with efficient allocation of investments and higher economic growth. Although
capital liberalization is believed to benefit economic and financial development, it also
carries challenges and potential risks for the economies. Particularly, IMF Institutional
view states that there is no presumption that full liberalization is an appropriate goal for
all countries at all times. The degree of liberalization depends on specific circumstances
of countries: their financial and institutional development. In order to benefits of
liberalization overweight its costs, liberalization should be well planned, timed and
sequenced. 62 Moreover, liberalization itself does not ensure capital inflows, which
depends also on investment and business climate, infrastructure and institutions,
attractiveness of markets, etc. However, the level of capital openness is a crucial condition
for the economic development as it determines the toolkits of economic policy.
Restrictions by international financial trilemma gave rise to addressing capital
mobility as a cornerstone in designing economic policy for any country. The history of
international finance that underwent considerable changes in twentieth century indicates
how countries searched optimal balance within the international financial trilemma.
Currencies of the major countries have changed their status from inconvertible to
convertible. Some countries have joined currency blocks; others have maintained
individual exchange rate policies. Speculative crises have followed periods of exchange
market stability. 63 On the other hand, long-standing trend towards liberalization of
62
63
De Grauwe, P. (1989), “International Money: Post-War Trends and Theories”, Oxford: Clarendon Press.
61
67
international capital transactions continued even in late 2000s despite the crisis-led
disturbances in global financial markets.64
Another important aspect of studies on capital mobility is difficulties related with its
measuring. Not infrequently, capital mobility measures based on dissimilar
methodologies display controversial results. Therefore, in order to get appropriate
reflection of state of affairs in financial regulations and actual capital flows in Central
Asian countries, detailed examination of de facto and de jure indices is to be
supplemented by study of national legislation.
This chapter aims to display the sequence of financial liberalization in Central Asian
countries and to define financial openness in each country. Section 2.2 provides brief
literature review of studies on financial openness through observation of de facto and de
jure capital mobility measures. De facto capital flows in Central Asian economies and
corresponding acknowledged capital mobility indices are discussed in sections 2.3.
Further in-depth study of national legislation on capital regulations is conducted in
sections 2.4-2.5 with the view to reveal sequence of financial liberalization in the region.
Section 2.6 presents Sequenced international financial liberalization index elaborated to
reflect gradual capital deregulation trends. Main findings on capital flow regulations in
Central Asian countries are summarized in concluding remarks in section 2.7.
2.2 Capital Mobility Measures
There is a wide range of measures to evaluate capital mobility in the country or within
the region. Mostly used measures in related papers varied depending on the applied data
or object of research, and commonly categorized into de jure and de facto measures
(Tables 2.1 and 2.2).
As a rule, de jure indices measure the legal regulation of capital flows 65, applied in
form of:
a) Direct or administrative capital controls, which restrict capital transaction and/or
the associated payments and transfers of funds through outright prohibitions, explicit
IMF (2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”, Washington, D.C.:
The International Monetary Fund.
65
Ariyoshi, A., Habermeier, K., Laurens, B., Ötker-Robe, İ., Canales-Kriljenko, J. and Kirilenko, A. (2000),
“Capital Controls: Country Experiences with Their Use and Liberalization”, IMF Occasional Paper, No
190, Washington, D.C.: The International Monetary Fund.
64
68
quantitative limits, or an approval procedure. Administrative controls typically seek to
affect directly the volume of the relevant cross-border financial transactions. A common
characteristic of such controls is that they impose administrative obligations on the
banking system to control flows.
Table 2.1 De jure capital mobility measures.
Index
KAOPEN (ChinnIto) index
De Jure Capital Measures
Miniane index
Johnston and
Tamirisa index
Potchamanawong
index
Quinn (1997) index
Glick and
Hutchison (2000a,
2000b) index
Aizenman et al
(2011)
Mody-Murshid
(2005) index
Components
KAOPEN is constructed as the first standardized principal component
of :
K1: Presence of multiple exchange rates
K2: Restrictions on current account transactions
ShareK3,t: Restrictions on capital account transactions
K4: Requirements of the Surrender of Export Proceeds
ShareK3,t=(k3,t+k3,t-1+k3,t-2+k3,t-3+k3,t-4)/5
Based on the binary dummy variables (until 1996), and ModyMurshid (2005) methodology after 1997 to codify the tabulation of
restrictions.
12 subcategories capital account transaction (IMF AREAER) +
multiple exchange rates of as an average of 0/1 dummies
No distinction between inflow and outflow. Does not cover temporary
capital control programs. Limited country coverage.
0/1 dummy variables for various capital controls (IMF AREAER),
cross-sectional analysis for 45 countries, incl. Kyrgyzstan,
Kazakhstan, Russia.
12 subcategories capital account transaction (AREAER) + multiple
exchange rates of as an equally weighted average of each ranged from
0 to 1 with 0.25 intervals.
Scales from 0 to 2 for 7 indices: Agreement such as OECD, EFTA;
payments for imports, invisibles, capital payments; receipts for
exports, invisibles and capital.
AREAER – some version of dummy variables: if more than 5
controls than defined as controlled
Applied KAOPEN (Chinn-Ito) index normalized from 0 to 1 as a
measure of capital mobility within Trilemma
0 to 4 as sum of a) openness of capital account, b) openness of current
account, c) the stringency of requirements for the repatriation and/or
surrender of export proceeds, d) existence of multiple exchange
regimes. 1- relatively open regime, 0-otherwise. 4-high level of
openness.
b) Indirect or market-based controls, which discourage capital movements and
associated transactions by making them more costly to undertake. As opposed to de jure
indices, de facto measures based on actual statistical data on capital flows and/or
instrumental variables to display their significance for the economic system. Such
controls may take various forms, including dual or multiple exchange rate systems,
69
explicit or implicit taxation of cross-border financial flows, and other predominantly
price-based measures. Depending on their specific type, market-based controls may affect
only the price or both the price and volume of a given transaction.
Table 2.2 De facto capital mobility measures.
Index
Components
De Facto Capital Measures
FORi,t=1-(MCi,tIFCI/MCi,tIFCG), FORi,t=1-( MCi,tIFCI/Pi,tIFCI)/( MCi,tIFCG/Pi,tIFCG)
Edison and
FOR-Foreign ownership restriction, MC – market capitalization – IFCI, IFCG
Warnock
indices.
(2001),
de facto measure correlates with Miniani and Quinn. The indices are by
Foreign
International Finance corporation.
ownership
restriction
index
International Financial Integration is defined as IFIGDP i,t=(FAit+FLit)/GDPit ,
LMF,
International where FA(FL) are the stocks of external assets (liabilities).
Equity based measure is GEQGDP it=(PEQAit+FDIAit+
Financial
PEQLit+FDILit)/GDPit, where PEQA (L) and FDIA (L)– Stocks of Portfolio
Integration
Equity and FDI assets (Liabilities). Therefore, GEQGDP is the indicator of
index
the level of equity cross-holdings.
Volume measures: FDI, Portfolio Investments and other investment items
Kraay
(BOP) as a share of GDP
(1998)
Chinn and Ito (2007) introduced KAOPEN index to measure financial openness that
is calculated as first standardized principal component of 4 elements: presence of multiple
exchange rates, restrictions on current account transactions, restrictions on capital account
transactions as an average for last 5 years, and requirements of the surrender of export
proceeds. This measure comprises main channels of capital flows and available for most
countries, which adds value to it. Meanwhile, binary value for index coding (0 or 1) used
for assessing KAOPEN elements does not let the index to capture the intensity of applied
capital controls.66 Therefore, the index indicates the level of financial openness of the
countries in historical perspectives; however, it does not display the gradual changes and
does not consider directions of financial flows. Yet, this measure is applied as valid
capital mobility index for defining the position of the countries within international
financial trilemma in Aizenman et al (2010, 2011).
Potchamanawong, P. (2007), “A New Measure of Capital Controls and Its Relation to Currency Crises”,
A Dissertation submitted to the Faculty of Claremont Graduate University in partial fulfillment of the
requirements for the degree of Doctor of Philosophy in the Graduate Faculty of Economics, Claremont,
California.
66
70
Another de jure measure based on 12 disaggregated subcategories of capital account
transaction and presence of multiple exchange rates in constructed in Miniane (2004).
Based on IMF AREAER, the index displays restrictions on all categories of capital
account transaction for 34 countries. Yet, Miniane index makes no distinction between
financial inflows and outflows.67 Moreover, it does not take into consideration significant
channels of financial flows, such as current account transactions and requirements of the
surrender of export proceeds. Though based on binary coding (0 or 1) it also cannot
demonstrate intensity of applied controls or changes towards softer controls, and the
index can serve only to reveal considerable changes within capital account subcategories.
Johnston and Tamirisa (1998) applied econometric tools to investigate introduction
of capital controls caused by balance of payments, macroeconomic management, market
and institutional evolution, prudential and other (security) issues in 45 countries,
including 2 Central Asian countries (Kazakhstan, Kyrgyzstan). For this, dummy variables
(0 or 1) for measuring capital controls reported in IMF AREAER are considered based
on all available disaggregation with distinction of financial inflows and outflows. Yet, as
pertinent to all de jure measures based on IMF AREAER, lack of consistency for these
reports in some cases can case misinterpretations.68
Quinn (1997) reported one of the mostly acknowledged capital mobility (openness)
measures based on presence of international agreements, restrictions on current and
capital account transactions. The scale is from 0 to 2 (with 0.5 intervals depending on
rigidity) for 7 elements with total score ranging from 0 to 14. The index comprises main
channels of financial flows and intensity of applied controls. Yet, the index is only
available for OECD countries and calculation requires subjective judgment.
Edison and Warnock (2001) considers Foreign Ownership Restriction index (FOR),
which is based on the degree of restrictions on foreign ownership for equities.
International Financial Corporation calculates this de facto measure in respect to 29
emerging countries as a share of market capitalization of Global and Investable indices.
The study found correlation of FOR index with de jure measures such as described in
Miniane, J. (2004), “A New Set of Measures on Capital Account Restrictions”, IMF Staff Papers, Vol 51,
No 2, Washington, D.C.: The International Monetary Fund.
68
California.
67
71
Miniani (2004) and Quinn (1997). The index is based on monthly data and called on to
comprise the intensity of applied capital controls. Yet data unavailability in respect to
observed Central Asian countries are among considerable disadvantages of the most de
facto measures.
Lane and Milesi-Ferreti (2001, 2003) developed another de facto capital mobility
measure called International Financial Integration index. The index is calculated as a sum
of all financial assets and liabilities as a share of GDP of the country. Some modification
of the index is calculated equity based as sum of stocks of portfolio equity and FDI assets
and liabilities as a share of GDP. The higher value denotes higher financial integration to
the world and lower controls on capital flows.
FDI and portfolio investments as a share of GDP as well as other volume measures
can be considered to analyze the economic effects of capital account liberalization (Kraay
1998, etc.). Among advantages of such measures is simplicity and availableness of
relevant statistical data. However, these ratios and other volume measures require
subjunctive judgment on financial openness level corresponding to given capital flows.
2.3 Financial Openness in Central Asian Countries
In order to investigate the capital mobility in Central Asian countries, several indices
comprising de jure and de facto measures are examined. Particularly, this study is to cover
both legislative regulation on capital controls and actual financial flows in the region. In
part of de jure regulations, following de jure measures are examined in respect to Central
Asian countries reasoned with calculation methodologies: KAOPEN (Chinn and Ito,
2007) and Disaggregated (Miniane Index, modified to measure capital mobility).
Capital mobility measures for Central Asian countries cover period of 1996-2010.
Most of de jure measures are based on IMF AREAER, which underwent several changes
in part of content since first introduction. Particularly, starting from 1996 IMF AREAER
provides detailed data based on significant disaggregation and distinction of financial
inflows and outflows. Besides, Central Asian countries announced independence in 1991,
and national currencies were introduced mostly in 1993-1995 (Table 2.7). Therefore,
observed period can provide suitable data to draw conclusions and figure out major
tendencies in regulations.
72
Table 2.3 FDI outflows as a share of GDP.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Kazakhstan
0.00 0.00 0.00 0.00 0.00 0.01 0.04 0.02 0.02 -0.12 1.73 -0.39 -2.96 -0.26 -0.47 3.01 0.90 2.74 5.33 2.54
Kyrgyzstan
0.00 0.00 0.00 0.00 0.00 0.00 1.38 0.48 0.33 0.40 0.00 0.00 1.99 0.00 0.00 -0.03 0.00 -0.01 0.00 0.00
Table 2.3 Portfolio equity net inflows as a share of GDP.
1999 2000
2001
2002
2003
2004
2005 2006
2007
2008
2009
2010
2011
Kazakhstan
0.00
0.11
0.25
0.16
0.21
-0.03
0.26
3.44
0.79
-0.96
0.03
0.09
0.02
Kyrgyzstan
0.00
0.00
0.00
-0.59
0.26
0.00
0.00
0.00
0.04
0.12
0.01
-0.38
0.09
Tajikistan
0.00
0.00
0.00
0.12
0.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Source: World Bank Dataset, http://data.worldbank.org/.
73
However, additional normative analysis will be carried out with the view to reveal if
the capital mobility indices reflect the actual sequence of financial liberalization in
Central Asian region or not.
2.3.1 De Facto Capital Flows
Available data shows that FDI outflows in the region were insignificant due to substantial
need for capital investments within national economies. However, along with overall
economic development and establishment of legislation on financial transactions,
international cooperation, bilateral and multilateral agreements on mutual support of FDI
and avoiding double taxation, outward foreign direct investments from Central Asian
region gradually increased.
Table 2.3 presents the shares of outward FDI flows from Central Asian countries in
the structure of national GDP. Data indicates that FDI outflows from Kazakhstan
fluctuated and increased up to 3% in 2007, however, it dropped in 2008 during global
economic and financial crisis. In following years, outward FDI flows recovered. In other
countries, the share of FDI flows into other economies considered insignificant.
Outward FDI flows from most of Central Asian countries should be considered in view
of financial flow regulations in the countries, which reflect economic and financial policy
of the authorities and development strategy in each country.
Table 2.4 presents portfolio equity net inflows as a share of national GDP of Central
Asian countries. According to the table, net inflows of portfolio equities still amount
insignificant shares in most countries of the region. At the time when in Tajikistan the
share of net portfolio investments was mostly close to 0%, in Kyrgyzstan the outflow of
portfolio capital flows exceeded their inflow in several years. Comparatively more
notable portion accounts portfolio equity net inflows in the structure of national GDP of
Kazakhstan. In exceptional 2006 year, their share increased abruptly up to 3.44% of GDP.
However, in most cases, the share of net portfolio equity flows amounted small portions
of GDP.
2.3.2
KAOPEN indices
KAOPEN indices, normalized from 0 to 1, revealed low capital mobility in most Central
Asian countries (Table 2.5). Figure 2.1 displays two apparent groups of countries that
74
substantially vary from each other. According to KAOPEN indices, financial regulations
on capital flows in Kyrgyzstan have been considerable liberalized, at the time when
Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan adopted restrictive capital
regulations.
KAOPEN for Kyrgyzstan indicates that liberalized financial system was observed
since very starting point till 2000s when financial regulations were reported to turn stricter
till the middle of 2000s. However, these indices still indicate to the absence of notable
controls on financial flows in the country, consequently significant level of financial
openness.
KAOPEN indices state that level of capital mobility in other Central Asian countries
demonstrated little change. Particularly, financial regulations on capital flows in
Tajikistan kept unchanged in all observed period except one-time temporary increase in
2008. KAOPEN indices of Turkmenistan display significant capital controls with
insignificant fluctuations demonstrating absolute immobility of capital in particular years.
Uzbekistan is reported to adopt financial regulations that provided moderate capital
mobility in 1996-1998, significantly strengthening capital flow controls afterwards.
Remarkably, KAOPEN indices imply that there was no change in financial flow
regulations in Kazakhstan. In all observed period, country’s indices kept same pointing
to the absence of either liberalization or restriction process in financial rules.
Table 2.5 KAOPEN indices.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Kazakhstan
0.16
0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16
Kyrgyzstan
n/a
0.82 0.82 0.82 0.82 0.75 0.69 0.69 0.69 0.69 0.69 0.75 0.82 0.82 0.82
Tajikistan
n/a
0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.45 0.16 0.16
Turkmenistan 0.00
0.00 0.16 0.00 0.00 0.00 0.00 0.00 0.16 0.00 0.16 0.00 0.16 0.16 0.00
0.24
0.24 0.24 0.16 0.00 0.00 0.00 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.00
Uzbekistan
Source: Aizenman, J., Chinn, M. and Ito, H. (2008), “Assessing the Emerging Global
Financial Architecture: Measuring the Trilemma's Configurations Over
Time”, NBER Working Paper, No 14533, Cambridge: The National Bureau
of Economic Research.
Comprising main channels of financial flows, KAOPEN index provides valuable data
on financial openness in historical perspectives. However, based on determining binary
value for index coding (0 or 1) might not reflect the intensity of applied capital controls.
75
Consequently, gradual or partial financial liberalization processes will be out of the
coverage of KAOPEN index until major portion or all of capital restrictions are removed.
Figure 2.1 KAOPEN indices.
Source: Aizenman, J., Chinn, M. and Ito, H. (2008), “Assessing the Emerging Global
Financial Architecture: Measuring the Trilemma's Configurations Over
Time”, NBER Working Paper, No 14533, Cambridge: The National Bureau
At this point, it should be taken into account that Central Asian countries used to be
a part of insolated economic system based on centralized planned economy. After
proclaiming political independence in 1991 transition from planned economy to market
economy started in this region with different pace and paths. This profound social and
economic transition must have predetermined presence of significant financial controls.
However, “liberalized financial markets have compelling benefits. <…> international
financial liberalization and growing international capital flows are largely inevitable and
irreversible”.69 In the era of globalizing, changes and challenges in any region influence
to the world economy as a part of interrelated system, and the integration process with
removal of restrictions for capital flows in developing and transition economies is
considered quite realistic. In view of that, examination of more disaggregated capital
Eichengreen, B. (1999), “Towards a New International Financial Architecture: A Practical Post-Asia
Agenda”, Washington, D.C.: Institute for International Economics.
69
76
mobility measures in respect to Central Asian countries is considered appropriate to
reveal actual capital mobility and financial regulations in the region.
2.3.3
Disaggregated indices
Miniane (2004) index composes more disaggregated classification of financial controls
to measure capital mobility in different areas. Table 2.6 presents disaggregated capital
mobility indices for Central Asian countries.
Note that indices in the table are modified to measure capital mobility instead of
capital controls, originally applied in Miniane (2004). The index ranges from 0 to 1, where
higher scale indicates higher capital mobility.
Disaggregated capital mobility indices for Central Asian countries depict different
from KAOPEN situation (Figure 2.2). Indices support conclusions drawn from KAOPEN
in the part of higher capital mobility in Kyrgyzstan in comparison with other Central
Asian countries. However, the scales significantly differ due to comprised elements and
applied methodology.
Important distinction of disaggregated measure is in revealed alterations in capital
regulations, which was not observed in KAOPEN. Disaggregated indices indicate to
gradual financial liberalization in Kazakhstan in observed period. Contrary tendency of
introducing stricter rules for capital flows is observed in Tajikistan since early 2000s and
in Kyrgyzstan in recent years. According to disaggregated capital mobility indices for
Central Asian economies, Turkmenistan applied all-encompassing capital controls; at the
time when gradual fluctuation is noticed in financial regulations in Uzbekistan.
Table 2.6 Disaggregated capital mobility indices.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Kazakstan
0.08
0.08
0.08
0.08
0.15
0.15
0.15 0.15 0.15
0.15 0.15 0.15 0.23 0.23 0.31
Kyrgyzstan
0.38
0.46
0.46
0.46
0.46
0.46
0.46 0.46 0.46
0.46 0.46 0.38 0.46 0.23 0.23
Tajikistan
0.23
0.23
0.23
0.23
0.23
0.23
0.15 0.15 0.15
0.15 0.15 0.15 0.15 0.15 0.15
Turkmenistan
0.00
0.00
0.08
0.00
0.00
0.00 0.00 0.00
Uzbekistan
0.08
0.08
0.08
0.00
0.00
0.08
0.08 0.00
0.08 0.15 0.15
0.08 0.00 0.08 0.08 0.08
0.15 0.15 0.15 0.08 0.08 0.00
Source: Calculated by author based on IMF AREAER (1996-2011) and
Miniane (2004).
77
Figure 2.2 Disaggregated capital mobility indices.
Source: Prepared by author based on IMF AREAER (1996-2011) and Miniane (2004).
In spite of both indices are based on IMF AREAR and generally match, applied
methodologies do not display the full picture. Therefore, in-depth study of financial flow
regulations are required to reveal actual state of affairs in Central Asian economies. Study
of national legislation is expected to help to define actual capital mobility in Central Asian
countries and find out if there were any financial liberalization in the region in observed
period.
2.4
Liberalization of Financial Regulations
Related regulatory legal acts addressed in this study include national laws on exchange
arrangements and exchange regulations, central banks, foreign investments and
investment activities in corresponding countries. Table 2.7 contains brief insight into the
laws on exchange arrangements and capital regulations in Central Asian economies.
Findings show that national laws on exchange transactions in Central Asian countries
were adopted in early 1990s with further introduction of amendments in following years.
National currencies were mainly introduced in 1993-1995. Afterwards, Tajikistan
reintroduced its new currency in 2000, and Turkmenistan redenominated its currency in
2009. National laws defined central banks of corresponding countries as the main
regulatory body of exchange arrangements in all countries.
78
Table 2.7 Legal acts on exchange arrangements and capital regulations.
National
currency
Article VIII
Laws
Regulatory
Body
Current
Account
Transactions
Capital
Account
Transactions
Kazakhstan
Kazakh Tenge, November
1993
Kyrgyzstan
Kyrgyz Som, May,
1993
Tajikistan
Tajik ruble, May, 1995;
Tajik Somoni,
November, 2000
Uzbekistan
Uzbek Sum, July, 1994
Article VIII,
July16, 1996
«О валютном
регулировании и
валютном контроле»
National bank and
government
Article VIII,
March 25, 1995
«Об операциях в
иностранной
валюте»
National bank of
Kyrgyz Republic
All current account
and capital account
transactions are
permitted without
any restrictions.
National bank may
restrict transactions
in order to meet
international
obligations put by
United Nations
Figureer.
Article VIII,
December 9, 2004
«О валютном
регулировании и валютном
контроле»
National bank of Tajikistan
Article VIII,
October 15, 2003
«О валютном регулировании»
All current account
transactions are permitted
without any restrictions.
All current account transactions are permitted without
any restrictions. Restrictions may be imposed by Central
Bank to ensure Economic Security or prevent legalization
of income from criminal activities or terrorism.
FDI inflows and their repatriation are permitted without
any restrictions. Real estate transactions for diplomatic
and other representation of government in foreign
countries, as well as real estate transactions by
nonresidents in Uzbekistan; circulation of securities in
foreign currencies, transactions between residents and
nonresidents are regulated by the Cabinet of Ministers.
Other transactions on capital account are regulated by
Central Bank.
Current account transactions
require notification or
registration in National
bank.
Capital account transactions
require notification or
registration in National
bank.
Restrictions (special
exchange regime) may be
imposed to ensure economic
security.
Capital account transactions
for residents are regulated by
National bank. Capital
account transactions for
nonresidents are regulated
by National Bank and
Government.
Central bank of Uzbekistan
Turkmenistan
Turkmen Manat,
November, 1993
Redenominated in
January, 2009
Article XIV
Central bank of
Turkmenistan
All current
account
transactions
require approval.
Source: IMF (1996-2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”, Washington, D.C.: The International Monetary
Fund;,
Жогорку Кенеш Кыргызской Республики (1995), “Закон Кыргызской Республики “Об операциях в иностранной валюте” №6-I от
5.07.1995г., Газета "Свободные горы", №44 от 15.07.1995г., в редакции Законов КР №161 от 19.05.2009г., №60 от 26.04.2013г.;
Маджлиси Оли Республики Таджикистан (1995), “Закон Республики Таджикистан “О валютном регулировании и валютном контроле”,
№112 от 5.11.1995г., Ахбори Маджлиси Оли Республики Таджикистан, 1995г., №21, ст.251;
Олий Мажлис Республики Узбекистан (2003), “Закон Республики Узбекистан “О внесении изменений и дополнений в Закон
Республики Узбекистан “О валютном регулировании”, №556-II от 11.12.2003г., Ведомости Олий Мажлиса Республики Узбекистан,
2004г., №1-2, ст.6; Собрание законодательства Республики Узбекистан, 2009г., №37, ст.403; 2014г., №36, ст.452;
Парламент Республики Казахстан (2005), “Закон Республики Казахстан “О валютном регулировании и валютном контроле”, №57-II
от 13.06.2005г. Ведомости Парламента Республики Казахстан, июнь, 2005г., №11, ст.38.
79
Thus, transition to new economic system that started in Central Asian region in 1991
resulted in establishment of basic legal frameworks on financial regulations in the middle
of 1990s.
Provided data indicates to the presence of several waves in liberalization of capital
account transactions in the region. The first wave encompasses Kazakhstan and
Kyrgyzstan, which officially accepted requirements of Article VIII of Article of
Agreement of IMF on convertibility of national currencies on current account transactions
in 1995-1996. That is, these countries liberalized trade transactions straightaway after
introduction of their national currencies and establishment of regulatory frameworks.
Bearing in mind that Kazakhstan and Kyrgyzstan adopted rapid models of transition to
market economy, followed steps on financial liberalization are believed to match speedy
transformation strategies.
The second wave of liberalization of current account transaction is observed in
Uzbekistan and Tajikistan in 2003-2004. In Uzbekistan, this liberalization followed after
implementation of economic programs on import substitution and structural
diversification. Unlike Kazakhstan and Kyrgyzstan, Uzbekistan adopted gradual model
of transition to market economy, which aimed at step-by-step liberalization and
reorganization of all sectors along with providing social protection to population and
establishing regulatory legislation. Consequently, financial liberalization is being carried
out within implemented strategy.
Turkmenistan demonstrated moderate approach to economic reforms, consequently
all financial transactions on both current and capital account balances are subject to
significant controls.
Although most Central Asian countries accepted obligations on current account
transaction, countries vary significantly on regulations and liberalization of capital
account transactions (Table 2.7). In Kazakhstan, the law states that all current and capital
account transactions are subject for notification or registration in National bank. The law
defines in detail the requirements for all types of transactions, which is to serve to avoid
violent interpretations and prevent frequent changes in requirements. However, the
government reserves the right of imposing restrictions in form of Special Exchange
Regime to ensure economic security.
80
In Kyrgyzstan, the law states that all current account and capital account transactions
are allowed without any restrictions. National bank may restrict transactions in order to
meet international obligations put by United Nations Charter. However, according to the
IMF AREAR there are controls enforced for securities, commercial and financial credits,
direct investments, real estate operations and others.
According to national legislations, all current account transactions are allowed
without any restrictions in Tajikistan. Regarding capital account transaction, Tajik law
authorizes National bank for capital transaction for residents, at the time when National
bank and the government of Tajikistan regulate capital account transactions in part of
nonresidents.
Uzbek laws also define that all current account transactions are allowed without any
restrictions. However, restrictions may be imposed by Central bank to ensure economic
security or prevent legalization of income from criminal activities or terrorism.
Furthermore, it is legally established that FDI inflows and their repatriation are allowed
without any restrictions. Real estate transactions for diplomatic and other representation
of government in foreign countries, as well as real estate transactions by nonresidents in
the territory of Uzbekistan, circulation of securities in foreign currencies, transactions
between residents and nonresidents are regulated by the Cabinet of Ministers. Other
transaction on capital account are regulated by Central bank.
The study of de jure capital mobility measures and national legislations indicate to
different level of restrictions on financial flows in Central Asian countries. However, in
most countries significant number of financial transactions are still subject to capital
controls.
2.5 Sequence of Capital Liberalization
2.5.1
IMF: Institutional View
Despite financial crisis risks, high mobility of capital is associated with enhancing
efficiency in allocation of investments and ensuring higher economic growth.
Institutional view of IMF is built on countries` experience in recent years and summarizes
of the best practices of liberalization and management of capital flows. It states that the
degree of liberalization appropriate for the country at a given time depends on its specific
81
circumstances, especially its financial and institutional development.70 Country-specific
circumstances require liberalization of capital flows in a manner that is properly timed
and sequenced taking into account economic and financial prudential policies in order
benefits outweigh costs. Integrated approach to capital flow liberalization comprises
following phases: first, liberalization of FDI inflows, which are more stable and closely
correlated with economic growth; second, liberalization of FDI outflows and long-term
portfolio flows; finally, liberalization of short-term portfolio flows.
Figure 2.3. Integrated approach by IMF.
Source: IMF (2012), “The Liberalization and Management of Capital Flows: An
Institutional View”, Washington, D.C.: The International Monetary Fund.
The sequence described in Integrated approach can be summarized as “long-term
before short-term, FDI (and other non-debt) before debt, inflows before outflows”.
However, countries` experience of capital liberalization shows that the process of removal
of capital restrictions in each case is unique and not always go along with sequence
described in Integrated approach.
Related studies indicate that the path of capital transactions account liberalization in
each country differed, however similarities are not rare as well. Table 2.8 presents brief
review by IMF of countries` experience on liberalization of capital account transactions.
70
82
Table 2.8 International capital liberalization experience.
Categories
Sequence and Applied Methods
Short-term /
Liberalization of short-term transactions typically followed or
Long-term
accompanied long-term transactions
Portfolio
All types of portfolio investments and derivatives often
Investments
liberalized simultaneously
FDI
Some countries liberalized FDI flows followed by Portfolio
investments, At the time when other countries did the opposite.
Lifting controls on FDI inflows often preceded outflows.
Real Estate
Controls on inward real estate transactions are often maintained
Transactions
after all other transactions liberalization.
Openness to
Liberalization is carried out through gradual increase in ceilings
Foreign
on investments, changing prior approval requirements to
Investors
registration or notifications, expending sectors open to investors,
removing controls on legal entities` transactions earlier than
other investors.
Inflow /
Capital outflows remained controlled longer than inflows
Outflow
Source: IMF (2012), “Liberalizing Capital Flows and Managing Outflows”,
2.5.2
Capital Liberalization Sequence in Central Asian Countries
Regulations on FDI and Portfolio investments in Central Asian countries are examined in
details based on IMF AREAER and summarized in Tables 2.9-2.10.71
The study shows that although all Central Asian countries welcome FDI inflows,
Central Asian countries differ in regulation of FDI flows: both inward and outward.
Kazakhstan liberalized regulation of FDI into national economy through gradual
increasing the ceiling for registration: ceiling for FDI amount that requires NBK
registration certificate increased from $100 000 in 2000 up to $500 000 in 2009. In
absolute figures, annual FDI inflows demonstrated significant increase in observed period,
especially, starting from 2006 until global financial and economic crisis. Meanwhile,
outward FDI regulations also underwent changes. NBK license which was required for
investing abroad, changed to NBK registration in case of investing into OECD-member
countries since 2003. In 2005-2009, the ceiling for outward FDI that required registration
increased from $10 000 to $100 000. As a result, net outward FDI increased significantly
in 2007, though global crisis affected foreign investments in 2008. However, further
outward FDI recovered to considerable shares of GDP.
71
See Appendices 1-2.
83
As reported by IMF, there is no restrictions in Kyrgyzstan both for inward and
outward FDI flows. However, since 2007 restrictions on acquisition and owing banks`
shares were imposed. Yet annual FDI inflows fluctuated significantly and accounted
inconsiderable amounts, which signals on issues related to investment climate and
economic attractiveness. Outflow FDI remained insignificant related to GDP.
In Tajikistan and Turkmenistan both inward and outward FDI flows require approval,
though in 2009, Turkmenistan was reported to have no restrictions for FDI by legal
entities which are registered in MED. FDI inflows to Tajikistan significantly improved in
2004, and in 2006-2008 with sudden drop in 2005 and since 2009. In Turkmenistan, FDI
inflows gradually increased up to 2008 and sharply increased (tripled) in 2009 despite
global crisis.
In Uzbekistan, inward FDI were highly welcomed being provided various fiscal
incentives. In respect of outward FDI, softening of restrictions is observed. The approval
requirement reported in 1997 gradually changed to notification requirement in case of
appropriate decision taken by entities` top management body. FDI inflows fluctuated
insignificantly with sharply improving since 2007. Remarkable point is that inward FDI
flows continued to grow even during global economic and financial crisis.
Even though the share of portfolio investments in Central Asian countries is not
substantial in scale, the countries advance in their regulation. Kazakhstan considerably
liberalized both inward and outward portfolio investments since 2000 through increasing
ceilings for transactions that require registration/notification. Simultaneous liberalization
approach of portfolio investments is observed in these countries despite Integrated
approach, which supposes lifting restrictions on inflows followed by outflows.
In Kyrgyzstan, vice-a-verse notification requirements gradually changed to approval
requirements and restrictions on acquisition of banks` shares or investments in securities
of single issuer, which also can be considered as prudential issues. In Tajikistan, inward
portfolio investments underwent changes in regulations from approval requirements to
notifications, however, transactions with securities (sale/purchase) still require NBT
approval. IMF AREAR reports that all inward and outward transactions in Turkmenistan
are subject to CBT and MEF approval. Uzbekistan gradually liberalizes both inward and
outward portfolio investments; however, strict prudential requirements are applied in
form of registration of securities.
84
Table 2.10 Capital regulations in Central Asia since 1996
Kazakhstan
Current account
transaction
1996-(L)Article VIII, IMF
.
Kyrgyzstan
Tajikistan
FDI inflow
(L)-liberalization
(R)- restriction
FDI outflow
1996-(R)
1997-(L)
1996-(R)
(L)-liberalization
(R)- restriction
Portfolio outflow
1996-(L)
.
2000-(L)$100 000
2002-2004 -(R)Insurance Industry
2004-(R)Domestic banks
2005-(L)$300 000, or through domestic banks
2009-(L)$500 000, Banks
1996-(R)
2003-(R)
2007-(R)Banks’ share
1997-(L)
1996-(R)
1996-(R)
(L)-liberalization
(R)- restriction
Portfolio inflow
Uzbekistan
(Acceptance of Article VIII of
Articles of IMF Agreement)
Capital account
transactions:
Turkmenistan
2003-(L)OECD countries with higher ratings
(R)If 50% of shares belongs to foreign
domestic owner
2005-(L)$300 000, or through domestic banks
2007-(L)$50 000, Banks
2009-(L)$100 000, Banks
1996-(R)
2000-(R)Registration
2002-(L)Notification
1997-(R)Reg./Reports
2000-(L)$100 000
2003-(L)Through resident broker companies
2005-(L)$300 000 or through resident banking 2005-(R)20% of banks’ share
institutions
2007-(R)10% of banks’ share
2008-(L)Sale abroad by residents
2009-(L)$500 000
(L)Money market instruments
2011-(L)Purchase by non-residents.
1996-(R)
(L)-liberalization
(R)- restriction
2000-(L)Purchase abroad
2003-(L)Through resident broker companies
2005-(L)Banks, Insurance, Pension funds
2007-(L)$50 000
2009-(L)$100 000
1996-(R)
2008-(L)Money market
instruments
2009-(R)Insurance comp.,
Investment funds.
1996-(R)
1998-(R)10% shares
2000-(R)20% of banks’
share
1996-(R)
1996-(R)
2008-(L)Purchase by nonresidents
1996-(R)
1998-(L) Money market
instruments.
2003-(R)Buying from nonresidents.
2006- (R) Money market
instruments..
1996-(R)
1996-(R)
Source: IMF (1996-2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”, Washington, D.C.: The International
Monetary Fund.
85
The study indicates that there is a gradual liberalization of financial flow (FDI and
portfolio) regulations in Central Asian countries that matches “Integrated approach”,
however, they differ in pace and path. Meanwhile, most capital transactions in
Turkmenistan are subject to controls (Table 2.9).
Table 2.9 Capital liberalization in Central Asia.
Country
Liberalization Period
Level of Liberalization
Kazakhstan
In 2000s
Significantly liberalized
Kyrgyzstan
In 1990s
Significantly liberalized
Uzbekistan
In 2000s
Partially liberalized
Tajikistan
In 2000s
Partially liberalized
Turkmenistan
Not liberalized
Source: Prepared by author based on IMF AREAER (1996-2011).
2.6 Sequenced International Financial Liberalization Index
Taking into account, that commonly used capital mobility measures cannot reflect gradual
financial liberalization unless total removal of all capital regulations; and most of the
financial liberalization processes in emerging and developing countries are sequenced,
there is a need for the index that can display changes under gradual financial deregulation.
Therefore, Sequenced International Financial Liberalization Index (SIFLI) is called to
reveal the alterations in regulations, direction of trends and the level of financial openness.
However, alike to most other capital mobility indices, personal subjunctive judgment
evaluation of some components in SIFLI is still required, therefore, the index reflects
individual assessments to some extend. On the other hand, due to large number of
components (38) included into calculation, clear rules and criteria for evaluation, and
calculation formula serve for minimizing the effects of personal subjunctive judgment.
However, it should be noted that first of all SIFLI aims to reflect the changes and
trends in the financial regulations.
2.6.1 Methodology
SIFLI is a de jure index that measures financial liberalization based on sequencing stages
described in IMF’s Integrated approach and grounded on IMF AREAER.
86
SIFLI covers 13 subcategories of capital account transactions, convertibility of
national currency on current account transactions (acceptance of Article VIII obligations),
and existence of multiple exchange rates in the country as reported in IMF AREAER72:
1) Capital market securities
2) Money market securities
3) Collective investment securities
4) Derivatives and other instruments
5) Commercial credits
6) Financial credits
7) Guarantees, sureties, and financial backup facilities
8) FDI
9) Repatriation of profits or liquidation of direct investments
10) Real estate transactions
11) Personal capital movements
12) Provisions specific to commercial banks and other credit institutions
13) Provisions specific to institutional investors
14) Convertibility on current account transactions (Article VIII obligations)
15) Presence of multiple exchange rates
Calculation of SIFLI is based on 3 main stages of Integrated Approach of IMF with
shares 1/5 for S1, 2/5 for S2 and S3:
S1: FDI inflows liberalization (CAB and Multiple exchange regimes)
S2: FDI outflow, portfolio flows liberalization
S3: Other transactions liberalization
Evaluation of capital restrictions is as following:

0 - Restricted (Approval or preapproval required);

0.5 - Partly restricted (Registration required for FDI, capital transactions in banks;
minimum or maximum ceilings, different access to sectors, other similar
requirements);
72

1 - Liberalized (Notification, etc);

+0.05 - +0.1 - on-going liberalization (increase in ceiling, better access, etc);

Unavailable data is not considered.
See Appendix 3.
87
Formula contains weighted average of 3 groups of components as followings:
𝑆𝐹𝐿𝐼 =
𝐴𝑉𝑅(𝑆1) 2 ∗ 𝐴𝑉𝑅(𝑆2) 2 ∗ 𝐴𝑉𝑅(𝑆3)
+
+
5
5
5
2.6.2 Correlation with Other Indices
Table 2.11 presents the correlation coefficients with other commonly used capital
mobility indices. It shows that SIFLI is positively correlated with KAOPEN (0.70) and
disaggregated capital mobility measures (0.79). High correlations are explained with that
all these financial openness indices based on restrictions on capital and current account
transactions, and a quantity of exchange rates in the country reported in IMF AREAER.
Furthermore, higher correlation of SIFLI with disaggregated index is explained with
larger number of components in calculation of disaggregated.
Table 2.11 Correlation with other capital measures.
DISSAGGR
KAOPEN
SIFLI
DISSAGGR
1.000000
0.874442
0.792889
KAOPEN
0.874442
1.000000
0.701617
SIFLI
0.792889
0.701617
1.000000
Source: Calculated by author based on IMF AREAER (1996-2011), Miniane (2004)
and Aizenman et al (2008).
High positive correlation coefficients with KAOPEN and disaggregated index
indicate to the consistency of SIFLI, while greater number of components included into
calculation makes it possible to reflect gradual financial liberalization in SIFLI.
2.6.3 SIFLI in Central Asian Countries
Table 2.12 and Figure 2.4 present Sequenced international financial liberalization indices
in respect to Central Asian countries. SIFLI indicates that Kyrgyzstan significantly
liberalized financial flows in 1990s, followed by gradual financial liberalization in
Kazakhstan in 2000s. In Tajikistan and Turkmenistan, little change in financial
liberalization is observed in this period; however, they differ in the level of financial
openness. SIFLI in Uzbekistan signals on gradual financial liberalization process,
however, significant capital controls are preserved.
88
Figure 2.4 Sequenced international financial liberalization indices.
Source: Prepared by author based on IMF AREAER (1996-2011).
Table 2.12 Sequenced international financial liberalization indices.
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
1996 0.246666667 0.463492063
0.29
0.061904762
1997 0.248366013 0.537142857 0.33015873
0.061904762
1998 0.271895425 0.778571429 0.328888889
0.128571429
1999 0.371895425 0.778571429 0.328888889
0.061904762
2000
0.44248366
0.773809524 0.326666667
0.061904762
2001
0.44248366
0.759047619 0.30627451
0.061904762
2002 0.424575163 0.799047619 0.228496732
0.061904762
2003
0.46745098
0.799047619 0.226143791
0.061904762
2004 0.523333333 0.792380952 0.292810458
0.128571429
2005 0.650196078 0.798095238 0.292810458
0.114285714
2006 0.713529412 0.787809524 0.292810458
0.114285714
2007 0.733006536 0.775428571 0.292810458
0.047619048
2008 0.756535948 0.782016807 0.360784314
0.161344538
2009 0.896405229
0.77512605 0.374117647
0.161344538
2010 0.896405229
0.77512605 0.374117647
0.161344538
Source: Calculated by author based on IMF AREAER (1996-2011).
89
Uzbekistan
0.061904762
0.061904762
0.061904762
0.12
0.053333333
0.093333333
0.093333333
0.345714286
0.345714286
0.353333333
0.365882353
0.477310924
0.517647059
0.58627451
0.56627451
Despite commonly used capital mobility indices that state high capital restrictions and
absence of financial liberalization (except Kyrgyzstan) since 1990s, study of national
legislations and actual financial flows indicates to a gradual capital deregulation process
in Central Asian countries that match IMF’s Integrated approach. However, sequence of
these financial liberalization differs in pace and path. Particularly, in addition to
Kyrgyzstan, liberalization of capital flows in Kazakhstan, Tajikistan and Uzbekistan is
revealed. Most capital transactions in Turkmenistan are still subject to controls.
Constructed Sequenced international financial liberalization index shows that
Kyrgyzstan significantly liberalized financial flows in 1990s, followed by gradual
financial liberalization in Kazakhstan in 2000s. SIFLI of Uzbekistan and Tajikistan
signals on partial financial liberalization process. In Turkmenistan, little change in
financial liberalization is observed since 1990s. Consequently, from the standpoint of
capital liberalization, three groups of countries are observed in Central Asia:
a) Significantly liberalized countries (Kazakhstan, Kyrgyzstan),
b) Partially deregulated systems (Uzbekistan, Tajikistan),
c) Economies with considerable financial flow controls (Turkmenistan).
In view of discovered two distinct development strategies in Central Asia, revealed
dissimilar levels of financial openness reflect pursued policy goals in these countries.
Particularly, adherent to market liberal paradigm Kazakhstan significantly liberalized its
financial system in early stages under favorable conditions of considerable capital inflows
into extractive industries and substantial commodity export revenues. Alternative importsubstitution and export-oriented industrialization policy in Uzbekistan is associated with
developmental approach that implies financial regulations favoring industrialization.
Thus, financial openness in these countries generally corresponded to the pursued
development strategies in these countries.
90
Chapter 3 Exchange Arrangements and Monetary Frameworks in Central Asia
Chapter 3 Exchange Arrangements and Monetary Frameworks in
Central Asia
3.1 Introduction
Exchange rate regime is a part of international financial trilemma that can directly affect
conducted monetary policy through money supply and interest rates. On the other hand,
as a rule, any monetary policy cannot be fulfilled without touching upon exchange rates.
This circumstance necessitates putting them together in this chapter with the view to
examine exchange arrangements and monetary frameworks in Central Asian countries.
Given international financial trilemma restrains, monetary policy frameworks and
exchange arrangements are to be considered in view of capital mobility in particular
financial system. As a rule, even under low capital mobility the authorities are to take into
account introduced exchange regulations in order to ensure long-term financial stability.
Monetary policy framework is of particular importance during economic shocks and
financial crises as, not infrequently, authorities are to choose between exchange rate
stability and employment rate, financial sector stability and low inflation rates in face of
crisis. Therefore, monetary policy autonomy should be considered as a economic policy
tool, which is available or not, constrained with implemented macroeconomic strategies.
Conducted monetary policies and exchange arrangements in Central Asian countries
are examined through the study of corresponding national legislation, statistical data,
annual reports by central banks and other financial institutions. Particularly, central banks
and their priorities are discussed in section 3.2. In section 3.3, adopted exchange
arrangements in Central Asian countries since 1996 are examined followed by the study
of nominal and real exchange rates. Monetary policy frameworks and developments in
inflation and interest rates in Central Asian countries are presented in sections 3.4.
Conclusions are summarized in section 3.5.
91
3.2 Central Banks in National Legislations
Central bank is the key institution in the financial system of any country due to its
functions in part of conducting monetary policy, determining exchange arrangements,
carrying out financial supervision and developing corresponding regulations. Therefore,
goals pursued by central banks, and collaboration between central banks and the state
authorities established in national legislations are indicative and can affect adopted
policies and regulations.
Table 3.1 presents main goals of central banks and collaboration frameworks with
authorities according to national legislation in Central Asian region. Particularly, national
legislations state that in Kazakhstan and Kyrgyzstan, central banks are to coordinate their
activities with the state authorities as far as it does not contradicts main tasks and
monetary policy of central banks. In Tajikistan, central bank and government have to
coordinate their activities and conduct consultations on perspective actions; at the time
when in Turkmenistan central bank is to take part in the development of economic policy.
According to the regulations in Uzbekistan, central bank is independent in making
decision within its authority.
Corresponding legal acts on central banks in Central Asian countries designate the
priority goals in all these economies as ensuring stability of prices or/and currencies.
Particularly, existing legislation in Kazakhstan, Kyrgyzstan and Tajikistan specifies price
stability as a priority for central banks, whereas in Uzbekistan and Turkmenistan currency
stability is prioritized in the activities of central banks. Thus, national legislation in
Central Asian countries indicates to the domination of dissimilar priorities in monetary
frameworks and exchange arrangements.
On the other hand, actual monetary policy frameworks and exchange arrangements
might differ from officially announced ones due to macroeconomic circumstances. 73
Particularly, a number of studies revealed inconsistency of actual policy objectives with
officially proclaimed goals. Therefore, monetary policy frameworks and exchange
arrangements should be examined based on de facto conducted policies in observed
countries. In view of this, in this study, data on monetary policy frameworks and exchange
Bubula, A. and Otker-Robe, I. (2002), “The evolution of exchange rate regimes since 1990: evidence
from de facto policies”, IMF Working Paper, No 02/155, Washington, D.C.: The International Monetary
Fund.
73
92
arrangements is based on de facto classification reported in IMF AREAER, which
grounds on interventions of central banks to support exchange rates.74
Table 3.1 Central banks.
Country
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Priorities
Article 7. The primary goal of the National Bank of the Republic of Kazakhstan is
ensuring price stability in the Republic of Kazakhstan.
Article 22. National Bank of Kazakhstan coordinates its activity with the Government
of the Republic of Kazakhstan. <…> National Bank of Kazakhstan takes into
consideration in its activities and facilitates implementation of economic policy of the
Government if it does not contradicts main tasks and monetary policy of National Bank
of Kazakhstan.
Article 2. The objective of the Bank of Kyrgyzstan is achieving and maintaining price
stability through appropriate monetary policy according to this law.
Article 3. The primary goal that contributes to achieve the objective of the Bank of
Kyrgyzstan is maintaining purchasing power of the national currency, ensuring
efficiency, security and reliability of banking and payment system of the republic for
promotion long-term economic growth of the republic.
Article 6.2. Bank of Kyrgyzstan coordinates its policy with the Government of
Kyrgyzstan as far as this coordination does not contradicts its main goals and tasks.
Article 5. The primary goal of the National bank of the Republic of Tajikistan is
maintaining long-term domestic price stability level.
Article 23.4. National Bank of Tajikistan and the Government of the Republic of
Tajikistan inform each other about prospective actions of nationwide importance,
coordinate their activities, and conduct consultations.
Article 5. The objectives of the Central Bank of Turkmenistan are: 1) pursuing stability
of Manat; 2) development and strengthening of banking system of Turkmenistan.
Article 41.1. Central Bank of Turkmenistan with a view to fulfill assigned functions
takes part in the development of economic policy.
Article 3. The primary goal of the Central Bank is pursuing stability of national
currency.
Article 6. Central Bank is independent in making decisions within its authority.
Source: Жогорку Кенеш Кыргызской Республики (1997), “Закон Кыргызской
Республики “О Национальном банке Кыргызской Республики” №59 от
29.07.1997г., Газета "Эркин-Тоо", №62 от 06.08.1997г.;
Маджлиси Оли Республики Таджикистан (2011), “Закон Республики
Таджикистан “О Национальном банке Таджикистана”, №722 от 28.06.2011г.,
Ахбори Маджлиси Оли Республики Таджикистан, 2011г., №6, ст.435;
Меджлис Туркменистана (2011), “Закон Республики Туркменистан “О
Центральном банке Туркменистана”, №167-IV от 25.03.2011г.;
Олий Мажлис Республики Узбекистан (1995), “Закон Республики
Узбекистан “О Центральном банке Республики Узбекистан”, №154-1 от
21.12.1995г., Ведомости Олий Мажлиса Республики Узбекистан, 1995г.,
№12, ст.247;
Парламент Республики Казахстан (1995), “Закон Республики Казахстан “О
Национальном банке Республики Казахстан”, №2155 от 30.03.1995г.,
Ведомости Верховного Совета Республики Казахстан, 1995г., №3-4, ст.23.
IMF (1996-2014), “Annual Report on Exchange Arrangements and Exchange Restrictions”,
74
93
3.3
Exchange Arrangements
Central Asian countries announced independence in 1991, and national currencies were
introduced mostly in 1993-1995 (Table 3.2). Well ahead national currencies in Tajikistan
and Turkmenistan underwent additional reforms. In 2000, Tajikistan introduced new
currency “Tajik Somoni” in lieu of “Tajik Ruble” which was in use since 1995. In
Turkmenistan, national currency was redenominated in 2009.
Table 3.2 National currencies and exchange regularity bodies.
Country
Main Regulatory
Body
Turkmenistan
National bank and
government
National bank of
Kyrgyz Republic
National bank of
Tajikistan
Central bank of
Turkmenistan
Uzbekistan
Central bank of
Uzbekistan
Kazakhstan
Kyrgyzstan
Tajikistan
National Currency and
Introduction Date
Kazakh Tenge, November,
1993.
Kyrgyz Som, May, 1993.
Tajik Ruble, May, 1995;
Tajik Somoni, November, 2000.
Uzbek Sum, July, 1994.
Turkmen Manat, November,
1993;
Redenominated in January,
2009.
Article VIII of
IMF Agreement
Article VIII, 16,
1996.
Article VIII, March
25, 1995.
Article VIII,
December 9, 2004.
Article VIII, October
15, 2003.
Article XIV.
Source: IMF (1996-2014), “Annual Report on Exchange Arrangements and Exchange
Restrictions”, Washington, D.C.: The International Monetary Fund.
Most Central Asian countries, except Turkmenistan, accepted the obligations on
convertibility of national currencies on current account transactions. However, the
countries differ in date of acceptance, which displays two waves. Thus, Kyrgyzstan and
Kazakhstan officially confirmed acceptance of requirements of Article VIII of IMF
Articles of Agreement in 1995 and in 1996 accordingly. Following wave of countries that
accepted Article VIII obligations were Uzbekistan and Tajikistan in 2003 and in 2004
accordingly.
Another noteworthy fact is that in all Central Asian countries primarily exchange rates
are determined against US Dollar due to its role of key international reserve currency and
main currency used in foreign trade. Particularly, Central bank of Uzbekistan reports that
94
in Uzbekistan 95% of all foreign trade transactions with other countries in 2013 were
carried out in US Dollars.75
3.3.1 De Facto Classification
Exchange arrangements in Central Asian countries since 1996 according to IMF
AREAER de facto classification are presented in Table 3.3. Preliminary study shows that
except Turkmenistan, which introduced conventional pegged arrangement since 1998 to
present, Central Asian countries mostly applied some forms of managed floating in 19962006. However, in 2006-2007 most countries tended towards more pegged form of
exchange rate arrangements. Particularly, detailed study of corresponding central bank
reports revealed that in Kazakhstan, Kyrgyzstan and Tajikistan, this shift is associated
with global economic and financial crisis. Central Asian countries with higher capital
mobility and significant external debt stock experienced severe impact of the
uncertainties in global financial markets since 2007, which brought to the change of
policy priorities towards financial stability over price stability. Consequently, changes in
exchange arrangements occurred in Kazakhstan 76 , in Kyrgyzstan 77 and in Tajikistan78
with the view to ensure exchange rate stability as a source of financial stability during the
crisis. However, Kyrgyzstan returned to initial point shortly.
On the other hand, in Uzbekistan, pegged exchange arrangement has been introduced
in 2006 with the view to pursue export oriented development and macroeconomic
stability.79 Applied financial regulations and low external debt in Uzbekistan lessened the
effects of global economic and financial crisis and did not result in changes in adopted
financial strategies. Similarly, in view of limited capital mobility, low external debt stock
Ўзбекистон Республикаси Марказий банки (2013), “Пул-кредит соҳасидаги вазият ва монетар
сиёсатнинг асосий йўналишлари”, Ўзбекистон Республикаси Марказий банкининг расмий вебсайти, http://www.cbu.uz/.
76
Национальный банк Республики Казахстан (2000-2012), “Основные направления денежнокредитной политики Национального банка Казахстана”, Официальный сайт Национального банка
Республики Казахстан, http://www.nationalbank.kz/.
77
IMF (2009), “Kyrgyz Republic” Staff Report for the 2009 Article IV Consultation and First Review under
the 18-Month Arrangement under the Exogenous Shocks Facility”, IMF Country Report, No 09/209,
78
Национальный банк Таджикистана (2000-2012), “Прогноз основных направлений денежнокредитной политики Республики Таджикистан, Официальный сайт Национального банка
Таджикистана, http://www.nbt.tj/.
79
Ўзбекистон Республикаси Марказий банки (2006-2014), “Пул-кредит соҳасидаги вазият ва
монетар сиёсатнинг асосий йўналишлари”, Ўзбекистон Республикаси Марказий банкининг расмий
веб-сайти, http://www.cbu.uz/.
75
95
and accumulated international reserves, no significant change in implemented pegged
exchange arrangement in Turkmenistan was observed.
Table 3.4 shows that monetary policy frameworks in Central Asian countries
generally corresponded to the adopted exchange arrangements in these countries, that is
pegged exchange arrangements were associated with applied monetary policy pursuing
exchange anchors.
3.3.2 Developments in Nominal Exchange Rates
Taking into account that exchange rates and exchange arrangements are commonly used
as a tool in pursuing macroeconomic goals and ensuring longstanding financial stability,
developments in exchange rates under adopted exchange regimes is to display long-term
trends and reflect actual policy priorities in Central Asian countries.
Findings indicate that exchange arrangements in Kazakhstan were commonly driven
by internal and international economic circumstances. 80 As a rule, exchange rate regime
in Kazakhstan pursued price level stability, which was officially set as a priority in
national legislation since 2004. Consequently, price stability priority took over the
exchange rate stability soon after introduction of national currency. However, National
bank of Kazakhstan intervened exchange market with a view to smoothen significant
volatilities. Therefore, nominal exchange rates avoided significant fluctuations giving the
ground to gradual depreciation in 1996-1997 (Figure 3.1).
However, during Russian financial crisis in 1998, exchange rate of Kazakh Tenge
underwent significant pressure, which led to consequent decrease in international reserves
as a result of NBK interventions (Figure 3.6).
With the aim to stabilize financial sector and improve trade competitiveness,
independent floating regime was introduced in 1999 (Table 3.3). This change led to
immediate substantial depreciation of national currency in Kazakhstan. At a new rate,
managed exchange rate regime was reintroduced in 2000 with the view to depreciate
exchange rate of Kazakh Tenge according to inflation rate.
80
96
Table 3.3 Exchange arrangements since 1996.
Year
Kazakhstan
1996
1997
1998
Independent floating
Managed floating
Managed floating with no preannounced path
1999
Independent floating (April 5, 1999)
2000
2001
2002
2003
2004
2005
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Managed floating
Managed floating
Managed
floating
Managed floating
Managed Floating with
no preannounced path
(July 1, 2000)
Managed floating with
Managed floating with no preannounced path
(September 20, 2000)
Managed floating with no
preannounced path
Managed Floating with
(July 1, 2002)
Conventional pegged
arrangement (May 31, 2006)
2006
2007
2008
2009
2010
2011
2012
2013
2014
Conventional pegged arrangement
(October 1, 2007)
Stabilized arrangement
(April 30, 2008)
Conventional pegged
arrangement
(March 1, 2007),
Managed floating with
(October 1, 2007)
81
Pegged exchange rate within horizontal bands
(February 4, 2009),
Stabilized arrangement (May 1, 2009),
Crawl-like arrangement (October 28, 2009)
Conventional pegged
arrangement
(January 1, 2007)
Conventional
pegged
arrangement
(April 30, 2008)
Other managed
arrangement
(April 30, 2008)
Other managed
arrangement
(January 1, 2009)
(August 1, 2009)
Stabilized arrangement (February, 2014)
Crawling peg
(April, 2007)
Crawl-like arrangement
Source: IMF (1996-2014), “Annual Report on Exchange Arrangements and Exchange Restrictions”, Washington, D.C.: The
International Monetary Fund.
81
Changes in 2008 occurred in Kazakhstan, Kyrgyzstan and Tajikistan exchange arrangements due to methodological changes.
97
Figure 3.1 Developments in Kazakh Tenge against US Dollar exchange rates.
a)
b)
Source: OANDA currency database, http://www.oanda.com/.
98
Figure 3.2 Developments in Kyrgyz Som against US Dollar exchange rates.
a)
b)
Source: National Bank of Kyrgyz Republic, http://www.nbkr.kg/.
99
Relatively flexible exchange regime and significant capital inflows allowed
authorities to increase international reserves, and brought to appreciation of exchange rate
of Kazakh Tenge in the following years. However, significant increase in government
expenditures in the middle of 2005 increased inflationary pressure (Figure 3.12) and
corresponding policy by NBK to support exchange rate led to decrease in international
reserves. In 2003-2008, Kazakh Tenge gradually appreciated owing to substantial capital
inflows. This appreciation was accommodated without significant losses in export mainly
due to low elasticity of commodity (oil) export on exchange rate fluctuations (discussed
in chapter 4).
Uncertainties in global financial markets since 2007 reasoned authorities to change
priorities to ensure financial stability through introducing pegged exchange arrangements.
Chosen strategy of prioritizing financial stability determined corresponding changes in
monetary policy, which mostly served to support exchange rate stability since then.
Interventions by NBK to support exchange rate resulted in decrease of international
reserves in 2007. In order to ensure stability of pegged exchange rate as a priority during
global economic and financial crisis, exchange rate of the national currency was
significantly depreciated in 2009. In 2011, along with inflation targeting monetary policy
managed floating exchange arrangement was to be reintroduced.82 However, the actual
exchange arrangements indicated to on-going pegged exchange arrangement with another
abrupt depreciation of national currency occurred in Kazakhstan in 2014 (Figure 3.1).
Relatively liberalized financial system and monetary policy corresponding to
macroeconomic circumstances in Kyrgyzstan led to applying of flexible exchange rate
arrangements. However, NBRK intervened to stabilize nominal exchange rate
fluctuations. Figure 3.2 plots nominal exchange rates of Kyrgyz Som against US Dollar.
It indicates that substantial depreciation of Kyrgyz Som occurred mostly immediately
after introduction of national currency and in the second half of 1990s during Russian
financial crisis. However, in 2000s, Kyrgyz Som gradually appreciated up to 2009 and
underwent significant depreciation since then.
82
100
Figure 3.3 Developments in Tajik Somoni against US Dollar exchange rates.
a)
b)
Source: National Bank of Tajikistan, http://www.nbt.tj/;
OANDA currency database, http://www.oanda.com/.
101
Figure 3.4 Developments in Turkmen Manat against US Dollar exchange rates.
a)
b)
Restrictions”, Washington, D.C.: The International Monetary Fund;
102
Figure 3.5 Developments in Uzbek Sum against US Dollar exchange rates.
a)
b)
Source: Central Bank of Uzbekistan, http://www.cbu.uz/.
103
Figure 3.6 International reserves.
a)
b)
Source: UNCTAD statistics, http://unctadstat.unctad.org.
104
In early stages of global economic and financial crisis, NBRK de facto introduced
pegged exchange arrangement in 2007, which predetermined exchange rate anchor
strategy to support exchange rate stability (Tables 3.3-3.4). However, NBRK returned to
initial policy of managed floating regime shortly after that.
In Tajikistan, exchange arrangements reflected internal macroeconomic indicators.
Financial stability, low inflation and currrency stability priorities in view of international
reserves adequacy are pursued in monetary programs developed in cooperation with
IMF. 83 During the crisis, strict monetary policy pursued exchange rate stability. The
exchange rate of Tajik Somoni indicates to gradual depreciation up to 2009 when abrupt
devaluations were observed followed by exchange rate stability period. In this part,
developments in exchange rates in Kyrgyz Som and Tajik Somoni followed the Kazakh
Tenge.
In observed period, exchange regulations in Turkmenistan underwent little change.
Applied conventional pegged regime accompanied with significant capital controls and
strict monetary policy allowed the country to increase international reserves and ensure
financial stability (Figure 3.6). Nominal exchange rate kept stable with depreciations
when required. Figure 3.4 displays developments in nominal exchange rates of Turkmen
Manat against US Dollar. It shows that the exchange rates generally corresponded to
applied pegged exchange rate regime with substantial devaluation in 2008 during the
financial crisis.
Exchange arrangements in Uzbekistan were determined based on priorities of export
stimulation policy, low inflation, currreny stability and international reserves through
targeting macroeconomic indicators.84 For these purposes managed floating regime was
introduced in early stages. Gradual depreciation of national currency allowed to improve
competitiveness of national export, at the time when preventing from significant
fluctuations ensured currency stability (Figure 3.5). In 2006-2007, exchange
arrangements were used as a anti-inflation tool. As a result, strict monetary policy was
accompanied with lower degree of depreciation of Uzbek sum against US Dollar. Thus,
84
83
105
if in 2005 nominal exchange rate was depreciated to 8.4%, in 2006-2007 Uzbek sum
depreciated only to 4.2 and 4.0% accordingly.85
During the global economic and financial crisis the priority of export stimulation and
exchange rate stability prevailed. Therefore, given introduced crawling peg regime
nominal exchange rate of national currency was depreciated with larger scopes, however,
avoiding significant fluctuations. Thus, Uzbek sum annual depreciation varied from 7.9 %
to 11% in 2008-2011. This strategy allowed the authorities to increase international
reserves and to ensure financial stability and macroeconomic growth even during crisis.86
Positive current account balance, low external debt stock and limited capital mobility
allowed minimizing negative effects of global economic and financial crisis, and thereby,
did not result in significant policy changes.
3.3.3 Developments in Real Effective Exchange Rates
Figure 3.7 presents the developments in real effective exchange rates (REER) in Central
Asian countries. It shows that substantial appreciation of REER in Uzbekistan in 1990s
followed by its abrupt depreciation in early 2000s, when partial financial liberalization
occurred. This change reflects shift to export stimulation strategy revealed in Uzbekistan.
Further stable REER in subsequent years corresponds to export oriented development
strategy in Uzbekistan.
REER in Kazakhstan and Kyrgyzstan demonstrated similar trends: significant
depreciations after Russian financial crisis in 1998 led to REER decline in these countries
with gradual recovering up to 2008. Abrupt nominal exchange rate devaluations brought
to its declining in 2009 with the view to improve competitiveness of national economy
and current account balance. REER of Tajik Somoni underwent similar trends with
considerable fluctuations in 1990s, and stabilized in 2000s.
REER in Turkmenistan appreciated up to late 1990s followed by gradual devaluations
afterwards. Abrupt devaluation of nominal exchange rate in 2009 led to substantial
undervaluation of Turkmen Manat REER since 2009.
85
Ibid.
86
106
Figure 3.7 Developments in real effective exchange rates (2007 base year).
Source: Bruegel, http://www.bruegel.com/.
3.4
Monetary Policy Frameworks
3.4.1 De Facto Classification
Central Asian countries introduced national currencies in the middle of 1990s. In the early
stages, priority tasks were to establish financial system with appropriate banking system,
to develop market mechanisms, to soften transition from centralized planned economy to
market economy and to recover from the economic recession. However, along with
structural reforms and further economic recovery, authorities pursued macroeconomic
stability.
Table 3.4 displays monetary policy frameworks in Central Asian countries.
Preliminary study indicates that in 2001-2007 all these countries, except Turkmenistan,
applied monetary policies, which had no explicitly stated nominal anchor, but rather
monitored various indicators of monetary policies. However, since 2008 most Central
Asian countries shifted towards exchange rate anchor policy that is monetary policy goal
was to support specific level of exchange rate and ensure its stability.
107
Monetary policy in Kazakhstan in 2000s was conducted along with significant
financial liberalization.87 Authorities prioritized low inflation rates in 2000-2001 in view
of monetary aggregates and international reserves. Since 2002, gradual shift towards
inflation targeting was carried out along with ensuring stable economic growth rates.
Inflation targeting was legally established as the priority for National Bank of Kazakhstan
in 2004, that is monetary policy was to pursue price stability rather than exchange rate
stability. However, in view of considerable external debt stock in banking sector (Figure
1.28, chapter 1) associated with high financial openness, global financial and economic
crisis in 2007 pushed authorities in Kazakhstan to make a choice between price stability
and stability of financial system. Chosen strategy of prioritizing financial stability
determined changes in monetary policy, which mostly served to support exchange rate
stability (Table 3.4).
Table 3.4 Monetary policy frameworks since 2000.
Year
2001
2002
2003
2004
2005
2006
2007
Kazakhstan
Other
monetary
framework
2008
2010
2012
2013
2014
Other
monetary
framework
Exchange
rate anchor
(USD)
2009
2011
Kyrgyzstan
Exchange
rate anchor
(USD)
Other
monetary
framework
Monetary
aggregate
target
Other
monetary
framework
Tajikistan
Turkmenistan
Other monetary
framework
Uzbekistan
Other
monetary
framework
Monetary
aggregate target
Exchange rate
anchor (USD)
Monetary
aggregate target
Exchange rate
anchor (USD)
Exchange
rate anchor
(USD)
Exchange rate
anchor (USD)
87
108
Monetary policy in Kyrgyzstan was mainly determined by the internal
macroeconomic indices such as international reserves and inflation, however, authorities
prioritized price stability as a source of stable economic growth in the middle term. In
early stages of global economic and financial crisis and associated uncertainties in
international financial markets in 2007, the authorities introduced pegged exchange
arrangement, which predetermined exchange rate anchor strategy to support exchange
rate stability in following 2 years with further returning to initial monetary policy driven
by macroeconomic indicators (Table 3.4).
Similar strategy of applied monetary policy can be observed in Tajikistan. In
developing monetary frameworks, National bank of Tajikistan monitored various internal
macroeconomic indicators. Priorities in monetary policy included currency stability and
de-dollarization of national economy.88 During the global economic and financial crisis,
Tajikistan applied strict monetary policy with a view to ensure exchange rate stability.
Monetary frameworks in Turkmenistan underwent little change according to IMF
classification. Applied exchange rate anchor strategy pursued supporting conventional
pegged exchange rate regime introduced in the middle of 1990s.89
Supporting economic growth through export stimulation policy, price and currency
stability were determined as a primary goals of conducted monetary policy in Uzbekistan
in 2000s.90 According to IMF classification, in the first half of 2000s these goals were
pursued through monetary policy frameworks based on monitoring internal
macroeconomic indicators. However, global financial and economic crisis in 2007 made
authorities to conduct stricter monetary policy with the view to support applied pegged
form of exchange regime.91
89
90
91
Ibid.
88
109
Figure 3.8 Developments in interest rates in Kazakhstan.
Source: Federal Reserve System, http://www.federalreserve.gov/;
Bank of Russia, http://www.cbr.ru/;
National Bank of Kazakhstan, http://www.nationalbank.kz/.
Figure 3.9 Developments in interest rates in Kyrgyzstan.
National Bank of Kyrgyz Republic, http://www.nbkr.kg/.
110
Figure 3.10 Developments in interest rates in Tajikistan.
National Bank of Tajikistan, http://www.nbt.tj/.
Figure 3.11 Developments in interest rates in Uzbekistan.
Central Bank of Uzbekistan, http://www.cbu.uz/.
111
Figure 3.12 Developments in inflation rates.
a)
b)
Source:: UNCTAD statistics, http://unctadstat.unctad.org/.
112
3.4.2 Developments in Inflation and Interest Rates
Figures 3.8-3.12 display developments in inflation and interest rates in Central Asian
countries. Additionally, key interest rates of Federal Reserve System and Bank of Russia
are observed for comparison.
Inflation rates indicates to hyperinflation period in early stages of transition from
centralized planned economy to market economy, and dissimilar trends in Central Asian
countries afterwards (3.12). In part of interest rates, in all observed countries considerable
level of autonomy is observed in different years.
Particularly, decreasing inflation rates in Kazakhstan resulted in downturn trend of
interest rates in late 1990s followed by period of stability up to 2007, when the National
bank of Kazakhstan conducted strict monetary policy with subsequent monetary easing
after exchange rate depreciations to provide liquidity to banking sector (Figure 3.8).
Developments in interest rates in Kyrgyzstan displays its vulnerability under higher
capital mobility and flexible exchange arrangements, especially in late 1990s (Figure 3.9).
In Tajikistan, interest rates reflected the effects of crises: higher interest rates followed by
their decline along with exchange rate depreciations (Figure 3.10). Refinance rate of
Central bank of Uzbekistan shows gradual downturn slope trend, which went along with
decreasing inflation rates. Noteworthy that global financial crisis in late 2000s did not
affect interest rates in Uzbekistan indicating to significant level of its autonomy
(Figure 3.11).
Study of monetary frameworks and exchange arrangements indicates that there are
different approaches in Central Asian economies to trade-off between exchange rate
stability and monetary policy autonomy. Particularly, in Turkmenistan, conventional
pegged exchange rate regime was chosen as a priority. Accordingly, Central Bank of
Turkmenistan followed exchange rate anchor strategy with the view to support pegged
exchange rates against US Dollar. Additionally, exchange rate stability was ensured
through applied significant capital controls.
A different pattern is observed in other Central Asian countries. Particularly, since
introduction of national currencies in the middle of 1990s, Kazakhstan, Kyrgyzstan,
Tajikistan and Uzbekistan applied several exchange arrangements consistent with
113
different forms of managed floating exchange regime. However, in the middle of 2000s,
the countries altered to pegged exchange arrangements against US Dollar. While, this
change in Kazakhstan, Kyrgyzstan and Tajikistan was reasoned with global financial and
economic crisis, in Uzbekistan this shift was determined earlier in accordance with
adopted strategy. Monetary frameworks in these four countries underwent corresponding
shifts to exchange rate anchor strategies.
Developments in nominal exchange rates in Central Asian economies indicates that
as a rule in countries with flexible exchange arrangements (Kazakhstan, Kyrgyzstan and
Tajikistan) exchange rates underwent numerous significant depreciations, which
followed financial crises. Exchange rate depreciations in Turkmenistan are observed
rarely, however, substantial in scales. On the contrary, exchange rate of Uzbek Sum is
depreciated gradually without significant fluctuations.
Consistent with previous findings on dissimilar development patterns in Central Asian
region, different monetary policy frameworks and exchange arrangements corresponded
to commodity export based development strategy and export-oriented industrialization
strategy. Particularly, commodity export based development strategy represented by
Kazakhstan prioritized more flexible exchange arrangements under higher financial
openness. Lower elasticity of natural resources export on exchange rate fluctuations
(discussed in Chapter 4) allowed accommodating exchange rate changes without
considerable losses in export. However, significant capital inflows into extracting
industries and consequent increase in import of machinery brought to negative current
account balance, at the time when financial integration into global economy resulted in
increasing external debt stocks in banking sector. Consequently, with the view to ensure
financial stability exchange rate stability got priority in Kazakhstan during the global
economic and financial crisis.
On the contrary, export-oriented industrialization strategy represented by Uzbekistan
prioritized exchange rate stability as a key tool of export stimulation reasoned with higher
elasticity of export on exchange rate fluctuations (discussed in Chapter 4). Positive
current account balance, low external debt stock and limited capital mobility allowed
minimizing negative effects of global economic and financial crisis, and thereby, did not
result in significant policy changes.
114
Chapter 4 Determinants of Export Growth in Central Asian Countries
4.1 Introduction
The development strategies in Central Asian countries since early 1990s indicate the
presence of export-oriented industrialization and commodity export based development
patterns (see chapter 1). Accordingly, countries significantly varied on foreign direct
investments (FDI) and foreign trade flows, monetary policy frameworks, exchange rates
and exchange arrangements. Therefore, in Chapter 4, the relationships among export,
investments, exchange rates and energy resources are statistically examined with the
focus on the effects of FDI, local fixed capital formation (i.e. local investments), real
effective exchange rates, and available energy resources on export volumes in Central
Asian countries since 1990s.
There are a number of studies exploring a relationship among export, FDI, local
investments in different economies. In particular, causality issues have been addressed in
recent papers. The presence of causality between export and FDI in India over the period
1980-2010 was examined (Sultan, 2013), unidirectional causality relationship running
from FDI to export was revealed in Tanzania in 1980-2012 (Shawa and Shen, 2013). Prior
studies also showed a positive impact of FDI on export, gross fixed capital formation and
economic growth in Nigeria (Anfofum et al., 2013), on manufacturing export from
Thailand (Wongpit, 2006), on both manufacturing and natural resources export in
COMESA countries (Heliso, 2014), in Vietnam (Anwar and Nguyen, 2011), in China (Gu
et al., 2008), in transition countries in Central and Eastern Europe (Vukšič, 2006). The
statistically significant positive impact of FDI on export performance and the adverse
effect of real appreciation of national currency on export were reported in Vural and
Zortuk (2011), Clipa et al (2013), and Vukšič (2006).
Ahmadi and Ghanbarzadeh (2011) revealed the bidirectional causality between GDP,
FDI and export in Middle East and North Africa regions, whereas Miankhel et al (2009)
came to the conclusion that relationship differed significantly from country to country in
South Asia and selected emerging countries. Acaravci and Ozturk (2012) also reported
115
unlike causality flows between FDI, export and economic growth in ten transition
European countries.
These controversial outcomes in different economies despite significant role of FDI
as source of obtaining foreign technologies, managerial skills and capital inflows can be
explained with weak domestic capabilities and dissimilar performance requirements.92
Still, the adverse impact of changes in real exchange rates on export has been commonly
supported. However, the magnitude of impact of real exchange rates in countries will vary
depending on export elasticity, which differs country to country according to export
structure.
Different development patterns in Central Asian countries resulted in unlike FDI
distribution and export structure in these countries. Commodity export based
development strategy predetermined the leading role of FDI in fuel-energy sectors in
Kazakhstan and Turkmenistan, and caused abrupt export increase of oil, natural gas and
related products. Alternative development strategy based on export-oriented
industrialization in Uzbekistan led to significant role investments inflows into new
industries, and brought to gradual export diversification. Furthermore, Hakura and
Billmeier (2008) revealed unlike export elasticities in “oil-exporting countries” (incl.
Kazakhstan, Turkmenistan) and other countries (incl. Kyrgyzstan, Tajikistan and
Uzbekistan). Consequently, the role of real effective exchange rates in export oriented
development in these countries varied significantly.
However, in view of available data limitations and defined research purposes, this
study will focus only on revealing statistical impact of independent variables on
dependent variable in observed countries, and will not include causality, fixed term
effects and other related analysis.
4.2 Data and Descriptive Statistics
Table 4.1 presents the data used in this statistical analysis. With the view to reveal actual
changes in real export (dependent variable), data on export is in constant prices and
exchange rates of 2005 (base year) is used. Accordingly, inward FDI flows (FDI) and
local fixed capital formation (LFCF) are also in constant prices and exchange rates of
UNCTAD (2003), “Foreign Direct Investment and Performance Requirements: New Evidence from
Selected Countries”, Geneva: United Nations Conference on Trade and Development.
92
116
2005. Data on real export, FDI and local fixed capital formation is from UNCTAD
Statistics. Real effective exchange rates (REER) data is sourced from Bruegel in form of
index with the base year 2007. Possession of energy resources is denoted with dummy
variable (R), which takes 1 or 0. In this analysis, three Central Asian republics
(Kazakhstan, Turkmenistan and Uzbekistan) are considered as energy-rich countries
taking 1 in the dummy variable.
Table 4.1 Data specification.
Variable
Export
Inward FDI flows
(FDI)
Specification
Dependent Variable
In constant prices and exchange rates of 2005 in
million USD
Independent Variables
million USD; FDI=(Share of FDI in
GFCF, %)*(GFCF, 2005)/100%
million USD; LFCF= Gross Fixed Capital
Formation – Inward FDI
Dummy variable (Kazakhstan, Turkmenistan and
Uzbekistan =1, Kyrgyzstan and Tajikistan=0)
Local Fixed
Capital Formation
(LFCF)
Energy Resources
(R)
Real Effective
Exchange Rates
Index, base year 2007
(REER)
Source: Prepared by author
Data Source
UNCTAD
Statistics
UNCTAD
Statistics
UNCTAD
Statistics
Bruegel
Figures 4.1-4.5 display actual data on Export, LFCF, FDI and REER in 5 Central
Asian countries. In Kazakhstan, export gradually decreased in 1990s and dynamically
increased in early 2000s up to drop in 2009 and further recovery. FDI and LFCF also
demonstrated similar trends. Moreover, FDI and LFCF in several years amounted
comparable volumes, which corresponds to the development model of Kazakhstan.
Developments in REER indicate that real export continued to grow even when real
effective exchange rates appreciated, indicating to controversial relationship. This agrees
with the findings of Hakura and Billmeier (2008) on low export elasticity in oil-exporting
countries.
In Turkmenistan, export volumes underwent significant fluctuations since early
1990s, and demonstrated substantial growth in 2000s. FDI and LFCF remained stable up
to 2008 and abruptly increased since then. Capital controls and conventional pegged
exchange regime resulted in appreciation of REER in 1990s. It depreciated in late 2000s.
117
Figure 4.1 Developments in Export, LFCF, FDI and REER in Kazakhstan.
Source: Prepared by author based on UNCTAD statistics and Bruegel.
Figure 4.2 Developments in Export, LFCF, FDI and REER in Kyrgyzstan.
118
Figure 4.3 Developments in Export, LFCF, FDI and REER in Tajikistan.
Figure 4.4 Developments in Export, LFCF, FDI and REER in Turkmenistan.
119
Figure 4.5 Developments in Export, LFCF, FDI and REER in Uzbekistan.
Export volumes from Uzbekistan also fluctuated in 1990s and demonstrated
considerable increase in 2000s. LFCF volumes increased sharply since 2006 and
significantly exceeded FDI, which augmented gradually. Under limited capital mobility,
REER considerably increased up to early 2000s, when abrupt depreciation occurred and
brought to its stabilization since then. REER stability under crawl-like peg exchange
regime corresponds to the export-oriented development strategy in Uzbekistan.
In Kyrgyzstan and Tajikistan, export volumes fluctuated and augmented in late 2000s.
Developments in REER also demonstrate similar trends of appreciation in the middle
1990s and further stabilization followed by depreciation since early 2000s. FDI and LFCF
underwent significant fluctuation in both countries in observed period.
Tables 4.2 and 4.3 contain descriptive statistics of the sample and correlation
coefficients. Descriptive statistics shows that Central Asian countries significantly vary
on all observed macroeconomic indicators. Indeed, Chapters 1-3 revealed that Central
Asian countries contrast on available natural resources, economic structure, transition
models, development paths and financial regulations.
Table 4.3 presents correlation coefficients of the sample for all five Central Asian
economies. It shows that in Central Asia real export is strongly correlated with inward
120
FDI flows (0.89) and local fixed capital formation (0.89). Possession of energy resources
also positively related to real export (0.62). As expected, real effective exchange rates are
negatively correlated to the real export volumes, however, the correlation coefficient for
the all sample is considerably low (-0.23).
Table 4.2 Descriptive statistics.
EXPORT
FDI
LFCF
REER
Mean
8700.893
1229.206
3759.988
121.5562
Median
3347.479
194.8346
2588.882
101.6000
Maximum
35372.54
11531.08
20363.09
481.8000
Minimum
713.8313
-16.09878
-58.85050
6.800000
Std. Dev.
9953.343
2388.399
4765.023
85.81164
Observations
105
105
105
Source: Calculated by author based on UNCTAD statistics and Bruegel.
105
Correlation coefficients between other variables indicate to the strong interrelationship
between FDI and LFCF (0.82), FDI and R (0.41), LFCF and R (0.61). These coefficients
generally support previous findings on FDI concentration in fuel-energy sectors and
commodity export based development in resource-rich Central Asian countries.
Table 4.3 Correlation coefficients.
EXPORT
FDI
LFCF
R
REER
EXPORT 1.000000
FDI
0.886659 1.000000
LFCF
0.891180 0.824267
1.000000
R
0.618222 0.405396
0.607496
1.000000
REER -0.225844 -0.178938 -0.088665 0.223967 1.000000
121
4.3 Methodology and Model Specifications
Previous related empirical studies on statistical and econometric analysis are based on
variety of data and regression models, which were determined according to data
availability and research goals. Particularly, Vukšič (2006) used one way error
component panel data model in order to test whether or not there was significant
relationship between FDI and export performance in transition countries in Central and
Eastern Europe.
Clipa et al (2013) explored the impact of FDI over Romania’s exports based on
model developed through modification of Vukšič’s model (2005).
Considering the variables used in the previous studies (Vukšič, 2005; Clipa et al,
2013), this study conducted a statistical analysis based on panel data of Central Asian
countries with the following model specification.
EXPORTi,t=+β1FDIi,t+ β2LFCFi,t+ β3REERi,t+ β4Ri
(1)
EXPORTi,t=+β1FDIi,t+ β2LFCFi,t+ β3REERi,t
(2)
Where:
EXPORTi,t : Real export in country i at time t
FDIi,t : Real inward FDI flows to country i at time t
LFCFi,t : Real local fixed capital formation in country i at time t
REER i,t : Real effective exchange rates in country i at time t
R i: Dummy variable for possession of energy resources in country
Wherein model specification (1) is to be used in statistical analysis of panel data
covering all Central Asian countries with the view to reveal the impact of each
independent variable on dependent variable (real export) in region. Particularly, test is to
uncover the role of energy resources in the export growth in Central Asian countries.
Model specification (2) is to be used in statistical examination of countries grouped
according to development models. Reasoning for two different specifications in statistical
examination of all sample and country-groups is explained with technical limitations of
using dummy variable in the test. Particularly, “Commodity export based development
model” encompasses Kazakhstan and Turkmenistan, “Export-oriented industrialization
model” is represented by Uzbekistan, and Kyrgyzstan and Tajikistan are grouped into
“Other development model”. Thus, all 3 groups include either countries that are all rich
in energy resources (Kazakhstan, Turkmenistan; Uzbekistan) or economies without
122
energy resources (Kyrgyzstan, Tajikistan). Consequently, dummy variable cannot be used
in the analysis.
Furthermore, taking into account that in each development model dissimilar
independent variables can be statistically significant, different combination of
independent variables are to be tested with the view to unveil the most important factors
of export improvement in these countries.
4.4 Empirical Results
4.4.1 Model Specification (1)
Tables 4.4-4.10 present the empirical results of statistical analysis of the all samples based
on model specification (1) and several variations with different independent variables
combinations.
Table 4.4 shows that for all sample, FDI, LFCF, REER and R are statistically
significant factors for the export with major explanatory power, and model is statistically
supported (R-squared = 0.92, Adjusted R-squared = 0.91, F-statistics = 277.67).
Results in Tables 4.5-4.10 indicate that other different combinations of these
independent variables have less explanatory power. Particularly, the model without
REER demonstrated overall goodness-of-fit measures (R-squared = 0.89, Adjusted Rsquared = 0.89, F-statistics = 277.04), however, constant coefficient () became
statistically insignificant (Table 4.5). In the model specification without R and LFCF
(Tables 4.6 and 4.7), all coefficient are statistically significant, however, the goodnessof-fit measures lower compared with initial model. Alike results are revealed in model
specifications without FDI (Table 4.8), R and REER (Table 4.9). Model where FDI is
used as the only independent variable (Table 4.10) demonstrated higher F-statistics
(329.2), however, comparably lower R-squared and Adjusted R-squared (0.76).
Consequently, FDI and LFCF have strong explanatory power and are significant
independent variables in estimating real export improvements in Central Asian countries,
however, along with REER and R, the explanatory power of model increases.
Based on empirical results of statistical analysis of all samples, following
interrelationship are revealed:
123
Table 4.4 Results of statistical analysis.
Method: Panel Least Squares
Sample: 1992 2012
Periods included: 21
Cross-sections included: 5
Total panel (balanced) observations: 105
EXPORT=+ β1*FDI+ β2*LFCF+ β3*REER+ β4*R

β1
β2
β3
β4
Coefficient
Std. Error
t-Statistic
Prob.
2787.543
2.098100
0.637705
-20.19013
5651.375
576.4195
0.186000
0.107843
3.615792
779.7231
4.835962
11.28010
5.913300
-5.583876
7.247926
0.0000
0.0000
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.917402
0.914098
2917.233
8.51E+08
-984.1581
277.6698
0.000000
EXPORT=+β1*FDI+ β2*LFCF+ β3*R

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
781.4510
2.184258
0.739262
4091.540
513.7143
0.211245
0.121143
829.6279
1.521178
10.33993
6.102410
4.931777
0.1313
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.891648
0.888429
3324.633
1.12E+09
-998.4065
277.0486
0.000000
124
EXPORT=+ β1*FDI+ β2*LFCF+ β3*REER

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
3642.347
1.997879
1.041409
-10.80112
693.3826
0.227945
0.113484
4.148530
5.253012
8.764735
9.176716
-2.603603
0.0000
0.0000
0.0000
0.0106
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.874011
0.870269
3585.020
1.30E+09
-1006.324
233.5521
0.000000
EXPORT=+ β1*FDI+ β2*R+ β3*REER

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
3269.277
2.851042
8032.759
-23.79605
659.6456
0.156734
771.8222
4.119941
4.956111
18.19037
10.40752
-5.775823
0.0000
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.888519
0.885208
3372.286
1.15E+09
-999.9008
268.3293
0.000000
125
EXPORT=+ β1*R+ β2 *LFCF+ β3 *REER

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
3038.960
4997.515
1.470468
-23.57360
863.9647
1166.324
0.117915
5.404882
3.517459
4.284843
12.47061
-4.361539
0.0007
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.812303
0.806728
4375.759
1.93E+09
-1027.252
145.7007
0.000000
EXPORT=+ β1*FDI+ β2*LFCF

β1
β2
Coefficient
Std. Error
t-Statistic
Prob.
2266.311
2.067735
1.035351
461.3758
0.232684
0.116630
4.912072
8.886438
8.877254
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.865555
0.862919
3685.174
1.39E+09
-1009.734
328.3370
0.000000
126
EXPORT=+C(2)*FDI

β1
Coefficient
Std. Error
t-Statistic
Prob.
4230.213
3.637047
536.4272
0.200457
7.885903
18.14375
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.761682
0.759368
4882.535
2.46E+09
-1039.788
329.1958
0.000000
Method: Panel Least Squares
Sample: 1992 2012
Periods included: 21
Cross-sections included: 2
Total panel (balanced) observations: 42
EXPORT=+ β1*FDI+ β2*LFCF

β1
β2
Coefficient
Std. Error
t-Statistic
Prob.
8230.527
1.818844
0.652930
1043.144
0.267415
0.150543
7.890117
6.801568
4.337182
0.0000
0.0000
0.0001
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.824828
0.815845
4031.104
6.34E+08
-406.7146
91.81926
0.000000
127

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
12517.83
1.919194
0.562048
-41.35355
2577.724
0.265801
0.154722
22.85911
4.856155
7.220415
3.632632
-1.809062
0.0000
0.0000
0.0008
0.0784
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.838718
0.825986
3918.545
5.83E+08
-404.9796
65.87089
0.000000
Method: Least Squares
Sample: 1992 2012
Included observations: 21

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
3889.641
2.051884
0.555937
-7.574512
633.1040
0.980667
0.171673
1.373428
6.143764
2.092335
3.238355
-5.515040
0.0000
0.0517
0.0048
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.892123
0.873086
747.4859
9498499.
-166.5300
46.86233
0.000000
128
EXPORT=+ β1*LFCF+ β2*REER

β1
β2

Coefficient
Std. Error
t-Statistic
Prob.
3881.079
0.782112
-8.886507
689.9409
0.145343
1.331658
5.625235
5.381160
-6.673266
0.0000
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.864342
0.849269
814.6085
11944567
-168.9360
57.34353
0.000000

β1
β2
β3
Coefficient
Std. Error
t-Statistic
Prob.
1205.449
0.946936
0.348268
-2.099474
353.8506
0.874948
0.451430
2.997664
3.406661
1.082277
0.771478
-0.700370
0.0016
0.2859
0.4452
0.4880
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.059571
-0.014674
440.8153
7384090.
-313.2160
0.802361
0.500345
129

Local fixed capital formation (LCFC), FDI and available energy resources (R) have
positive impact on real export in Central Asian countries. Specifically, availability of
energy resources have most significant impact on real export growth. At the time when
rise in price of energy resources can result in increase of nominal export in Central
Asian region, increasing demand resulted in real export growth in Central Asian
countries. Consequently, energy resources possession can be the main determinant of
export growth. This empirical finding is broadly supported with previous findings on
commodity export concentration trends in Kazakhstan and Turkmenistan.

Real effective exchange rates have negative relationship with export growth that is
REER (national currencies’ value) appreciation is associated with decrease in export
of Central Asian countries. This relationship corresponds to theoretical
interrelationship between export and REER: increase in REER result in loosing
competitiveness compared with main trading partner countries, consequently real
appreciation of national currency will bring to decrease in export.

Despite both FDI and LFCF are positively correlated with real export, in comparison
with LFCF (0.63), FDI (2.09) resulted in higher export growth in CAC. This is valid
interrelationship taking into account that FDI in Central Asian countries are mostly
associated with fuel-energy sectors, which require not only substantial investments but
also advanced technologies available through FDI.
4.4.2 Model Specification (2)
Tables 4.11-4.15 present the empirical results of statistical analysis based on model
specification (2) and several variations with different independent variables combinations
with the view to reveal models that best fit data for 3 groups of countries:
1) Commodity export based development model (Kazakhstan and Turkmenistan);
2) Export-oriented industrialization model (Uzbekistan);
3) Other development model (Kyrgyzstan and Tajikistan).
Tables 4.11-4.12 present the empirical results of statistical analysis for “Commodity
export based development model” group. Results indicate that in these countries model
with FDI and LFCF had significant explanatory power, and appropriate data-fit-measures
(R-squared = 0.82, Adjusted R-squared = 0.82, F-statistics = 91.82). FDI and LFCF had
130
positive impact on real export volumes, wherein in comparison with LFCF (0.65), FDI
(1.82) resulted in higher export growth. REER is reported to have no statistically
significant impact on real export growth in observed group of countries.
Tables 4.13 – 4.14 present the results of statistical analysis for “Export-oriented
industrialization model” represented by Uzbekistan. Results indicate that in Uzbekistan
all examined independent variables (FDI, LFCF and REER) had statistically significant
impact on real export growth. Both specifications of the model had high explanatory
power and data fit properly into the model. Corresponding to previous findings, LFCF
had strong positive and REER was negatively correlated to real export. Increase in FDI
resulted in higher change in real export volumes (0.25) than increase in LFCF (0.56) in
Uzbekistan
Table 4.15 presents results of statistical analysis for “Other development model”
group (Kyrgyzstan and Tajikistan). Examination outcomes revealed no statistically
significant impact of either FDI, LFCF or REER on real export in observed countries.
Statistical analysis of Central Asian countries grouped according to development
strategies indicate that in “Commodity export based development model” foreign direct
investments and local fixed capital formation had significant positive correlation with real
export. Wherein increase in FDI resulted in higher real export growth in comparison with
local fixed capital formation. This corresponds to concentration of FDI inflows on fuelenergy sectors in resource rich Central Asian countries. In addition, statistical analysis for
all sample revealed that possession of energy resources is the key factor in explaining real
export growth into the region.
FDI, local fixed capital formation and real effective exchange rates affected real
export volumes in “Export-oriented industrialization model”, at the time when real
effective exchange rates had no statistically significant impact in “Commodity export
based development model”. Consequently, findings of low export elasticity in “Oilexporting countries” compared with other economies (Hakura and Billmeier 2008) are
supported.
In “Other development model” group no statistically significant impact of examined
variables on real export is revealed.
131
132
Chapter 5 Paths in International Financial Trilemma
5.1 Introduction
In view of international financial trilemma restrains that make it impossible to perform
high capital mobility, exchange rate stability and monetary policy autonomy
simultaneously, the authorities are to select optimal combination out of these policy tools
determined by economic development strategies. Consequently, defining countries’ paths
in international financial trilemma will reflect corresponding development strategies,
whilst changes in countries’ positions within international financial trilemma signal on
policy responses to faced macroeconomic shocks and challenges.
As a part of international financial trilemma, internationalization of capital flows
played the key role in the development of international monetary system. However,
despite globalization, international experience shows that there is no optimal capital
mobility level matching all countries. To benefit from free capital flows, every country is
to liberalize its financial system in a sequence according to institutional and financial
development. 93 History shows that Western European countries imposed large-scale
capital restriction after World War II to channel credit towards strategic sectors 94 with
further financial deregulations. Currently, many countries still practice some forms of
capital restrictions.95
Central Asian countries used to be a part of isolated economic system. In 1991,
transition from centralized planned economy to market economy started in this region.
During transition, countries suffered from severe recession and negative trade balances.
Fundamental changes predetermined the imposition of capital controls. However,
countries varied significantly on transition models and economic development
strategies. 96 Accordingly contrasted the sequence of financial deregulation in Central
94
95
IMF (2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”, Washington, D.C.:
96
93
133
Asian economies. Thus, Kyrgyzstan and Kazakhstan have significantly liberalized
financial system, at the time when Tajikistan and Uzbekistan performed partial financial
liberalization. Turkmenistan continued practicing substantial capital restrictions on most
of financial transactions.97
Increasing capital mobility faces countries to choice problem between monetary
policy autonomy and pegged exchange regime. Study of conducted monetary policy
frameworks and exchange arrangements in Central Asian countries revealed consistence
of international financial trilemma restrains. Particularly, in Turkmenistan, conventional
pegged exchange rate regime was chosen as a priority; at the time when Kazakhstan,
Kyrgyzstan, Tajikistan and Uzbekistan applied several exchange arrangements consistent
with different forms of managed floating exchange regime. However, in 2000s the
countries altered to pegged exchange arrangements. While, this change in Kazakhstan,
Kyrgyzstan and Tajikistan was reasoned with global financial and economic crisis in 2007,
in Uzbekistan this shift was determined earlier in accordance with adopted strategy.
Monetary frameworks in these countries underwent corresponding shifts to exchange rate
anchor strategies.
Bearing in mind these findings, Chapter five explores capital flow regulations,
exchange arrangements and monetary policy frameworks in Central Asian countries with
the view to construct countries’ paths in international financial trilemma. For this purpose,
sections 5.2 presents brief review of related academic literature on international financial
trilemma dimensions coding, and introduces coding methodology applied in this study.
Central Asian countries’ positions in international financial trilemma are constructed in
section 5.3. Section 5.4 explores countries’ paths in conjunction with revealed
development strategies in the region. Section 5.5 presents recent developments in Central
Asian economies and revealed policy changes in the region. Section 5.6 summarizes key
findings.
Karshibaev, J. (2014a), “Recent Developments in Capital Liberalization in Central Asia”, Kyushu
Keizaigakkai Nenpo (The Annual Report of Economic Science), No 52, pp.33-40.
97
134
5.2
International Financial Trilemma Dimensions
In construction the countries’ paths in international financial trilemma, proper dimensions
coding is one of the key issues. A number of attempts in previous studies to define
countries position in international financial trilemma based on various methodologies
indicate to the on-going search of the suitable and indicative metrics.
5.2.1 Trilemma Dimensions in Previous Studies
Aizenman et al (2008) developed metrics based numeral definition of countries positions
in international financial trilemma. For that, new metrics for measuring capital mobility
(KAOPEN) based on mathematical calculation of first principal component of four main
capital flow channels (multiple exchange rates, restrictions on current and capital account
transactions, surrender requirement of export proceedings) was introduced (Table 2.1,
chapter 2). Monetary policy autonomy was determined based on the correlation of the
country’s interest rates with the base country’s interest rates. In part of exchange
arrangements, exchange rate stability was defined as an invert of its volatility, standard
deviation of monthly depreciation against the currency of base country. Based on these
dimensions, it is found that trilemma restrains hold for most countries. However, applied
methodology of defining capital mobility does not reflect the intensity of controls 98 ;
consequently, the index does not allow observing the alterations in case gradual financial
liberalization occurs. As a result, KAOPEN indices could not reflect gradual financial
liberalization in Kazakhstan and in Uzbekistan.99
Another set of dimensions is discussed in Obstfeld et al (2004). Examining data for
over 130 years, it is found that international financial trilemma constraints hold in
historical data. In examining trilemma dimensions, IMF’s de facto and de jure
classifications for different periods were selected for countries’ exchange rate regime
coding. However, de jure classification was additionally checked in case of mismatch
between two classification methodologies. In part of monetary policy autonomy, short-
California.
99
Karshibaev, J. (2014a), “Recent Developments in Capital Liberalization in Central Asia”, Kyushu
Keizaigakkai Nenpo (The Annual Report of Economic Science), No 52, pp.33-40.
98
135
term nominal market interest rates and their divergence from base country (“world”)
interest rates were examined. For capital controls coding, IMF’s AREAER data was
chosen as an appropriate source for post Bretton Woods era, meanwhile it was assumed
that all countries had open markets during gold standard era and none do during Bretton
Woods period. De jure codes were adopted due to availability and reliability. Capital
mobility and exchange arrangements were defined strictly between two extreme options.
Therefore, gradual financial liberalization of capital flows and soft peg exchange
arrangements would be out of the discussion affecting results accuracy.
Based on this discussion, and bearing in mind findings on capital flow liberalization
in Central Asian economies, qualitative coding of international financial trilemma
dimensions for defining Central Asian economies’ positions are considered suitable in
the current study.
5.2.2
Trilemma Dimensions in Current Study
International financial trilemma dimensions applied for measuring the capital policy
mobility, monetary autonomy and exchange rate stability in the current study are
summarized in Table 5.1.
Table 5.1 International financial trilemma dimensions coding.
Capital mobility
(“Integrated approach”, IMF)
Low capital mobility:
Restrictions on most capital
flows except FDI inflows.
Partial capital mobility:
FDI outflow and long-term
portfolio flows liberalization,
some short-term flows can also
be liberalized at this stage.
High capital mobility:
All remaining controls are
eliminated.
Exchange arrangements
(“De facto classification”, IMF)
Hard pegs:
No separate legal tender
Currency board
Soft pegs:
Conventional peg
Crawling peg
Crawl-like arrangement
Pegged exchange rate within
horizontal bands
Other managed arrangement
Floating:
Floating
Free floating
Monetary Policy autonomy
(“De facto classification”, IMF)
Low of monetary autonomy:
Exchange rate anchor
Partial monetary autonomy:
Other monetary framework
High monetary autonomy:
Monetary aggregate target,
Inflation-targeting framework
Source: IMF (1996-2014), “Annual Report on Exchange Arrangements and
Exchange Restrictions”, Washington, D.C.: The International Monetary
Fund;
IMF (2012), “The Liberalization and Management of Capital Flows: An
Institutional View”, Washington, D.C.: The International Monetary Fund.
136
Table 5.2 Central Asian countries in international financial trilemma.
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Capital mobility
High
High
Limited
Low
Limited
(liberalization)
(significant in 2000s)
(significant in 1990s)
(partial in 2000s)
(not liberalized)
(partial in 2000s)
Monetary
autonomy
and
policy targets
High
Macroeconomic
indicators, inflation
targeting
High
Macroeconomic
indicators
Partial
Macroeconomic
indicators
Low
Exchange rate
anchor
Partial
Macroeconomic
indicators
(changes during
financial crises)
(shift to exchange rate
anchor)
(shift to exchange rate
anchor)
(shift to exchange
rate anchor)
(no significant
change)
(no significant
change)
Exchange
arrangements
Floating arrangements
Floating arrangements
Floating
arrangements
Pegged
arrangements
Pegged
arrangements
(shift to pegged
arrangements)
(shift to pegged
arrangements)
(shift to pegged
arrangements)
(no significant
changes)
(no significant
changes)
(changes during
crisis)
Source: Prepared by author based on data on Tables 2.9, 2.10, 2.12, 3.3, 3.4 and 5.1.
137
Capital mobility in Central Asian countries is determined in accordance with IMF’s
Integrated approach to sequenced financial liberalization. Taking into account gradual
financial liberalization processes in Central Asian region, coding of capital mobility based
on countries’ stage in financial deregulation is considered suitable. The stages of financial
liberalization according to Integrated approach are as followings: The first stage suggests
liberalizing FDI inflows, as such capital flows are considered to be more stable in
comparison with other financial flows, and more likely to contribute to the economic
growth. The first stage also lays the groundwork for further liberalization by introducing
international accounting standards and improving national statistics. The monetary policy
frameworks and financial sector regulations also require strengthening at this stage. The
second stage encompasses FDI outflows and long-term portfolio flows liberalization.
Some short-term capital flows can also be liberalized at this stage. The last stage
eliminates all remaining controls along with developing the financial markets and further
strengthening the financial sector through implementing adequate prudential regulations
and supervisions pursuing proper risk management of international capital flows. 100
However, with the view to define explicitly the countries’ paths in international financial
trilemma in part of financial openness, Sequenced international financial liberalization
index calculated in respect to Central Asian countries will be taken into consideration.
Exchange arrangements and monetary policy frameworks are based on IMF’s de facto
classification.101 The classification system is based on the members’ actual arrangements
and policies, as identified by IMF staff, which may differ from their officially announced
de jure arrangements.102
Monetary policy frameworks are categorized into three groups depending on policy
objectives: exchange rate stability, other monetary frameworks, inflation targeting and
monetary aggregate targeting. Despite IMF’s classification, Other managed arrangement
is categorized as a soft peg exchange arrangement in current study. Originally, this
category is considered as a residual category used when the exchange rate arrangement
does not meet the criteria for any of the other categories or arrangements characterized
by frequent shifts policies.
IMF (2011), “Liberalizing Capital Flows and Managing Outflows”, Washington, D.C.: The
101
See Appendix 2.
102
IMF (2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”,
100
138
Observed data on monetary frameworks and exchange arrangements indicates to the
presence of significant linkage and concordance. Countries that adopted some form of
pegged exchange arrangement as a rule introduced corresponding monetary policy to
support fixed exchange rates (exchange rate anchor).
5.3 Paths in International Financial Trilemma
Bringing together data on capital flow regulations, exchange arrangements, and monetary
policy frameworks in Central Asian countries (Tables 2.9, 2.10, and 2.12, chapter 2;
Tables 3.3 and 3.4, chapter 3), positions of Central Asian countries in international
financial trilemma have been derived (Table 5.2). Figures 5.1-5.5 display estimate
positions and paths of Central Asian countries in international financial trilemma based
on trilemma dimensions coding described in Table 5.1.
Figure 5.1 Path in international financial trilemma: Kazakhstan.
139
These paths in international financial trilemma display how countries searched
optimal combination of capital mobility, exchange arrangements and monetary policy
autonomy with the view to deal with faced macroeconomic challenges or/and to ensure
economic development in long perspectives.
Central Asian countries’ positions and paths in international financial trilemma
revealed presence of dissimilar patterns. Particularly, dissimilar paces of financial
liberalization in the region determined unlike trajectories in international financial
trilemma. Thus, significant capital flows liberalization in Kyrgyzstan (1990s) and in
Kazakhstan (2000s) reflected in movements towards higher capital mobility corner in the
positions of corresponding countries (Figures 5.1-5.2). Subsequently, approaching to high
capital mobility corner in international financial trilemma increased the pressure to
choose between exchange rate stability and monetary policy autonomy.
Figure 5.2 Path in international financial trilemma: Kyrgyzstan.
140
In Kazakhstan, authorities pursued low inflation rates. Therefore, monetary policy
was to aim price stability rather than exchange rate stability. Consequently, along with
financial liberalization in early 2000s, monetary policy gradually shifted from monetary
aggregates targeting towards inflation targeting (Figure 5.1). Thus, in view of higher
capital mobility, ceteris paribus, the authorities in Kazakhstan chose monetary policy
autonomy to exchange rates stability up to middle of 2000s with the view to achieve low
inflation. However, managed floating regime combined with strict monetary policy was
also called to ensure nominal exchange rate stability.
Monetary policy in Kyrgyzstan was mainly determined by internal macroeconomic
indices such as international reserves and inflation. Still, the authorities prioritize price
stability as a source of stable economic growth in the middle term. Therefore, liberalized
financial system in 1990s, and chosen monetary policy determined applying more flexible
exchange arrangements (Figure 5.2). However, National bank of Kyrgyz Republic was
called to stabilize nominal exchange rate in case of significant fluctuations.
Thus, given high capital mobility similar economic policy priorities determined
analogous positions of Kazakhstan and Kyrgyzstan in international financial trilemma.
However, the paths differed in view of unlike pace of financial liberalization in the
countries.
In early stages of global economic and financial crisis, Kazakhstan and Kyrgyzstan
had to alter their priorities. In view of high debt stock and increasing uncertainties in
international financial markets and global economy, exchange rate stability was
considered as source of financial stability in these countries. This priority change in 2007
reflected in shifts of the countries’ positions to the exchange rate anchor corner in
international financial trilemma. However, Kyrgyzstan returned to its initial positions
shortly, at the time when Kazakhstan’s position in international financial trilemma
indicates to further pursuing exchange rate stability.
Figure 5.3 presents current position and path of Tajikistan in international financial
trilemma. The path mirrors adopted monetary policy programs developed in cooperation
with IMF, however, mostly driven by internal macroeconomic indices, and corresponding
exchange arrangements under limited capital mobility. Major shifts in positions of
Tajikistan in international financial trilemma reflected partial financial liberalization in
the middle of 2000s, and priority changes in adopted monetary policy frameworks and
141
exchange arrangements in view of increasing uncertainties in the global economy in the
second half of 2000s. During global economic and financial crisis, Tajikistan applied
strict monetary policy with a view to ensure exchange rate stability. Applied strategy led
to prevention of significant fluctuations. Nominal exchange rate of national currency was
depreciated according to macroeconomic circumstances. However, frequent changes of
applied exchange arrangemnts observed in different time periods indicates to the ongoing search of optimal position in international financial trilemma.
Figure 5.3 Path in international financial trilemma: Tajikistan.
Another pattern is observed in the path of Turkmenistan in international financial
trilemma (Figure 5.4). The unchanging position in international financial trilemma
reflects significant capital controls and absolute exchange rate stability in the country.
Accordingly, pegged form of exchange arrangement introduced in 1990s determined
corresponding monetary policy of exchange rate anchor. Developments in nominal
exchange rates of Turkmen Manat displayed that pegged exchange rate was supported for
142
a considerable time periods with infrequent devaluations. In international financial
trilemma, this position corresponded to exchange rate stability and low capital mobility
corner.
Figure 5.4 Path in international financial trilemma: Turkmenistan.
Another pattern revealed in the path of Uzbekistan is displayed in Figure 5.5. The
path reflects gradual partial financial liberalization in 2000s and exchange rate stability
priority. Applied strategy of gradual depreciation of Uzbek Sum exchange rate with a
view to support export-oriented development went along with strict monetary policy. In
international financial trilemma, this position corresponded to the exchange rate stability
and partial capital mobility corner. However, given limited capital mobility and crawllike exchange arrangement provide some level of monetary policy autonomy.
143
Global economic and financial crisis did not result in position changes of
Turkmenistan and Uzbekistan in international financial trilemma.
Figure 5.5 Path in international financial trilemma: Uzbekistan.
5.4 Development Strategies and Financial Priorities in Central Asia
Defined paths in international financial trilemma show that Central Asian countries varied
significantly on pace of financial liberalization, adopted exchange arrangements and
monetary policy autonomy. This dissimilarity is a reflection of unlike transition models
and development strategies in these countries.
144
Table 5.3 Economic developments in Central Asian countries.
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Transition model
Rapid
Rapid
Other
Other
Gradual
Key export articles
Oil, Metals
Gold
Metals, Cotton
Gas
Cotton, Cars, Gas,
Gold, Food
Export structure
Significant Export
Concentration
Other
Significant Export
Concentration
Significant Export
Concentration
Gradual Export
Diversification
Export elasticity
Comparatively low
Comparatively
high
Comparatively high Comparatively low
Comparatively high
FDI in GFCF and
GDP
Significant
Significant
Significant
Significant
Limited
FDI sectoral
distribution
Concentrated on oil
related sectors
More diversified
sectors
More diversified
sectors
Concentrated on gas
related sectors
More diversified
new industries
Current account
balance
Negative
Negative
Negative
Positive
Positive
External debt stock
High
High
High
Low
Low
Source: Prepared by author based on findings in Chapter 1 and Chapter 4.
145
5.4.1 Transition Models and Financial Liberalization
The paths of Central Asian countries in international financial trilemma corresponded
to the transition models adopted in these economies since early 1990s. Economic
transformations in these countries affected their paths in international financial trilemma
accordingly through unlike pace and manner of financial liberalization. Subsequently, it
affected on countries further choice of exchange arrangements and corresponding
monetary policy frameworks.
Consistent with market liberal approach, Kazakhstan and Kyrgyzstan adopted rapid
model of transition to market economy actively attracting foreign investments within
extensive program of privatization and decentralization since early stages of reforms.
Prompt economic liberalization processes covered financial sector of these countries in a
short time as well. In turn, growing capital mobility increased trade-off between exchange
rate stability and monetary policy autonomy. Supplemented with economic development
strategies and considerable financial inflows it brought to prioritization of monetary
policy autonomy.
Alternative approach to transition in Uzbekistan is associated with developmental
paradigm, which assumed industrialization with the view to catching-up with advanced
countries. Strategy of gradual economic reforms under leading role of government
predetermined presence of capital controls, which have been partially liberalized since
early 2000s. Limited capital mobility provided more autonomy in conducting monetary
policy to stimulate national economy along with ensuring exchange rate stability as a part
of export-oriented development strategy.
Moderate approach to economic reforms in Turkmenistan and corresponding steady
position in international financial trilemma is mainly associated with wide-ranging capital
flow controls that allowed adopting conventional pegged exchange arrangement. In
Tajikistan, transition period complicated with internal political tense significantly
affected the pace and manner of financial liberalization, subsequently, the position in
international financial trilemma.
146
5.4.2 Development Strategies and International Financial Trilemma
At the time when transition models affected the paths of Central Asian countries in
international financial trilemma in early stages and mainly through the pace of financial
liberalization, economic development strategies determined further priorities.
Table 5.3 summarizes main developments in real sector of the economy in the region.
It shows that Central Asian countries significantly differ from each other not only by
transition models but also by economic development strategies. Rapid economic and
financial liberalization and high oil prices brought to concentration of FDI and internal
investments mainly in extractive industries leading to commodity export based
development in Kazakhstan. Impressive export and GDP growth rates were achieved
mainly due to advance in oil related sectors, which caused increasing dependency of
economic sustainability on oil price volatility. Additionally, high financial inflows and
GDP growth resulted in negative CAB and increasing external debt stock in banking
sector, however, considerable international reserved were accumulated in national
sovereign fund (NFRK). In order to decrease inflationary pressure resulted due to
substantial capital inflows into fuel-energy and banking sectors under high capital
mobility, Kazakhstan gradually shifted towards inflation-targeting policy (monetary
policy autonomy). Low export elasticity on exchange rate fluctuations, which resulted
due to substantial share of oil in export structure of Kazakhstan, allowed mitigating
negative effect of exchange rate appreciations. However, despite high international
reserves, reasoned with high financial openness, debt stock and negative CAB, the
authorities had to change policy priorities in favor of exchange rate stability during global
economic and financial crisis as a source of financial stability.
Alternative development approach in Uzbekistan resulted in partial financial
liberalization under leading role of government with the view to perform industrialization
and export diversification. The role of FDI gradually increased augmented with internal
investments into the industrialization and export diversification. Significant GDP growth
rates were ensured through export-oriented development stimulation by means of gradual
nominal exchange rate depreciation under pegged form of exchange arrangements
accompanied with limited monetary policy autonomy. As the result, positive CAB and
low external debt stock went along with international reserves accumulation. Achieved
macroeconomic stability along with limited capital mobility lessened the impact of global
147
economic and financial crisis on Uzbek economy and did not cause significant changes
in policy priorities.
These two development strategies revealed in Central Asian countries indicate to clear
contrast of their paths in international financial trilemma (Table 5.4). Commodity
exporting based development is associated with high capital mobility due to rapid
financial linearization and prioritizing monetary policy autonomy over exchange rate
stability due to low export elasticity on exchange rate fluctuations. On the contrary,
export-oriented industrialization model assumes presence of significant capital controls
justified with necessity of capital flows concentration for industrialization and ensuring
exchange rate stability. Accordingly, exchange rate stability is prioritized in this model
with the view increase competitiveness of national economy and stimulate exportoriented growth.
Table 5.4 Development patterns in Central Asia.
Commodity export based
model
Export oriented
industrialization model
Transition pace
Rapid
Gradual
Key export articles
Natural resources
Industrial products
Export structure
Natural resources
concentrated
Diversified
FDI in GFCF and GDP
Significant role
Limited role
FDI sectoral
distribution
Natural resources sectors
concentrated
More diversified
sectors
Current account balance
Negative
Positive
External debt stock
High
Low
Capital mobility
High
Low
Exchange arrangement
Flexible exchange regime
Pegged exchange
regime
Trilemma
Real economy
Sectors
Monetary autonomy
High
Source: Prepared by author based on Tables 5.2-5.3.
Limited
In other Central Asian countries, mixture of these two development approaches can
be observed conditioned to available resources and macroeconomic circumstances.
Combination of these development approaches in Turkmenistan brought to concentration
148
of FDI and internal investments mainly in extractive industries leading to commodity
export based development. However, contrasting to Kazakhstan, in Turkmenistan
adopted considerable capital controls and absolute exchange rate stability resulted in
positive CAB and low external debt stock, which along with significant international
reserves lessened the negative impact of global economic and financial crisis. However,
undiversified economic structure in Turkmenistan excessively depends on natural gas
export, consequently on its market price volatility.
Kyrgyzstan and Tajikistan do not possess sizeable mineral resources, however,
commodities such as gold or cotton made major shares of export revenues. These
countries experienced negative CAB and considerable debt stocks, therefore heavily
depended on external remittances and borrowings. Kyrgyzstan and Tajikistan
significantly differ in financial regulations, however both countries adopted financial
program developed with IMF pursuing low inflation development under managed
floating regime. Global economic and financial crisis had negative impact on these
countries and resulted in significant depreciation of national currencies and temporary
priority changes within international financial trilemma.
5.5
Recent Developments in Central Asian countries
At the time when global economic and financial crisis unveiled fragility of financially
open economies and resulted in economic downturn, extreme volatility of commodity
prices put into doubt sustainable growth perspective in commodity exporting countries.
Discussions raised in Central Asian countries on the need of further structural reforms
and diversification with the view of ensuring macroeconomic stability and progress in the
long-term. However, macroeconomic circumstances and challenges in each Central Asian
country varied significantly; subsequently contrasted approaches and policy priorities.
5.5.1 Priority Change in Kazakhstan
As a clear representative of commodity export based development in Central Asia,
Kazakhstan struggles with both high external debt stock in financial sector and decreasing
export revenues from oil exporting. Given high financial openness, Kazakhstan had to
change priorities from independent monetary policy (inflation targeting) towards
exchange rate stability since 2007 with the view to ensure stability of financial system.
149
Box 5.1 Industrial and Innovative Development Program of Kazakhstan for 2010-2014.
2010-2014 State Program of accelerated industrial and innovative development of Kazakhstan
The purpose of the Program is to guarantee stable and well-balanced economic growth by
means of diversification and improvement of its competitive ability.
The Program is a logical continuation of conducted policy on diversification of economy and
it contains the main provisions of the Industrial-innovation Development Strategy for 2003-2015,
the Program "30 corporate leaders of Kazakhstan" and other program documents in the sphere of
industrialization.
For the period up to 2015 the main priority of the accelerated industrial policy will be
realization of big investment projects in traditional export-orientated sectors of economy with
multiplication of new business opportunities for small and medium-sized businesses by means of
focused development of Kazakhstan content and following processing.
The initiators of big projects promotion will be JSC National Welfare Fund «SamrukKazyna», strategic companies of fuel-energy and metallurgical sectors of economy and strategic
foreign investors.
Simultaneously there must be formation and/or development of the sectors of economy
which are not related to raw materials sector, but oriented on internal and then on regional markets
(the countries of the Customs Union and Central Asia).
The Government will support the initiatives of Kazakhstan medium-sized and small
businesses focused on transfer of high technologies, attracting foreign investments for creation of
modern import-substituting productions with the prospect of their export orientation
development.
Development of national innovative infrastructure and support of scientific-technologic
projects with prospects of commercialization will continue in order to form the basics of postindustrial economy.
In general, the Governmental support of diversification economy will be provided by
realization of system measures of economic policy on macro-and sectoral levels and selective
support measures of specific sectors of economy and projects.
The system measures of economic policy will be concentrated on formation of positive
macro-environment and investment climate, improvement measures of productivity and
competitive ability of the national economy.
The selective measures will be taken on the basis of combined set of measures of financial
and nonfinancial support of priority sectors and projects.
The Government will systematic organize its interaction with business on the basis of
formation of effective institutes of cooperation on Republican and regional levels.
Necessary course of the industrialization policy up to 2015 will have internal consistency
with resources, infrastructural, institutional and technologic restrictions. System character of the
mechanisms involved into the Program, stimulating diversification and technologic
modernization of economy, will provide:
creation of positive macro-environment conditions;
improvement of business-climate and stimulation of investments flow-in;
mass technologic modernization and development of national innovative system;
improvement of human capital quality.
Concentration of the resources of the Government and business for development of priority
sectors of economy will be provided with interactive decision making process of the Government
and business, using modern information systems of monitoring and specific instruments of
realization.
Source: President of Kazakhstan (2010), Decree of the President of the Republic of
Kazakhstan dated March 19, 2010 No 958, National Agency for Export and
Investment «KAZNEX INVEST» under the Ministry of Investment and
Development of Kazakhstan, http://invest.gov.kz/.
150
Box 5.2 Industrial and Innovative Development Program of Kazakhstan for 2015-2019.
The state program of industrial-innovative development of Kazakhstan for 2015-2019
The Program was developed in accordance with long-term priorities of the Strategy
"Kazakhstan-2050", to implement the key area "To accelerate the economy diversification" of the
Strategic development plan of the Republic of Kazakhstan till 2020, the Concept of Kazakhstan
joining the top 30 developed countries of the world, and to implement the instructions of the Head
of State, made at the 26th plenary session of the Foreign Investors Council under the President of
the Republic of Kazakhstan, and in the framework of implementation of the President`s Address
to the people of Kazakhstan of January 17, 2014 “Kazakhstan`s way – 2050: One goal, One
Interest and One Future" dated January 17, 2014.
The Program is a follow-up of the State program for accelerated industrial and innovative
development of the Republic of Kazakhstan for 2010-2014 (SPAIID) and it takes into account its
operational experience. The Program is part of the industrial policy of Kazakhstan and it is
focused on development of the secondary industry taking efforts and resources in a limited
number of sectors, regional specialization using the cluster approach and effective industrial
regulation.
The Program is sensitive to public policy aspects affecting the business climate. The Program
success is related to achievement of the objectives by the Republic of Kazakhstan to improve the
environment of doing business, increase the Global Competitiveness Index, decrease the share of
state participation in economy by conducting the planned privatization, taking into account
"principle of Yellow Pages", Kazakhstan joining into the FDI Confidence Index by A.T. Kearney,
and indicators of human capital assets. In addition, efficient implementation of the Program
depends on the funding model, full and timely allocation of budget.
Period of implementation 2015-2019
To achieve by 2019 the following economic indicators with respect to the level of 2012:
1) increase of production volume of the secondary industry by 43 % in real terms;
2) increase of gross value added of the secondary industry by no more than 1,4 times in real
terms;
3) increase of labor productivity of the secondary industry by 1,4 times in real terms;
4) increase of non-primary (finished) exports by no more than 1,1times;
5) decrease of energy value of the secondary industry by no more than15 %;
6) employment growth in the secondary industry by 29,2 thousand people.
Sources and amount of financing
Total expenses, provided for in the republican budget for implementation of the Program of
2015 - 2019, will amount for 643909, 6 million Tenge, including:
In 2015- 327 506,3 million Tenge*
In 2016 - 111 324,6 million Tenge*
Notes: amounts are under hold in accordance with the state budget for relevant financial year.
Source: President of Kazakhstan (2014), Decree of the President of the Republic of
Kazakhstan dated August 1, 2014 No 874, National Agency for Export and
Investment «KAZNEX INVEST» under the Ministry of Investment and
Development of Kazakhstan, http://invest.gov.kz/.
151
However, despite announced temporary change of priority in late 2000s, Kazakhstan
continued pursuing exchange rate stability since then. Moreover, National bank of
Kazakhstan declared pursuing not only price stability but also competiveness of national
economy in conducting exchange policy.
Figure 5.6 Path alternatives in international financial trilemma: Kazakhstan.
Source: Prepared by author based on data on Tables 2.9, 2.10, 2.12, 3.3, 3.4, 5.1 and
IMF Country Report No 11/150 (2011).
Latest Developments in exchange rate of Kazakh Tenge against USD showed
significant decrease of its fluctuation since 2007 along with its systematic abrupt
devaluation with the view to improve the trade competitiveness, which resulted in positive
CAB in most recent years. Furthermore, the authorities announced imposing
industrialization program in 2014-2019103 as a continuation of program realized in 20102014104 with the view to diversify national economy with higher share of manufacturing
103
104
See Box 5.2.
See Box 5.1.
152
and agriculture in GDP in medium-term. Consequently, announced industrialization
program by the government and declaration of NBK on pursuing trade competitiveness
indicates to substantial changes of priorities in development strategy and long-lasting
location in current position in international financial trilemma (Figure 5.6). Taking into
account substantial financial inflows and further increase in internal investments,
avoiding either exchange rate appreciation or increase in money supply will be
problematic, which will affect on trade-off between exchange rate stability and monetary
policy autonomy in the future.
IMF recommends adopting greater flexibility of exchange rates with the view to
improve monetary policy effects at the time when NFRK should continue oil savings to
avoid exchange rate appreciation.105 Furthermore, investments are recommended to direct
into human resources (education, health) and infrastructure development programs, at the
time when competitiveness is to be improved through trade liberalization, more
transparency and accountability, employment creation and social safety.
5.5.2 Policy Priorities in Uzbekistan
Figure 5.7 shows path alternatives in international financial trilemma for Uzbekistan.
Demonstrating high economic growth rates based on industrialization and export
diversification, authorities in Uzbekistan aim to continue monetary tightening policy and
reserve accumulation. Middle-term economic goal is to raise real income per capita by
increasing productivity in capital and labor, and ensuring employment for young and
growing population. Short-term economic challenges are related with slowdown in main
trading-partner countries (Russia, China) and to rein inflation through coordination of
exchange and monetary and prudent fiscal policies.106 However, authorities understand
the importance of further economic liberalization and diminishing government
regulations along with promotion of industrial modernization and economic
diversification.107
IMF (2011), “Republic of Kazakhstan” Staff Report for the 2011 Article IV Consultation”, IMF Country
Report, No 11/150, Washington, D.C.: The International Monetary Fund.
106
IMF (2013), “Republic of Uzbekistan” Staff Report for the 2012 Article IV Consultation”, IMF Country
107
See Box 5.3.
105
153
IMF recommends shifting into more flexible (market driven) exchange rate policy
and focusing on inflation targeting along with foreign exchange market liberalization
(Figure 5.7). However, authorities are concerned with saving the reserve levels in growing
uncertainties in the global economy, and therefore planning to continue strategy of
gradual depreciation of Uzbek Sum exchange rate with the view to support exportoriented growth.108
Figure 5.7 Path alternatives in international financial trilemma: Uzbekistan.
IMF (2013), “Republic of Uzbekistan” Staff Report for the 2012 Article IV Consultation”, IMF Country
108
154
Box 5.3 Program of Actions of the Government of Uzbekistan.
Program of Actions of the Cabinet of Ministers for Near and Long-Term Perspective
The program presented on January 23, 2015 and encompassed followings:.
The first, it is a further increase in competitiveness of the economy through the expansion and
deepening of structural reforms, modernization and diversification of the active leading
industries, the widespread introduction of information and communication technologies,
strengthening macroeconomic stability.
The second, the removal of all obstacles and limitations, providing complete freedom in the
development of private property and private enterprise.
The third, a critical assessment of the level of government involvement in the economy,
reducing it to a strategically and economically reasonable size.
The fourth, the radical change in the principles and approaches to corporate governance,
introduction of modern international standards of corporate management of production, foreign
trade and investment processes.
The fifth, the deepening of localization of production, expansion of inter-sectoral industrial
cooperation.
The sixth, creation of infrastructure, especially information and communication systems, the
development of road transport and engineering communications construction.
The seventh, the creation of necessary conditions for the employment of the population,
especially the employment of graduates of professional colleges and universities.
Further expansion of the structural changes in the economy, modernization and diversification
of the active leading industries - are being developed programs to ensure further development and
improvement of industrial competitiveness. In particular, in the preparation of the Program of
measures for structural reforms, modernization and diversification of production in the years
2015-2019, a list of 870 major investment projects worth $ 38 billion. Projects include the creation
of 415 new businesses, as well as modernization, technical and technological renovation of 455
existing industrial facilities. The program is expected to result in:
- Accelerated development of industries producing products with high added value, such as
engineering, Petrochemical, chemical, textile and food industries, with the development of around
1 000 new industrial products;
- Growth of industrial production for 5 years by 1.5 times and an increase in the share of
industry in GDP from 24 percent to 27 percent by 2020;
- Further growth of high-tech exports and create more 52 thousand new jobs.
Development of the industry is to improve the localization of production and the expansion of
cross-sectoral industrial cooperation. In order to optimize imports due to the expansion of
domestic production for deep processing of local raw materials and develop programs and
localization of production of finished products, components and materials for 2015-2019 years.
The program includes 600 projects with a deep processing of local mineral raw materials,
production of 1225 the most popular types of products with an estimated annual effect on the
import of $ 3.5 billion and the creation of 13.3 thousand new jobs.
With the view to reduce the level of state presence in the economy was finalized Program for
privatization of state property in the years 2015-2016, which provides:
- The elimination of more than 660 non-loaded state-owned enterprises with their subsequent
implementation at public auction to new private owners;
- Complete the sale of the state share in 360 non-strategic businesses;
- Implementation of "zero" value of more than 400 unused state objects;
- Reduction in the 203 existing enterprises the state share to 51.0 percent.
Source: The Government Portal of the Republic of Uzbekistan, http://www.gov.uz/.
155
5.5.3 Developments in Kyrgyzstan, Tajikistan and Turkmenistan
In Kyrgyzstan, special program developed in cooperation with IMF is being
conducted to deal with high external debt stock, undiversified economic structure and
inflation issues since early 2000s.109 Accordingly, structural reforms are reported to be
mostly completed; however, they are to be continued in banking and governance.
Figure 5.8 Path alternatives in international financial trilemma: Kyrgyzstan.
Export diversification based development based on cost competitiveness has been
pursued under gold production reduction in Kyrgyzstan. Low inflation rates along with
flexible exchange rate regime (smoothening short-term fluctuations) under non-gold
IMF (2013), “Kyrgyz Republic” Staff Report for the 2013 Article IV Consultation and Fourth Review
under the Three-Year Arrangement under the Extended Credit Facility, Request for Waver of
Nonobservance of Performance Criterion, and Request for Modification of Performance Criterion”, IMF
Country Report, No 13/175, Washington, D.C.: The International Monetary Fund.
109
156
export development is defined as a priority. IMF considers managed floating regime as
an appropriate exchange arrangement along with price stability priority in Kyrgyzstan
(Figure 5.8).
Figure 5.9 Path alternatives in international financial trilemma: Tajikistan.
Source: Prepared by author based on data on Tables 2.9, 2.10, 2.12, 3.3, 3.4, 5.1.and
Tajikistan also developed monetary program in cooperation with IMF with the view
to debt restructuring, macroeconomic stabilization and structural changes since 2000s.110
IMF reported institutional weakness, business environment improvement, fiscal and
banking reforms as priority challenges. Managed floating regime aimed at meeting
international reserve targets and smoothing short-term exchange rate volatility is
IMF (2011), “Republic of Tajikistan: 2011 Article IV Consultation, Fourth Review Under the ThreeYear Arrangement Under the Extended Credit Facility, Request for Waiver of Nonobservance for
Performance Criteria and Modification of Performance Criteria-Staff Report; Staff Supplement; and
Public Information Notice on the Executive Board Discussion”, IMF Country Report, No 11/130,
110
157
considered appropriate strategy for Tajikistan at the current stage of development
(Figure 5.9).
Figure 5.10 Path alternatives in international financial trilemma: Turkmenistan.
IMF Press Release, No 13/214 (2013).
Significant international reserves and substantial capital controls lessened impact of
global economic and financial crisis on Turkmenistan. However, augmented effects of
natural gas price volatility raised the issues of export diversification in Turkmenistan.
IMF recommends conducting reforms to increase the role of private sector and marketdriven interest rates, export diversification and transparency, and shifting towards more
flexible exchange regime (Figure 5.10). 111 Most recent statements in Turkmenistan
IMF (2013), “Statement at the Conclusion of the 2013 Article IV Mission to Turkmenistan”, IMF Press
Release, No 13/214, Washington, D.C.: The International Monetary Fund.
111
158
indicate to the authorities’ intention to pursue import-substitution and export
diversification policy based on more market driven mechanisms.112
The study revealed that transition models and economic development strategies in Central
Asian countries reflected in countries’ dissimilar paths in international financial trilemma.
Particularly, commodity export based development strategy is associated with significant
financial liberalization in early stages of transition and monetary autonomy priority over
exchange rate stability reasoned with low export elasticity and inflationary pressure due
to substantial capital inflows. Alternative development strategy of export-oriented
industrialization requires to preserve capital controls with the view to concentrate capital
flows in industrialization and to ensure exchange rate stability under limited monetary
policy autonomy. Other Central Asian countries are characterized with some combination
of these two development approaches.
Thus, the study revealed the presence of interrelationship between development
strategies and policy priorities that reflected in the positions and paths of the Central
Asian countries in international financial trilemma. Countries’ paths in international
financial trilemma supported adopted development strategies through corresponding
financial regulations, exchange arrangements and monetary policy frameworks.
Global economic and financial crisis and recent commodity price volatilities
differently affected Central Asian countries, consequently brought to dissimilar results in
priority reconsideration within international financial trilemma. Thus, Kazakhstan
introduced new program of innovative and industrial development aimed at economic
diversification. Consequently, pursuing external competitiveness of national economy in
exchange policy was prioritized, which indicates that temporary shift towards exchange
rate stability in Kazakhstan grew into a position for a longer perspective. On the contrary,
authorities in Uzbekistan tend to continue adopting pegged form of exchange
arrangements with the view to stimulate further export-oriented development and to
Президент Туркменистана (2015), “Выступление Президента Гурбангулы Бердымухамедова на
расширенном заседании Кабинета Министров Туркменистана от 5 апреля 2015 года”,
Электронная газета «Туркменистан: золотой век», http://turkmenistan.gov.tm/.
112
159
accumulate additional international reserves in face of future uncertainties in international
financial system.
160
Conclusion
Conclusion
In the dissertation, financial flow regulations, monetary policy frameworks and exchange
arrangements in five Central Asian countries are examined with the view to reveal their
positions and paths in international financial trilemma in conjunction with economic
reforms and development strategies since the beginning of transition to market economy
in 1991. Findings indicate to the presence of dissimilar paths in international financial
trilemma that reflected and supported two distinct development patterns in the region:
Commodity export based development strategy and Export-oriented industrialization
strategy. These development patterns significantly varied in liberalization sequence,
structural changes, economic policy priorities and regulations, therefore contrary
trajectories mirrored in international financial trilemma.
Commodity export based development in the resource-rich Central Asian region is
associated with market liberal paradigm that prioritizes market mechanisms with the view
to avoid government failures. Consequently, the role of the government in the economy
diminished substantially in early stages of transition through massive and rapid
privatization and denationalization processes in active participation of foreign investors.
However, economic openness and attractiveness of extractive industries in these
resource-rich countries brought to capital concentration in fuel-energy sector with
consequent establishment of commodity export based model.
Alternative development strategy in the Central Asian region aimed at export-oriented
industrialization is associated with developmental paradigm that pursues catch-up
industrial policy of advanced countries. For that reason, government preserved significant
role in the economy during transition and further stages of development. Sequenced
economic and financial liberalization processes went along with import-substitution
industrialization in early stages followed by export-oriented industrial policy afterwards.
Correspondingly, FDI and internal investments were channeled to establish new
industries and industrial modernization.
These dissimilar development strategies determined contrasting priorities in
economic policy that reflected in countries’ positions and paths in international financial
trilemma. Commodity export based development strategy performed higher capital
161
Conclusion
mobility due to financial liberalization in early stages putting pressure on trade-off
between exchange rate stability and monetary policy autonomy. Moreover, substantial
capital inflows and commodity export revenues were associated either with exchange rate
appreciation or inflation risks. Lower elasticity of commodity export on exchange rate
fluctuations resulted in monetary policy autonomy priority aimed at inflation targeting.
Consequently, exchange rate appreciation decreased economic competitiveness and
reinforced commodity export concentration. In international financial trilemma, the
position and the path of this development strategy corresponded to high capital mobility
and significant monetary policy autonomy corner.
Export-oriented industrialization strategy is associated with preserving government
regulations on capital flows that provided more room for maneuver in trade-off between
monetary policy and exchange arrangements. However, export-oriented strategy
predetermined priority of exchange rate stability over monetary policy autonomy with the
view to ensuring export competitiveness. Therefore, in international financial trilemma,
the position and the path of this development strategy corresponded to exchange rate
stability and limited financial openness corner.
Achieved economic progress and confronted challenges in Central Asian countries
displayed merits and demerits associated with these development strategies, and thus
contribute to the on-going discussions on optimal combination of state and market in the
economy. Particularly, commodity export based development is associated with
significant economic growth due to substantial capital inflows and export revenues,
especially during high commodity prices. Furthermore, considerable international
reserves are accumulated in these economies. However, undiversified export structure
increases fragility of the national economy and amplifies dependence on commodity price
volatility. Moreover, augmented import can bring to negative trade balance, while higher
financial openness is associated with increasing debt stock in banking sector.
Limited capital mobility and pegged exchange arrangements aimed at export-oriented
industrialization is associated with positive current account balance and lesser external
borrowings. Economic growth rates are stable and gradually accelerated along with
export-oriented industrialization process. However, lower financial openness shrinks the
access to the capital flows required for industrial modernization, while monetary policy
pursuing exchange rate stability increases inflationary risks.
162
Conclusion
Unlike impact of recent global economic and financial crisis unveiled apparent market
failure in the current stage of economic development in resource-rich Central Asian
countries. Particularly, limited financial openness and lower debt stock associated with
developmental approach allowed lessening severe impacts of the crisis. Consequently, no
significant changes occurred in this strategy. However, understanding of need for larger
role of market aimed at efficiency enhancement in this model requires appropriate growth
ideology and effective constructions of social collaboration between government and
market.
In contrast, uncertainties in financial markets and commodity price volatility
augmented with high debt stock in financial sector brought to reconsideration of policy
priorities in commodity exporting countries associated with market liberalism. As a result,
movement towards developmental approach was observed in Kazakhstan. Proclaimed
new economic diversification strategy through innovative and industrial policy led to
subsequent changes in financial precedencies that reflected in shift from monetary policy
autonomy priority towards exchange rate stability with the view to improve economic
competitiveness and trade balance. However, unlike other traditional paths of
industrialization, Kazakhstan pursues catch-up under higher financial openness.
Revealed development patterns and corresponding paths in international financial
trilemma illustrate the role of the government in industrialization during the transition
and early stages of development in resource-rich Central Asian countries. Particularly,
during the transition period the adopted strategy determined the course of structural
reforms that effects further development. At the time when active role of government in
pursuing industrialization originated economic diversification, prompt economic
liberalization in resource-rich countries resulted in commodity export based development
model. Different financial priorities, which reflected and supported development
strategies, reinforced established economic tendencies.
Although developmental approach acknowledged its efficiency during catching-up
stage of the development in Asian region, there is an alternative strategy in resource rich
Central Asian economies: to accumulate reserves during high commodity price periods,
and to spend reserves for temporizing for better market conditions during economic
downturns. However, excessive commodity price volatility and reoccurring crises, and
technical progress cast doubt on sustainability of commodity export based model
163
Conclusion
initiating policy reconsiderations in favor of industrialization and export diversification
in a longer perspective. Consequently, strategy that ensures external economic
competitiveness and supports catch-up industrialization becomes the key issue in the
current stage of development in Central Asian economies.
Thus, a shift towards economic diversification through industrialization revealed in
resource-rich Central Asian countries went along with transition to market economy. The
paths in international financial trilemma that reflected and supported corresponding
development patterns in the region indicate to the active role of government regulations
in early stages of industrialization. However, ensuring sustainable economic progress
based on market mechanisms requires new approaches to government regulations in view
of increasing capital mobility. Perspective development strategies in Central Asian
countries declare pursuing this goal. Given international financial trilemma restrains, it
will enforce incompatibility between exchange rate stability and monetary policy
autonomy in Central Asian economies, and thereby will necessitate addressing the issues
of financial cooperation in the region.
164
Appendices
Appendices
Appendix 1
Changes in FDI Flow Regulations
Regulations on Inward FDI
Regulations on Outward FDI
Kazakhstan
1996: Prior registration in NBK is required;
1996: NBK license is required;
2000: NBK registration certificate is required
for FDI over $100 000;
2002-2004: Several restrictions for nonresidents in local insurance industry
established;
2004: Investments into domestic banks
allowed only to entities with
international rating higher than
Kazakhstan`s sovereign rating, except
registered in specific offshore sites;
for FDI over $300 000 except banks
which are to notify NBK ex post;
for FDI over $500 000 except banks
which are to notify NBK ex post.
2003: FDI into OECD-member countries or
countries which has agreement on mutual
investments with Kazakhstan do not
require NBK license; NBK registration is
required if domestic owner holds 50% or
more shares of foreign entity;
2004: FDI into OECD-member countries or
countries which has agreement on mutual
investments with Kazakhstan required to
register in NBK if domestic owner holds
50% or more shares of foreign entity;
2005: NBK registration required if FDI excess
$10 000 except banks which are to notify
NBK ex post.
NBK ex post.
NBK ex post.
Kyrgyzstan
1997: No restrictions to FDI;
1997: No restrictions to FDI.
2000: All FDI enterprises must be registered
in Ministry of Justice and statistical
agencies;
2007: Acquisition of more than 10% of bank`s
shares is to be approved by NBKR;
Legal entities not engaged in financial
entities cannot own more than 20% of
bank`s shares.
165
Appendices
Appendix 1 (continued)
Changes in FDI Flow Regulations
Regulations on Inward FDI
Regulations on Outward FDI
Tajikistan
1996: Inward FDI are required to register with
the Ministry of Finance;
1996: NBT approval is required;
2003: NBT approval is required;
Turkmenistan
1996: FDI by juridical persons are permitted
to all sectors with the authorization
from MFER/State Service for Foreign
Investments; FDI of over $500 000
requires approval by Cabinet of
Ministers; Foreign participation in JV is
limited to 49%;
1996: Outward FDI require approval;
2009: No restrictions on investments by legal
entities; Investors are required to
register in MED.
Uzbekistan
1996: Enterprises may establish Joint
Ventures as FDI with approval of
Ministry of Justice; Foreign equity is
allowed up to 100%; Enterprises with
30% of FDI are subject to fiscal
incentives;
1997: Outward FDI require approval;
2000: Enterprises established abroad must be
registered with Ministry of Foreign
Economic Relations;
2002: Foreign Investment Enterprises (FIE)
2002: Investors may establish enterprises abroad
may be established with registration in
upon decision of legal entity`s top
Ministry of Justice; FIE status is
management body; Ministry of Foreign
provided if authorized capital of
Economic Relations must be notified;
enterprise is at least $150 000, one of
participants is foreign legal entity, and
the share of foreign partner is over 30%
(FDI that cannot meet these conditions
can be registered in local authorities
(2006).
166
Appendices
Appendix 2
Changes in Portfolio Investment Flow Regulations
Regulations on Inward
Portfolio Investments
Regulations on Outward
Kazakhstan
1997:All transactions require registration with
NBK or approval by NSC (National
Securities Commission);
1997: Approval or license by NBK or NSC is
required for all transactions;
2001: Sale by non-residents of foreign
corporate securities to residents require
NBK license, and further trades are
subject to a clearance procedure, other
securities require approval by NBK;
Bonds of IFI do not require clearance;
NBK license, further trade between
residents require NBK authorization
except securities with high ratings;
2003: Purchases by non-residents in excess of
$100 000 require registration with NBK
except those effected through resident
NBK license except those effected
broker companies;
through resident broker companies,
further trade between residents require
NBK authorization except securities
with high (A,A2) ratings;
2005: Purchases by non-residents in excess of
2005: Purchase abroad or sale by non$300 000 require registration with NBK
residents of foreign corporate securities
except those effected through resident
to residents 1) by banks as dealers and
banking institutions, which notify NBK;
2) matches law requirements do not
require NBK license;
2005: Purchase abroad or sale by nonresidents of foreign shares to residents –
banks, insurance companies, pension
funds managers, and pension saving
funds; and 2) it is considered a FDI
(over 10%) but less $10 000 not require
NBK registration;
2007: Resident must notify on transactions not
considered FDI that exceeds $50 000
(non-residents` securities) and $300 000
(residents` securities); Issue/sale abroad
(residents` securities); Issue/sale locally
requires permit; Purchase locally is
requires authorization process; Purchase
subject to controls;
abroad is subject to controls;
(residents` securities);
(residents` securities);
2011: No restrictions on purchases by nonresidents.
2000: Purchases/Issue in excess of $100 000
require registration with NBK; except
capital market securities other
transactions require prior approval by
NBK; Money market instruments are
subject to registration/licensing if they
considered as securities;
167
Appendices
Kyrgyzstan
1997: Control is exercised by the National
Securities Market Commission
(NKRTsB); all transaction must be
registered or reported;
1998: NKRTsB must be informed if 5% or more
of stock shares purchased locally by nonresidents; Purchase of government
treasury bills must be reported to NBKR;
Derivatives not regulated due to their
absence;
1997: Control is exercised by the National
Securities Market Commission
(NKRTsB); all transaction must be
registered or reported;
1998: same regulation as purchase locally by
non-residents;
2000: No restrictions on purchase abroad by
residents;
2005: Purchase of bank`s shares exceeding 20%
requires approval by NBKR;
2007: Acquisition of 50% or more shares of
company may be effected according to
Law; Acquisition of 10% or more shares
require approval by NBKR; Legal entities
not engaged in financial activities may not
own more than 20% of banks` shares;
2008: No restrictions on sale/issue abroad by
residents; no restrictions money market
instruments transactions;
2008: no restrictions money market
instruments transactions;
2009: Insurance companies may not invest
more than 20% of insurance reserves;
investments in foreign exchange assets
may not exceed 10% of insurance
reserves; investment funds are not
permitted to invest more than 15% of
their net assets in securities of single
issuer;
168
Appendices
Tajikistan
1996: All transactions require approval by NBT;
1998: Purchases of 10% shares by non-residents
require NBT and MOF approval;
purchases among shareholders are
restricted; Only juridical persons may
issue shares abroad with registration with
MOF and approval of NBT;
2001: MOF approval required for purchase of
10% shares; NBT must be notified on
purchase of over 5% of shares of banks,
and NBT approval required for purchase
of over 20% of shares of banks;
2003: NBT approval is required when
instruments are considered as securities
(over 180 days);
1996: All transactions require approval by
NBT;
1998: Sale of money market instruments by
non-residents is permitted;
2003: Residents may purchase money market
instruments from non-residents only
with NBT approval; NBT approval is
required when instruments are
considered as securities (over 180
days);
2006: Sale or issue locally by non-residents
require NBT approval;
2008: NBT must be notified on purchase of over
5% of shares of banks, and NBT approval
required for purchase of over 20% of
shares of banks;
2009: Notification of NBT required for all
transaction on increase of share to 10%,
20%, 33%, 50%, or 75%. NBT approval
is required when instruments are
considered as securities (over 1 year);
2009: NBT approval is required when
instruments are considered as securities
(over 1 year);
Turkmenistan
1996: All inward capital transfers are subject to
CBT and MEF approval; the market for
derivatives do not exist.
1996: All outward capital transfers are subject
to CBT and MEF approval; the market for
derivatives do not exist.
169
Appendices
Uzbekistan
1996: All inward capital transfers are subject to
controls;
1996: All outward capital transfers are subject
to controls;
2002: Sale/issue of securities of foreign
issuers are based on annual quotas;
Purchase abroad by residents is
governed by special regulations;
2006: According to new law on Foreign
exchange regulation circulation of
securities in foreign currency, acquisition
by residents of securities in foreign
currency, and acquisition by non-residents
of securities issued by residents are
regulated by state authority for regulation
and coordination of securities market with
CBU;
2006: According to new law on Foreign
exchange regulation circulation of
securities in foreign currency,
acquisition by residents of securities in
foreign currency, and acquisition by
non-residents of securities issued by
residents are regulated by state authority
for regulation and coordination of
securities market with CBU;
2008: Non-residents may purchase for foreign
currency any securities permitted for
circulation in Uzbekistan unless their term
of issue prohibits holding them by nonresidents; Government may establish
quotas (permission procedure) on sale
abroad by residents based on international
commitments;
Resident commercial banks and legal
entities may hold certificates of deposit.
Resident legal entities may be dealers in
the short-term government bonds market
and may hold bonds. Medium-term
government treasury bonds are placed
among resident commercial banks and
legal entities that can be used for
collateralization of loans, and for
repo/reverse repo transactions.
2008: Issuance and sale of securities are
subject to registration; General rule,
quotas and procedure for permitting is
established by government; Securities
purchased by non-residents may be sold
in exchange market and over-thecounter market; there is no restriction
on the purchase securities abroad, At
the time when institutional investors
may purchase securities in amounts
established by laws;
Resident commercial banks and legal
entities may hold certificates of deposit.
Resident legal entities may be dealers in
the short-term government bonds
market and may hold bonds. Mediumterm government treasury bonds are
placed among resident commercial
banks and legal entities that can be used
for collateralization of loans, and for
repo/reverse repo transactions.
170
Appendices
Appendix 3
List of Sequenced International Financial Liberalization Index Components
1) Current account balance transactions
2) Multiple exchange arrangements
3) Capital market: purchase locally by nonresidents
4) Capital market: sale or issue abroad by residents
5) Capital market: sale or issue locally by nonresidents
6) Capital market: purchase abroad by residents
7) Money market: purchase locally by nonresidents
8) Money market: sale or issue abroad by residents
9) Money market: sale or issue locally by nonresidents
10) Money market: purchase abroad by residents
11) Collective investment securities: purchase locally by nonresidents
12) Collective investment securities: sale or issue abroad by residents
13) Collective investment securities: sale or issue locally by nonresidents
14) Collective investment securities: purchase abroad by residents
15) Derivatives and Other Instruments: purchase locally by nonresidents
16) Derivatives and Other Instruments: sale or issue abroad by residents
17) Derivatives and Other Instruments: sale or issue locally by nonresidents
18) Derivatives and Other Instruments: purchase abroad by residents
19) Commercial credits: to residents from nonresidents
20) Commercial credits: by residents to nonresidents
21) Financial credits: to residents from nonresidents
22) Financial credits: by residents to nonresidents
23) Guarantees, sureties, and financial backup facilities: to residents from nonresidents
24) Guarantees, sureties, and financial backup facilities: by residents to nonresidents
25) Inward Direct investments
26) Outward Direct investments
27) Controls on liquidation of direct investments
28) Real estate transactions: purchase locally by nonresidents
29) Real estate transactions: purchase abroad by residents
30) Real estate transactions: sale locally by nonresidents
31) Provisions specific to commercial banks: Nonresident deposits
32) Provisions specific to commercial banks: Borrowing abroad
33) Provisions specific to commercial banks: Deposits abroad
34) Provisions specific to commercial banks: Foreign loans
35) Personal capital movements: to residents from nonresidents
36) Personal capital movements: by residents to nonresidents
37) Provisions specific to institutional investors: limits (max) on securities by nonresidents
and on portfolio invested abroad
38) Provisions specific to institutional investors: limits (min) on portfolio invested locally
171
Appendices
Appendix 4
IMF De Facto Classification of Countries’ Monetary Frameworks
Categorization of Monetary Frameworks
Exchange rate anchor - the monetary authority buys or sell foreign exchange to maintain
the exchange rate at its predetermined level or within a range. The exchange rate thus
serves as the nominal anchor or intermediate target of monetary policy.
Monetary aggregate target - the monetary authority uses its instruments to achieve a
target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the
targeted aggregate becomes the nominal anchor or intermediate target of monetary
policy.
Inflation-targeting framework - This involves the public announcement of numerical
targets for inflation, with an institutional commitment by the monetary authority to
achieve these targets, typically over a medium-term horizon. Monetary policy decisions
are often guided by the deviation of forecasts of future inflation from the announced
inflation target, with the inflation forecast acting (implicitly or explicitly) as the
intermediate target of monetary policy.
Other monetary framework - The country has no explicitly stated nominal anchor, but
rather monitors various indicators in conducting monetary policy. This category is also
used when no relevant information on the country is available.
Source: IMF (2011), “Annual Report on Exchange Arrangements and Exchange Restrictions”,
172
Appendices
Appendix 5
IMF De Facto Classification of Countries’ Exchange Arrangements
Categorization of Exchange Rate Arrangements
No separate legal tender – this category involves confirmation of the country
authorities’ de jure exchange rate arrangement. The currency of another country
circulates as the sole legal tender (formal dollarization). Adopting such an arrangement
implies complete surrender of the monetary authorities’ control over domestic monetary
policy.
Currency board - this category involves confirmation of the country authorities’ de jure
exchange rate arrangement. A currency board arrangement is a monetary arrangement
based on an explicit legislative commitment to exchange domestic currency for a
specified foreign currency at a fixed exchange rate, combined with restrictions on the
issuance authority to ensure the fulfillment of its legal obligation.
Conventional peg - for this category the country formally pegs its currency at a fixed
rate to another currency or a basket of currencies, where the basket is formed. There is
no commitment to irrevocably keep the parity, but the exchange rate may fluctuate
within narrow margins of less than ±1% around a central rate—or the maximum and
minimum values of the spot market exchange rate must remain within a narrow margin
of 2% for at least six months.
Stabilized arrangement - classification as a stabilized arrangement entails a spot market
exchange rate that remains within a margin of 2% for six months or more (with the
exception of a specified number of outliers or step adjustments) and is not floating. The
required margin of stability can be met either with respect to a single currency or a
basket of currencies, where the anchor currency or the basket is ascertained or
confirmed using statistical techniques.
Crawling peg - classification as a crawling peg involves confirmation of the country
authorities’ de jure exchange rate arrangement. The currency is adjusted in small
amounts at a fixed rate or in response to changes in selected quantitative indicators,
such as past inflation differentials vis-à-vis major trading partners or differentials
between the inflation target and expected inflation in major trading partners.
173
Appendices
IMF De Facto Classification of Countries’ Exchange Arrangements
Categorization of Exchange Rate Arrangements
Crawl-like arrangement - for classification as a crawl-like arrangement, the exchange
rate must remain within a narrow margin of 2% relative to a statistically identified trend
for six months or more (with the exception of a specified number of outliers), and the
exchange rate arrangement cannot be considered as floating.
Pegged exchange rate within horizontal bands - classification as a pegged exchange
rate within horizontal bands involves confirmation of the country authorities’ de jure
exchange rate arrangement. The value of the currency is maintained within certain
margins of fluctuation of at least ±1% around a fixed central rate, or a margin between
the maximum and minimum value of the exchange rate that exceeds 2%.
Other managed arrangement - this category is a residual and is used when the exchange
rate arrangement does not meet the criteria for any of the other categories.
Arrangements characterized by frequent shifts in policies may fall into this category.
Floating - a floating exchange rate is largely market determined, without an
ascertainable or predictable path for the rate. Foreign exchange market intervention may
be either direct or indirect and serves to moderate the rate of change and prevent undue
fluctuations in the exchange rate, but policies targeting a specific level of the exchange
rate are incompatible with floating.
Free floating - a floating exchange rate can be classified as free floating if intervention
occurs only exceptionally and aims to address disorderly market conditions and if the
authorities have provided information or data confirming that intervention has been
limited to at most three instances in the previous six months, each lasting no more than
three business days.
174
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YAPONIYA TA’LIM, MADANIYAT, SPORT, FAN VA
TEXNOLOGIYALAR VAZIRLIGI
KYUSHU UNIVERSITETI
Qo’lyozma huquqida
Karshibayev Jasur Hazratkulovich
MARKAZIY OSIYO MAMLAKATLARIDA
IQTISODIY RIVOJLANISH VA
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08.00.07 – Moliya
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И МЕЖДУНАРОДНАЯ ФИНАНСОВАЯ ТРИЛЕММА
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