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> Home > Document Library > Committee Reports > 2002 Annual Session > AV 188 EC/EW(02)4 - Report of the Sub-Committee on East-West Economic Co-operation and Convergence. 'Economic and political challenges in Central Asia'
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Report of the Sub-Committee on East-West Economic Co-operation and Convergence. 'Economic and political challenges in Central Asia'
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Rapporteur : Harry COHEN (United Kingdom - Royaume-Uni)
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TABLE OF CONTENTS (Page)
I. INTRODUCTION 1
II. HISTORICAL BACKGROUND 2
III. KAZAKHSTAN 6
IV. THE KYRGYZ REPUBLIC 9
V. TAJIKISTAN 11
VI. TURKMENISTAN 13
VII. UZBEKISTAN 15
VIII. THE ROLE OF OUTSIDE ACTORS IN THE REGION 17
IX. CONCLUSIONS AND RECOMMENDATIONS 19
I. INTRODUCTION
1. Until recently, the five countries of Central Asia-- Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan--have not garnered a great deal of Western attention. At the onset of the Soviet Union's break up, the West was far more concerned with events in other former Soviet Republics like Ukraine, the three Baltic countries, Belarus and of course Russia itself. Even in the Caucuses, which to many seemed remote indeed, the combination of grave instability and energy reserves attracted more Western attention. Central Asia, however, has languished in relative isolation and obscurity despite the serious problems the countries of the region confront. Of course, that isolation was hardly complete; several countries in the region were admitted to the OSCE and NATO's Euro-Atlantic Partnership Council, and both Kazakhstan and Turkmenistan were recognised as emerging players in global energy markets. But for the most part, Western governments neglected the region although there were concerns about its poverty and insufficient foundation in democratic governance and human rights protection.
2. The terrorist acts of 11 September, however, dramatically shifted the Western perspective on Central Asia. There is now a growing sense that if engagement in the region long seemed to bear a daunting price tag, neglect has proved even more costly. One country in the region, Afghanistan, wracked by twenty years of war first with the Soviet Union and then with itself, became a haven for a global terrorist network responsible for the attacks on New York and Washington. A Taliban government dedicated to waging Jihad and the presence of terrorist networks willing to globalize that Jihad had profound implications for Afghanistan's neighbours, the United States and the international community.
3. With an American-led force having successfully conducted military operations against Al Qaeda and with Western troops now deployed in the region, Central Asia is now attracting far greater international attention. Increased scrutiny, however, is not inspiring a high degree of confidence in these successor states. Their problems are indeed daunting, although one must avoid excessive generalisation. Indeed, important differences exist among the region's countries. Nonetheless, to varying degrees, poverty, political instability, ethnic rivalry, authoritarianism, corruption, the lack of openness, terrorism, the harsh legacy of Soviet domination, and geographical isolation have gravely complicated a transition process that is still in its early phases. At the same time, however, the region is also assisting the global coalition in the anti-terrorist struggle, hosting Western military bases, and supporting humanitarian efforts in Afghanistan.
4. Because of events following the 11 September attacks, Central Asia is finally attracting significant Western attention. Its governments now have an opportunity to utilise these newfound contacts with the West to improve the security landscape and hasten political and economic development. These are, of course, related phenomena. Indeed, Central Asia's economic advancement is critical to bolstering security in that remote region, but so too is greater democracy and improved human rights protection. Without improvement on all these fronts, Western governments and businesses are likely to find it increasingly difficult to work with the region's governments. Yet, several of those governments seem profoundly uncomfortable with this notion, and some ruling elites use the purported absence of a democratic culture to justify undemocratic practice. Democracy, however, is only built through its practice. It is in the interest of the people of Central Asia as well as Western businesses and governments operating there that democratic practice be given a chance to take root.
5. This report provides a broad overview of key political and economic features, trends and challenges in each of the five Central Asian countries. The purpose here rather is to present both a broad overview of the economic and political trends in the region and provide a snapshot of the specific challenges each of the five countries face. Over the last decade, this sub-committee has assessed various aspects of economic transition in Central and Eastern Europe. The challenges Central Asia confronts are, by comparison, significantly more daunting. This report should thus help build a foundation to begin to consider the West's evolving relationship with this long neglected but important region and identify those areas where Western engagement can make a difference.
II. HISTORICAL BACKGROUND
6. The countries of Central Asia share a number of common historical experiences, which while not necessarily uniting them, nonetheless result in important similarities. The region as a whole was relatively impoverished under Soviet rule, with per capita incomes ranging from 50% of the Soviet average in Tajikistan to 90% in Kazakhstan. Other social indicators including life expectancy, infant mortality, health facilities and housing conditions were much worse. ("Economic Reforms in Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan," IMF paper, www.imf.org.)
7. Independence and transition brought even greater hardship as living standards and per capita income have generally plunged over the past decade. The Soviet system bequeathed the region a host of grave economic problems that none of its governments have been able to surmount. Within the Soviet Union's highly centralised command system, the Central Asian Republics had very little autonomy and were utterly dependent upon centrally planned inputs, subsidies, Russian managers, scientists and technocrats and the markets that Soviet rule guaranteed. The system's disintegration simply eviscerated many of those old links and countless skilled ethnic Russians, Jews, Germans and others fearing political and economic marginalisation, emigrated to Russia.
8. The rulers of the five Soviet Republics initially ranked among the most committed opponents first to Gorbachev's Perestroika and Glasnost and to the Union's ultimate break-up. The need to preserve economic ties to their large neighbor to the north inspired these concerns as did an almost morbid fear of the consequences of opening up tightly controlled economic and political systems. An unexpected consequence of Glasnost in Central Asia was the resurgent expression of the Islamic faith. This, in turn, provided fertile soil for political opposition to the old apparatchik clinging to power after the Soviet Union's downfall. In fact, the Soviet rulers had never managed to quash Islam, which they saw as backward and fundamentally anti-revolutionary. Soviet oppression simply pushed Islamic practices below the radar screen, while local Soviet officials tacitly tolerated the discreet practice of the faith. The end of Soviet control, however, triggered a phenomenal building boom in village mosques, which physically expressed a revival in Islamic consciousness. The Soviet war in Afghanistan only hastened that revival, and many young Central Asians fighting for the Red Army returned from Afghanistan with a respect for the Mujahedeen's tenacious campaign and the Islamic values that had inspired them. The war had helped raise the Islamic consciousness of those who would eventually take arms against the successor states of Central Asia. At the same time, radical groups operating out of Afghanistan, Pakistan and the Arab world exploited pervasive alienation, the quest for identity and a growing Islamic consciousness to win recruits to Jihad-oriented networks. (See Ahmed Rashid, Jihad: The Rise of Militant Islam in Central Asia, Yale University Press, 2002.)
9. Although Central Asia's post-Soviet leaders moved quickly to lay the foundations of sovereign states, and in some cases, to create ostensibly democratic forms where none before had existed, they nonetheless borrowed heavily from the old Soviet model. Democracy in the Western sense is not apparent, although the Kyrgyz Republic has made some strides in this direction while Tajikistan has at least brought the representative of former Islamic rebels into the government. But the exercise of power has tended to be highly personalised and concentrated in the hands of the region's presidents. Moreover, the political class in many of these countries is almost uniformly shaped in the image of the old Soviet apparatchik, ill-disposed to the practice of democracy, unwilling to share power in any meaningful way and given to employing authoritarian methods behind the paper-thin veneer of semi-"democratic" institutions. Human rights abuses are widespread as is corruption. In several countries, the rulers seem more content with controlling a large share of the economy rather than helping it grow.
10. One problem is that these governments lack modern ideological foundations. Soviet Marxism essentially exhausted its appeal, and successor states have not elaborated dynamic ideological frameworks to fill the void. The Uzbek regime, for example, has reached back to the 14th century empire of Amir Temur in its quest to endow itself with a legitimate foundation. But, at times, it uses the past in ways that would seem perfectly familiar to those who lived under Soviet rule. Democracy is only paid lip service; ruling elites want no power sharing, and are thus hard pressed to build public loyalties to their regimes. This has resulted in chronically weak states and opened a wide gulf between the region's rulers and people. (Charles Fairbanks, "Ten Years after the Soviet Break-up: Disillusionment in the Caucuses and Central Asia," www.sais-jhu.edu/casa/cybercaravan/) The lack of genuine grass roots democracy, pervasive repression, the dominance of individual leaders in controlling party and state machinery, and the absence of a genuinely free press have dramatically narrowed political outlets in these societies and undermined regime legitimacy.
11. The region's judicial systems are largely inadequate. Judges are not independent, juries are often non-existent and prosecutors are too powerful. In some countries there are no possibilities for acquittal and lenient judges frequently lose their jobs. Western donors have recognised the problem and are working with the region's governments to improve the situation. In Uzbekistan, for example, the American Bar Association, with the financial support of the British government, is supporting the introduction of a trial transcription system. But the lack of court transcripts is but a fraction of a much larger judicial problem.
12. In Uzbekistan and Turkmenistan, the Soviet Republic's party structure even at the neighbourhood level remains largely intact. The governments of these two countries have hardly consented even to outward forms of democracy and market-based transition. In these two cases, strong Presidents head states in which the capacity of local government officials to exercise power autonomously is utterly limited. In the weaker states of the region, local officials have license to rule, oftentimes in a capricious and overtly venal fashion. Uzbekistan's and Turkmenistan's Presidents govern with such iron hands that "unauthorised" corruption carries with it great risk. Thus, in the words of the American expert Charles Fairbanks, "To be an Uzbek or Turkmen is to give up all freedom, but to belong to a state capable of furnishing order and protection." (Charles Fairbanks, "Ten Years after the Soviet Break-up: Disillusionment in the Caucuses and Central Asia," www.sais-jhu.edu/casa/cybercaravan).
13. Fairbanks also points out that the repressive order offered by the two strongmen of Central Asia is increasingly undermined by state repression of the Islamic oriented opposition. Leaders have used the existence of indigenous and external Islamic terrorist movements to justify the crackdown. But in so doing, they have indiscriminately targeted all manner of Islamicists, including many groups that explicitly renounce violence to achieve their ends. Wedged between two radical Islamic regimes, Iran and Afghanistan, and ideologically wedded to the Soviet Union's jaundiced view of political Islam, Central Asia's leaders viewed Islamic revival with great suspicion and exaggerated the threat to increase their own authority. In so doing, they have helped make the case of their opponents.
14. In the mid-1990's, Tajikistan plunged into a civil war in which a broad Islamic front sought to overthrow the communist regime. That catastrophic civil war, in turn, galvanised the four other Central Asian countries to clamp down on Islamic groups-a set of policies that only invigorated Islamic revival and redoubled public discontent with these regimes. Tajikistan's civil war only ended when the combatants struck a power-sharing accord that offers a foundation for broadening the government's legitimacy.
15. The Islamic Movement of Uzbekistan (IMU), which enjoyed close links with the Taliban and Al-Qaeda, has posed a substantial threat to regional security. Although initially dedicated to the overthrow of the Uzbek regime, before long it extended its ambitions to the creation of a pan-Central Asian caliphate structured on Sharia law. The IMU has operated from strongholds in the mountains of Tajikistan and Afghanistan while building networks of sleeper cells throughout the Ferghana Valley, at the intersection of the Kyrgyz Republic, Tajikistan and Uzbekistan. Uzbekistan has routinely pressured its neighbours to crack down on Islamic movements in their own countries, but this, in itself, hardly diminished the problem as repression only alienated more of the public.
16. Yet the challenge the IMU posed was serious and the region's governments had every right to be concerned. Not only was it actively engaged in terrorism, it also became a major player in the Afghan heroin market. Allegedly more than half of Afghanistan's opium exports course through Turkmenistan and Tajikistan with IMU protection, and the IMU also controlled much of the opium passing through the Kyrgyz Republic. (Svante E. Cornell and Regine A. Spector, "Central Asia: More than Islamic Extremists", The Washington Quarterly, Winter 2002, pp.193-206.) Although the Taliban's defeat has gravely weakened the IMU, poppy production has soared in Afghanistan. Central Asian governments thus continue to require greater Western assistance to deal with a very serious drug smuggling problem with global implications.
17. Other barriers to development in Central Asia include a managerial class inculcated in Soviet methods and attitudes, arbitrary tax policy and poor tax collection methods, undeveloped banking systems incapable both of aggregating savings and lending to potentially dynamic enterprises, and inadequate economic regulation. As long as the region's political leaders are reluctant to engage in a genuine dialogue with their societies while undertaking regulatory reform, it is unlikely that these challenges will abate.
18. Nor has the external environment been helpful. Russia remained a critical market for all five successor Republics, but its financial crisis in August 1998 dramatically reduced its foreign exchange holdings and weakened its capacity to finance imports from Central Asia. Foreign investment in the region, already at a low level, plunged further as a result. The most important exceptions were investments in the oil and gas sectors, particularly in Kazakhstan and, to a lesser extent in Turkmenistan. Here the reward/risk ratio was evidently higher than in other industries. Not surprisingly, Kazakhstan has managed to attract the lion's share of foreign direct investment (FDI) in the years since independence; indeed it has been the third highest beneficiary of such investment among former Soviet-bloc countries after Poland and Hungary. (S. Frederick Starr, "The Investment Climate in Central Asia," www.sais-jhu.edu) Mining too was an important industry under Soviet rule and has also attracted some foreign capital. But investment rates in other industries have been woeful, and if anything, disinvestment has posed a critical problem.
19. Dependence on Moscow made it even more difficult for these Republics to develop the kinds of institutions they would need to manage and finance trade, regulate financial and commercial markets and oversee national currencies. Soviet authorities had actively discouraged regional economic cooperation and left few intra-regional cooperative and commercial links in place. For all intents and purposes, the Kremlin had mediated the republics' relations with each other. Not surprisingly it has proven difficult to vivify regional links after 70 years of neglect. The problem has been exacerbated by intra-regional tensions over water rights, territorial disputes and border conflicts. The governments of the region have recognised the challenge, at least theoretically, and all but Turkmenistan have joined the Central Asian Economic Community (CAEC). Last June, those four states established a two-year program to create a single economic space while Kazakhstan, the Kyrgyz Republic, and Tajikistan have agreed to create a free trade zone. Border disputes are now being resolved and over the past three years, for example, Uzbekistan and Kazakhstan have managed to delineate 96% of their common 2440 km border. (Kazakhstan News Bulletin, September 16, 2002.)
20. Despite such progress, moving goods across the region's borders poses a tremendous challenge, due in part to customs corruption, as well as to security problems in border regions. (Daniel Kaeser, "Economic Transition in Central Asia: The Lack of Common Sense," http://www.csend.org/) The land mining of Uzbekistan's borders in and around the Fergana valley, a government effort to block the terrorist Islamic Movement of Uzbekistan (IMU) from crossing into Uzbekistan from Tajikistan, has had the side effect of discouraging all manner of commercial and human exchanges in a region that was once economically unified and needs to be again in order to sow the seeds of economic recovery. Western governments are looking at technical solutions to help Uzbekistan maintain border security without landmines.
21. Making matters worse, has been the persistence of inefficient state controls on national economies and a pattern of privatisation that, in several countries, has been more akin to a series of asset seizures than an orderly sale of state property. This has only widened the gulf between elites and the public and has done virtually nothing to nurture a modern managerial cadre. Rather, it has entrenched an old nomenklatura steeped in restricted and corrupt Soviet-style thinking, while raising a high entry barrier for other potentially more effective market players, although not for certain organised criminal groups that typically flourish in such conditions. The public sector in all these countries is large, poorly organised and a general hindrance to market development. Maintaining such large bureaucracies imposes a terrible financial burden as well, and despite international lending efforts, public deficits, with the clear exception of Kazakhstan, have tended to worsen. Representatives of the region's governments recognise these problems and point to formal legal changes designed to deal with them. But according to independent observers, there is a large gap between the legal code and practice. (Meetings of Rapporteur with Central Asian embassy officials and academics from the University of London, September 2002.) This has made it very difficult to encourage honest and transparent business practices.
22. The region also faces daunting environmental problems. The Soviet government constructed massive mining and metallurgy complexes throughout Central Asia that polluted the ground, air and water. The obligatory cultivation of cotton in arid plains under Soviet rule caused chronic water shortages in certain Central Asian regions and is largely responsible for the catastrophic shrinking of the Aral Sea. The Soviets used an island in that Sea to dump materials for biological weapons, and there are grave concerns that these stockpiles are not properly secured. The waters of that sea as well as the dust from what was the seabed are highly polluted and now constitute a serious health hazard to the region's population. ("Central Asian Environmental Problems," United Nations Environmental Program Website, http://www.grida.no/.) In the Kyrgyz Republic, radioactive waste from uranium plants is stockpiled without adequate protection and now risks polluting the rivers in neighbouring Uzbekistan while posing security problems for the rest of the world. Frequently, water and gas distribution is not metered and this does nothing to encourage much needed conservation.
23. As suggested above, legal reform throughout the region has also been slow. Even when governments formally embrace reforms, implementation is highly problematic. Conflicting advice given by the international donor community has created a patchwork of American, British, continental and Soviet-era legislation, little of which can be practically implemented. One former IMF official recently suggested that it is very difficult to convince judges to enforce laws protecting private property and governing bankruptcy both because these are unfamiliar concepts and because the laws on the books are opaque. In such a legal limbo, administration tends to be arbitrary and often unfair. Governments tend to stress the reform laws that have been adopted but are far less comfortable exploring their real impact. (Daniel Kaeser, "Economic Transition in Central Asia: The Lack of Common Sense," http://www.csend.org/)
24. Declining public infrastructure and plunging social welfare benefits have been an inevitable result of economic decline. Poverty, in the many ways one can measure it, has mounted dramatically in most of the region's countries. Wages have collapsed, public health expenditure has dried up and life expectancy rates are falling. One study in 1998 suggested that Tajiks are consuming 71 percent less meat and 45 percent less cooking oil than they did in 1991. Farm animals per household average less than half the 1991 figure. (Charles Fairbanks, "Ten Years after the Soviet break-up: Disillusionment in the Caucuses and Central Asia," www.sais-jhu.edu/casa/cybercaravan/index.htm). Again, Kazakhstan is the only country in the region to experience some improvements due to significant energy export earnings and inward investment, while Uzbekistan has managed to forestall decline by resisting painful but ultimately necessary reform. Adding yet more woe to the region has been a nearly continuous drought that began in 1999. In a region where millions earn their living off the land, this drought, exacerbated by intensive cotton production, the destruction of irrigation systems as a result of Tajikistan's civil war, and efforts to use water to pressure neighbours, have had serious consequences in a large swathe of Central Asia.
25. Although very high, unemployment has nonetheless lagged behind the startling falls in output, suggesting that labor and capital are still misallocated. Wages have fallen for most people, and growing activity in the black market only partly compensates for this. In Kazakhstan and Turkmenistan, oil wealth has enriched a very small ruling elite but has not qualitatively improved the welfare of the general public. (Ahmed Rashid, op. cit., pp.65-66.) Although the Kazakh government has created an oil trust fund for general public welfare, the management of that fund is nontransparent. (Rapporteur Discussions at the University of London, September 2002.) Throughout the region, shadow economies are not subject to taxation, and this has exerted yet more pressure on badly hamstrung public budgets. Collapsing company revenues, incomplete or corrupted privatisation, inflation and currency devaluation have only made matters worse.
III. KAZAKHSTAN
26. Kazakhstan is the largest and most prosperous of the Central Asian states. Because of its energy potential, it has enjoyed prodigious inflows of foreign capital and is already exporting significant amounts of oil and gas on world markets. Yet, the country has hardly benefited uniformly from the oil boom; oil wealth remains concentrated in the hands of a relatively small elite.
27. The former communist party leader, Nursultan Nazarbayev, has led Kazakhstan since its independence in 1991. Now in his third term, he has concentrated the country's wealth and power within a closed ring of family and friends. Nazarbayev maintains close ties with Russia and is the region's most dedicated supporter of the Commonwealth of Independent States (CIS). This is driven both by economic needs and government aspirations to retain a degree of loyalty among much needed skilled Russians. It has only partly succeeded in this. A significant number of Russians and Germans have emigrated. Yet, unlike other countries in the region, Kazakhstan has not been saddled with ethnic violence, although tensions exist. There was initially little support for Islamic extremism. This has changed though as public dissatisfaction and oppression have inspired some young Kazakhs to turn to militant forms of political Islam.
28. Kazakhstan occupies a strategically vital position, not simply because of its substantial energy reserves. For Russia, it serves as a buffer with the other less stable Central Asian republics. The 11 September attacks also elevated its importance in the eyes of the American defense establishment. In the wake of those attacks, President Nazarbayev offered the United States access to Kazakh military bases and air space for both military and humanitarian missions.
29. While Russia is still Kazakhstan's most important trade partner, supplying the republic with more than 51% of its imports and purchasing more than 20% of its exports, US oil companies are the principal investors. By the end of 2001, American firms had invested slightly more than US $4 billion in Kazakhstan or roughly 47% of total foreign direct investment (FDI). (Robinson, A., "Geopolitics and oil focus the spotlight on Central Asia," Financial Times, December 17, 2001.) Investment on this scale distinguishes Kazakhstan from its neighbors. While FDI between 1993 and 1999 totaled US$8.81 billion, in the first half of 2001 alone FDI rose by 90% to US$2.3 billion, of which US$1.7 billion was earmarked for the oil and gas sector. A number of international banks are operating in Kazakhstan and several are even engaged in retail banking. (Discussions with Ambassador of Kazakhstan to the United Kingdom, Erlan Idrissove, September 2002.)
30. These capital inflows, however, are more a reflection of Kazakhstan's energy potential than a ringing endorsement in the reigning business climate. The sanctity of contracts is an important concern among investors who have also complained that the tax environment is muddled and opens companies to arbitrary and unpredictable levies. Kazakh officials seem to have recognised some of the problems and are adopting new laws that could bring positive change.
31. Kazakhstan harbours enormous on-shore and offshore hydrocarbon assets. Proven reserves currently stand at 1.1 billion tons of oil (8 billion barrels), 1.8 trillion cubic meters of natural gas, and 34 billion tons of coal (Strategic Forecasting LLC, 2001, www.stratfor.com/CIS/). The Tengiz field is estimated to hold between 750 million and 1.125 billion tons of crude oil. Kashagan in the Caspian Sea could be the world's largest new oil field since Alaska's Prudhoe Bay, and some have calculated that it holds twice as much oil as Tengiz, as well as between 700 billion and 2 trillion cm of gas. Once the Kashagan field becomes fully operational, Kazakhstan could join the ranks of the world's top ten oil producers; the challenges lie in moving this oil to market and putting the revenue to use in developing the rest of the country. Needless to say, reserves on this scale have had a magnet-like effect upon foreign oil companies. Their presence in the country is likely to be of a long duration and potentially of great mutual benefit.
32. The Chevron-led TengizChevroil project represents the largest single foreign investment in Kazakhstan and is worth $US 20 billion. (Strategic Forecasting LLC, 2001, www.stratfor.com/CIS/) A joint venture between Chevron (50%), Mobil (25%), and Kazakhstan (25%) is developing the field's oil reserves. Italy's Agip will lead a consortium of nine companies to develop Kashagan, and drilling is expected to begin in 2002. Some government forecasters predict that by 2010 the country could have an annual output as high as 100 million tons. ("Kazakhstan banks on oil," The Petroleum Economist, November 26, 2001). Western oil executives are more cautious in their predictions, but they recognise that Kazakhstan will be an important player in global oil markets.
33. Until recently, the main obstacle to oil and gas development related to Kazakhstan's distance from blue ocean ports and its reliance on Russian pipelines to transport oil and gas to market. Transportation obstacles can obviously offset relatively low extraction costs. The November 2001 opening of the Caspian Pipeline Consortium (CPC) pipeline, which stretches from the Tengiz oil field in western Kazakhstan to the Russian Black Sea port of Novorossiysk, has improved the situation. The pipeline will initially transport 28 million tons oil annually, but is expected to increase its throughput to 67 million tons per year. This should lower transport costs to a third of rail transport costs. (Robinson, A., "Geopolitics and oil focus the spotlight on Central Asia," Financial Times, December 17, 2001). Turkey, however, will limit tanker traffic through the Dardanelles. Kazakhstan will also have an option to ship its oil through the Baku Cehan line; yet this will not be sufficient to accommodate all its needs. Iran may provide another alternative, but the United States strongly opposes this option. China offers yet another market but it would have to finance a very long and expensive pipeline to make the connection.
34. Significant oil discoveries oftentimes pose new challenges. One is the problem of the so-called enclave economy. In developing countries with large oil and gas reserves, the energy sector tends to employ relatively few people, particularly when refining takes place elsewhere. Enclave economies need to import many of the inputs for drilling, storing and transporting hydrocarbons. This can limit the positive impact on the rest of the country, depending on how the revenues are ultimately used. At the same time, the influx of foreign exchange earnings and investment can dramatically increase the value of the national currency and lead to so-called Dutch-disease-a phenomenon whereby oil export induced currency appreciation renders other nationally produced goods uncompetitive on world markets. These potential problems require very careful government management, and Kazak officials seem to be well aware of the problem. Kazakhstan's Central Bank, for example, has intervened in currency markets to offset the adverse effects of capital inflows. (Discussions with Ambassador of Kazakhstan to the United Kingdom, Erlan Idrissove, September 2002)
35. Apart from hydrocarbons, Kazakhstan also possesses large supplies of other minerals and metals. The mining sector is seriously undercapitalised. The machine-building sector, another pillar of the republic's economy under Soviet rule, is also plagued by capital shortages and managerial deficiencies. Kazakhstan was also an important agricultural producer in the Soviet Union, and remains one of the world's largest wheat exporters. But since 1992, the country's grain output has dropped precipitously due to badly implemented reforms and poor weather conditions. Inadequate storage facilities, antiquated and unreliable irrigation systems and aging machinery are all part of the problem. Agriculture's share of GDP has dropped from 23% in 1992 to 8.6% in 2000 although it remains the country's largest employer, and the third most important source of export revenue. (The Economist Intelligence Unit - Country Profile: Kazakhstan, http://db.eiu.com)
36. Industry's share of GDP shrank from a peak of 31% in 1992 to 22.5% in 1998, but the contraction has not been uniform. Oil and the semi-processed metals sectors obviously dominate industrial output, and both sectors are subject to fairly wide price fluctuations. These oscillations can destabilise other sectors. Kazakhstan's economy slowed sharply in 1998 with GDP declining by 2% due to the August financial crisis in Russia and falling oil prices. The government reacted by introducing trade barriers and devaluing its currency-a policy mix that proved unsustainable.
37. The most serious challenge for Kazakhstan, however, is corruption. Many outside observers are concerned that the President and his associates are not well prepared to use oil revenues effectively for national development. But according to numerous reports, corruption runs throughout the entire system and has burdened Kazakhstan's transition and the prospects for broader development.
38. The government has established a national fund from the royalties generated through oil concessions. The fund is ostensibly modeled on Norway's petroleum investment fund and will be used to invest in the country's future development. It can also be tapped for use as a budget stabiliser in a crisis. According to Kazakh officials, the Parliament has oversight responsibilities of this fund, but some independent observers have questioned the fund's transparency, suggesting that it is not clear how it will be used and who has final control over it. That President Nazabayev has twice dismissed parliament and that some characterise Parliament as a vehicle for patronage distribution among the country's powerful clans, raise questions about how this fund will be administered.
39. Structural and fiscal innovation has so far been inadequate to the task at hand. The state's reach is extensive as is corruption. Privatisation saw many firms sold to the cronies of President Nazarbayev, who also appears to be setting up a dynastic succession for his daughter Dariva Naz. (She has headed a huge media holding company and her husband is in charge of the internal security forces. (Ahmed Rashid, op.cit. p. 64.) High oil prices have partly softened the impact of inadequate reform.
40. There are some signs of improvement. Sound fiscal and monetary policies have succeeded in lowering inflation below 10% and budget and current account surplusses were forecast for 2001. Financial deepening is evident with rising domestic deposits, growth in reserves and falling external debt.
41. Kazakhstan's economic prospects are certainly the brightest in Central Asia. But its political outlook is less rosy. Nazarbayev and a narrow political elite rule this large country in an authoritarian manner that brooks little dissent. A legal opposition movement, "Democratic Choice for Kazakhstan" led by Galemzhan Zhakiyanov has been allowed to operate. Initially President Nazarbayev responded quite mildly to this challenge, but Zhakiyanov was recently arrested on criminal charges, and his case is now pending. At the end of the day, whether the government can come to terms with this opposition could determine the long-term political stability of the country and the success of its economic and political transition that will be critical to broader regional stability.
42. Freedom of expression, and media freedoms are severely limited in Kazakhstan. Human Rights Watch noted that in 2001, journalists, editors and members of the opposition critical of the government faced persecution, attacks and criminal charges. The government has resisted the opposition's calls for electoral reform, and a genuine opposition party, the Republicans, have suffered serious harassment including office raids and an inability to hold public rallies. (http://hrw.org) Amnesty International reported that although no official statistics on the death sentence were published in 2001, human rights groups report that at least 30 people were executed. (http://web.amnesty.org/) Kazakhstan has one of the highest rates of imprisonment in the world, and conditions are described as "horrific". In August 2002, unknown assailants attacked a journalist, Sergei Duvanov. Duvanov had been scheduled to address an OSCE meeting on human rights abuses in Kazakhstan. He received official notice of his invitation on the same day as the attack. Earlier in the year, the Kazakh government had detained Duvanov for his Internet postings about government attempts to silence journalists covering stories on corruption. (http://www.hrw.org) Members of Hizb ut-Tahir (HT), a non-violent but radical Islamic organisation that challenges the legitimacy of all the Central Asian governments have been arrested for their views. (http://hrw.org/)
IV. THE KYRGYZ REPUBLIC
43. The Kyrgyz Republic, which has a population of 4.8 million people, achieved its independence from the Soviet Union in 1991 under very adverse conditions. Its economy was already in tatters, and the new government was severely challenged to stem rapid economic contraction and rampaging inflation. Inflation rose to 1,200% in 1993 while industrial production fell precipitously. In 1994 the country adopted an IMF stabilisation program that involved significant privatisation and currency reforms. With the help of Western and international donors, President Askar Akayev, the region's only leader not to have inherited his position from Soviet times, implemented a stabilisation programme despite strong opposition from an entrenched Soviet era bureaucracy. The Kyrgyz Republic subsequently acquired a reputation as perhaps the most progressive and market-oriented of Central Asia's states. Public assets were privatised, a democratic government structure was adopted, and the inflation rate at the end of 2001 was 7.5-8%.
44. While production declines between 1991 and 1995 were severe, by mid-1995 recovery was underway, and exports had begun to rise. Growth in 1998 stood at only 2.1%, recovering to 3.6% in 1999 and 5.7% in 2000. Real GDP growth is expected to slow to 4% annually in 2002-03. In 1998, inflation reached 18% and then rose to 39.5%, resulting in substantial currency devaluation. That effectively ended the Som's standing as one of the most stable currencies of the CIS. (Strategic Forecasting, LLC, 2001, "The Kyrgyz Republic: The Economy - Global Connections", www.stratfor.com/CIS/countries/Kyrgyzstan).
45. Kyrgyz officials note that Russia remains a critical economic partner and Russia purchases significant amounts of gold and electricity. Political relations with Russia have improved markedly in recent years, and cooperation extends to the security sphere. (Discussions with Kanat Tursunkulov, First Secretary, Embassy of the Kyrgyz Republic, September 2002.) The country also remains dependent both on Uzbekistan and Kazakhstan for key supplies of oil, gas and coal while Uzbekistan, in turn, needs access to Kyrgyz water. Kyrgyz dependence has had important political consequences.
46. Due to the tenuous security situation in Afghanistan as well as the remote location of the Kyrgyz Republic, the government has had trouble attracting foreign investment, although investors have shown some interest in developing the country's hydroelectric generating potential, as well as its minerals, coal, metal mining and textiles industries. Foreign debt stood at $1.27 billion in 1999, the largest per capita debt in the region. The World Bank maintains that some 60% of the population lives in poverty. (Ahmed Rashid, op.cit, pp. 69-72)
47. The industrial sector contributes a mere 22% to GDP, and gold mining remains the most important national industry. With the exceptions of gold mining and textiles, the industrial sector has not experienced any meaningful growth over the past decade. This has only augmented the central importance of agriculture. (The Economist Intelligence Unit - Country Profile: Kyrgyzstan, http://db.eiu.com). The Kumtor gold mine, a joint venture between the Canadian firm Cameco and the Kyrgyz government, has attracted the largest share of direct foreign investment. That venture alone constituted 7% of GNP in 1999. Agriculture remains the largest sector and generates roughly 40% of GDP. Nearly half of agricultural output consists of grain, particularly wheat, the production of which is concentrated in the country's lower valleys. Live stock grazing is common in the higher valleys.
48. The Kyrgyz government has recognised that it must take strong measures to bolster the economy, compensate for the country's isolated location, and boost investment. It has adopted a ten-year poverty mitigation programme, initially focusing on privatisation and other structural reforms. To increase FDI, the government has introduced a new visa regime making it easier for foreigners to work in that country. In 2000, visa restrictions were eased for citizens of the US, Japan, Germany, Denmark, Spain, Italy and France. Last year this was extended to all "Schengen area" countries, as well as the United Kingdom, Switzerland and Canada. The country has also acceded to the WTO and consequently adopted a liberal trade policy. The effects of all this, however, have not been dramatic; regional tensions and the sheer distance to dynamic Western markets from this landlocked country are proving very difficult to overcome.
49. Another problem has been the government's reluctance to move more quickly to privatise state-owned business and its continued reliance on gold mining. This has left the entire economy vulnerable to gold price fluctuations. (The Economist Intelligence Unit - Country Profile: Kyrgyzstan, http://db.eiu.com) The country is also harmed by a dearth of reliable transportation links to move its goods to regional and global markets. Improving this situation is a clear priority of the government.
50. The European Bank for Reconstruction and Development (EBRD) has described the Kyrgyz Republic's public sector as very corrupt and has strongly endorsed a draft plan to eliminate redundant government jobs and install a wage structure designed to attract and retain skilled bureaucrats. The IMF is providing support for financial and banking reform. Nor has democratisation proceeded as quickly as it might have, even though the Kyrgyz Republic enjoys the reputation of being the most open society in Central Asia. Crushing poverty has bred discontent, and although open elections were held in 1996, mounting demands on the state have increased the temptation to respond with repression. Making matters worse has been Uzbek pressure to abandon tolerance and adopt tough policies against political Islam in its bid to squelch the IMU, which has even been particularly active in the Kyrgyz Republic according to their diplomats. Nevertheless the struggles against the IMU and HT have been used to justify all oppressive policies, not only in Uzbekistan but also throughout the region. The government has also confronted rising demands from the Russian minority, and there appears to be substantial tension between the majority Kyrgyz community and ethnic Uzbeks who live in and around the city of Osh. At the same time, China, which confronts a separatist movement in the far western province of Xinjiang, has pressured the government to crack down on the political activities of the Kyrgyz Uighur population.
51. Uzbekistan blocked oil and gas supplies to the Kyrgyz Republic in the spring of 1999 to hammer home its wish that the government crack down on political Islam. That embargo only ended when President Akayev began to arrest Islamic militants from HT and forced all mosques to register with the state. (Ahmed Rashid, op.cit. p. 70.) President Akayev also imprisoned his main rival for the presidency in 2000, and is now looking to hand pick his successor. (The Economist Intelligence Unit, Country Profile: Kyrgyzstan and Country Report: Kyrgyzstan, http://db.eiu.com). Officials justified the arrest as merely a matter of corruption; but corruption charges are selectively used throughout the region to squelch legitimate political opposition. (Rapporteur's discussions at University of London with Professors Alena Ledeneva and Bhavna Dave.)
52. As suggested above, the human rights situation in the Kyrgyz Republic has deteriorated since October 2000. Human Rights Watch has catalogued pervasive infringements on freedom of political expression, assembly, press, and religion in 2001(http://www.hrw.org), while Amnesty International drew attention to the country's continued use of the death penalty, with at least 10 death sentences passed in 2001. (http://web.amnesty.org/) A Human Rights Watch Fact Sheet claims that the government's post-11 September relations with the US "may have emboldened it, allowing it to suppress political opposition leaders without fear of diplomatic consequence". (http://www.hrw.org) Others counter that American officials are using their newfound leverage to support democratisation.
53. The opposition claims that the arrest of the MP, Azimbek Beknazarov, on 5 January 2002, was politically motivated. Officials have denied groups the right to freedom of assembly, most notably on 17 March 2002, at Kerben, when police opened fire on protesters, killing at least 5 people. In May 2002, an estimated 90 peaceful demonstrators were arrested in Bishkek, and later charged with "violating the public order". (http://www.hrw.org)
V. TAJIKISTAN
54. The mountainous country of Tajikistan is one of the poorest of the 15 former Soviet Republics-a condition rendered far worse as a result of a bitter five-year civil war between the Communist government and the opposition Islamic Renaissance Party. That war effectively suspended Tajikistan's economic and political transition and, among other things, resulted in the flight of over 200,000 ethnic Russians including many skilled technocrats. In 1997 the United Tajik Opposition (UTO) and the government of President Emomali Rakhmonov reached a peace agreement that resulted in the legalisation of opposition parties-a rare feat in this part of the world. But the agreement's implementation has been slow, the main opposition party remains politically marginalised and the government is still unable to ensure control over its entire territory.
55. Rakhmonov's government has failed to tackle widespread corruption and drug smuggling, and the government lacks the means to resist overt encroachment on its sovereignty. This leads to all manner of problems. The state is burdened with a restive Uzbek minority stirred up by an Uzbek government that detests the idea of power sharing with Islamic party representatives. The border with unstable Afghanistan is porous, and drugs and Islamic extremists have moved across it with ease. Criminal as well as political violence is common, Tajikistan's cooperation with the American war on terrorism and its recent accession to NATO's Partnership for Peace (PfP) program, however, are improving the security situation, particularly now that a new government sits in Kabul. Russia remains an active guarantor of Tajikistan's security, and has based its 201st army division there. But the country is loosening some ties with Russia somewhat by broadening its western links.
56. Six years of civil strife and the loss of Soviet markets and subsidies have dramatically weakened Tajikistan's economy. Roughly 80% of the population lives below the poverty line, per capita GDP is only US$1,140, and the birth rate is one of the highest in the world. Wealth remains concentrated in the hands of a narrow elite. Officially, unemployment stands at 5.7% although the real figure is probably around 25%. Inflation in 2000 was 40%, but has fallen since then. (The Economist Intelligence Unit, http://db.eiu.com). Growth rates have risen in recent years as a result of the war's end, increased private sector economic activity, strong cotton and wheat harvests and favorable terms of trade. In 2000 real GDP growth was 8.3%; yet, output was still 50% below that of 1990. (The Economist Intelligence Unit, http://db.eiu.com) Tajikistan remains dependent on international humanitarian assistance.
57. Tajikistan remains a largely rural society. Cotton is the country's most important crop, and under Soviet rule, Tajik farmers produced roughly 11% of the USSR's cotton. After 1991, however, production plunged due to the loss of traditional markets and the civil war. The contribution of the agriculture sector to the country's GDP has progressively declined over the past five years; yet, it remains central to the economy. In 2000, agriculture generated roughly 17% of GDP while employing 67% of the labour force. Silver, gold, uranium, and tungsten mines are still producing, although not in large quantities. A large aluminium plant is the country's most important single source of export revenue; yet, a decade after national independence, its output had fallen by 50%. (The Economist Intelligence Unit. http://db.eiu.com). Tajikistan has a very small oil industry, and natural gas reserves are just 200 billion cubic feet (Bcf). It produces a substantial amount of hydroelectric power, which accounts for 98% of the country's electricity production, and there is potential for substantial further development of that industry. (US Department of Energy - Tajikistan, www.eia.doe.gov/)
58. The net present value of Tajikistan's external debt is now estimated at 400% of GDP. Debt burden on this scale effectively means that the government spends the least of all Central Asian countries on health. The need to invest in poverty reduction is compelling. The lack of funding also has important implications for energy development. Despite a huge potential for hydropower, the country relies upon imports of gas and oil, which it cannot afford. Investment is thus critically needed in hydropower infrastructure.
59. Tajik authorities had initially mapped out a strategy to move the country from a command economy to a market system. The civil war, however, prevented much of the legislation from coming into force. The government has since laid out a new reform agenda, including measures to achieve macroeconomic stabilisation. In July 2001, the IMF awarded the government fairly high marks for complying with the terms of its three-year (1998-2001) poverty reduction programme. In agreeing to release a credit tranche worth US$8 million, the Fund pointed to the government's successful efforts to curb the fiscal deficit and reduce monetary growth. IMF officials, however, remain concerned about the slow pace of banking and agricultural sector reform, and have urged the government to give priority to external debt reduction. For its part, the World Bank has loaned the country US$50 million to underwrite a basket of structural reforms aimed at improving the investment climate. Last year, the EBRD announced a $13 million loan to support modernisation of the country's telecom network. In so doing, it doubled its commitment to that country (Starobin, P., "The Stans are seizing the day", Business Week, International Editions, Special Report: "The Muslim World in turmoil: Central Asia", Number 3753, pg. 36). Tajikistan must continue to implement the 1997 peace agreement to achieve stability, which in turn, is the key precondition for new foreign investment.
60. Human Rights Watch consistently characterises Tajikistan's human rights problems as very serious. Since the end of the civil war in 1997, the government has obstructed political opposition, severely restricted the media, and arrested citizens on religious grounds. Police and security forces are alleged to engage in systematic torture. (http://www.hrw.org) According to Amnesty International, at least 74 people were reportedly sentenced to death in 2001. (http://web.amnesty.org/) Political violence continues although the civil war has ended. Among prominent politicians assassinated in 2001 were the Deputy Interior Minister, a presidential adviser on foreign policy, and the Minister of Culture. The state owns and controls the only publishing house for newspapers, and the government monitors and "counsels" all news media. Critical journalists face harassment and arrest. (http://www.hrw.org) However, the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) noted a positive development in August 2002, when under intense international pressure, the government granted an independent news agency a radio licence. A report indicated that this could be the first step in a policy of media liberalisation. (http://www.irinnews.org) In 2001 the government arrested several members of the Islamic Revival Party (IRP), claiming they were members of HT. Repressive measures against members of HT increased with courts handing down sentences of up to 14 years imprisonment for charges such as inciting religious hatred and distributing anti-state literature. (http://www.hrw.org)
VI. TURKMENISTAN
61. Turkmenistan's President, Saparmurad Niyazov has fabricated a bizarre personality cult and used it to rule his country with an iron hand. In 1999 the Turkmen assembly (Majlis) "reelected" him to an indefinite term. Human Rights Watch considers Niyazov's regime to be "one of the most repressive and abusive governments in the world" ("Oil of freedom" The Economist, 11 April 1998. The country is non-aligned and neutral and maintains its distance from the other Central Asian republics. Niyazov has played no role in the CIS. Disputes over the share of gas and oil resources in the Caspian Sea have plagued his government's relations with Azerbaijan and Russia. (Economist Intelligence Unit , http://db.eiu.com). Along with Tajikistan, the country is one of the least developed and poorest of the former Soviet republics. Yet, it is endowed with vast natural gas reserves that could be a springboard to development. (Strategic Forecasting LLC, 2001, Turkmenistan: The Economy, www.stratfor.com/).
62. Gas production accounts for roughly three quarters of Turkmenistan's export earnings and between one-half and two thirds of GDP. The Energy Information Administration of the US Department of Energy ranks the country as the world's fifth largest producer of natural gas, and it holds 100 trillion cubic feet, or 11% of world gas reserves. (The Economist Intelligence Unit, http://db.eiu.com). Moving this gas to dynamic export markets remains a concern, and the long-term natural gas cooperation pact signed with Russia in early December 2001 will certainly help. In the past, Russia insisted that Turkmen gas could run through Russian pipelines only if it were subsequently sold to other CIS countries, several of which lacked the means to pay for it. As a result, by 2000, Turkmenistan was owed $1.5 billion for gas sold in the CIS.
63. The government also hopes to supply gas through new pipelines to Turkey, Europe, Pakistan and India and even to central and coastal China. There are serious economic and political difficulties with all of these projects, and moving this abundant asset to market will not be easy for a government that has some difficulty in formulating pragmatic policies of any kind. Regime change in Afghanistan might eventually make it possible to build gas pipelines from Turkmenistan to Pakistan. However, no investors will leap at a project on this scale until they can be assured that regional peace is sustainable. The problem with the Turkish gas market is that it will be saturated if one or two of the proposed pipelines are built. The sense is that the first to complete gas lines into that dynamic market will capture it for the foreseeable future. (Rose Roth Seminar, Tbilisi, Georgia, October 2002)
64. There is some optimism regarding Turkmen oil production. In the first four months of 2001, oil production had risen by 10% from the same period in 2000. ("Turkmenistan", US Department of Energy, www.eia.doe.gov/). The country still needs substantial foreign investment in the oil infrastructure. Yet investors are more than a little leery of the highly unpredictable and isolationist government. In April 2000, the EBRD suspended $209 million in public sector loans as a result of the government's undemocratic and non-transparent methods.
65. Agricultural production accounts for roughly 25 percent of Turkmenistan's GDP. It is the world's tenth largest producer of cotton, and the state relies upon on the foreign exchange this industry generates. Compulsory sales to the state means that cotton farmers receive much less for their product than they would under a free market system. Needless to say, there is a dearth of investment incentives in that industry. (Economist Intelligence Unit:Turkmenistan, http://db.eiu.com). Niyazov plans to increase the annual production of raw cotton to three million tons, but this will prove most difficult given the current incentive system not to mention a dearth of the water needed to increase production. The Soviet-built canal system, which made cotton-farming possible in Turkmenistan's vast deserts, has both depleted the Aral sea and caused high levels of water logging and salinity in the soil. (Ahmed Rashid, op.cit. p 75.) President Niyazov also aspires to make Turkmenistan self-sufficient in food and plans dramatic increases in sugar beet and grain production despite poor land quality, a lack of water, and an unsuitable climate. Niyazov's refusal to liberalise water prices in order to encourage more rational water use has only further distorted agricultural markets and investment patterns. (Economist Intelligence Unit - Country Profile: Turkmenistan).
66. For all intents and purposes, Turkmenistan remains a command economy. The authorities maintain this system of price controls and subsidies with income from oil and gas exports. The government has adopted wildly optimistic economic plans envisioning an increase in per capita income from US$ 7,500 in 2005 to US$ 15,000 in 2010. Foreign trade turnover is supposed to rise to US$10.6bn by 2010 based on overoptimistic assumptions about future gas and oil exports and foreign investment. The government envisions substantial public investment spending based on flawed resource assumptions that fail to account for the fact that Turkmenistan must also compete with its neighbors both for a position in Western markets and for finite foreign investment. (Strategic Forecasting LLC, 2001, Turkmenistan: The Economy, www.stratfor.com/CIS)
67. Turkmenistan is considered by Human Rights Watch to be "one of the most repressive countries in the OSCE region". Religious and ethnic minorities are persecuted, dissent is stifled and the media is strictly controlled. (http://hrw.org/) The KNB, successor to the KGB, exercises "truly pervasive surveillance over the population, using intimidation, searches without warrants, arbitrary detention, and torture to dissuade all dissent". (http://hrw.org/) Since 1997, the government has allowed only two religious denominations, Sunni Muslim and Orthodox Christianity to operate. All other faiths are considered illegal and have been aggressively persecuted. Human Rights Watch has urged the US administration to designate Turkmenistan a country of particular concern for religious freedom under the US International Religious Freedom Act (IRFA). According to Amnesty International's report for 2001, religious freedoms were consistently violated: "Peaceful meetings in private homes were broken up and participants fined or detained for short periods; religious materials were confiscated and places of worship closed down; the faithful were physically and verbally abused; and a number of foreign missionaries and their families were deported."( http://web.amnesty.org)
VII. UZBEKISTAN
68. Like much of Central Asia, the West initially did not pay great heed to Uzbekistan after it won independence in 1991. Western governments were particularly wary of President Islom Karimov, an autocrat whose ruling style borrowed heavily from Soviet practices. Karimov has sought to make Uzbekistan the indispensable power in the region. And, in an important way, his aspirations are close to fulfillment for reasons that have little to do with the state's political virtue but much to do with its geography, relative military strength and the fact that there are large Uzbek minorities settled around the region.
69. After 11 September this remote country sharing a border with Afghanistan and the other four Central Asian Republics became a critical partner in the anti-terrorist coalition. Uzbekistan has been a key staging point for that coalition's military operations and for the delivery of desperately needed humanitarian aid to Afghanistan. It now hosts a critical American logistical support base in Karshi. Tashkent's relations with Washington have consequently been transformed, and Uzbekistan has become a key US ally in the anti-terrorist campaign. Although the precise impact of the military intervention in Afghanistan on Uzbekistan's economy is not yet evident, the country has clearly benefited politically from its role in supporting the campaign and its aftermath.
70. Most importantly President Karimov has won unstinting American support for his struggle against the IMU. In October 2001 the American government extended a security guarantee to Uzbekistan and offered to come to its direct aid if it were attacked. The Afghanistan campaign almost immediately improved Uzbekistan's security situation, and coalition military operations resulted in the destruction of IMU bases and probably the death of the IMU's leader, Juma Namagani. The organisation is reportedly much weakened as a result.
71. Like the rest of the region, Uzbekistan has confronted serious economic problems over the past decade. On top of the normal difficulties associated with transition, Uzbekistan also suffered from the loss of markets and subsidies from the Soviet Union, major disruptions in inter-republic trade and payments, hyperinflation and steadily declining output. Karimov adopted a state-centered reform strategy, which on the face of it, seems like a contradiction in terms. Political rather than macroeconomic goals have ultimately shaped the strategy, which one might best characterise as "stability at any cost". While delaying the painful move to a free market, the approach has strained Uzbekistan's relations with international financial organisations that advocate more ambitious reforms designed to invigorate the private sector.
72. The IMF, World Bank and private lending institutions have been reluctant to invest in an economy guided by a government that sometimes seems to mistrust the autonomous activities of private economic actors. The government, for example, recently closed 80% of the country's bazaars in an effort to control and limit the sale of imported consumer goods-a move that struck at one of the more dynamic elements of the retail economy. Neither the Uzbek public nor international lending organisations were enamored with a decision that seems only to have reinforced the statist bias of the ruling elite. (Sub-Committee visit to Uzbekistan, October 2002.)
73. Accordin,, g to the EBRD, the state's dominant role in the economy lends itself to corruption while authoritarian rule makes it very difficult to document. ("EBRD wants more transparency in Central Asia, Caucasus", Eurasianet, November 20-26, 2001.) Western Embassy officials told members of this committee visiting Uzbekistan that even ministerial budgets are treated like state secrets-a practice which makes real reform only more difficult to achieve. Government officials seem focused on achieving a high degree of economic self-sufficiency without recognising the benefits that mutual economic dependencies introduce. Discussions with officials suggest that basic principles like comparative advantage do not factor into government economic calculation.
74. Agriculture employs 35% of the workforce, and generates 30.4% of GDP (The Economist Intelligence Unit, Country Profile: Uzbekistan, http://db.eiu.com). Uzbekistan is the world's third largest cotton exporter, and also produces oil and gold as well as machinery and chemicals. The state holds a monopoly on cotton purchasing and pays extremely low prices to farmers for a commodity that it then sells internationally at global prices. Western lending institutions have sharply criticised this practice as it sends all the wrong signals to the country's farmers. Western embassies in Tashkent also lament a policy of enforced and unremunerated labor during the harvest. (Sub-Committee visit to Uzbekistan, October 2002.)
75. It is nonetheless important to note that Uzbekistan managed to avoid the dramatic output collapse and decline in living standards that befell other CIS countries. To many analysts, however, delayed reform is only postponing the day of reckoning. Macroeconomic and structural reforms are clearly needed, and the failure to embrace economic reform led the IMF to suspend Uzbekistan's only stand-by loan facility in 1996. Last year, the IMF refused to replace its resident representative in protest of the government's unwillingness to liberalise exchange rates. But change may be afoot. An IMF delegation returned this past August to evaluate government promises to move toward real currency convertibility at stable exchange rates, and initial reports are encouraging. American aid levels are also rising, and US officials claim to detect a newfound willingness on the part of Uzbek officials to engage in substantial economic reform. But when members of this Committee met with top Uzbek officials, promises to engage in reform were mixed with assertions that the highest economic imperative was to achieve economic "self sufficiency"-a goal that on the face of it sounds illiberal and self-defeating. (Sub-Committee visit to Uzbekistan, October 2002.)
76. The government's aspiration now is to parlay deeper cooperation with the United States into more generous aid packages from Western governments and international lending institutions. Even if the US raises aid levels, this will not be sufficient to turn the economy around. Internal reform is ultimately needed, and Uzbekistan needs to do much more to woo foreign investors, who might otherwise be attracted to the county's skilled work force, strategic location and natural resource endowments. Western governments continue to advise their business communities against investing in Uzbekistan because of the poor macroeconomic climate and the utter lack of transparency. (Sub-Committee visit to Uzbekistan, October 2002.)
77. Unlike other organisations, the World Bank has maintained a presence in Uzbekistan. It has approved a three-year Country Assistance Strategy, the goal of which is to reinforce the institutional and legal foundation for eventual trade and currency liberalisation. It will also underwrite various poverty reduction programs, social safety-net improvements, efforts to cope with ecological disaster prevention and environmental degradation and initiatives to improve public health and social welfare structures. The Bank has financed various programs to improve public enterprise management and privatisation. It is also supporting efforts to improve the moribund financial sector and the country's legal and regulatory framework. By July 2001, the Bank had committed US$463 million to Uzbekistan, of which $273 million had been disbursed. (The World Bank Group, Country Brief, Uzbekistan, http://wbln0018.worldbank.org/ECA/eca.nsf).
78. According to Human Rights Watch, Uzbekistan, has an "appalling" human rights record. It reports that torture in Uzbekistan is "a routine practice" and has documented eleven recent deaths in custody arising from suspicious circumstances. Accordingly to Western embassy officials and NGO representatives who met with this sub-committee, torture of those in custody, one of the worst forms of human rights abuse, is widespread. Recently, the badly burned bodies of two Islamic political prisoners were returned to their families. The government has refused to investigate or even to comment on the deaths. (Sub-Committee visit to Uzbekistan, October 2002.) In May 2002, the United Nations Committee against Torture called on the Uzbek government to review all convictions based on confessions handed down since 1995 because of the likelihood that they had been coerced through torture. (http://www.hrw.org) The state has cracked down most harshly on members of the extremist but non-violent HT, and this too has elicited protest from Western governments. The Uzbek government maintains extremely tight control on the media and seeks to harness other forms of expression. Genuinely independent political parties or social movements are not tolerated.
79. "Stability at all costs" unfortunately appears to be exacting a high toll both on the Uzbek people and the national economy. The country is impoverished, social discontent is evident and the outlets for expressing this discontent are very limited indeed. Several Islamic opposition movements have emerged, and while the IMU was perfectly willing to use violence, other groups follow a non-violent approach. Repression is only increasing public alienation while conferring a completely unhelpful degree of legitimacy on the most malevolent forms of opposition including the nonviolent yet radical HT. US officials in Tashkent detect positive change, but other Western embassies including that of Great Britain as well as the human rights NGO community remain stoutly critical of the human rights situation. (Sub-Committee visit to Uzbekistan, October 2002.) The government would do very well indeed to enter a dialogue with the opposition rather than seek to silence it. A dialogue will be essential to improving Uzbekistan's relations with the West and could be a catalyst to the country's economic, institutional and political development.
VIII. THE ROLE OF OUTSIDE ACTORS IN THE REGION
80. America's Central Asian policy has shifted significantly over the past decade. Its initial concern was to ensure the removal of Soviet-era nuclear weapons from the region and to help successor states establish independent identities. American officials also supported the development of the region's energy potential. Economic aid to the region was generally bilateral. As early as 1989, Congress created the Central Asian American Enterprise fund and appropriated $150 million to support the development of small and medium businesses there, although only $73 million had been invested by 2001. It established a bipartisan Silk Road Caucus in 2001 to focus legislators on the region's myriad challenges. Reducing opium trafficking through the region has also been a key US priority.
81. The outbreak of regional strife in 1999 increased American concerns about regional security. A debate ensued between those who wanted to drive a wedge between the region and Russia and those who, as Colin Powell once put it, viewed the region as inhabiting "Russia's Neighborhood." (Vladimir Socor, "War Draws Central Asia's "Stans" closer to the U.S.," Wall Street Journal, January 19, 2002.) All of this changed after 11 September. To varying degrees, all five Central Asian states agreed to cooperate and the Americans quickly built a significant military presence in the region. That presence represents a sea change, and its impact extends beyond the regional military balance. Clearly increased US visibility offers the potential for greater regional stability while carrying the risk of precipitating great power rivalry. Much depends on how both local and external actors respond.
82. Aid has become a critical currency in the security dialogue as well. French, US and Japanese promises of assistance, for example, helped sway Tajikistan's President Imomali Rahmonov to make his country's airfields available to the anti-terrorist coalition, and the prime minister of the Kyrgyz Republic described regional deployments of western troops as a "gold mine" for his country. (Vladimir Socor, "War draws Central Asia's "Stans" closer to the US," Wall Street Journal, January 19, 2000.) New macroeconomic and humanitarian assistance programs have followed closely on the heels of burgeoning security cooperation. The Bush administration has also called for normalising trade relations with all the former Soviet republics including Russia and has asked Congress to wave the human rights certification for Uzbekistan and Turkmenistan-a process that normally precedes the extension of such privileges.
83. Russian interests in Central Asia derive from a combination of history, genuine security concerns and economic interests, particularly as these relate to energy and pipeline politics. Apprehensions about the region's role in the heroin trade as well as Russia's own anti-terrorist agenda and the fact that there is an Islamic revival underway in certain Russian Republics also inform Russian policy. Islamic extremism in Chechnya challenges the very coherence of Russia (although one could argue that Russian tactics have hardly helped here). Finally, ethnic Russians play a prominent role in several Central Asian societies and the Russian government tends to support the interests of those groups while using their presence as leverage.
84. This broad set of interests is compelling and does not easily yield facile policy choices. Russian officials are clearly uneasy about the West's sudden presence in the region. Yet, President Putin accepted this presence because in the anti-terrorist struggle, he has found an important juxtaposition of Russian and US interests. He likely also recognised that it would have been counterproductive to try to stop the Americans from forging regional links to better conduct the Afghan campaign. That accommodating view is not fully shared either by the Duma nor the Russian Ministry of Defence. This division within the Russian elite complicates any assessment of Russia's long-term regional strategy, but certain limitations will condition the Russian approach. The Russian state, for example, lacks the resources to provide significant aid to the region. On the other hand, Russia offers a natural market for Central Asian goods as well as a transport corridor to move hydrocarbons and hydroelectric power to market and this should be a foundation for improved cooperation. (Ahmed Rashid, op cit. p. 194.)
85. Russian leaders have sought to preserve a strong presence in the region and offered close cooperation in security matters with the successor states. Russia was initially the principal source of military assistance to the region, and had actively engaged these countries with the exception of Turkmenistan in the Shanghai group of states cooperating with Russia and China to counter regional terrorist threats. (Olivier Roy, "Le nouveau jeux de l'Asie Centrale," Le Figaro, November 15, 2001.) Russian troops have operated as border guards in Tajikistan while Putin has worked to build a rapid reaction force with Kazakhstan, the Kyrgyz Republic and Tajikistan to deal with terrorists. Like Turkmenistan, Uzbekistan remains very wary of Russian regional ambitions, and has limited its security ties with Russia. This is certainly one reason why Uzbekistan seized on the opportunity to tighten links to the United States. (Vladimir Socor, "War draws Central Asia's "Stans" close to the US," Wall Street Journal, January 19, 2000.)
86. Turkey has sought to build upon common linguistic and cultural foundations to increase its influence in Central Asia. Turkish officials have played an important role as a bridge to the West. In this sense, Turkey poses a challenge to Iran, which also enjoys a traditional regional cultural and economic presence and shares the Persian language with Tajikistan. On the other hand, Turkey's economy lacks the weight to make a great difference, particularly in light of its own financial difficulties. Thus while Turkey can be very helpful at the margins, what it brings to the table is somewhat limited in terms of aid and market access. Its greatest importance perhaps is as a model of how Islamic societies can modernise while building viable, secular democratic institutions and close relations with the West. The importance of that model should not be underestimated.
87. The EU has not made Central Asia a priority in its external relations. In October, EU foreign ministers acknowledged the importance of stability in the region, while privately recognising that the main priority for the EU remains the Balkans. Nevertheless, Javier Solana recently stated that the EU must do more to support reform efforts in the region to prevent it from becoming a breeding ground for extremism, terrorism and a transit point for trafficking in drugs, arms and humans. (Judy Dempsey, "Central Asian states force way into EU consciousness," Financial Times, October 30, 2001.) In reaching out to the region, the European Union has also revived the image of the ancient Silk Road, and it is supporting a number of projects to invigorate regional transportation and trading links.
IX. CONCLUSIONS AND RECOMMENDATIONS
88. According to the IMF, although the situation in Central Asia can hardly be characterised as favourable, there are some signs of progress in all five countries. To varying extents there are signs of enhanced willingness to countenance reform, a broadening of international links, a deepening of regional cooperation and small increases in production and trade. The litany of challenges, however, is daunting: general liberalisation has not moved forward quickly enough in most of these countries, banking systems remain under state control (although Kazakhstan has made progress here), inflation rates are generally high, growth rates are low, budgets are in deficit, external debt is rising, foreign investment with the exception of Kazakhstan is very low, the public sector is overstaffed at the central and regional levels, and perhaps most importantly, corruption, poor governance, and political repression are to varying extents unchecked. On top of this, radical forms of Islam have been imported to the region and repressive government policies are driving young people into these movements. These political and economic trends are closely related. It is essential to recognise, however, that human rights protection, judicial reform, transparency, and democracy building are all essential elements to economic reform just as economic reform is a key building block for democracy.
89. As the West deepens its engagement in the region, it should draw certain lessons from the experience in Afghanistan. Most important, Western governments must resist the temptation to abandon these weak and vulnerable countries to their fate. Afghanistan was an object of intense international struggle in the 1980s. Yet, the lack of Western engagement after the Soviet withdrawal helped create a vacuum ultimately filled by the Taliban and Al Qaeda. The costs have been very high indeed. Western disengagement either from Afghanistan or the rest of Central Asia risks far more than it promises and should therefore not be seen as an option.
90. Accordingly, western countries need to develop an overarching approach to the region that, while incorporating security support, also assists in economic development, democratisation and institution building. Cooperation with Russia, Turkey and China is also needed to find common ground and prevent the emergence of some "Great Game," which would turn the region's states into the pawns of great powers. Region-wide approaches are clearly needed to help these countries break out from their isolation and to encourage regional cooperation. Economic and democratic development will be critical to suppressing the conditions that foster terrorism and drug smuggling. Ultimately, poverty, repression and corruption provide the most fertile grounds for those sowing religious and ethnic strife. Significant aid to the region will be critical to kick-starting genuine economic transition, but this may not be forthcoming without sufficient democratic and human rights reform.
91. In a sense, the current crisis brought on by the events of 11 September presents an opportunity for the region as well as a serious challenge. The Western presence has brought global attention to the region. The five countries of the region must exploit this moment to deal with their own problems in the knowledge that Western governments will support them in these endeavours. Increased security, alone, should bring economic rewards, but staunch economic and political reform is also essential. Public sectors throughout the region are too large and are hindering economic development. Bank systems, pension and health care systems must be reformed, and put on a financially sustainable basis. Privatisation must proceed, but governed by a strong regulatory framework. Broad legal reform is still needed as is greater transparency and accountability to ensure that the business environment is predictable and the opportunities for corruption are diminished. Resources including gas and water are wasted and rational pricing and metering systems are too often lacking. Government statistics are poor and provide little guidance for those seeking to enact reform and environmental clean-up is desperately needed. Western assistance and lending in all of these areas is essential.
92. Efforts are also needed to reunite economically the divided Fergana valley. This volatile but dynamic region represents a potential engine of economic growth, but it will never play that role as long as the borders that now envelop it remain shut and land mined. At the very least, the land mines need to be removed and replaced by other monitoring devices. There are also high levels of corruption at border crossings, and foreign assistance is needed as well as political goodwill to deal with this serious problem. Greater Western support for developing trans-regional transportation links would also be welcome. The West should encourage the reintegration of irrigation systems that have been blocked for parochial reasons to the great detriment of the regional economy.
93. The global campaign against terrorism should not be seen by the leaders of Central Asia as a carte blanche to engage in a crackdown on internal political opposition. This will not increase security and will only isolate the region's leaders from their own people as well as their partners in the West. This is all the more true now that the IMU has been severely weakened as a result of the war in Afghanistan. An opportunity now exists to mediate differences through democratic practice. Uzbekistan and Turkmenistan, which have the worst human rights records in the region, have a great deal of room for improvement on this front but so do the other three. Supreme scepticism is required when ruling elites claim that no political repression exists, and that political opponents are thrown into prison only because they are "corrupt". The highly selective application of anti-corruption statutes is a very common form of political oppression in this part of the world. Western governments should establish contacts with a range of opposition forces in the region, excluding, of course, those engaged in violence.
94. At a time when the partnership with NATO and the EU is growing, Western governments should therefore continue to pressure the region's governments to conduct a more open and democratic dialogue with their own societies. Western parliamentary delegations visiting the region should make every effort to meet with opposition groups and independent human rights monitors both to gather the best possible information about prevailing situations and to underline the value we attach to pluralism and democratic dialogue. Indiscriminate repression of Islamic groups, even radical but non-violent ones, will only spark further tension and swell the ranks of the most violent or radical terrorist organisations. And while part of the problem can be attributed to the presence of extra-regional terrorists sometimes supported by funds from the Arab world, repression at the hands of Central Asia's governments is also to blame. NATO member governments should not be in a position in which security concerns are used by the region's governments to undermine democratic dialogue. Major Western oil companies operating in the region also have a role to play by encouraging more responsible use of oil revenues among the elite with whom they conduct their commercial activities.
95. Although it is tempting to despair for the region's future, there are models from which Western governments can draw to develop innovative regional approaches. In Pakistan's northern Karakorum Mountains near the border with Afghanistan, the Aga Khan Development Network has focused efforts at the community level to encourage the inhabitants to build schools, improve food cultivation, set up small businesses, and improve local government. This has helped transform that area from a centre of drug smuggling activity and lawlessness to a peaceful and more prosperous region. This model has now been transferred to Badakhshan in the Pamir Mountains of Tajikistan with very positive initial results including a dramatic improvement in food production. The Aga Khan has now engaged the presidents of Tajikistan, the Kyrgyz Republic, and Kazakhstan to build a region-wide educational institution to teach the skills needed to foster and encourage economic and social development. (S. Frederick Starr, "Afghanistan's biggest problem, poverty, can be solved," The Christian Science Monitor, October 16, 2001.) These are precisely the kinds of programmes that Western governments should support, and the result will be welcomed by the region's governments and people alike.
96. Ultimately, of course, responsibility for a successful transition lies with regional governments and their people. There is much to be done. Regional cooperation is very poor and border controls are so cumbersome as to make normal commercial exchange very difficult. Transportation links must be improved and the region's governments, with Western support, must streamline border controls and improve visa administration. Environmental clean-up is also a critical challenge and will require significant western support as well as the implementation of sustainable development strategies. But the real key lies in opening these societies to democracy. Western support and know-how is needed in all of these areas.
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