Comparative Regional Economy : Central Asia, Middle East and North Africa

1. Comparative Regional Economy <Lecture Note 4R > 12.04.30 Comparative Regional Economy: Central Asia, Middle East and North Africa * Some parts of this note are borrowed from the references for teaching purpose only. Semester: Spring 2012 Time: Monday 2:00-5:00 pm Class Room: 115 Professor: YooSoo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com 1

2. I. Central Asia

3. Central Asia • Armenia • Georgia • Azerbaijan • Kazakhstan • Kyrgystan • Tajikistan • Turkmenistan • Uzbekistan

4. 2 Physical Characteristics

5. 1 Georgia

6. Caucasus and Central Asia

7. Population Density in Central Asia

8. Linguistic Geography of Central Asia

9. Central and West Asia and North Africa: Major Features - Dry climates and the Muslim faith dominate in this region. - More than sixty percent of the world's oil reserves are found here. - The Fertile Crescent was one the major domestication hearths extending from the Levant to the Persian Gulf. Crops originating here include figs, grapes, dates, and olives. - Home to three of the world's major religions: Judaism, Christianity, and Islam. - Water is the most important resource in the area and population is concentrated where water is found. Water is not only the basis for life, but for the social organization of the village. - The Middle East is one of the world's shatterbelts and a focal point of conflict.

10. Twelve countries in this region have populations of 10 million people or more. • Iran, Turkey, and Egypt have more than 60 million; • Iraq, Afghanistan, Uzbekistan, Morocco, Saudi Arabia and Algeria have populations that range between 24 million and 32 million. • These countries have populations that range between 10 million and 20 million: Syria, Yemen, Kazakhstan, and Saudi Arabia. • Western Sahara, Qatar and Bahrain are the smallest countries in population with 0.3 million, 0.6 million and 0.7 million people, respectively.

11. CA: Introduction - Central Asia is a large, compact, landlocked region within the Eurasian landmass. - Until 1991, other than the Soviet Union, the region contained only two countries, Mongolia and Afghanistan. - Soviet Union’s breakup added several more independent countries to the region. - Historically, Central Asia has been weakly integrated into international trade networks.

12. Geopolitical Framework: Political Reawakening • Partitioning of the Steppes - Before 1500, Central Asia was a power center - Mobile (horseback) armies threatened sedentary states - Gunpowder and effective hand weapons changed the balance of power - Russia and China gained control of the region Manchu (Chinese) conquest 1644 Russian Empire in the 1700s Concern over British influence in the area

13. Development in Central Asia - Central Asia was dominated for many years by Russia and China. - This region is now emerging as a separate entity. - It has a rugged terrain, and was historically pastoral - Today, presence of fossil fuels is generating interest, but construction of pipelines is needed. - Collapse of political and economic systems in early 1990s - Warfare, armed conflict have damaged economies and infrastructure. - Afghanistan is especially troubled, and emerged as a focus of world interest in September 2001.

14. Central Asia Under Communist Rule  Soviet Central Asia - Soviets inherited Russian Empire’s domain United territories together into Soviet Union Created a series of “union republics” (Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, Tajikistan, Azerbaijan) Sowed the seeds of nationalism, nation-states  The Chinese Geopolitical Order - After China reemerged as a unified country in 1949, it reclaimed most of its old Central Asian territories Movement into Xinjiang and Tibet  Current Geopolitical Tension - Strife in Western China Repression of Tibet, and local opposition to Chinese rule Border of China and India still contested Chinese control of Xinjiang Uygur opposition War in Afghanistan before September 11, 2001

15.  1978: Soviet-supported military “revolutionary council” seized power - Marxist government began to suppress religion - Russian invasion U.S. and Saudi support rebels Soviets withdrew in 1989 • War in Afghanistan before September 11, 2002 - 1995–1996 rise of the Taliban - Taliban founded by young Muslim religious students - Closely associated with the Pashtun ethnic group • Imposed an extreme interpretation of Islamic law consistent with Pashtun culture - Other Afghan ethnic groups opposed the Taliban - The Roles of Russia, Iran, Pakistan, and Turkey - Russia has armed forces in Tajikistan, and transportation routes cross Kazakhstan - Iran is a major trading partner, and offers access to ports - Pakistan supported Taliban; now supports the U.S. - Turkey has close cultural and linguistic connections

16. International Dimensions of Central Asian Tension • Islamic Fundamentalism? - Many other Central Asian Nations were concerned that Islamic fundamentalism could affect their nations. - Islamic movement rose in Uzbekistan (IMU) - After September 11th balance of power shifted - U.S. with British assistance launched a war against al-Qaeda and the Taliban government. - Bombing campaign and support of Northern Alliance - Defeated the Taliban and began a process of forming a new Afghan governmen.t - Fighting continues, and U.S. forces remain in Afghanistan.

17. Abundant Resources, Devastated Economies  The Post-Communist Economies - Many Central Asian industries relied heavily on subsidies and oil from the Soviet Union. - Today, no Central Asian country could be considered prosperous. - Kazakstan is most developed - Uzbekistan has second-largest economy - Kyrgyzstan is aggressively privatizing former state-run industries - Turkmenistan has a large agricultural base - Tajikistan most troubled of former Soviet republics - Mongolia, industries not competitive enough in the global market, and it has a meager agricultural base

18.  The Post-Communist Economies (cont.) • The Economy of Tibet and Xinjiang in Western China • Chinese portions of Central Asia have fared better than the rest of the region • Tibet is one of the world’s poorest places. • Tibetans provide for most of their basic needs. • Xinjiang has large mineral wealth and oil reserves and productive agriculture sector as well • Economic misery in Afghanistan: It is the poorest country in the region with almost no economic development. • Afghanistan suffered nearly continuous war starting in late 1970s. • By 1999, it was the world’s largest producer of opium.

19.  Central Asian Economies in Global Context • - Overall, Central Asia is not well connected. • - Afghanistan is tied to the global economy through its export of • illegal drugs. • - In former Soviet areas, most of the connections remain with • Russia. • - Former Soviet republics are developing ties with Iran, Pakistan, • Turkey, and China. • - U.S. and other Western countries are drawn to the region by oil • and natural gas deposits, but construction of pipelines is • necessary.

20. GDP Sources: The World Bank (2009)

21. GNI Per Capita Sources: The World Bank (2009)

22. Openness and Major Exports Source: World Bank World Development Indicators

23. Caucasus and Central Asia Oil and gas exporters Oil and gas importers Kazakhstan Southwestern Asia Uzbekistan Georgia Kyrgyz Republic Azerbaijan Armenia Turkmenistan Tajikistan

24. Eurasia: Growth in real GDP 1999-2008 South Caucasus & Ukraine Central Asia

25. Business Environment in Eurasia •  Strong economic performance in both Central Asia and South Caucasus/ • Ukraine regions •  Wide economic growth disparities and fluctuations across countries •  FDI levels and growth still relatively low • - Average FDI per capita up to 6 times lower than South East Europe or CEE • - Average FDI growth a third lower than regions like South East Europe • - Limited FDI diversification in most countries •  Need to improve business climate to attract investment and develop the private • sector further

26. FDILevels 1999-2007 (in US$ million) South Caucasus & Ukraine Central Asia Source: EBRD Transition report 2007 FDI increased 4 times for CA and time for SCU Average annual growth rate of 20% since 1999 (23% for SCU, 18% for CA) SEE: 29% for the same period

27. Savings (% of GNI, 2007) Source: The world Bank (Data& Statistics)

28. Competitiveness Barriers to FDI Competitive Assets High perception of risk for business transactions Administrative barriers to foreign direct investment Relatively weak institutional development, slow pace of economic, legal and institutional reforms (implementation gap) Underdeveloped physical infrastructure Weak regional cooperation, including limited intra-regional trade • Endowment in natural resources • Low cost and productive labor force • Process of internal and external liberalization, particularly under the European • Neighborhood Policy • Macroeconomic stabilization, high growth • rates and good prospects for the long term • sustainable growth • FDI in energy infrastructure as a catalyst for • FDI in related sectors

29. The Global Recession’s Impact on CA • Kazakhstan, the country most integrated into the global economy and potentially most harmed by the global crisis, is the country best-prepared for negative financial and trade effects. • Uzbekistan and Turkmenistan have foregone economic benefits from global integration, but by the same token are relatively insulated from external shocks other than commodity prices. • The Kyrgyz Republic is in an intermediate position, but its major export commodity, gold, often does well during recessions and 2008-9 has been no exception. • A more significant transmission for the poorer countries is migration, and the direst negative impact is through the reduced flow of remittances to Tajikistan, the poorest country in the region.

30. Different Central Asian Economies  Divergent Paths - Despite strong similarities in culture, history and economic structure, their transitions from Soviet central planning ranged from the most rapidly liberalizing (the Kyrgyz Republic) to the most non-reforming (Turkmenistan) of all former Soviet republics. - By the turn of the century, when the transition from central planning was essentially completed, the Central Asian countries had created vastly different economic systems. These differences had important implications for economic stability during the 1990s, for long-term growth prospects in the 2000s, and for the impact of the global economic crisis that gathered pace in 2008-9. - The Central Asian countries are open economies in the sense that international trade is important, but they have all been suspicious of integration into the global economy and have embraced globalization to varying degrees.

31. Integrating Central Asia into the World Economy • China and India next to other Asian Pacific players will draw • Central Eurasia into closer economic orbit diversifying oil • and gas markets. • If this accords with internationally accepted governance norms and • economic disciplines this trend will impose new rigor and business models • on existing investment and trade patters. • Market rigidities characterize investment and trade patterns in today’s • Eurasian gas scene; fragility and fragmentation despite plentiful economic • opportunities that are yet to be unlocked… • Asian Pacific interests in Central Eurasia may prompt further Euro Atlantic • investment to integrate Central Asian trade and investment flows globally • with the Euro Atlantic as well as the Asian Pacific; the two global energy • consumption growth poles. Source: OECD/IEA,(2007)

32. Globalization and Central Asia • Open but not integrated Economy • Kazakhstan as the richest and most developed economy in the region has the most complex relations to globalization, but even there suspicion of losing autonomy (reflected in the slow progress of WTO accession negotiations) has limited the degree of globalization of the Kazakhstani economy. • The main channels of globalization, and hence for contagion from the global economic crisis, run through (1) the financial sector, (2) trade, and (3) migration and remittances. The last is important because hundreds of thousands of workers from Tajikistan and to a lesser extent the Kyrgyz and Uzbekistan are working abroad and their prospects will be directly influenced by economic conditions in Russia and elsewhere. • Trade and Openness - The Central Asian countries have high export/GDP ratios except for Tajikistan whose ratio would be much higher if exports of labor services were included Despite efforts to diversify their economies by using revenues from energy, mineral or cotton exports or through import-substituting policies or other measures, the Central Asian countries’ exports remain heavily concentrated in a small number of commodities.

33. US Interest in Central Asia • Collapse of the Soviet Union to 9/11 • Revolved around the three broad themes of political and economic reform, security, and energy • Securing and dismantling nuclear stockpiles was the most pressing security concern • Promotion of democracy • Post 9/11 • Stopping the threat of terrorism became the top priority for the US in Central Asia, and US secured bases in Central Asia to prepare for military actions against Afghanistan • US seeks to allow Central Asia to sell its energy at global market price, to help the region maintain its independence and to prevent Russia from establishing economic hegemony over Central Asia

34. The period between September 11, 2001 and summer of 2003 marked the high point of US influence in Central Asia. • US influence began to decline in 2005 following the ejection of US forces from air base in Uzbekistan following US criticism of Uzbek authorities’ handling of the events in Andijon • US emphasis on democratization and its explicit links between political reform and economic aid have alienated many Central Asian leaders • Anti-American sentiment rose after American-led invasion of Iraq, perceived as American campaign against Islam

35. Relationship between China, Russia, and Central Asia • Important trade partners • Russia remains Central Asia’s leading trade partner. Trade between China and Central Asia increased 10 times from $500 million in 1992 to $5 billion in 2004 (12 years) • Russia secured two agreements for natural gas pipeline in 2007 with three countries, doubling its imports of gas from Central Asia • Strategic Partners • Shanghai Cooperation Organization (SCO), mutual-security organization founded in 2001 by the leaders of 6 countries: China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan • Russia’s energy agreement provide it with increased leverage over Central Asia, as well as Europe.

36. Caspian & Central Asian Oil Fast Forward On Its Own Momentum - East meets West in Kazakhstan- New western outlets in place new outlets reach towards China- Rising Central Asian oil production calls for more Source: OECD/IEA (2007)

37. Central Asian Geopolitics

38. A Closer Look at the Speed Recovery Real GDP Growth (percent change from a year earlier)

39. Per-capita Disposable Income to Recover by 2011 ...except in Armenia, Georgia, and the Kyrgyz Republic Sources: IMF, World Economic Outlook; and IMF staff calculations.

40. Need to Tackle High and Rising NPLs in Some Countries Nonperforming loans(Overdue by 90 days or more, unless otherwise noted; percent of total loans) Source: National authorities.¹Overdue by 60 days or more.²Overdue from 1 day to 270 days.³Overdue by 30 days or more.

41. Belarus-Kazakhstan-Russia Customs Union

42. Challenges Beyond the Crisis - Growth, development, and poverty reduction - Fiscal and external sustainability - Financial deepening and strengthening monetary policy instruments

43. On the Back of High Oil Prices, the Recovery Continues

44. Strong Fluctuations in Oil Sector GDP, Non-Oil Remains Steady

45. CCA Economic Outlook • The region is being hit by external shocks. - Contraction in world economy, esp. Russia - Declining commodity prices - Drying-up of capital inflows • Current account positions have weakened • Fiscal balances are worsening, and public debt is rising • Growth will drop sharply in 2009 and recover gradually in 2010  Inflation is falling

46. Capital Inflows Are Drying Up. Net Private Capital Flows (In percent of GDP)

47. Current Account Positions Current Account Balance (In percent of GDP) Gross International Reserves 1/ 1/ March 2009 data includes SBA purchases of $249 million (Armenia) and $250 million (Georgia).

48. Growth in the Region Real GDP Growth (In percent)

49. Recovering Slowly in 2010 Real GDP Growth (Annual percentage change)

50. Caspian Oil Production Growth and Diversity kb/d Caspian provides bullish growth, Complements stable MENA and Russian volume with incremental volume and added diversity Source: OECD/IEA,(2007)