NIS ECONOMIC REFORM ISSUES

Created: 7/28/1999

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ISSUES

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WTO Membership:

Measuring the Commitment to Economic Reform

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intensity with which the Newly Independent States (NIS) pursuein the World Trade Organization (WTO)itmus test of their overall comrnitmcnt lo economic reform. Not only does the WTO require liberalization of foreign trade rem'mes, it also expects prospective members to make progress on all the other aspects of economic reform. States are encouraged totheir economics, diminate subsidies, and open their industry and agricultural sectors to outside competitionto meet the strict and detailed requirements for membershipa sustained effort by much ofthe country's governing apparatus: the political leadership; the government bureaucracies responsible for trade, financial, and economics issues; and the legislative branch, which must pass comprehensive and detailed enabling

islation.'

Overstating theost ofthe key political fcaders of the NIS have made WTOigh priority, but, so far, only Kyrgyzstan hasember, joining the WTO last October. Only Tuikmenistani President Niyazov does not have WTOon his country's economic agenda The other leaders see WTO accession asajor shot to theirby bolstering their export earnings.

membership, however, are likely lo be

Kyrgyzstan, for example, is not contiguous lo any ofthe other WTO member states aod its greatest trade potential in the short nm lies with its neighbors. It will take many years for Kyrgyzstan to develop extensive trade ties to any of theTO members.

Pursuing WTO Membership:

MeasuringCommitment to Economicconomic Reform in the NIS:

Battered but not Beaten by the Russian Crisis The Human Costs of Transition in the Former Soviel Union;

Miles to Go Before We Sleep I I

Matrix: NIS economic Reform Developments Q

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6 11

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The political leaders also see membership in this prestigious organization as another means of securing their independence and joining the world community

bToova

goal of European integration.

Georgian President Shevardnadze claimed that joining the WTO is equal to joining the UN as far as recognition of Georgia's statehood is concerned, according to the press.

Moldovan Foreign Ministry

lhat, without WTO membership.

could not pursue

nd Underestimating the Costs.

This widespread political cc*rururroerit has not translated into quick action, however. Those newly mdependent states that are not far along in the accession process tend to underestimate the amount of work that must be done before they could join the WTO. While the top leaderships of these countries may support the goal, those at lower echelons may drag their feet or even be actively

property rights.ater stage ofthe process, the bureaucracy must prepare responses to literally hundreds of questions from WTO members on the existing trade regimes

Moreover, at least sorne ofthe lop leaders appear lo believe they will be admired on "special'1 terms that will limit the changes they have to make to their existing trade regime.

The Chairman of Kazakhstan's Strategic Planning Agencyews conference that the standard admission policies arc not suitable when many countries are experiencing an acute financial crisis, according to the press. Kazakhstanrace period of five to seven years to protect its economy with high tariffs.

Armenia wants to be accepted into the WTO' because that would allow the government to provide agricultural subsidies of up toercent of GDP, according to our Embassy. Subsidies arc currently provided indirectly through the tax system.

government officials are the ones who must prepare the memorandum describing their country's bade regime in great detail, including inforniauon oo the existing tanff structure for every good traded, import and export regulations, technical barriers to trade, agricultural and industrial policy, customs valuations, licensing rcquirernents, and intellectual

Moldova's Geneva representative!

thai Moldova should be allowedaintain structure since it had so little impact on the US market. Moldova alsoermanent arrangement that will enable it to implement agricultural support programs

Ihe reader:

This is Ihe first Issueew serial publication, requested by the State Departmenta Office ofthe Special Advisor for the Newly Independent States, providing analysts and viewpoints on economic reform issues tn the non-Russian NTS states as Ihey make their transitions from closed cenlntlly planned regimes to something resembling market-based economies Each Issue will include up to threeocus on cross-evmng and regionalreform Issues ofcurrrrt tmportanct. ll will alsoatrix of recent developments for each country In key reformODtfind this new publication useful and uric ome your commenls an as content or formalay be

H

A Bearable Cos*

One cost mat the newly independent states are wiEna tos to aBer their trade agreements with other parties in the CIS and, tor those states that are members, theUnton

rubberstamp role may actually penalize Armenia, as parliamentarians who are generally suspicious of economic reform move slowly on the legislation.

Moldova has moved to restore the momentum to its WTO negotiations. It has been engaged in working party'and bilateral discussion8 and into this year. If President Lucinschi can ffit the implementing legislation through apowcrful and sometimes discordant parliament, Moldovaood chance of acceding to the WTO this year.

Kazakhstan must negotiate favorable conditions for joining the WTO and "cannot be said to beccording to the Director of Foreign Economic Policy in the Energy, Industry, and Trade Ministry. This implied tough negotiating stance-combined with Kazakhstan's introduction of supposedly temporary protectionist tariffs on awide range of airports from regional partners lastwill probably damage prospectsear-term accession.

Ukraine has essentially stopped its forward movement on accession over the pastt is badly behind in:

paperwork, and the bureaucracy working on WTO accession is understaffed and likely to remain so. Moreover, with President Kuchma focused on his reelection prospects, there is little chance that he will push the implementing legislationargely unsympathetic legislature so that Ukraine can be ready to join the WTO this year.

In the next iter, Belarus has begun working party reviews; Uzbekistan is still gathering information; and Azerbaijan has recently submitted its Memorandum describing its foreign trade regime, the first step in this long process.

Belarusian President Lukashenko is not committed to economic reform, and. therefore, Belarus's chances ofember are slight. The near total withdrawal of Western advice and assistance, which was crucial in helping Kyrgyzstan toember, further reduces Belarus's prospects.

Uzbekistan has submitted its memorandum describing its foreign trade regime, but appears unwilling to take major steps on economic reform, particularly allowing the convertibility of its currency.

Azerbaijan is very early in the process and has made only limited progress on economic reform. President AJjyev's centralized decisionmaking styleompliant legislature could put WTO accessionast track, but it seems more likely mat other issues will demand hb attention, particularly given his poor health and his resulting reduced work. Withoutull attention. Azerbaijan will probably not be ready lo join the WTOfor severalyears. Apost-Aliyev succession struggle would delay accession even more.

The two remaining non-Russian NIS, Tajikistan and Turkmenistan, arc far from membership. Tajikistan has been involvedivil war that formally came to an end only two years ago. ft is making progress achieving macroeconomic stability, but the structural changes necessary for WTO accession are coming slowly. Nevertheless, Tajikistan is preparing its application for WTO membership,!

Turkmenistan's President Niyazov has rejected taking any major steps on economic reforms despite advice from the IMF, World Bank, and the US administration. I I

Economic Reform in the NIS:

Battered but Not Beaten by the Russian Crisis

Recent external shocks to the NTSbuffeted by the twin blows of the Asian andtlie spilloversfrom Russia'sfinancialfinancial crises. While the Asian contagion didlow to tlie region's economicarge direct impact on the NIS because of thebut have notff its tracks. Progress relatively underdeveloped financial and stockreforms has slowed in virtually every one of the newly its affects were felt nonetheless as weakeningslates, according to the European Bank lor demand eventually depressed prices for many of theand Developmentut this is commodities that these states export such assurprise, given the economic turmoil thai has roiled minerals, and textiles. Russia's economic collapseregion. The transition process is difficult, andar more devastating impact, given the strongstarts arc to be expected: the Central and East and financial links that most of these statesstates that are much farther along the reform maintained with Russia. As Russia's collapse beganare noteamless transitiondown the NIS economies, international lender and

investor concerns about the region also sank, adding to

For the most part, the economic chaos that has their financial plight

rucked Russia and the NIS since last August's ruble

devaluation has not resulted in any serious The Leaders

reconsideration of economic reforms by those

states aspiring to become market economies. Russia's recent problems have not altered the

underlying reasons to reform among those states in the NIS at the forefront of economic reform. If Many of the NIS were cautiously optimistic about their anything, the region's continued vulnerability to economic prospects at the startS before being

external shocks reinforces Ihe need to proceed with reforms and diversify trade and financial links.

esource-rich slate such as Kazakhstan, reformingrerequisite lo enticing the Western expertise and financial resources it needs to exploit its underground wealth.

At the other end of the spectrum, the leaders of resource-poor and isolated Moldova see no alternative but to reform because it needs every advantage possible to be competitive in global markets. [

Kyrgyzstan is generally considered Uie economic reform leader in the NIS: it has an excellent track record working with the IMF and last December became the first member ofthe NIS toember of Ihc WTO. Although the pace of reformsit this past year in response to financial hardships. President Akayev reiterated his commitment to reforms in April. He did, however, ruleradical" approach. [

Kazakhstan ranks high among reform leaders, but itmall step backward this past year because it was hit hard by the Russian crisis. In responseeteriorating trade balance, Astana temporarily banned selected food imports from Russia and imposed duties on some goods from neighboring Uzbekistan and KyrgyzstatL Later, Kazakhstan's decision to floal its currency, Ihc tengc, was undertaken without consulting the IMF, which applauded the decision but was upset with some of the supporting provisions, such as an increase in the hard currency surrender rate. Kazakhstan hopes to renew its reform efforts by offering stakesumber of its blue-chip enterprises.

Moldova also ranks near the top of Ihe reform list because it moved quickly toariety of reforms. But Moldova's very large trade links lo Russia leave its economy highly vutaerable, and the pace of reforms have slowed markedly over the past year. The leadership's commitment to reforms has notnew Prime Minister Sturzauch more committed reformer than hisit does note that the hardships it is suffering at present compel it to move more slowly. Moreover, frequent disagreements between members of the fractious ruling coalition in parliamenttrong Communist opposition make it hard to pass reform legislation.

Armenia hasery reform-minded agenda, given its heavy dependence on foreign economic assistance and inflows from the Armenian Diaspora. President Kocharian is considered proreform, but some questions have been raised about (he commitment of the recently elected government Prime Minister Sarkisyan has stated that Armenia has no option but to reform,lso advocates more state control of theevival of state industry, and increased social protectionist measures.

Georgia's leadership is commiued to economic reforms, and the country has made important progress since independence. In recent years, however, the ability of President Shevardnadzes government to press ahead on reforms has been hampered by the tense political climate and rampant corruption at the highest levels of government Moreover, the government has been slow to meet IMF requirements to take decisive action on its persistent deficit. P

The Lollygaggers

Several of the states arc pursuing reform-oricntcd agendas but for one reason or another have been unable to make the concerted effort needed to raise themselves to the next ]

Azerbaijan's reform program slowed this past year because the economyeating from low oil prices, and legislation was put on hold while President Aliyev dealt with his health problems. Progress on large-scaledelayed by nearlyey litmus test of the government's resolve. Reform could easilyackseat to prolonged squabblingotential successor to Aliyev and to widespread

"Setter

Ukraine has made any progress at all on reform to date is perhaps somewhat surprising, considering Lhat it has been in an almost constant state of economic turmoil since independence. Ukraine's modest reform program, however,ack scat to the Russian crisis, with Kiev imposing currency controls and import restrictions. The reform pace will remain sluggish again this year wiih the presidential election coming up thisfaU. In fact, Ukraine's commitment to the reform process remains questionable, with some analysts arguing thateveneelectedonly do the minimum to garner needed Western funds.

Tajikistan has only recently embarked on reforms, as years of internal strife since independence have left it wellumber of others in the region. The government is hying to catch up by working very closely with the IMF in developing its reform agenda. The tense political climate, however, can frequently divert the government's attention. Moreover, Dushanbe's heavy reliance on Russia for security increases the potential for Russian Influence over other domestic matters, such as the pace and direction of reforms.

The Laggards

Ruling officials in the hardcore, norucformistBelarus, Turkmenistan, andto be undaunted by the Russian crisis. If anything, Russia's latest time of troubles only reinforces their belief that economic dislocations are best avoided byarge degree of state control and proceeding with reformsnail's pace. For these three stragglers, however, the question remains how long they can maintain this posture. Alt three face serious external financial Imbalances, and they eventually may have to make some concessions on reform to gain the backing of the IMF and World Bank.

While Uzbekistan occasionally pays lipscrvice to reform, it also says that the Russian crisis emphasizes the need not to undertake any measures without careful consideration of the social costs and implications. It bas had no ties to the IMFtandby agreement was canceled at the end of6 and recently hiked some tariffs in response to Russian-induced trade problems. Indicatorsossible change of heart on reforms would be some movement on Uzbekistan's recurring pledge to move forward on currency convertibility and progress on privatization. Tashkent, however, recently removed one of its most attractiveAlmyk metalsits privatization list

Belarus is close to the bottom rung of the reform ladder. The leadership recently echoed statements that it has made over the past year that it will not follow in Russia's footsteps by engaging in "wild privatization and bandithe EBRD noted in its annual update on the transitioning economies that Belarus is the only country in the NIS to actually have regressed on economic refoims4here are those within the government that arc speaking out on mountinghead of the Central Bank warned that soft loans have left the bank on the verge of collapse,inance Ministry official complained that Belarusian banks lack the funds to finance debt Minsk is considering some price and exchange rate liberalization to appease the IMF, but it clearly lacks the ideological commitment to hold fast to IMF conditions.

The EBRD puts Turkmenistan in last place in implerncnting reform, noting that Ashgabat has retained the most extensive controls in the NIS.

leadership is clearly more comtortablewith We "Visible hand of thendeed, President Niyazov's government reacted to cheap imports from Russia by introducing even more administrative measures, such as foreign exchange controls. Turkmenistan's pervasive use of price controls and subsidies have left it financially beleaguered

Not Yet Full-Speed Ahead

Progress on economic reforms will continue for most states in the region over the coming year, but the pace is likely to remain quite sluggish. Continuing problems in Russia willajor factor. While the Russian economy recently has shown some signs oflife, growth

on the rest of the NIS. Moreover, dampening growth prospects this year forole.

Upcoming elections also win dampen the enthusiasm of some leaders lo undertake tooeform agenda too soon because of the continuing social costs. In addition to the election in Ukraine, presidential elections are also tentatively slated in the fall in Tajikistan, in January in Uzbekistan, and in April in Georgia. Much of the Caucasus and Central Asia can look forward to parliamentary or municipal elections over the next six months.

Finally, most of the states on the reform track need to embark on the more difficult steps, such as large-scale privatization, enterprise restructuring; and reform of banking and capital markets. Most, if not all, of these states lack the resources and expertise to proceed effectively with these more difficult reforms during such difficult times, and the leaderships remain far more preoccupied at present with trying to achieve some degree of maCToeconomic stability and to moderate the negative effect on living standards.

Some privatizations arc lagging at present because of sluggish investor interest in tbe region and the voluntary decision by some governments not to sell key structures at depressed prices.

Even for those governments wishing to move more briskly, their efforts will continue to be plagued by corruption, cronyism, and the lack of the rule of law.

IMP bacomn otoM whea tm Mia af amidaBdtDPoai

tipna anwhet* a* dcW-tc-OW fito*O pawa ruga nndnsanat

"fiom the ad1 to ihc rail of I

Source: EBRD. TranslOo* Report Update.roUinloify estknUDS.

The Human Costs of Transition in the NIS: Mites To Go Before They Sleep [

The breakup of the Soviet Union plunged rnillions of people into poverty as production dropped, salaries and pensions were not paid, unemployment soared, and many of the health, education, and welfare benefits that were distributed through the work place ceased. For most of the people in the former Soviet Union, the economic decline and psychological loss of status experienced is greater than anything the US experienced during the Great Depression. Wars and clhnic conflict added to the

War aod Ethnic Conflict Add to the Numbers

misery, as tens of thousands died, and millions mote became refugees in conflicts over Nagorno-Karabakh, and in Chechnya, Georgia, and Tajikistan. The Central and East European statesim il ar economic downturn, but most of them quickly adopted policies designed toend itecade after the depression began, most ofthe newly independent states (NTS) arc still mired in it and have no clear exit strategy.

and Per Capita Income Decline Worst of

One ofthe most comprehensive studies ofthe situation in the former SovietN Development Program study. Poverty in Transition, published late last year, notes that "no region in the world has sufferedramatic decline in living standards as have the countries ofthe former Soviet Union and Eastern Europe" in. The study acknowledges that in only six of theountries do people in the former Soviet Union live as badly as the poorest in Latin America (where someillion people live on lessay) or Africa (where the situation is even moreut it also points out mat no other part ofthe world saw such dramatic drops in per capita GDP as the stales ofthe former Soviet Union did during, f

For example, most of the NIS have experienced losses of betweenndercent of their preindependence GDPs per capita, and those states that were embroiled in armed conflict such as Armenia, Azerbaijan, Georgia, and Tajikistan experienced GDP losses in excess ofercent.

In Taj ikistan. most ofho were internally displaced and ihrho Oed to Afghanistan have since returned home and begun to rebuild rheir lives, but the moreussians who returned to Russia and the0 Jews who emigrated to Israel are now living at the bottom ofthe economic ladder in their new homes. '

Problems With Defining Poverty

Determining who has been most affected by the declining living standard across tha former Soviet Union is difficult because of the wide disparity In incomes across the union prior to the transition ond because concepts of poverty have altered over time. As the UN Development Program study notes, different attempts to measure poverty will yield different estimates because of the difficutttea involved in calculating income, assets, and tho effect of the informal economy. Matters are further complicated by the fact that some of the measures refer to absolute levels of poverty, and others do not. For example,stonia had an annual per capita GDP ofhile Tajikistan had an annual per capita GDP of

for dealing with declining incomes. Most build on strategics that evolved during the Soviet era People, for example, still rely heavily on private plots for food, use their cars as taxis to earn extra income, hire themselves out as tutors, and borrow from relatives or neighbors when the money runs out. I

Who Are the Bardest Hit?

UN and World Bank studies show that women and children have been most impoverished

In July, for example, the Armenian Government announced thatercent of the registered unemployed in the country were women. Q

Individual Strategies for Dealing With Poverty Resulting From Transition

In-depth World Bank studies ofthe newly impoverished in several transitioning states show that individual families haveariety of coping strategies

The new circumstances, however, have also led to the development of new coping strategies. For example:

Many families have moved in together to conserve fuel in winter and sell furniture, jewelry, and other household goods, as well as rent or even sell their newly privatized apartments to make up for lost income.

When these assets are gone, men and women become traders, migrate abroad in search of work, or turn to crime. I-

There arc no comprehensive statistics mdicating precisely how many people do each, but the numbers are significant For example, some reports suggest that as manyillion ofillion population go abroad in search of work.

The experience of the transitioning states to date indicates that increasedpoverty and income inequality are an inevitable consequence of the process, but that

governments lhathree-pronged reform strategy aimed at achieving macroeconomlc stability

and reform ofthe social safety net have been able to end the poverty fairly quickly. Unfortunately, none of the NIS have unambiguously embarked on such

Inbriefs

Wage Arrears Jump ia Ukraine. Wage arrears roseU percent over tbe to billionulion) as ofillion hryvnias at the start ofthe year, according to the State Statistics Committee. Arrears owed to state workers paid from the budget makeillion hryvnia of the total amount. The head of rhe Pension Fund said that arrears on pensions totaledillion hryvnias. Arrears have risen dramatically over the last several years in Ukraine despite repealed government promises to pay them down. Prime Minister Pustovoytenko, whose government survived the latest no-confidcncc vote in parliament on Tuesday, promised deputies that paying off arrears on salaries and pensions wouldriority issue for his cabinet

Ukrainian Fuel Shortages Threaten Harvest.

Ukrainian refineries in June processedercent less oil than last year, while diesel fuel imports also fell sharply, according to press reports An agricultural consultant said that farms had less than half the fuel supplies they had this time last year, while Kherson Oblast officials warnedmported combines are idle The government has responded by easing oil importinagricultural fuel needs, and negotiating with Azerbaijanons of diesel fuel, which began arriving in mid-July, according to press reports. In addition, separate deals were reached for anillion tons of fuel fioin Greek and Kussian firms.

fforts should begin toan effect soon -farms can use the Azerbaijani fuel itnmediately, while the ellmlrustion oftsnport fees should old oil product trade with Russia

While these measures can help to alleviate the immediate need for fuel, problems will continue until Ukraine develops an oil market with solvent customers and enforceable payment schedules.

Central Bank Head Says Belarus Not Ready Cor Unified Currency. National Bank Chairmanthat the ^traductioningle Russian-Bclarusian currency requires time andreporters last week that Bclarusians will continue to receive their wages, penttoru. and benefits in Bclarusian rubles for "at least tbe nexte also noted that President Lukashenko has ordered urgent measures be taken to strengthen the Bclarusian ruble, which Prokopovich considers to be the main prerequisite for the unification of the two currencies. [

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