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Bringing Investment Freedom to Central Asia

Tuesday, February 23, 2010

As U.S. increases its involvement in Afghanistan, the stability of the neighboring Central Asian states will become critical for defeating Islamic fundamentalists. General David Petraeus, in his visit to the region in January of last year, declared that the increased instability in Pakistan has made Central Command (CENTCOM) consider further cooperation with Central Asian countries to supply its forces in Afghanistan (United States Congressional Research Service). An expansion of NATO and U.S. supply routes in the region would require the region to be stable, to ensure that supply convoys would be safe against insurgents. Unfortunately, while the region is more stable than its southern neighbor Pakistan, the prospect of stability continues to be out of reach due to economic woes, especially in the wake of the global economic crisis.

As the location of some of the most impoverished counties in the world, Central Asia would profit enormously in terms of stability economic opportunities were to be increased. The two poorest countries in the region, Tajikistan and Kyrgyzstan, have the most potential to profit from liberalization of their foreign investment policy. According to the United Nations Development Programme, over 70% of the populations of both countries were living bellow $2.15 a day in 2003 (Olcott). These countries’ problems have only been exacerbated by the economic crisis, as both countries faced a drop in real GDP growth of over 5% (Olcott). Both countries lack the economic freedom found in more economically successful developing economies, and fall far behind neighboring nations in terms of foreign investment freedom. Tajikistan received a 25% for investment freedom in the 2010 Economic Freedom Index, due to its numerous bureaucratic impediments to investment and private entities’ inability to purchase property. Kyrgyzstan fairs slightly better at 50%, but it too has placed a series of impediments in the way of much-needed foreign investors, and even prevents foreign investors from owning land (2010 Index of Economic).
This economic instability has played a major role in the expansion of Islamic fundamentalism and narco-trafficking. The Islamic Movement of Uzbekistan, who has been designated as a terrorist organization by the U.S. for its plotted attack on the U.S. Air Force base at Rammstein, Germany, has used Tajikistan for training its forces to attack Kyrgyzstan and neighboring Uzbekistan. In 2006, these attacks became so severe that the Kyrgyz defense minister labeled them a threat to national security (United States. Congressional Research Service). As opium production in Afghanistan grew over 43% between 2001 and 2008, the heroin traffickers began to utilize Tajikistan as base for their trafficking network to Europe. While the country has been able to make substantial narcotics seizures, capturing over 500 KG in the first half of 2008, the high level of unemployment in the country has led to the creation of a expansive narcotics business, as desperate Tajiks have no other options for economic advancement, as other economic opportunities have withered away ("Tajikistan Tackles Drug").
Analysis:
In order to facilitate economic growth in Kyrgyzstan and Tajikistan, foreign direct investment needs to flow in to the industrial sector of their economies. Increased industrial production would be very effective in developing both countries’ economies, as both countries continue to have predominately rural populations. Tajikistan and Kyrgyzstan have urbanization ratings of 26% and 36% respectively (The World Factbook), suggesting that both nations have much untapped human capital for industry. Both countries also have access to vast amounts of hydropower, and are, in fact, major electricity exporters in the region. With access to cost-effective energy sources, both countries can position themselves as attractive countries for industry. The current investment policies of both countries dissuade foreign investors from investing in the industrial sector, making the possibility of expanding the vital industrial sector very small if no liberalization efforts are taken. In order to ensure that the liberalization of investment policy is successful in stimulation FDI in these countries, it must be coupled with a demand for further economic and political transparency in the region. Transparency International’s Corruption Perceptions Index for 2009 shows that Kyrgyzstan and Tajikistan have ratings of 2.0 and 1.9 (out of 10) respectively ("Corruption Perceptions Index"), suggesting that a large influx of FDI into both countries would not be effective with the current levels of government transparency which would make it expensive for exporters to do business in both countries.
Next Steps:
On March 14th, 2008, the Millennium Challenge Corporation (MCC) signed an agreement with Kyrgyzstan to provide $16 million in aid over two years to increase the effectiveness of the police and judicial forces in the country, and to reduce the levels of corruption ("Kyrgyz Republic Launches"). This MCC plan should be used as a foundation in both countries for targeted development aid. The U.S. should offer a series of short-term (two to three year) development plans to Tajikistan and Kyrgyzstan, which would be renegotiated ever two to three years to ensure that progress is being made. By utilizing such a plan, the U.S. can ensure that it does not spend large amounts of money in the region without seeing in progress made in terms of investment freedom reform and corruption, a major concern given both countries’ high levels of corruption.

Key Facts:
• Over 70% of Tajikistanis and Kyrgyzstanis live with under $2.15 a day (Olcott).
• Tajikistan and Kyrgyzstan have investment freedom ratings of 25% and 50% respectively (2010 Index of Economic).
• Tajikistan and Kyrgyzstan have corruption perception ratings of 2.0 and 1.9 respectively ("Corruption Perceptions Index").

Talking Points:
• Tajikistan and Kyrgyzstan are the most impoverished countries in Central Asia.
• As NATO and U.S. supply lines are further developed in the region, Central Asia’s stability grows in importance for the U.S.
• Islamic fundamentalism and narco-traffickers have been active in both countries as citizens have been given few other economic opportunities.
• The U.S. must use the March 14th, 2008 MCC agreement with Kyrgyzstan as a basis for development aid that promotes investment policy reform and reduces government corruption in the economy

Sources:
“Corruption Perceptions Index 2009 .” Chart. Transparency International. N.p., 2009. Web. 21 Nov. 2009. .
“Kyrgyz Republic Launches $16 million Millennium Challenge Threshold Program to Improve the Rule of Law.” Millennium Challenge Corporation. N.p., 14 Mar. 2008. Web. 29 Jan. 2010. .
Olcott, Martha. “Asia’s Overlooked Middle.” International Economic Bulletin. Carnegie Endowment for International Peace, June 2009. Web. 14 Jan. 2010. .
“Tajikistan Tackles Drug Trafficking.” United Nations Development Programme. United Nations, June 2009. Web. 25 Jan. 2010. .
2010 Index of Economic Freedom. Washington: Heritage Foundation, 2009. N. pag. 2010 Index of Economic Freedom. Web. 23 Jan. 2010. .
United States. Congressional Research Service. Central Asia: Regional Developments and Implications for U.S. Interests. By Jim Nichol. Washiington: Congressional Research Service, 2009. Federation of American Scientists. Web. 14 Jan. 2010. .
The World Factbook 2009. Washington, DC: Central Intelligence Agency, 2009. N. pag. Print.

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