by Augustin Chabrol
At the start of 2015, the final stage of regional integration between Belarus, Kazakhstan and Russia will take effect. This Eurasian Economic Union evolves from the current Customs Union which has already succeeded in removing custom borders and implementing a Common External Tariff among these former Soviet republics. Kyrgyzstan, a small mountainous Central Asian country of about 5.5 million people, is another post-Soviet state that has expressed interest in joining the CU.
At first glance, joining the Customs Union (CU) may have a negative impact on certain sectors that constitute a major part of Kyrgyzstan’s economy, such as the re-exportation of Chinese consumer goods. However, upon further consideration, accession could very well be an opportunity for the development of Kyrgyzstan in rehabilitating its own industries and exporting its own products. Before going any further, let’s wind the clock back to the immediate aftermath of the Soviet Union’s collapse in the early 1990s. Kyrgyzstan was unexpectedly thrust into independence. Its industrial production ceased, standards of living fell dramatically and the country plummeted into poverty, with rural populations suffering the worst.
Today Kyrgyzstan has sought to adjust itself as a developing country within the globalized world, but despite pursuing a democratic form of governance, the fragile republic has become reliant on unsustainable economic activity that does not contribute to the country’s socio-economic capacity and self-sufficiency in the long run.
An Economy Dependent on “Made in China”
One of the largest economic activities in Kyrgyzstan is the re-exportation of consumer goods from neighboring China. The sprawling open-air Dordoi and Kara-Suu Bazaars are among the largest wholesale markets in Central Asia and major regional transit hubs for goods being re-exported to other CIS countries and beyond. Dordoi Bazaar alone is estimated to generate an annual turnover of 2.9 billion USD and provides employment for around 60,000 people. Established on top of the ruins of a command-economy, these bazaars, which were estimated to constitute 13 percent of the national GDP, have been described as “a modern monument to the power of raw commerce.”
Nevertheless, the CU presents a major challenge to this bazaar economy. Currently individual bazaar traders benefit from low tariffs when importing consumer goods. Transitioning to a new tariff regime under the CET would however reduce this incentive, consequently leading to a decrease in volume of imports. The impact is estimated to be a 9 percent loss in the national GDP. Traders are already facing a decline in trade ever since Kazakhstan, a major market for re-exported goods, has adopted and enforced the CET. Despite efforts from Kyrgyz leaders in negotiating trade concessions, these requests have been ignored by Kazakhstan and Russia, who view re-exported goods as contraband.
Agriculture: A Way Forward for Kyrgyzstan?
A viable tradeoff for the anticipated losses in the bazaar economy would be the development of the agricultural sector. Agricultural activity accounts for about one-fifth of the national GDP and provides employment for nearly half of the population. Nevertheless, only about 7 percent of arable land is used for crop cultivation and, often, many Kyrgyz growers rely on outdated Soviet-era production methods that limit the potential for greater yields. These trends could be reversed if the Kyrgyz government and agribusinesses became more efficient and invested in improved value-added agricultural production techniques. Not only would such action address food security issues, but would also contribute to poverty reduction in rural areas.
Moreover, integration with its Eurasian neighbors provides Kyrgyzstan with more accessible and attractive markets. In Kazakhstan, for instance, Kyrgyz products could be sold at a price 40 to 60 percent higher than in the domestic market. In Siberia, where agricultural production is restricted by short growing seasons, there is a need for some of Kyrgyzstan’s most valuable crops such as apples, apricots, grapes, tomatoes and potatoes. In anticipation of joining the CU, it’s up to Kyrgyz agribusinesses to conduct proper analysis and studies on these markets.
At the same time, as much as it is an opportunity for Kyrgyzstan, accession to the CU also remains the only viable path for developing Kyrgyzstan’s agro-industries. As a non-member, Kyrgyzstan, which lacks the technical capacity (i.e. laboratories), would face the high costs and challenges of meeting the technical and sanitary import regulations set by the EEU. Since 2011, Kazakh agribusinesses have taken advantage of this situation by buying cheap produce in Kyrgyzstan and selling it in Kazakhstan at a higher price—a loss for local growers that could be avoided. By joining the CU, support would be provided in technological development by the member states in order to achieve the standardization of Kyrgyz products.
All in all, the long-term development and interests of the Kyrgyz Republic should be kept in mind when deliberating its accession to the Eurasian Customs Union. Although currently vital for employment in Kyrgyzstan, the re-export bazaar economy is not sustainable because it is a fleeting string of economic activity reliant on what other countries produce. On the other hand, the building-up of the agricultural sector and other industries, such as garment and textiles, presents real potential for Kyrgyzstan to produce and export its own goods. A “Made in Kyrgyzstan” option would generate more substantive employment and reduce poverty in rural areas where agriculture remains a primary activity.