Central aSiaComPetitiveneSS outlook

Competitiveness

and Private Sector Development

Central aSia

ComPetitiveneSS outlook

With the financial support of The European Union

key findings

The OECD Eurasia Competitiveness Programme was launched in 2008 to support Eurasian economies

in developing more vibrant and competitive markets. It includes seven countries from Central Asia (Afghanistan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, Uzbekistan) and six countries from Eastern Europe and the South Caucasus (Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine).

The Programme’s approach leverages OECD instruments and tools in order to assess where and how to enhance the competitiveness of countries, sectors and regions to generate sustainable growth. Since its inception, the Programme has developed and implemented several regional and country specific competitiveness strategies, complemented by capacity building seminars and coaching for Central Asian policy makers.



With a total population of 92 million people, Central Asia boasts near universal literacy and abundant natural resources. However these resources are unevenly distributed among the countries of the region. Kazakhstan, Turkmenistan, and Uzbekistan are heavily reliant on exports of energy resources, while the economies of Afghanistan, Kyrgyz Republic, Mongolia, and Tajikistan are mainly based on agriculture or primary products like copper and gold.

Thanks to its significant endowments, Central Asian economies have achieved some of the world’s best growth performances over the past ten years. Over this period, their labour productivity grew consistently between 3 and 6% above world average, GDP rose by about 8% an- nually and FDI flows into the region were multiplied by nine.

However, the global economic crisis cut GDP growth levels in the region by half, exacerbating existing high levels of poverty and income inequality and further weakening the business climate. Countries’ competitiveness was further diminished by pre-existing challenges such as a significant skills gap, limited opportunities for small and medium-sized enterprises (SMEs) development and an over-reliance on energy resources.

In order to address these competitiveness challenges, the countries of the region should focus policy reform on three priority areas:

• HUMAn CAPITAl DEvElOPMEnT

• ACCESS TO FInAnCE FOR SMEs

• InvESTMEnT POlICy AnD PROMOTIOn

This leaflet contains the main findings of the first OECD Central Asia Competitiveness Outlook, a targeted competitiveness review focusing on these three priority areas. It highlights the region’s significant endowments and strong potential, the major challenges it faces and the reforms needed to unlock further growth.

The Outlook is the product of close collaboration between the OECD, the World Economic Forum and the economies of the region.

Central Asia: the context

-15%

-10%

-5%

0%

5%

10%

-86% -85%

-87%

-88%

-89%

-90%

-91%

Central Asia labour productivity value relative to the world average (2) growth below world average

CentralAsia labour productivity growth relative to the world (1)

1993

1994 1995 1996 19981997

1999 2000

2001 2002

2003 2004 2005 2006

2007 2008

growth above world average

Central aSia’S ComPetitive aDvantageS

Significant endowments

The region is surrounded by some of the world’s fastest-growing economies such as Russia, India and China. Rich endowments, both in human and natural resources, have contributed to the strong growth of the region over the past decade. Adult literacy among its population of 92 million is at 99%¹, compared to a world average of 8%. Central Asia benefits from abundant natural resources: Kazakhstan holds an estimated 65 years of oil reserves and 08 years of coal reserves and Turkmenistan 22 years of natural gas reserves.

High productivity growth

Productivity in Central Asia surged dramatically in the 1990s and consistently grew above the world average.

This development reflected, in part, the broad-based economic rebound that these countries experienced after the recessions of the 1990s. The shift of labour from manufacturing and agriculture to the more productive services sector further contributed to an overall increase in labour productivity.

Source: OECD analysis based on World Development Indicators database (World Bank).

Note: Central Asia includes all the countries of Central Asia except Afghanistan; (1) GDP per employee growth minus world GDP per employee growth; (2) Deviation (%) GDP per employee with respect to world average. GDP is measured in constant 2000 USD.

STRONG LABOUR PRODUCTIVITY GROwTh

Central Asia is endowed with both natural and human resources that could drive its economies to higher levels of competitiveness.

1with the exception of Afghanistan

5

Rising foreign direct investment

Central Asia is becoming an increasingly attractive destination for foreign direct investment (FDI). Although a first wave of foreign investments targeted Central and Eastern Europe in the early 1990s, followed by a second one to South East Europe in the early 2000s, FDI is now moving even further eastward towards Central Asia. From 2005 to 2009, FDI to the region increased from USD  to 19 billion. Despite the negative effects of the financial crisis, this upward trend is expected to continue.

Source: OECD analysis based on data from IMF, EBRD.

0 5000 10000 15000 20000 25000 30000 35000 40000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010P

millions USD

Central Europe first wave of FDI

Impact of the financial crisis Central Europe

South East Europe

Eastern Europe and South Caucasus Central Asia

South East Europe second wave of FDI

Central Asia third wave of FDI ? wave 1

wave 2 wave 3

A NEw wAVE OF INVESTMENT FLOwING TOwARD CENTRAL ASIA FDI net inflows, selected regions, 1995-2010

three key ChallengeS

A mismatch between workers’ skills and job market needs, limited access to finance for businesses, a lack of economic and FDI diversification still prevent Central Asia from reaching its full growth potential.

Best practice level

Development of the teacher workforce

Consult ative processes in the

VET system The in

clusiveness of strategy formul ation

Teacher recruitment and retention

Development of the VET system

Workforce skills strategy

Development of a work-rel ated

system of CET high

Level of reform implementation low

1. Human capital:

a significant skills gap

• Education is not aligned with job market needs, and employers are not sufficiently involved in educational decision-making.

• Spending on education in the decade following independence has significantly declined. In all Central Asian countries, public spending on education per capita is currently very low as compared to OECD average.

• Although primary education rates are high, secondary and tertiary levels remain poor and resources could also be more efficiently allocated.

• Vocational and continuous education training (VET-CET) could be developed much further, including through higher funding.

Source: Policy for Competitiveness Assessment Framework 2010 results (OECD).

CENTRAL ASIA’S PERFORMANCE ON hUMAN CAPITAL DEVELOPMENT

Note: The charts on pages 6-8 reflect the results of a tripartite survey of Central Asian ministries, business organisations and OECD experts.

They highlight the perceived gap between competitiveness reforms that have been implemented in Central Asian economies against interna- tional best practice.



1 International Monetary Fund, World Economic Outlook Database, December 2010; sample: Kyrgyz Republic, Mongolia and Tajikistan

22008/2009 World Bank Enterprise Survey

 OECD Country Risk Classification under the Arrangement on Export Credits

2. Access to finance: a constraint to business development

• There is an important financing gap in the region which disproportionately affects SMEs, essential engines for economic growth: high interest rate spreads (1% on average for the region¹) and collateral requirements (11% on average for the region in 200²) hinder access to finance.

• Central Asian countries are high on the OECD Country Risk Classification scale (between 5 and  out of ), which indicates a high risk to service their external debt.

Interest rates for external financing are thus usually much higher than in other countries. Kazakhstan, the best ranked country in the region, was rated 5 in 2010.

Mongolia, Turkmenistan and Uzbekistan all rated 6, while Afghanistan, the Kyrgyz Republic and Tajikistan rated ^.

• Financial systems are not well integrated globally, with limited diversification of financial products.

• Guarantee schemes could be developed much further, thus providing easier access to credit for SMEs.

Source: Policy for Competitiveness Assessment Framework 2010 results (OECD).

Level of reform implementation

Best practice level

Effective regul atory framework

Access to bank finance Early-st

age finance

Guarantee schemes

Improving skills (quality of demand)

Access to c apital market high

low

CENTRAL ASIA’S PERFORMANCE ON ACCESS TO FINANCE

3. Economic diversification:

a high dependency on natural resources

Despite significant reform efforts, foreign direct investment to Central Asia remains concentrated in the energy and mineral sectors.

• In 2008, petroleum and related products made up 65%

of total exports of Kazakhstan.

• Gold represents 29% of all exports in the Kyrgyz Republic.

• Copper accounts for % of Mongolia’s total exports.

Source: Policy for Competitiveness Assessment Framework 2010 results (OECD).

Best practice level

Institutional support Strategy

One-stop shop

Monitoring and evalu ation

Poli cy advoca

cy

(Sub-) N ational coordin

ation

Client rel . man

agagement FDI-SME link

ages

Aftercare se rvices

Free economic zones high

Level of reform implementationlow

CENTRAL ASIA’S PERFORMANCE IN KEY POLICY AREAS RELATIVE TO INTERNATIONAL BEST PRAC-

TICE

Source: Policy for Competitiveness Assessment Framework 2010 results (OECD).

CENTRAL ASIA’S PERFORMANCE ON INVESTMENT PROMOTION

To increase economic diversification, policy makers should focus on investment policy and promotion measures that specifically target non-energy and non-commodity-based sectors. Investment promo- tion efforts should also focus further on aftercare services and FDI-SME linkages.

9

To attract further investment into a wide range of economic sectors, governments need to consult more closely with the private sector to implement reforms that target three priority areas:

Developing human capital

• Consulting with employers to create a better balance between higher education, vocational education and training and continuous education that meets job market requirements.

• Making public spending more cost effective: monitoring quality and avoiding unecessary repetition of school years.

• Involving the private sector in education development strategies.

Enhancing SME financing

• Making SME finance a priority in financial sector reform.

• Providing incentives for financial institutions to invest in SMEs (especially in rural areas).

• Offering greater support for credit guarantee agencies.

• Improving skills through capacity building and linkage programmes between SMEs and foreign direct investors.

Capturing more and better investments

• Placing greater emphasis on land ownership regulations, titling and cadastre systems.

• Developing comprehensive investment promotion strategies to diversify FDI.

• Identifying and removing policy barriers to sector growth and responding to investor concerns.

unloCking Central aSia’S ComPetitiveneSS Potential

Source: Level of reform to enhance competitiveness: PfC Assessment Framework 2010 results (OECD); Level of competitiveness - Global Competitiveness Report 2010-2011 (World Economic Forum).

Note: The PfC Survey is based on the 2010 Policies for Competitiveness Assessment Framework results averaged across three policy areas.

Source: PfC Assessment Framework 2010 Results (OECD).

Note: Public sector includes: ministries of economy, finance, educa- tion and science, while the business intermediaries include chambers of commerce and trade and analytical centres.

0 1 2 3 4

5 Best practice level GCI highest score

Perceived gap

Level of reform to enhance

competitiveness Level of competitiveness

PfC assessment 2010 (OECD) Global Competitiveness Index 2010/11

Perceived gap

Gap between level of reform and best practice

Public sector perspective

Investment policy and promotion Human capital

development

Access to finance

Business intermediaries

Higher

Lower Higher

Point of alignment between public and private sector perspectives

Gap between public and private sector perspective on level of reform OPPORTUNITY TO IMPROVE PUBLIC-PRIVATE DIALOGUE

To support Central Asian policy makers in speeding the pace of reform and successfully implementing reform measures, the OECD Central Asia Competitiveness Outlook will be followed in 2012 by a report con- taining recommendations on effective reform design and implementation.

KEy COnTACT InFORMATIOn:

mr. Fadi Farra,

Head, OECD Eurasia Competitiveness Programme Fadi.Farra@oecd.org

For general enquires:

eurasia@oecd.org Media Contact:

Ms. Vanessa Vallée Vanessa.Vallee@oecd.org

www.oecd.org/daf/psd/eurasia