Tuesday, 27 August 2013

Should Kyrgyzstan Search for Investors at Home?

Published in Analytical Articles

by Rafis Abazov and Talaibek Koichumanov (the 08/21/13 issue of the CACI Analyst)

The Kyrgyz government has announced new initiatives aiming to attract foreign direct investments (FDIs) into the Kyrgyz national economy. The country needs significant resources to deal with chronic mass unemployment – especially high among rural youth – as well as widespread poverty and an aging manufacturing infrastructure. Yet, the experience of some developing countries, such as Bangladesh, India and China, suggests that help might be much closer than politicians think: in the so-called Bamboo Capitalism, diaspora-sponsored business development. According to various estimates, the rapidly growing Kyrgyz diaspora and domestic Kyrgyz businesses keep between US$ 1 and US$ 3 billion in foreign accounts, properties, businesses and equities. Can Kyrgyzstan utilize this unique opportunity to revive its national economy?

BACKGROUND: Kyrgyz government officials have announced a number of measures to attract FDIs into its struggling economy. For the last 3–5 years the national economy has been experiencing very tough times due to the impact of the global financial crisis and increasing competition in the region for investments. The impact has been felt in such diverse sectors as tourism and the garment industry. The country experienced an almost 20 percent decline in FDIs from US$ 438 million in 2010 to US$ 391 in 2011 (World Bank est.). It needs to at least double the inflow of investments and technologies in order to achieve the necessary level of economic growth to create jobs for its growing population and to meet the demand for spending on national programs. The budget situation is so tight that government officials in Bishkek have been discussing the possibility of shutting down several ministries.

The economic difficulties and dim prospect of positive economic change are putting a huge pressure on the population to migrate. Indeed Kyrgyzstan has emerged as one of the top migrant-sending countries in the CIS zone along with neighboring Tajikistan. Estimates vary but experts put the numbers anywhere between 300,000 and one million people; an additional 80,000 to 120,000 people are involved each year in seasonal migration. In fact an entire generation of school and university graduates sees their future outside of their own country, regularly filling foreign-language schools across a linguistic spectrum ranging from Russian and English to Korean and Japanese – and often citing a future career abroad as their first choice in school essays.

Migration is a very controversial topic in Kyrgyzstan. On the one hand, a significant number of educated and highly-skilled young professionals have left or are leaving the country. On the other hand, these migrants have begun contributing to the economic development of Kyrgyzstan in a very different way – by sending home remittances. According to World Bank estimates, remittances in Kyrgyzstan reached US$ 1379.3 million or 28 percent of the country’s GDP in 2010, up from US$ 112.7 million in 2003. Migrants began sending remittances home during the 1990s, but over the last few years the country has experienced a steep rise in remittances through both legal banking transfers and informal channels similar to havala – informal money transfer services popular in South Asia and the Middle East.

IMPLICATIONS: Already for several years the government of Kyrgyzstan has been struggling to keep budget and financial stimulus tools balanced. Many developing countries use a variety of public policy and economic tools to increase their competitiveness and stimulate economic activities to jump-start national economies. Unfortunately Kyrgyzstan is still at the bottom of the Global Competitiveness Index, remaining in 126th place (out of 142) in 2011–2012.

And yet a visitor would be surprised to see that the country is seemingly booming. The capital Bishkek and several large urban centers are experiencing construction and consumer booms. Construction companies are completing new business offices, apartment buildings, private houses and large country residences (dachas), and the streets are full of expensive cars including large SUVs and limousines imported directly from the U.S.

At the center of these activities are vigorous private, family-funded small entrepreneurs – what some economists call Bamboo Capitalists because like bamboo they are small, flexible and numerous.

However, a careful economic analysis would reveal that most of the economic activities are limited to consumption and consumption-servicing sectors and are financed almost entirely by the inflow of remittances. Much of the construction work is funded by private individuals and is limited largely to housing, including luxury housing.

The retail sector in the country is also experiencing a mini-boom, with prices in the major stores such as Tsum and Beta-Mall catching up with prices in energy-rich capitals such as Astana, Baku and Moscow. Businessmen and women complain that they have no choice but to invest in short-term consumer markets, as they are not sure about the security of long-term investments in manufacturing and agriculture.  Experts inside and outside the country hotly debate the impact of all these remittances on the economic development of Kyrgyzstan. Some argue that the large-scale remittances have a significant distorting effect on receiving countries as they exclusively stimulate consumption. Others argue that there is also a significant positive impact on the economic dynamics through stimulating domestic consumption as well as contributing to the growth of the service sector and creating jobs.

CONCLUSIONS: Extended-family “Bamboo” businesses, funded by relatives through remittances, have been increasingly talking about the deterioration of the business environment and increasing risks and red tape. For example, Kyrgyzstan declined from 41st position in 2010 to 69th position in 2013 in the World Bank’s Doing Business Ranking. Some businesses have been closed or have downsized their activities and even started investing in other countries. Anecdotal evidence suggests that Kyrgyz entrepreneurs have begun investing in neighboring Kazakhstan, Russia and even such distant places as the Baltic States and the Czech Republic. The classic case of sustainable economic development for developing and least-developed countries is about using the right combination of financial and policy tools to stimulate a positive and dynamic business environment. The government of Kyrgyzstan should prioritize core sectors and provide legal protection and more transparent taxation initiatives for diaspora investors and treat them as foreign investors. It should also consider a greater use of free economic zones, not only to attract foreign direct investments but also investments from the Kyrgyz diaspora. Representatives of the Kyrgyz government do maintain contacts with the Kyrgyz community in various countries, but fail to work systematically on business and investment issues with them. The government also needs to develop the national strategy to support and stimulate the development of the SME sector and family businesses, and to find financial and other stimuli to direct remittances from pure consumption to investment inflow reaching SMEs and bringing know-how from successful diaspora businesses in foreign countries. 

AUTHOR’S BIO: Rafis Abazov, PhD, is a visiting professor at Al Farabi Kazakh National University and a director of Global Classroom Program. He also teaches at SIPA, Columbia University, NY. He is author most recently of The Role of Think Tanks in the Policy-Making Process in Kazakhstan (2011). Talaibek Koichumanov, PhD, is ‎Head of the Secretariat of Investment council under the Kyrgyz government.  He is author of ten books on economic development in Kyrgyzstan, including Kyrgyzstan: The Path Forward (2005). He is a former Minister of Economy and Minister of Finance of Kyrgyzstan.

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