BACKGROUND: The consequences of the Asian and Russian economic crises of 1998 seem more and more evanescent in East Asia. For Central Asia the effects are still devastating. Before the crisis, Asian investment to the region, mainly from South Korea, was accelerating. Now two years later, Central Asia is still confronted with the impact of the crisis and will likely be for many years to come. The most obvious aspect of the crisis has been suspension of projects. For example, in 1998 the most important private Asian investor in Central Asia, Daewoo, sold a part of the shares it owned in Kazakhtelecom and has suspended projects crucial to the ecomony of the volatile Ferghana Valley where it produced engines for Daewoo automobiles sold in Uzbekistan.

According to the UN Conference on Trade and Development statistics, Daewoo is the most important transnational corporation working in developing countries in terms of foreign assets. This is in keeping with the fact that South Korea is the second ranked country overall in this category. In Central Asia, South Korea represents, by far, the bulk of Asian investment to the region. Since the Russo-Japaneses War in 1904-05 when thousands of Koreans were exiled to Central Asia, Koreans have played an influential role in the region. In fact, it was not unusual to see Koreans selling kimchi in the bazaars of Central Asia. South Korean investment is a result of this century old legacy. In Uzbekistan, South Korea is still the most important investor primarily due to Daewoo investment in an auto assembly factory. In 1998, South Korea was the second leading foreign investor in Kazakhstan, equalling more than 20% of the country’s cumulative flows since 1992.

To a lesser extent, Malaysia is a major investor in Uzbekistan (telecommunications, services, finance, textile), in Kyrgyzstan (gold processing) and in Turkmenistan (hydrocarbons with Petronas). Indonesia, thanks to the Ispat-Karmet branch, is also very present in the steel industry in Kazakhstan. However, because of the relatively low level of Asian investment in Turkmenistan, Tajikistan and Kyrgyzstan, these countries have been less affected by the suspension of projects because they were so few in number. Nevertheless, the crisis has had major indirect repercussions on the Central Asian economies, especially those of Kyrgyzstan, Tajikistan, Uzbekistan and Kazakhstan. World demand for various raw materials and metals collapsed in the aftermath of the liquidity crisis in East Asia causing a severe decrease in world prices. The Central Asian economies, with the exception of Turkmenistan, are notably very dependent on cotton, gold and non-precious metals such as copper, aluminium, zinc, chrome, and are greatly affected by price fluctuations. Thus, the Asian crisis has further deteriorated the already fragile economies of Central Asia.

IMPLICATIONS: Now that most of the Asian economies have stabilized, will Asian investment return and play a major role in the development of the Central Asian economies? The most salient consequences of the Asian crisis will be felt over the long-term. After several years of activity in the region, investors have realized that the potential returns on their investments are extremely low and profits may not be realized for years if not decades in Central Asia. Because of recent financial problems of the major Korean, Malaysian and Indonesian holdings, projects will be selected with a great deal more care and hesitancy than they were before 1998.

Due to numerous constraints, it is most unlikely to see Asian investments significantly rising in the coming years. None of the Central Asian states have a market large enough for businesses to focus their investment in a single country. Corporations must therefore conceptualize Central Asia on a regional basis. For instance, Daewoo could only further increase its capacity production of 100,000 cars per year by exporting vehicles to neighboring countries because of the near saturation of the Uzbek market. On the contrary, Central Asian countries are raising tariffs and non-tariff barriers between them and are thus dissuading potential investors from coming to the region. Moreover, the investment climate in Central Asia is no longer an incentive for further large scale investment because, after ten years of independence, most of the most lucrative projects have already been implemented.

Potential inverstors in Central Asia have also been limited by the region’s political instability, unstable legal frameworks, inadequate corporate governance, bureaucratic interference, and rampant corruption. The European Bank for Reconstruction and Development has shown that among twenty-two countries in transition, a country’s foreign direct investment per capita is a very important indicator for a successful transition. Furthermore, macro-economic stability does not necessarily ensure foreign direct investment flows. For example, in December 1997, members of the American Chamber of Commerce in Uzbekistan stated publicly that bureaucratic culture and reprisals in Uzbekistan were directly heightening investor concerns and frightening corporations away. Three years later, international organizations report and foreign investors working in the region state that that this Uzbek example is being replicated by the four other Central Asian countries.

CONCLUSIONS: The Asian crisis was the turning point in Asian investment in Central Asia. Since 1998, East-Asian countries have realized that it is much easier and more profitable to invest in South-East Asia or in Central Europe than in Central Asia. This is why many investors today have adopted a cautious approach toward the region. Asian investment will not flow massively into Central Asia despite the region’s vital needs as long as macro-economic stabilization remains fragile, corruption is widespread, excess bureaucratic regulations are common, and the rule of law is not ensured.

Across Central Asia, the very low levels of domestic savings, investments, structural trade deficits, and foreign direct investment inflows have mitigated the effects of the economic transition. However, the situation is not hopeless. Foreign companies from South Korea or Malaysia would be ready to return to the region if local authorities would be dedicated to the in-depth liberalization of their economies. But this is one big if. In light of the recent economic and political developments in the region, the situation is not encouraging.

AUTHOR BIO : Gaël Raballand specializes in the study of economies in transition. In 1999, he served as an OSCE economic/environmental officer in Kyrgyzstan. He currently is a doctoral student at the Sorbonne University.

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