Pomfret (2009)_Regional Integration in Central Asia

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Regional integration in Central Asia

Richard Pomfret

Published online: 12 October 2008 Springer Science+Business Media, LLC. 2008

Abstract This paper analyses the interaction of regionalism and multilateralism in

the five Central Asian countries’ trade policies. The basic question is why have

leaders been willing to sign so many regional agreements, which often include

visions of regional trading arrangements (RTAs), and yet so unwilling to implement

any preferential trading arrangements? The paper examines the durability of mul-

tilateralism and the added incentives for joining the World Trade Organization in

light of China’s WTO accession in 2001 and Russia’s expected accession. The finalsection draws together arguments for multi-dimensional (bilateral, plurilateral, and

regional) regional cooperation within a WTO framework.

Keywords Central Asia Regional integration Multilateralism

The trade policy experience of the five Central Asian countries since they became

independent at the end of 1991 has been a microcosm of trends in international trade

policy. Many regional and bilateral trade agreements have been signed, often at thehighest political level, since 1991. The rhetoric of these agreements has envisioned

recreating the economic space (but not the economic system) part of the Soviet

Union or establishing a customs union on the European Union model or establishing

a free trade area, but their striking feature is the general lack of progress in

establishing or implementing preferential trade policies. Despite their presidents’

espousal of regionalism, in practice the Central Asian countries have in their trade

policies largely followed the path of policy autonomy combined with non-

Paper presented at the Conference on ‘‘The Political Economy of Regional Economic Integration: TheChallenges for the Emerging Economies’’, held in Ravenna, Italy, 18–19 November 2005. Parts of this

paper draw on background papers which I prepared for UNDP (2005) and ADB (2006).

R. Pomfret (&)School of Economics, University of Adelaide, Adelaide, SA 5005, Australia

e-mail: [email protected]

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discriminatory multilateralism. Their actual trade patterns have become much more

diversified since independence, with greater integration into global rather than

regional markets. Nevertheless, the governments have been cautious about

accession to the World Trade Organization and so far only one of the five countries

has become a WTO member.This paper analyses the interaction of regionalism and multilateralism in the trade

policies of the Central Asian countries and their neighbors. The opening section

provides a brief economic survey of the five countries. The second section assesses

regional economic agreements involving the Central Asian countries; the common

question running through these assessments is why have the Central Asian leaders

been willing to sign so many regional agreements, which often include visions of

regional trading arrangements (RTAs), and yet so unwilling to implement any

preferential trading arrangements? Section 3 examines the durability of multilat-

eralism and the added incentives for joining the World Trade Organization in lightof China’s WTO accession in 2001 and Russia’s expected accession. The fourth

section analyses the political economy of the choice between regionalism and

multilateralism, and sets out the distinction between regional trading arrangements

and regional cooperation in trade, and why the latter is a desirable concomitant of

WTO membership. The final section draws together the arguments for multi-

dimensional (bilateral, plurilateral, and regional) regional cooperation within a

WTO framework and offers some conclusions.

1 Background1

The five Central Asian countries became independent with the dissolution of the

Soviet Union at the end of 1991. Their role in the Soviet economy had been

primarily as producers of raw materials, mainly cotton, minerals, oil, and natural

gas. The four southern republics had, together with Azerbaijan, been the poorest

republics in the Soviet Union, while Kazakhstan had higher incomes and a more

diversified economy. In the early 1990s all five countries suffered substantial

economic decline following the end of central planning, the breakdown of economic

links within the former Soviet Union, and hyperinflation. The five countries’

economies began to grow after the mid-1990s and by 2005 they had essentially

completed the transition from central planning, although the timing and the type of

market-based economy varies substantially from country to country.

During the 1990s Uzbekistan, which pursued a gradual reform strategy, was the

most economically successful of all former Soviet republics, but a tightening of

economic controls after 1996 hurt long-term growth and its economic performance

has been less positive since the turn of the century. Turkmenistan has an even more

repressed economy with highly limited economic freedom, but the regime has been

able to survive thanks to large rents from natural gas. The most liberal economy in

the region is that of the Kyrgyz Republic, but economic performance has been

stymied by lack of natural resources, poor transport links, and poor institutional

1 This highly condensed account is based on my two books on Central Asia (Pomfret 1995, 2006).

48 Econ Change Restruct (2009) 42:47–68

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development. Tajikistan’s history has been dominated by a bitter civil war which

lasted until 1997, and which effectively swept away the old economic structure; like

the Kyrgyz Republic it is resource-poor and with a difficult location for accessing

world markets. Kazakhstan has pursued more liberal polices than Uzbekistan, but

the privatization process in the 1990s was characterized by large-scale corruption;the country’s economic performance has been a tale in two acts with disappointing

results until 1998, and an oil-fuelled boom since 1998 which made it the richest and

fastest growing economy in the region.

Table 1 provides summary statistics on the five countries’ economies. Uzbekistan

and Kazakhstan are the two leading regional powers, the former with the largest

population and the latter with the highest GDP. The data from Turkmenistan are the

most suspect and few observers would accept that the reported per capita GDP

figures reflect true living standards in the country, especially in rural areas which

have experienced serious economic and environmental problems. The KyrgyzRepublic and Tajikistan have become impoverished, with Tajikistan now ranking

among the least-developed countries in the world. All five countries have

maintained the relatively high social indicators of the Soviet Union, with life

expectancies of 66–70 years and almost universal literacy, although there are

concerns about declining educational and health standards.

In all five countries the leaders from the Soviet era repositioned themselves as

national leaders, and in all but Tajikistan the President in the early 2000s was the

first secretary appointed by Gorbachev in the final phase of the USSR. All of

these leaders established systems which gave power to the president, and limitedthe role of the legislature. In Tajikistan the situation was confused by the civil

war, but by the mid-1990s the President was establishing a super-presidential

system similar to that in the other Central Asian countries. In spring 2005 this

uniformity began to crack, as the Kyrgyz President fled the country, although it is

unclear whether his successor will, despite asserted commitments to greater

democracy and transparency, establish a less centralized system. In May 2005

protests in Andijan were violently suppressed by the Uzbek government,

signaling its President’s willingness to use force to retain power. At the time

of writing a question mark hangs over the political future of Kazakhstan whose

Table 1 Economic and social indicators, 2002

Population(Millions)

Life expectancyat birth (years)

GDP(BillionUS dollars)

GDP per cap(US dollars)

GDP per cap@ PPP(Internationaldollars)

Kazakhstan 15.5 66 24.6 1,656 5,870

Kyrgyz Rep 5.1 68 1.6 320 1,620

Tajikistan 6.2 69 1.2 193 980

Turkmenistan 4.8 67 7.7 1,601 4,300

Uzbekistan 25.7 70 7.9 314 1,670

Source: UNDP Human Development Report 2004—online statistical database at http://hdr.undp.org/statistics

Econ Change Restruct (2009) 42:47–68 49

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President is less likely to allow a peaceful revolution than his Kyrgyz counterpart

was, but he is also unlikely to be as ruthlessly repressive as his Uzbek

counterpart. In Turkmenistan the political future is highly uncertain because the

regime is highly personalized with no obvious successor when the President

becomes incapacitated or dies.When the five Central Asian countries became independent, they had open

economies measured by the ratio of exports and imports to GDP, but their trade

was geographically heavily concentrated, with 85–90% involving partners from

the former Soviet Union. Both trade and GDP were adversely affected by the

negative shocks of the early 1990s, but trade flows began to recover in the mid-

1990s and in the process became substantially more diversified, with over half of

the five countries’ international trade being outside the CIS after 1996. By the

early twenty-first century, all five countries were substantially involved in the

global economy, almost entirely as raw material exporters. Export/GDP ratiosestimated by World Bank staff with 2000 data were: Kazakhstan 59%, Kyrgyz

Republic 42%, Tajikistan 81%, Turkmenistan 63%, and Uzbekistan 25% (World

Bank 2004, p. 9).2

The trade policies of the five countries have generally been liberal, with low

average tariffs (Table 2) and without great tariff variance. This has not always

been true, as countries have levied high duties in reaction to external shocks

(e.g., Kazakhstan’s response to the 1998 Russian Crisis) or to protect specific

producers (e.g., the UzDaewoo car factory), and liberal trade policies have been

nullified by exchange controls introduced in Uzbekistan in 1996 (but loosened

since 2003) and Turkmenistan in 1998. Nevertheless, as might be expected of

export-oriented economies, the general picture is of tariff barriers which are not

especially high and which are collected on a multilateral rather than preferential

basis.3

Table 2 Average import tariff, 2002 (%)

Kazakhstan 7.9

Kyrgyz Republic 5.2

Tajikistan 8.3

Turkmenistan 0.5

Uzbekistan 19.0

Source: IMF data reported in World Bank (2004, Table 3.2)

2 Especially for Turkmenistan and Uzbekistan whose forex markets were tightly controlled suchcomparisons are subject to caveats about data and the appropriate exchange rate. For Kazakhstan and

Turkmenistan the high export/GDP ratios are driven by energy exports, while for the Kyrgyz Republicand Tajikistan they reflect a low denominator. Uzbekistan’s relatively low ratio hides its dependence on

cotton, of which Uzbekistan is in most years the world’s fourth largest exporter.3 Especially in the early years after independence, borders within the former Soviet Union were looselymonitored and customs duties were rarely collected on goods crossing these borders. Collection wastightened in the late 1990s and early 2000s, although some differential treatment for intra-CIS trade mayhave remained as a result of still-porous borders with corrupt officials or of the agreements described in

the next section.


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2 Regional trading arrangements in Central Asia

The Central Asian countries are involved in several regional organizations, some of

which seek to create a regional trading arrangement, as well as having signed

numerous bilateral trade agreements. This section analyses the evolution and current

activities of the various organizations and arrangements.4 Most have at some time

envisaged preferential trade policies—variously described as free trade areas,

customs unions, common markets, or a common economic space. These self-

descriptions do not always follow the normal usage, and it is better to examine the

specific content of each arrangement.

The membership of the various regional organizations in 2005 is summarized in

Table 3. The bilateral trade agreements are even harder to track, and the list of such

agreements with the date of signing in Table 4 is both too long, because some of the

agreements have not been implemented, and probably too short, because some

agreements may have been omitted. These often overlapping agreements, to the

extent that they envisage preferential treatment of regional or bilateral trade, exhibit

a spaghetti bowl effect.5

Table 3 Membership in regional organizations

CIS EAEC UES CACO SPECA ECO SCO CAREC

Azerbaijan 9 9 9

China 9 9

Kazakhstan 9 9 9 9 9 9 9 9

Kyrgyz Rep 9 9 9 9 9 9 9

Mongolia 9

Tajikistan 9 9 9 9 9 9 9

Turkmenistan 9 9 9

Uzbekistan 9 9 9 9 9 9

Russia 9 9 9 9 9

Iran 9

Pakistan 9

Turkey 9

Afghanistan 9

Armenia 9

Belarus 9 9 9

Georgia 9

Moldova 9

Ukraine 9 9

Note: See text for details

4 This section summarizes material in Pomfret (2003) and Sect. 4 of Pomfret (2005a), which provide

more details on the historical evolution of the various organizations.5 The term spaghetti bowl effect originated from Jagdish Bhagwati, and for Central Asia the effect is

illustrated in UNDP (2005, Fig. 2.1).


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The five Central Asian countries are all members of the Commonwealth of

Independent States (CIS), which was initially conceived as a framework in which to

maintain economic ties among the Soviet successor states. In both the political and

the economic spheres, however, the replacement of the Soviet Union by sovereign

nations created conflicts that the CIS framework was unable to contain. The CIS has

made no progress in introducing special treatment for trade among members,

although some members’ trade and tax policies continue to favor CIS partners.

In December 1994, Kazakhstan announced the formation of a customs union with

Russia and Belarus, which came into effect in 1995. The Kyrgyz Republic acceded

in 1996 and Tajikistan in 1999 making it a Union of Five. Despite the formal

agreements between 1994 and 2000, there was little evidence of implementation bythe Central Asian countries, and members’ actual policies were going in

contradictory directions. For example, the tariff bindings which the Kyrgyz

Republic agreed to in the negotiations leading to its 1998 WTO accession would for

Russia or Belarus be unacceptably low as part of the custom union’s common

external trade policy, and for similar reasons President Nazarbayev indicated in

September 1996 that Kazakhstan would leave the customs union when it acceded to

the WTO (Webber 1997, p. 56).6

In October 2000 the Union of Five was renamed the Eurasian Economic

Community (EAEC) and a new treaty was signed in Astana, which came into effectin May 2001. Although the institutional framework was strengthened in a bid to

ensure better implementation, the functional areas of the EAEC differ little from

those agreed within the earlier frameworks, with emphasis on free intra-community

trade and a common external tariff as well as a common market for labor and

capital, common policies towards migration, and more general policy harmoniza-

tion. A specific intention was to coordinate WTO accession negotiations, but even

this attempt at a common external trade policy is dubious given that the Kyrgyz

Table 4 Bilateral free trade agreements involving Central Asian republics and other CIS members

Kazakhstan Kyrgyz Rep Tajikistan Turkmenistan Uzbekistan

Armenia 1994

Azerbaijan 1997 2004 1996 1996

Belarus 1998 1993

Georgia 1999 1996 1995

Moldova 1995 1995 1993 1995

Russia 1992 1993 1992

Ukraine 1998 1994

Source: Tumbarello (2005, Table 1)

6 In 1996 Kazakhstan’s WTO accession seemed more imminent than proved the case. For both theKyrgyz Republic and Kazakhstan, harmonizing their tariffs with Russia’s would bring no benefits, andwould lead to trade diversion and trade destruction; (a) Russian goods would have a larger preferencemargin, encouraging greater replacement of imports from the least-cost supplier by more costly Russiangoods, and (b) higher external tariffs would encourage displacement of some imports by inefficient

domestic producers.


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Republic is already a WTO member and that Belarus appears to have differing

WTO goals than Russia.

The EAEC was from its 1995 origins explicitly aimed at being a customs union.

A formal agreement on the common external tariff (CET) for the customs union,

signed in February 2000, envisaged a CET consisting of tariff lines that werecommon to Belarus, Kazakhstan and Russia with the remaining tariff lines to be set

at a subsequent stage. The implementation period was 5 years, but by 2005 the CET

covered only 6,156 of the 11,086 tariff lines identified in the Union’s classification

system. The remaining tariffs are set independently by each member. Although

substantial harmonization of external tariffs is often reported, this applies to non-

contentious tariff lines; for example, the Kyrgyz Republic still has to align a third of

its tariff lines, and these are presumably the ones where the costs of change are seen

to be highest.

An alternative grouping among CIS countries emerged in February 2003 whenthe leaders of Russia, Belarus, Ukraine and Kazakhstan reached a tentative

agreement to create a United Economic Space (UES). Russia promoted the concept,

but the other three countries have to varying degrees bridled at suggestions of

establishing supranational institutions and of adopting the Russian ruble as a

common currency. The outcome of the December 2004 Ukraine election makes

cooperation even less likely.7

After the collapse of the ruble zone in November 1993, the presidents of

Kazakhstan, the Kyrgyz Republic and Uzbekistan agreed to create the Central Asian

Economic Union, announced in the Tashkent Declaration of January 1994 andformalized in the Cholpon-Ata Treaty signed by the heads of state in April 1994.

Intended to be modeled on the European Union, this organization evolved into the

Central Asian Economic Community (CAEC), when Tajikistan joined in 1998.

Apart from the activity of the now effectively defunct Interstate Central Asian Bank

of Cooperation and Development, the CAEC had little in the way of practical

achievements.8 Officials claimed to have made contributions in tax harmonization

and elimination of double taxation, but these are difficult to document, and the

CAEC had little impact on intra-regional trade. By some counts, at the CAEC

meetings the Central Asian leaders passed over 250 resolutions, but the implemen-

tation record fell far behind the statements of intentions.

In February 2002 the four Presidents proclaimed the Central Asian Cooper-

ation Organization (CACO) as the successor to the CAEC. They attempted to

7 Although Ukrainian President Yushchenko attended the August 2005 UES summit (held in conjunctionwith the CIS summit), he was only willing to sign 15 of the 29 agreements signed by the other three UESmembers and made it clear that any economic cooperation within the UES was subordinate to the largeraim of pursuing EU membership. Earlier in the same month the presidents of Ukraine and Georgia

announced a plan to create a Commonwealth of Democratic Choice, which was supported by Poland andLithuania, but not by Russia.8 The Interstate Central Asian Bank of Cooperation and Development was created in June 1994, but byJanuary 1997 the participating countries had given the Bank only some two-thirds of its charter capital,and it was clearly incapable of drawing substantial external funds into Central Asia for investment incollaborative projects. Borrowers in Uzbekistan were effectively excluded after the introduction inOctober 1996 of strict exchange controls, because the Bank made hard currency loans and required

repayment in hard currency.


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distinguish the CACO from its predecessor by emphasizing improved effective-

ness, but the founding agreement of the CACO continued to make lofty

aspirations without paying much concern to institutionalizing implementation.

The CACO summit in Dushanbe in October 2002 was combined with the

meeting of the four heads of state of the International fund to save the Aral Sea,and a regional business forum held its first session in November 2002 in

Tashkent, but after this initial flurry of activity the CACO seemed little different

from its predecessor. In May 2004 Russia became a CACO member, but this was

a sign of Uzbekistan-Russian rapprochement rather than a strengthening of the

CACO. The logical next step was for Uzbekistan to join the EAEC, or

equivalently, as announced at the CACO summit in Saint Petersburg in October

2005, for CACO and the EAEC to merge.

The newly independent Central Asian countries, Azerbaijan and Afghanistan

joined the Economic Cooperation Organization (ECO) in 1992.9

ECO aspires tobe a RTA, and the three founding ECO members (Iran, Pakistan, and Turkey)

offer preferential tariff treatment to one another. However, the list of eligible

products for preferential tariff treatment is extremely restricted, and, although the

Central Asian countries have expressed commitment to ECO principles, they

have not accepted even the limited preferential trading arrangements agreed

among the three founding members. Trade between the Central Asian countries

and their southern neighbors has expanded since 1992, but from a low base and

more slowly than many observers expected. Moreover, it has done so on a non-

discriminatory MFN basis rather than within an RTA such as the ECO foundingmembers envisaged in the early 1990s. In 1996 the Council of Ministers

approved the establishment of a permanent ECO Secretariat in Tehran, but this

was a highpoint for ECO at which subsequent summits broke down in acrimony.

As with the CAEC/CACO, the practical impact of ECO has been limited. In both

organizations a fundamental obstacle to regional integration is the similarity of

the member countries’ economies, which all tend to be specialized on a small

group of primary products (oil, gas, minerals, and cotton).

The Special Programme for the Economies of Central Asia (SPECA) was

launched in 1998 as a forum for regional cooperation, and differs from the

EAEC, CACO or ECO insofar as it has no intention of promoting preferential

regional trade.10 The main purpose of SPECA is to support the Central Asian

countries in strengthening their cooperation in order to both stimulate their

economic development and facilitate their integration with the economies of Asia

and Europe. Although SPECA could have become an institutional framework for

trade cooperation, its achievements have been minimal. In part, this is because it

has no self-funding mechanism, but the lack of achievement also reflects

incomplete participation; Uzbekistan and Turkmenistan have not attended the

9 The history and evolution of ECO are analyzed in Pomfret (1999).10 With the support of the United Nations Economic and Social Commission for Asia and the Pacific andthe United Nations Economic Commission for Europe, the presidents of Kazakhstan, the KyrgyzRepublic, Tajikistan and Uzbekistan signed the Tashkent Declaration on 26 March 1998 creating SPECA,and in September 1998 Turkmenistan officially indicated its intention to sign the Declaration and to

participate in SPECA projects.


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meetings of the Regional Advisory Committee, the governing body of SPECA

which is responsible for strategic decisions, and as SPECA became closely

associated with the EAEC’s members it became divisive rather than uniting for

the Central Asian region as a whole. The existence of SPECA is symptomatic of

the proliferation of institutions in Central Asia; if, for example, the CAEC/CACOhad been an effective regional organization, there would have been little need for

SPECA.

Another institutional vehicle for regional cooperation is the Central Asia

Regional Economic Cooperation (CAREC) program, an initiative to encourage

economic cooperation in transport, energy, trade policy, and trade facilitation

between Azerbaijan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan,

Uzbekistan, and Xinjiang autonomous region of China.11 Despite slow progress

since its launch in 1997, CAREC has some achievements in coordinating transport

and trade facilitation among the member states. The IMF has led support for theoperations of the CAREC trade policy coordinating committee, which was

established in September 2004 and which may signal a willingness to take definite

steps on trade facilitation (including cooperation on transport and on transit), where

the greatest gains from regional cooperation lie in the short-run. Expansion of

CAREC to include Afghanistan and Russia will increase its coverage in

geographically relevant directions, although it may dilute the decision-making

ability of CAREC.

Another overlapping configuration, dubbed the Shanghai Five, emerged from a

meeting in 1996 of China, Russia, Kazakhstan, the Kyrgyz Republic, andTajikistan intended to demilitarize borders. At a summit in Dushanbe in July

2000, the Shanghai Five, with Uzbekistan as an observer, took up a number of

economic issues, and the group changed their name to the Shanghai Forum. At the

June 2001 summit Uzbekistan became the sixth member and the group was

renamed the Shanghai Cooperation Organization (SCO). At the 2004 summit

Mongolia was admitted as an observer. After the June 2004 SCO summit,

Uzbekistan and Russia signed a strategic partnership agreement and China

announced plans to extend $900 million in loans and credits to Central Asian

countries. There has, however, been no move towards creating preferential trading

among SCO members.

The regional arrangements described in this section have often been in

implicit competition, reflecting differing and mutually exclusive political pacts,

and such ebbing and flowing of interest in alternative regional permutations has

inhibited the institutional development of any regional organization involving

the Central Asian countries. The main caveat to this generalization is that intra-

CIS trade tends to be freer than trade with non-CIS countries, and the internal

free trade regime is especially true with respect to trade among EAEC

11 CAREC is, like SPECA, supported by an alliance of multilateral institutions led by the AsianDevelopment Bank, and also including the United Nations Development Program, the European Bank forReconstruction and Development, the International Monetary Fund, the Islamic Development Bank andthe World Bank. In June 2005 consideration was being given by CAREC members to invite the RussianFederation and Afghanistan to participate as new members. Turkmenistan has been invited but has so far

refused to participate.


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members,12 but progress towards proposed customs unions has been slow overthe past decade.13 Otherwise, steps to make preferential trade policies

mandatory or to harmonize external trade policies have been practically

fruitless, and none has posed a threat to multilateralism in the Central Asian

countries’ trade policies. The economic impact of all of the manifold regional

agreements signed by Central Asian countries since 1991 has been minimal.

3 Multilateralism and the World Trade Organization

Membership in the World Trade Organization (WTO) is a natural institutional

counterpart to economic openness. In the 1990s, however, the Central Asian

countries (apart from the Kyrgyz Republic) were suspicious of international

obligations which placed constraints on their policy autonomy. They were happy to

join the United Nations as a signal of nationhood, and to join the International

Monetary Fund and World Bank and the regional development banks as potential

sources of capital, but they held back on WTO accession. For Turkmenistan, this

attitude remains even in 2005, as the President views WTO membership as

incompatible with the country’s neutrality.With low average tariffs, the main obstacle to WTO membership has been

governments’ unwillingness to formally abjure their policy independence, and right

to impose temporary tariffs or artificial non-tariff barriers. So far, only the Kyrgyz

Republic has joined the WTO (Table 5). Kazakhstan’s application is fairly far-

advanced, with an active program of Working Party meetings in recent years. The

accession process of Uzbekistan and Tajikistan is at an earlier stage than

Table 5 Status of WTO accession negotiations to mid-2005

Applied Working parties Member

Kazakhstan January 1996 7 meetings 1997–2004

Kyrgyz Rep. 1993 DeD December 1998

Tajikistan May 2001 1 meeting, March 2004

Uzbekistan December 1994 2 meetings, July 2002 & June 2004

Turkmenistan Not applied

China 1986 December 2001

Russian Fed. June 1993 28 meetings, 1995–2005

Source: WTO website

12 There have been exceptions when trade barriers have been imposed at internal CIS borders, but some

of these measures have been temporary.13 Tajikistan did increase some tariffs in 2004 in order to give itself more leeway in negotiating WTOaccession without committing to bound tariff levels which would be unacceptable to Russia as a commonexternal tariff for the customs union. As mentioned above, however, there is a strong economicdisincentive for the smaller economies to accept a Russian-devised tariff which would discourage their

citizens from buying imports from the most competitive source.


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Kazakhstan’s, although for all three countries the process has speeded up since

2002.14

WTO membership brings both costs and benefits, although the costs are often

misinterpreted. The Kyrgyz Republic’s WTO accession was followed by recession,

which critics of the WTO ascribe to the onerous obligations of WTO membership,but this confuses before/after and with/without comparison. The Kyrgyz post-WTO

troubles arose because non-WTO factors (such as the Russian Crisis, Kazakhstan’s

50% devaluation, and the collapse of three of the country’s four largest banks)

dominated any positive WTO effect. The WTO is no panacea, and for the Kyrgyz

Republic the positive effect of accession was weak because transport and transit

conditions stymied Kyrgyz trade.

A more robust criticism of the Kyrgyz Republic’s accession experience is that the

negotiators, whether due to inexperience or by intent, failed to make transitional

arrangements or gain exemptions that would have protected Kyrgyz interests. Somelearning process is reflected in Kazakhstan’s lengthier and more detailed WTO

negotiations, and harder stance on some of the voluntary codes. The appropriate

negotiating balance must reflect a country’s preferences and compliance capabil-

ities; immediate compliance may be problematic and a phasing-in period desirable.

Nevertheless, even this criticism lacks much force, because WTO-based restrictions

on trade practices are largely what a small open economy should be doing in its own

interests, and WTO members retain flexibility over applied tariffs as long as they are

below the bound level.

The more substantial costs of WTO accession are in building institutionsto ensure compliance with the various WTO codes, even though bilateral and

multilateral donors can assist with this institution-building. Many of these non-core

elements of the WTO are, like the commitments to non-discriminatory trade policies

and not to increase bound tariffs, in the interest of the acceding country, but the

introduction, implementation, and enforcement costs may outweigh the benefits for

a poor country.15 One lesson learned from the Kyrgyz Republic’s brief accession

negotiations is the desirability of being selective in entering into non-core

commitments.

14 The timing and number of Working Party meetings provides a reasonable but imperfect guide to theprogress of accession negotiations. Uzbekistan’s Working Party did not meet 1994–2002 because little orno progress was being made during that period. A large economy or a more complex case will requiremore Working Party meetings than simpler or less contentious cases. The 28 meetings of Russia’sWorking Party reflect more progress than in the case of Uzbekistan, but also the complexity of Russiannegotiations and the relative importance of the Russian economy, so that existing WTO membersscrutinize Russia’s offers more carefully than the offers of, say, the Kyrgyz Republic or Kazakhstan.15 An oft-cited example is the cost to Cambodia of adopting and implementing legislation consistent withthe Trade-Related Aspects of Intellectual Property Rights (TRIPS) code, which was signed as part of

Cambodia’s 2004 WTO accession. Despite external assistance in training officials and the private sectorin anticipation of TRIPS enforcement, the government still spent much legislative time drafting laws, andlawyers, judges, law enforcement and customs officials were taken away from other duties to be trained inTRIPS compliance. Given the low probability of Cambodia producing intellectual property that canbenefit from TRIPS protection, the net benefit from all of these activities is unlikely to have outweighedthe opportunity cost of scarce human capital. For more detailed treatment of these compliance costs,

including a box on Cambodia’s experience, see Hoekman and Bernard (2005).


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The most important benefit of WTO membership is to place trade on a common

basis of international trade law, and potentially to separate trade from politics.

Accession by more Central Asian countries would provide a common framework

for formal trade policies and dispute resolution with respect both to a greater

proportion of intra-regional trade and to trade with all of the region’seconomically important neighbors. The WTO rules also impose some consistency

on customs and border practices which will help to facilitate trade within the

region. The benefits to Central Asian countries from WTO membership have been

accentuated by China’s accession in 2001 and will be further reinforced by

Russia’s imminent accession.16 Pakistan and Turkey have long been WTO

signatories, and Iran’s WTO accession is also on the horizon after a March 2005

announcement by the USA that it would not oppose an application. There are

important network benefits from WTO rules. When Mongolia and the Kyrgyz

Republic joined the WTO in 1997 and 1998, the benefits were limited becausetheir neighbors were not members. Chinese accession in December 2001 and the

imminent Russian accession dramatically transform the situation. The benefits of

common rules are greater as more people play by them.

The importance of a common and enforceable institutional framework is

illustrated by the Kyrgyz Republic’s experience. The Kyrgyz Republic has formal

free trade agreements with all CIS members except Georgia, and yet Kyrgyz trade

with partners covered by these bilateral agreements has been subject to many

restrictions whether as emergency reactions to the 1998 Crisis in Kazakhstan, or

Uzbekistan’s attempts to discourage shuttle traders by tariff increases, or byarbitrary anti-dumping duties imposed by CIS trading partners. Most of these

measures would be illegal under WTO rules, but the Kyrgyz Republic has been

unable to do much about the restrictions and WTO membership offers little

protection as long as most of its CIS partners are not bound by WTO

membership. While WTO accession would limit the ability of countries to

suddenly increase their own tariffs, the benefits from guarantees against partners

doing the same thing is more valuable and increasingly so as more neighbors

accede to the WTO.

A basic explanation of the disappointing trade performance of the Central Asian

countries is the poor institutional environment. WTO membership could alleviate

this major obstacle to trade by providing the framework in which regional and wider

trade can flourish. Trade is difficult if players play by different rules, and the WTO

provides a set of rules to ensure that one country isn’t playing soccer rules while

another plays hockey rules. Access to the strengthened dispute resolution process of

the WTO is an important benefit for smaller trading nations, who have a credible

recourse against large countries which bend the rules.17

16 The Russian Federation, at the 27th session of its Working Party on 13 and 15 April 2005, completedbilateral negotiations on goods with 29 WTO members (the EU counting as one), who account for 87% of total Russian imports.17 The lack of dispute resolution or enforcement mechanisms has often been a weakness of RTAs, so thatfor the Central Asian countries common WTO membership is likely to provide superior recourse against

large neighbors’ RTA- or WTO-illegal trade measures than membership in an RTA would.


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WTO accession could bring further benefits by encouraging liberal policies and

punishing backsliding on commitments. At a minimum, WTO membership ensures

that tariff rates are bound, but as members sign on to more codes of behavior there is

a greater legal commitment to policy stability, and WTO dispute settlement

mechanisms offer some recourse for people damaged by unforeseen policy changes.Such an environment helps to attract foreign direct investment, as well as making

domestic investment more attractive.

With a positive domestic environment, WTO membership helps to ensure that a

country can reap benefits from specialization and trade with diminished fear of

protectionist responses in foreign markets. Small trading nations have always been

open to unilateral restrictions on their exports to larger trading nations, but one of

the major developments in the WTO, as opposed to the pre-1995 situation, is that

the dispute settlement mechanism provides a more credible means of redress. Less

powerful trading nations have won cases against the major trading nations, and the judgments have been implemented by the latter. Of particular interest to Central

Asian countries is the October 2004 WTO ruling in support of Brazil’s complaint

against US subsidies for cotton production; although the USA is drawing out the

year-long appeal process, there is a time limit to this and little doubt that the

eventual outcome will be some reduction in support for US cotton producers.

Finally, WTO membership would grant some leverage to reduce existing illiberal

polices. Most immediately, Uzbekistan and Tajikistan would want to join WTO

member countries lobbying for reduced subsidies to cotton producers in the USA

and EU.

18

Four West African countries have had success in publicizing the harmfulimpact of these subsidies on some poor countries’ export earnings, and they

formally introduced the Cotton Initiative into the Doha Development Agenda in

April 2003. Central Asian cotton-producing nations would broaden the coalition and

highlight the iniquity of subsidizing rich country farmers to the detriment of poor

farmers in areas with a comparative advantage in growing cotton. More generally, a

feature of the WTO negotiating process, especially since the September 2003

Cancun ministerial meetings, has been the formation of various groupings of

countries to lobby on particular issues. The Central Asian countries may want to

join the group of 19 developing and emerging economies pressuring for changes to

WTO rules on agriculture, or conceivably in future Kazakhstan might want to join a

group lobbying against EU and US iron and steel policies, or Azerbaijan and

Kazakhstan might be interested in an energy-related trade group.

There is symmetry in the analysis of regional trading arrangements and WTO

membership as routes to realizing greater gains from trade. Regionalism may appear

attractive, but on deeper investigation using preferential tariffs to encourage imports

from a neighbor who is not the least-cost producer of a good has economic costs.

Multilateralism formalized by WTO membership may look like an unattractive

restriction on policy autonomy, but on deeper investigation it provides the best

18 Removing subsidies to US and EU cotton producers would lead to a higher world price for cotton.Pomfret (2005c), using World Bank data, estimates that in Uzbekistan, Turkmenistan and Tajikistan GDP

per annum would be 3–6% larger in the absence of the EU and US subsidies.


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framework within which the Central Asian countries can develop their international

economic relations.

4 The political economy of regional trading arrangements versus regionalcooperation

Despite the lengthy history of non-achievement by RTAs signed since 1992,

proposals for regional trading arrangements continue unabated, whether in the form

of a free trade area, a customs union, or deeper economic union. At the eighth ECO

summit in Dushanbe in September 2004, Iran proposed committing to an ECO free

trade zone by 2015. Also in 2004 President Karimov of Uzbekistan called for a

Central Asian customs union, even though it seems implausible that Uzbekistan

would accept the Kyrgyz tariff as the common external tariff of a customs union,and the Kyrgyz Republic would have to renounce its WTO obligations to raise its

tariffs in March 2005 Presidents Karimov and Nazarbayev set up a working group

on the creation of a free trade zone between the two countries.19 What is the

fascination with RTAs in Central Asia despite their abject record?

Part of the motivation behind announcements of regional initiatives is political,

and the various groupings must be viewed in light of individual countries’ political

objectives. Among the smaller countries, Turkmenistan, with abundant rents from

natural gas and cotton and with an autocratic leadership, has seen no need to impose

any limits on its policy independence.

20

At the other extreme, the Kyrgyz Republicwith limited natural resources and relatively liberal leadership was most open to the

suggestions of international institutions that it integrates rapidly into the global

economy. Tajikistan went through a bitter civil war for most of the 1990s, and the

leadership is well aware of its debt to Russia for military assistance. The two largest

countries have had broader visions of their role on the international stage and

competition for regional leadership has never been far from the surface, but

Kazakhstan is constrained by the large Russian minority whose location near the

Russian border poses a constant implicit threat of secession. Thus, Kazakhstan has

leaned closer to Russia, but both Kazakhstan with its oil and Uzbekistan with cotton

and gold are open economies supplying global commodity markets in which

preferential treatment is irrelevant for export promotion and undesirable in

constraining import choice.

Superimposed on these more or less structural political considerations have been

fluctuating international relations objectives. In 1992 and 1993, after the unexpected

and largely unwanted independence of their countries, the Central Asian presidents

were concerned with nation-building, cementing their own authority, and

19 In 2004 there were also proposals for monetary integration. The Chairman of the Kazakhstan central

bank proposed a common currency for the EAEC and senior Russian political leaders proposed adoptingthe ruble as a common currency for the UES, both aspiring to follow the European Union’s adoption of the euro.20 The centerpiece of Turkmenistan’s diplomacy was obtaining recognition of its neutrality by the UNGeneral Assembly in 1995. The President rarely participated in meetings of regional organizations of

which Turkmenistan is a member, e.g., he was a non-attendee at the CIS August 2005 summit in Kazan.


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minimizing, or at least controlling, economic change. They retained the ruble for

longer than most other former Soviet republics, and they participated in the many

summits aimed at maintaining the Soviet economic space. As the collapse of the

ruble zone became inevitable during the second half of 1993, the presidents of

Kazakhstan and Uzbekistan made several statements on the need to maintain acommon economic space in Central Asia. After 1994, however, as Uzbekistan

attempted to assert a stronger leadership role in Central Asia, Kazakhstan’s interest

in the CAEC waned and interest in a Russian-centered RTA grew.

The rapid accession to ECO in 1992 reflected a keenness of all of the Central

Asian leaders to diversify their countries’ direction of trade and to assert their

solidarity with Islamic neighbors, especially if they supported secular Islam. The

southern orientation was reinforced by linguistic and cultural ties between Tajiks

and Iran and between the other four countries and Turkey, but the willingness of the

three ECO founders to provide practical assistance to the new ECO members fellshort of the Central Asian countries’ expectations. In 1995 and 1996 Uzbekistan,

partly responding to Kazakhstan’s pro-Russia shift, moved closer to the USA. This

undermined relations with Iran, and the 1996 ECO summit ended early amid

acrimonious insults between Iran and Uzbekistan. Within the CIS a split deepened

between the Union of Five members (Russia, Belarus, Kazakhstan, the Kyrgyz

Republic, and Tajikistan) and the GUUAM (Georgia, Ukraine, Uzbekistan,

Azerbaijan, and Moldova) group, and the fault line ran down the middle of Central

Asia.21

The role of the USA in the region grew in the early 2000s, as the USA establishedbases in Uzbekistan and the Kyrgyz Republic for military operations in Afghanistan.

This development was viewed with suspicion by other regional powers, but Russia

and China at least initially were constrained to pay lip-service to a common cause

against terrorism. China had been shifting away from support for the USA during

the late 1990s.22 This was reflected in China’s participation in the predecessors to

the SCO; China’s first real experiment with regional arrangements. In the 1990s and

early 2000s China obtained little response from the Central Asian countries, who

harbored lingering suspicions of their large neighbor’s territorial ambitions and fear

of Chinese immigration.23 After the 2003 invasion of Iraq, however, the welcome

for US troops in Central Asia began to be reassessed. A greater emphasis on the

SCO, especially by Uzbekistan, reflected growing concerns about the reliability of

21 Turkmenistan remained ostentatiously neutral. Armenia, in a cold war state with Azerbaijan, waseffectively in the Russian-led camp, although the diaspora kept Armenia’s profile positive in the USA.Uzbekistan formally joined the four GUAM countries in 1999, effectively withdrew from the alliance in

2002, and withdrew de jure in May 2005.22 China had been a strong supporter of the US-led multilateralist response to the 1997 Asian Crisis, but

by the turn of the century it was cooperating with Japan in building regional monetary institutions such asthe Chiang Mai Initiative (Pomfret 2005b). The US bombing of the Chinese embassy in Belgrade appears

to have been a catalyst.23 The xenophobic fears of the 1990s reflected the isolation of Soviet Central Asia and inheritedterritorial claims by China. By the end of the decade Kazakhstan, the Kyrgyz Republic and Tajikistan hadall reached border delimitation agreements with China, and were ready for normal relations. ForUzbekistan the presence of China as a counterweight to Russia made the SCO acceptable at a time (1999–

2002) when Uzbekistan was a member of the anti-Russian GUUAM group.


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the USA. Although the economic motives for closer ties with China and Russia had

not changed, the political motives became stronger as Uzbekistan recognized

kindred spirits in the Chinese and Russian leaderships’ attitude towards democracy

and civil rights.

The relative position of the USA, China, and Russia was highlighted after theMarch revolution in the Kyrgyz Republic and the Andijan events of May 2005. US

calls for an independent inquiry into the deaths at Andijan were met by an Uzbek

demand that the US base in Uzbekistan be vacated within 6 months. On 5th July the

SCO requested the USA to set a deadline for the withdrawal of US military

personnel from Central Asia. The Russian foreign minister meanwhile justified his

country’s complaisance with the Uzbek regime by saying that ‘‘Uzbekistan is not a

CSTO member, and we do not interfere in the internal affairs of other countries’’.24

A China Foreign Ministry spokesman said ‘‘About what happened in Uzbekistan

recently, we think it’s their internal affair, but we strongly support the governmentcrackdown on separatists, terrorists and extremists’’.25

The apparent shift towards China and Russia was, however, incomplete, as the

Kyrgyz Republic, despite the SCO policy, renewed the US lease on an airbase near

Bishkek. When US secretary of state Condoleezza Rice visited Central Asia in

October 2005, she visited Kazakhstan, the Kyrgyz Republic, and Tajikistan, while

pointedly avoiding the formerly strongest US ally in the region, Uzbekistan.

Superficially at least, there had been a reversal of alliances as the three countries

formerly closest to Russia now tilted towards the USA, and the two most repressive

regimes shifted towards Russia.26

The speed with which political alignments have changed in Central Asia since

1991 helps to explain the ephemeral nature of the many regional arrangements. For

the presidents, treaties of friendship and economic cooperation are cheap ways of

signaling political alignments. From a Soviet culture which paid little respect to

economic contracts, there was most likely little expectation that these agreements

would ever be implemented in their economic details. That was, however, not the

Table 6 Welfare effects of implementing the eurasian economic community customs union (million USdollars)

Kazakhstan Kyrgyz Republic

Change in tariff revenue ?223.4 ?22.8Change in consumer surplus -255.2 -26.3

Net welfare effect -31.8 -3.5

Source: Tumbarello (2005, Table 4)

24 Quoted in ‘‘The Geopolitical Balance in Central Asia tilts towards Russia’’, posted 6 July 2005 at

www.eurasiant.org. The Collective Security Treaty Organization (CSTO) includes the members of theEurasian Economic Community and is headed by a Russian ex-general.25 Quoted in ‘‘International Pressure on Tashkent mounts over Andijon’’, posted 1 October 2005 at

www.eurasiant.org.26 Turkmenistan had begun to deviate from its strict neutrality, bordering on political isolationism, by

seeking Russian economic assistance.


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point. The political twists and turns work against the establishment of any strong

regional organization; even the CIS is the subject of continual speculation about its

imminent death.

There are also strong economic reasons why the Central Asian countries do not

implement preferential regional trading arrangements (Pomfret 1997/2001). Theprinciple argument is the likelihood of trade diversion. Preferential duties on

imports from a neighbor will encourage consumers to purchase some goods which

appear to be better value than the tariff-inclusive price of lower-cost or higher-

quality imports. The government of the importing country loses tariff revenue, and

consumers are worse off than they would be with non-discriminatory tariff

reductions. Although the political leaders may not express their concerns in terms

such as ‘trade diversion’, there is a strong recognition when agreements come down

to implementation that, while a country may want to expand the market for its own

sheltered industries, they do not want to give preferential status to their neighbors’manufactured goods.

The most advanced RTA in the region is the Eurasian Economic Community. For

both the Kyrgyz Republic and Kazakhstan, harmonizing their tariffs with Russia’s

higher tariff rates would lead to trade diversion and trade destruction. This comes

out clearly in the scenarios for EAEC customs union analyzed by Tumbarello

(2005). Using a simple partial equilibrium model of the response of trade flows to

changes in tariff rates, she shows that both Kazakhstan and the Kyrgyz Republic

would receive more tariff revenue as customs union members, but the welfare

effects would be dominated by the loss of consumer surplus (Table 6). On the otherhand, if the Eurasian Economic Community members were to join the WTO and

hence bind their tariff rates before implementing the customs union, then the lower

tariffs would mean that although Kazakhstan would still lose from entering into a

RTA with Russia and Belarus, the welfare loss to Kazakhstan ($2.4 million) would

be less than ten percent of that in Table 6.

Similar quantitative exercises are not available for other RTAs in the region,

primarily because they are far from realization. Nevertheless, given the similarity of

economic structure of the members of ECO or CACO, it is apparent that the

potential for trade creation is small and the opportunities for trade diversion are

large. In sum, the potential for RTAs, whether simple preferential tariffs as among

the three founding ECO members or more ambitious free trade areas or customs

unions, is limited because they are likely to be economically harmful and there is no

political will to accept economic costs in the name of creating an economic or

political union. The prospects for deeper regional integration are likewise limited

under current circumstances, because no government in the region is ready to accept

constraints on its policy autonomy in the kind of areas that other deeper regional

integration schemes have entered such as financial sector regulation, competition

policy or monetary integration.

There remains, however, an important role for regional cooperation (UNDP

2005). Many of the obstacles to trade in Central Asia require regional

cooperation in order to reduce the costs of trade. Tariffs and traditional non-

tariff barriers, which are the subject of national policy, are only a small part of

the story. Trade facilitation, while more mundane, is an area in which progress


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could be made to reduce foregone opportunities for mutually beneficial trade and

also to enable landlocked countries to facilitate transit of goods to the wider

international market. With respect to trade facilitation, transport and transit,

regional cooperation is complementary to multilateralism in trade and must not

be confused with regional trading arrangements whose goal is preferential tradepolicies.

Regional cooperation in areas not covered by the WTO is a complementary

element of the new institutional environment. The need for regional cooperation

appears to be recognized by the Central Asian leaders, but they have failed to

create suitable institutional mechanisms. This is highlighted by the example of

the ECO transit agreements, which on paper could have alleviated many of the

region’s transit problems. Only eight countries signed the 1995 transit trade

agreement, and the two non-signatories, Afghanistan and Uzbekistan, straddle

some of the most important routes in the region. The agreement officially enteredinto force in December 1997, but by early 1999 only five national governments

had ratified the agreement. The modified, and much watered down, 1998 transit

agreement had, as of mid-2000, only been approved by Azerbaijan and

Tajikistan, whose geographical position makes them marginal countries to an

ECO-wide transit arrangement. Many of the free trade agreements among CIS

members contain provisions on transit which have likewise not been honored.

The unwillingness of key countries to accept the principle of unhindered passage

of goods in transit remains a major obstacle to trade in Central Asia.

Apart from trade issues there is a pressing need for regional cooperation onenvironmental issues, most dramatically the desiccation of the Aral Sea, and

perhaps on security matters in the face of insurgent threats. In the longer term a

more formal regional arrangement may be beneficial for some countries in the

region. Advocates of regional agreements often point to the success of the

European Union, and call on Central Asian leaders to follow this example. In the

current Central Asian context, this is a red herring, because the political will is

less and the economic costs greater. On the political level, the EU has been the

vehicle for closer political ties, whereas the Central Asian countries have no wish

to compromise their political autonomy. On the economic level, the least-cost EU

producer’s price (aside from agriculture) is generally little different from the

world price, so the costs of trade diversion have been low; among the

economically similar Central Asian countries the least-cost producer of an

import-competing good is unlikely to be close to matching the world price, and

trade diversion costs will be high. In the future, however, if a group of countries

in the region wish to pursue deeper regional integration, then a formal

arrangement may be desirable.

At the same time there are some less powerful pressures working against the

assertion of policy autonomy in trade matters. Increasing WTO coverage will

highlight the distinction of non-membership. Turkmenistan is the only country in

the region not to have applied for WTO membership and, if all other countries

acceded, this would highlight the unwillingness of Turkmenistan to accept the

norms of international trade law, exposing producers to specific risks such as sudden

changes in tariffs on imported inputs or in customs practices and deterring potential


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investors by the general institutional uncertainty. If Uzbekistan or Azerbaijan,

whose WTO negotiations are proceeding more slowly, were to remain non-members

as Russia, Kazakhstan, Tajikistan, and Iran became members, then these countries

would also share the outsider status of Turkmenistan. As mentioned above, there are

good reasons for taking care over the accession negotiations,27

but it is alsoimportant to recognize the costs of non-membership and that these costs will

become more salient as the neighborhood is transformed from a non-WTO to a

WTO zone.

5 Conclusions

It has become commonplace to state that regional or bilateral trading

arrangements are becoming a major feature of the global trading system. Suchstatements are supported by counting the number of RTAs notified to the WTO,

which reached at an all-time high in the early 2000s. Crawford and Fiorentino

(2005) state that ‘‘Between January 2004 and February 2005 alone, 43 RTAs

have been notified to the WTO, making this the most prolific RTA period in

recorded history’’. One reason for the rapid increase in the number of RTAs

during the 1990s was the proliferation of bilateral and plurilateral free trade

agreements among former Comecon countries, which were a response to regional

disintegration, rather than a trend towards regionalism. On 1st May 2004 when

eight eastern European countries joined the EU, the web of bilateral tradingarrangements among the accession countries and of preferential agreements

between the accession countries and the EU became redundant, although with the

incorporation of eight more countries into the EU customs union the degree of

regionalism was increased. As a result of the EU enlargement in 2004 the

number of registered RTAs fell from 285 to 229 (World Bank 2005, p. 53n), so

that allowing for abrogation after the EU enlargement the net change in number

of RTAs during the period identified by Crawford and Fiorentino as ‘‘the most

prolific RTA period in recorded history’’ was negative (Pomfret 2007). Some

RTAs are important, but counting RTAs is nonsense because some arrangements

are of little importance and some are never implemented. In sum, the economic

significance of such arrangements (as opposed to the extent to which they

preoccupy trade negotiators and economic journalists) is not obvious. In contrast,

it is arguable that, despite the increased attention being paid to regional

arrangements, the hold of multilateralism is stronger than ever as practically all

trading nations have now acceded to the WTO, with lower trade barriers and

stronger trade dispute settlement procedures.

27 For both Azerbaijan and Uzbekistan some of the major obstacles to concluding the accessionnegotiations are policies which are not in their own national interest, notably the desire to retain throughhigh bound tariff levels the ability to protect inefficient import-competing industries and the desire toexclude structural reforms of subsidized public utilities. More fundamentally, the governments seem toshare, albeit in less extreme form, Turkmenistan’s reluctance to accept the external constraints on policy

autonomy which are inherent in fuller participation in the global economy.


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The gap between negotiated and actual RTAs is nowhere more apparent than in

Central Asia.28 The economic reasons for not implementing the many preferential

trading agreements signed by Central Asian countries since 1992 are powerful. They

are not a practical approach to realizing the gains from specialization and trade, and

they would impose substantial trade diversion costs as consumers responding todistorted relative prices would be encouraged to purchase goods from favored

suppliers who are not the least-cost or best-quality producers. Quantitative estimates

of a Eurasian Economic Community customs union point to negative net economic

effects for Kazakhstan and the Kyrgyz Republic. Other putative RTAs are likely to

have even more strongly negative economic effects for the Central Asian countries,

especially when they involve competing economies whose exports are concentrated

in a narrow range of primary products. These are not just abstract exercises; they

help to explain why the many RTAs which have been signed have not been

seriously implemented.Why have so many RTAs been signed in Central Asia? In the early 1990s many

were flailing attempts to limit the impact of huge negative shocks, by preserving

anachronistic trade flows or by establishing new markets, but RTAs were not an

effective strategy. By the mid-1990s a more powerful driving force was the use of

trade agreements as a foreign policy instrument, especially by the two largest

countries (Kazakhstan and Uzbekistan). The effectiveness of this policy tool is hard

for an economist to assess; the RTAs had little economic impact either for good or

for ill, apart perhaps from distracting the attention of policymakers from multilateral

trade diplomacy. Whether they achieved political goals of signaling friendship isless clear. Because political allegiances in the region were shifting over the first

decade and a half after independence, none of the regional agreements led to

establishment of an effective regional organization in Central Asia.

The positive feature of the de facto multilateralism in trade relations is that the

region remains well-placed to take advantage of opportunities offered by China’s

WTO accession and Russia’s imminent accession. Central Asian countries which

are or become WTO members will benefit from a rule-based environment in their

trade with all neighboring economies except Afghanistan and Iran. Moreover, WTO

rules are generally the most desirable trade practices for small open economies. The

costs in terms of restrictions on import-substitution strategies and other anti-liberal

trade policies and in terms of reduced potential for political grandstanding via

economic proposals in regional fora are minor—and indeed the tying of

governments’ hands in such activities should benefit the countries’ citizens.

Additional benefits from WTO membership include a possible reform-reinforcing

effect, as well as access to the WTO dispute resolution mechanism and the ability to

join coalitions working towards reducing trade barriers facing important exports.

Regional cooperation to reduce trade costs is fully compatible with WTO

membership. To date there is no pre-eminent institutional setting for such

cooperation in Central Asia; existing organizations have either found it difficult

28 Because they do not involve WTO members, many of the agreements negotiated by the Central Asiancountries are not notified to the WTO or recorded by the WTO. Thus the count of RTAs on the WTOwebsite, which is used by most authors, is lower than the true number, but the actual significance of RTAs

is not understated by omitting the Central Asian RTAs.


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to implement agreements, or they do not include all relevant countries. In practice,

regional cooperation does not require a single institution; sometimes bilateral

agreements are appropriate (e.g., for coordination of border crossing arrangements),

while for other purposes a plurilateral agreement may be more appropriate (e.g.,

transit agreements). Regional regulatory regimes may be harmonized under theGeneral Agreement of Trade and Services (GATS) as more Central Asian countries

accede to the WTO and GATS is extended. Regional regulatory cooperation is

desirable in, for example, air transport, which was explicitly taken outside the WTO

in a Uruguay Round GATS annex; air transport is regionally poorly connected in

Central Asia (e.g., there are no direct flights between Almaty and Bishkek or

between Tashkent and Dushanbe) and could benefit from a regional open skies

agreement similar to the European Civil Aviation Area model which has greatly

increased the number of point-to-point services and brought down prices.29

Regional cooperation on environmental issues such as the desiccation of the AralSea is even more desirable, although progress is slow. Deeper integration may be a

longer term goal for some countries in the region, e.g., some commentators in

Kazakhstan talk about deepening the EAEC after Russia and Kazakhstan have

joined the WTO, although this would clearly have a strong political dimension.

Although the trade policy experience of the five Central Asian countries has been

a microcosm of trends in international trade policy, with many regional and bilateral

trade agreements signed, often at the highest political level, since 1991 but with

limited implementation, there are distinctive features. The Central Asian govern-

ments faced almost uniquely traumatic shocks, for which they were ill-prepared andwhich they had to deal with in the midst of nation-building from scratch.30

Policymakers had little experience of market economies and few instruments of

foreign policy. In this context, failure to appreciate the full economic impact of

trade policy decisions is understandable, while the Soviet experience encouraged

grandiloquent statements of international amity without seeing any obligation to

deliver on trade policy commitments. Fifteen years later, such excuses are wearing

thin, and WTO accession will harden the constraints on seeing RTAs as

opportunities for cheap talk rather than serious negotiations.

References

ADB (2006) Central Asia: increasing gains from trade through regional cooperation in trade policy,transport and customs transit. Asian Development Bank, Manila

Crawford J-A, Fiorentino R (2005) The changing landscape of regional trade agreements. WTOdiscussion paper No. 8, World Trade Organization, Geneva

Hoekman B (2005) Making the WTO more supportive of development. Finance and Development,March, 14–18

29 Such an approach to air transport is advocated by Chorobek Imashev ‘‘Trade Facilitation in CentralAsia: Perspective for Kyrgyz Republic’’ (paper commissioned by the Swiss government and presented at

an ADB workshop in Almaty on 10–11 June 2005).30 The economic shock was bigger perhaps only in Mongolia, which has bucked the regionalism/

bilateralism trend insofar as it is in the only WTO member with no RTA.


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