High priced commodities stall regional reform - EBRD

An increase in commodity prices throughout the world, including Central Asia, is impeding economic reform in some countries of the region, a new report by the European Bank for Reconstruction and Development (EBRD) said this week. "There is a risk and a tendency that reforms stall if countries have it too good," Sam Fankhauser, the EBRD's director of policy study and sector strategy, told IRIN from the bank's headquarters in London. "This is unfortunate because high price periods would be an opportunity to soften the blow of painful reform." His comments follow the release earlier this week of the EBRD's latest transition report, measuring progress to a market economy and pluralist democracy among the former Communist countries of central Europe and Central Asia. Despite some progress made, the report warned that even in the most successful transition countries, the scope for further progress had not been exhausted. Political leaders in the region, including central Asia, needed to renew their commitment to structural reforms and sound macroeconomic policies, both of which were drivers of sustainable growth. Like most countries in the Commonwealth of Independent States (CIS), growth continued to rely heavily on high but volatile prices for energy, metals and various agricultural commodities, the report said, adding sustainable diversification into other sectors remained a challenge for all countries that exported natural resources. "Obviously high commodity prices - and hence the growth that comes with it - are not sustainable," Fankhauser said. "We show in the report that sustained structural reform is important for long-term growth." According to the EBRD official, if a country was resource-rich, the careful management of resource wealth becomes important to avoid "Dutch disease" (the crowding out of the non-resource sector) and the "resource curse" (resource-rich countries tending to grow more slowly). "The oil rich countries now have oil funds that help them manage hydrocarbon wealth, but it is important that these funds are transparent and well run," he explained. But such policies are a long way from implementation in Central Asia, a region of over 58 million, where the vast majority live close to the poverty line or below. "We see diversification as very important, given the vulnerabilities that reliance on commodities entails," Fankhauser offered, noting that the effects of a commodity price bust could be mitigated through good resource revenue management, but could not be eliminated. In short, natural resources the world over could be a curse, with wealth stimulating rent seeking and waste, while being more forgiving of bad policies. As for Central Asia, the bank was very concerned about the lack of reform being undertaken in countries like Turkmenistan and Uzbekistan, Fankhauser said, noting, countries in the region might very well be trapped in a low growth, low reform, high vulnerability equilibrium. Energy-rich Turkmenistan, in terms of economic reform, was still where most countries were in 1991. "They have the whole reform effort still ahead of them, including the liberalising reforms that are mostly completed elsewhere," he said. "An important first step would be the realisation of the need to reform and a commitment from the authorities to embark on this path." Only mountainous Kyrgyzstan won praise for introducing economic reform the EBRD claimed would serve them well in the future. "The Kyrgyz republic has always stood out as a (relatively) good reformer in central Asia," he said, noting the former Soviet republic of 5 million was the first CIS country to join the World Trade Organization (WTO). In 2003/2004 the main achievement had been the privatisation of the important Kumtor gold mine, which accounts for about 10 percent of the GDP, he explained, while benefits from the liberalisation of the telecom industry had already been felt, the bank official added. Tajikistan, the region's poorest state, had had an average year, he offered, noting progress in the power sector (tariff reform and an interesting public-private partnership) and the banking sector (restructuring of the two largest banks). Supported by a favourable economic environment, recent GDP growth had remained robust and inflation had sharply fallen to 3 percent annually in August 2004, a recent UN report maintained. The current Tajik government had improved the overall implementation of monetary policy and has been commended for its continued commitment to fiscal discipline. "These positive economic developments have contributed to a decline in poverty," the report said. According to the most recent World Bank Poverty Assessment Update (PAU), 64 percent of the country's 7 million inhabitants lived below the poverty line of US $2.15 per day in 2003, compared to 81 percent in 1999.