The history of the economic development of Kyrgyzstan in the 1990s differs little what was experienced by the majority of post-Soviet countries. Liberalization of the economy, privatization of state property, deregulation of prices, openness of trade, and reduction of state intervention (in favor of a free market)all these features became the principal manifestations of economic reforms during the transition period. In the opinion of the International Monetary Fund (IMF), Kyrgyzstans policy in the sphere of structural transformation of its economy was the most progressive among all the countries of the region, particularly with respect to the liberalization of prices and privatization.[1] Despite the difficult position that confronted Kyrgyzstan because of the high degree of its dependence on the Soviet economy,[2] its reforms followed the path of shock therapy. Simultaneously, the government of Kyrgyzstan encountered problems that were associated with the assertion of sovereignty, the need to pursue a policy aimed at macroeconomic stabilization and economic reform, and the establishment of a new posture with respect to foreign policy and foreign trade.[3]

The inextricable characteristic features of this period included the following:

a decline in the gross domestic product (GDP), which, between 1990 and 2000, dropped by more than twofold;

de-industrialization, with the industrial share of the GDP decreasing from 47 percent in 1990 to 20 percent in 2000;[4]

a decline in the average annual per capita income by a factor of five;[5]

an increase in the foreign debt (to 140 percent in 2000);[6]

a growth in the number of people living below the official poverty line, with these coming to represent approximately 50 percent of the population of Kyrgyzstan in 2000.[7]

The economic crisis that struck all post-Soviet countries in the 1990s was twice as intense as the Great Depression in the countries of Western Europe and the United States in 1930-1934. For example, during this period the general contraction of production in the United States reached 27 percent, whereas during the first seven years of independence the post-Soviet countries experienced an average decline of production that was on the order of 51 percent.[8] In Kyrgyzstan specifically production fell by 50 percent during the first four years of independence (1991-1995). Although since 1995 Kyrgyzstan has witnessed a growth in the GDP, by 2000 it had reached only 66.6 percent of its GDP in 1990.[9]

The Investment Crisis in Kyrgyzstan

Yet another characteristic feature of the period of economic reforms was the decrease in the volume of investments. To be sure, in the 1990s Kyrgyzstan received substantial financial injections in the form of credits, technical assistance, and grants from international financial organizations and donor countries.[10] Nevertheless, the volume of investment in industry in 1999 was ten times smaller that what was invested in 1991; simultaneously, the volume of industrial output was reduced by half and state financing for scientific research dropped from 0.7 percent of the GDP in the 1990 to 0.2 percent in 1999.[11] In spite of the growth of direct foreign investments in the period from 1993 to 1998, by 2000 their volume had dropped fivefold since 1998.[12]

A characteristic indicator of investment activity is the dynamics of investment in fixed capital or capital investment in the economy (including the production of machinery, construction of productive capacities, real estate, and also changes in the stockpile of operating materials).

As Figures 1 and 2 (see the Appendix) show, the level of investment in fixed capitaldespite periods of growth and contractionwas considerably lower in 2000 than it was in 1991. As for the structure of investments, one can see a sharp reduction in the volumes of state investment, a decrease of financing based on the internal means of enterprises and the general population, substantial fluctuations in direct foreign investment, and (in recent years) a growth of financing through foreign credits.

Economic analyses show that changes in the volumes of investment do not determine economic growth in the short term.[13] However, from the perspective of long-term economic growth, investment does play a key role. The research of D. Rodrik[14] and the experience of many countries have demonstrated the close interrelationship between the level of investment and economic growth.[15] While investments are vitally important for further development, how they are utilized is no less important. Unfortunately, in the opinion of the analysts of Kyrgyzstan, the model and practice of investment activity that developed in this country in the 1990s were ineffective and primitive.[16]

The Investment Crisis: Explanations

There are several explanations of what precipitated the investment crisis in Kyrgyzstan. Above all, the destruction of the Soviet economy immediately meant a loss of the significant inputs that the Kyrgyz economy had been receiving from the central all-Union budget. In addition, some analysts contend that the decline of investments resulted from the fact that Kyrgyzstan did not offer an attractive target of investmentgiven the small scale of its internal market, the absence of rich natural resources, and the lack of a good infrastructure. Other analysts attribute the crisis to an excess of bureaucracy and corruptionin other words, administrative barriers constitute the principal obstacle to the growth of investments.[17] Finally, some analysts hold the view that the lack of a healthy investment climate derives from the negligible scale of domestic investments and from the backwardness of the internal capital market with regard to both volume and liquidity.[18]

All these arguments are valid, but each of them reflects a particular period or individual dimension of economic life in Kyrgyzstan. It is true that Kyrgyzstan is really not well endowed with natural resources; the local market is limited because the population is small and the consumer poor. It is also true that the collapse of the Soviet economy deprived Kyrgyzstan of enormous resources to supplement its budget. There are also major problems with respect to corruption, and its domestic investment has also become weaker. There is no question but that these explanations are fair. Nevertheless, investment depends not only and not so much on an abundance of natural resources and the scale of the internal market, as on the instruments of economic policy that either stimulate or regulate these capital inputs. Nor is the state bureaucracy always an obstacle to investment. On the contrary, it is precisely the bureaucracy that can play a positive role in promoting the accumulation of domestic savings and in stimulating investment. Brilliant examples of such a policy can be found in the 1960s and 1970s in the countries of East Asia, such as Japan, the Republic of Korea, and Taiwan: none of these possessed rich resources, but they all demonstrated an astonishing growth of investments because the state made extensive use of the instruments of investment policy. If one seeks a contemporary case, then Ireland and Singapore can serve as examples, and their experience will be briefly described below.

In examining the interrelationship between economic policy and investment, it should be said that the investment crisis in Kyrgyzstan had many traits that were similar with the processes transpiring in Russia, Kazakhstan, Armenia, and also a number of other countries in the post-Soviet space that pursued a policy of radical liberalization of their economies. An understanding of the interrelationship between the instruments of economic policy and the dynamics of investment in post-Soviet countries is important not only because this can provide a more complete picture of the causes of the investment crisis, but also because the substantial changes in the economic policy of several countries in the last three to four years (for example, in Russia and Kazakhstan) make it possible for one to see clearly the influence of such instruments on the investment process.

The Investment Crisis and the Radical Liberalization of the Economy

Before the year 2000, at least, the international financial institutions evaluated the reforms in post-Soviet countries or in countries with a transition economy according to this criterion: the degree of liberalization. In terms of this criterion, Kyrgyzstan was recognized as better from the perspective of the degree of liberalization and macroeconomic reform.[19] According to the assessments by experts, in the 1990s the international community made Kyrgyzstan its favorite among the countries in the Commonwealth of Independent States (CIS). That popularity derived from the fact that Kyrgyzstan was peaceful and relatively democratic; its leadership was liberal and well-educated; and Kyrgyzstan had carried through all types of significant reforms.[20]

One of the principal arguments advanced by the advocates of radical liberalization in post-Soviet countries is the assertion that the formation of a market gives a boost to growth and to the efficient distribution of investment. A major discussion of experts from the IMF, the World Bank, and other international organizations about the advantages and shortcomings of the gradual versus the radical reforms ended in favor the latter.[21] In 1992, Anders Åslund[22] argued that the Soviet Union must adopt much more liberal conditions than those that usually exist in the West. In his view, the need for the state must be reduced to a minimum and confined to essential questions, such as law and order, the basic state institutions that provide the budgetary and monetary balances, the infrastructure, and social services. He also argued that state revenues must be reduced and that this will occur more or less automatically. In fact, he wrote, this signifies the development of a wild capitalism reminiscent of the times of Charles Dickens.[23]

Unfortunately, the scenario propounded by Åslund became a reality. The catastrophic economic and social shocks that descended on Kyrgyzstan (as in most of the post-Soviet countries) can only be compared with the era of wild capitalism in nineteenth-century England. As one of Dickens heroes said: See how we live, where we live, and how many there are of us, and how defenseless we areto the very last person.[24]

The proponents of radical reform proposed to give an enormous push to the formation of a market by implementing a host of reforms:

elimination of state intervention in the economy through several simultaneous steps: privatization of state property, abolition of state subsidies, and deregulation of the economy;

liberalization of the trade regime by lowering the tariff barriers on imports and exports;

development of export-oriented production.

Formation of the market, in turn, will create stimuli to rechannel investments into productive branches and to promote their subsequent growth. However, as Oliver Blanchard (one of the advocates of liberal reforms in post-communist countries) later admitted, neither the degree of economic restructuring nor the relatively low cost of labor and the high level of education generated high indicators of growth in the accumulation of capitalcontrary to expectations.[25] In 1999, Joseph Stiglitz, previously the leading economist at the World Bank, declared that the transition from a socialist or communist economy to a market economy did not happen in ways that the economists had predicted a decade earlier. Moreover, he added, the transition process is extremely far from being complete.[26] As for Kyrgyzstan, Western experts wrote that the external world, which the newly-born government of Kyrgyzstan had so enthusiastically attempted to charm, provided few prescriptions to deal with existing problems or, at least, none that could produce the quick results that Kyrgyzstan had come to expect.[27]

What precisely were the reforms that Kyrgyzstan implemented and why did they fail to create stimuli for a growth of investment? Did its legislation affect the stimulus for investment? Let us examine only a few factors that shaped the negative dynamics of state, domestic private investment, and direct foreign investment.

In the Soviet period, the main source of investments in the economy was the state. After the budget of Kyrgyzstan lost these substantial subventions from the Soviet economy (which, beginning in 1993, affected the real capacity of the government to invest in the economy), the Kyrgyz government adhered to its obligations to the IMF and devised a state policy that was based on a reduction of subsidies for enterprises and, correspondingly, a reduction in investments in the economy. Thus, whereas in 1990 state investments in the economy represented 43.8 percent of budgetary expenditures, in 1999 these outlays had plummeted to just 11.9 percent.[28] Hence the reduction of state investments followed naturally from a government policy that made the deregulation of economic relations its fundamental principle.

The basic cause of the reduction of private investment on the part of domestic investors was the unavailability of internal credit, which in turn was due to the inordinately high interest rates. Financial liberalization had, above all, been accompanied by the creation of a network of commercial banks, which received the right to determine independently the credit policy with respect to their borrowers. The high level of risk on investment in the real sector and the high interest rate on credits (sometimes reaching 300 percent) led to a reduction in the share of long-term credits needed for the productive sphere. And it led to a corresponding increase in the share of short-term credits for trade, the service sphere, commercial intermediary transactionsi.e., those spheres where the level of profitability was significantly higher than the costs of credits. The character of credits therefore underwent a basic change: from long-term, productive credits to short-term, commercial loans.[29] Credit policy did not change in the course of the entire 1990s; that was due to the obligations that the government and National Bank of Kyrgyzstan had made to the IMF with regard to nonintervention in regulating interest rates on credits (in accordance with the Memoranda on economic policy of 1993, 1998, and 2001). Today the interest rates on credits from the banks located in Kyrgyzstan on average range between 25 and 35 percent for credits in hard currency and between 35 and 45 percent for credits in the national currency. It is clear that such credits, despite the significant reduction in interest rates compared with the first years of liberalization, are nevertheless too onerous for domestic producers. One of the recent studies of the financial sector of Kyrgyzstan presented the following data: enterprises obtain 75 percent of their financing from their own savings and earnings from business, and they derive only 3 percent of the financing from bank credits. According to this study, as security to back loans banks now demand a sum that in fact is twice the amount of the credit.[30] According to the calculations of economists, the interest rate must not exceed 10 to 12 percent in order to repay credits for long-term investment in production. Despite all this, the IMF continues to insist that Kyrgyzstan observe its obligation not to regulate the interest rates of banks.

The creation of a favorable investment climate for foreign investors became one of the principal objectives in the majority of post-Soviet countries. That aspiration was reflected, above all, in the legislation about foreign investment that virtually all these countries have adopted. In the course of the entire 1990s there existed the opinion (and it still exists) that the attractiveness of an investment climate denotes its attractiveness specifically for foreign investors. In fact, foreign investors not only brought finances to the economies of our countries (where capital was in such short supply after the breakup of the Soviet economy), but also new technologies and the experience of modern management. Kyrgyzstan was one of the first to adopt a law on foreign investments that conferred a number of privileges and advantages on foreign investors (depending on the sphere of investment). It must be acknowledged that this law did significantly contribute to attracting the interest of foreign investors. In addition, Kyrgyzstan approved a statute on free economic zones, the goal being to create (with the assistance of foreign investors) productive zones that were exempt from taxation.

Thus the state, with the assistance of preferential tax policies, created stimuli for attracting direct foreign investment. In 1997, however, at the initiative of international financial institutions, the law on foreign investments was replaced by a new act that deprived all future investors of any tax or customs advantages. This revision was a response to the fact that the enterprises with foreign investments had become a source of tax evasion, and the fact that the advantages extended to foreign investors vis-a-vis domestic producers were not justified. There may indeed have been some truth in this. Nevertheless, once this new law went into effect, Kyrgyzstan found itself deprived of comparative advantages,[31] because all the surrounding states in Central Asia not only possessed, but had significantly expanded opportunities to confer tax privileges and to provide additional incentives to foreign investors. For example, in 1998 Kazakhstan adopted a law on investments establishing ways to obtain significant tax advantages; such preferential treatment depended on the sphere of investment (for example, construction in Astana, the countrys new capital) and the significance of the project, without making any distinction between foreign and domestic investors. The Uzbek government has applied extensively the practice of creating a special preferential regime for individual investment projects. In both states the measures of tax stimuli for investment have been applied and are still being used. Kyrgyzstan, after adopting the Tax Code in 1996 (which prohibited the grant of tax privileges and advantages) forfeited the right to use the instruments of tax incentives to stimulate investment.

A discussion of the question of investments is often accompanied by another question: how was international financial assistance (which was more generously granted to Kyrgyzstan than to other post-Soviet countries) used? Why were these sources unable to generate economic growth? If one looks at the structure of the distribution of foreign economic assistance for the period from 1992 to 2000, one finds that the majority (57.17 percent) was directing at supporting the national currency and the state budget, with 6.13 percent going for industry, 4.28 percent for agriculture, and the balance for miscellaneous other expenditures.[32] Thanks to the significant support of the national currency, Kyrgyzstan achieved a substantial reduction in inflation and a relatively stable exchange rate for the national currencysigns of macroeconomic stabilization. Because of the monetary policy, the country succeeded in reining in hyperinflation, which had reached 2,032 percent in 1991, and was able to reduce inflation to 9.6 percent in 2000.[33] However, the reduction of inflation did not lead to a growth of investment. Moreover, it came time for Kyrgyzstan to repay the foreign credits, and that became the most substantial obstacle not only for state but also private investments. The terms contained in Point 13 of the Memorandum on Economic Policy (signed with the IMF in November 2001) can serve as an example.[34] By 2004, the government assumed the obligation to privatize the remaining four sectors of the economyin particular, the company Kyrgyztelekom, Kyrgyzgaz, Kyrgyz Airlines, and four distribution companies of Kyrgyzenergo. The government also agreed to use 75 percent of the receipts from privatization to extinguish the foreign debt, retaining the balance of 25 percent for further privatization. In addition, the government agreed to abolish a number of tax privileges, to increase certain categories of taxes, and to introduce a number of additional taxes. Among these measures one of the harshest blows to private investments was the obligation to abolish preferential treatment for the value-added tax on the import of fixed capital. The effect of this innovation will undoubtedly be a reduction in the volume of imported machinery and equipment, thereby causing a further contraction of investment in the real sector of the economy.

International Investment Policy in the 1990s

In March 2002 an international conference on Financing for Development was convened in Monterrey (Mexico). The participants included the United Nations, the World Bank, the IMF, a number of other international financial institutions, as well as representatives from sixty countries around the world. The conference produced a document called the Monterrey Consensus, which determined the key directions of international policy with respect to financing the economies in developing countries. In the main report of the World Bank, but also in a number of joint declarations by conference participants, one could hear words to the effect that the level of investments and their distribution are the most important factor in determining the tempos and models of growth. The conference also pointed out that, without an effective mobilization of internal resources, it is impossible to achieve stable growth. In other words, it is critically important to mobilize internal savings (state and private) and to support investment in production. Foreign investments are therefore an important complement to national and international efforts.[35]

The declarations in Monterrey substantially differ from the principles of investment policy that international financial institutions had followed in the 1980s and 1990s. This earlier policy had emphasized support for foreign investments and opportunities to achieve growth without relying on the domestic market, and instead to rely on a policy of open trade and an export-oriented strategy.[36] Macroeconomic stability, a free market, and minimal governance were regarded as the basic criteria for further growth.[37]

It is difficult to say what precipitated the change in the economic prescriptions of international organizations, but perhaps it was some of the results from international investment policy that was the logical cause of the change. The political recommendations of the 1980s and 1990s had been based on the view that foreign investments have a number of inherent advantages over domestic ones. Thus, for many developing countries, one of the main problems is the dearth of domestic resources and the absence of modern technologies. Foreign investors can provide both these components. These advantages became the motor that led international financial institutions to support and promote foreign investments, and that also impelled many developing countries to take a strong interest in creating conditions that would be attractive for foreign investors. In the last twenty years, however, this policy has failed to produce any significant results. Thus, despite the fact that during this period 132 developing countries adopted legislation to stimulate and attract foreign investments, the distribution of such investment has remained virtually unchanged. In particular, 95 percent of direct foreign investments are concentrated in the thirty most developed countries, which are also the home for 99 percent of foreign investors.[38] If one looks at the distribution of foreign investments among developing countries, one finds that they are concentrated in countries with rich natural resources. One example can be the countries of Central Asia, where the concentration of foreign investments (in per capita terms) is highest in Kazakhstana country rich in oil and gas resources.

There is a dissenting opinion that foreign investors are attracted by cheap labor. However, as research conducted by the Organization of Economic Cooperation and Development (OECD) has shown, low labor costs as a rule are not an attractive factor for the foreign investor. Rather, the foreign investor is far more influenced by the following factors: proximity to the main sources of raw materials; a high income among consumers; access to high-quality transportation and communications networks; the presence of personnel with superior qualifications; and legislation that exhibits a clear, stable, and friendly attitude toward investors.[39] At the last global forum of the OECD (which was devoted to international investments and held in Mexico in November 2001), Marino Baldithe head of the committee on international investments and transnational companiesdeclared that economic liberalization and encouragement of direct foreign investments in themselves are not factors that serve to attract foreign investors. In Baldis opinion, the determining factor is the presence of a strong, stable domestic economy.[40] The same view is shared by the UN Committee on Trade and Development (UNCTAD). In particular, according to the data of UNCTAD, the concentration of foreign investments reflects a concentration of economic activity as a wholei.e., a high level of exports, internal investments, and technologies. Economies that are richer and more competitive receive more direct foreign investments.[41]

One research study conducted by experts from the IMF and based on the example of countries in Eastern Europe provides an analysis of the reasons why the volume of foreign investments in recent years has been insignificant.[42] According to this study, factors that discourage investment include the following:

a low technological level and hence low labor productivity;

institutional factors, such as a weak defense of property rights and unfair legal practices;

limited access to credit markets because of a lack of property for security that could insure credits;

macroeconomic instability;

budget deficits, as an indicator of a crisis condition in the economy (which, accordingly, demands much greater risk from the investor and increases his demands with respect to future profits).

What lessons can and should Kyrgyzstan draw from the declarations in Monterrey and from the research of the OECD, UNCTAD, and the experts at IMF? I shall focus on that question in one of the last sections of this article, but first it is important to consider one other aspect of Kyrgyzstans economic policies in the 1990s that has significantly influenced the dynamic of domestic investments: Kyrgyzstans membership in the World Trade Organization (WTO).

WTO: Unfair Neighbors,[43] Investments and the Complexities of Open Trade

In 1998, Kyrgyzstan became the first post-Soviet country to join the WTO. Accession to the WTO became an extension of the general policy of radical liberalization, but it was also one of the preconditions for obtaining credits from the IMF. One of the documents of the IMF stated that the government of Kyrgyzstan will continue its efforts to obtain full membership in the WTO, and it is prepared to remove any obstacles that might delay these processes.[44] Today, because of membership in the WTO, the import tariffs have been reduced to an average of 5.5 percent, export tariffs have been eliminated altogether, nontariff restrictions on import and export have been abolished, and a statutory limitation on subsidies and compensatory payments has been adopted.

By joining the WTO, Kyrgyzstan primarily hoped to increase its export potential. The data show the following. The dynamics of exports between 1993 and 1997 (with the exception of 1994) was favorable. However, in 1998 and 1999, the indicators on exports sharply declined, and in 2000 they barely reached the level of 1998. It is also important to bear in mind that, beginning in 1997, gold (mined chiefly in Kumtor) has been the main export product of Kyrgyzstan. For example, in 2000 gold accounted for 39 percent of total exports. Given this factor alone, one can draw a conclusion about the decrease in the export of all other types of products.[45]

Among the explanations for the decline in exports, several factors have been cited. These include: the contraction of demand for goods among the countries in the CIS; the introduction of trade restrictions by Kazakhstan; and the influence of the price factor. For example, beginning in 1998, Kazakhstan has adopted a strategy of economic development based on import-substitution, which correspondingly has led to the adoption of protectionist measures (including an increase in several import duties and an increase in nontariff restrictions). Among the measures of nontariff regulation, the most painful for the exporters of Kyrgyzstan were the numerous transportation fees exacted for crossing Kazakh territory. Such measures have sharply increased the cost of exports not only in Kazakhstan, but also in Russia, since access to the latter is only possible by passing through Kazakhstan. Another major problem has been not only the loss of sales markets, but also a fall in the prices on export products. Thus, for example, the average cost of exporting anthracite coal in 2000 was 62 percent higher than the previous year; the cost of exporting wheat rose by 32 percent during the same period.

Thus one can concur with the opinion of authors who assert that Kyrgyzstan did not derive any advantages from joining the WTO. In their opinion, at the time when Kyrgyzstan became a member of the WTO, it had neither a competitive economy nor the goods to sell to foreign consumers.[46] In addition, access to the WTO had a negative impact on the opportunities for the state to defend its domestic producers. These local producers, whose position had already been weakened by the lack of investments and modern technologies, now lost the legal right to protection against an inundation of imported goods. Given that domestic producers were simply in no position to compete with these imports, the stimuli for investments in production fell accordingly.

In the opinion of Martin Khor, the opportunities for export partly depend on the prices for existing export products, the presence of an infrastructure, and the capacity of the population and enterprises to generate new exports (a prolonged and difficult process).[47] Exports also depend on the accessibility of markets. All this dictates the conclusion that the quality, time, sequence, and rates of liberalization of imports are very important.[48] Were these questions taken into account when the decision was made to join the WTO? If so, how is one to explain the lack of results from this decision?

Can One Learn Lessons from History and Today?

What can one learn from the experience of countries that were successful in stimulating a growth of investments? Unquestionably, each country is different, and the policy of one country cannot be blindly transposed to another. Nevertheless, experience provides the most important evidence for the existence of the levers of influence on the growth of investment.

As pointed out earlier, the growth of investmentas a ruleis linked not so much to the presence or absence of natural resources, as to the instruments of economic policy that serve to regulate and stimulate the dynamics of investment. If one takes the experience of South Korea in the 1960s and 1970s as an example of a country with few natural resources, chronic unemployment, and insignificant internal savings in the 1950s, one can discern the following most widely applied instruments of influence on the growth of investments. For example, the government of Korea made abundant use of tax policies to promote industrial development. Thus, in 1961-1972, the state actively began to encourage exports by giving tax privileges and direct credits to exporters. For example, the interest rate on credits for export amounted to 3 percent at a time when the usual rate was 20 percent.[49] Moreover, the state granted direct and indirect preferential tariffs to exporters by permitting them to write-off losses from the imported components of future export products. Korea also defended domestic producers by establishing a tariff to protect goods produced in Korea.[50] In 1973-1979, the Korean government used investment credits and tax holidays to promote the development of the heavy and chemical industries. A widely know method to stimulate investment was the conferral of a special regime for imported machinery, which was expressed in a number of tariff and tax privileges for importers of especially wanted equipment and technologies.

If one turns to contemporary examples, it is worthwhile to consider Ireland and Singapore, since their experience demonstrates a high degree of activity on the part of both domestic and foreign investors.

Ireland, a country that has a population of four million and that occupies a small territory, is similar to Kyrgyzstan. In the 1950s, Ireland obtained 40 percent of its national income from agriculture and had a foreign debt equivalent to 116 percent of its gross income. It was judged to be, in terms of its financial condition, the worst country in Europe. By the year 2000, however, Ireland had emerged as a country with the fastest growing economy in the European Union, its annual rate of growth being in the range of 8 to 10 percent. In the opinion of Irish specialists, the turnaround in the economy was achieved when the government devised a strategically integrated approach (that is, the development of strategic spheres of the economynamely, telecommunications and education) and for this purpose used various instruments and mechanisms to attract foreign investors.[51] In particular, Ireland introduced very low rates of taxation for enterprises (10 percent) and freed itself of any form of bureaucratic obstacles that impeded the way of investors. The government in fact played an important role in devising the strategy of growth; its key organ for implementing policy was the Agency for Industrial Development. The flow of foreign investments resulted in the creation of many companies, including domestic ones. The government arranged long-term credits for domestic enterprises; as a result, many Irishmen could own their own business. The 1990s thus witnessed significant industrial growth. From a country that an enormous number of people had abandoned and that had a high unemployment, Ireland had transformed itself into a country that imported labor and that induced Irish emigres to return from all corners of the globe.

A no less amazing example is afforded by the history of economic growth in Singapore, a country that has a population of three million and occupies 600 square kilometers. It dates its economic breakthrough to 1965, the year it acquired independence. That same year, the state adopted a program of accelerated industrial development with the involvement of foreign investors in the productive and financial sectors of the economy. In 1967, Singapore adopted the Economic Expansion Incentives Act, which granted tax stimuli for producers in strategic branches of industry and for the encouragement of exports. In 1979, this law was supplemented by new provisions to stimulate the development of advanced technology and to improve the qualifications of employees. A further addendum in 1984 encouraged the development of highly skilled labor, industries involved in computer production, and scientific research. In the 1990s, Singapore adopted a strategic economic plan that concentrates on the development of high-tech, R&D-intensive; industry, and the promotion of scientific research in key technologies.[52] Impressive too is the fact that, despite the successful growth of foreign investment, the state was and remains a major investor. For example, today the state is the largest owner of the housing stock (90 percent). A policy directed at a growth of investments and the strategy for their distribution through the development of strategic branches of industry became the key element in the striking economic development of Singapore. As a result, this country, where investments amounted to 11 percent of the GDP in the 1960s, had increased that indicator to 40 percent by the 1990s. In 1997-1999, Singapore was recognized in the list of the most competitive countries of the world (in the rating of the World Economic Forum).

To summarize briefly the experience of these countries, it is interesting to note that South Koreain contrast to the other three countriesblocked access to the local market for foreign investors. Singapore and Ireland, by contrast, encouraged such investment. However, most important and common to all threeSouth Korea, Ireland, and Singaporewas (and remains) the presence of a strategy linking the growth of investments to the development of strategic branches of industry. In South Korea, the objects of strategic development in the 1960s and 1970s were chemical and heavy industries, in Ireland these were telecommunications and information technologies, and in Singapore it was high-tech production. Thus, the governments in all these countries had aggressive strategies of industrial development.

It may also be useful to consider the experience of developed countries like the United States and the countries of Europe. For example, during periods of economic downturn, the government of the United States has established a fixed exchange rate and placed limits on the interest rate for credits. The goal here is to protect investors from bankruptcy and to give them an opportunity not only to repay credits but also to earn a profit. The economic recession observed in recent years in the United States has generated active measures from the presidential administration. In particular, the government has raised the tariffs on steel, a step which provoked a stormy reaction in the countries of Europe, but which received much support from the steel producers in the United States. Moreover, at the beginning of 2002, the U.S. government increased its subsidies for American farmers. The agricultural subsidies are one form of state investment that has been extensively employed in Europe and in the United States. Beside the tariff regulation and subsidies, the countries of the European Union and North America actively employ measures of nontariff regulation. A study conducted by experts from the IMF shows the presence of a direct correlation between the level of nontariff regulation and the level of development of an economy.[53] The conclusion is as follows: the richer the country, the lower its average tariff rates. However, as far as nontariff barriers are concerned, the situation changes radically: the richer the country, the higher its average level of nontariff barriers and the more discriminatory their character.

Russia, which has demonstrated encouraging results in economic growth during the last three to four years, has begun to use the policy of import-substitution. It has raised import duties on a number of goods that are produced domestically by using the instruments of hard-currency regulation and by placing restrictions on the export of capital. Many observers link the economic growth of Russia and Kazakhstan above all to the increase in oil prices and assert that such a growth cannot be sustainable. However, a number of economists attribute the growth of these countries to their protectionist policy, which is aimed at creating and protecting domestic markets. Thus, there are grounds to assert that the growth in Russia and Kazakhstan results not only from the favorable conditions on the oil market but also from the states economic policy.

Investment Policy, Economic Strategy, and the Future of Kyrgyzstan

To summarize the foregoing, we have seen that Kyrgyzstan had a negative experience in the 1990s with respect to stimulating investment, but we have also examined the experience of countries that exhibit successful models of economic growth and investment policy. I would like to conclude this article with an assessment of Kyrgyzstans opportunities to create an investment policy that will have a real influence on investment activity. It would, however, be one-sided to examine investment policy separately from the general economic strategy of the state. Therefore, the questions discussed below often make no clear distinction between problems of economic strategy in general and investment policy in particular.

Today in Kyrgyzstan, all discussions of the problem of investment policy and their resolution revolve around attracting direct foreign investment. However, as pointed out above, studies conducted by the OECD and UNCTAD show a direct correlation between the interest of foreign investors and the strength and stability of the domestic market; that, in turn, demonstrates the urgent need for Kyrgyzstan to create an internal market. Specifically, Kyrgyzstan should draw the following conclusion from the research conducted by the experts at the IMF. At present, Kyrgyzstan has weak technological indicators and institutional factors; it affords investors few opportunities to obtain credit resources; and most important it has an enormous budgetary deficit and an economy in the throes of crisis. Given all that, Kyrgyzstan will not be attractive for foreign investment for a long time to come. Unfortunately, the more serious task now is simply to hold onto the few investors who have remained in Kyrgyzstan.

At the conference on Advancing a New National Investment Policy: The Role of the Government in the Private Sector (held in Bishkek on 29-30 May 2002), Szabolcs Szekeres presented a report entitled Attracting Direct Foreign Investment to Kyrgyzstan. His report offered a number of recommendations on how Kyrgyzstan might increase its attractiveness for foreign investors.[54] The majority of recommendations concern organizational questions, such as the work of special administrative organs for foreign investments, but there are also others, from the acceleration of privatization and assistance to the development of mining, hydroelectric energy, and tourism. Many of the recommendations are quite useful, but these cannot be examined without reviewing the governments economic strategy as a whole. In citing the declarations voiced at the international conference in Monterrey, I would note that direct foreign investments are an important, but auxiliary factor in development. This means that the policy of attracting foreign investment is not the sole component of an investment policy, but only one of several.

Therefore, in my opinion, the first and obvious goal is to create a strong domestic market that can attract the interest of both domestic and foreign investors. The creation of a strong internal market makes it necessary to: (a) provide protection for domestic producers (which undoubtedly includes foreign companies operating in Kyrgyzstan); and (b) stimulate internal savings and the growth of long-term investments, both domestic and foreign, in sectors of the economy that the government deems to be of strategic importance. Hence it is essential to utilize tariff policy as an instrument of regulation and, in particular, to use import tariffs to protect domestic producers. Moreover, directly or indirectly, by conferring tax and customs privileges or subsidies, the state must encourage the import of high-tech equipment to help create and support new production. A credit policy that regulates interest rates for production credits must also become an instrument of state policy for promoting the development of production.

I absolutely agree with the opinion of Katsuhiko Takehara, the official advisor on industrial development at the Ministry of Foreign Trade and Industry of Kyrgyzstan. He argues that Kyrgyzstan has many opportunities to be transformed into a highly developed country with a promising future, but for that the country must have clearly defined objectives, priorities that are correctly determined, and a strong industrial policy aimed at the development of strategic branches of industry (such as light and food-processing industries, the processing of precious metals, and hydroelectric power).[55] Industrial production in sectors that the government deems strategically important and that are competitive (in the region and in internal markets) must be a significant if not central component of state economic policy. For this it is necessary to have a corresponding industrial policy. Recently some experts, observing the relatively successful growth of agriculture, have declared that it is necessary to give this sector priority in the development of the economy of Kyrgyzstan. Without denying the need to support agriculture, one should recall that not a single state in the world has reached prosperity on the basis of agriculture. Progress in the twentieth century has been achieved because of technologies, and the fate of a country in the twenty-first century depends on high tech. A country that counts on an economic upsurge because of agricultural production is consciously putting itself down on the list of backward states. One could cite an even larger number of arguments showing the need to support and develop industry. For example, the fact that in developing countries the productivity of industry is six or seven times greater than in agriculture; the fact that price elasticity in agriculture is very low compared with technologies; and the fact that in all successfully developing countries the first sign of growth is an increase in the share of industry and the decrease in the share of agriculture in the general structure of the economy. This question, however, must be the subject of a separate discussion.

The response of any state civil servant to these proposals will most likely be negative. Not because they are illogical, but because the majority of the proposed instruments are prohibited, in one way or another, by Kyrgyzstans obligations to the IMF or by the commitments it assumed when joining the WTO. As for industrial policy, this element is missing in the Memoranda of the IMF. To be sure, it is difficult to become emancipated from the burden of an excessively large foreign debt, which at times has been transformed from a financial into a political obligation. Nevertheless, it is vitally important to conduct negotiations with the IMF and to propose ones own path for resolving the persisting crisis. It is also critically important to know that the IMF and the WTO were created and function with the goal of promoting growth and development in the debtor-countries or member-countries. Without doubt, it was thanks to the policy of the IMF that Kyrgyzstan was able to stabilize its economy and bring inflation under control. But if stabilization, once achieved, does not generate economic growth, if it leads not only to an economic but also to a social crisis, then it is necessary to have the audacity and determination to treat critically the factors that have led to the current situation.

As for the external market, experience has already shown that there is no need to put your hopes on friendly neighbors. An example is afforded by the tariff and nontariff barriers that the contiguous states have erected against Kyrgyzstan. Moreover, neighboring states are in the first instance concerned about the well-being of their own peoples, even if this comes at the expense of friendly, but alien, peoples.[56] Anders Åslund, an advisor to the president of Kyrgyzstan, sees the path of Kyrgyzstan in the development of exports and thereby its entry into the foreign market.[57] It is difficult to quarrel with this recommendation, since a growth of exports is, as a rule, a main source of revenues for a state that has an insignificant market. However, the question is not so much the desirability of exports as what precisely is to be exported. Does Kyrgyzstan today have the potential of being competitive on the international market for goods? Apart from the gold mines at Kumtor (which today represents one-half of the industrial potential of Kyrgyzstan, exports almost 40 percent of the total volume of exports, but is now reaching the end of its output), then such a production simply does not exist in Kyrgyzstan.[58] If one acknowledges this, then that raises the question of developing domestic industry and creating an internal market. It would be good to recall the words of Friedrich List, the famous German economist of the nineteenth century, who, after examining the history of the development of the English and American economies, wrote that prior to the stage of open trade a state must have a strong industry, but open trade is advantageous for countries with equal levels of development.[59]

These two goalsthe creation of a strong internal market and securing a place on external marketscannot be achieved overnight. Nor can they be accomplished by a state that has been deprived of the rudimentary instruments of economy policy. It is also impossible to solve questions pertaining to the struggle against poverty without resolving the question of economic growth. Stabilization that has been artificially sustained is of no value if it fails to ensure growth. It is vitally important to have a state strategy that has clear goals and priorities and that is realized by an effective government. In her book, The Myth of the Powerless State, Linda Weiss observes that the contemporary period can be characterized as a time of the denial of the state, which entails the loss of a national economy, the helplessness of governments in the face of international capital, and the gradual disappearance of the sovereign state as an organizational principle. Weiss holds that the contemporary visage of the state must combine the power of the state with the power of business and must contribute to various forms of cooperation between the state and entrepreneurs. Such cooperation will make it possible, on the one hand, to realize the economic management of a country within the framework of state policy and, on the other hand, to control the actions of the state without interfering with its effectiveness.[60]


The Russian economist Stanislav Zhukov, in one of his recent works devoted to Central Asia, writes about the marginalization of the Kyrgyz economy. In his opinion, this process is not the result of mistakes and miscalculations, but has an objective, internally-driven character. In his words: The economic potential of the country is too insignificant to provide for stable economic growth and a higher level of material well-being. In this sense, the independent Kyrgyzstan that has appeared on the political map of the contemporary world has added to the numerous ranks of so-called failed states.[61] Experts from the IMF adhere to just as pessimistic (if less extreme) view. These experts, in examining the prospects of the deeply indebted states in the CIS (Armenia, Georgia, Kyrgyz Republic, Moldova, and Tajikistan) and proposing alternatives to overcome the current situation, see no way to reduce the debts and to achieve a quick end to the severe economic crisis in Kyrgyzstan.[62] It is interesting that, after a decade of praising the economic policy of the government of Kyrgyzstan, the international financial institutions have suddenly changed their assessment. From the most progressive state Kyrgyzstan has become a country with a poor investment climate and a weak government.[63] The government of Kyrgyzstan has become, in such treatments, a classic example of feeble and ineffective governance. Moreover, no one recalls that Kyrgyzstan was, and remains, one of the most devoted adherents of the policies of the IMF.

Indeed, the economic situation in Kyrgyzstan is grave, but that does not mean that it is hopeless. The title of this article includes the words in search of new approaches. In fact, as one can see from the foregoing that there are no new approaches, but only that the principles of economic growthprinciples that have been tested by time and in the experience of many stateshave been forgotten. As D. Rodrik has written, what was correct for developed countries is also correct for developing ones, adding that economic develop unquestionably originates in domestic strategy, not in the world market. He urges the political leaders of developing countries to avoidbecoming fixated on things foreign, to leave globalization as something on the horizon, and instead to concentrate their efforts on the construction of domestic institutions of society. They must believe more in themselves and in local conditions and less in the global economy and in the copies derived from it. It is necessary for Kyrgyzstan to look honestly and critically at the past decade, to draw conclusions, and to reflect and to fight for its own future. I cannot agree with the opinion of Stanislav Zhukov, who has included Kyrgyzstan in the list of expiring and hopeless countries. Kyrgyzstan does have a future, and I sincerely believe that.


Figure 1. Index of Physical Volume of Investments to Fixed Capital (1991 100%)

Figure 2. Investments (total volume in percentage)

[1]International Monetary Fund, Economic Review: Kyrgyzstan (1992), pp. 8, 13.

[2]In 1990 total export from Kyrgyzstan to former Soviet Union countries was 98 per cent and import to Kyrgyzstan from former Soviet Union countries was 73 per cent.

[3]International Monetary Fund, Economic Review: Kyrgyzstan (1992), pp. 8, 13.

[4]A. Tabyshalieva, Kyrgyzstan: Common Country Assessment (Bishkek, 2001), p. 33 (a study prepared for the United Nations System in Kyrgyzstan, in cooperation with the National Statistics Committee).

[5]In 1991, the average per capita annual income in Kyrgyzstan was 1,550 dollars; by 2000 this indicator had decreased to 270 dollars.

[6]Data supplied by the National Statistical Committee of Kyrgyzstan.

[7]According to data compiled by the World Bank, the level of absolute poverty in Kyrgyzstan, measured as living on less than 1 dollar per day, encompassed 50 percent of the population. However, according to a poll conducted by the local sociological service, that indicator stood at 70 percent.

[8]See What Can Transition Economies Learn from the First Ten Years? A New World Bank Report, in Transition Newsletter (

[9]Z.I. Kudabaev, Ekonomicheskoe razvitie Kyrgyzskoi Respubliki (Bishkek, 2001), p. 28.

[10]Kyrgyzstan received the largest volume of international assistance in the form of credits and grants if calculated in per capita terms. In per capita terms, Kyrgyzstan received nine times more than Uzbekistan and six times more than Kazakhstan. See United Nations Development Program, Human Development Report, 1999 (New York: Oxford University Press, 1999), p. 194.

[11]Z. Kudabaev and L. Tekebaeva, Puti preodoleniia investitsionnogo krizisa (available at:

[12]Direct foreign investments reached their peak in 1998, amounting to 109 million dollars. Their volume fell to 35 million dollars in 1999 and to 19 million dollars in 2000. See: Attracting FDI to Kyrgyzstan: Current Status, June 2002" (final report relating to the UNDP Reimbursable Loan Agreement [RLA] No. 02-001, dated 16 May 2002, prepared by Information for Investment Decisions, Inc.)

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