"Exploring Opportunities for Economic Cooperation: Trade, Transport and Border Crossing"
Ladies and Gentlemen,
It is a great pleasure for me to be here, and to address the 2010 SPECA Economic Forum. The Secretary-General of UNCTAD, Dr. Supachai, has asked me to convey his regrets, as his travel schedule unfortunately did not allow him to be here, as originally planned. However, you may be pleased to hear that at this very moment he is also working to support the economic development of Central Asia by opening the Forum on Investment in Agriculture in Turkmenistan.
I would also like to congratulate the SPECA Economic Forum for devoting this session to exploring how greater cooperation among the SPECA countries can support the stabilization and development of one of its poorest and most conflict-ridden members, Afghanistan. It is heartening to see the regional group, which itself faces significant challenges, pool their efforts for its weakest member.
In this context, I would like to offer some thoughts on how the SPECA countries can harness economic cooperation on trade and transport facilitation to meet the dual challenge of supporting Afghanistan´s stability and economic development in particular, and strengthening the region´s trade and growth potential as a whole.
Ladies and Gentlemen,
It is by now widely known that Central Asia faces some of the greatest obstacles to global trade integration of all regions in the world. Sharing the geographical disadvantage of lacking direct access to a seaport means that - like all landlocked countries - the central Asian countries depend on their neighbouring countries´ transit systems, regulatory environment and transport infrastructure to access global markets. However, this particular region is often perceived as facing even more difficult situations than others. With an average distance of 3350 km between the Central Asian countries and the closest seaport, they are among the most remote from the world markets.
Geographical remoteness and difficult topography complicate the region´s transport links with other parts of the world and significantly raise the cost of trade. Administrative controls, which also translate in excessive paperwork and long delays at land borders, entail additional cost to trade and hamper competitiveness. This is exacerbated by the poor quality of transportation services and difficulties with transit through neighbouring countries. Surveys such as the World Bank´s Doing Business or the Logistics Performance Index confirm these views. On average, the international trade transaction costs for landlocked developing countries in Central Asia remain three times higher than those of maritime countries in the region. Indeed, the SPECA countries have some of the highest land transport and administrative costs in the world.
Against this backdrop, it is perhaps surprising that a cursory glance at the trade statistics for the region appear to paint a different picture: On average, exports of goods and services accounted for 50% of GDP for the region, ranging from 64% for Turkmenistan to 40% in Uzbekistan. The notable exception is Afghanistan with a ratio of only 16%. Total merchandise exports of the region stood at $125 billion in 2008, which reflects a sharp increase since 2000. And the export to GDP ratio of 50% has actually increased from 46% in 2002. Indeed, the region´s annual export growth rate outpaced the world average of 11.3 percent during the 2000-2009 period with the exception of Tajikistan. (Again, Afghanistan was another key exception, seeing a decrease in the export ratio from 31% to 16%).
Of course, economic size and endowment of the countries differ significantly across the region. The largest exporter is Kazakhstan, which accounts for 50% of total SPECA merchandise exports in 2009, followed by Azerbaijan (25%) and Uzbekistan (13%). Afghanistan is the weakest exporter, accounting for a mere 0.5% of total SPECA exports.
However, a closer look at the composition of these exports explains the apparent paradox: The exports of many economies in the region are essentially driven by the natural resources sectors, including petroleum and related products (accounting for 91% for Azerbaijan and 64% for Kazakhstan), as well as natural gas (44% for Turkmenistan) and non-ferrous metals (28% for Tajikistan). Afghanistan´s (and Kyrgyzstan´s) exports, in contrast, are concentrated on agricultural products and light manufactures. For Afghanistan, vegetables and fruits represent 38% of its exports, and textiles and related products, 14%.
The region´s dependence on natural resources exports has allowed it to benefit from the commodity price boom in recent years, which essentially explains most of the trade increase, but also made it vulnerable to external shocks. In 2009, as a result of combined effects of the global economic crisis and commodity price reversals, all countries of the region except Uzbekistan registered a sharp drop in export value, ranging from 40% in Kazakhstan to 11% in Kyrgyzstan. Exports also fell in Afghanistan by 25%.
The region´s non-natural resource trade, however, remains crucially constrained by the high transport costs. These constraints could lead one to believe that at least trade among the Central Asian countries themselves was well-developed. However, in intra-regional trade, the area lags far behind its potential. SPECA intra-regional trade accounts for a mere 5% of the total SPECA exports in 2008, and this percentage has even fallen from 8% in 2000. Part of this relative decline is explained by the rise in volume and prices of commodities trade, most of which tends to be exported to major markets outside the region. The relative importance of intra-regional trade varies across countries. For the period 2000-2009, the intra-regional trade was most significant in Kyrgyzstan (26% of total exports), followed by Uzbekistan (11%), Tajikistan (10%) and Turkmenistan (7%). The low overall percentage demonstrates that there is great potential to expand intra-regional trade.
This potential is particularly important for Afghanistan, which suffers from a chronic trade deficit. Its total merchandise exports accounted for 16% of GDP while imports were 46%, resulting in a trade deficit approaching $3 billion in 2009. Since 2000, exports have grown faster than imports, but the country continued to record a deficit. The strong import boost is driven by reconstruction needs, which is barely matched by export earnings. This creates a key problem for public finances. Accumulated long-term debt reached almost $2 billion in 2008, up from just 162 million in 2000. Thus, external financing is a key policy challenge, given that FDI inflows remain weak (185 million in 2009). To date, official assistance, which stood at $5 billion in 2008, plays a key role in filling these gaps. However, in the medium to long-term, boosting export capacity is fundamental. And here, the SPECA region can play an important role. So far, the major export destinations of Afghanistan are India (26%), the United States (17%), Pakistan (17%) and the EU (16%). By contrast, the SPECA region as a whole represents an insignificant 1.4%. Similarly, its major import sources are Pakistan (26%), the EU (16%), UAE (13%) and Kazakhstan (11%). The SPECA region is more significant in terms of imports and represents 13% of total imports.
Ladies and Gentlemen,
Given the region´s common challenges of geography and dependence on natural resources, greater regional cooperation offers considerable potential for development: First, regional cooperation could foster more intraregional trade, helping to overcome the problems of scale arising from small markets. Dynamic effects may potentially create further benefits through competition, investment and transfer of technology. Indeed, the asymmetry of endowments among the SPECA countries means that the potential for intra-regional trade is likely to be quite large. Secondly, as trade with neighbouring countries with similar levels of development tends to encourage non-traditional higher value-added products, regional integration and cooperation can provide a viable avenue for diversification and ultimately sophistication of export and production structures, which are essential for sustained growth and development of the region as a whole. Thirdly, and particularly in the context of the current economic crisis, greater regional integration offers better insurance against external shocks in the global economy.
So what kinds of policies and measures could be used to strengthen regional economic cooperation and trade?
Let me mention a few:
The first is strengthening and consolidating regional trade agreements. While existing trade barriers are already relatively low in the region there is still scope for improvement in some countries. The simple average tariff is 11% in Uzbekistan, 3% in Kyrgyzstan, 9% in Azerbaijan and 6% in Afghanistan. Reducing these barriers vis-à-vis the regional partners can go a long way to promoting intra-regional trade. Consider that the average applied tariff imposed on Afghanistan´s exports is 0% in Kyrgyzstan but 15% in Azerbaijan. At the same time, Afghanistan faces relatively high tariff barriers in its major export markets outside the region, including 35% in Turkey, 24% in Bangladesh, 13% in Pakistan, and 7% in India for its agricultural exports. Thus wider regional cooperation, such as under ECO, could also prove useful.
Various regional and bilateral trade agreements already exist in the region but many are dysfunctional. One of the most outstanding regional trade agreements is the Central Asian Cooperation Organization (CACO). There is thus scope to consolidate the RTAs and the growing number of bilateral FTAs in the region into coherent and consistent trade agreements. Functional integration may proceed on the basis of consolidating and harmonizing differing commitments such as through the adoption of a common framework of rules of origin and integration of bilateral trade and investment agreements.
At the same time, regional cooperation should go beyond trade liberalization and could also focus on regulatory and developmental cooperative measures, such as development of transport linkages and regional infrastructure. Such an integrated framework would create economic synergies and economies of scale and scope and an integrated market of enhanced interest to non-energy related foreign direct investment (FDI). It would also enhance the bargaining power of individual countries in other negotiations such as those related to WTO accession and the Doha Round and negotiations on trade relations with other blocs (e.g. South Asia/SAFTA, ASEAN/AFTA, BIMSTEC, etc.). Care should be taken that the commitments countries undertake under such mechanisms be consistent with their WTO commitments, and, vice versa, their WTO commitments should not inhibit ongoing regional integration processes.
A second, closely related measure is the development of the services sector. Services already account for a relatively significant share in GDP (and employment) in some SPECA countries, and thus the services sector development is key to growth. For instance, the sector accounts for 53% of GDP for Kazakhstan, 52% in Kyrgyzstan, 46% in Tajikistan and 43% in Uzbekistan. It is lowest in Azerbaijan (24%), and Afghanistan (34%). By contrast, trade in services still accounts for only a minor share in SPECA countries´ total exports. Services exports represent 38% of total exports for Kyrgyzstan, up from 11% in 2000, while they account for smaller shares for Tajikistan (9%), Azerbaijan (3%) and Kazakhstan (5%). Services sector development lagged behind in the region as former central planning focused largely on industry and natural resource-based activities. Enhanced regional cooperation could build enabling regulatory and institutional frameworks, especially for infrastructural services, which serve as the backbone of the economy. UNCTAD works on the regulatory and institutional dimension of services, and already assisted the Kyrgyz Republic in a national services policy review, which identified tourism and energy services among others as key strategic sectors of the economy.
- Third, and probably most urgent, is the development of trade and transport infrastructure. The introduction of regional transit corridors, the simplification and harmonization of customs procedures, and the improvement of border management are among the key measures, which could provide a catalyst for both regional integration and better access to international markets. Given the significant needs in this area, it has been estimated that Central Asian countries would need to devote at least 2 to 2.5 per cent of GDP to transport infrastructure networks for many years. Such resources may not be easily available individually, but regional cooperation could ease addressing such resource gaps by pooling and sharing funds.
Some of these measures are being introduced under the targeted initiatives by bilateral and international agencies, including UNCTAD. UNCTAD has assisted Afghanistan in streamlining its customs procedures by introducing the Automated Customs Data System, known as ASYCUDA. This assistance is part of the joint World Bank-UNCTAD Emergency Customs Modernization and Trade Facilitation Project.
To date, ASYCUDA has been implemented in the six main Customs offices in Afghanistan, and led to the full automation of the entire customs clearance process for imports and exports, which resulted in reducing red tape, delays at the border and costs of trade.
For example, the system enabled the Afghani Customs office to introduce a new, simplified declaration process, which is aligned to international standards and reduces the previous 14 steps and signatures to just three. It has also reduced customs clearance time for trucks almost five-fold. ASYCUDA, which operates in two major transport corridors, linking the country with the neighbours, also helped the Afghani Customs Department to dramatically increase customs revenue: from $86 million in 2003/4 to $311 million in 2006/7. While so far our main activities in the region have focused on Afghanistan, of course, UNCTAD is prepared to install ASYCUDA in other SPECA member countries, should they deem it useful.
Ladies and Gentlemen,
These are only some of the measures that could help to strengthen economic cooperation in the SPECA region and to generate economic opportunities for Afghanistan. UNCTAD stands ready to assist the countries of Central Asia in all of its areas of expertise, so as to help the region turn its geographical position from a challenge into an advantage. After all, the region is the link between Asia and Europe, with a potential to benefit from trade between the EU, the Russian Federation, China and India.
Thank you very much.