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The west should invest in central Asia

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  • The west should invest in central Asia

    The west should invest in central Asia
    By Jean Lemierre

    FT.com site
    Jul 01, 2004

    A worrisome disparity is developing between countries that spent
    decades together behind the Iron Curtain. On one side of the emerging
    divide are the eight countries of central Europe and the Baltic region
    that joined the European Union on May 1 - hard-won recognition of
    their economic and political transformation. But further east, beyond
    the new borders of the EU, economic and political transition in the
    seven poorest countries emerging from the command economy system has
    been slower; half the population still lives below the poverty line.

    In many parts of central Asia and the Caucasus, poverty, ethnic
    tensions, the slow pace of reform and high indebtedness combine to
    pose a threat to regional and global security. This is particularly
    true in Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova,
    Tajikistan and Uzbekistan.

    Geographically and ideologically, these seven countries were closer
    than the new EU members to the heart of the former Soviet Union and it
    is taking them much longer to emerge from its long shadow. They have
    not had the offer of EU membership to encourage them through arduous
    and often unpopular reforms. Widening the embrace of the EU to
    include eight new central European and Baltic states will only go so
    far to stabilise the post-cold-war situation, if, over the horizon,
    trouble is brewing. Pent-up social frustration born of a lack of
    opportunity in these seven nations may heighten tensions, even
    extremism. In the long run, private-sector growth and job creation
    coupled with political reform are the only means to defuse tensions.

    Of course, if economic transition were easy to accomplish in these
    states, it would have happened already. The publicly owned European
    Bank for Reconstruction and Development was created in 1991 to foster
    such transition in 27 countries of the former Soviet sphere and the
    bank is the largest single investor there. But, in spite of our
    expertise, local presence and mandated interest in doing business in
    the seven poorest countries, we have had difficulty raising the level
    of our investment there. Given the challenges of doing business in
    these countries, it is easy to understand why private-sector investors
    shy away.

    Yet the EBRD's local offices see many promising investment
    opportunities. These range from big oil, gas and mining deals to
    family-owned bakeries, middle-sized lumber businesses, small-scale
    hydro-power producers, dairies and growing textile mills.

    Unfortunately, opportunity is not enough. The slow and uneven pace of
    economic and political reform in these countries discourages foreign
    investors and local businesses alike. There remain too many vestiges
    of the command economy system and big government, and there is not
    enough commitment to improving commercial law, the functioning of
    courts and regulatory bodies, and fighting corruption.

    The least painful path to economic growth is to cut red tape and then
    get out of entrepreneurs' way. At the EBRD annual meeting last year,
    one Kyrgyz entrepreneur reported that 160 permits were needed to start
    a small business in her country; that was an improvement on the old
    days when 193 permits were required. A year later, the situation has
    not changed much. Both local business growth and foreign investment
    would be encouraged if governments cut through the thicket of
    restrictions on foreign currency exchange and on cross-border trade
    and travel.

    Trade depends on transport and here we have seen many encouraging
    signs of greater regional co-operation. The upgrading of the ancient
    Silk Road linking the Caucasus and central Asia is an example of
    national governments, donors and international lenders working
    together on regionally important infrastructure. The
    Baku-Tbilisi-Ceyhan oil pipeline has built better relations between
    Azerbaijan and Georgia and introduced more than a dozen top
    international banks to those countries.

    A new EBRD initiative aims to promote greater investment and
    accelerate economic reform in these seven still-poor countries by
    accepting higher risk to make investments, improving banking services
    for small and medium-sized businesses, encouraging small-scale
    infrastructure projects, and promoting legal reform and regional
    trade.

    As every euro invested in a project by the EBRD typically attracts two
    more from other sources, we expect this initiative will increase
    private investment. The expansion of the EU's borders has brought
    Europe closer to the Caucasus and central Asia. There is no better
    time to promote economic development there, increase prosperity and
    underpin stability for the region, and beyond.

    The writer is the EBRD's president
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