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