How can Central Asia “build back better”?

A worker in the mining sector in Khromtau, Aktobe region, Kazakhstan. Banner image: Alexey Revkyk

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This article is part of a series in which OECD experts and thought leaders —from around the world and all parts of society— address the COVID-19 crisis, discussing and developing solutions now and for the future.

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Crises are often moments of abrupt and sometimes painful change. More often than not, though, they reinforce long-term trends rather than reversing them. Most crises highlight problems already long present and accelerate changes already under way. COVID-19 is no exception: it has brutally exposed and even increased socioeconomic, gender and spatial inequalities around the world. At the same time, it has accelerated the pace of processes like the digital transformation.

In Central Asia, the crisis has yet again highlighted the structural weaknesses that have been apparent for many years. Even before COVID-19, trend GDP and productivity growth had been decelerating for a decade (Figure 1). To a significant extent, this reflected the over-reliance of Central Asian economies on two volatile growth drivers – exports of raw materials and remittances from migrant workers. When the global economy was buoyant, this had the effect of reducing the sense of urgency about structural reforms that could have contributed to greater diversification of economic activity and employment and greater private sector dynamism. This could not only strengthen growth, it could also make it more inclusive: extractive sectors, being capital intensive, generate relatively little employment. Most employment is still in low-skill, low-productivity activities. Real diversification is thus critical to creating more high-productivity jobs for Central Asia’s rapidly growing labour force.

Figure 1. Growth performance of the Central Asia 5

Growth central asiaRelease on central asia

Read more about the OECD Eurasia Competitiveness programme

How then can we use the post-pandemic recovery to strengthen the foundations of Central Asian economies, making them more productive, inclusive and sustainable?

Our new report, Improving the Legal Environment for Business and Investment in Central Asia, offers some answers to this question, drawing on OECD experience and intensive engagement with the five Central Asian countries. In Central Asia, recovery from the crisis offers an opportunity to improve the framework conditions for entrepreneurship and investment.

The coming years could thus mark a turning point, setting the region’s economies on a path towards more diversified, sustainable and inclusive growth. The activities and innovations of entrepreneurs, investors and private firms of all sizes are critical to generating the ideas and jobs needed for a more resilient and prosperous future. In Central Asia, though, the private sector’s ability to play this role has been limited by persistent weaknesses in the business environment. FDI outside the extractive sector remains low, and the outsized role of state-owned enterprises constitutes both a barrier to private-sector growth and a source of competitive distortions. Policies aimed at economic diversification have so far achieved little, and Central Asian countries are falling behind in the digital transformation, despite ambitious e-government programmes, because private firms have been slow to embrace the digital world. Awareness, skills and investment are needed and bear an enormous potential for countries, economies and societies concerned. Digital inclusion has to be the “mantra of the day” to prepare a more promising future for the people in Central Asia. Moreover, the current crisis requires governments to revisit their legal environment for businesses and foreign investors.

The overriding challenge is to bridge the gap between de jure policy settings and the de facto reality on the ground. Across the region, the report highlights the problem of weak implementation of policies and inconsistent – and often untransparent – application and enforcement of rules. Central Asian countries have made tremendous progress in overhauling legislation but this is not yet reflected in the real conditions that firms face.

The OECD FDI Regulatory Restrictiveness Index findings illustrates this point. Statutory restrictions are relatively low, and many regulatory and administrative processes have been digitalised, but investment is not forthcoming. The evidence – and the testimony of many private-sector actors in the region – suggests that a range of informal barriers, including widespread corruption and ad hoc interventions by state actors, make the investment environment far less open than it appears on paper. As the report shows, such implementation gaps may be found in many policy domains, from tax and trade to dispute resolution. Businesses need certainty and clarity if they are to invest and innovate, and governments can provide this only where implementation and enforcement are consistent, transparent, effective and fair.

OECD FDI

The analysis and recommendations in Improving the Legal Environment for Business and Investment in Central Asia therefore come at an important moment, as the report offers a guide to some of the key regulatory and legal challenges besetting private sector development in the region and offers clear priority areas for action. The report can also can help governments prioritise addressing those areas that could have the greatest impact on the health of their business climates. To guide governments, each chapter of the report proposes a series of country-specific priority reforms. This year and next, we are working with the countries to advance those reforms, reflecting our conviction that the OECD cannot just offer recommendations to sit on a shelf gathering dust. We are committed to continued engagement with the Central Asian countries to deliver on those recommendations.

This work can help bring Central Asian countries closer to OECD approaches and standards, as the work draws heavily on OECD tools and instruments, such as the Policy Framework for Investment, which have been generated and endorsed by our member states. I believe that these instruments, as well as the OECD work on key components such as competition, state-owned enterprises, digitalisation and taxation, can help to rebuild the foundations of a healthy business climate in the region.

It is my hope that our partners in Central Asia will see the advantage of addressing these long-standing issues now, as part of the recovery from COVID-19 and as a commitment to a more prosperous future.

Find more about the OECD work in Eurasia and the policy responses to COVID-19 in Central Asia in the OECD COVID Hub

OECD Eurasia

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Andreas Schaal

Director, Global Relations, OECD

Mr. Andreas Schaal is the Director of OECD Global Relations. In this capacity, he is responsible for the OECD’s relations with Brazil, China, India, Indonesia and South Africa as well as with growing regions like Southeast Asia, Latin America and the Caribbean, South East Europe, the Eastern Partner region and Central Asia, and the MENA region. He supports the Secretary General’s objectives for a regionally inclusive and globally relevant organisation.

Mr. Schaal is a non-Resident Senior Fellow of the Chongyang Institute for Financial Studies at Renmin University of China (RDCY).

Between 2013 – 2016, he served the organisation as the Head of the Sherpa Office and the Global Governance Unit at the OECD and between 2013-2018 as the G20 Sous Sherpa. He has worked with the OECD Chief of Staff and Sherpa to advance OECD contributions to key pillars of the global governance architecture, such as the G20, G7, APEC and the Deauville Partnership supporting Transition Countries in the MENA Region. He also represented the organisation as a Sous-Sherpa in the respective meetings.
Since joining the OECD in 2008 he has also held positions as a Senior Policy Analyst in the Investment Division of the Directorate for Financial Markets and Enterprise Affairs, and as Counsellor in the Office of the Secretary General. Prior to joining the OECD, Mr. Schaal held various positions during his work for the German Federal Government, including Deputy Director G8 Summit/German Sherpa Office, Federal Ministry of Economic Affairs and Technology, Economic Counsellor, German Permanent Delegation to the OECD, Paris, Vice Chair (elected 2005-2006) of OECD’s Economic and Development Review Committee (EDRC) and Policy advisor and chief of staff to Parliamentary Secretary of State Siegmar Mosdorf, MP, Federal Ministry of Economic Affairs and Technology.

Mr. Schaal, a German national, holds a Masters in Public Policy and Public Management from the University of Konstanz, Germany.