Ambassador Terry Miller and Anthony Kim
The eight countries of the Caspian region–Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—are diverse in history, culture, religion, resource endowments, and levels of development. All but Georgia are landlocked. Several have rich deposits of oil and natural gas. Climate varies dramatically across the region, and governments range from hereditary autocracies to relatively open free-market democracies.
However, a characteristic that still defines them all is the legacy of more than half a century within the political and economic confines of the Union of Soviet Socialist Republics. In the almost three decades since the disestablishment of the USSR, the countries of the Caspian have evolved to varying degrees, as has Russia itself. This evolution, particularly of the economic and business environments, has been documented extensively in The Heritage Foundation’s Index of Economic Freedom.
A Critical Region with Great Economic Potential
The Caspian region is a place where a multitude of challenges and opportunities converge. The Caspian Sea lies at the heart of the Eurasian land mass, and it is no fantasy when leaders invoke the ancient Silk Roads in arguing for new road, rail, and port infrastructure to realize the region’s potential as a crossroads for trade from North, South, East, and West. The region has abundant natural resources that serve as the main drivers of regional economic activity. An estimated 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proved and probable reserves provide a foundation for investment and capital flows throughout the region.
The abundance of natural resources is also one of the main reasons the region is prone to outside influence. Turkey, though not a Caspian littoral state, maintains very close cultural, linguistic, historical, and economic links to the region. Russia and Iran continue to propagate pro-Russian and anti-West narratives and perspectives to the governments and peoples of the region, and see themselves as having a special role in Caspian affairs due to their historical engagement with the region. Russian territorial incursions in Georgia emphasize the historical and current threat Russia poses for the territorial integrity and independence of the region’s countries. A newly resurgent China has attempted to make greater inroads to the region as part of its Belt and Road Initiative.
Internal challenges are no less significant. The ongoing dispute between Armenia and Azerbaijan diverts resources that could be better used to promote development, and the threat of Islamist extremism is a reality in several countries. Environmental problems abound, and cross-border management of water resources can be a source of tension.
Despite these challenges, progress is apparent but slow. According to the International Monetary Fund, economic growth in the Caspian region as a whole is averaging around 4 percent per year, and the region has largely recovered from large external shocks during the years from 2014 to 2016. By and large, economies in the region are benefiting from efforts to strengthen macroeconomic policy frameworks, including the adoption of new fiscal frameworks. In addition to maintaining overall monetary stability, moves toward greater exchange-rate flexibility have also helped authorities manage external pressures and contain inflation.
Still, however, the region’s 4 percent average growth is too low to raise standards of living to those of comparable economies over the medium term. Much of the fault for this economic lassitude can be attributed to issues that are a legacy of decades within the USSR.
The Soviet Hangover
After World War II, the countries of the West (loosely defined to include Western Europe, the United States, and Japan) leaped ahead through commitment to principles of democratic government that emphasized respect for individual rights and equal treatment of all under the rule of law and a free market economic system that emphasized private property, transparent and limited government regulations of economic activity, and openness to international flows of goods, services, and capital that vastly expanded the size of markets to which individuals and firms have access.
The countries under Soviet domination were directed on another economic path, that of communal ownership by the state, central planning and decision-making, and an environment in which state permission was required for almost any change in economic activity. Two tragic impacts of this system stand out: a massive increase in corruption, as individuals sought to evade restrictions that hampered their ability to prosper or even survive, and as officials learned to profit by looking the other way; and the loss of any incentive for innovation or entrepreneurship, as private profits from such were disallowed.
The results were inefficiency and economic stagnation that impoverished most of the population, with only the politically powerful able to prosper through the application of governmental force. The countries of the Caspian experienced all of this, to greater or lesser degrees, and the legacy of that era is still a factor hampering the fuller integration of the people of the region in the globalized world economy.
The Current State of Economic Freedom
The Heritage Foundation’s annual Index of Economic Freedom has documented the region’s policy successes and shortcomings over the past 25 years. The Index’s ideal is a country committed to the free market, with even-handed rule of law, limited government interference in the economy, whether through excessive taxation and spending or burdensome business and labor regulations, and open access for individuals and businesses to international flow of goods, services, and capital.
Economic Freedom in the Caspian Region: Which Countries are Progressing?
The paragraphs below offer an economic freedom snapshot of each country drawn from the Index. It is interesting to note that the majority of countries of the region—including Armenia, Azerbaijan, Georgia, Kazakhstan, and Kyrgyzstan—have moved measurably ahead of Russia, which remains mired in the lower middle of the economic freedom rankings as only the 98th freest economy in the world. Others—including Turkmenistan, Uzbekistan, and Tajikistan, are lagging behind even that mediocre pace.
Armenia ranks 47th in the 2019 Index of Economic freedom. Despite efforts to improve the business environment through tax reform, reduce corruption in the customs and tax administrations, and increase the transparency of procurement processes, Armenia’s geographic isolation, narrow export base, and pervasive monopolies in important business sectors make it particularly vulnerable to deteriorations in global commodity markets. Nevertheless, modest diversification has produced greater economic dynamism, and a decade of strong economic growth has reduced poverty and unemployment. Cronyism and influence peddling remain concerns, and progress in tackling corruption has been limited.
Azerbaijan ranks 60th in the 2019 Index. Priorities include joining the World Trade Organization, developing Azerbaijan into a trade and transit hub by continuing investment in road and rail infrastructure, and diversifying away from economic dependence on hydrocarbons. Continued market-based improvements in regulatory efficiency and further restructuring are needed to capitalize on the well-educated labor force and broaden the production base. There has been measurable progress in improving the rule of law in recent years, but corruption remains a lingering problem.
Georgia ranks 16th in the 2019 Index. Since the 2003 “Rose Revolution,” reforms by successive administrations have reduced petty corruption, cut regulation, simplified taxes, opened markets, and developed transport and energy infrastructure. Further reductions in regulation, taxes, and
corruption are needed to attract foreign investment and stimulate growth. Maintenance of monetary stability and overall sound fiscal health have fostered macroeconomic resilience. Nonetheless, deeper and more rapid institutional reforms to enhance judicial independence and effectiveness are still needed to ensure dynamic and lasting economic development.
Kazakhstan ranks 59th in the 2019 Index. The country has a growing labor force and considerable development potential, but the poor business environment, weak competition in some sectors, and long distances to global markets remain significant constraints. Growth in recent years has been driven largely by the expansion of the extractive sector and high commodity prices, which have supported growth in consumption and government spending. Little progress has been made in diversifying industrial production away from mining. Investors remain concerned about corruption, bureaucracy, and arbitrary law enforcement, especially at the regional and municipal levels.
The Kyrgyz Republic ranks 79th in the 2019 Index. Despite some reforms, the overall improvement in the Kyrgyz Republic’s entrepreneurial environment has been slow and uneven. Political turmoil adds to policy volatility and uncertainty, hampering economic development. Political rivalries and powerful special interests hold back implementation of deeper structural reforms. With remnants of the former Communist system evident in many areas, the economy still lacks the institutional foundations of greater economic freedom. Weak rule of law fosters pervasive corruption and ownership insecurity, undermining private-sector investment and business growth.
Tajikistan ranks 122nd in the 2019 Index. Policy priorities include securing support for the banking sector, still on the verge of collapse, and finding external financing for large infrastructure projects. Tajikistan’s poor business climate, burdensome bureaucratic regulations, and inconsistent administration remain impediments to foreign investment. Central bank expenditures to support the weak currency leave little space for additional fiscal or monetary measures. Despite some progress in privatizing small and medium-size public enterprises, private-sector development has been slow. The rule of law is exceptionally weak, and Tajikistan remains one of the world’s most corrupt nations.
Turkmenistan ranks 164th in the 2019 Index. Little has been done to improve the business climate, privatize state-owned industries, or combat rampant corruption, and excessive dependence on hydrocarbons and lack of diversification have deepened the country’s economic crisis. Consumers face severe shortages because of import restrictions. Currency depreciation, autarkic policies, and limited spending on public services have led to economic stagnation. Rigid labor regulations and the nearly complete absence of property rights further limit private-sector activity.
Uzbekistan ranks 140th in the 2019 Index. Priorities are to improve ties with the country’s neighbours and attract foreign investment by improving public administration, maintaining macroeconomic stability, and reforming such sectors as agriculture, finance, and banking. In September 2017, the exchange rate was liberalized and allowed to float, after which the currency depreciated by 50 percent. The country has a long history of corruption, protectionism, and government intervention in various aspects of the economy that has hampered growth. The rule of law remains very weak, damaged by a seriously deficient legal framework.
The Way Forward
Moving forward, Georgia and Azerbaijan, the two most western-oriented countries in the region, have important leadership roles to play. Within their vastly different political systems, both have managed significant reforms to liberalize economic regulations and advance economic freedom. Armenia is well-positioned to join them but needs to make a concerted effort to break free from Russian economic and security influence and resolve its conflict with Azerbaijan in Nagorno-Karabakh. Kazakhstan, the largest country in the region, has enormous potential, but its autocratic political system, little changed from Soviet times, has slowed economic reforms almost to a standstill. An injection of fresh political and economic thinking is long overdue. The other countries lag far behind in fighting corruption and establishing even-handed legal systems that can protect private property, a basic requirement for free-market development.
The region’s cultures are historically strong, but whether they will succumb to radical Islamic influences or the collectivist approach of China, or indeed remain subject to hereditary autocracies or the one-party rule that is a legacy of the Soviet Union as opposed to genuine democracy, is a story still being written. Whatever the outcome, the region has always been, and will remain, an area of geopolitical importance and competition.
More proactively adopting policies that enhance economic freedom will aid development on both the economic and political fronts. Greater growth and broad-based development contributes both to political stability and, by empowering more people to participate actively in the life of their communities, pluralism and democracy.
It is in that direction that the most promising future for the countries of the Caspian region can be found. Several are well along the way. It’s time for the others to join their march of freedom.