UNITED NATIONS DEVELOPMENT PROGRAMME
THE MACROECONOMICS OF POVERTY:
A CASE STUDY OF THE KYRGYZ REPUBLIC
Report of a Mission to the Kyrgyz Republic for the
United Nations Development Programme
July 2002
September 15, 2002
CONTENTS
FOREWORD
MAP
CHAPTER 1: INTRODUCTION 1
The Soviet Legacy
An Overview of the Transition
Structure of the Report
CHAPTER 2: POVERTY IN THE KYRGYZ REPUBLIC 6
A. Poverty
Poverty Trends
Characteristics of the Poor
B. Human Poverty
The Human Poverty Concept
Human Poverty issues
Measuring Human Poverty
CHAPTER 3: PROGRESS TOWARDS STABILISATION 17
A. Stabilisation Strategy
Fiscal Adjustment
Monetary Policy
Trade Measures
B. Capital Flows and External Debt
Capital Flows
Foreign Direct Investment
External Assistance
C. The Impact on Poverty and Current Stabilisation Measures
Impact of Stabilisation Measures
Current Stabilisation Measures
D. Stabilisation and Potential Shocks
Potential Risks
Actions to Reduce the Risk of a Shock
Actions to Mitigate the Impact of a Shock
CHAPTER 4: GROWTH AND POVERTY REDUCTION 33
A. Macroeconomic Performance
Factors Behind the Sharp Decline and the Slow Recovery
B. Production Sectors During the Transition
Changes Since Independence
Changes in the System of Incentives
Access to Inputs and Services
Problems of Transformation from Collective to Private Agriculture
The Continued Industrial Decline
Other Sectors
C. The Employment Scenario
D. Poverty and Growth
Lessons
E. Policies for Poverty-Alleviating Development
Policy Objectives
Elements of a Growth Strategy
CHAPTER 5: THE REDUCTION OF INEQUALITY 55
A. Inequality in the Kyrgyz Republic
B. Increasing the Productivity of the Poor
The Agricultural Sector
Non-Agricultural Sectors
Labour and Demographic Issues
C. Fiscal Policies to Address Inequality
Social Transfers
Public Works
Taxation
Social Investment
CHAPTER 6: ECONOMIC GOVERNANCE 68
A. Overall Development Planning and Economic Management
The Comprehensive Development Framework
The National Poverty Reduction Strategy
Economic Management
The Public Investment Programme
Aid Coordination
B. Strengthening pro-poor Economic Policy Development
Strengthening Poverty Monitoring and Analysis
Additional Macro-micro Linkages
Participation in Economic Policy Making
Ensuring Effective Monitoring and Evaluation of the NSPR
REFERENCES
LIST OF TABLES
|1.1 |Relative Progress in Transition 2001 | |
|1.2 |Estimated Level of Real GDP in 2000 (1989=100) | |
|2.1 |Poverty and Inequality in the Kyrgyz Republic (1996-2001) | |
|2.2 |Further Measures of Poverty in the Kyrgyz Republic (1996-2001) | |
|2.3 |Education Enrolment Levels (1989-1999) | |
|2.4 |Life Expectancy at Birth (1991-2001) | |
|2.5 |Access to Health Services (1996-2001) | |
|2.6 |Child Nutrition (1996-2001) | |
|2.7 |Households with Access to Services 2001 (1996-2001) | |
|2.8 |Households without Access to Safe Drinking Water | |
|2.9 |Percentage of Population expected to die before 40, 50 and 60 | |
|2.10 |Human Poverty Indexes | |
|3.1 |Main Fiscal Indicators (1991-2001) | |
|3.2 |Inflation (1991-2001) | |
|3.3 |Current Account Deficit (1992-2001) | |
|3.4 |Structure of Kyrgyz Foreign Debt (1998 and 2001) | |
|3.5 |External Debt Service (US$ million) (2002-2005) | |
|3.6 |Foreign Direct Investment, % GDP (1995-2001) | |
|3.7 |Main Indicators of Enterprises with Foreign Participation (1999) | |
|3.8 |Health and Education Expenditures (% of GDP, 1990-2001) | |
|3.9 |Commodity Concentration of Trade (1993-2001) | |
|3.10 |Geographical Concentration of Trade (1993-2001) | |
|3.11 |Trade with main CIS Trading Partners (1997) | |
|4.1 |Decline and Recovery during 1990-2001 | |
|4.2 |Selected Macroeconomic Variables | |
|4.3 |Structural Change in Agriculture | |
|4.4 |Estimates of Change in Terms of Trade for Agriculture | |
|4.5 |Forms of Organisation in Kyrgyz Agriculture (% of total Land, 2001) | |
|4.6 |Outputs of Selected Industries | |
|4.7 |Growth in Real GDP and Employment Between 1996 and 2000 | |
|4.8 |Alternative Projections of Investment and Saving (% of GDP) | |
|5.1 |Gini coefficients as measured by Consumption, Expenditure and Income | |
|5.2 |Demographic Trends (1991-2000) | |
|5.3 |Population without Access to Medical Services by Oblast (%, 1996-2000) | |
|5.4 |Average Salary by Sector | |
|5.5 |Percentage of Households with Access to Services (2001) | |
LIST OF BOXES
|2.1 |Poverty Measurement in the Kyrgyz Republic | |
|2.2 |Well Being and Ill-being in the Kyrgyz Republic | |
|2.3 |Calculating the Human Poverty Index | |
|6.1 |Overview of the Development Planning and Economic Management Instruments | |
|6.2 |Participation at the Macro Level | |
LIST OF FIGURES
|5.1 |Sex and Age of Population as of January 1st 2001 | |
ACRONYMS AND ABBREVIATIONS
CAS Country Assistance Strategy
CBO Community Based Organisation
CDF Comprehensive Development Framework
DAC Development Assistance Committee
EPC Economic Policy Council
EWIS Early Warning Information System
FDI Foreign Direct Investment
GDP Gross Domestic Product
GNP Gross National Product
GVA Gross Value Added
HBS Household Budget Survey
HDI Human Development Index
HES Household Energy Survey
HPI Human Poverty Index
ICOR Incremental Capital Output Ratio
IFI International Financial Institutions
INSPR Interim Strategy for Poverty Reduction
KAFC Kyrgyz Agriculture Finance Corporation
KPMS Kyrgyz Poverty Monitoring Survey
LSG Local Self-Government
MDG Millennium Development Goal
M&E Monitoring and Evaluation
MTBF Medium Term Budget Framework
NBKR National Bank of the Kyrgyz Republic
NGO Non Governmental Organisation
NSC national Statistics Committee
NSPR National Strategy for Poverty Reduction
PIP Public Investment Programme
PRGF Poverty Reduction and Growth Facility
SHG Self Help Group
SME Small and Medium Size Enterprise
UNV United Nations Volunteer
VoP Voices of the Poor
FOREWORD
This report represents a case study for the Kyrgyz Republic on the macroeconomics of poverty reduction in order to provide useful policy advice on promoting pro-poor growth and making the economic policies of the National Poverty Reduction Strategy more effective in achieving poverty reduction goals. The process is also linked to the UNDP regional programme in Asia-Pacific on the macroeconomics of poverty reduction in order to foster cross-country comparative analysis and learning. The regional programme is covering seven countries—Bangladesh, Cambodia, China, Indonesia, Mongolia, Nepal and Vietnam—most of which are also formulating Poverty Reduction Strategy Papers and many of which are also countries in transition.
The report is the output of a team of five members, both Kyrgyz nationals and internationals, who came together in the Republic during July 2002. The team comprised the following members:
• Michael Reynolds, UNDP Consultant
• Azizur Rahman Khan, UNDP Consultant
• Dorothy Rosenberg, Regional Poverty Advisor, UNDP Bureau for Development Policy
• Roman Mogilevsky, UNDP Consultant
• Emil Alymkulov, UNDP Consultant
The team worked in the Kyrgyz Republic during the period that the government in consultation with civil society was preparing the National Poverty Reduction Strategy. The mission engaged with the body responsible for preparing the document through providing direct advice, sharing drafts of this document and commenting on drafts of their document. This report is the result of frank and open discussions with government (central and local), civil society and members of the international donor community. It is based on the contributions of all members of the team but has been put together by Michael Reynolds who remains responsible for its contents.
The team would like to express its sincere thanks to Ms Aikan Mukanbetova, UNDP Programme Officer in the Kyrgyz Republic Country Office, who provided strong support to the team and to Mr David Akopyan, UNDP Deputy Resident Representative in Bishkek for his support and guidance.
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CHAPTER 1: INTRODUCTION
The Kyrgyz Republic is a land locked country situated in the heart of Central Asia. It is bordered by three other landlocked countries, Kazakhstan, Uzbekistan and Tajikistan as well as China on the latter’s remote western border far from access to the sea. Approximately 93% of the country is mountainous, dominated by the Tien-Shan Mountains (the world’s third highest mountain range) with over 40% of the land higher than 3,000 meters above sea level. Its landlocked status and mountainous nature contribute to difficult and expensive inter- and intra-country communications and poor access to world markets. The climate is continental: cold winters, hot summers and low precipitation.
Of the five million Kyrgyz people, 66 percent are ethnic Kyrgyz, 14 percent are Uzbek and 12 percent Russian. Since independence, one quarter of ethnic Russians previously resident in the Kyrgyz Republic left for Russia, with some returning now. There are smaller numbers of Germans, Koreans, Tartars, Chechens and Ukrainians, many of whom were settled in the Kyrgyz Republic during the Stalin dislocations of the 1930s and 1940s, together with Kazakhs, Dungans and Uighurs. Two-thirds of the population live in rural areas.
Unlike some of its neighbours the Kyrgyz Republic is relatively poorly endowed with natural resources. With 170 proven deposits of gold it was however the third largest producer of gold during the Soviet period behind Russia and Uzbekistan and gold remains the key mineral resource and export commodity. The Republic also has abundant water resources and potential for developing hydroelectric power, another important export. Large coal deposits are difficult to exploit as they are found deep in mountainsides. Small deposits of oil (in relation to demand) exist in the south of the country together with some gas.
THE SOVIET LEGACY
The process of transition in the Kyrgyz Republic since independence can only be understood in the context of its historical development during the Soviet period since the Soviet legacy has strongly influenced the direction, speed and results of the reforms. The Soviet strategy was to create a specific pattern of agricultural specialization and industrial development in the Central Asian region to which the Kyrgyz Republic belonged. Being a part of a highly autarkic economic union with the rest of the Soviet Union, with an almost infinitely high common external tariff, would by itself have created a pattern of regional specialization that would not necessarily correspond with the region’s comparative advantage in the context of integration into the global economy. The Kyrgyz Republic also received quite significant direct and indirect subsidies from the central Soviet budget either (a) directly to the republican budget, (b) in the form of investments into large enterprises, or (c) channelled through subsidized prices of many important resources (fuel and transportation costs in particular). These subsidies allowed Kyrgyz enterprises to have close cooperation with partners in very remote parts of the former Soviet Union.
In the industrial and service sectors, production was organized in large-scale state-owned enterprises. The Soviet strategy of industrialization not only emphasized autarky at the union level, but also a degree of self-sufficiency for the regions and republics. The manufacturing industries in the Kyrgyz Republic thus had a relatively broad base: it included producers’ goods like electrical engines and centrifugal pumps, a variety of farm machineries, even trucks; intermediate goods like cement and bricks; consumption goods like, textiles, garments, processed food; and agricultural processing like cotton fibre. The Kyrgyz Republic was also a major producer of electrical energy and coal. Apart from catering to domestic demand, much of these industries were based on the processing of material supplied by the rest of the Soviet Union or on demand for export to other Soviet republics. The industrial sector was also strongly dependent on input supplies from, and output markets in, other parts of the USSR and prices for the inputs and outputs heavily subsidized by the central government.
In agriculture, the institutional framework was provided by the collectivised organization of agriculture in which rural households belonged either to state farms (sovkhoz) or to collective farms (kolkhoz). The Soviet strategy was to promote a particular kind of regional specialization in agriculture: wool, livestock products and, to a lesser extent, cotton in Kyrgyz Republic; cotton in Tajikistan, Uzbekistan and Turkmenistan; and wheat in Kazakhstan. Thus incentives were sharply shifted in favour of the respective crops and products in the Republics. In spite of the well-known problems under collective institutions and central planning, the countries attained a certain degree of efficiency in the production of these goods.
The pattern of specialization imposed by Soviet central planning was based on the planners’ notion of the comparative advantage of the republics. It is quite possible that their presumption was often correct, that Kyrgyz Republic had comparative advantage in wool, livestock products, electrical energy, cement and coal. While the broad pattern of specialization might have been consistent with comparative advantage, it is almost certain that the distorted incentives during the Soviet period resulted in an extent of specialization well beyond the dictates of comparative advantage with all their attendant inefficiencies.
Due to large investments into social infrastructure, especially into the education and health care systems, a high level of human capital had been achieved; for example, indicators of education (literacy, secondary school enrolment etc.) in the Kyrgyz Republic had values more typical for countries with much higher GDP per capita. The isolation of the country meant, however, that there was limited experience with the world outside the Soviet Union and its satellites and, more importantly, with the workings of a market economy. Finally, few if any institutions – in terms of rules of the game – required for the effective functioning of a market economy were in place. Once the decision to move to a democratic society and market economy had been made huge efforts were going to be required to establish the appropriate institutional framework and build capacities to manage it.
AN OVERVIEW OF THE TRANSITION
Towards the end of 1991, eleven communist party officials met in Kazakhstan and signed a document that was to become known as the Alma Ata Declaration, which stated, “the USSR shall henceforth cease to exist”. The Kyrgyz Republic and the four other Central Asian Soviet Socialist Republics were represented at the meeting which effectively marked their transformation to independent nations. They were all founding members of the Commonwealth of Independent States (CIS), the umbrella coordinating organisation created in Alma Ata, and by the following year each had joined the United Nations and sought membership of key international organisations including the IMF and World Bank. From this common starting point, however, the newly independent states of the Soviet Union set out on different paths of development.
The Kyrgyz Republic quickly embarked on the simultaneous transition to a democratic system of governance and an economic system based on the market. For much of the early 1990s the Kyrgyz Republic stood out in the region for both is determined transition to democracy and for its approach to rapid economic reform. The term “Island of Democracy” was liberally used to describe the political situation and distinguish the country from the lack of political reform in it is neighbours. For economic reform, the country was seen to have the features of a “good pupil” of the IMF and World Bank although in reality the selection of the reform strategy was made before joining these organisations. Table 1.1 below shows recent rankings of reform according to the orthodox strategy promoted by the International Financial Institutions (IFI) illustrating the Kyrgyz Republic’s status as a good pupil in relation to its neighbours[1]. Donors and IFIs rewarded the reform strategy with significant levels of foreign aid both grants and concessional loans. For the period 1992-2000, the Kyrgyz Republic received US$ 1,690 million in external assistance or approximately US$370 per person in the country.
Table 1.1: Relative Progress in Transition 2001
| |Kaz. |Kyr. |Taj. |Tur. |Uzb. |
|Enterprises |
|Large-scale privatisation |3 |3 |2+ |1 |3- |
|Small-scale privatisation |4 |4 |4- |2 |3 |
|Governance and enterprise restructuring |2 |2 |2- |1 |2- |
|Markets and Trade |
|Price liberalisation |3 |3 |3 |2 |2 |
|Trade & foreign exchange system |3+ |4 |3+ |1 |2- |
|Competition policy |2 |2 |1 |1 |2 |
|Financial Institutions |
|Banking reform & interest rate liberalisation |3- |2+ |1 |1 |2- |
|Securities mkts. & non-banking financial institutions |2+ |2 |1 |1 |2 |
| | | | | | |
|Average (mean) |3- |3- |2 |1+ |2 |
Source: EBRD Transition Report 2001
Progress in the transition to a market economy, stabilisation, sustainable economic growth and improvements in the living standards of the people has not been monotonic. For the period since independence the economic transition can be divided into three distinct sub-periods:
(a) 1991 to 1995 witnessed a sharp reduction in output and income throughout the economy coinciding with a rapid rise in inequality in the distribution of income; hyperinflation followed by primary macroeconomic stabilization; rise in poverty to about 50% of the population
(b) 1996 to 1999. Since 1996 the economy has been on a path of recovery, led by the agricultural sector. This recovery has neither been particularly robust nor very steady: growth was concentrated in a limited number of sectors, notably agriculture, gold mining and energy; and it was weak in 1998 and 1999. The budget deficit continued to be high and this stage ended with the financial crisis of 1998-1999.
(c) the period 2000-2002 has witnessed continued growth, the slowing down of inflation, reduction of the budget deficit, exchange rate stabilization, and aggravation of the external debt problem (eased by rescheduling in 2002).
Table 1.2: Estimated Level of Real GDP in 2000 (1989=100)
|Central eastern Europe and the Baltic States |107 |
|South Eastern Europe |73 |
|Commonwealth of Independent States |61 |
|Kyrgyz Republic |66 |
|Moldova |33 |
|Uzbekistan |98 |
Source: EBRD Transition Report 2001
Compared to the last years of Soviet rule real GDP at the turn of the twenty-first century was only 66 per cent, only slightly higher that the average for the members of the CIS as illustrated in Table 1.2 above. By the turn of the century the incidence of absolute poverty had grown high and there was widespread popular perception of growing inequality. The Kyrgyz Republic, with a per capita income of US$ 270 (Purchasing Power Parity $ 2,540) in 2000, is among the poorest quintile of nations in terms of per capita income and the second poorest country in Central Asia. It is one of the most agricultural and the least industrial of the former Soviet Central Asian Republics with agriculture accounting for approximately 40 per cent of GDP and half of the labour force.
STRUCTURE OF THE REPORT
This report presents findings, lessons learned and policy recommendations for promoting pro-poor economic development in the Kyrgyz Republic. It is divided into five further chapters:
Chapter 2 looks at poverty in the Kyrgyz Republic, not only in terms of income and consumption but also examining the multi-dimensional poverty in the country.
Chapter 3 examines the progress towards stabilisation made during the past ten years. Stabilisation has been the main focus of economic transition process. Issues related the risks of shocks to destabilise the economy are also examined. The chapter establishes a framework within which further chapters are set.
Chapter 4 examines the issue of poverty reduction and growth, looking at how since the time of recovery economic growth, equality and poverty issues have interacted and proposing further steps for pro-poor economic growth.
Chapter 5 continues the focus on pro-poor economic growth by examining the prospects for income distribution and equality in the Kyrgyz Republic. It also examines inequality in the broader context of human poverty.
Chapter 6 examines the systems for development planning and economic management in the Kyrgyz Republic and specifically on making the processes more pro-poor.
CHAPTER 2: POVERTY IN THE KYRGYZ REPUBLIC
As noted in the previous chapter radical changes in the socio-economic system of the country accompanied by economic decline, hyperinflation, sharp cuts in government expenditures, and unfavourable changes in relative prices have all negatively influenced the living conditions of a large part of population. Poverty was not unknown, however, in the Soviet period. Estimates based on the Soviet Family Budget Survey, although imperfect and certainly not suitable for comparison with more recent surveys, are that on the eve independence approximately 33% of the population in what is now the Kyrgyz Republic had household income under the minimum level of Ruble 75 per month. While poverty existed in Soviet times (although this fact was not officially recognized), its scale was not as large as became observable in the 1990s. This chapter sets the scene by describing the trends in poverty since the start of the transition in two sections:
• Section A examines the results of various household surveys poverty and the trends of poverty over the last decade or so. It also identifies the profile of the poor revealed by the surveys.
• Section B goes beyond income poverty to look at the broader dimensions of human poverty.
A. POVERTY
POVERTY TRENDS
From the levels inherited from the Soviet period described above, poverty increased rapidly during the early days of the transition and by the mid-1990’s the level of poverty had risen to approximately half of the population. Table 2.1 below shows the estimates of poverty (the proportion of population below the poverty line) and inequality (the Gini index of the distribution of per capita expenditure) in the Kyrgyz Republic, separately for the nation and for urban and rural areas. The poverty line is based on the cost of a food basket that provides approximately 2100 kilocalories per person, its composition being based on the average food consumption pattern of the poorest third of the population. To this is added an amount for minimum non-food expenditure.[2]
The trend in rural poverty is fairly easy to describe: it rises until 1998 when it reaches a peak. Thereafter rural poverty declines steadily until 2001. Urban poverty had a more zigzag course. A highly implausible change took place between 1996 and 1997 when average urban income shot up and urban poverty declined sharply. Barring the possibility of a statistical quirk – a really strong possibility – this can only be explained by large-scale income transfer in favour of urban residents by the state in that year. Since there is not enough information to judge the validity of this possible explanation, this report will not discuss this figure any further. Urban poverty increased between 1996 and 1998. Thereafter it did not change much. There was a small overall decline between 1998 and 2001, but only after a small rise in 2000.
Table 2.1: Poverty and Inequality in the Kyrgyz Republic (1996-2001)
| |Proportion of Population in Poverty |Gini Ratios of Expenditure |Per Capita Real Expenditure |
| |Total |Urban |Rural |Total |Urban |Rural |Total |Urban |Rural |
|1996 |43.5 |30.3 |49.6 |0.370 |0.370 |0.350 |5712 |6960 |4937 |
|1997 |42.9 |22.2 |55.3 |0.410 |0.380 |0.360 |5749 |8096 |4357 |
|1998 |54.9 |42.2 |62.4 |0.360 |0.364 |0.341 |4341 |5136 |3865 |
|1999 |55.3 |42.4 |60.0 |0.372 |0.371 |0.362 |4382 |5353 |4024 |
|2000 |52.0 |43.9 |56.4 |0.326 |0.322 |0.323 |4399 |4902 |4131 |
|2001 |47.6 |41.2 |51.0 |0.320 |0.313 |0.351 |4663 |5179 |4385 |
Source: National Statistical Committee
Note: The NSC estimates for different years are based on the data from the following sources: 1996-98: Kyrgyz Poverty Monitoring Survey (KPMS); 1999: Household Energy Survey (HES); 2000-2001: Household Budget Survey (HBS) – See Box 2.1 below. The NSC takes the view that the KPMS and the HES surveys employed very similar methods, the only significant difference being that the questions on food consumption were more aggregated in the HES. Their belief that this did not introduce a bias is supported by the finding that the ratio of food expenditure to total expenditure is very similar according to KPMS 1998 and HES. The HBS for 2000 and 2001 are nationally representative sample surveys as were the KPMS and HES although they were designed independently. On-going work at the World Bank, based on a panel of 1043 households from the HBS for 1998, 1999, 2000 and 2001 broadly confirm the above changes except that their findings suggest a somewhat stronger poverty reduction during this shorter period: they find a rise in urban poverty only in 1999. Per capita real expenditure is at constant purchasing power of 1996 (deflated by the CPI).
It is worth noting that the headcount poverty index is very sensitive to the definition of the poverty line; even marginal changes in this line result in significant changes in the value of this index. This means that consumer expenditures of a majority of the population are just slightly above or below the current poverty line. Approximately 13.5% of the population fall under the extreme poverty line[3]. The level of extreme poverty has followed a similar pattern to poverty, increasing from 1996 to a peak in 1998/99 before falling between 1999 and 2001. This decline since 1999 has been significant, especially in rural areas as illustrated by Table 2.2 below.
Table 2.2: Further Measures of Poverty in the Kyrgyz Republic (1996-2000)
|Indicators |1996 |1997 |1998 |1999 |2000 |2001 |
|Extreme poverty level (%) |19.1 |14.9 |23.0 |23.3 |17.8 |13.5 |
|Extreme poverty level in rural area (%) |23.3 |20.7 |25.8 |25.6 |20.5 |15.6 |
|Poverty gap index (P1) |15.9 |13.9 |19.5 |19.8 |17.7 |13.9 |
|Poverty severity index (P2) |7.9 |6.3 |9.2 |9.8 |7.7 |5.6 |
Source: National Statistics Committee
In addition to the headcount index two other measurers have been developed to provide a greater understanding of poverty. Clearly the headcount index cannot indicate whether the poor have consumption levels 1% or 90% below the poverty line and a change in the consumption of those living below the poverty line may not be detected. The poverty gap index (P1) distinguishes among the poor depending on how far their consumption levels is below the poverty line. It can therefore be used to roughly estimate the costs of transfers to bring the consumption of the poor up to the poverty line. The poverty severity index (P2) is more sensitive to the distribution of income below the poverty line by giving more weight to those further away from it. Both measures have peaked in 1999 and have seen significant declines in the period 2000-2001.
Box 2.1: Poverty Measurement in the Kyrgyz Republic
Kyrgyz Poverty Monitoring Survey
The Kyrgyz Poverty Monitoring Survey (KPMS), rounds I-V, is a multi-purpose individual, household and community survey conducted respectively in October-November 1993 (round I), February-March 1996 (round II), October-November 1996 (round III), October-November 1997 (round IV) and October-November 1998 (round V). The data are not panel but nationally representative cross-section, collected using probability sampling. Rounds I-III covered approximately 2,000 households and 10,000 individuals in each year. The design of the subsequent rounds was modified and the sample size increased to allow analysis at the Oblast level.
The Household Energy Survey
The Household Energy Survey (HES) is a special multi-purpose survey with a focus on Energy. It was conducted on about 3000 households in the fall of 1999 using a probability sampling and it contains a different and more aggregated expenditure module than the KPMS. Although the consumption aggregate has been derived using this survey, the aggregation of the food items into broad categories makes the comparison of estimated poverty figures from this survey to those from the KPMS questionable.
The Household Budget Survey
The Kyrgyz Household Budget Survey (HBS) is an ongoing survey of households that are asked to regularly fill a diary of their incomes and expenditures. Information on expenditures and income are collected on a monthly basis and cover a whole year period. The HBS started in 1952 using “quota sampling” of 1000 enterprise workers. The sample frame has changed to a more population based sample of 2000 households in 1997 and further expanded to 3000 households in 2000. The latest increase in the sample size was aimed at making the HBS regionally representative, in particular with a better representation of the southern poorer regions.
Source: Ivanshenko, O., S. Ibragimova and A. Kolev (2002) Economic Growth and Inequality in the Kyrgyz: What Happened During 1996-2001. Annex 1: Data Available for Poverty Monitoring.
CHARACTERISTICS OF THE POOR
Less is known about the characteristics of the poor than is necessary for the design of an efficient poverty reduction programme, especially the design of programmes of direct interventions to benefit the poor that would minimize the leakage to the non-poor. In this sub-section some of the known characteristics of the poor are summarized.[4]
• Most Poor are in Rural Areas. About 70 per cent of the absolute poor and 75 per cent of the extreme poor are residents of rural areas making rural Kyrgyz Republic the principal focus of poverty reduction programmes.
• Poverty also has a regional concentration. Its incidence is highest in Naryn followed by Talas, Jalal-Abad and Issyk-Kul. The headcount rate of poverty in Naryn was more than 40 per cent higher than national average in 2001. It was a third higher than national average in Issyk-Kul. The incidence of poverty in Talas and Jalal-Abad was between that in Naryn and Issyk-Kul.[5] These four oblasts are also ranked poorest in terms of per capita income. Poverty reduction programmes in Kyrgyz Republic therefore needs to focus on these poor provinces.
• The poor have larger families than the non-poor. In addition, poverty is likely to be higher in households (a) that are female-headed rather than male-headed (b) where the head is unemployed (c) where disabled individuals are present. Households with pensioners are less likely to be poor especially in rural areas.
• The poor have a lower endowment of education. But the difference between their educational endowment and that of the non-poor is not dramatic. To give an example, the poor have 9.5 years’ schooling on the average as compared to 10.5 for the non-poor. Per capita private spending on education for the poor households is, however, only 35 per cent of the same for the non-poor households. The poor also appear to have less vocational training than the non-poor.
• The poor are more dependent on subsistence income than cash income. At the same time, implying a possible conflict with the above, they are also more specialized in the production of cash crops. The former finding has been widely observed to be a characteristic of the poor in the developing countries.
• The poor have land. The landholding characteristic of the poor is somewhat unexpected: the poor do not have a lower endowment of land than the non-poor. It therefore appears that the egalitarian land reform in Kyrgyz Republic may have succeeded more in reducing the inequality in the distribution of income than in eliminating poverty. This shows that land endowment by itselfcan not eliminate poverty for the families, which have few other resources and a lack of experience of farm management.
B. HUMAN POVERTY
THE HUMAN POVERTY CONCEPT
The poverty measures based on income or consumption described in Section A capture only a single dimension of poverty. Human poverty attempts to capture the multi-dimensional nature of poverty and recognises that income poverty is too narrow a concept to reflect the problems of the poor. Rather human poverty focuses on the capabilities people have to function – the poor in this respect lack the opportunity to achieve some minimally acceptable level of functionings that are valuable to them such as to live a long and health life, being well nourished, mixing well with others in the community and so on[6]. The nature of these dimensions is country specific and needs to be identified through listening to the poor themselves. A participatory poverty assessment undertaken for the Kyrgyz Republic in 1999 – the Voices of the Poor (VoP) exercise - revealed the importance of some of these other dimensions. Box 2.2 shows the definitions of ill-being and well-being from VoP (Chapter 6 describes the VoP exercise in more detail).
Box 2.2: Well-being and Ill-being in the Kyrgyz Republic
Well-being
……………….. informants understand well-being (tyn jashoo) as good life (jashoo) and wealth (bailyk); however, they do not think that well-being is limited to these tangible components but believe that well-being is impossible without tolerance, peace, family, and children. The informants think that the basis of well-being is good health, peace in the family and in the society. In their opinion, wealth is an important component of well-being and can only be gained if these conditions are present. Most of the informants define well-being as stability in the household and society and the ability to satisfy one’s material and spiritual needs.
Ill-being
Ill-being is understood by informants as problems in life. The informants very rarely used the word “poverty” when discussing ill-being. Instead, they spoke of such specific components of ill-being as lack of livestock, lack of agricultural equipment, inability to work on one’s land, wage and pension arrears, payment of pensions and social benefits in-kind, overpriced food, absence of a house and the need to rent a flat, no cash in hand, lack of food and clothes, inability of children to attend school, inability of high school graduates to continue their education in universities, family conflicts, and poor health.
Source: World Bank and Counterpart Consortium (1999) Voices of the Poor: Kyrgyz Republic National Synthesis Report
The study also revealed that many of the dimensions of poverty were a cause as well as an effect of low income, for example lack of access to health services and education. It was noted in the previous section that education attainment was negatively correlated to poverty but as we will see poverty is an important cause of low education attainment. Within the concept of human poverty lack of attainment of education thereby reducing an individual’s capability to function (in the sense described above) is a cause of poverty itself whether for those with low income or not. At the same time, many of the dimensions of human poverty are not related to income but more to location. This inequality in terms of human poverty is as important as that of income poverty as measured by the Gini coefficient. Both aspects of inequality will be discussed later in Chapter 5 of this report.
HUMAN POVERTY ISSUES
The previous section illustrated the rising incidence of income poverty since the start of the transition albeit with some reduction in recent years. Other aspects of human poverty have followed a similar pattern. This section looks at some of the key elements of human poverty examining how they may have affected a large part of the population since the start of the transition. Two issues identified as being part of ill-being, namely lack of access to productive assets and poor social protection systems, are described in Chapter 5 in more detail.
Education
Access to education is an important aspect of human poverty as it directly affects a person’s capability to function. A well-educated population and a strong system of education were some of the more positive elements of the Soviet legacy. Literacy and education attainment levels at the time of independence were far above those of countries of similar per capita incomes and remain so today. The education system has, however, suffered from a decline in both enrolment levels and quality since the start of the transition. Table 2.3 below illustrates the trends in enrolment levels.
Table 2.3: Education Enrolment Levels 1989-1999
| |1989 |1990 |1991 |1992 |1993 |1994 |
|% of people without access to health services |11.8 |8.3 |15.9 |14.4 |14.3 |9.3 |
Source: NSC
While official figures for maternal and infant mortality (MMR and IMR respectively) reveal declining rates since the start of the transition it is unlikely that these figures are accurate. Two surveys undertaken in mid 1990s[8] reveal MMR and IMR rates significantly higher than official estimates. There is no reason to suspect that the situation has changed and the dynamics of health outcomes are very difficult to identify without more recent surveys. Children in particular suffer from inadequate in health services especially when combined with poverty. Table 2.6 below indicates the level of moderately or severely malnourished children between the ages of one and six.
Table 2.6: Child Nutrition (1996-2001)
| |1996 |1997 |1998 |1999 |2000 |2001 |
|% of moderately or severely malnourished children ages of 1-6 |9.3 |5.7 |8.9 |7.3 |6.6 |7.2 |
Source: National Human Development Reports
The financial barriers created by the demand for informal payments for services in additional to paying for medical supplies and medications are frequently insurmountable for the poor. The success of the recent introduction of mandatory health insurance remains to be seen.[9] In rural areas, non-salaried workers see no reason to buy insurance, as they understand that they will not receive service without making informal payments. The credibility of the system, which is mandatory for salaried workers, is also threatened by arrears in payments by the Social Fund to doctors and low level of payments as well as the failure to noticeably reduce the frequency or level of demands for informal payments.
Access to utilities
The majority of the infrastructure in the Kyrgyz Republic including such basic services as water supply, waste removal, electricity, gas, heating, local roads and transportation services was constructed during the Soviet period. At the beginning of the 1990s, the Republic enjoyed a comparatively high level of infrastructure services. However, most of present health infrastructure is in a poor condition since it has not been properly maintained due to lack of financing. Limited access to basic services, as indicated in Table 2.7 below, has also had an impact on health status and issues in the Kyrgyz Republic.
Table 2.7: % of Households with access to services (2001)
|Running Water |40.0 |
|Public Sewerage |39.7 |
|Flushing Toilet |26.7 |
|Bathroom/shower |24.8 |
|Hot water |20.9 |
|District heating |29.2 |
|Central gas supply |36.1 |
|Telephone |28.0 |
|Electricity interruptions less frequently than once per week |41.9 |
Source: HBS 2001 (weighted data)
According to the NSC “running water” means centrally supplied running water, which is generally available only in urban areas. A majority of rural and many urban people have access to clean drinking water through village pumps etc., which are not included as running water in the above sense. In 2001, 16% of the population still had no access to safe drinking water as indicated in Table 2.8 below.
Table 2.8: Households without Access to Safe Drinking Water (1996-2001)
| |1996 |1997 |1998 |1999 |2000 |2001 |
|% of population without access to safe drinking water[10] |18.7 |17.4 |18.3 |14.1 |14.0 |16.0 |
Source: UNDP (2001) National Human Development Report for the Kyrgyz Republic
Social problems
Declining levels of social cohesion – seen as the possibility to resolve problems of the community by joint effort of all community members and as unity and friendship between people of different ethic backgrounds[11] – have also been identified by the VoP exercise. The number of registered crimes has increased significantly since 1991 although official figures suggest that the disclosure rate has also increased rapidly. The VoP reveal a general perception of increased rates of crime since the start of the transition. The Kyrgyz Republic is also faced with an increase in new types of crime or of types of crime that were only of minor significance in the Soviet Period. The number of drug related crimes has increased three times since 1991. Trafficking in women and children has also increased rapidly and recent studies suggest that as many as 4,000 people were victims of such trafficking in 1999[12]. Economic crimes are also growing rapidly.
MEASURING HUMAN POVERTY
The Human Poverty Index (HPI) was introduced by UNDP in the 1997 Human Development Report to capture and monitor progress in alleviating human poverty. The HPI concentrates on deprivation in three essential elements of human life already reflected in the Human Development Index (a) longevity (b) knowledge and (c) a decent standard of living. Box 2.3 below explains how the HPI is calculated.
Box 2.3: Calculating the Human Poverty Index
The basic indicator is made up of the following elements:
P1 The percentage of people expected to die before the age of 40
P2 The percentage of adults who are illiterate
P3 The average of the following three indicators:
P31 The percentage of the population without access to safe drinking water
P32 The percentage of people without access to health services
P33 The percentage of moderately or severely malnourished children under the age of 5
HPI-1 = [1/3 (P1³ + P2³ + P3³)]1/3
Source: UNDP (1997) Human Development Report
While the HPI (as defined above) can be used to measure human poverty across a large number of countries it may not however be the most suitable for the Kyrgyz Republic. Ultimately the HPI is important not just because it can be used for international comparison but also for national policy makers. Its suitability as an indicator for policy makers has to be questioned, however, for the following reasons[13]: (a) life expectancy is high and therefore the percentage of people dieing before the age of 40 is low, and (b) The literacy indicator measures are extremely high but do not reflect functional literacy.
Two recommendations can be made to address these issues: First, to use the percentage of people who die before the age of 50. Trends for different ages are illustrated in Table 2.9 below. Second, to use net enrolments in secondary school. These figures are, however, also misleading (as indicated above) and further work will be required to ensure accuracy.
Table 2.9: % of Population expected to die before 40, 50 and 60 (1990-2001)
| |1990 |1991 |1992 |1993 |1994 |
|HPI – 1 |10.3 |9.1 |10.9 |9.5 |9.3 |
|HPI – KR |13.8 |12.9 |13.5 |12.8 |12.0 |
Source: HPI-1: NHDR 2001; HPI-KR authors’ calculations
CHAPTER 3: PROGRESS TOWARDS STABILIZATION
Macro-economic stability is achieved when key economic relationships are broadly in balance and sustainable. The orthodox thinking is that growth is good for the poor and that macro-economic stability is good for growth. Both need to be qualified. In the next chapter issues related to growth and the poor will be examined more closely revealing that growth is necessary but not sufficient for sustainable poverty reduction. Instability can be caused by exogenous actions or be self-induced through poor macro-economic management. Exogenous actions may be internal (for example a climate induced decline in agriculture productivity) or external (for example commodity price changes).
This chapter examines stabilisation but also links it with issues raised in future sections on growth, inequality and economic management where they are discussed in greater depth and the implications of the stabilisation strategy are examined in more detail. This chapter therefore sets out the macroeconomic framework within which stabilisation has taken place and is divided into the following sections:
• Section A overviews the stabilisation strategy since the collapse of the Soviet Union in 1991 and the move towards establishing a market economy
• Section B examines capital flows and the issue of debt that became serious in the late 1990s
• Section C examines the impact of the measures to date and the current stabilisation strategy being implemented by the government
• Section D identifies potential risks of destabilisation and actions to mitigate the risks as well as the impact on the poor of further shocks should they occur
A. STABILISATION STRATEGY
The collapse of the Soviet Union in 1991 was a dramatic and massive macroeconomic shock for the Kyrgyz Republic. It has taken 10 years for macroeconomic imbalances to be addressed through a comprehensive set of stabilisation measures that have been the focus of the reform effort. A money-based stabilisation programme was adopted in 1993 with the agreement with IMF and the overall strategy has been to implement IMF stabilisation programmes as a pre-condition for ensuring significant external financial flows, both private and official.
FISCAL ADJUSTMENT
The massive fiscal adjustment required following the collapse of the Soviet Union was largely the result of three transmission mechanisms: (a) the loss of budgetary support from the USSR equivalent to nearly 13% of GDP (b) the loss of implicit transfers through subsidized energy prices, and (c) the sharp decline in tax revenues in response to dramatically falling output.
Table 3.1: Main Fiscal Indicators (1991-2001)
| |1991 |1992 |1993 |1994 |1995 |1996 |1997 |1998 |1999 |2000 |
|% GDP |-10.6 |-2.0 |-2.6 |-7.1 |-23.2 |-7.8 |-22.1 |-14.6 |-6.1 |-1.3 |
Source: NKBR
B. CAPITAL FLOWS AND EXTERNAL DEBT
CAPITAL FLOWS
Large capital inflows have been an important part of the stabilisation strategy. The Kyrgyz Republic entered independence in a situation where it was unclear which newly-independent former Soviet republics would assume responsibility for the USSR’s external debt commitments and claims. In April 1993 Russia proposed a Zero Option Agreement under which the newly independent states would give up any claims on Soviet assets in return for Russia taking full responsibility for all outstanding debts of the USSR. Therefore, in agreement with the republics as well as its main international creditors, Russia assumed the entire international debt burden of the Former Soviet Union (FSU). As a result, the Kyrgyz Republic started its transition process with zero external debt.
By end-1993, however, the Kyrgyz Republic already had a debt to GDP ratio of 29%. About half of this came from conversion of large outstanding balances on correspondent accounts within the CIS into state debts. These bilateral correspondent account balances were held in the newly formed central banks and were designed to facilitate payments in the FSU and to allow Russia to finance the trade deficits of the NIS following the move to world prices for commodities. Over 1992 and 1993 these outstanding balances were converted into interest bearing US$ denominated state loans. The Kyrgyz Republic has since fully repaid both Kazakhstan and Turkmenistan through barter arrangements but debts to Russia and Uzbekistan continued to grow.
During 1995-1997 much of the increase in non-concessional debt was due to the Kumtor gold mining operation which accounts for approximately 25% of total debt stock (end-1998) Official concessional loans also increased in this period usually for financing the PIP or programme lending as part of a structural reform package. The impact of rapid exchange rate depreciation in 1998 has had an important impact on the debt-output ratio. World Bank estimates show that without the end-September depreciation the 1998 debt to GDP ratio would have been 84% instead of actual 96% and in 1999 it would have been 90% rather than close to 140%.
Table 3.4: Structure of Kyrgyz foreign debt (end of period, 1998-2001)
| |1998 |2001 |
|1. Budget |62.1 |75.4 |
| Multilateral donors |36.6 |46.0 |
| Bilateral donors |23.9 |27.5 |
| Of which CIS countries |10.3 |10.7 |
| Government guarantees |1.6 |2.0 |
|2. NBKR (debt to IMF) |11.8 |10.4 |
|3. Government non-guaranteed debt (inc. Kumtor) |26.1 |14.2 |
| |100% |100% |
Source: NBKR
Following approval of the IMF programme under the Poverty Reduction and Growth Facility (PRGF) the Paris Club creditors agreed with the Kyrgyz Government to restructure its external debt (March 2002). The agreement consolidates approximately US$ 99 million dues on loans, credits and consolidations contracted by the Kyrgyz Republic before August 31, 2001 and consisting of interest and principle repayments falling between December 6, 2001 and December 5, 2004. As a result of the restructuring agreement debt service due to Paris Club creditors will fall from US$ 101 million for the period 2002, 2003 and 2004 to US$ 5.6 million. Table 3.5 below shows the projection for total external debt service including non-Paris Club creditors. The terms of the restructuring also include a so-called ‘goodwill clause’, whereby upon successful completion of PRGF programme the Kyrgyz Republic will be able to secure still more concessional restructuring involving a substantial reduction not only of the debt service, but also of total outstanding debt. This created a precedent when a first-time applicant to Paris Club was granted a goodwill clause. The reduction on the debt stock in 2005 will depend on (a) the terms offered by the Paris Club (33% for Houston, 67% for Naples) (b) the Kyrgyz Republic successfully implementing the PRGF agreed with the IMF, and (c) completion of bilateral negotiations (especially with non-Paris Club members) by end-2002.
Table 3.5: External Debt Service (US$ million)
| |2002 |2003 |2004 |2005 |
|Before Paris Club agreement |58.55 |59.66 |59.32 |55.97 |
|After Paris Club agreement |13.86 |22.14 |18.78 |65.42 |
Source: Financial and Economic Bulletin, 2002, Ministry of Finance
FOREIGN DIRECT INVESTMENT
The receipt of foreign direct investment (FDI) in the Kyrgyz Republic has not been stable. As a whole, the role of FDI in funding capital investments in the country is not large – in 1999-2000 their share in all sources of external financing was only 4-5%. The dynamics of the FDI in the Kyrgyz Republic is shown in the Table 3.6 below. With the notable exemption of the Kumtor gold mine, producing 8-10% of the country’s GDP and about 40% of its exports, the role of the enterprises with foreign capital in the economy is not very large, and their share in the GDP has been declining during the last few years. The number of workers employed with enterprises having direct foreign investment has not reached more than 2% of the total number of the employed. At the same time the level of labor remuneration at such enterprises is three times higher than average.
Table 3.6: Foreign Direct Investment (%GDP)
| |1995 |1996 |1997 |1998 |1999 |2000 |2001 |
|Gross |6.4 |8.4 |4.9 |8.3 |8.7 |6.5 |5.9 |
|Net |6.4 |2.6 |4.7 |5.3 |3.1 |-0.5 |-0.1 |
Source: NSC, NBKR
For the foreign trade operations of enterprises with foreign investment, excess of imports over exports is typical and often explained by the importation of the equipment required for starting up the production, making a large contribution to the trade balance deficit of the Kyrgyz Republic. The analysis of the sectoral structure of the FDI and the gross value added (GVA), generated by the enterprises with foreign participation shows that the major part of investments are made in the industry, particularly in the processing industry. This industry plays the leading role in the generation of GVA.
Table 3.7: Main indicators of enterprises with foreign participation (1999) [15]
|Total number of enterprises |4,691 |
|Of which, functioning |2,103 |
|Gross Value Added (GVA), mil Som |3,241 |
|GVA, in % to GDP |6.7 |
|Number of employees, thou people |28.9 |
|Number of employees, in % to total number of employed in the economy |1.7 |
|Average salary, Som/month |3,560 |
|Average salary, in % to average salary in the economy as a whole |339.1 |
|Export, mil USD |67.5 |
|Import, mil USD |221.6 |
Source: National Statistics Committee
EXTERNAL ASSISTANCE
As noted earlier high levels of external assistance have been a feature of the transition and could be seen as a reward for adopting a fast pace of reform towards a market economy. The total amount of international aid received by the Kyrgyz Republic for the period of 1992-2000 was approximately US$1690 million or about US$370 for a resident of the Republic. External assistance is dominated by multilateral organisations (65% of all funds provided) with bilateral assistance representing 29% and non-government organizations 6% of the total. Out of the total amount of external assistance disbursed approximately 20% was made available on grant basis, and 80% loans.
The period 1992-1995 saw rapidly increasing assistance, largely aimed at budget and balance of payment support, strengthening of foreign exchange reserves and procurement of critically needed imported goods. During the period 1996-1998 with the improvement of the economic situation in the Kyrgyz Republic the structure of the external financial aid changed. The major part was allocated to the funding of investment projects for infrastructure development, restructuring of enterprises and rehabilitation and development of transport communications, increase of agricultural product manufacturing, equipment of the health care and educational institutions. The volume of the investment assistance for this period constituted US$373.2 million or 56% of the total volume of the external aid.
The period from the second half of 1998 till middle of 1999 was conditioned by the adverse affect of the global, regional and local economic situation. The difficult macroeconomic situation that occurred during this period meant that the Government had to attract additional funds to support the balance of payments. During the period of 1998-1999 about 38% of the total financial aid received was allocated to stabilization of the national currency and covering the budget deficit. The period from the second half of 1998 up to middle of 1999 was characterized by increase in programme loans to address the budget deficit. The period from the second half of 1999 till present, as positive tendencies began to show in the economic development of the Republic, the size of external aid declined.
C. THE IMPACT ON POVERTY AND CURRENT STABILISATION MEASURES
IMPACT OF STABILISATION MEASURES
As can be seen above there has been considerable progress at bringing many of the macroeconomic relationships into balance. But the cost has been declining output, rising unemployment and increased human poverty. Was there any alternative? It may not be useful or even possible to predict what would have happened had the Kyrgyz Republic undertaken a different path of reform, for exampling modelling it on China or neighbouring Uzbekistan. There are however insights that can be made here into the impact of elements of the strategy on living standards and poverty in the country while other such insights are made in later chapters.
First, social expenditures, especially in the education sector, were hit particularly hard as illustrated by Table 3.8 below. Measurement as a percentage of GDP, however underestimates the real magnitude of dis-investment. Factoring in the decline in GDP, current public health care financing are roughly one-third of their 1990 level. This figure also underestimates the real effects as the cost of all major health care system inputs from medications to energy with the single exception of labor has risen dramatically. It is estimated that the level of resources allocated for the health sector today covers only approximately 50% of real sectors needs, with the rest of the costs of medical services covered by patients.
Table 3.8: Health and Education Expenditures as % GDP (1990 –2001)
| |1990 |1991 |1992 |1993 |1994 |1995 |1996 |1997 |1998 |
|Export |19.2 |24.4 |18.8 |21.2 |34.6 |39.7 |43.5 |43.1 |49.0 |
|Import |22.5 |24.1 |18.5 |17.2 |14.8 |14.3 |12.9 |13.4 |13.5 |
Source: NKBR
Table 3.10: Geographical Concentration of Trade (1993-2001)
| |1993 |1994 |1995 |1996 |1997 |1998 |1999 |2000 |2001 |
|Export |... |39.2 |38.9 |40.9 |39.3 |45.0 |39.9 |38.7 |38.3 |
|CIS |55.4 |54.1 |52.4 |53.6 |52.3 |54.7 |52.7 |55.9 |53.3 |
|Non-CIS |... |48.3 |46.4 |37.6 |59.1 |68.5 |56.6 |52.8 |51.7 |
|Import |... |39.9 |36.8 |33.1 |35.9 |32.2 |28.6 |32.9 |32.4 |
|CIS |57.8 |53.1 |52.3 |53.4 |55.4 |56.8 |54.4 |54.9 |53.0 |
|Non-CIS |... |56.0 |31.7 |27.1 |30.1 |25.8 |28.5 |31.1 |31.7 |
Source: NKBR
There has, however, been a reduction in the geographical concentration of trade, especially for imports, since the start of the transition as illustrated by Table 3.10. There are also some good signs regarding the concentration of trade within the CIS, and area more likely to suffer from its own shocks. Table 3.11 below illustrates the pattern of trade in 1997 before the Russian Financial Crisis and the important of Kyrgyz Trade with Russia, Uzbekistan and Kazakhstan and in turn the importance of the latter two countries trade with Russia. This was one of the key transmission mechanism during the financial crisis. Clearly the table also illustrates that the importance of such trade is considerably less than in 1997 and that the risks from similar financial crisis in Russia are significantly reduced.
Table 3.11: Trade with main CIS Trading Partners 1997 (exports as % of total)
| | |1997 |2001 |
|Kyrgyz to |Russia |20.3 |13.5 |
| |Kazakhstan |16.9 |10.1 |
| |Uzbekistan |21.8 |8.2 |
|Kazakhstan to |Russia |42.5 | |
| |Kyrgyz |1.7 | |
| |Uzbekistan |7.0 | |
|Uzbekistan to |Russia |31.2 | |
| |Kazakhstan |5.4 | |
| |Kyrgyz |4.0 | |
Source: NBKR quoted in WB Fiscal Sustainability
Reforms in neighbouring countries and other trading partners will also have an impact on macroeconomic stability and living standards. This year Uzbekistan started quite serious reforms directed inter alia at the elimination of the multiple exchange rate regime, trade and price liberalization and, weakening of the state cotton procurement system. This could have important consequences for Kyrgyz economy. While official trade flows would not necessarily be much affected, unofficial channels could have a significant impact. For example, it is well known that almost all gasoline in the South of the country is contraband from Uzbekistan. If Uzbek domestic prices will go up, or the difference between the black market and official exchange rates in Uzbekistan would disappear or become much narrower (and it has considerably narrowed already), the price of contraband gasoline on Kyrgyz market should go up with obvious inflationary consequences for the economy and living standards of the population.
Capital Flows
Since aid flows are important to the stabilisation strategy, although less so that in previous times, adverse changes in aid and official capital flows represent a large risk. Since most bilateral grants are not included in the budget the main risk is from a decline in the larger bilaterals (eg Japan) and the IFIs. Failure to meet IMF conditionalities could result in a suspension of agreements and therefore suspension of budgetary support from ADB and the World Bank. In addition failure to perform well with existing aid could reduce support from ADB and the World Bank. As part of the debt reduction strategy the emphasis has been on reducing investment loans and negotiating with donors on converting a part of the projects (particularly in social infrastructure) to a grant basis. It may be that targets for grant aid may not be achieved. The Kyrgyz Republic also faces double conditionality, however, with the risk of failing to meet IMF programme targets possibly resulting in failure to get significant write-offs of debt at the end of the programme period.
Financial Sector
A weak banking system is a serious risk for macro stabilisation. Although extensive efforts have been made over the last ten years the banking system in the Kyrgyz Republic is still insecure. Monetary policy has been successful in increasing savings and in restoring confidence in the national currency but this situation could change without further financial sector reform.
Domestic Output Decline
The dominance of gold production in the economy means that special risks are attached to this sector, and to output from the Kumtor mine in particular. Already we have seen the impact of problems at the Kumtor mine can have on output. In July 2002 the mine suffered a pit wall fall and as a result the impact on production has been significant with expected output down from 700 thousand ounces to 500 thousand ounces for the year 2002. The IMF recently revised its estimates of 2002 growth because of the disaster. Expected GDP growth rates are now only 1.5% in 2002 and 5% (0.5% up because of lower starting base) in 2003.
With the agricultural sector so dominant in the Kyrgyz economy there are also significant potential output risks here too. Taking into account the technology currently used in Kyrgyz agriculture, output depends very much on climate conditions; if these conditions become unfavourable a decline in output would become unavoidable. While the climate risks could cause serious consequences in the short run (next year’s weather quite possibly could be better), there is a high risk factor of a long-term nature. Kyrgyz agriculture is based on use of irrigated land, and irrigation systems play a key role in it. So far the efforts to maintain and develop the irrigation systems are obviously insufficient despite public investment in this area. An economically sound system of covering expenditures on irrigation (through realistic prices for water or direct contributions of agricultural producers on irrigation purposes) does not exist, which means gradual deterioration of the irrigation systems with corresponding declines in agricultural productivity.
Political Instability
The Kyrgyz Republic lies at the heart of a region that has suffered from political instability in the recent past. Notwithstanding the ongoing events in Afghanistan and the past civil war in Tajikistan the Kyrgyz Republic has suffered from a number of internal events that have led to instability. Such elements of political instability will have a strongly negative effect on at least two areas important for the Kyrgyz Republic’s future development. Most important is FDI, which needs to be increased significantly from the current historically low levels. Second for tourism, which is an important element of the strategy to increase the service sector in the country. In addition, each demonstration of political instability caused by both external and internal factors increases emigration outflow, especially of the most economically capable part of the population.
ACTIONS TO REDUCE THE RISK OF A SHOCK
Strengthen risk management
There needs to be early warning systems in place so that actions can be taken quickly. The government has already identified the need to undertake risk analysis stating that “…….the building of the system to monitor and evaluate threats to development is necessary”[20] The government has instigated systems to examine macroeconomic risks within the Debt Management Department of the Ministry of Finance. Such systems need to be able to address macroeconomic risks of all kinds even when the potential origin of the shock is political or social. An example can be found in the Preventative Development Component of the UNDP Decentralised Governance Programme which has developed an Early Warning Information System (EWIS) for Batken Oblast. The EWIS reports will serve as a basis for identifying the key factors that may lead to conflict and provide information to initiate preventative development measures.
Continue the programme of structural reform in specific areas
• Continue efforts to strengthen economic management and improving budget transparency
Continued strengthening of the Banking System – as noted above the impact of the Russian Crisis in 1998/9 was made far more serious because of weaknesses in the banking sector. Further reforms are required to ensure that it could withstand another crisis.
Further efforts are also required to reduce trade concentration and the dependency on exports of gold and electricity.
ACTIONS TO MITIGATE THE IMPACT OF A SHOCK
Understanding the impact of the shock
The key to mitigating the impact of the shock on the poor is to understand the nature of that impact. Policy makers must be ready to analyse who is affected by the shock and how they are affected before designing actions to address the impact. The variety of shocks and the different transmission mechanisms make it essential to understand quickly what the impact will be. Tools such as rapid poverty assessments are required and it is essential that capacities in this area are developed and the appropriate institutional framework put in place. Without such information the design of effective actions will be impossible. The issue of improved poverty monitoring and analysis is discussed in more detail in Chapter 6.
Focus on poverty
Once the poverty impact of the shock is understood, the second essential element is to focus actions on poverty. For example, fiscal adjustment should protect the type of spending that is most important to the poor. This will probably be on the provision of social transfers and social services but within these broad sectors some categories of expenditure will be more important than others. It is also important for policy makers to take into account the fact that an economic downturn may lead to an increase in the unofficial payments for social services that will affect the poor the most. As well as understanding the impact of the shock on the poor, it is essential to identify the impact and costs to the poor of the different stabilisation measures that need to be taken to bring the macro economy back into balance. Again policy makers will be faced with choices some of which will be more pro-poor than others.
Strengthen the Social Safety Net
Simply increasing the size of transfers through the social safety net will not necessarily address those that need help, especially if based on existing categorical methods of targeting. New categories may need to be introduced or better more flexible systems of targeting or self-targeting. The development of new parallel instruments may take too long to implement to address urgent needs. Mitigating the impact of shocks should be an essential element of the design of social safety net programmes. This is discussed more in Chapter 5. It is also difficult to develop more safety net instruments or strengthen existing mechanisms during the crisis and preparations need to take place in advance.
Ensure an enabling environment for private sector safety net instruments
Taking the safety net in a broad sense there are many private sector interventions that need to be developed to strengthen the net. The role of the state is to create an enabling environment for these interventions to be established and for the various micro-instruments to flourish. Insurance markets are an important element of this (for examples for farmers or other entrepreneurs) as is access to credit of an appropriate type and at realistic interest rates (for example for farmers). Other issues related to the social safety net and its development as well as access to it are discussed further in Chapter 5.
CHAPTER 4: GROWTH AND POVERTY REDUCTION
As stated in Chapter 1, despite the recovery since 1996, Kyrgyz Republic is desperately poor at the beginning of the twenty-first century, with only 60 per cent of the per capita income and a vastly higher incidence of absolute poverty as compared to the year 1990. To attain anything like the millennial target of poverty reduction, the process since 1996 must be accelerated. By raising the average growth rate of 5.5 per cent obtained over the last six years to something close to 7 per cent and by avoiding an increase in the inequality of the distribution of income, Kyrgyz Republic should be able to bring down the incidence of poverty very substantially. The purpose of this chapter is to explore the feasibility of such a growth path.
• This is done by first trying to understand the broad features of the decline and the recovery that has characterized the last decade (Section A).
• Next, the performance of the major sectors of the economy in the period of recovery and the constraints faced by them are analysed (Section B).
• Employment is a critical link between economic growth and poverty reduction. It is the conduit through which the benefits of economic growth are passed on to the poor for whom labour is the principal, often the only, available resource. Section C constructs the employment scenario that has accompanied economic recovery since 1996.
• Section D attempts an understanding of the poverty-alleviating characteristics of the growth process since 1996 or thereabout.
• Section E pulls together the findings of the preceding sections to identify the elements of a strategy of poverty-reducing growth for Kyrgyz Republic in the coming decade and beyond.
A. MACROECONOMIC PERFORMANCE:
DECLINE AND RECOVERY IN THE POST-INDEPENDENCE PERIOD
THE MAGNITUDE OF DECLINE AND THE EXTENT OF RECOVERY
Table 4.1 summarizes the basic facts about the macroeconomic performance of the economy and its major sectors following independence. Independence was followed by a sharp decline in GDP and its component sectors for half a decade. Since 1996 economic recovery began to take place. But growth has by and large been limited to agriculture, gold mining and energy. By 2001 agricultural output had significantly exceeded the previous peak and was 17 per cent above the level in 1990. Industrial output had declined by 70 per cent between 1990 and 2001. There was a large increase in the output of gold, and a better than average performance of the energy sector over the same period, which hides the true magnitude of de-industrialization: manufacturing output declined by 78 per cent over the same period. Manufacturing value added fell from 26 per cent of GDP in 1990 to 6 per cent in 2000. The services sector also declined though at less catastrophic a rate than industries and mainly due to non-market services (education, health care etc.). By 2001 real value added in services had fallen by more than two-fifths since 1990.
Table 4.1: Decline and Recovery during 1990-2001
| |Annual Growth Rates (percent) |2001 as % |
| | |of 1990 |
| |1990-1995 |1995- |1990- |1996 |1997 |1998 |1999 |2000 |2001 | |
| | |2001 |2001 | | | | | | | |
|GDP |-12.7 |5.5 |-3.2 |7.1 |9.9 |2.1 |3.7 |5.0 |5.3 |67.9 |
|Agriculture VA |-6.0 |8.1 |1.4 |15.2 |12.3 |2.9 |8.2 |3.9 |6.4 |116.9 |
|Industrial VA | | |-9.1 |-2.6 |19.6 |-3.9 |-4.3 |6.0 |5.4 |35.0 |
|Manufacturing VA | | |-13.0 |-4.7 |0.9 |-6.0 |-5.8 |-19.3 |0.9 |21.6 |
|Services VA |-11.3 |2.1 |-4.7 |1.1 |2.5 |3.5 |3.5 |5.8 |2.9 |58.9 |
|Population |0.97 |1.22 |1.3 |1.46 |1.44 |1.57 |1.28 |0.83 |0.79 |115.3 |
|Per Capita GDP |-10.7 |2.6 |-4.7 |5.5 |8.3 |0.5 |2.4 |4.1 |4.5 |58.9 |
Note: These data should be regarded as approximate indicators rather than precise estimates.
Source: For 1990-2000: World Bank, 2002; for 2001: Economist Intelligence Unit Country Reports. Growth rates are annual compound rates of change between end points of the periods shown. Blank spaces indicate absence of data on a comparable basis. Some data are from the National Statistical Committee (NSC).
GDP as a whole was nearly a third lower in 2001 than in 1900. The rate of population growth declined substantially after independence and available estimates of annual growth have fluctuated sharply from one year to another due to uneven rates of migration. Once population growth is factored in, Kyrgyz Republic shows a more than 40 per cent decline in per capita GDP between 1990 and 2001.
FACTORS BEHIND THE SHARP DECLINE AND THE SLOW RECOVERY
The causes of the sharp decline and the slow recovery of GDP after independence are not difficult to identify. Perhaps the most important and immediate cause was the break-up of the Soviet Union. The highly autarkic economic union, exacerbated by the system of central planning by command, fostered a production structure in these republics that was extremely rigid. The break-up of the system immediately resulted in a massive dislocation of sources of supply of raw materials and capital inputs and markets for outputs, disrupting production. The Central Asian republics depended on substantial transfer from the Soviet Union. Independence meant an end to these transfers leading to a sharp reduction in resources for investment and public expenditure. Independence also witnessed the emergence of new political problems causing instability and its adverse economic consequences. There was a significant rate of emigration of skilled ethnic minorities. The fear of fundamentalism led a number of Central Asian republics, notably Uzbekistan, to adopt measures towards its neighbours which hampered the development of trade. Being landlocked, the Kyrgyz Republics and its immediate neighbours found it extremely difficult to create the infrastructure necessary to access new markets. Added to these difficulties specific to the region were all the problems of transition from central planning to a market economy that proved so overwhelming for most of the formerly centrally planned economies.
It is extremely difficult, often quite impossible, to compare macroeconomic trends between the Soviet period and the contemporary time periods. Much of what then represented domestic flows, for which statistical documentation is unavailable, are now international transactions. Furthermore, the valuation during the Soviet period was subject to extremely distorted relative prices that characterized the autarkic central planning of the time. And yet there seems to be few doubts about the following observations, largely based on the data in Table 4.2.
Table 4.2: Selected Macroeconomic Variables
|Savings/GDP % |Investment/GDP % |Current Account/GDP % |Debt-Service |
| | | |Ratio |
|1990 |1995 |2000 |1990 |1995 |2000 |1995 |2000 |2000 |
|14.0 |5.4 |4.0 |24.0 |18.3 |16.0 |-15.7 |-9.8 |29.3 |
| | | | | | | | | |
|Exports of Goods and Services as| |Percentage of 2000 export value | |FDI ($m) |
|% GDP | | | |Net |
|1990 |2000 | |Agric |Fuel |Gold |Mining | |2000 |
|29 |43 | |9.3 |16.3 |37.7 |27.9 | |-2 |
| | | | | | | | | |
Source: World Bank, 2002; Asian Development Bank, 2001; EIU Country Reports.
Note: Debt-service ratio is the ratio of debt service to exports of goods and services.
There was a sharp reduction in the rate of investment. The Soviet period was characterized by a high rate of investment, close to 25 per cent of GDP on the eve of independence. During the post-independence period the rate of investment sharply declined. One of the major weaknesses of the recent recovery is that it has not only failed to reverse this trend but has actually been characterized by a continued further decline in the rate of investment.
The decline in investment was associated with a drastic fall in the rate of domestic saving. The elimination of transfer from the Soviet Union and the disruption in the production structure led to a reduction in the capacity to save.
Kyrgyz Republic recorded large current account deficits in the post-independence period. In recent years this has declined substantially though investment continues to be heavily dependent on capital inflow. The continued decline in the rate of investment in recent years is a consequence of the stabilization of the external imbalance by reducing the current account deficit without a compensating increase in the rate of domestic saving.
If all flows to the other republics of Soviet Union were counted as international trade, Kyrgyz Republic would show a high proportion of export to GDP prior to independence. Kyrgyz Republic’s exports have grown, as a proportion of GDP, since independence although the absolute volume of exports has shown little growth. There has also been a large change in their composition. Most notably, traditional agricultural exports have declined: wool exports have been almost wiped out and livestock exports have fallen. This phenomenon – reflecting a possible adjustment to the pattern of production fostered by Soviet central planning – features prominently in the analysis of agricultural transition in the next section. Gold has emerged as the most important export. Kyrgyz exports have on the whole become highly vulnerable due to their dependence on a handful of staples: metal, dominated by gold, electricity and a handful of agricultural and processed items.
B. PRODUCTION SECTORS DURING THE TRANSITION
CHANGES SINCE INDEPENDENCE: DECLINE, RECOVERY AND STRUCTURAL CHANGE IN AGRICULTURE
Independence and the breakup of the Soviet Union inevitably disrupted this system of agricultural specialization. The elaborate system of subsidizing specific products could not be sustained. The rigid central planning of supplies of inputs and marketing of outputs broke down and caused additional disruption of production. The institution of collective agriculture was incapable of coping with these dislocations and their inefficiency was exacerbated by their inability to cope with the transition. Additional problems discussed in the preceding section in the context of overall economic decline – political instability, civil strife, the loss of subsidies from the Soviet Union, the inability to create new infrastructure to facilitate trade with new markets – aggravated these difficulties. The result was a decline in agricultural production during the first half of the 1990s.
Table 4.3: Structural Change in Agriculture
|A. Indices of Crop and Livestock Output for 1998-2000 |
|(1989-91 = 100) |
| |
|All Crop Production 129.1 |
|Food Crop Production 114.5 |
|Livestock Output 78.7 |
|B. Indices of Output and Yield Per Ha in 1999 (1992=100) |
| |Output |Yield/Ha |
| | | |
|Wheat |163.3 |95 |
|Cotton |166.9 |103 |
Source: NSC
As noted above, in the Kyrgyz Republic the decline in agriculture was more modest than the decline in GDP during the first half of the decade and the real value added in agriculture was higher at the end of the decade than before independence. As expected, the transformation of agriculture did not affect all its components uniformly. Table 4.3 summarizes the features of agricultural transformation. Agriculture achieved substantial growth over the period as a whole; but the growth was limited to crop production including the production of food grains. Livestock products remained far lower at the end of the decade than at the beginning, resulting in the loss of exports of wool. Despite a massive move towards free trade, there was a shift in favour of trade replacement, away from exports towards import substitution. There was a considerable increase in wheat production, indicating a shift of resources, including irrigated land, to this import-substitute crop. An exception to this pattern is cotton: while its production in the major producing countries in Central Asia, in Kyrgyz Republic, a minor exporter of cotton, this actually increased.
These changes since independence could be explained with reference to three sets of factors: change in the system of incentives; change in the access to inputs and services; and change in agricultural institutions. The three sets of factors often overlap. For example, changes in incentives affect input supply and changes in institutions influence incentives. Thus the discussion of these three factors entails a degree of overlap.
CHANGES IN THE SYSTEM OF INCENTIVES
To what extent is the performance of agriculture related to changes in incentives for the sector? Does the change in the cropping pattern represent a correction of the extreme specialization that was fostered by the arbitrary Soviet policy in the past? One can only provide tentative answers to these questions in view of the lack of detailed information. Changes in the incentive system have been complex and are in need of a serious analysis for the formulation of future policies.
The breakup of the Soviet Union was followed by a gradual integration of Kyrgyz Republic with the global economy. It has radically reduced the average tariff rate and the extent of quantitative restrictions on trade. Domestically it has moved away from compulsory procurement, price control, distribution control and the restriction of private enterprise. It is, however, by no means clear that it has succeeded in creating a uniform and neutral system of incentives, free of significant distortions.
Table 4.4: Estimates of Change in Terms of Trade for Agriculture
|Base Year |Terminal Year |Agricultural Price/ |Agricultural Price/ GDP |Annual % change in TOT2 |
| | |Industrial Price (TOT1) |Deflator | |
| | | |(TOT2) | |
|1990 |1999 |0.468 |0.626 |-5.2 |
Method of estimation: Deflators are found for agriculture, industry and GDP by dividing the current price value added by the index of real value added (all shown in World Bank, 2001a). These are converted into indices for the terminal year. TOT 1 is the ratio of the index of the deflator for agriculture to the index of the deflator for industry. TOT 2 is the ratio of the index of the deflator for agriculture to the index of GDP deflator.
The terms of trade for agriculture appear to have deteriorated since independence. While direct estimates of sectoral terms of trade are not available, numerous pieces of evidence clearly point to an adverse movement in the relative prices of agricultural goods. Table 4.4 puts together two indirect indices of agriculture’s terms of trade of which the second index, the ratio of agricultural prices to overall GDP deflator, appears to be more appropriate. It shows a substantial deterioration. Since it is hard to argue that the incentive system in the benchmark period was massively distorted in favour of agriculture, one must conclude that the current incentives discriminate against the sector.
A decline in terms of trade represents a fall in the purchasing power of income generated in the sector. Thus the change in per capita agricultural output is too optimistic an indication of the change in real income of the workers and entrepreneurs in the sector.
The decline in agriculture’s terms of trade have come about mainly due to the need of the state to overcome the severe fiscal difficulty caused by the withdrawal of Soviet subsidies and the general loss of revenue due to the economic downturn in the years following independence. Large agricultural subsidies were removed. Large transport costs have made the prices of imported fertilizer higher than average world price while they have prevented an equalization of domestic prices of agricultural products with world prices.
ACCESS TO INPUTS AND SERVICES
During the Soviet period, much of agriculture achieved a high intensity of input use. There was a serious decline in the quality and quantity of inputs available to agriculture after independence. In 1986-90, 252 kg of fertilizer was used per hectare of arable land.[21] By 1992, it had fallen to a tenth of the rate of use at the end of the 1980s! By the end of the 1990s there had been little recovery.
The problem about access to inputs has been two fold: first, a steep rise in their price and, second, a disruption in the supply channel. The problem of high price was sometimes exacerbated by the lack of coordination of price reform for inputs and outputs. The rise in the cost of machines, spare parts and fuel is widely perceived as obstacles to access to inputs.
Irrigation is another major agricultural input to which the quality of access has deteriorated. The maintenance of the irrigation infrastructure and the operation of the pumps have been under pressure due to the broader problem of management of water distribution.
Access to traditional markets was disrupted due to the breakup of the former economic union. Most importantly, Kyrgyz Republic lost its traditional export market for wool. The replacement of the traditional export market has been obviated, apart from the specific or low quality of the products, by the landlocked location of the country and the inability to finance the large investment needed to create new infrastructure.
The emergence of private farming, often organized by small individual and household farms, has created the need for the supply of a wide range of services in divisible units, of which the country has little experience. There is also an unmet need of small farmers for credit for the financing of their access to inputs and technology.
PROBLEMS OF TRANSFORMATION FROM COLLECTIVE TO PRIVATE AGRICULTURE
Post-independence Kyrgyz Republic was in need of an urgent and inevitable transformation of the organization of agriculture as of the economy as a whole. The collective institutions, the sovkhoz and the kolkhoz, were not relevant any more. Experience in many countries over many decades had shown that it was virtually impossible to have an efficient organization of work and incentives under these institutions. Political support for them had evaporated with the demise of socialist central planning.
The alternative was not, however, clear or obvious. Circumstances in the Kyrgyz Republic were not the same as in the successful cases of decollectivisation, notably China. In China collectivisation of agriculture had lasted for approximately two decades, with plenty of experience of peasant farming surviving among the rural population. In the Kyrgyz Republic collectivisation had lasted for nearly six decades, erasing all experience of peasant farming from the contemporary generation of agricultural population. Furthermore, the resource endowment of agriculture in the Kyrgyz Republic, with a relatively mechanized and irrigation-dependent farming, created a special problem of transition to decollectivisation due to the indivisibility of technology and management that characterized socialist planning. Large tractors and combines could not be divided up among individual peasants and the centralized management of irrigation was in need of complex restructuring of organization commensurate with the change in the organization of farming. These factors constituted an obstacle to transition to a system of equitable private peasant farming.
Notwithstanding these problems the Kyrgyz Republic has become an outstanding case of replacing collective agriculture by a system of egalitarian peasant farming through nearly universal access to land. In the decade beginning independence, the Kyrgyz Republic distributed approximately 72 per cent of all agricultural land (except pasture) among nearly 2,596 thousand individuals (510 thousand families) in the form of land shares. This ensured that pretty much every household resident in rural areas ended up with land entitlement. Initially access to land was given in the form of lease for 49 years which was later extended to lease for 99 years. Following a national referendum in 1998 full ownership rights were conferred on the farmers, including the right to sell land. Simultaneously a moratorium on the particular provision about the right to sell was declared for five years which was recently rescinded. Starting September 1, 2001 land can be bought and sold with certain restrictions, notably that only Kyrgyz nationals with two years’ residence in rural areas can buy land.
The original distribution of land was reasonably equitable. Land was distributed according to the family size. There were large regional variations in the amount of land per person due to regional differences in the availability of distributable land per person. Land distribution was not, however, accompanied by measures to promote access to complementary resources to enhance the ability of the weaker households to perform as farmers. This must emerge as an important issue in the future as the legalization of sale of land creates the possibility that more efficient farmers would buy up the land of the weak and inefficient farmers. The “Management of Land Act” of December 2000 provides for a legal limit on land concentration by making the maximum size of the agricultural land plot owned by any individual equal to “20 times the average land share established by a particular local state” with an absolute limit of 50 ha.[22] . This kind of policy seems neither providing protection for small farms, nor ensuring an increase in efficiency of agricultural production. Other policies need to be geared to enhance the capability of the small peasants to remain viable and competitive.
Of the households that received land the highest proportion completely opted out of the collective system. A fair proportion of them, however, continued to be parts of cooperatives while others formed joint-stock companies. A number of state agricultural enterprises continue to operate, usually specializing in seed and livestock development. Table 4.5 shows a distribution of land among principal organizational forms of farming.
Table 4.5: Forms of Organization in Kyrgyz Agriculture (Per cent of total land, 2001)
|1. Dekhkan (peasant) Farmers |41.6 |
|2. Collective Peasant Enterprises |26.3 |
|3. Agricultural Cooperatives |14.5 |
|4. Joint-Stock Companies |3.8 |
|5. State Enterprises |14.9 |
Note: The estimates are based on the data shown in the paper by Kadyrkulov in Law and Business, 2001. The actual figures of the proportions of land for each category shown in the paper are different because, oddly, it shows the shares as proportions of land belonging to all non-state enterprises, thereby making the total of all shares well above 100 per cent. Reconciling these figures with the actual distribution of land to households is difficult because the sources of these data make confusing shifts from “agricultural land” to “sown land” and other definitions of total land. It, however, appears that 1, 3 and 4 represent households who received land as part of the land reform programme. Item 2, collective (another name “unified”) peasant enterprises represent a transitional form of agricultural enterprises. In reality there is no difference between them and agricultural cooperatives. The Civil Code, which is now in force, does not provide for such form of legal entity, so all these enterprises are now in the process of reorganization into other forms of enterprises either transforming into cooperatives, JSC etc. or dissolving to individual peasant farms.
While many peasant households became independent farmers, others remained in cooperatives. The system was flexible enough to permit the independent peasant farmer to continue to receive certain services from the cooperative from which he/she has withdrawn. These cooperatives have no resemblance with the former collectives. They provide a minimum of services that are sufficiently indivisible to create an incentive on the part of the individual peasant households to combine in a cooperative arrangement for their provision.
THE CONTINUED INDUSTRIAL DECLINE
The performance of the industrial sector has been infinitely gloomier than that of agriculture. Within industries, manufacturing sectors have performed most dismally. Two “non-manufacturing” activities, gold and electric energy have performed differently. The coming into production of the Kumtor gold mine in 1997 added a significant boost to the growth of GDP. Between 1996 and 2001, almost 22 per cent of the increase in GDP has been due to the output of Kumtor gold mine. In 2001, value added by the gold mine accounted for nearly 8 per cent of GDP and 36 per cent of value added in industries. By 2001 the output of electric energy also exceeded the level at the time of independence.
As Table 4.6 shows, the only manufacturing industry that has avoided a decline in output since before independence is cotton fibre, an agro-processing industry with a small proportion of value added in manufacturing. All other traditional manufacturing sectors performed dismally. The factors behind the decline are diverse. For intermediate goods – cement, coal and bricks – the loss of export market in former Soviet Union was the principal reason. For capital goods – electrical engines and pumps and trucks – it was a combination of the disruption in the supply of components from sources in former Soviet Union; the lack of demand on the part of the traditional domestic users, chiefly the collective and state farms which had ceased to exist; and the inability to compete with imports under a liberalized trade regime. Individual peasants were not able to replace the demand for agricultural machineries that in the past was due to the collective and state farms. In the case of consumption goods the decline was due to a combination of the above factors and the decline in domestic consumption demand.
Table 4.6: Outputs of Selected Industries
|Industry |Unit |1991 |1995 |1999 |2000 |
|Electric Energy |b. KWH |14.2 |12.3 |13.2 |15.0 |
|Coal |m. Tons |3.5 |0.5 |0.4 |0.4 |
|Electric Engines AC |Thousand |234.5 |49.1 |1.2 |0.8 |
|Centrifugal Pumps |Thousand |44.9 |12.1 |0.7 |0.7 |
|Cement |m. Tons |1.3 |0.3 |0.4 |0.5 |
|Bricks |million |874.0 |96.4 |90.0 |n.a. |
|Cotton Fibre |Th. Tons |22.1 |17.7 |24.5 |n.a. |
|Textiles |m. Sq. meters |n.a. |23.2 |14.0 |8.7 |
Source: National Statistical Committee.
The quantitative magnitude of the fall in aggregate industrial value added is an inadequate indicator of the adverse impact of industrial decline on the poor. This is because a good part of the incremental value added in the most rapidly growing industrial sector, gold, is lost to Kyrgyz Republic because it takes the form of factor income paid abroad to the foreign investors at Kumtor. As will be shown later, since Kumtor started production, the growth rate of GNP has been one percentage point below the growth rate in GDP. Although it is well known that GNP is a truer index of average living standard than GDP, all official growth measurements in Kyrgyz Republic are made in terms of GDP. There is a second reason why the change in aggregate industrial value added is an inadequate indicator of the adverse effect of the sector’s decline on the poor. Of the value added contributed to GNP by the best performing sectors, gold and electric energy, the proportion that accrues to poor households in the form of wage is much smaller than the average of that proportion for the rest of the industries. A unit increase in value added in gold/energy, offset by a unit reduction in value added in traditional manufacturing would leave poor households worse off.
The decline in industrial output was accompanied by the deterioration in the financial situation of enterprises. At its peak, in 1996, 41 per cent of state enterprises sustained loss and this ratio remained as high as 36 per cent in 1999.[23] This has a detrimental effect on public and aggregate domestic saving.
The Kyrgyz Republic has promoted widespread privatisation of industries. Available estimates of privatisation are not transparent. A recent estimate suggests that, by early 2001, 89 per cent of industrial enterprises had been privatised.[24] Since privatisation has been concentrated among smaller enterprises, this is almost certainly an exaggerated indicator of the extent of privatisation of industries in Kyrgyz Republic. The same source estimates that private enterprises contributed about 20 per cent of manufacturing output in 2001. So far there is no evidence of a dynamic private sector performance with a foreseeable prospect of arresting the decline of the sector.
OTHER SECTORS
Outputs of transport, trade and many other services are closely linked with the production sectors, principally agriculture and industry. It is therefore not surprising that GDP originating in these sectors declined sharply over the decade under consideration. Even during the period of recovery, only the trade sector registered a rapid and steady growth. Indeed this sector’s real value added increased since 1995 at a faster rate than GDP. The growth of transportation services was substantially slower than the growth in GDP. Public administration, after moderate growth until 1999, registered absolute decline, which may have been a deliberate policy under the stabilization programme. While slow growth in services can be caused by the low demand due to the slow growth of production sectors, often the direction of causation is reversed. This is particularly true of transport and financial services whose supply inelasticity can be a constraint on the growth of the economy. It is highly likely that the Kyrgyz Republic has faced such constraints during its recovery phase.
C. THE EMPLOYMENT SCENARIO
The principal mechanism through which economic growth improves the welfare of the poor and helps reduce poverty is by increasing remunerative employment. Labour is often the only resource that the poor have. Unless economic growth draws labour in adequately large numbers to the growing sectors, the impact of growth on poverty reduction is weakened. A rise in unemployment – resulting from a reduction in self employment and wage employment taken together – is almost always associated with a rise in the incidence of absolute poverty.
In the decade since independence much of traditional industries and urban services have declined. The sectors that have contributed to the “recovery” of industries since 1996 have neither absorbed much labour nor been specifically located in urban areas. In these circumstances, one would have expected a sharp rise in urban unemployment. Indeed rising urban unemployment has been characteristic of economic reform in all transition economies, including not only the overwhelming majority of cases of stagnation and negative growth (e.g., former Soviet Union) but also China which has grown at a historically-unprecedented rate. Paradoxically, the registered unemployment rate in the Kyrgyz Republic has remained low and stable, well below 5 per cent and declining during the second half of the 1990s.[25]
Table 4.7: Growth in Real GDP and Employment between 1996 and 2000
(Cumulative per cent growth over the period)
|Sector |Real GDP |Employment |
|Agriculture |29.9 |21.0 |
|Manufacturing and Mining |49.2 |-19.5 |
|Construction |-25.5 |-22.3 |
|Transport |13.3 |-27.6 |
|Communication |10.6 |-5.8 |
|Trade, Hotels, Restaurants |36.5 |21.3 |
|Other Services |0.4 |-2.7 |
|Total Economy |22.2 |7.0 |
Source: Growth rates for the entire economy and agriculture are from Table 4.1. All other growth rates of output and employment are from NSC sources.
The explanation of the phenomenon is provided by the data in Table 4.7 which shows the allocation of incremental employment during the period of recovery. Growth was concentrated in three sectors of which agriculture was the largest with the biggest absolute increase in output and income. A second sector which experienced growth is trade, hotels and restaurants. It is possible a good part of their growth was due to informal activities in the urban areas. A third sector in which output growth took place is manufacturing and mining. More accurately, output growth took place in two sub-sectors of this broad sector, namely gold mining and electrical energy. For the rest of the manufacturing sector there was a decline in output.
Of the three growing sectors, manufacturing and mining experienced employment-hostile growth. This sector as a whole had a highly negative output elasticity of employment: a 49 per cent growth in real value added leading to a 20 per cent reduction in employment. The explanation must lie in the fact that the growing segment of the sector, gold mining and electricity, has a far smaller labour intensity than the stagnating and declining segment, the traditional manufacturing, details that are hidden because of the aggregation of the two disparate segments.
The other two growing sectors were highly labour intensive: once the output and employment growth are converted into annual compound rates, the output elasticity of employment is 0.72 for agriculture and 0.6 for trade. It is the high employment intensity of growth in these two sectors which helped preserve the linkage between growth and poverty reduction.
It should nevertheless be noted that these are highly perverse trends. One of the incontrovertible generalizations in economics is that during the process of growth labour moves out of (low-productivity) agriculture into (high-productivity) non-agricultural activities. In the Kyrgyz Republic there was no movement of population and labour from urban to rural areas. What occurred was a relatively higher rate of population growth in rural areas, because of higher birth rate in these areas and also because of the outflow of urban population to other countries (this explains in part the observed unexpectedly low unemployment in towns which would have been far worse had this not occurred). According to the statistical rules adopted in the Kyrgyz Republic in 1997, all rural adults with land (and that includes a large part of the adult population) are automatically considered as employed; this has contributed to the quite significant growth in agricultural employment at that time. All available statistics on internal migration (see, for example, the UN Common Country Assessment) shows an unambiguous trend of movement of population from villages to towns, especially to Bishkek, not vice versa.
D. POVERTY AND GROWTH
For the Kyrgyz Republic as a whole, the period since 1998 may be regarded as a period of poverty reduction, disregarding an insignificant rise in 1999. Between 1998 and 2001 there was a 7.3 percentage point reduction in the proportion of population in poverty. In this period the proportion of population in extreme poverty – those whose total expenditure is no greater than the cost of minimum food subsistence only – shows a steadier reduction in both urban and rural areas. Proportionate poverty gap – showing the average depth of poverty – and the squared poverty gap – measuring the change in poverty by taking into account the distribution of expenditure among the poor themselves – show steady improvement after 1999, with a slight worsening between 1998 and 1999 (see Chapter 2, Table 2.2). For a deeper understanding of the growth-distribution-poverty nexus it is useful to scrutinize the change in poverty and related indicators in each year.
1997: Between 1996 and 1997 GDP increased at 9.9 per cent. Once the contribution of Kumtor is excluded the growth rate of GDP falls to 5.3 per cent, or, in per capita terms to about 4 per cent. Agricultural output increased by 12.3 per cent. Why did rural poverty increase? The answer lies in the fall in per capita real personal income in rural areas by almost 12 per cent. How can a 12 per cent increase in real output of agriculture, the overwhelmingly dominant source of rural income, translate into a 12 cent fall in real income? It is impossible to account for all the factors that have been in operation, and it is possible that a part of the difference is due to errors of one kind or another. But several factors preventing the translation of output growth into income growth can be enumerated. In 1997 there was almost a 5 per cent increase in employment in agriculture.[26] A second possibility is the decline in agriculture’s terms of trade. Data are not readily available to estimate the change in agriculture’s terms of trade in that year, but, as this report argued above, a conservative estimate of the annual reduction in agriculture’s terms of trade during the 1990s was 5.1 per cent. There could have been a sharper reduction in terms of trade, especially once the government’s fiscal intermediation is factored in. Together these two factors could have more than wipe out the effect of increased output on growth in per capita income. There were additional factors: e.g., the growth is non-agricultural rural income was probably very slow if at all positive. There was also a slight increase in the Gini index of expenditure distribution. The change in urban poverty has already been discussed above.
1998: Poverty increased everywhere. The principal reason is the weak growth of the economy. GDP increased at 2.1 per cent. Once Kumtor is excluded, the growth rate of GDP falls to 1.06 per cent, leading to a fall in per capita GDP. Agricultural output increased by 2.9 per cent. The rate of increase in agricultural employment and rural population was of the same order of magnitude. Thus output per person in agriculture showed no increase. Additional factors, e.g., change in terms of trade, a slower growth of non-farm rural output and state intermediation in income distribution, could have exerted additional influence on income. Per capita expenditure in both urban and rural areas fell. Despite a slight improvement in the distribution of expenditure, poverty increased.
1999: GDP increased by 3.7 per cent. Once Kumtor is excluded, the rate of GDP growth rises to 4.1 per cent due a fall in Kumtor’s contribution to GDP in 1999. Agricultural output increased by 8.2 per cent. Per capita expenditure increased in both urban and rural areas by more than 4 per cent. There was a slight increase in the Gini indices, but this could not outweigh the poverty-alleviating effect of income growth. Poverty fell overall and in rural areas while remaining almost the same in urban areas.
2000: GDP increased by 5 per cent and at a slightly lower rate once the effect of Kumtor is excluded. Agricultural output increased by 3.9 per cent. Rural per capita expenditure increased by 2.7 per cent and the rural Gini index fell significantly. There was a substantial reduction in rural poverty. Urban per capita expenditure fell by more than 8 per cent. Its potential adverse effect on poverty was partly offset by the significant improvement in the Gini index. There was a small increase in urban poverty. Poverty for the Kyrgyz Republic as a whole fell significantly. Why did urban per capita income fall? Growth in urban areas, though not directly measurable, was weak. Furthermore, this year agriculture’s absorption of employment fell sharply, to only 1.6. This almost certainly led to a substantial rise in urban unemployment.
2001: GDP increased by 5.3 per cent (slightly faster if the contribution of Kumtor, which experienced slower growth, is excluded) and agricultural output increased by 6.4 per cent. These were translated into healthy growth in per capita expenditure, by 5.7 per cent in urban areas and 6.2 per cent in rural areas. Gini index fell for the nation and for urban areas. It increased a little in rural areas but was not able to make much of a dent in the favourable effect on poverty reduction of the robust rise in rural per capita expenditure. The result was a substantial reduction in poverty in both urban and rural areas.
LESSONS
The Kyrgyz experience in recent years clearly brings out what is widely recognized in the poverty policy analysis: a reduction in poverty requires a growth in income and the avoidance of an increase in inequality. Growth is a necessary precondition for poverty reduction because poor societies have little room for poverty reduction by redistribution alone; but a growth in income is not sufficient because its positive effect on poverty reduction can be offset by a worsening of the distribution of income. In 2000 the large reduction in per capita urban expenditure would have increased poverty much more but for the significant improvement in the distribution of expenditure.[27] To translate a given increase in income to an equivalent reduction in poverty, a worsening of the distribution of income must be avoided. An improvement (deterioration) in the distribution of income magnifies (compresses) the effect of a given increase in income on poverty reduction.
Over the period under review inequality remained the same for rural areas and decreased significantly for urban areas and for the nation. What was behind the avoidance of inequality? This report highlights the egalitarian land distribution, without which rapid rural recovery might have been disequalizing, and the substantial labour absorption into the growing agricultural and urban informal sectors.
It should perhaps be noted that while Kyrgyz Republic has attained greater equality over the period under review, the absolute degree of inequality can not be considered to be low. A Gini index of 0.32 for expenditure is quite consistent with a Gini index higher than 0.4 for income (see Table 2.1 for an estimate of income Gini in the 1990s) which represents no less than the average inequality in a contemporary developing country.
In Kyrgyz Republic poverty and inequality estimates are measured in terms of expenditure rather than income. This is consistent with the argument often made by economists that (consumption) expenditure is a more reliable indicator of permanent income than current income which is affected by transitional fluctuations. An argument weighing against this is that the poor can maintain consumption above poverty threshold in a bad year by selling assets or acquiring debt which reduces their capacity to cope with poverty in the long run. According to this argument poverty should be measured both in terms of consumption and income to get a more balanced view of changes that are occurring. Unfortunately, Kyrgyz household surveys enumerate income so incompletely that this is impossible to do.
Another important lesson of the Kyrgyz experience, so often lost sight of in poverty policy analysis, is that a given growth in GDP does not always translate itself into an equivalent growth in personal income and expenditure in terms of which the incidence of poverty is measured. Disconnect between the two has occurred frequently in the Kyrgyz Republic, leading to the failure of GDP growth to reduce poverty. Examples include rural areas in 1997 and urban areas in 2000. This can happen due to any of a large number of factors: (a) a shift in sectoral terms of trade; (b) a shift in sectoral composition of employment and/or population; (c) macroeconomic policies resulting in a rise in the factor shares of business and government and a fall in the factor share of households; (d) a change in the composition of incremental output resulting in a shift in factor share in favour of business and government and against households (e.g., a sharp rise in the output shares of sectors like Kumtor and energy).
E. POLICIES FOR POVERTY-ALLEVIATING DEVELOPMENT
POLICY OBJECTIVES
The purpose of this section is to bring out the policies and programmes implied by the analysis in the preceding sections. It outlines the policies and programmes that Kyrgyz Republic and its international development partners need to adopt in order to facilitate poverty-alleviating growth. The emphasis is on macroeconomic aspects of policy making although references are made to those microeconomic policy instruments which have close links with the policy objectives.
Poverty-alleviating growth combines the objectives of growth and poverty alleviation. It is more than growth in so far as it envisages the wide dissemination of the benefits of growth among all income groups including the poor. It is more than poverty alleviation in so far as it stipulates a rapid rise in the average standard of living, not merely raising the absolute poor up to a minimum standard of living. Its basic elements are: (a) a rapid increase in national product; and (b) a rapid increase in the welfare of the poor. Given high enough a rate of growth, the objectives of the strategy are ensured if inequality in the distribution of income is not allowed to rise and, wherever possible, measures are adopted to improve the distribution of income. This section in turn deals with the principal elements of a growth strategy while the next Chapter examines an income-distribution strategy keeping in mind that the two are inextricably linked. Different growth strategies have different distributional outcomes. Different approaches to income distribution have different growth outcomes.
ELEMENTS OF A GROWTH STRATEGY
The recent pattern of growth is not sustainable
The recovery of the Kyrgyz economy during the past six years had a lopsided sectoral composition. Between 1996 and 2001 annually compounded sectoral growth rates have been as follows:
|GDP |5.6 | |
|Agriculture |7.9 | |
|Manufacturing and Construction |-2.8 |(excluding gold and energy) |
|Services |negative |(precise calculation requires clarification of the exact definition of |
| | |the sector which is difficult) |
This pattern of growth is not sustainable. Agricultural growth has been stimulated so far by import substitution which was essentially a correction of the distorted pattern of regional specialization imposed by Soviet planning in the past. Soon this will lose steam. Further growth of agriculture must be based on new sources of demand. At the moment it is hard to visualize a rapid growth of export demand for agricultural goods on a broad front. Growth of the sector must largely be based on the growth of domestic demand. There must also be a growth in the domestic production of inputs for agriculture and the expansion of trade and marketing services without which the growth of agriculture will face supply-side constraints. In the final analysis, the composition of sectoral growth must return to the limits of the Engels parameters, which are among the most durable generalizations regarding the pattern of economic growth. Manufacturing, construction, transportation and other services must attain growth rates that are higher than that of agriculture and GDP.
The current rate of growth is an unreliable basis for steady and sustained poverty reduction
There are several strong reasons to believe that the current rate of growth is not an adequate basis for steady, sustained and rapid reduction in poverty. To start with, poverty reduction was erratic during the last six years and, indeed, poverty in 2001 is higher than in 1996 for urban areas and only marginally lower for the nation as a whole. The annual growth in GNP is almost one percentage point lower than the annual growth in GDP in terms of which growth targets are set.[28] This means that a 5.0 per cent growth in GDP translates to approximately 2.5 per cent growth in per capita GNP. But a given GNP growth typically translates into a smaller growth in household income.[29] Thus, the annual growth in per capita household income would be less than 2.5 per cent if GDP grows at 5 per cent. As shown above, this is rate of growth in overall household income is quite consistent with the impoverishment of large groups due to such factors as changes in sectoral terms of trade.
But there is a stronger reason to suspect that this rate of growth in income would be an inadequate basis for poverty reduction. As repeatedly emphasized above, one of the basic elements in Kyrgyz Republic’s poverty performance in the recent past was the avoidance of an increase in inequality in the distribution of income/expenditure. There have been small fluctuations in Gini indices from one year to another but no trend. Indeed the Gini indices for urban areas and the nation at the end of the period have been lower than what they were at the beginning of the period of recovery. It is necessary to analyse in depth the reasons why this stable and favourable distribution, so uncharacteristic of growth under reform in the period of globalisation, has obtained in Kyrgyz Republic. Pending such research, this report has surmised that a large part of this has been due to concentration of growth in agriculture, which experienced the implementation of a highly egalitarian distribution of land and absorbed labour from outside the sector. Agricultural growth has so far been based on the use of traditional inputs and has avoided facing up to technological progress. As efficiency and high factor productivity inevitably become more dominant in production decisions, tendencies for polarization will occur in agriculture, a process that is likely to be facilitated by the recent legalization of land sale.
This report has also argued that growth in trade services and informal activities has been equalizing due to its large absorption of labour. Once growth in non-agricultural sectors resumes, it is likely to be less egalitarian than growth in agriculture, trade and informal services have been. Market-driven returns to different skill levels, entrepreneurial ability and the ability to take risks would be more differentiated in the non-agricultural sectors even if public policy keeps emphasizing distributional equality. Thus, in order to maintain the modest pace of poverty reduction achieved in the recent past, the rate of GDP growth would have to be higher, say at least 6 per cent per year. To make a more meaningful impact by way of poverty reduction closer to the millennium goal, Kyrgyz Republic would need to aim at even higher a GDP growth rate, 7 per cent or more. With a GDP growth rate of 4 per cent – as is projected in the Interim National Strategy for Poverty Reduction (INSPR) for 2005 – it is unlikely for the Kyrgyz Republic to achieve any meaningful poverty reduction under the assumptions outlined above. An important reason, why the INSPR and indeed the current draft of the NSPR foresee a quite moderate economic growth for 2003-2005, is the expected significant decline in Kumtor production due to the gradual exhausting of the deposit.
The incremental capital-output ratio will rise
During the first five years of recovery – 1996 to 2000 – the average of the annual investment/GDP ratios was above 19 per cent, falling from more than 25 per cent in 1996 to 16 per cent in 2000. Incremental capital-output ratio (ICOR) is much too crude an instrument of projection. There is nevertheless a strong linkage between the rate of investment and the growth rate in GDP. Very roughly, the crude ICOR was about 3.5 during the period of recovery (assuming no lag between gross investment and increment in GDP). Using this assumption, the achievement of a 6 to 7 per cent growth in GDP would require a rate of investment between 21 per cent and 24.5 per cent of GDP.
But the incremental investment cost of output growth – the ICOR – would rise as the sectoral shares of incremental GDP more closely conform to the normal growth pattern. Agriculture is not only less capital intensive, agricultural growth in the recovery period has followed a path of intensive use of labour and traditional inputs and postponing capital investment, including investment in replacement. In the future, agriculture will need to face up to the capital investment necessary for the rehabilitation of the irrigation system, application of modern inputs and the provision of infrastructure. Non-agricultural sectors are significantly more capital intensive than agriculture. There is an implicit admission of this in the INSPR, which projects a steady investment rate of 16 per cent between 2001 and 2005 and a steady decline in the real GDP growth rate from 5 per cent in 2001 to 4 per cent in 2005. One might interpret this projection as an implicit assumption that the crude ICOR would rise from 3.2 in 2001 to 4 in 2005. While the direction and rate of change in the ICOR envisaged in the INSPR projections appear right, the levels may still turn out to have been optimistic. Thus it is likely that the rate of investment required for modest to rapid poverty reduction would have to be higher than the 21 per cent to 24.5 per cent range stipulated above.
Much of investment would embody indivisibility and externality
The matrix of measures in the INSPR document outlines a long catalogue of investment in infrastructure: arterial transport network; improvement of rail transport; expansion of air transport network; the development of a modern system of postal and telecommunications network; the rehabilitation of the irrigation system and hydroelectric power are some of the examples. New transportation infrastructure is needed to direct exports to new markets to replace the traditional markets that have been lost and to promote tourism. These investments are bulky and often indivisible. They entail large-scale externalities, making them unattractive to private investors. Kyrgyz Republic foresees future economic growth in manufacturing and services sectors to be led by small and medium enterprises (SMEs). These enterprises are not able to undertake investment in ancillary activities and services that larger private entrepreneurs are often able to finance. Thus the proportion of investment that entails externality would be larger in the Kyrgyz Republic than in many other developing countries. Without public sector participation, it is hard to see how these investments would take place.
Two essential macroeconomic preconditions for poverty-alleviating growth
The above propositions lead to two conclusions: (a) The Kyrgyz Republic must reverse the declining trend in the rate of investment that has characterized its recent development; and (b) it must reverse the recent trend of a drastic reduction in the share of the public sector in total investment.
The consequence of the recently declining rate of investment has been brought out by the INSPR document itself: the rate of GDP growth will fall from the average of 5.5 per cent over the last six years to just 4 per cent in 2005. As argued above, this rate of GDP growth – after allowance for the net factor income paid abroad, the less than unit elasticity of household income with respect to national income, and the probable increase in inequality as growth spreads to non-agricultural sectors – is unlikely to enable the Kyrgyz Republic to reduce poverty.
The argument that the free fall of the share of public sector in investment that has characterized Kyrgyz development in the recent past needs to be reversed must not be confused with a case for a large role of the public sector in production activities. Development experience around the world convincingly demonstrates that the state is not an efficient entrepreneur in production activities. Orderly privatisation of state agricultural and industrial enterprises is highly desirable. But involvement in investment in infrastructure which entails externalities is a necessary responsibility of the state. An abdication of this responsibility prevents the realization of growth potential. The orthodox argument that public investment crowds out private investment, and hence provides no benefit, ignores the demand side of investment which is a serious constraint in the Kyrgyz Republic. As has been argued by the critics of the orthodox view, without public investment in infrastructure and other externality-producing activities, there is inadequate incentive to invest, especially on the part of the small entrepreneurs. In this sense, pubic investment in Kyrgyz Republic will have a “crowding in” effect on private investment.
Financing a higher rate of investment
How will Kyrgyz Republic finance a significantly higher rate of investment? Will an attempt to stimulate the rate of investment endanger its recently attained macroeconomic stability? It is worth noting that macroeconomic stabilization has been attained at the cost of a significant reduction in the rate of investment which, according to the projections of the INSPR, will lead to a significant reduction in the rate of growth. As argued in this report, the fulfillment of the growth target of the INSPR will almost certainly jeopardize the modest poverty reduction that Kyrgyz Republic has achieved in the recent past. It is, however, not a sensible strategy to sacrifice macroeconomic stability in order to increase the rate of investment just as it was not justified to promote stabilization by reducing the rate of investment. So the question that one should ask is what is the rate of investment that can be financed without sacrificing macroeconomic stability? In other words what is the aggregate rate of resource generation by combining domestic savings with the feasible rate of capital inflow?
A good starting point is to look at the INSPR projections which provide a scenario for the period until 2005. Table 4.8 shows the INSPR figures for 2000 (preliminary estimates) and 2005 (projections). Note that the INSPR does not explicitly state the rate of net capital inflow. It has been derived residually as the difference between the gross investment rate and the gross domestic saving rate
Table 4.8: Alternative Projections of Investment and Saving (Per cent of GDP)
| |Preliminary 2000 |INSPR Projection |Alternative Projection |
|Gross Investment |16.0 |16.0 |22.3 |
|Public |8.5 |3.8 |10.1 |
|Private |7.5 |12.2 |12.2 |
|Gross Domestic Savings |7.5 |11.5 |13.8 |
|Public |-2.2 |2.3 |2.3 |
|Private |9.7 |9.1 |11.5 |
|Net Capital Inflow |8.5 |4.6 |8.5 |
There are some remarkably implausible features of the INSPR projections for 2005. Public savings are projected to rise to a modest positive rate. But inexplicably private saving rate is projected to fall! Indeed, the INSPR projects the private saving rate to rise to 10.8 per cent in 2003 and then fall significantly in the following years. It also projects a fairly sharp reduction in the rate of net capital inflow. None of these last two assumptions make much sense. The explanation lies in the remarkable fact that the INSPR reversed the process of making these projections from what they usually are: instead of asking what rate of investment can be financed by resources that the country could mobilize, it asked what should be the rate of domestic saving once a pre-determined investment ceiling and a rate of net capital inflow are agreed upon with the donor community. The sequence of steps in the projections seems to be as follows: (a) the rate of investment is exogenously determined by donor conditionality; (b) the rate of net capital inflow is also a part of agreement with the donors; (c) public saving rate is a part of donor conditionality; and (d) private savings are residually determined. The private saving rate thus determined is below the rate obtained in the recent past, indicating that a part of potential private savings are frustrated because of the investment ceiling.
The authors of this report have made an alternative projection for 2005 which is shown in the last column of Table 4.8. It reverses the practice adopted by the INSPR by starting from an independent projection of feasible resources and puts investment equal to resources generated. Its resource projection assumptions are as follows. It projects the rate of capital inflow to remain the same in 2005 as in the benchmark year. It also assumes that private saving rate will linearly increase between 2003 and 2005 at the same modest rate as the INSPR projects it to rise between the benchmark year and 2003. This enables Kyrgyz Republic to attain a 22.3 per cent rate of investment, something that is more consistent with a rate of GDP growth that would permit a decent rate of poverty reduction.
The alternative projection in Table 4.8 is a rhetorical projection, not one based on serious and detailed analytical work. Its point is simple. If private savings continue to grow modestly at the rate at which the INSPR projects it to grow between 2000 and 2003 – there is no reason why it should not do so – and if capital inflow remains unchanged at the benchmark rate, then it is possible for the Kyrgyz Republic to attain a 40 per cent higher investment rate than is projected by the INSPR. An annual rate of capital inflow of 8.5 per cent of GDP is by no means excessive for a poor country like the Kyrgyz Republic. Given the recent issues related to external debt the donor community should finance a significant part of this inflow on grant terms. The total amount of net capital inflow would be modest, something of the order of $120 million in the immediate future. Sustained over several years, this will give the Kyrgyz Republic the breathing space to get launched into a path of steadily accelerating growth with substantial poverty reduction. Private saving is as much a matter of inducement to invest as the capacity to save. Saving rates achieved in the recent past suggest that if inducement to invest is adequate the alternative projection will be well within the grasp of the Kyrgyz Republic.
Can one go beyond the rhetorical alternative presented in Table 4.8? The authors of this report have reasons to believe that the target rate of investment in 2005 can be higher than the figure shown in the alternative projection in Table 4.8. This belief is based on the perusal of recent domestic savings estimates. Domestic saving rates in the Kyrgyz Republic, as estimated by the NSC, have been extremely volatile. It needs to be analysed if this volatility is largely a statistical quirk or due to real volatility in economic circumstances. It however appears that the rate of domestic savings in recent years – 2000 and 2001 – has been much higher and more stable than it was thought to be. According to revised NSC estimate the rate of domestic saving in 2000 was14.4 per cent of GDP, far higher than assumed in the INSPR projections. Preliminary estimate for 2001 puts the saving rate at even higher a level. If these figures are right, it should easily be feasible for the Kyrgyz Republic to attain a 15 to 16 per cent rate of domestic saving by 2005 under the growth scenario proposed in this report. This would make it possible for the country to attain a 24 per cent or slightly higher rate of investment.
The main point that this report makes is that a predetermined ceiling on the rate of investment is not the way to go for a desperately poor country hoping to quickly overcome its poverty and backwardness. It should generate as much of domestic savings as is feasible by setting up right incentives to save and invest. The international community should join forces with this national effort by continuing a rate of capital inflow that is no lower than what it was in the benchmark year
Incentive to invest
The INSPR projects the private investment rate to rise to 12.2 per cent and the public investment rate to fall to a meagre 3.8 per cent by 2005. As this report has argued, the rate of public investment can not decline so drastically without jeopardizing badly-needed investment in infrastructure and other externality-providing sectors. In the alternative projections of Table 4.8, private investment rate is kept at the same rate as postulated in the INSPR and the increase in the investment rate, over the INSPR projection, is allocated to public investment. Two points need to be noted. First, the public investment rate in the alternative projection is lower than the actual public investment rate in 1999. Secondly, it includes all large-scale public collaboration with foreign direct investment. Budgetary practice in Kyrgyz Republic seems to include FDI with private investment. Thus the difference between the alternative projection and the official projection of the share of public investment is less extreme than appears from Table 4.8.
The feasibility of the projected private investment will depend on the adequacy of the inducement to invest. For the small entrepreneur inducement to invest is also an inducement to save which often takes the form of direct capital construction and mobilization of resources from informal sources. The Kyrgyz Republic needs to set up a broad-based system of incentives to invest and promotion of worthwhile industries. While its principal focus should be the small and medium enterprises, it should also aim at larger industries which might attract FDI. The decline of Kyrgyz industries has been caused by the loss of the system of incentives under Soviet central planning which, though distorted, was a powerful guarantee for survival under all uncertainties. So far, the principal achievement of economic reform has been the abolition of that distorted system of incentives. It is yet to set up an alternative system of incentives that would induce investors to overcome the “generalized infancy” that industries are afflicted with in landlocked Kyrgyz Republic inheriting a poor infrastructure and suffering from inadequate skills, lack of training in business practices and lack of contact with potential markets. To reverse the on-going industrial decline, Kyrgyz Republic needs to offset these disadvantages by a broad and strong set of measures for industrial promotion. Devising such a system of incentives is a major undertaking. The present report can only indicate some of its necessary elements.
One of the most important elements of a strategy for the promotion of private investment is public investment in infrastructure: roads, railways, airports, and transport services, communications. There should be carefully targeted investment in the development of skills, business management and the facilitation of access to information. Given that much of future industrial development is planned under SME, there needs to be special assistance in market access through the dissemination of information and facilitation of links with international marketing networks. There is an overriding need to facilitate access to credit, including credit for small and micro-entrepreneurs. Access to critical inputs at competitive prices must be assured. These are difficult tasks which require the creation of new institutions and organizations. This should be the principal focus of development policy in the immediate future.
A related need is the creation of new trading links to replace the ones that were eliminated by the demise of the Soviet Union. The issue of the emerging pattern of comparative advantage for exports is closely linked with the identification of new markets. To a certain extent new destinations for exports can be found within the existing infrastructure. Some of it has taken place naturally, in response to the change in incentives. Examples of this are the increased export of wool and livestock products to China. Ultimately the diversification of sources and destinations for trade will require the creation of new infrastructure: transport, port and communications facilities. This will require careful planning and long-term donor assistance of substantial proportions within the framework of regional cooperation.
Promotions of the above kind should create adequate inducement to invest once they are fully in place. But these measures take a long time to reach a critical minimum level. In the meantime public policy in the Kyrgyz Republic must use more direct support to promote worthwhile industries by offsetting the factors causing their infancy. The traditional method for such support is protection which has its own adverse effects, especially if it is indiscriminately resorted to. This report by no means recommends a return to the mindlessly inefficient arbitrary protection, under the import-substituting industrialization regime, that characterized the development of the third world until recently. An alternative is the kind of carefully designed export promotion that the East Asian countries adopted by channelling subsidized credit to successful export performers. The success of this alternative presupposes the autonomy and independence of public administration, banks and financial institutions that by themselves constitute a precondition for industrial inducement.
Foreign investment incentives in the Kyrgyz Republic are also dependent on expanded economic cooperation with the immediate neighbours. Freer trade with the neighbours would expand the size of the market for Kyrgyz products both by increasing sales to them and by more efficient transit to other markets. Also, it would be easier for the region to attract FDI once it forms itself into one market. Within that expanded market Kyrgyz Republic will find it easier to attract FDI in industries in which it has comparative advantage. Unfortunately, this is clear to everybody including the Kyrgyz Republic’s neighbours and is probably a major reason why these neighbours are so reluctant to make progress in the issue of regional cooperation. If the regional market would emerge, investors would indeed choose the Kyrgyz Republic (with its relatively liberal regulations) and not Uzbekistan or Kazakhstan; obviously, this perspective is not attractive for governments of these countries trying to promote their own industries and worrying little about comparative advantages and benefits of trade with such minor partner as the Kyrgyz Republic.
CHAPTER 5: THE REDUCTION OF INEQUALITY
Various forms of inequality exist in every society. Individuals have different abilities, talents and potential to acquire skills and societies are organized along a variety of patterns, all of which include some form of hierarchy. Income inequality, expressed below in terms of Gini coefficients, is only one aspect of inequality, although connected to many others through the purchase of goods and services in a market economy. Other aspects of inequality include levels of access to personal security and justice, health care and education, shelter and care-giving, as well as adequate nutrition, clean water, the means to earn an adequate living, and the ability to participate in the social and cultural life of the community and make a contribution to society. Each society reaches implicit agreements as to acceptable levels of variation in the degree of access to and responsibility for the provision of these goods. While the Soviet-era agreement on these matters no longer applies, Kyrgyz society is still engaged in reaching a new consensus. This chapter examines inequality building on the previous one and linking inequality to poverty reduction both in terms of income poverty and human poverty. It does so in two sections:
• Section A examines the state of inequality in the Kyrgyz Republic in its various dimensions
• Actions to increase the productivity of the poor as an essential element of a pro-equality strategy are examined in section B
• Section C examines the role of fiscal policy in promoting equality in terms of both income and expenditure
A. INEQUALITY IN THE KYRGYZ REPUBLIC
As outlined in the preceding chapters, the economic crisis following independence has reshaped the Kyrgyz economy. It has also reshaped the structure of society, from relatively egalitarian to increasingly unequal. The level of inequality in the Kyrgyz Republic is relatively high, comparable to its neighbours in Central Asia, as well as such developing countries as India or Indonesia. In addition, a recent broad survey comparing transition economies with Western developed and developing economies found that "people in transition countries are indeed significantly more egalitarian …less willing to tolerate existing income inequalities."[30]
High or entrenched levels of inequality can become barriers difficult or impossible for individuals or social groups to overcome, leading them to conclude that efforts to improve their skills or compete would be wasted. High levels of inequality, combined with high levels of poverty, affect the levels of domestic demand, savings and investment and thus the development of the domestic market and sustainable economic growth. Extremely high levels of inequality can become socially dysfunctional, as for example levels of gender discrimination which discourage women from contributing their half of total human potential to society. When inequality is expressed as discrimination and distributed along clear ethnic, confessional or geographic lines, it can become socially destabilizing with the potential of contributing to or resulting in civil conflict.
The previous chapter set out the observation that the level of inequality effects the impact of economic growth on the level of poverty. There is also evidence that countries which are more equal will experience faster economic growth[31]. While there is broad agreement on this relationship, the actual factors behind it are less clear. First political reasons, high inequality may lead to: (a) political instability, more uncertainty, less investment and slower growth (b) populist rather than redistribution taxes, more disincentive effects and slower growth (c) a disproportionate influence of rich/powerful groups who lobby for preferential treatment (for example tax), leading to sub-optimal investment and slower growth. Second the economic reasons, high levels of equality may lead to (a) greater equality of land ownership, leading to more labour input and greater land productivity (b) greater level of human development (nutrition, education and health), greater productivity of the workforce and greater innovation (c) greater access to credit and information and therefore improved opportunities to make productive investments (d) larger domestic markets and greater opportunity to exploit economies of scale.
Disagreement among different data sources is a common problem. In this case, the disagreement as to the magnitude of inequality and its trend is due in part to the measurement selected.[32] Most measurements show some fluctuation, but demonstrate a generally rising trend in Kyrgyz inequality and an extreme increase in inequality since the end of the Soviet period
Table 5.1: Gini coefficients as measured by consumption, expenditure and income
| |1991 |1992 |1993 |1994 |1995 |
|Bishkek |4.8 |2.2 |6.5 |5.7 |15.1 |
|Batken Oblast |- |- |- |- |7.7 |
|Jalal-Abad Oblast |1.3 |9.6 |21.7 |27.0 |12.7 |
|Issyk-Kul Oblast |8.0 |7.0 |6.1 |6.7 |13.2 |
|Naryn Oblast |13.5 |2.8 |5.5 |6.6 |21.2 |
|Osh Oblast |8.4 |6.7 |3.8 |4.7 |3.6 |
|Talas Oblast |34.5 |11.2 |20.2 |21.5 |5.0 |
|Chui Oblast |7.3 |18.4 |29.9 |22.3 |26.6 |
Source: NHDR, Kyrgyz Republic 2001
While the ongoing reform of the health care sector has had a positive impact on the structure of expenditures it has not substantially improved and has in rural areas degraded access to health care facilities for the poor. The move toward concentration services with the closure of lower case-load facilities on economic efficiency grounds also has had the effect of moving services away from rural villages, where distance and the absence of or cost of transportation can constitute an insurmountable barrier. In addition, shift from policlinics to a family doctor system has not gone especially smoothly, in particularly because of the decline in the network of paramedical stations in every village and nurse's offices in every school. Despite the declared intention to maintain this rural entry-level system, a brief field visit to one of the wealthier oblasts produced the information that only 3 out of 4 paramedic stations were still functioning, and those that were still staffed no longer had either medications or medical supplies. Patients now had to travel to the nearest small town to receive routine injections previously been available in the village. School nurses offices were described as bare of any supplies. Child vaccination programs were being carried out by UNICEF, as public funding was no longer available.
Education infrastructure shows the effects of a decade of deferred maintenance. Schools are often unheated in winter, and rural schools frequently do not have access to clean drinking water. The situation of declining enrolments and quality of education are more severe in rural areas.
Despite the introduction of a new salary payment system in 2001, which helped to increase salaries,
as shown in Table 5.4 below, incomes in health, education and culture are the lowest in the public sector. Health care workers receive the lowest average salary of all, well below the 2001 poverty line of 624.5 Som and only slightly above the absolute poverty line. All three sectors have average salaries of less than half of the 2001 Minimum Consumption Budget of 1,316 Som. There is very little incentive for talented students to enter any of these fields and those who do are likely to either seek work in private institutions or in other, better paying sectors after completing their training or to emigrate in search of better opportunities. Unless public salaries in these sectors are increased and class sizes are coordinated with projected demand, the investment in training will be lost, both to the society and to the individuals involved.
Table 5.4: Average Salary by Sectors
| |Average salary |% growth |
| |1999 |2000 |2001 |2002 |1999-2000 |2000-2001 |2001-2002 |
|Education |484 |525.6 |599.3 |644.6 |8.5 |14.0 |7.6 |
|Science |743 |799.3 |1,034.3 |1,034.3 |7.6 |29.4 |- |
|Culture |533 |539.6 |638.5 |638.5 |1.3 |18.3 |- |
|Health |401 |416.3 |455.6 |492.5 |3.9 |9.4 |8.1 |
|Social assistance |698 |730.0 |993.8 |1,186.2 |4.5 |36.1 |19.4 |
|Public management |1,879.2 |1,860.9 |2,389.0 |2,751.5 |-1.0 |28.4 |15.2 |
|Law and order |700.0 |895.5 |1,170.0 |1 500.0 |27.9 |30.7 |28.2 |
|Defence |1,000.0 |1,200.0 |1,600.0 |1 700.0 |20.0 |33.3 |6.3 |
|Others |441.0 |722.3 |957.1 |999.4 |63.8 |32.5 |4.4 |
Source: Ministry of Finance MTBF (2003-05)
As stated in Chapter 2, lack of access adequate nutrition and clean drinking water are problems, which affect a significant portion of the Kyrgyz population. Table 5.5 below illustrates that there is great spatial inequality that will impact on income inequality and growth. It also demonstrates that
objectively for every dimension of human poverty the quality of life of the rural population in Kyrgyz Republic is much worse, in terms of access to basic services and utilities.
Table 5.5: Percentage of households with access to services, 2001
|Service |Total |Urban |Rural |
|Running Water |40.0 |70.4 |16.8 |
|Public Sewerage |39.7 |69.7 |16.8 |
|Flushing Toilet |26.7 |56.3 |4.1 |
|Bathroom/shower |24.8 |51.9 |4.2 |
|Hot water |20.9 |45.2 |2.4 |
|District heating |29.2 |58.4 |7.0 |
|Central gas supply |36.1 |55.3 |21.4 |
|Telephone |28.0 |47.9 |12.8 |
|Electricity interruptions less frequently than once per week |41.9 |62.6 |26.2 |
Source: HBS 2001 (weighted data)
Chapter 3 showed how social expenditures have declined since the start of the transition and also how the (draft) NSPR proposed to increase the level of expenditure to these sectors. While this must be welcomed, efforts are required to ensure that the expenditures are used to address those issues most important to the poor and to ensure that the issue of spatial inequality is addressed so that all people in the country have access to basic social services, not simply those fortunate enough to live in certain regions where access is available.
CHAPTER 6: PRO-POOR ECONOMIC MANAGEMENT
The identification, design and implementation of effective economic policies and interventions will to a large extent depend on the system of economic management and this system must ensure that such economic policies and interventions are explicitly pro-poor. This chapter will deal with issues of economic management, setting economic policy making within the broader context of development planning. It will therefore not look at the policies and interventions themselves, these have been discussed elsewhere in the report. Rather it will focus on the instruments, organizations and institutions that guide economic policy development in the Kyrgyz Republic and look to how these can be made to ensure effective and sustainable poverty reduction over the longer term. The chapter is divided into two sections:
• Section A will overview the current system of development planning and economic management and examine how it includes poverty concerns.
• Section B will examine ways to improve the system of economic governance to ensure the poor have a voice and that policies and interventions remain pro-poor after the current donor effort to support the development of the first NSPR is over.
A. OVERALL DEVELOPMENT PLANNING AND ECONOMIC MANAGEMENT
Since the start of the transition the Kyrgyz Republic has been developing a system of planning and economic management tools and instruments conducive to the effective management of a market economy. A complete set of instruments is being finalized, largely with the assistance of the IMF and World Bank, which offers a comprehensive and holistic system to undertake these tasks. Those instruments inherited or loosely based on the command economy are being eliminated and new ones introduced.
When examining the system of economic management it is essential to look at the development planning tools that will guide it. Two documents, the Comprehensive Development Framework (CDF) and the National Strategy for Poverty Reduction (NSPR) set the overall development-planning framework. These instruments will guide economic planning in the long and medium term respectively. They form the policy framework in which economic management policies are designed. Box 6.1 below summarises the main instruments and indicates how the interact.
In addition to these main instruments it is important to note that other sectoral and thematic programmes also exist, such as the Belim and Manas programmes for educational and health sector reform respectively. Such programmes are often linked to external programme assistance for example the ADB Education Sector Development Programme (ESDP). The government has also received considerable technical and financial assistance in developing these planning tools and in some cases this assistance has led, directly or indirectly, to capacity building of local counterparts.
Box 6.1: Overview of the development Planning and Economic Management Instruments[39]
At the national level the development planning and economic management system that the Kyrgyz Republic is currently developing can be summarized as follows:
• The Comprehensive Development Framework (CDF) provides the overall long-term development vision for the country in 2010 and a strategy to achieve it (2001-2010)
• The National Strategy for Poverty Reduction (NSPR) will be an action plan covering three years of implementation of the CDF (2003-2005) and focussed on poverty reduction.
• The Medium Term Budget Framework (MTBF) will cover the same period of the NSPR (2003-2005) and will be developed within the policy frameworks of both the CDF and NSPR but will also set the financial framework for the NSPR, the PIP and the budget.[40]
• The Annual Budget will be guided by the MTBF and NSPR
• The Public Investment Programme (PIP) will set out the specific capital investment plans guided by the NSPR and CDF within the framework of the MTBF.
THE COMPREHENSIVE DEVELOPMENT FRAMEWORK (CDF)
The CDF is the key instrument to guide the development of the Kyrgyz Republic. Agreement was reached between the World Bank and the Kyrgyz government for a pilot of the CDF approach[41] and work started on its preparation in 1999. Approved in June 2001 it will guide development in the country until the year 2010. The CDF sets out the following national vision[42]:
“The overall goal is the political, social and economic well-being of the people of the Kyrgyz Republic, with freedom, human dignity and equal opportunity for all”
In addition the framework sets out the following three overall national goals together with subsidiary goals that support achievement of the national vision for the Kyrgyz Republic:
Effective and transparent administration of the state: Effective and transparent administration of the State is fundamental to rebuilding the nation. The sub-goals here are the creation of:
1. a democratic, pluralistic and open system of government based upon independent legislative, judicial and executive branches of government;
2. a professional, efficient and accountable civil service at all levels of government; and
3. national and local democratic institutions that are capable of responding to and supporting the social and economic development of the nation.
A fair and secure society: A fair and secure society strives to ensure that all members of society share equitably in the nation’s political, social and economic development. The sub-goals here are:
1. poverty eliminated or at least substantially reduced – this is the priority goal under the CDF in Kyrgyz Republic where poverty has reached crisis proportions;
2. a social safety net that caters to those who are adversely affected by changes in the economic environment as well as for the aged and infirm;
3. health, education and training facilities accessible to all members of society in need of them, including those living and working in rural and remote areas.
Sustainable economic growth and development: Sustainable economic growth and development is a fundamental goal. Without it the State cannot function effectively and society becomes fragmented and unstable. The sub-goals here are:
1. a diversified market oriented economic system based on principles of private enterprise as the engine of growth;
2. effective institutions and systems for macroeconomic management;
3. an effective financial system that is capable of mobilizing the nation’s savings and channelling them efficiently into both public and private investment;
4. all sectors of the economy revitalized and contributing positively to national economic growth and development.
The CDF Secretariat within the Economic Policy Department of the President’s Administration manages the CDF and was also responsible for its development. A CDF Council has been established consisting of the President and Prime Minister of the Republic, the Chairman of Parliament and other governmental and non-governmental representatives. The Council is responsible for “….consolidating the people through active involvement of all strata of society in the implementation of the CDF on participation principles; ensuring transparency of all CDF-related processes following the principles of openness, timeliness, fairness and accessibility; popularising and advocating CDF goals and objectives….”[43] Unlike earlier attempts at preparing a long-term national development plan, the CDF is set within a macro-economic and financial framework although there is a question as to how flexible the framework will be within changing macro-economic environment. In addition, the document does not contain alternative scenarios or an assessment of risks of shocks that could fundamentally change the long-term scenario provided. For example the CDF envisages economic growth at a level of 5-7% per annum but as noted in previous chapters for a number of reasons growth in 2002 is expected to be less than 2%. Obviously it would have a major influence on public expenditure policy and also the likelihood of achieving CDF and NSPR objectives.
There is no explicit statement of the concept of poverty (income or multi-dimensional) used in the document but it can be assumed that a narrow income-based concept is used. Poverty is treated sectorally being one sub-goal of the national goal to achieve a fair and secure society. The reduction of (income) poverty is stated to be the primary goal of the CDF. In some ways the strategy reflects the New Poverty Agenda of the 1990s as set out in the 1990 World Development Report with an emphasis on the three pillars of (a) economic growth, (b) investment in human capital, and (c) strengthening the social safety net. The strategy does include support to the development of good governance, which together with the other three elements may create an enabling environment for poverty reduction. Except for the economic growth issues other sections of the documents are rather declarative. Actual political and social processes currently developing in the republic do not correspond with the statements made.
Broad participation is a key element of the CDF concept as set out by the World Bank together with, among others, government ownership. In an attempt to achieve both these goals the government engaged in a process to build national consensus. The CDF document states that:
“This Vision, and the National Goals that flow from it, have been formulated on the basis of wide-ranging and lengthy consultations with parliament, with all levels of government, with the private sector and with elements of civil society. A national consensus has also been achieved regarding the main directions to be taken up in the CDF approach to national development. This has been achieved over a period of two years beginning in May 1999. The Government has organized and held 5 major national workshops, over 100 round table meetings and numerous other discussions and meetings with a wide range of interests”.
It is difficult to evaluate the extent to which issues identified during the consultative process or civil society comments on draft documents were taken into account. Informants reveal a broad range of responses from everything to nothing. The Kyrgyz Parliament was included in the consultations and the CDF Secretariat has published a participation and partnership resource book outlining the main proposals made and issues identified during the consultation process. The CDF Document also sets out the principles for partnership and participation in implementation of the strategy it contains defining roles for the state, private sector and civil society as well as for international organisations and donors. The CDF Secretariat has made efforts to make the CDF document widely available and has included it on its internet website. Regular newsletters are also produced but it is too early to see if the results of the CDF will be widely disseminated.
The CDF document devotes a section to monitoring and evaluation and includes a table of indicators. Results of monitoring and evaluation using both qualitative and qualitative methods will be published annually. It should be noted that to effectively monitor the implementation and results of the strategy the indicators will need to be improved and relate more directly to the goals, objectives, actions and expected results set out in the CDF document.
A significant problem facing the government is to achieve national acceptance of the CDF by the people of the Kyrgyz Republic in light of numerous other programmes that have been introduced since the start of the transition but have not been implemented successfully or have not sufficiently guided policies and interventions. To be taken seriously by the people the government needs to show that it is using the CDF and that the CDF truly guides the development process and more significantly government policies and strategies over the next ten years. The monitoring process and wide dissemination of this information will support this process. Discussions with local government reveal that there is the intention to develop local CDF plans but how these fit into the overall CDF or how they are financed is unclear. An evaluation of the national poverty programme Araket approved by the Government in 1998 revealed that its main influence at the local level was to mobilise local government and NGOs to address poverty concerns. It may be that the impact of the CDF at the local level will be similar.
THE NATIONAL STRATEGY FOR POVERTY REDUCTION (NSPR)
In 2001 the government prepared an interim NSPR (INSPR) in parallel to the CDF. The INSPR formed the basis for the new three-year IMF programme under the Poverty Reduction and Growth Facility (PRGF) approved by the IMF Executive Board on December 6, 2001. At the time of writing the CDF Secretariat is preparing a draft of the full NSPR. It is due to be completed by end-September 2002 and will be discussed at a Consultative Group meeting in October 2002 before being presented to the Boards of the World Bank and IMF in December.
The NSPR is being designed to implement the first stage (3 years) of the 10-year CDF[44]. It is therefore action plan for the years 2003-05 to guide the government through a set of clear, justified, and consistent set of actions within a timeframe and financial framework aimed at progressing towards the CDF goals. The three pillars of the CDF related to the three goals described above remain the three components of the NSPR. Therefore for each objective of the CDF specific actions will be developed within the NSPR, each with clear responsibility and timeframe.
The major paradox is that, as stated above, the CDF doesn’t explicitly focus on poverty as a goal either in narrow or broad terms and by default neither will the NSPR since it will implement the CDF. It may be that the NSPR could make poverty its explicit goal but it would need to do this by both mainstreaming poverty within all activities and by identifying specific direct interventions. This may in fact be more effective than a separate poverty programme narrowly focussed on a few interventions and policy reforms.
The INSPR was developed by the CDF Secretariat in parallel with the CDF using the same consultative process. The development of the NSPR has to date been less participatory. This may be justified to some extent in that the issues being addressed have already been identified within the CDF. The CDF Secretariat is, however, working with the Association of NGOs to hold a sub-regional workshop to discuss the NSPR and will also organise Oblast level workshops with the inclusion of Community Based Organisations of the poor. With World Bank assistance the CDF Secretariat intends to undertake specific activities to improve accountability and transparency of NSPR implementation. UNDP has supported training in gender mainstreaming for the CDF Secretariat and members of the various working groups.
ECONOMIC MANAGEMENT
Overall economic management is the responsibility of the Ministry of Finance which is presently being restructured with the support of World Bank and IMF. With almost all controlling power over resource mobilization and allocation taken at the central level, the fiscal system of the Kyrgyz Republic is effectively centralised[45] Much of the state administration is allocated to the oblast and raiyon levels but these are elements of decentralisation as these level have little power to mobilize and allocate resources. Where elements of autonomy exist it lies with the governors and akims who are appointed by the central government.
The state budget is prepared on an annual basis and participants in this process are identified in the “On Main Principles of the Budget Law” (1998). At present responsibility for preparation of the budget is split. A Budget Commission consisting of government representatives is responsible for the recurrent budget while the Goscominvest Committee is responsible for implementation of the PIP. It is likely that the two will be replaced by the Economic Policy Council (EPC) in 2003. The EPC was established by Decree №332 on 15 November 2001. Membership of the council is defined by President. The Chairman is the Prime Minister and other members include the Vice Prime Minister on Economy, Investment and Trade (Deputy Chairman); Ministers of Agriculture, Labor and Social Protection, and Finance, and; Chairmen of the following state commissions: State property management and attraction of foreign investment; Entrepreneurship development; Anti-monopoly. The Chairman of NBKR is also included as an observer.
The first step is to develop the basic parameters of the budget using the Annual Indicative Plan for the Social and Economic Development of the Kyrgyz Republic prepared by the Ministry of Finance which includes detailed economic forecasts. The appropriateness of the system with administratively set targets for growth (volume of physical production) and inflation to a market economy has been questioned. A model Medium Term Budget Framework (MTBF) has been prepared by the Ministry of Finance and may replace the Annual Indicative Plan. The MTBF sets out the analytical context within which the budgetary sectoral allocations are made. According to the recently approved MTBF for 2003-2005 (approved by the EPC) the aim of the framework is “to bring a more strategic focus and greater predictability to the budget process by linking budgetary allocations explicitly to government priorities, as set out in the NSPR and the CDF”
In 1998 the IMF adopted a Code of Good Practice on Fiscal Transparency. A recent IMF mission[46] to examine fiscal transparency made the following comments:
• Important steps have been taken to improve fiscal transparency in recent years, but weaknesses remain
• The role and responsibility of the government and between government and the rest of the economy need to be further clarified
• The budget preparation, execution and reporting process needs strengthening
• The coverage and presentation of fiscal information available to the public should be improved
Efforts are being made to ensure greater transparency of the budget process. In 2002 the Ministry of Finance began publication and dissemination of a Quarterly Financial and Economic Bulletin containing key elements of budget implementation. The draft Budget has also been available on the Parliament internet web site since 2000. There are however a number of areas where the budget lacks transparency and that reduce accountability of government organisations in financial management including:
• Extra budgetary funds: Although the Law on the Basic Principles of the Budget (Article 30) prohibits the creation of extra-budgetary funds by government entities with the exception of the Social Fund, the following exist[47]: (a) State Privatization Fund (b) Small and Medium Enterprise Support Fund (c) Fund for Micro-credit
• Special Means accounts: The extra-budgetary revenues of budget organisations (for example fees and cost recovery charged for various social services)[48]. According to MTBF all special means collected from performing by governmental agencies their licensing functions in entrepreneurship shall be regarded as ‘non-tax payments’ and shall be included in full settlement in republican budget. It is planned that starting from 2004 the special means will be in total included in the budget with further financing of the agencies from the budget.
• Quasi-fiscal operations: These can be explicit (for example issues a guarantee or insurance) or implicit (for example where economic agents expect government compensation for something based on previous experience) They are also not reported to parliament nor included in the budget accounts
PUBLIC INVESTMENT PROGRAMME (PIP)
The draft PIP (2001-2003) dated May 2001 is defined by the goals and objectives of the CDF and NSPR and the PIP is seen as one of the main tools for implementing these comprehensive development programmes. The PIP is largely financed by external assistance (approximately 90% in 2001). The PIP external and domestic co-financing is ring-fenced in a development budget outside of the state budget. Only the latest draft of the MTBF puts together the external PIP and government capital expenditures, previously separated, which will facilitate the prioritisation process.
With the technical assistance of the ADB the government started to prioritise the projects within the PIP to determine budget allocations in 2001. There is however no attempt to introduce poverty analysis into the prioritisation decision. Projects are divided into three groups (a) economic (b) social and (c) public administration. Even analysis of economic needs to go beyond rates of return and look at other issues that will impact on poverty especially capturing various externalities such as crowding in private sector investment and creating sustainable employment, especially for the poor. Poor management of the PIP has also led to overlaps between projects with two or more projects sharing similar or the same components.
The first PIP was developed with external assistance (UNDP and TACIS) in 1995 for the period 1996-1998 and since then the process has suffered from a number of drawbacks[49] largely due to the fact that responsibility for the design and implementation of the PIP rested with the Goscominvest agency and was therefore divorced from the Ministry of Finance. For example government counterpart contributions were generally lower than planned and this was combined with significant implementation delays. There is a general need for greater integration into MTBF and annual budget: the PIP grant financed expenditures were not protected lines in the budget nor were the recurrent costs included in the projects. Additional reasons for poor PIP project implementation include: (i) insufficiently clear project objectives and unrealistic project disbursement schedules during project appraisal and preparation; (ii) inadequate prioritization by Government at the project selection stage; and (iii) poor administration and management capacity of executing agencies.
While the PIP may be guided in the future by the NSPR this will at best be in a broad manner and will not be sufficient to prioritise specific actions that will contribute to a complex poverty reduction strategy. At the same time poverty considerations need to be taken into account within the prioritisation process. Because the PIP captures only some internationally funded projects and not all of them, it is difficult to effectively prioritise. This especially true when projects that directly support poverty reduction are excluded for example community development programmes or employment generation programmes. These are just the type of project that will be financed by bilateral and multilateral donors on a grant basis.
PIP monitoring systems have been introduced with the help of the ADB technical assistance but the system relates only to financial aspects of implementation. Responsibility for monitoring the results of the interventions rests with the donors and the respective Project Implementation Units (PIU). The PIP department doesn’t see the results of these interventions or in many cases the outcomes of evaluations undertaken to fulfil the bureaucratic requirements of donor headquarters. It is necessary to complement the standard economic appraisal methods with the estimation of project impact on poverty reduction. The use of distributive analysis should be an important part in this process.
A positive development has been the design by the Ministry of Finance of principles of “equity participation” in projects implemented through the PIP. The Ministry of Finance has already developed the principles of equity participation in projects aimed at rehabilitation of public infrastructure as well as social projects. This initiative represents considerable progress towards the implementation of program budgeting principles and efficient implementation of the NSPR. Equity participation also takes into account the role of local self-governments. This approach will facilitate transparency in the process of financing the social sector. The mechanism of sharing participation has already being implemented in practice for example the Soros-Kyrgyzstan Foundation for support of social and economic initiatives of local communities (e.g. the construction of water supply systems in rural area) as well as the UNDP Project on Preventive Development, both of which contain elements of such a mechanism.
AID COORDINATION
Aid coordination - the integration of external assistance into national programmes, plans and strategies – will be facilitated by the NSPR. The World Bank will develop its Country Assistance Strategy (CAS) around the NSPR and other donors, multilateral and bilateral, have also indicated that it will guide their assistance programmes. The basic framework described above coincides with that recommended in poverty reduction guidelines prepared by the Development Assistance Committee (DAC) of the OECD, the body that represents most bilateral donors[50]. Aid coordination systems, however, are weak and will need to be developed if effective aid coordination is to be achieved. For example, coordination responsibilities are split between a number of different organisations:
• The PIP Department is responsible for investment loans (together with associated technical assistance for preparation of relevant projects)
• The Foreign Relations Department of the MoF is responsible for grant assistance except where aimed at large scale investment
• Budget support is the responsibility of the Structural Policy Department
• The State Debt Department monitors disbursement of loans
The last donor coordination report was prepared over two years ago and there is limited information sharing from these organizations. It is expected that these issues will be addressed in the forthcoming reform of the structure of the Ministry of Finance and ADB will provide support for more effective aid management.
The CDF Secretariat is making efforts to mobilize grant resources within the context of the NSPR. Further efforts will need to be made to ensure that there is overall coherence between the actions included in the document and the financial arrangements as well as to ensure that the activities are fully justified. Coherence between the NSPR and CDF is also important if the NSPR is to implement the first stage of the long-term framework. The government’s strategy is to reduce the credit financed PIP but increase the availability for grants to finance priority investments – this will lead to even greater need for more effective aid management. Overall there is a need for greater effectiveness of external assistance.
B. STRENGTHENING PRO-POOR ECONOMIC POLICY DEVELOPMENT
As noted above, to be effective in significantly reducing poverty, poverty concerns need to be mainstreamed within all government actions to create a pro-poor enabling environment to complement direct poverty reduction interventions. To support more effective pro-poor economic policy making requires interventions on a number of levels. Various donors are supporting the government in developing economic management systems that are more accountable and transparent as well as more efficient in certain dimensions. Recent statements by the Government on the reform of the Ministry of Finance are also a step in this direction. This section will address the issue of making economic management more pro-poor. It will therefore examine a number of crucial issues aimed at:
• Strengthening poverty monitoring and analysis as well as their utilization
• Further strengthening and exploiting of macro-micro linkages
• Facilitating greater participation in economic planning and management
• Developing effective monitoring and evaluation systems for the NSPR
The above are closely linked. For example an effective monitoring and evaluation (M&E) system will include participatory approaches as will poverty monitoring. Participation by people at the micro-level in macro-level economic management also constitutes a micro-micro linkage. But not all poverty analysis or M&E is participatory and not all of it represents a macro-micro linkage. The section will therefore look at each in turn examining linkages but focusing on the question of how to integrate poverty concerns into specific instruments.
STRENGTHENING POVERTY MONITORING AND ANALYSIS
In order for poverty to be effectively mainstreamed in economic management (as well as overall development planning) it is essential that there exists the capacity for effective monitoring and analysis of poverty concerns. Policy makers and programme designers need information on poverty in all its dimensions as well as rigid analysis of this information and mechanisms to translate the analysis into effective interventions and policy reforms. In addition, there is a need for sufficient information to react quickly to economic shocks as they occur. To know about the poor and to be able to learn more about the effect on them from such shocks will support the development of effective polices to address them. All too often the impact of the shock is rapid, although with long-term implications, but policies to address the impact are designed in a vacuum.
Quantitative Surveys
There is already an annual Household Budget Survey (HBS) in place as described in the poverty section of Chapter 2. To its credit, the NSC has been processing the HBS data without too long a lag. There are, however, ways of improving the system of measuring and monitoring poverty. The poverty thresholds need careful differentiation based on regional and locational differences in cost of living and further work should supplement ongoing NSC efforts in this direction. The results of the survey require deep and careful analysis to determine the vulnerability of different social groups and the changing pattern of their vulnerability. Monitoring of the non-income aspects of poverty should be institutionalised and integrated with the HBS. Current data on access of different income groups to health and education suffer from serious inadequacies.
Qualitative Assessments
The household budget surveys form only part of the picture and need to be complemented by qualitative surveys and issue-specific surveys to get a more complete picture of the poor, who they are and why they are poor. This is especially true when considering poverty in its broader dimensions. Participatory poverty assessments are a good example of such qualitative approach and in 1999 the World Bank supported a qualitative poverty monitoring exercise in the Kyrgyz Republic as part of the global Voices of the Poor exercise. A national NGO was contracted to undertake the work in nine sites in the three poorest Oblasts of the country, Naryn, Jalal-Abad and Talas, as well as in the capital city of Bishkek. Assisted by affiliated grassroots NGOs the team of researchers conducted field and focus group interviews with 1,100 people or approximately 1000 people in each community. A synthesis report[51] summarizing the findings from all sites was presented to the government, donors, the academic community and others in mid-1999. The study covered 4 main areas:
• Well-being and trends over time
• Priority problems and concerns
• Institutional analysis
• Changes in gender relations
Donor financing should be sought to undertake a second national participatory assessment in anticipation of the development of the second NSPR for 2006-2008. In addition to such large scale assessments described above, it is essential that smaller often rapid participatory assessments are made to address specific issues. Again these could be combined with more formal surveys and the results triangulated. An example of how such surveys can be used could relate the newly introduced Social Passports to be provided to poor (and non-poor in some areas) as the basis for social assistance means testing. Rapid qualitative assessments could help identify inclusion and exclusion errors where they exist. Participatory approaches such as wealth ranking could be used to verify allocation by administrative means testing means.
The government at both central and local levels will probably not have the capacity to undertake much of the qualitative analysis. There is, however, capacity for undertaking participatory poverty assessment or rapid poverty assessments designed to investigate the impact of specific policies or interventions. For example:
• The VoP indicates that there is national capacity for undertaking participatory assessments, specifically in the networks of participatory facilitators supported by Counterpart Consortium the NGO responsible for undertaking the exercise.
• UNDP community activists undertakes poverty assessments as part of both the Social and Decentralized Governance Programmes
• The independent Centre for Opinion Polls undertakes polling and other qualitative analysis and surveys. It has been contracted by various organizations and has worked in many countries in the CIS.
The government could use this capacity to undertake such assessments, contracting organisations and individuals on a competitive basis. There is probably a need for upgrading of skills and further training in some areas. There is certainly a need to develop an internal network of practitioners – individuals and organizations – to facilitate the process and lead to identification of appropriate methods for undertaking such activities in the Kyrgyz Republic. The networking process is a likely outcome of the increased use of these organizations and could be facilitated through donor support. Development of linkages between such a network and similar institutions and support organizations outside the Kyrgyz Republic should also be facilitated.
Utilization and Analysis
An important issue is the utilization of the information by the various parties responsible for economic as well as overall development planning. It seems utilization by government has been weak with poor dissemination of anything beyond description (so many poor here, so many very poor there) and little understanding among policy makers across all sectors about how the information and analysis can be used. The existing capacity in many sectoral ministries is not sufficient to use such information for formulation of poverty reduction actions and policies.
It is clear that poverty monitoring and analysis initiatives have largely been donor driven with few examples of ownership. The Voices of the Poor is a case in point and was little used by government. This was not helped by the fact that the aim of the study was not to support more effective analysis of poverty so as to develop pro-poor interventions and policies. The National Synthesis Report states “Its purpose is to enable poor people to contribute their experiences with [sic] the World Development Report 2000/01”.
As noted in the section above there is no overall agency responsible for poverty monitoring in both qualitative and quantitative methods. The NSC plays the key role in designing and implementing quantitative methods. There needs to be a technical unit that will support the mainstreaming of poverty concerns, in all their dimensions, into government activities across the board. Part of the existing problem seems to concern not a reluctance to look at poverty-related issues but a lack of capacity and institutional structures to do so.
Recommendations
The main recommendation is to establish a poverty analysis unit that will examine poverty in all its dimensions. Responsibility for designing and undertaking surveys may remain with existing organisations as appropriate. The unit would draw on a number of resources for its poverty analysis and to identify the poverty impact of policies and interventions and would use a variety of instrument including many of those described in the previous section and those outlined below. The unit would service government ministries and agencies in developing policies and interventions that are pro-poor. In addition the unit would undertake Training/awareness-raising among policy makers and other as to how to utilize the information and analysis to examine the poverty impact of their own interventions and policies. Care must be taken to maintain national ownership and donors need to learn from the experience of the World Bank in supporting the HBS. It is difficult to say where the unit should be but experience suggests that it should not be located in a sectoral ministry. The establishment of such a unit should be explicit in the NSPR even if a decision on where to place it has not been made.
ADDITIONAL MACRO-MICRO LINKAGES
Participatory poverty assessments, large and small, represent one example of linking the reality at the micro-level to policy makers at the macro. In addition to surveys and assessments commissioned from the macro-level and linking it to the micro, there need to be mechanisms to give the micro level a voice in policy development and the design of interventions.
Civil engagement
It is important to give civil society organisations a voice in macro-level policy making through civil engagement with policy makers. At the macro level there are consultative arrangements in place for example an NGO forum for discussion of key policy issues with a small number of selected NGOs. It is, however, especially important to give that voice to community based organisations (CBOs) at the micro-level. CBOs exist across the country: Many have been established in response to specific needs of the local community while others have been established to address many local issues within donor projects. The following examples represent the kind of organisations that have been established:
• Under the poverty alleviation component of the UNDP Social Governance Programme, Self Help Groups (SHGs) have been established from among the poor to, inter alia, access micro-credit for productive activities. These SHGs have subsequently joined together with others in the community to form SHG Associations.
• Under the decentralisation component of the UNDP Local Governance Programme, CBOs have been established to support the process of participatory planning at the local level.
The question is therefore how to link these CBOs at the micro-level to the macro level, to give them a voice not only when preparing specific national documents such as the CDF and NSPR but on an ongoing basis. What are the institutional and organisational arrangements necessary for such a process to occur? A recent workshop of national and international United Nations Volunteers (UNVs) identified several possibilities including the following:
• CDF Committees at the Oblast level: CBOs would engage with the Oblast CDF committees which would then link with the CDF Council and CDF Secretariat at the centre.
• Macro-level NGOs: CBOs would link with large regional and central NGOs that can engage directly with government at the macro-level.
To facilitate more effective civil engagement, in particular for the poor, it is essential that social mobilisation processes are continued, expanded and strengthened. Such processes utilised by the UNDP programmes described above need to be implemented with in an appropriate legal framework and a strategy for institutional development of CBOs (including SHGs and SHGs associations) needs to be developed and implemented.
Projects
What is needed is a system that institutionalises linkages between discrete projects (often pilots) at the local level and the policy makers in the centre. The linkages will not just be qualitative (for example insights from participatory approaches to sub-project identification) but also quantitative (for example local information databases. In this regard an important role is played by the projects containing vertically integrated components, for example:
• As noted above the Poverty Alleviation Component of UNDP’s Social Governance Programme has been working with grassroots SHGs since 1998. It has amassed considerable knowledge about the effectiveness of social mobilization and micro-finance activities in the country. In May 2001 it held a National Forum on the Role of Social Mobilization and Micro-finance in Poverty Alleviation in close cooperation with the President’s Administration. This experience has been used in NSPR and MTBF preparation. Namely, a mechanism of matching (stimulating) grants have been developed by the Ministry of Finance, as well as special Law on Microfinance Institutions has been prepared by the National Bank and then adopted by the Parliament.
• The Decentralization component of UNDP’s Decentralized Governance Programme also has over 4 years experience in working with communities and local government in pilot raions in each Oblast. As a result in a number of pilot raions Social-Economic Development Plans (SEDPs) have been developed. These plans included concrete actions and projects on poverty reduction at the local level initiated by CBOs and NGOs.
PARTICIPATION IN MACRO-ECONOMIC POLICY MAKING
The question is how to integrate participation into the economic management tools and into overall macro-economic decision-making. The extent of participation in the key development planning and economic management instruments and processes has been discussed in Section A of this chapter above. It is clear that great efforts have been made to ensure effective participation in the CDF. It is also clear that lessons have been learned that will facilitate even greater and more effective participation in the future. Participation in economic management and development planning at the macro level can take a number of forms. Two have already been examined (a) participation in M&E and (b) Poverty analysis but what other forms could it take? Participation goes beyond consultation processes and need to be institutionalised into mainstream policy making. The development of capacity for poverty monitoring and analysis described above will facilitate this process but what are the institutional reforms that are required to make participation sustainable and ongoing.
A key challenge remains to institutionalise participatory processes with in government. At this stage participation could take a number of forms as set out in Box 6.2 below:
Box 6.2: Participation at the macro-level
• Participation in poverty monitoring and analysis
• Participation in monitoring and evaluation
• Participation in the design and implementation of development planning instruments (CDF and NSPR)
• Participation in the budget process
• Participation in macro-economic policy making
Participation in the budget
For effective participation it is essential to continue efforts with the IMF and others to make economic management systems and processes more transparent. This need to be combined with explanation of key economic management and development planning tools and processes to help people and CSOs understand them, their role and how they are managed as well as how they can participate. Fiscal decentralization will support more effective participation in the budgeting process. However, the issue of redistribution of tax revenues to local budgets should be discussed together with the decentralisation of state social obligations. Donor supported interventions such as UNDP’s decentralized governance programme will facilitate this process and have illustrated that people including the poor can effectively participate in the local development process where resources are available for effective development plans to be developed. This will facilitate greater engagement by civil society in the processes. In addition it is essential to building national capacity to effectively undertake and engage in processes such as public expenditure reviews. This can be facilitated by establishing institutional arrangements for effective civil society-government engagement in the process of economic management.
Additional tools can be introduced to facilitate participation in all stages of the budget cycle and lessons can be learned from innovative practices in other countries where such participation has been successful. The introduction of such instruments need not be immediate as institutional development and capacity building efforts need to be undertaken, but should be included within the timeframe of the NSPR currently being developed. Examples of such instruments include expenditure tracking system and systems for monitoring the quality of service delivery for example through citizen report cards allowing feedback from citizens as to the effectiveness of public expenditures.
The government has indicated to introduce what it calls “stimulating grants” in addition to the equalising and categorical ones that already exist. These grants will be provided to NGOs and Aiyil Okmotus to “stimulate” the development of social and economic infrastructure as well as other priorities identified by the community. They will be matching grants although the precise formula for allocating resources, involving the community in identifying priorities and ration of budget/community contribution have yet to be identified. In addition the government is currently finalising a strategy for decentralisation including fiscal decentralisation. The elements of the strategy will provide an enabling environment for greater participation in the budgeting and overall development planning process at the local level.
The mechanism should give an opportunity to CBOs and local self-governments (LSGs) to participate in local development in a practical manner. Decision-making for the participatory projects should include all levels from LSGs to the Oblast government. There are different sources of project financing that include the budgets of different levels of government, external assistance and off-budget funds (for example sponsor and/or community funds). The mechanisms are being prepared by State Fund for Economic Development which has been selected as the agency responsible for the scheme. It is assumed that considerable emphasis will be placed on monitoring changes in social and economic impact indicators of the projects. The criteria for project selection must be based on social and economic development programs and fall within the actions required by the NSPR.
Participation in the PIP
Donor supported projects may include consultation with civil society in the identification and formulation of investment projects but greater participation needs to be introduced in the PIP prioritisation process. While new government systems to facilitate greater local level participation in the design and implementation of specific local level interventions should be applauded (see equity participation above), public consultation of the PIP as a whole needs to take place within a transparent prioritisation mechanism even though prioritisation is set within the framework of the NSPR. Such participation is especially important for reviewing the aspects of large expensive projects. Up to date the “readiness to pay” as well as other social effects of social infrastructure development have not been analysed while planning the capital investments. At the same time greater participation in the M&E process which needs to go beyond monitoring financial flows to look at the poverty impact of the investments. If public investments are to crowd in private sector investment or provide greater marketing opportunities for rural farmers then such beneficiaries should play a major role in evaluating its success and monitoring progress towards these targets.
ENSURING EFFECTIVE MONITORING AND EVALUATION OF THE NSPR
Poverty monitoring is an important part of the monitoring and evaluation systems for all government instruments. This section will look at the development of effective monitoring and evaluation (M&E) systems for managing the NSPR. M&E is a management tool to ensure effective design and implementation of policies strategies and programmes and action plans as well as ensuring that the information so collected is used to address key issues. IN the context of the NSPR, it is worth looking at the good practices identified by IDA/IMF evaluation of the PRSP Approach[52], specifically:
• Developing the institutions required for improving monitoring and evaluation and reporting on plans and associated assistance requirements in the PRSP;
• analyzing the poverty and social impact of major programs and policy actions;
• setting realistic targets for growth and poverty outcomes, including the MDGs among national goals when relevant, and customizing targets to country circumstances; and
• developing appropriate intermediate indicators to enable timely monitoring of performance and feedback, to complement measurement of poverty outcomes.
Two basic approaches should define the design of the M&E system
Results Oriented: The approach needs to be results oriented. Although results oriented, it is however important not to ignore the inputs and outputs as by doing so will make effective implementation of the instruments very difficult.
A combination of Quantitative and Qualitative Methods: It may not be appropriate to build capacity within government but to ensure that capacity is built within NGOs and Research Organizations that government can contract to undertake the work. From the previous section it is clear that existing capacity exists but it is likely that further support is needed.
In addition, a number of issues need to be examined in considering the design of an effective M&E system for the PRSP.
a) Integration of systems: It is essential to link to the extent possible the various systems of M&E. This will not only be more effective but it will reduce burden on statistics providers and save money on the collection on information (qualitative and quantitative) that may not be collected on a regular basis. For example if the NSPR is to implement the first stage of the CDF then there should be comparability of indicators and of reporting and information management systems. The NSPR goals will indicate progress towards achievement of CDF goals.
b) Introduction of Programme Budgeting: A key element of this new budgeting process is to have effective M&E systems to measure the results of the programmes and provide feedback for policy revision and design of additional interventions as required. These systems should be integrated into the overall NSPR and CDF systems. There is no point in developing parallel systems given the cost of the process.
c) Costs of M&E: The costs of a comprehensive M&E system need to be calculated and budgeted for. Realistically it is necessary to develop a core set of monitoring and evaluation activities within the NSPR together with a secondary set of activities that would be desirable if funds become available.
d) Building M&E capacity: It is essential to build capacity not just for the NSPR but for the other tools as well. Rather than relying on outsiders it is essential to institutionalise training capacity, develop appropriate manuals in Russian and Kyrgyz for government officials and representatives of NGOs. UNDP has been supporting this process with the Tracking Human Development Progress Project with in their Central Governance Programme.
e) Input and Output Monitoring: While focussing on results it is important not to forget to monitor inputs and outputs. This will facilitate effective utilisation of the strategy and also help civil society and donors see if the strategy is actually being utilised.
f) Millennium Development Goals (MDGs) and other commitments: the Kyrgyz Republic signed up to the MDGs and it makes sense therefore if the MDGs are explicitly represented in the CDF and PRSP M&E design.
g) Capturing the multidimensional nature of poverty: Much has been done to improve income poverty monitoring in the Kyrgyz Republic but as noted repeatedly above, other dimensions of poverty still need to be captured. Which dimensions of poverty to be included may depend of the concept of poverty that has been identified for the NSPR. It is suggested that the Human Poverty Index adjusted to the Kyrgyz Republic as described in Chapter 2 is used.
h) Triangulation: It is important to check the validity of the indicators collected. Mainstream government data collection systems may not be perfect often because incentives for officials to report the correct data are not there. Surveys can often be used to validate (or not as the case may be) official data leading to redesign of official systems for data collection. Two examples already described in previous chapters can be repeated here. First, there are strong incentives for school directors to over-report enrolment levels since they will be evaluated on their success in increasing enrolment but actually have little power to do much about it. Surveys have revealed that there are far more out of school children than official statistics suggest. A second example is the use of surveys (MICS and DHS) that have revealed IMR levels three-times the official rate. Triangulation techniques to identify abnormalities need to be used if the data is truly to be useful for policy formulation and the identification of appropriate interventions.
Dissemination and Utilization
In addition to utilization a key issue will be the dissemination the M&E results through a comprehensive system for reporting. As stated above the World Bank will assist the CDF Secretariat with the development and strengthening of dissemination tools for example through the internet and newsletters. M&E results must be disseminated for utilisation of a wide variety of government and non-government organisations involved in the poverty reduction process as well as to ensure transparency. The CDF and PRSP will become more effective as management tools if people take them seriously and this will be facilitated by regular dissemination of information on activities and results.
REFERENCES
Asian Development Bank (2000) Kyrgyzstan Fiscal Decentralisation Study
Asian Development Bank (2001) Asian Development Outlook 2001, Oxford University Press, Oxford, New York.
Aslund, A (2002) The Kyrgyz Republic Needs Higher Growth Through Export Expansion. Report for UNDP Bishkek
Babu, Suresh and Alisher Tashmatov (2000) Food Policy Reforms in Central Asia: Setting the Research Priorities. International Food Policy Research Institute, Washington, D.C.
CASE Kyrgyzstan (Quarterly) Kyrgyz Economic Outlook. Bishkek
EBRD (2001) Transition Report 2001. London
Economist Intelligence Unit, Country Profiles Kyrgyz Republic and Tajikistan, EIU Website at .
Eversmann, E. (1999) School Attendance in the Kyrgyz Republic: Report for UNICEF Bishkek
GoKR (2000). The Kyrgyz Republic: A New Perspective. The Comprehensive Development Framework Strategy 2001 to 2010.
GoKR (2001a) Interim National Strategy for Poverty Reduction 2001-2003
GoKR (2001b) Interim National Strategy for Poverty Reduction 2001-2003 Progress Report
GoKR (2002a) External Finance and the Public Investment Programme. Technical Note for the MTBF 2003-05. Ministry of Finance: Bishkek
GoKR (2002b) Draft NSPR – Economic Section
IMF and IDA (2001) Kyrgyz Republic: National Strategy for Poverty Reduction Preparation Status Report and Joint Staff Assessment. IMF: Washington DC
IMF (2002) Kyrgyz Republic: Report on the Observance of Standards and Codes – Fiscal Transparency Module. IMF: Washington DC
IMF/IDA (2002) Review of the Poverty Reduction Strategy Approach: Main Findings. Washington DC
Khan, A. R. and D. P. Ghai (1979) Collective Agriculture and Rural Development in Soviet Central Asia, Macmillan, London.
Kudabaev, Zarylbeck and Shamsiya Ibragimova (2001) Economic Growth and Poverty in the Kyrgyz Republic, National Statistical Committee, Bishkek (manuscript).
Law and Business (2001) Law and Business, No. 2, April, a journal sponsored by the USAID LIME Project (ARD/Checchi), Bishkek.
McKinley, T. and Shamsia Ibragimova (2000) Recommendations for Strengthening the Human Development Aspects of the National Poverty Reduction Strategy. Report for UNDP Bishkek
Milanovic, Branko (1998) Income, Inequality, and Poverty during the Transition to a Market Economy, World Bank, Washington, D.C.
Ministry of Finance (Quarterly) Financial and Economic Bulletin
Mudahar, M.S. (1998) Kyrgyz Republic: Strategy for Rural Growth and Poverty Alleviation. Discussion Paper No. 394, World Bank: Washington DC
NBKR (Monthly) Bulletin of the National Bank of the Kyrgyz Republic
NBKR (Quarterly) Balance of Payments of the Kyrgyz Republic
OECD (2001) The DAC Guidelines: Poverty Reduction. Development Assistance Committee, OECD: Paris
Oxfam (1997) Growth with Equity: An Agenda for Poverty Reduction. Oxford
Suhrcke, M. (2001) Preferences for Inequality: East vs. West. Innocenti Working Paper No. 89, October 2001, Florence
UNDP (1993) Human Development Report 1993. Oxford University Press, New York.
UNDP (1994) Human Development Report 1994. Oxford University Press, New York.
UNDP (1997) Human Development Report 1997. Oxford University Press, New York.
UNDP (1999a) UNDP Regional Bureau for Europe and CIS, Central Asia 2010, Prospects for Human Development.
UNDP (1999b) Kyrgyz Republic: Assessment of the National Anti-poverty Programme. Background Paper for UNDP NY
UNDP (1999c) Participatory Poverty Alleviation Programme Phase II: Participatory Action Research and Monitoring System. UNDP Bishkek
UNDP (2000) Evaluation report of the Participatory Poverty Alleviation Programme. Report for UNDP Bishkek
UNDP (2001a) Kyrgyzstan: National Human Development Report. UNDP: Bishkek
UNDP (2001b). Poverty Alleviation and Issues of Governance Improvement. Report for UNDP Bishkek
UNDP (2001c) Political and Administrative Local Governance Programme - Decentralisation Component: Annual Report 2001 UNDP Bishkek
UNDP (2001d) Political and Administrative Local Governance Programme - Preventative Development Component: Annual Report 2001 UNDP Bishkek
UNDP (2001e) Human Development Report 2001, Oxford University Press, New York.
United Nations (2001) Kyrgyzstan Common Country Assessment. Institute for Regional Studies in cooperation with the National Statistics Committee: Bishkek
World Bank (2000a) Kyrgyz Republic: Agriculture and Agribusiness: growth Opportunities and Obstacles, June 30.
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World Bank (2001a). Kyrgyz Republic: Country Assistance Evaluation. Washington DC
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World Bank (2001c) Kyrgyz Republic: Fiscal Sustainability Study. Country Study, World Bank: Washington DC
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[1] This is a simplified system of progress in transition developed by the EBRD. Pluses and minuses have been added to the original 1-4 scale to indicate countries on the borderline between two categories.
[2] For 1996 the cost of the food basket was 2177 Som (approximately $ 170). To this was added an amount for minimum non-food expenditure in a way that the latter was 39.8 per cent of the poverty line. For all subsequent years, the cost of the food basket was adjusted upwards by the rise in the cost of food and an allowance was made of non-food expenditure of the same proportion of total expenditure. See Z. Kudabaev and S. Ibragimova, 2001.
[3] Poverty line of the food basket only
[4] These are substantially based on World Bank, 2001b and unpublished analysis of more recent HBS.
[5] These regional estimates are also from NSC sources.
[6] UNDP Human Development Report 1997
[7] Eversmann, E. (1999) School Attendance in the Kyrgyz Republic: Report for UNICEF Bishkek
[8] Demographic Health Survey and UNICEF Multi-Indicator Cluster Survey
[9] The introduction of a mandatory medical insurance scheme is intended to increase access to medical services. About 83.7% of the population had been enrolled by 2002. The system is designed to provide for socially vulnerable groups including pensioners, the registered unemployed, children under 16 and recipients of the hardship allowance. Medical insurance for children under 16 and people receiving hardship allowances is financed from the republic budget at 72.9% and 34.4% respectively. Another problem is the systematic arrears of the Social Fund, which collects the contributions, to the Fund for Compulsory Medical Insurance.
[10] Includes water from rivers, springs and other natural sources for drinking and cooking.
[11] Voices of the Poor
[12] UN System in the Kyrgyz Republic Common Country Assessment (CCA)
[13] The basic recommendations were originally made in McKinley and Ibragimova (2000)
[14] World Bank (2001c) Kyrgyz Republic: Fiscal Sustainability Study. Country Study, World Bank: Washington DC
[15] Excluding Kumtor
[16] This item includes social benefits, pensions to military and police servicemen, social safety net expenditures, subsidies to the Social Fund.
[17] From the draft of the macroeconomic section of the NSPR distributed September 1 2002
[18] This perception seems to be critically important in a number of areas; inflation expectations, risk premium level and tax compliance are just few examples of macro phenomena depending on it.
[19] World Bank (2001) Measuring Economic Downside Risk and Severity. Working Paper 2674, World Bank : Washington DC
[20] GoKR (2001) Interim National Strategy for Poverty Reduction Progress Report (Nov 1 2001) p4
[21] See World Bank, 2000a. Kyrgyz Republic: Agriculture and Agribusiness: growth Opportunities and Obstacles
.
[22] See the article by T. Omuraliev, Minister for Local Government and Regional Development, in Law and Business, 2001.
[23] United Nations, 2001, p.34.
[24] Ibid. p. 29.
[25] This is according to the NSC data. It is well known that these data are often criticized for failing to capture the “discouraged” workers who stop seeking employment due to a perceived low probability of finding one. Broader estimates of unemployment, based on the Kyrgyz Poverty Monitoring Surveys of 1996 to 1998, indeed show a higher level of unemployment if discouraged workers, as well as all those who are unemployed according to strict ILO definition, are taken into account. But once again there is no rising trend over the limited period of sluggish growth for which these estimates are available. Indeed broad unemployment, thus defined, fell between 1996 and 1998.
[26] Although this can partly be explained by the change in definition of employed to include those with land. Sectoral employments shifts cited in this sub-section are from NSC sources. .
[27] It is useful to note that the change in the Gini index does not necessarily capture the effect of the change in the distribution of income/expenditure on the poor. An improvement in distribution at the lower end can be offset by an equivalent deterioration in distribution at the upper end with no change in the Gini index. This, however, improves the welfare of the poor and reduces poverty.
[28] NSC makes estimates of GNP (called Gross National Income and defined as GDP less net factor income on property paid abroad) at current price only. The conclusion is based on estimates of real GNP obtained by deflating the current price estimates by the GDP deflator.
[29] In other words, the elasticity of household income with respect to GNP is less than one. This is a widely-observed phenomenon in developing countries and is also generally the case in Kyrgyz Republic (see the year-by-year analysis of poverty above).
[30] Suhrcke, M. (2001) Preferences for Inequality: East vs. West. Innocenti Working Paper No. 89, October 2001, Florence.
[31] Oxfam (1997) Growth with Equity: An Agenda for Poverty Reduction
[32] The level of expenditures tends to be less unequal than measures of earnings or income, as higher earners are likely to save a portion of their earnings.
[33] For example, A decline of nearly 50% in the number of extremely poor households in Jalal-Abad oblast between 1999 and 2000, while the number of malnourished children aged 1- 6 rose is implausible, especially compared with a doubling of extremely poor households in Issyk-Kul oblast, while the number of malnourished children 1-6 declined slightly. In the same two years, lack of access to medical services in Naryn oblast nearly tripled, while in Talas oblast it fell by from 21.5% to 5%. An obvious cause is that the 2000 data is preliminary, but nonetheless, highly inconsistent as to trend.
[34] Bishkek Observer of July 16, 2002 reports the sale of 870 hectares recorded with land registration authority. The average price of land, almost all of which was farm land, was only 6,200 Soms per hectare or just $ 129. This indicates the strong possibility of substantial distress sale.
[35] At the first sight, the latter is more correct as the government policies with respect to agriculture seem to be either neutral, or favorable (for example, disproportionally low taxes on agricultural enterprises in comparison with industrial or trade ones).
[36] Women and Men in the Kyrgyz Republic. National Statistical Committee and UNDP: Bishkek, 2001, p.8.
[37] This may be because the pensioners are people with skills who continue to work and are able to benefit from past contact with institutions and individuals
[38] Including poor as one has a right to register for VAT voluntarily even having income below the threshold.
[39] The list could include the Sustainable Human Development Strategy (1998-2015) approved in 1997 but although still in effect and acting as a declaration of intent, it is little used in practice and seems to have been superseded by the CDF.
[40] It is likely that the MTBF will replace another economic management tool, the Annual Indicative Plan
[41] The World Bank is currently undertaking an evaluation of the pilot CDF countries
[42] GoKR (2001) The Kyrgyz Republic: A New Perspective. The Comprehensive Development Framework Strategy 2001 to 2010
[43] GoKR (2001) The Kyrgyz Republic: A New Perspective. The Comprehensive Development Framework Strategy 2001 to 2010
[44] Although the NSPR is to implement the first stage of the CDF it is unclear how the CDF was implemented in 2001 and 2002
[45] ADB (2000) Fiscal Decentralization Study
[46] IMF (2002) Kyrgyz Republic: Report on the Observance of Standards and Codes – Fiscal Transparency Module. IMF: Washington DC
[47] IMF (2002) Kyrgyz Republic: Report on the observances of Standards and Codes – Fiscal Transparency Module. IMF: Washington DC
[48] Some of these special means are theoretically included in the budget although the generating organizations have considerable discretion in how to spend the resources
[49] GoKR (2002) External Finance and the Public Investment Programme. Technical Note for the MTBF 2003-05. Ministry of Finance: Bishkek
[50] OECD (2001) The DAC Guidelines: Poverty Reduction. Development Assistance Committee, OECD: Paris
[51] World Bank and Counterpart Consortium (1999) Consultations with the Poor – Participatory Poverty Assessment in the Kyrgyz Republic: National Synthesis Report
[52] IMF/IDA (2002) Review of the Poverty Reduction Strategy Approach: Main Findings. Washington DC
!B@: 57
These data are the latest data frot in the Kyrgyz Republic: National Synthesis Report
[53] IMF/IDA (2002) Review of the Poverty Reduction Strategy Approach: Main Findings. Washington DC
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