The costs of transition in Central Asia

The costs of transition in Central Asia

SHORT PAPERS The Costs of Transition in Central Asia D A V I D J A Y G R E E N and A R M I N B A U E R This article discusses the experience of the ...

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The Costs of Transition in Central Asia D A V I D J A Y G R E E N and A R M I N B A U E R

This article discusses the experience of the Central Asian countries of Kazakstan and the Kyrgyz Republic since independence in 1990, providing a picture of the enormous social and economic costs resulting from the change in regimes. The breakdown of the central planning system of the former Soviet Union (FSU) occasioneda severe economic depression, personal income has fallen sharply, and unemployment and severe poverty have emerged as serious problems. The attendant public sector fiscal crisis has weakened the provision of social services and social support, increasing the pressure on the family and societal networks.



The breakdown of the former Soviet Union (FSU) had a particularly severe impact on the economies of Central Asia. For Kazakstan and the Kyrgyz Republic a five-year depression developed in which personal income fell sharply, unemployment emerged as a serious problem and the incidence of poverty increased.l The attendant public sector fiscal crisis has weakened the provision of social services and social support, increasing the pressure on the family and societal networks. The modest growth developing since 1995 is narrowly based and offers scant promise of a quick reduction in the costs of transition. Independence has also brought self-determination and a measure of political and economic freedom. However, because of the severe depression, the increased occupational and consumer freedom cannot fully be appreciated by most people. The reform process, to date, has failed to provide satisfactory living standards and there is a high risk of a loss of popular support for reform. In some respects it is only the patent fact David Jay Green * Senior Economist, Asian Development Bank, 6 ADB Avenue, Manila 0401, Philippines. E-mail: [email protected]. Attain Bauer • Economist (Social Sector), Programs Department (East), Asian Development Bank. E-mail: [email protected].

Journal of Asian Economics, Vol. 9, No. 2, 1998, pp. 345-364. ISSN: 1049-0078


Copyright © 1998 by JAI Press Inc. All ri~,hts of reproduction in an), form reserved.



that the Soviet Union cannot be put back together that leads to a resigned support for the existing Governments and their policies. The burden of the systemic breakdown and the difficult transition towards market-based institutions have affected nearly everyone. However, some groups of people, often women and children, proved particularly vulnerable to the changes. Specifically: • elderly women and women with many children have lost much of the support previously provided through an extensive social protection network; • children face faltering education and health systems and declining investment in child welfare and social protection measures; and • people living in certain localities such as company towns, in which economic activity was over-extended under Soviet central planning, face severely limited economic options.



INDEPENDENCE AND THE TRANSITION TO A MARKET-BASED ECONOMY The Structure of Pre-independence Economies of Central Asia

1. Production was Determined by Central Planning Before independence, the pattern of economic activity in the Central Asian Republics was the result of decisions taken in Moscow. The decisions flowed from central planning and political considerations that placed a high priority on maintaining the Council for Mutual Economic Assistance (CMEA) as an autarchic economic unit, isolated from the broader international community. The location of economic activities, the nature and scope of capital investment, labor staffing, and implicit resource prices, service costs, and resource usage were taken without regard to economic efficiency as determined by world market prices or a sustainable use of the environment. 2. Production was Highly Capital Intensive The resulting economies were characterized by highly capital intensive production processes (Campbell, 1991, especially pp. 51-60 and 127-129), This was particularly evident in agriculture (Green & Vokes, 1997). The structure of the sector developed from the often brutal collectivization of nomadic Kyrgyz and Kazak families in the 1920s and 1930s. Production was organized on the basis ofsovkhozes (state farms) or kolkhozes (collective farms). Farms were often extremely large; farms in Kazakstan averaged 35,000 to 40,000 hectares. Considerable capital investment was made in a wide variety of infrastructure including rural roads, large-scale farm machinery, and irrigation facilities, primarily to promote intensive crop production in addition to the traditional livestock raising. 3. Production was Inefficient by International Standards Symptomatic of Soviet central planning, much of this capital was inefficiently invested or maintained

Transition Costs in Central Asia


(Brooks et al., 1991, p. 152). Inefficiency was also noted in the use of labor inputs. One estimate puts the over-staffing in state and collective farms in the Kyrgyz Republic at 50 percent (ADB, 1995c, p. 2). 4. The Central Asian Economies were Thoroughly Integrated into the Economy of the FSU The Central Asian economies were tied to FSU markets for output and input suppliers. Zhukov suggests that before independence 46 percent of the industry in Kazakstan and 33 percent of industry in the Kyrgyz Republic were thoroughly dependent upon the extended centrally planned economy) The Central Asian states were highly dependent upon trade with the rest of FSU. Imports plus exports in 1990 in Kazakstan represented 57 percent of total output. 3 In 1991, trade between Kazakstan and the CIS countries represented 87 percent of the country's total trade, with much of the remainder to ex-CMEA states (World Bank, 1993, p. 197). FSU trade was particularly important for Kazakstan where much of the industry had been developed as part of the Soviet military-industrial complex. The company towns in Kazakstan, 40 to 60 isolated urban areas developed around large integrated industrial activities such as mineral processing and tightly bound to FSU distribution systems, were an extreme example. In company towns, one or two large enterprises provided nearly all employment in the area plus a wide range of social infrastructure, including schools, health facilities, and urban utilities. 5. The System was Protected from Broader International Markets Relative to international markets, the prices used by the central planning system implicitly provided a low value to natural resources, most services including transportation, and to capital. This can be seen in the pattern of inflation that followed independence. Producer prices, heavily influenced by natural resource and raw materials inputs, rose much faster than consumer prices, dominated by agriculture produce and slow-adjusting public services. In the Kyrgyz Republic, between 1990 and 1995, data from the International Monetary Fund imply that producer prices rose 5.2 times as fast as consumer prices, with most of the relative difference manifesting itself after independence in 1991 and 1992 (IMF, 1996, Table 9, p. 37). The price changes have revealed international comparative advantage for the region in raw materials and agriculture produce and a lack of comparative advantage for most industries. 6. The Central Asian Republics were Heavily Subsidized by the FSU Central Government The economic system in Central Asia depended upon large subsidies or transfers from the central government of the FSU. These transfers had amounted to an average 9.5 percent of local gross domestic product (GDP) in 1989-1990. 4 The funds provided for the large social sector spending that was characteristic of the Soviet system and, in Central Asia, provided for a balance on the regional trade as imports were larger than exports. Social sector spending (health, education, social protection, excluding social security) in Kazakstan represented on the order of 38 percent of total public spending in 1990 (World Bank (1992), Table 4.1, p. 182). The trade imbalance



in 1991 for Kazakstan was estimated to be 10.6 percent of GNP (World Bank, 1993, Table 3.1, p. 197).

7. The System Depended upon an Unsustainable Use of the Environment Under Soviet-style central planning, little regard was held for the environment, other than as a resource base to be exploited. The region has extensively developed mining, chemical, metallurgical, and coal industries utilizing relatively low levels of technology by international standards. The situation is particularly worrisome in some industrial centers, especially Kazakstan's company towns, where pollutants in water, soil and air routinely exceed maximum standards and are the source of many serious health problems. Agriculture practices have also taken a toll on the environment. In Central Asia widespread and inappropriate soil and water conservation techniques and improper use of fertilizers and other chemical inputs resulted in severe ecological damage to the soil and water resources. Poorly conceived and executed irrigation and land use practices have resulted in extensive soil degradation. Especially in Kazakstan, topsoil loss has been considerable and in many cases erosion may be irreversible. The environmental impact of this industrialization is particularly obvious in Kazakstan which suffers from a number of what can only be called ecological disasters. The Aral Sea is the most obvious example of the poor state of Soviet environmental practices. One of the world' s largest inland water bodies, the level of the surface areas of the sea fell 14 to 15 meters with the post-World War II development of the region. This resulted in much of the land areas surrounding the sea becoming a desert (Levintanus, 1992, p. 60; and Glantz et al., 1994, p. 170, figure 10.3). The ecological disaster was largely a product of the diversion of water for irrigation purposes directed towards increasing the cultivation of cotton and rice. The shrinkage in the lake has resulted in sharply reduced livelihood opportunities and serious public health problems. The fishing industry has collapsed. The exposed dry-sea bed releases salts into the atmosphere and surrounding water tables. The high levels of air and water pollution, aggravating the impact of depressed income, have been identified as contributing to an elevated regional incidence of health problems. Infant mortality figures in the Aral Sea region, for example, are nearly 32 percent higher than the average for the country (ADB, 1996a, Table 2, Appendix 4, p. 4). B. Relative to Personal and Regional Income, Living Standards Were High Prior to the disintegration of the FSU, Kazakstan and the Kyrgyz Republic were among the poorer Republics within the FSU. The World Bank estimates that in 1990, per capita GDP in the Kyrgyz Republic was 44.8 percent of per capita GDP for the Russian Federation and for Kazakstan the comparable figure was 64.1 percent (World Bank, 1992, pp. 4-5). Moreover the well-known lack of quality and choice among consumer goods in the FSU exacerbated the low formal standard of living for most people. The service sector was particularly ill-developed and offered little freedom of

Transition Costs in Central Asia


choice for consumers. Esentugelov (1996, p. 199), for example, suggests that the service sector in 1991 in Kazakstan accounted for only 8 percent of the economy.5 In spite of relative poverty, the countries in the region nevertheless achieved a comparatively high standard of human development. Indicators such as life expectancy and age-specific mortality rates were relatively good given per capita income. Universal literacy had nearly been achieved and enrollment ratios at all levels of education were high. The systems for the provision of social services were generally inefficient in the use of resources and of uneven quality and were clearly faltering as the economy of the FSU weakened in the 1980s. 6These systems were, however, relatively accessible to all. A complex system of social infrastructure provided utility services at highly subsidized prices. People living in urban centers were provided district heating, electricity, housing, water and sanitation for purely nominal charges. In Kazakstan, in 1985, more than 87 percent of all urban dwellings had access to potable water, district heating, and sanitary facilities (Goskomstat, 1995). In rural and remote areas, the transport of goods, including food, was highly subsidized. The harsher aspects of low income were further masked by an extensive system of social support and social assistance. Although formally comprehensive, the administrative inefficiencies and the lack of essential targeting did leave serious weaknesses in the social safety net. 7 Much of this assistance was provided to pensioners who accounted for 18 percent of the population of Kazakstan in 1991 (World Bank, 1993, p. 94). An average retirement age of 55-58 years for men and 50-53 years for women encouraged a relatively large group of economically inactive people. In 1990 of the total population of Kazakstan only 45.3 percent represented people available to work (ADB 1996a, p. 59). Under the Soviet system, direct social assistance support was provided through a variety of mechanisms, often as a matter of entitlement (i.e., because of the number of children in a family) and not as a matter of targeted need. As a result of generous entitlement provisions, even by 1995, 1.6 million people or 11 percent of the population, were receiving some form of social assistance in Kazakstan (ADB 1996a, p. 68).

IlL THE BREAKDOWN OF THE FORMER COMMAND SYSTEM NECESSITATED THE DEVELOPMENT OF NEW INSTITUTIONS The break-up of the FSU came suddenly with little or no warning for the newly independent states. Within a short period of time the Central Asian Republics found themselves in need of the full panoply of political and administrative institutions necessary for a modem state. Previously all decisions of any importance had been taken in Moscow and government institutions existing in the region were basically branch offices. Administrative institutions such as the central bank, sector ministries, regulatory agencies, and a court system needed to be created out of existing Soviet agencies and personnel. In theory by the mid-1990s much of the needed institutional structure



has been put in place, however, the new institutions lack trained personnel and adequate budgets. A clear sign of the institutional lacunae in the newly independent Republics was the hyperinflation that arose in 1992 and 1993. In 1992 and 1993, inflation in the Kyrgyz Republic was in excess of 1,000 percent; in Kazakstan similar hyperinflation was present between 1992 and 1994 (ADB 1995a, Table 4, p. 9 and ADB 1995b, Table 3, p. 10). This debilitating inflation was only successfully attacked with the development of the institutional tools of monetary policy. With the establishment of independent central banks and national currencies, the development of credit control mechanisms, and the liberalization of prices for most goods and services; inflation began to moderate. By the end of 1997, inflation was a relatively modest 20 percent in Kazakstan and 25 percent in the Kyrgyz Republic. Politically, the two Central Asian countries have developed legislative and executive structures providing for democratically selected, representative government. Each country has held elections that were regarded by international observers as reasonably free of overtly coercive practices. In actuality both countries have developed strong one-party or one-person states in which the President faces little organized domestic opposition to programs and policies.



A. Personal Income has Declined Sharply and Unemployment has Emerged 1. Independence Brought a Breakdown in Trade and Economic Depression In Kazakstan and the Kyrgyz Republic, independence and the collapse of the central planning system brought the loss of markets and the breakdown of payments mechanisms. The decline in interrepublican and international trade in Kazakstan between 1990 and 1992 was more than 50 percent, and in the Kyrgyz Republic was approximately 90 percent) There are reasons for believing that the official statistics on the decline in trade are over-estimates, however, it is clear that trade declined sharply. The collapse in trade aggravated the decline in aggregate demand resulting from the end to subsidies from the central budget of the FSU. As a result, in both counties, recorded GDP fell by more than one-half in the period 1990-1995 (Figure 1). The output contraction was present in nearly all sectors; however, industry and construction experienced particular difficulties. In both countries, between 1990 and 1995, industrial output declined roughly 70 percent. 9 Construction fell-off as capital investment activities sharply diminished. Capital investment by the public sector in these two countries declined from between 5-7 percent of GDP before independence to probably well under 2 percent in 1995 (ADB 1995a, p. 12 and ADB 1995b, pp. 12-13). Given the decline in real GDP there are almost no real resources being used for capital investment. Recovery has only begun in 1996 and especially in Kazakstan is concentrated heavily in a few export-oriented


Transition Costs in Central Asia Annual change GDP (percent) 10




-25 1991






(consl'~nt1993p~c~i -E--K~'~rZRepublic(constant1990som)[ F I G U R E 1.

Contraction of Output in Central Asia

sectors such as oil, gas, and some minerals. 10The liberalization of the economies has revealed much of the productive capacity as incapable of survival without significant new investment and an infusion of new technology and managerial skill. 2. Unemploymenthas Emerged The economic decline and industrial restructuring have resulted in a dramatic increase in unemployment, from negligible levels before independence to include significant proportions of the labor force. By the end of 1997, in Kazakstan, about 18 percent of the economically active population were considered unemployed, in the Kyrgyz Republic 25 percent of the labor force was considered to lack full-time work.11 These estimates include official or open unemployment as well as hidden unemployment, with the latter accounting for more than two-thirds of the total. The hidden unemployed are people on uncompensated, forced leave or working without choice in part-time arrangements. Companies are reluctant to terminate employees, partly to avoid mandatory severance payments. In addition, there are political pressures on firms to avoid mass labor shedding. The large semi-privatized enterprises are particularly sensitive to this sort of pressure. Individuals accept this situation partly because



unemployment still carries a social stigma developed under the Soviet regime. In addition, while on leave, these individuals and their families can often continue to access some of the social benefits traditionally provided by enterprises. Government unemployment compensation appears to be too little, paid only after a relatively lengthy waiting period, and too uncertain to encourage people to formally register their unemployment. The restructuring of large enterprises, in the course of privatization exercises, will probably cause more open unemployment. As the budgets facing firms harden and competitive forces grow, labor retrenchment becomes inevitable. In the coming years, major layoffs can be expected in (i) the large-scale industries currently being privatized, (ii) the social sectors now moving to local government control, and (iii) public administration. The large-scale heavy industries in Kazakstan's company towns face particularly bleak futures. In these towns, 80-100 percent of the workers depend on one company and unemployment can reach "menacing levels" (UNDP, Kazakstan HDR, 1996, p. 17). Women accounted for nearly one-half of the labor force in the FSU and, in the initial phases of the transition, have fared poorly. Protection against formal gender discrimination in the labor market was a major FSU achievement. In support of employment for women, the State also provided substantial support for the family through public assistance and social services. Women were found working in all sectors, but especially in the social sectors and public administration. As a result, especially in the initial years after independence, unemployment had a pronounced gender-bias. Women working in social sector positions were the first to be unemployed as firms struggled to survive in the new environment of reduced public subsidies and protection. In 1991, in the Kyrgyz Republic, women accounted for 82 percent of the registered unemployed. As the economy deteriorated, labor retrenchment has occurred in production sectors and in management. With more males becoming unemployed, the extreme gender bias has diminished. In the Kyrgyz Republic, by 1996, the proportion of women in the ranks of the unemployed declined to 52.1 percent. The gender bias in unemployment is falling-off with higher unemployment rates for men, not because of a general improvement in the labor market. Due to the pattern of labor market participation and skills, women are forming a core group of the long-term unemployed. 3. Income Fell as a Result of a Drop in Real Wages and the Delay in Payments Reflecting the deterioration in labor market conditions and the severe inflation, real wages and income have declined substantially since independence. In Kazakstan, over the five years 1990-1995, the index of real wages fell by 53 percent. By the end of 1995, the average monthly wage in the formal sector in the Kyrgyz Republic was Som 434 ($40), which was more than one-third below the cost of the minimum consumption basket. Moreover, the formal salary structure does not accurately represent the actual income. Often, salaries and related allowances are paid several months late. In mid-1995, outstanding wage payments in the Kyrgyz Republic

Transition Costs in Central Asia


amounted to Som 325 million ($30 million), approximately one-half of the monthly wage bill for the whole economy. The hyperinflation experienced in 1992 and 1993 seriously eroded the real value of wages that were paid even a few weeks in arrears. A striking development in labor markets has been the growing inequality of income as market-oriented relations displace the older order established under central planning. Under the FSU system, wages were roughly equal across occupations and relatively low cash wages were off-set by the provision of many benefits including services at highly subsidized rates. As many of the non-cash benefits disappear, the wage structure becomes more important in determining living standards.12 Reflecting the prevalence of women in occupations and sectors characterized by relatively low compensation (such as social sectors), women's wages are generally lower than men's. B.

The Social Costs Have Been Enormous

Under the Soviet system a comprehensive social safety net provided both social insurance and social protection. Although the system was poorly targeted, social insurance was provided generally for the elderly, the unemployed, those unable to work, and people who fell ill. Social protection was designed for those who fell through the safety net provided for most people by enterprise employers, especially the rural poor, children, and mothers. Increasingly, this complex system provided less and less actual assistance in the evolving post-independence conditions. The social safety net is being destroyed by the fiscal crises, hyperinflation, and restructuring of enterprises. Because of the severe economic and fiscal crises, the provision of social services has also deteriorated. The faltering provision of social services such as health and education implies a smaller investment in human resources for the current generation of children. The impact of these changes has been aggravated by the deterioration in the complex social infrastructure system that provided services such as heating, sanitation, transportation, and water. 1. The Social Safety Net has Failed to Provide Adequate Protection Social insurance in Kazakstan and the Kyrgyz Republic provides payments through quasi-independent funds supported by wage-taxes. For example, in the Kyrgyz Republic, in mid- 1996, social insurance functioned through four principal venues; the Pension Fund (for old age insurance), the Employment Fund (providing unemployment benefits), social insurance endowments (disability benefits and income supplements in the case of sickness), and a newly created Medical Insurance Fund (for medical treatment). Throughout much of the period since independence, in the aggregate, the social insurance funds have been underfinanced relative to their obligations. 13 Weak economic conditions, resulting in massive, continuing losses for farmers and enterprises have resulted in poor revenue collections by the various funds. In the Kyrgyz Republic, for example, accumulated debts of the social insurance endowments rose from Som 170 million ($13 million) in 1994 to an estimated Som 448 million ($36 million) at the end of 1995. Underfunding has resulted in lowered payments as benefit schedules have



been kept from rising as fast as the general price level. Moreover, payments are often paid only months in arrears, which further reduces the value of the assistance to the beneficiaries especially during the hyperinflationary period.14 Supplementing social insurance programs, social assistance transfers and allowances were provided as entitlements under the Soviet system. These transfers are the major source of income assistance to the poor. In mid-1995 in the Kyrgyz Republic, social welfare benefits were given to approximately one-quarter of the population or 1.2 million persons. Approximately 95 percent of the payments were to children covering especially orphans and children in poor families. The average monthly benefit was a scant Som 34 (less than $3). Moreover, benefits were often not paid due to the lack of funds. A major problem with the social assistance program is that payments were often not well targeted to the poor and inequitably distributed by region. The Kyrgyz system, with World Bank support, underwent major reforms in the beginning of 1996. Most importantly the total number of people entitled to benefits is expected to be reduced by an estimated 35 percent to approximately 800,000 by the end of 1996. Over time, better targeting will improve the assistance to the truly needy but the program will continue to be hampered by limited public funds for retraining and restructuring. 2. The Health System has Faltered Under the FSU, a comprehensive and well-established integrated health care system was developed. The country's free primary health care system provided comprehensive access, good coverage and frequent surveillance. Good general health came from effective programs of immunization, prenatal care, and health and nutritional monitoring. The weaknesses in the health system included (i) overspecialization and a lack of attention to preventive health measures, (ii) overly rigid central planning and administration, (iii) a lack of cost recovery, and (iv) inefficient use of inputs.15 The inefficiency was particularly noticeable: overstaffing was commonplace. Kazakstan, for example, has one of the highest ratios of physicians per person in the world. In 1991, there were 40.3 physicians per 10,000 people in Kazakstan, well higher than found in most developed countries. 16 Before independence, inefficiency was not a local concern because of soft budget constraints and generalized subsidies from the FSU's central government. Because of the severe economic and fiscal crises, health sector services have deteriorated considerably. In both countries, the Governments have maintained total health expenditures at 3-4 percent of GDP, little changed from the period of time prior to independence. However, with the decline in GDP, the real resources being devoted to health care are less than one-half that previously available and are not sufficient to maintain the old standards of service (Figure 2). Due to a lack of funds staff payments are low and often delayed, there are shortages of medicines and operational supplies, an inability to pay for utility services including heat, and inadequate maintenance operations. As a result of the decline in resources, health conditions for children as well as for adults have deteriorated. Although the official data are not completely consistent, life


Transition Costs in Central Asia













share or" GDP B Real Resources ] I


Real Resources is share of GDP deflated by an index of GDP


Support for Health and Education in Kazakstan

expectancy appears to have declined since 1991 by one to two years. 17 The situation is not always so clearly shown in official statistics, which, for example show fairly stable figures for maternal and infant mortality. It is widely thought by health experts in the countries that statistical reporting problems and the introduction of registration fees, have biased these numbers downward. For example, staff of the Kyrgyz Ministry of Health have suggested that the 1995 infant mortality figures may be underestimated by as much as 20-25 percent. ~s High maternal mortality rates are noticeable particularly for women living in remote areas and are directly linked to the deterioration in the rural transport system which prevents women from reaching adequate assistance. The declining public health resources and falling personal incomes are having a particularly severe impact on the health of children. 19 Acute malnutrition is found among 7 percent of preschool-age children in the Kyrgyz Republic and poor nutrition is becoming noticeable in all age groups. Child nutrition problems are also present in poorer areas of Kazakstan such as Kzyl-Orda near the Aral Sea. The incidence of nutrition problems does not seem to be as large as found in many poor developing



countries, however, they are worrisome in the context of overall deterioration in the health support systems and in the decline of family income since independence. The high and rising incidence among children of respiratory infections in winter and of diarrhea in summer indicate a lack of effectiveness in primary health care, health education, and sanitation. 3. The Education System is Deteriorating As in health, the FSU achieved notable success in education. Educational attainment and literacy was high relative to most industrialized countries. With independence and the economic and fiscal crises, Government financing for education has declined. The share of GDP allocated to education fell from 6.8 percent in 1990 to 3.3 percent in the 1996 budget in Kazakstan, and in the Kyrgyz Republic from 9.0 percent in 1989 to 6.0 percent in 1996. With a smaller GDP the reduction in real resources has been considerable. The funding crisis and structural reform has had the most deleterious impact on the preschool system. 2° Unlike the situation before independence, the majority of children increasingly lack access to preschool education. In Kazakstan, in the school year 1991/1992 more than one million children (51 percent of the eligible children) attended preschools and day-care facilities. Four years later this figure dropped by nearly three-quarters, as more than two-thirds of the former 8,881 facilities had closed. In many rural areas there are practically no open preschool facilities. Moreover, many preschools said to be operating according to official reports are in fact closed for long periods of time, especially in winter, because of difficulties in providing heat for the buildings or transportation for the students and staff (Bauer et al. 1997b). The loss ofpre-school facilities goes beyond the reduced access to early education. Pre-schools provided 3--4 meals a day, often compensating for poor nutrition in low-income households. Kindergarten and pre-schools also provided access to primary health care services such as immunization, generally free of charge. In addition, the preschools allowed parents, particularly women, increased access to the formal labor market. Finally, the preschool system provided employment especially to many women. The wholesale closure of these institutions thus reduces human resource development and lowers labor force participation for women. More generally, because of the fiscal constraints, the education system is losing skilled personnel and closing facilities. The situation is particularly critical in rural areas where many schools have closed because oftbe lack of funds to pay staff, provide heat in the winter, and maintain and repair deteriorating buildings. Owing to a shortage of operational facilities, primary and secondary schools often operate in two shifts. While overall enrollment levels for primary and secondary schools have not yet suffered, the system is under severe pressure. The extensive vocational training system particularly shows the strain of transition. The system, which previously had prepared young people for life time employment in state enterprises is in near complete disarray. Jobs no longer exist for graduates, and, as result of falling family income, students often enter the job market without advanced training.

Transition Costs in Central Asia


At all levels of education, there is a great need to revamp the educational curriculum and teaching methodology. Students are still using materials suffused with the communist ideology that holds little relevance for them. 2t 4. Deteriorating Social Assets Aggravate the Decline in Living Standards Before independence, many social infrastructure assets such as housing, health care and education facilities, cultural centers (libraries, sports arenas and theaters), and utility services (heating, water, and transport) were provided by state farms and enterprises. In the process of privatizing and restructuring these farms and enterprises, these social assets have been divested, and some of them transferred to local governments. Local governments, however, largely lack the financial resources to maintain these activities. As a result many of these social assets have been closed. While some of the services formerly supplied can be recognized as luxuries no longer possible in the absence of outside subsidies, some play an integral part in serving basic human needs. The preschool system is one example, communally supplied urban services is another. During Soviet times communally supplied services such as housing, heating, and water and sanitation, were freely accessible. The closure of facilities, the privatization of public enterprises, and falling budgetary allocations have resulted in service disruptions and in major price increases. As a result, access to household services has decreased during transition. In many areas there have been severe interruptions or insufficient supplies of electric power, gas, and heat (supplied in many cases through district heating systems). Hot water in public and residential buildings is often unavailable causing severe health problems, especially for children and the elderly, especially in winter. These developments result in a serious deterioration in living conditions and have contributed to the decrease in sanitation and health standards. C.

Poverty has Emerged as a Visible Phenomenon

In both countries, as a result of falling wages, increased unemployment, and reduced social safety net support, there has been a graphic increase in the incidence of poverty. 22Figure 3 provides an illustration of the changing incidence of poverty using some of the available definitions that provide comparable measures at different points in time. In the Kyrgyz Republic, the data suggest an increase in the incidence of poverty from 20 percent to 49 percent between 1989 and 1996 and in Kazakstan from 16 percent to 35 percent. D.

Certain Groups have been More Vulnerable to the Transition than Others

There are definite regional biases in the incidence of poverty. A person is more likely to be poor if he or she is living in a rural area and is a member of a family with many children. Using the World Bank sponsored poverty assessments in the Kyrgyz Republic, in 1996 rural households were twice as likely to be living below the poverty


JOURNAL OF ASIAN ECONOMICS (9)2, 1998 Percent 80.0 70.0 60.0 50.0 40.0 30.0 20.0 ~6

10.0 0.0 wloe

. . . . . . ~,~a,,

Nation' ...... 4 wide Rural Urban


Kazakstan Kyrgyz Republic

Notes: Data for 1996 amd 1993 are for households, whereas those for 1989 are for population living under the FSU poverty line of 75

Rubies. Data for 1989 are taken from the 1989 Family Budget Survey of the Soviet Union. Household data are from the World Bank sponsored poverty assessment surveys in each country. FIGURE


Incidence of Poverty

line as urban households (Bauer et al., 1998). The situation in Kazakstan was similar, although perhaps not as extreme. There is some evidence that rural female-headed households are faring particularly poorly as a result of land and farm-asset distributions, under privatization, that appear to discriminate against women, z3 Although gender-based data are not widely available, what data there are suggest that women and particularly mothers are slightly more likely to live in poor households than men. Female-headed households appear to be a large fraction of the poor: in the Kyrgyz Republic, nearly one-half of all poor households are female-headed.24 Particularly vulnerable to the changes of the transition period are those households with many young children and elderly women living alone. For the former, the breakdown in the systems providing for social assistance to families and childcare have had a very severe impact. For the latter, the deteriorating health and social insurance systems have been particularly difficult. The experience of poverty is exacerbated by the failing communal services and the wider changes in society. For example, for many ethnic Russian people, migration has meant that family members cannot provide the assistance traditionally found in Central Asia. z5 Perhaps more importantly, the impact of the transition has come to rest on children. They have lost their extensive systems of pre- and after-school care. Malnutrition and childhood diseases are becoming more common. Street children, unknown in the FSU, are now present in big cities. The most severe problems result from the increasing strains on the family, itself a result of growing poverty and unemployment, z6

Transition Costs in CentralAsia




Moderate growth is expected in these two Central Asia countries from 1997. As markets develop, there will be increased use of existing assets and an increased efficiency of use. The question is whether this supply response can adequately counterbalance the declining potential represented by the deteriorating physical infrastructure and social sector institutions. The paper has concentrated on depicting the economic and social costs of the breakup of the FSU and the present incomplete transition to a market-based economy. To date the increased economic freedoms implicit in the shift from a command to a market-based economy have been little enjoyed by most people. There is, however, no way back--the FSU cannot be recreated and the subsidized activities that previously existed must be curtailed. There is wide spread recognition of the problems as discussed in this paper. The Governments have launched broad-based reform programs designed to encourage economic growth and limit the enormous social costs. Reform and economic restructuring are sui generis developments with each country following its own path and pace. However, given the similar history, common challenges exist across countries. • Sustainable growth must be encouraged through the maintenance of essential macrostability, a careful line must be walked between discouraging inflation and providing for liquidity needs. 27 • Reforms must encourage the creation of free markets including the establishment of legal institutions ensuring: (i) for the protection of property rights, (ii) that voluntary transactions are the basis of trade, (iii) that prices are free to adjust to changing market conditions, and (iv) that entry into and exit from markets are relatively unrestricted. • The development of competitive markets must be advanced; privatization exercises that leave unreconstructed Soviet farms and firms must be redone and impediments to entrepreneurial activity reduced. Within the context of the FSU this would include (i) a thorough distribution of state assets, (ii) effective anti-monopoly activities, (iii) taxes and tariffs that do not distort market-based relations, (iv) a reasonable degree of factor mobility, and (v) the creation of viable financial markets. • The provision of social services must be reformed, made more cost efficient, more reliant upon user charges, and access assured for the poorer members of society. • Social insurance payments, especially pensions, must be increased in real terms and be better targeted. • Social assistance networks must be reformed to better serve the needs of the truly vulnerable, assistance payments must be raised in real terms and better targeted. 28


JOURNAL OF ASIAN ECONOMICS (9)2, 1998 F o r r e f o r m to p r o v i d e for sustainable e c o n o m i c g r o w t h , the e n v i r o n m e n t a l r e s o u r c e base m u s t be utilized, taking into a c c o u n t the full costs o f resource exhaustion and pollution.

T h e e m e r g e n c e o f g r o w t h in 1996, f o l l o w i n g e c o n o m i c r e c o v e r y in s o m e other transition e c o n o m i e s , suggests that the worst o f the crisis m a y be passing. It will then be the c h a l l e n g e to ensure that g r o w t h is sustainable and that the benefits o f this g r o w t h are equitably distributed. Social protection is necessary. R e f o r m is essentially a political process. I f the process is felt to be inequitable, there will be n o n e o f the wide spread support n e c e s s a r y to c o m p l e t e the p r o g r a m . 29 Acknowledgments: The views expressed are those of the authors and do not necessarily reflect those of the Asian Development Bank. The authors are grateful to Ms. Ma. Cristina Mendiola and Ms. Isabelita Alba for secretarial and technical assistance, respectively.

NOTES 1. A more detailed discussion of the subject can be found in a series of recent reports by the Asian Development Bank: Bauer et al. (1997a); Bauer et al. (1997b); and Bauer et al. (1998). See also the UNDP country Human Development Reports for Kazakstan and the Kyrgyz Republic for 1995, 1996, and 1997. As detailed in the paper, Kazakstan and especially the Kyrgyz Republic offer extreme examples of an immizerizing transition. Other republics, such as Uzbekistan and Turkmenistan, have been able to exploit domestic energy resources or favorable shifts in the terms of trade to supplement government tax revenues. More general discussions of recent economic developments can be found in ADB (1997a) and ADB (1997b). 2. These industries were, in Zhukov's words, "subordinate to [the] center." See Zhukov (1996), Table 3.3, pp. 114-115. 3. World Bank (1993, pp. 170 and 178). Trade data are, however, highly uncertain, owing partly to the necessity of using official exchange rates and posted prices for valuation. 4. World Bank (1993), Table 2.6, p. 16. See also Zhukov (1996) who puts the Central Government budget subsidy to Kazakstan in 1990 at 13.6 percent of local GDP, and to the Kyrgyz Republic at 10.9 percent (Table 3.3, pp. 114-115). 5. Estimates of the size of the service sector in the FSU, however, are particularly suspect. Meaningful statistics were simply not collected on many subsectors (finance for example) that provided what were often regarded as non-productive activities. 6. The progressive problems were especially noticeable in the health sector. See the description of the situation in Eastern Europe in Preker and Feachem (1994, p. 294). 7. Estrin (1994, p. 74) provides a summary discussion of income inequality and the dimensions of poverty in the FSU. 8. World Bank (1995). Trade data is particularly imprecise. One problem is that pre-independence trade estimates rely upon official exchange rates, which likely results in an overestimate of the volume of trade at market prices. Moreover some present-day trade may be unreported due to an absence of customs posts and a lack of reporting requirements for trade within FSU Republics, as well as to evade taxes. 9. ADB (1995a) and (1995b). It should be noted that GDP statistics likely overestimate the extent of the depression. The official statistics primarily reflect production reported by the larger enterprises. Thus they fail to capture the development of small enterprises, particularly in the newly emerging service sectors such as urban transport or restaurants. Officials in the Kyrgyz Ministry of Economy in 1996, for

Transition Costs in Central Asia


example, estimated that the GDP figures may miss as much as one-third of the real economy (ADB, 1995b, pp. 4-5). Even with a correction for undercounting, the output contraction has been severe. 10. Growth in Kazakstan in 1996 and 1997 was approximately 1-2 percent per year. In the smaller Kyrgyz Republic, prompted partly by the development of an extremely large gold mine, growth averaged 6 percent per year in 1996 and 1997 (ADB, 1997a and ADB, 1997b). 11. As of the beginning of 1996, the Kazakstan Government has tightened the definition of unemployment. Thus 1996 and 1997 statistics are not comparable to earlier data. In either case, conceptual and measurement problems limit the comparability of Central Asia labor market data to those of non-FSU countries (Klugman & Scott, 1997). 12. Ackland and Falkingham (1997, p. 86) note a sharp increase in the Gini coefficient for total household income even during the first few years after independence. Jackman and Rutkowski (1994) suggest that a general lack of understanding of the process by which wages are determined in a market system has contributed to the general public dissatisfaction with reforms. 13. "Pension benefits in eastern Europe and the FSU are low and yet still unaffordable" (Fox, 1994, p. 3). 14. In late 1997, the Government in Kazakstan initiated a program to reform the pension system, including the payment of accumulated arrears which had totaled approximately 2-3 percent of GDP. A description of the program is contained in ADB (1997d). 15. Estrin (1994, p. 72) notes also that the system was showing clear signs of strain in the 1980s as a result of overall economic difficulties in the FSU. 16. The OECD economies had on average 22.2 physicians per 10,000 people in 1984. UNDP (1992) Table 33, p. 192. 17. The 1995 Kyrgyz figures are anomalous. On this subject see also UNDP, Kazakstan: Human Development Report: 1996, especially pp. 6 et seq. 18. ADB (1996b), Appendix 3. Similarly estimates of the actual Kazak infant mortality rate are 50--60 percent higher than the officially reported data (ADB, 1996a, Appendix 3). Official statistics for maternal mortality are also thought to be biased downward in recent years (ADB, 1996a, Appendix 2 and ADB, 1996b, Appendix 2). 19. Bauer et al. (1998), Bauer et al. (1997a, pp. 31-39), Bauer et al. (1997b, pp. 59-68), and Ismail and Hill (1997). 20. Bauer et al. (1998) and Klugman et al. (1997). 2 I. In 1997, the Kyrgyz Republic initiated a program to reform the educational system concentrating on assuring access to and improving quality of primary education (ADB, 1997c). 22. Poverty measurement in FSU does not follow most international work. Under the Soviet system, the "concept of poverty received little attention" and measures of the extent of poverty did not correspond to non-Soviet international standards (Mroz & Popkin, 1995, p. 1). Estimates of the incidence of poverty heavily depend on the methodology used. Poverty measures are also extremely sensitive to the base used, for instance between income and expenditure (Ackland & Falkingham, 1997). In the Kyrgyz Republic, for example, the National Statistical Committee (NatStatCom) publishes poverty data based on an assumed minimum per capita expenditure providing for a daily energy intake of 2,240 calories. Alternatively the Ministry of Labor and Social Protection (MLSP) estimates a minimum income related to the calculation of the minimum wage. The MLSP standard is used to determine transfer payments to the poor. Using the NatStatCom standards, for example, in mid- 1996, 80 percent of the population lived in poverty, using the MLSP standard, it was 26 percent. The text discussion uses data generated through the Living Standard Measurement Survey, sponsored in both countries by the World Bank and assessed by the respective national statistical agencies. The estimates of the incidence of poverty using these surveys tend to fall between the estimates given by the different public agencies in their official publications. 23. Graham (1997, p. 352) notes a similar phenomenon in Mongolia. Ackland and Falkingham (1997), looking at 1993 data, note however the precarious nature of urban, female-headed households. 24. The situation in Kazakstan is not as clear-cut, partly because regional characteristics are much more important in explaining the distribution of income.



25. Emigration is particularly prevalent in Kazakstan. The ethnic Russian community has seen more than 600,000 people emigrate since independence and the ethnic German community nearly one-half million. 26. Sipos (1994) also notes the differential impact of Eastern European transitional experiences on child poverty. 27. Graham (1997, p. 326) also emphasizes the importance of macroeconomic stability as a precondition to reducing the social costs of adjustment during the structural transition. 28. Chu and Gupta (1993) and Falkingham (1997) provide summary suggestions on better targeting for social safety nets in the FSU. 29. Graham (1997, p. 344), Chu and Gupta ( 1993, p. 24) and B arr ( 1994, p. 192) echo this sentiment.

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Chu, K.Y. and Gupta, S. 1993. "Protecting the Poor: Social Safety Nets During Transition," Finance and Development, June: 24--27. Esentugelov, A. 1996. "Kazakstan: Problems and Prospects of Reform and Development." In B. Rumer (Ed.) Central Asia in Transition: Dilemmas of Political and Economic Development (pp. 198-226). Armonk, N.Y.: M.E. Sharpe. Estrin, S. 1994. "The Inheritance." In N. Barr (Ed.), Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond (pp. 53-76). Oxford, U.K.: Oxford University Press. Falkingham, J. 1997. "Public Transfers and Targeting in Kyrgyzstan." In J. Falkingham, J. Klugman, S. Marnie, and J. Micklewright (Eds.), Household Welfare in Central Asia (pp. 163-182). Houndmills, U.K.: Macmillan Press, Ltd.. Fox, L. 1994. "What To Do about Pensions in Transition Economies?" Transition, 5(2-3), Feb.-March: 3--6. Glantz, M.H., Rubinstein, A.Z., and Zonn, I. 1994. "Tragedy in the Aral Sea Basin: Looking Back to Plan Ahead?" In H. Malik (Ed.), CentralAsia: Its Strategic Importance and Future Prospects (pp. 159-194). New York: St. Martin's Press. Graham, C. 1997. "Strategies for Addressing the Social Costs of Market Reforms: Lessons for Transition Economies in East Asia and Eastern Europe." In W.T. Woo, S. Parker, and J.D. Sachs (Eds.), Economies in Transition: Comparing Asia and Eastern Europe (pp. 325-355). Cambridge, MA.: MIT Press. Green, D.J. and Vokes, R.W.A. 1997. "Agriculture and the Transition to the Market in Asia," Journal of Comparative Economics, 25: 256-280. International Monetary Fund. 1996. Kyrgyz Republic-RecentEconomic Developments, IMF Staff Country Report No. 96/98, September. Washington. [IMF(1996)] Ismail, S. and Hill, H. "Nutritional Status in the Kzyl-Orda Area of Kazakstan." In J. Falkingham, J. Klugman, S. Marnie, and J. Micklewright (Eds.) Household Welfare in Central Asia (pp. 141-160). Houndmills, U.K.: Macmillan Press, Ltd. Jackman, R. and Rutkowski, M. 1994. "Labor Markets: Wages and Employment." In N. Barr (Ed.), Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond (pp. 121-159). Oxford, U.K.: Oxford University Press. Klugman, J. and Scott, K. 1997. "Measuring Labor Market Status in Kazakstan." In J. Falkingham, J. Klugman, S. Marnie, and J. Micklewright (Eds.), Household Welfare in Central Asia (pp. 118-140). Houndmills, U.K.: Macmillan Press, Ltd. Klugman, J., Mamie, S., Micklewright, J., and O'Keefe, P. 1997. "The Impact of Kindergarten Divestiture on Household Welfare in Central Asia." In J. Falkingham, J. Klugman, S. Mamie, and J. Micklewright (Eds.), Household Welfare in Central Asia (pp. 183-200). Houndmills, U.K.: Macmillan Press, Ltd. Levintanus, A. 1992. "Saving the Aral Sea," International Journal of Water Resources, March: 60--64. Mroz, T. and Popkin, B.M. 1995. "Poverty and the Economic Transition in the Russian Federation," Economic Development and Cultural Change, 44(1): 1-31. Preker, A.S. and Feachem, R.G.A. 1994. "Health and Health Care." In N. Barr (Ed.), Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond (pp. 288-321). Oxford, U.K.: Oxford University Press. Republic of Kazakstan, State Committee on Statistics and Analysis. 1995. The Social and Economic Situation of the Republic of Kazakstun (Russian). Almaty. [Goskomstat] Sipos, S. 1994. "Income Transfers: Family Support and Poverty Relief." In N. Barr (Ed.), Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond (pp. 226--259). Oxford, U.K.: Oxford University Press. United Nations Development Programme. 1992. Human Development Report 1992, New York: Oxford University Press. [UNDP 1992] United Nations Development Programme. Kazakstan, Human Development Report, issues for 1995, 1996, and 1997. New York, Almaty, Kazakstan. [UNDP Kazakstan HDR] United Nations Development Programme. The Kyrgyz Republic, Human Development Report 1995, 1996, and 1997. New York, Bishkek, the Kyrgyz Republic.



World Bank. 1993. Kazakstan: The Transition to a Market Economy. Washington, D.C.: World Bank. World Bank. 1992. Statistical Handbook: States of the Former USSR. Studies of Economies in Transformation, Number 3. Washington, D.C.: World Bank. World Bank. 1995. World Tables 1995. Baltimore: Johns Hopkins University Press. Zhukov, S. 1996. "Economic Development in the States of Central Asia." In B. Ruiner (Ed.), CentraIAsia in Transition: Dilemmas of Political and Economic Development (pp. 106-135). Armonk, N.Y.: M.E. Sharpe.

Received August 1997; Revised April 1998