Academic journal article The European Journal of Comparative Economics

Constructing Market-Based Economies in Central Asia: A Natural Experiment?

Academic journal article The European Journal of Comparative Economics

Constructing Market-Based Economies in Central Asia: A Natural Experiment?

Article excerpt

1. Introduction

Following the collapse of central planning in Eastern Europe and the Soviet Union, an active and urgent debate ensued on the merits of alternative strategies for the transition to a market-based economy. In econometric studies of economic performance (typically measured by change in GDP) the strongest results were for variables that picked up the difference between Eastern Europe and the former Soviet Union, whether measured as distance from Dusseldorf or years under Communism or levels of human capital, and for some obvious negative correlations (e.g. between growth and war or hyperinflation). The extensive literature produced little or no consensus on the relative merits of gradual versus rapid transition or on the optimum sequencing of reform, because beyond the similarities of a Communist regime and central planning the thirty-something transition economies were a diverse group.

A better basis for comparative analysis may be to take a smaller less heterogeneous group of economies. In this paper I ask whether the five Soviet Central Asian republics provide such a natural experiment. Apart from their similarity of geography and culture, the five Central Asian successor states were, together with Azerbaijan, the poorest Soviet republics in 1991. Their role in the Soviet division of labour was supplying a small range of primary products (cotton, oil and gas, and minerals). The Central Asian republics had no prior history as independent nation states. Their territory had been incorporated into the Russian Empire in the nineteenth century, so that they had roughly similar lengths of experience in the Tsarist Empire as well as the same Soviet history. The republics' borders were more or less arbitrary creations of Stalin; they could conceivably have been amalgamated as the Turkestan Soviet Republic, but instead they gained independence in December 1991 as five separate states. In four of the five republics, First Secretaries appointed by Mikhail Gorbachev became national presidents and quickly established super-presidential political regimes, with power heavily concentrated in the executive branch and with weak parliaments and legal institutions. The exception was Tajikistan which experienced a bitter civil war until 1997, but since then the president has established a super-presidential system. (4)

When the five Central Asian countries became independent in December 1991, the political priority was nation-building. At the same time they faced three major economic shocks: the end of central planning, hyperinflation, and the collapse of demand and supply chains. Although the central planning system had been abandoned in the final years of the Soviet Union, reform had hardly begun in Central Asia, but when Russia introduced a big bang liberalization of prices in January 1992 the Central Asian countries, which still shared a common currency with Russia, were forced to follow. In the transition to a market economy, government spending exceeded revenues and inflation accelerated, turning to hyperinflation in 1992-3, which was exacerbated by the common currency zone. Finally, when transport networks were nationalized and borders were erected, the Central Asian economies were vulnerable to the rapid collapse of Soviet-era demand and supply links.

All five countries suffered serious disruption from the dissolution of the USSR. Falling output and rising prices became much worse after the formal dissolution of the USSR removed residual central control over the Soviet economic space. Attempts to maintain economic links by retaining the ruble as a common currency in 1992-3 were abandoned by the end of 1993. (5) After 1993 each national government had considerable freedom of action in fiscal and monetary policy and in structural reforms.

National strategies for transition to a market-based economy varied among the five countries, ranging from the most rapid reform of any former Soviet republic in Kyrgyzstan to minimal change in Turkmenistan. …

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