University of Central Asia

Transcript - 'Growth' by Dr Ngozi Okonjo-Iweala, World Bank Managing Director

PUBLIC LECTURE SERIES  |  27 June 2011

Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank
University of Central Asia, Bishkek
3 June 2011


I. An uncertain global and regional environment

It is a pleasure to be with you this afternoon.  I am very grateful to [the Minister of Education and], the Dean and staff of the University of Central Asia for inviting me to meet with you today. Being here, a few hundred meters from the old Silk Road that linked the east and the west, for centuries, I cannot help but think of how different yet how similar the development challenges we face today must be compared to 2000 years ago.

As a global community we still need to improve our trade practices, improve our communications infrastructure, feed our people and build sound institutions that serve the common good.

In your rich and age old history as a people you have experienced periods of crisis. But you also know that out of each of these crises an opportunity was created. The question today for the Kyrgyz Republic is how to turn the dramatic experiences of the last year into an opportunity.  What will it take to do this and where do you begin?  This is what I will like to focus my talk on. As a small country facing the global challenges of recession, volatility, and political transition, how can the Kyrgyz Republic find pathways to a stable, prosperous future?

1. First and foremost, the Kyrgyz Republic will have to devise a strategy to benefit from the global recovery. The nature of the global recovery is favorable to the Kyrgyz Republic. Why do I say this?  After a contraction of 2.2 percent in 2009, world GDP grew at a rate of 3.9 percent last year and our forecast is that this will continue in 2011, at 3.3 percent, and in 2012, at 3.6 percent. So the recovery is underway – but it’s fragile.

But perhaps more important is the source of this growth. Over half of global growth this year will be driven by emerging markets – countries with a history of using your backyard as a trading route. While the United States contributed 27 percent of the world’s GDP growth in the 80s and a whopping 36 percent in the 90s; its share in world trade dropped to 21 percent in the 2000s. By contrast, the share of China and India in global GDP growth increased from 5, to 12, and now to 32 percent. China was one of the countries that weathered the Great Recession best, with GDP growth almost steady in the 9-10 percent range.

Your region and your main regional trading partners-China, Russia, Kazakhstan, are also growing. The Europe and Central Asia region as a whole expanded by 4.7 percent last year after a 6.6 percent contraction in 2009. We expect growth to continue in the 4-5 percent range. Russia recovered at a rate of 4.0 percent last year, after a 7.9 percent contraction in 2009. In Kazakhstan, the GDP did not contract in 2009 and growth reached 7.0 percent last year. In these countries, growth is expected to continue at a rate of 4-6 percent. In sum, the Kyrgyz Republic’s main partners in terms of investment, trade, and remittances are recovering quite strongly.  You can ready yourselves to take advantage of the recovery.

2. The second point is that the recovery is volatile and uncertain as the number of crises increases. By one count, there were 150 crises per year in the 1980s and there are now over 370 per year. That is, on average, one every single day – crises of all types from economic to natural disasters! For example, one source of instability that matters particularly to the poor is fluctuation in food prices.

Indeed, the Kyrgyz Republic is, with Georgia, the only country in the region with food inflation over 20 percent. The poor are particularly vulnerable with over 70 percent of their budget devoted to food – one of the highest shares in the world. Put simply, the Kyrgyz Republic’s 27 percent increase in food prices in December 2010 is equivalent to a 19 percent fall in poor non-farming households’ purchasing power. That’s like losing two and a half month’s income in a year.

This is compounded by inflation in the price of energy products, at 15 percent, in a country where energy intensity is high compared to the rest of the region. Higher and more volatile prices of both food and energy are important risks for Kyrgyzstan because the country has a large combined food and energy trade deficit: at 25.2 percent of GDP, it is the largest deficit in Europe and Central Asia – and, if both food and energy prices were to increase by another 30 percent, the deficit would further increase to 32.8 percent of GDP. How can this be an opportunity you ask? Well the best way to prepare for crises is to plan.

Better planning in agriculture is one way. The sector accounts for over 30 percent of GDP, about half livestock and half crop production. Despite strong growth up to 2004, sector growth has been erratic in recent years. How could more productivity gains be generated and vulnerability to shocks reduced?

One way to prepare for short term price shocks is to improve traders’ responsiveness to prices, reduce the inefficiencies in cross-border trade and invest in storage capacity. Experience shows that any attempts to directly regulate traders or influence prices are not likely to succeed when a small country like Kyrgyzstan neighbors a major wheat exporter like Kazakhstan.

What Kyrgyzstan should, however, do is build further on its earlier successes. It is a long standing leader in the region in respect to helping communities invest in the management of their own natural resources such as water and pastures. Its 2009 pasture law is one of the most radical and progressive reforms since the country passed land reforms in the 1990s. This new approach to pasture management could potentially be extended to neighboring countries, such as Tajikistan and others. The Kyrgyz Republic is also one of the regional leaders in development of community based irrigation. The current expansion of the Community Seed Funds in more than 200 villages is a providing high quality seeds to the poorest households. The Kyrgyz Republic is also making radical efforts to reduce animal diseases and public health risks by completing the privatization of the veterinary services. The Brucellosis control program in Naryn, which has already reduced human cases by 50 percent shows that this can work but much remains to be done.

After last year’s crisis, all these efforts to improve productivity and reduce instability in the sector are also helping communities build trust in their government and give voice to the poorest in rural areas.

The next stage will be to help the Kyrgyz Republic improve its competitiveness on the domestic market and penetrate regional markets further, such as Russia, Kazakhstan and beyond, by taking advantage of its top commodities - milk, beef, sheepmeat and wheat.  The recent success story of beans export from Talas oblast to Kazakhstan, supported by the WB, is one of many others that show Kyrgyzstan can!

3. My third point is that there are dramatic and unforeseen political transitions that are unfolding around the world. You saw it in the streets around you in April 2010. As I speak, we are now watching events unfolding in the Middle East. Citizens are challenging authorities across this region with the unifying refrain of ‘Dignity, Respect, and Freedom’. None of us knows where this transformation is leading these countries. But it has already reminded us all that development without participation is a fragile and precarious construction. As World Bank Group President Bob Zoellick has said, the Arab Spring calls for a new “social contract for development”.

The political nature of these events should not lead us to underestimate the role played by economic factors. Without productive employment and economic opportunity, the energetic spirit of young women and men cannot long be satisfied. Unemployment and economic stagnation will inevitably translate into political frustration.

It seems to me that the people of the Kyrgyz Republic understand very well the lessons of the last year’s political change, both here and abroad. Over the last two days, it has been my privilege to listen to a range of Kyrgyz citizens, from the White House to the dusty novostroiki. And, once again, everywhere I have heard that stability and prosperity will depend on clean and transparent institutions. The call for reform is the Kyrgyz Republic’s, but the voice is also that of the whole developing world.

II. Reigniting Growth – seizing opportunities

So how can Kyrgyz take advantage of the current post crisis environment?

The country has important achievements to build upon, starting with its growth record. Between 2003 and 2008, GDP growth averaged 5.7 percent a year. Underpinning growth, some progress has been made in aspects of the business environment for the private sector, as highlighted by improvements in the World Bank’s Doing Business indicators: the Kyrgyz Republic was the 7th top reformer between 2006 and 2011, bringing the country to the 44th rank among 178 countries.

The country has also managed to deal with last year’s economic crisis. The governments of April and December 2010, as well as the National Bank, took quick and decisive measures. Let us not forget what they had to deal with: the collapse of the country’s largest bank, with 53 percent of national deposits, the closure of borders, panic among local and international investors, sudden demands for new public spending, and a 27 percent increase in food prices. But a year later, it is a different story. The Kyrgyz Republic has a strong growth forecast, a banking sector that has stabilized though with need for further reinforcement, and a staff-agreed program with the IMF.

Economic growth has also translated into important social outcomes. Poverty incidence has fallen down from 50 percent in 2003 to 32 percent in 2009. Last year, the Center for Global Development identified the Kyrgyz Republic as the second top-performer toward reaching the Millennium Development Goals, with a high likelihood of meeting these objectives by 2015 – with the exception of reducing maternal mortality. This is no small achievement when one considers that the country is still adjusting to the massive impact of the withdrawal of Soviet subsidies for social services.

But where are the future sources of growth? How can the Kyrgyz Republic take advantage of its location and neighboring markets? Which sectors can deliver jobs for the people while attracting more regional investors? With the economy contracting by 1.5 percent last year, with unemployment at 8 percent of the labor force, with citizens’ expectations for change, and with such an uncertain global and regional environment, it is critical for the country to generate income opportunities for all. Let me focus on two sectors of particular importance.

Mining is a critical source of growth: the sector, of which gold is the leading output, accounts for 40 percent of all export earnings. The Kyrgyz Republic’s achievement of Extractive Industries Transparency Initiative compliance as well as the personal commitment of President Roza Otunbayeva in leading this agenda has earned international praise. It means that Kyrgyz citizens have access to more information about mineral revenues, since the EITI process covers 46 operators or 95 percent of the mining sector revenues. It also means that they can hold the Government and the private sector accountable.  As the country is now embarking on the post compliance phase, we encourage you to maintain momentum!

In what concerns the mining sector, Kyrgyz civil society organizations as well as local communities have always been and continue to be very active. This is very commendable. I can only wish that all parties – the government, the mining companies and the community leaders – come together more often to discuss options and find solutions that are beneficial to the welfare of the entire country. The government should recognize that this participatory process is very important.

At the same time, the private investors should recognize the importance of the corporate social responsibility agenda. There are many the positive examples of how companies can benefit from engaging and supporting local communities in Chile, Brazil, Ghana, South Africa or Canada. The benefits are significant! And there are some positive examples even here, in your country. One certain company has certainly learned some tough lessons in the beginning but is doing much better now. In the case of the Kumtor Gold project, which benefited from IFC support during the earliest stages, efforts by the foreign private investor in assisting local communities with micro-credits, farming equipment, seeds, etc. seem to bear fruit. It has helped the dialogue with the local population and built their trust.

Looking ahead, the mining industry can only grow if investors are confident that the Government will treat them transparently, predictably, and fairly. This concerns both the attribution of mineral rights, the improvement of the mining legal and regulatory framework, and the improvement of the overall investment climate. The mining sector in the Kyrgyz republic has very strong potential and the Government needs to take all the necessary steps to maintain and attract investments.

Trade. We are beside the Silk Road and only a few minutes from Central Asia’s busiest market, which employs 40,000 women and men. So we cannot forget that the Kyrgyz Republic lives by the energy and entrepreneurship of its traders and the openness of its borders. The Kyrgyz Republic took the wise decision soon after independence to pursue World Trade Organization membership and the path of commercial liberalization. With hindsight, it is now obvious that a country with few natural and industrial resources has to trade to survive. But at the time, it took courage and vision to make such a decisive break with the dirigiste past.

Now the Kyrgyz Republic faces another choice: how to adjust to the creation of a customs union by its main trading partners to the north? What it means to join this customs union will depend on the pace of Russia’s and Kazakhstan’s WTO accession. Certainly, if joining the customs union means the Kyrgyz Republic’s compromising its open and competitive trading regime, this is a course that should not be embarked upon without serious reflection and analysis.

But one thing is sure: the Kyrgyz Republic’s attractiveness as a trading partner will depend upon its commitment to tackling informal trade and taxation at its borders. This requires clean and efficient customs institutions. It also requires solid infrastructure: 60 percent of your roads still require maintenance or rehabilitation. WB is assisting the Government’s road rehabilitation efforts in the south of the country through a 41 million project but much more needs to be done. The logistics performance index shows that you score relatively well on timeliness and arranging international freight in comparison with other similar countries, but trade infrastructure needs critical attention. 

III. Building Stronger Institutions

However, to be successful, the Kyrgyz Republic must build strong institutions to support markets and public sector delivery if it is to succeed. It must address issues of governance, corruption, and institutions. This is a critical issue for and I would like to spend some time on it.

A lesson from our recent World Development Report on “Conflict, Security, and Development” is about the central role of institutional development. Strong institutions absorb internal and external stresses on the society; on the contrary, weak institutions break under stress and the breakdown leads to conflict and violence.

The sources of stress on your society are familiar to you. I have heard today how some of the psychological wounds of June 2010 are still open. The new, uncertain world we are living in is adding to the stress on each country around the world.

Every evening, you must see on your televisions the risks of weak institutions. If people believe that politicians are enriching themselves at the expense of ordinary citizens, if they cannot trust the police to protect them, if corrupt inspectors are denying them economic opportunity, if waste in public spending is denying them adequate schooling and health care, if they cannot voice their concerns, then violence and criminality will replace growth and development.

On the governance and anti-corruption front, you can do much more.  The country was ranked 164 out of 178 countries in Transparency International’s Corruption Perception Index in 2010; this shows little progress in fighting corruption since the first time the country appeared in the index, in 2003, where Kyrgyzstan was ranked 118 out of 133 – while, during the same period, GDP per capita has increased by 24 percent. Corruption and organized crime can become entangled, especially when fueled by drug trade, making a breakthrough more challenging.

Moving forward, as is well known to the people of the Kyrgyz Republic, and indeed is the lesson from the analysis in our World Development Report, strengthening security and justice institutions is a priority. Building stronger institutions requires holding to account past malpractices, cracking down on organized crime, and strengthening border controls – some of which is under way.

But building institutions to strengthen governance is not a matter to be left to law enforcement agencies alone; rather it should be the core of Kyrgyzstan’s development strategy. This will be a long-term effort, seeking to change incentives and behaviors, not just the rules. For instance, when it comes to business regulations on paper, the Doing Business indicators classify the Kyrgyz Republic as high as Spain or Luxembourg. The problem is that feedback from the private sector highlights how corrupt and unpredictable are the institutions that apply the rules.

The country has taken steps over the past year towards improved governance. On the public financial management front, achievements include the merging of the off-budget National Development Fund into the budget, the adoption of rules-based allocation of power export revenues, and the implementation of a new internal audit law. The role given to civil society organizations through the supervisory commissions is also a striking innovation. Political changes have also been made to increase accountability, bringing back the checks and balances that the previous regime had undermined. It is encouraging that the transparency efforts in the mining sector that I mentioned earlier, the EITI, are now being replicated in the energy sector, with the recent establishment of the ESTI – the Energy Sector Transparency Initiative. Kyrgyzstan can and must build on this to move forward.

From my own experience, I am mindful that tackling this agenda takes time and is difficult.  I was proud to attend the ceremony of the “Women of Courage” at the United States State Department a couple of months ago and see President Roza Otunbayeva being honoured in that ceremony. It will certainly take courage to build governance and institutions. But even in just two days, I have been moved by the passion, patriotism of many, many Kyrgyz citizens, in their determination to rebuild a stronger and fairer Republic.

IV. Conclusion

Your country is at an important crossroad, where the future is being built. With other Development Partners, the World Bank Group is prepared to support the country’s vision for its future during these uncertain times. Since 1992, the WB has supported 47 projects and committed almost $1 billion in resources. Last year, we were able to double the regular allocation of $70 million to allow us to respond faster and more efficient to your needs under extraordinary circumstances. But more than these numbers, all these years we hope that we have made a difference by investing in your trust.

Our new strategy for 2012 to 2013 will engage us to support a government with commitment to institutional reform. We can bring experience from other countries, and will also count on our staff in the Bishkek office: I have seen through them how the people of Kyrgyzstan care passionately about their country.

The Kyrgyz Republic faces huge challenges. And yet nobody could have imagined what the resilient people of this small country could have achieved over the last 12 months in terms of political and economic stabilization. You have turned your difficulties into opportunities – showing a well-placed sense of optimism. As Winston Churchill once he said, “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Hence, having seen you come so far, I can only be optimistic for the years to come.

Thank you!