Op-ed

The west should invest in central Asia & Caucasus

Financial Times, 2 July 2004

by Jean Lemierre

A worrisome disparity is developing between countries that spent decades together behind the Iron Curtain. On one side of the emerging divide are the eight countries of central Europe and the Baltic region that joined the European Union on May 1 - hard-won recognition of their economic and political transformation. But further east, beyond the new borders of the EU, economic and political transition in the seven poorest countries emerging from the command economy system has been slower; half the population still lives below the poverty line.

In many parts of central Asia and the Caucasus, poverty, ethnic tensions, the slow pace of reform and high indebtedness combine to pose a threat to regional and global security. This is particularly true in Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan.

Geographically and ideologically, these seven countries were closer than the new EU members to the heart of the former Soviet Union and it is taking them much longer to emerge from its long shadow. They have not had the offer of EU membership to encourage them through arduous and often unpopular reforms. Widening the embrace of the EU to include eight new central European and Baltic states will only go so far to stabilise the post-cold-war situation, if, over the horizon, trouble is brewing. Pent-up social frustration born of a lack of opportunity in these seven nations may heighten tensions, even extremism. In the long run, private-sector growth and job creation coupled with political reform are the only means to defuse tensions.

Of course, if economic transition were easy to accomplish in these states, it would have happened already. The publicly owned European Bank for Reconstruction and Development was created in 1991 to foster such transition in 27 countries of the former Soviet sphere and the bank is the largest single investor there. But, in spite of our expertise, local presence and mandated interest in doing business in the seven poorest countries, we have had difficulty raising the level of our investment there. Given the challenges of doing business in these countries, it is easy to understand why private-sector investors shy away.

Yet the EBRD's local offices see many promising investment opportunities. These range from big oil, gas and mining deals to family-owned bakeries, middle-sized lumber businesses, small-scale hydro-power producers, dairies and growing textile mills.

Unfortunately, opportunity is not enough. The slow and uneven pace of economic and political reform in these countries discourages foreign investors and local businesses alike. There remain too many vestiges of the command economy system and big government, and there is not enough commitment to improving commercial law, the functioning of courts and regulatory bodies, and fighting corruption.

The least painful path to economic growth is to cut red tape and then get out of entrepreneurs' way. At the EBRD annual meeting last year, one Kyrgyz entrepreneur reported that 160 permits were needed to start a small business in her country; that was an improvement on the old days when 193 permits were required. A year later, the situation has not changed much. Both local business growth and foreign investment would be encouraged if governments cut through the thicket of restrictions on foreign currency exchange and on cross-border trade and travel.

Trade depends on transport and here we have seen many encouraging signs of greater regional co-operation. The upgrading of the ancient Silk Road linking the Caucasus and central Asia is an example of national governments, donors and international lenders working together on regionally important infrastructure. The Baku-Tbilisi-Ceyhan oil pipeline has built better relations between Azerbaijan and Georgia and introduced more than a dozen top international banks to those countries.

A new EBRD initiative aims to promote greater investment and accelerate economic reform in these seven still-poor countries by accepting higher risk to make investments, improving banking services for small and medium-sized businesses, encouraging small-scale infrastructure projects, and promoting legal reform and regional trade.

As every euro invested in a project by the EBRD typically attracts two more from other sources, we expect this initiative will increase private investment. The expansion of the EU's borders has brought Europe closer to the Caucasus and central Asia. There is no better time to promote economic development there, increase prosperity and underpin stability for the region, and beyond.