OECD Observer
Eurasia: Investing for the future

After an extended period of relatively strong growth, the countries of Eurasia have recently experienced a series of powerful external economic shocks.* Lower global commodity prices, recession in Russia, moderate growth in China and subdued economic prospects in many west European economies have all hit Eurasia hard. The region’s overall GDP fell in 2015 for only the second time in two decades (the first time was in 2009), and growth in 2016 was weak, according to IMF estimates, with accelerations in a few countries offset by downturns elsewhere. The recovery seems to have continued into 2017 but it is uneven and modest at best, and growth is far below the rates achieved in the 2000s.

The region’s oil and metals exporters have naturally been hit hardest by the end of the commodities boom, but, perhaps surprisingly, the comparatively resource-poor economies of Eurasia have also suffered. Many rely heavily on trade with, and remittances from, the oil exporters, particularly Russia. Moreover, the conflict in Ukraine, which has inflicted enormous costs on that country, has also affected the rest of Eurasia, owing mainly to the impact of western sanctions and Russian counter-sanctions on trade flows, as well as the effect of heightened uncertainty on investment.

These developments have thrown into sharp relief some of the structural vulnerabilities of the Eurasia economies. Most have relatively concentrated export profiles–particularly in terms of goods exported but also, in many cases, heavy reliance on a few key export markets. In a number of Eurasia countries, hydrocarbons and metals account for 80-90% of exports, and many of the rest depend heavily on agricultural goods with minimal or no processing. Moreover, the data suggest that for most Eurasia countries, the commodity share of exports was increasing in many countries in the years preceding the present slowdown.

The diversification imperative

The problem is not new: the challenge of economic diversification has loomed large on the region’s policy agenda for well over a decade, especially in the oil-exporting economies. There was widespread awareness even during the boom years before the global financial crisis in 2008 that sustained long-term growth would require a transition to more investment-led and innovation-led growth. The slower rates that followed the crisis–even before the shocks of 2014–seemed to confirm that the growth models of the previous decade were reaching their limits. In fact, our calculations show that the aggregate GDP of the Eurasia region grew by more than 8.5% per year in 2000-08 but just 5.1% in the post-crisis recovery period of 2010-13, before stalling in 2014-15.

When thinking about diversification, policymakers often tend to think in terms of sectors. This frequently leads to trouble, largely because politicians and officials are rarely best placed to identify the most promising long-term trends in product markets.

A more effective approach to diversification focuses on building up a country’s endowments–its natural, human, physical and financial capital. At first glance, it might seem that countries can do little about their natural endowments but there is, in fact, a great deal that depends on policy. For example, while governments cannot change the quality or composition of the soil, the economic potential of such resources is influenced by legislative and regulatory factors, as well as physical infrastructure and technological capacities–hence the importance of Kazakhstan’s current overhaul of its mining code or Ukraine’s efforts to advance land reform. And reforms to water policy and water governance in Central Asian states like Tajikistan could support both economic growth and long-term environmental sustainability.

The benefits of higher productivity and inclusive growth

But reducing external vulnerabilities requires more than diversifying productive activity or exports. Raising productivity also plays a critical role. If these countries are to make most of their people’s talents and to allow the great mass of their citizens to pursue productive, rewarding careers, the countries of Eurasia need to invest in human capital development. That also means fostering the emergence of activities capable of generating more high-skilled, high-productivity employment. At present, many of the Eurasia countries are characterised by wide disparities in productivity, income and, as a result, well-being, because high-productivity employment in many countries is concentrated in just a few sectors and regions. The case of Kazakhstan is instructive here: value added per worker in resource extraction is more than eight times the national average, but it accounts for only about 2% of total employment. By contrast, our calculations based on official data suggest that around 28% of employment is in sectors where output per worker is only about 16% of the average. Higher productivity and inclusive growth require more focus on further reforms to education and training systems, which have in some cases changed little since communist times.

Good governance for well-functioning markets

Above all, though, the Eurasia countries need to continue to build up their institutional capital, strengthening public governance and the rule of law, while creating sound framework conditions for investment, entrepreneurship and innovation. Well-designed and well-functioning regulatory and tax regimes are critical, as well as secure property rights, fair competition and open markets.

The good news is that the region’s governments are far from idle. The squeeze of the last two years has triggered a new round of reforms in such diverse fields as customs regulation, tax administration and investor protection. Support for start-ups is expanding. But there is more to be done, particularly to create favourable conditions for the growth of new firms and SMEs, the critical drivers of innovation, job-creation and diversification.

The OECD continues to support countries in Eurasia in designing and implementing institutional and policy reforms that will help strengthen their economic endowments and set them on a path to sustainable, inclusive growth.

*“Eurasia” refers to the countries participating in the OECD Eurasia Competitiveness Programme: Afghanistan, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, the Republic of Moldova, Mongolia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

High-level representatives from Eurasia and OECD countries will meet in Almaty, Kazakhstan on 23-25 October 2017 for the fourth annual OECD Eurasia Week to exchange perspectives on “Openness for Shared Prosperity”, assess progress made, and discuss the region’s future reform agenda. To learn more about the OECD’s work with the Eurasia region: www.oecd.org/eurasia

References and links

IMF (2016), World Economic Outlook: Subdued Demand: Symptoms and Remedies.

Agency for Statistics of the Republic of Kazakhstan. Visit www.stat.gov.kz