CAREC study: Infrastructure and political tensions stifle Central Asian trade

Intra-regional trade among Central Asian countries remained low, with trade shares ranging from 4.6% to 9.1% due to limited transportation infrastructure, political tensions, and heavy reliance on natural resources, a recent study by the Central Asia Regional Economic Cooperation (CAREC) Institute showed.

Central Asian countries, which share many similarities in economics, politics, history, and culture, have increasingly sought to strengthen their trade relationships with various regions following the dissolution of the Soviet Union. These efforts aim to enhance stability and foster economic development through international cooperation. 

A recent study by the Central Asia Regional Economic Cooperation (CAREC) Institute delved into the trade relations of Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan from 2005 to 2021, assessing prospects and recommending policies for improving export growth.

In the decades following independence, Central Asian economies have focused on policies promoting trade with external partners, notably the European Union (EU), the People’s Republic of China (PRC), and Russia. The PRC, driven by substantial foreign direct investments (FDIs), has increased its economic engagement with Central Asia. 

Russia remains a vital partner due to geographical and historical connections that have bolstered economic development. Meanwhile, the EU has become crucial for political, economic, and cultural cooperation, fostering regional stability and sustainable development.

Despite these efforts, regional economic integration within Central Asia remains challenging due to low levels of regional economic interdependence. Central Asian countries often compete rather than complement each other in exports, and various factors such as infrastructure challenges and differing political systems hinder regional trade and investment.

The CAREC study aimed to identify factors influencing regional integration and evaluated trade relations with the EU, PRC, and Russia, focusing on trade openness, FDIs, distance, landlocked status, and exports. The study revealed that from 2005 to 2021, Kazakhstan had the highest average trade share with the EU at 31.9%, while Turkmenistan had the highest trade share with the PRC at 36.4%. Bilateral trade with Russia also showed growth, particularly for the Kyrgyz Republic and Uzbekistan.

The study also highlighted that a 1% increase in the GDP of Central Asian economies could boost exports by 0.005% to 0.05%. Similarly, a 1% GDP growth in the EU, PRC, and Russia could enhance exports by 0.007% to 0.09%. Moreover, increased FDIs from these major trade partners could raise Central Asia’s exports by 0.5% to 0.7%, driven by technology transfer, market access, and knowledge spillovers.

However, the region faces challenges such as limited industrial diversification, which leads to export uncertainty. The heavy dependence on a narrow range of products, particularly oil, gas, minerals, and agricultural goods, makes Central Asian economies vulnerable to global commodity price fluctuations.

To address these challenges and improve trade relations, several policy recommendations are proposed:

1. Strengthen Trade Agreements and Regional Cooperation: Bilateral or multilateral trade agreements, such as joining regional trade blocs, can enhance connectivity, facilitate trade flows, and attract foreign investment by harmonizing regulations, reducing trade barriers, and promoting cross-border infrastructure projects.
2. Improve Investment Climate: Policies that protect property rights, ensure regulatory transparency, simplify administrative procedures, and provide incentives for foreign investors can increase trade openness and attract FDIs.
3. Develop Infrastructure: Upgrading or building transportation networks, including roads, railways, ports, and airports, is crucial for connectivity and trade.
4. Streamline Customs and Trade Processes: Implementing modern customs regulations, and electronic customs clearance systems, and reducing bureaucratic obstacles can expedite the movement of goods.
5. Diversify Exports: Expanding the variety of export products can enhance participation in global value chains, reduce market dependency, and improve trade openness.

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