Energy, Wealth and Governance in the Caucasus and Central Asia In 1991 the eight countries of the Caucasus and Central Asia (CCA) became independent from the former Soviet Union. Although a region rich in natural resources, the transition toward a market economy has not gone smoothly for the CCA countries. Drawing upon recent progress in development economics and political science, the book provides fresh analysis of the CCA countries’ transition by tracing the impact of the natural resource endowment. The book examines the synergies between energy-rich and energy-poor states and highlights the practical consequences of both well-managed and poorly-managed energy revenue deployment. The region has been a relatively slow reformer, its governments have become more authoritarian, and the contributors argue that despite recent growth spurts, further reform is required to sustain rapid GDP growth and nurture democracy. They suggest that unless CCA elites change the way in which they deploy natural resource revenues, regional development will fall short of its potential with possibly disastrous consequences. The contributors apply the experience of the developing market economies to demonstrate that the region still holds considerable potential to become an important stable supplier of raw materials and a source of industrial demand to the global economy. However, the CCA could become a threat to the global economy as a consequence of the misuse of energy revenues in promoting the interests of predatory political elites. With contributions from prominent specialists on resource-driven econ- omies Energy, Wealth and Governance in the Caucasus and Central Asia pro- vides a systematic and integrated analysis of the political economy of resource-driven growth in the CCA region. Richard M. Auty is Professor of Economic Geography at Lancaster University, UK. Indra de Soysa is Associate Professor of Political Science at the Norwegian University of Science and Technology. ... 35 CENTRAL ASIA RESEARCH FORUM Series Editor: Shirin"" Akiner, School of Oriental and African Studies, University of London Other titles in the series: SUSTAINABLE DEVELOPMENT IN THE CASPIAN CENTRAL ASIA Politics, energy and security Edited by Shirin Akiner, Sander Tideman Edited by Shirin Akiner and Anne Aldis and John Hay ISLAM AND COLONIALISM QAIDU AND THE RISE OF THE Western perspectives on Soviet Asia INDEPENDENT MONGOL STATE Will Myer IN CENTRAL ASIA AZERI WOMEN IN TRANSITION Michal Biran Women in Soviet and post-Soviet TAJIKISTAN Azerbaijan Edited by Mohammad-Reza Djalili, Farideh Heyat Frederic Gare and Shirin Akiner THE POST-SOVIET DECLINE OF CENTRAL ASIA UZBEKISTAN ON THE Sustainable development and THRESHOLD OF THE comprehensive capital TWENTY-FIRST CENTURY Eric Sievers Tradition and survival Islam Karimov PROSPECTS FOR PASTORALISM IN KAZAKHSTAN AND TURKMENISTAN TRADITION AND SOCIETY IN From state farms to private flocks TURKMENISTAN Edited by Carol Kerven Gender, oral culture and song Carole Blackwell MUSLIM REFORMIST POLITICAL THOUGHT LIFE OF ALIMQUL Revivalists, modernists and free will A native chronicle of nineteenth century Sarfraz Khan Central Asia Edited and translated by Timur Beisembiev ECONOMIC DEVELOPMENT IN KAZAKHSTAN CENTRAL ASIA The role of large enterprises and foreign Aspects of transition investment Edited by Tom Everrett-Heath Anne E. Peck THE HEART OF ASIA ENERGY, WEALTH AND A history of Russian Turkestan GOVERNANCE IN THE CAUCASUS and the Central Asian Khanates from AND CENTRAL ASIA the earliest times Lessons not learned Frances Henry Skrine and Edward Denison Ross Edited by Richard M. Auty and Indra de Soysa Energy, Wealth and Governance in the Caucasus and Central Asia Lessons not learned Edited by Richard M. Auty and Indra de Soysa fl Routledge I~ Taylor & Francis Group LONDON AND NEW YORK First published 2006 by Routledge Published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2006 Editorial matter and selection, Richard M. Auty and Indra de Soysa individual chapters, the contributors Typeset in Times by RefineCatch Ltd, Bungay, Suffolk The Open Access version of this book, available at www.tandfebooks.com, has been made available under a Creative Commons Attribution-Non Commercial-No Derivatives 4.0 license. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Energy, wealth & governance in the Caucasus & Central Asia: lessons not learned / edited by Richard Auty and Indra de Soysa. p. cm — (Central Asia research forum) Simultaneously published in the USA and Canada by Routledge. Includes bibliographical references and index. 1. Caucasus — Economic conditions. 2. Asia, Central—Economic conditions—1991– 3. Energy policy—Caucasus. 4. Energy policy— Asia, Central. 5. Caucasus—Politics and government. 6. Asia, Central — Politics and government — 1991– I. Title: Energy, wealth and governance in the Caucasus and Central Asia. II. Auty, R. M. (Richard M.) III. De Soysa, Indra. IV. Series: Central Asia research forum series. HC415.16.E64 2005 333.79′09475′09049—dc22 2005001292 ISBN13: 978-0-415-37206-0 (hbk) Contents List of figures vii List of tables viii Acknowledgements x List of contributors xi PART I Introduction 1 1 Transition to mid-income democracies or to failed states? 3 RICHARD M. AUTY 2 Resource-driven models of the development of the political economy 17 RICHARD M. AUTY PART II Transition trends and scenarios within the CCA region 37 3 Nature’s blessing or nature’s curse? The political economy of transition in resource-based economies 39 AKRAM ESANOV, MARTIN RAISER AND WILLEM BUITER 4 Optimistic and pessimistic energy rent deployment scenarios for Azerbaijan and Kazakhstan 57 RICHARD M. AUTY 5 Resource abundance, governance and economic performance in Turkmenistan and Uzbekistan 77 RICHARD POMFRET 6 Transition and economic development challenges in the resource-poor countries 94 CEVDET DENIZER vi Contents PART III Political economy constraints 113 7Deficient social capital and its consequences for sustained reform 115 ERICA JOHNSON AND RICHARD M. AUTY 8 Incentives to reform in the Caucasus and Central Asian political states 135 RICHARD M. AUTY AND INDRA DE SOYSA PART IV Synergies of resource-rich and resource-poor CCA countries 153 9 The importance of good neighbors: regional trade in Central Asia 155 CLEMENS GRAFE, MARTIN RAISER AND TOSHIAKI SAKATSUME 10 Environmental problems and solutions in the Caspian and Aral Basins 177 ANIL MARKANDYA AND RICHARD M. AUTY 11 Regional threat perceptions and risks of military conflict 198 ROY ALLISON PART V Assessing the strength of external leverage on the CCA political economy 217 12 Prospective impacts of Russia and Iran 219 MARK N. KATZ 13 China, Russia and energy in the CCA region and East Asia 231 CHARLES E. ZIEGLER 14 The effectiveness of western leverage: IFI projects and programs 248 ROBINDER BHATTY AND RICHARD M. AUTY PART VI Conclusion 267 15 Conclusion: lessons not learned by the CCA countries? 269 RICHARD M. AUTY Index 282 Figures 1.1 Median GDP per capita of resource-rich and resource-poor developing countries 5 2.1 Staple trap and exogenous democratization model (STEX) 21 2.2 Competitive industrialization and endogenous democratization model (CIEN) 21 7.1 Vicious circles of rent-seeking behavior 123 9.1 Direction of trade 158 9.2 Intra-regional trade of trade blocs as percentage of total exports of each trade bloc 160 9.3 Development of trade liberalization 166 9.4 Average tariff rates 167 9.5 Percent of firms that export by size of enterprises 168 9.6 Prices in Kyrgyzstan relative to Kazakhstan 171 9.7 Prices in Uzbekistan relative to Kazakhstan 172 13.1 Oil and natural gas export infrastructure of the Caucasus and Central Asia 238 13.2 Selected existing and proposed oil and gas infrastructure in Russia’s Far East 242 Tables 1.1 GDP projections 2000–2020, Caucasus and Central Asian Region 6 2.1 Investment, GDP growth and investment efficiency, six natural resource endowment categories 1960–1997 18 2.2 Share of rents in GDP 1994 and GDP growth 1985–1997, by natural resource endowment 19 2.3 Evolution of political accountability, under political states with differing autonomy and aims 24 2.4 Initial conditions and transition trajectories, by geographical region 32 3.1 Indicators of resource dependence, selected transition economies and other oil-producing countries 42 3.2 Energy rents in AKTU and Russia, 1992–2000 43 3.3 Average expenditures on health and education 45 3.4 Reform progress in energy-rich countries, compared to Eastern Europe and non-oil CIS average 47 3.5 Direct and indirect transfers in the Soviet Union 49 3.6 Government turnover and social cohesion in transition economies 51 4.1 Estimated recoverable oil and gas, Caspian Sea region 2002 58 4.2 Azerbaijan: oil and gas fiscal revenues 1999–2000, with projections to 2020 59 4.3 Estimated cost of oil production, South-west Caspian Basin 60 4.4 Potential rent: Azerbaijan and Kazakhstan oil and gas, three price scenarios 61 4.5 Estimated cost of oil production, North Caspian 62 4.6 Kazakhstan: oil fiscal revenues 1999–2000, with projections to 2040 63 4.7 Structural change 1990–1999 and projections to 2020 65 4.8 Revenue, expenditure and fiscal compression by reform group 1992–1998 67 4.9 Population and per capita income, principal economic regions of Kazakhstan