Role of multilateral and regional trade disciplines: Kyrgyzstan’s experience

Role of multilateral and regional trade disciplines: Kyrgyzstan’s experience

Accession to WTO is not a panacea to economic problems

This paper analyzes the process of Kyrgyzstan’s WTO accession and its impact on the republic’s economy and foreign trade balance.

The author’s main finding is that the republic’s accession to the WTO did not improve the country’s imports and exports and did not lead to a significant increase in FDI. As a matter of fact, FDI fell by approximately 30% from 1998 to 2000 (a subsequent increase in FDI is attributed to FDI from non-WTO countries: Russia and Kazakhstan). There is also no evidence that WTO accession affected Kyrgyzstan’s shadow economy (especially remittances sent by Kyrgyz laborers working in Russia, estimated at 25-50% of the country’s official exports).

On the other hand, the transition to the VAT destination principle, mandated by the WTO, had a positive impact on budget revenue, as VAT on imports provides the largest share of taxes collected in the republic. Equalization of import and domestic excise rates also had a positive effect on budget revenues.

According to the author, the changes in the republic’s balance of trade are mainly attributed to non-WTO factors:

  • massive foreign aid received since 1993 which was sometimes used to finance imports and allowed a very large budget deficit (up to 10% of GPD in 1996-2000)
  • as a result of budget deficit, the effects of the nominal exchange rate devaluation in 1998 were particularly severe, causing a 50% depreciation in real exchange rate against non-CIS currencies
  • since 2002 the republic’s trade with its main foreign partners (Russia, Kazakhstan and Uzbekistan) began to improve as some of the trade barriers imposed by Kazakhstan and Uzbekistan were lifted
  • strong real depreciation of the domestic currency undermined the competitiveness of imported consumer goods originating from non-CIS countries (especially China)

  • the depreciation of domestic currency rendered foreign debt unserviceable

The author concludes that the effects of WTO membership were secondary to other developments in the economy, as exports and imports continued to decline. The author notes that a significant increase in the export of Kyrgyz goods on the world market would require more than a removal of barriers to trade. Some of the problems that must be addressed include:

  • high transportation costs and the region’s geographic isolation (an increase in trade with China would require massive investments into new transport infrastructure)
  • prevalence of primary product production in the economy and small size of enterprises
  • low productivity and quality of production