89226 A briefing of good practices and lessons learned from the Europe and Central Asia region June 2014> Volume 70 Tajikistan: Reinvigorating Growth in Khatlon Oblast Authors: Francisco Carneiro and Marina Bakanova This report supports a joint World Bank-IFC initiative to review and evaluate economic growth prospects for Khatlon Oblast in order to develop a private sector-driven strategy for accelerating the region’s growth over the medium term. Context With almost 2.7 million people in 2011, the oblast of Khatlon is the most populous of the four administrative regions of Tajik- istan and contains over one-third of the country’s total inhabit- ants. The population is overwhelmingly rural (83 percent) and is engaged predominantly in primary agriculture, with less than 3 percent employed in the industrial sector. Approximately one-third of all ginneries in Tajikistan are in Khatlon, includ- ing three new ones that began operations in 2012. The oblast also accounts for two-thirds of the national raw cotton output and one-half of the cotton fiber production. On the other hand, Khatlon borders Afghanistan and lies on the path of major drug smuggling routes. Its poor, agriculture-based economy is highly KEY MESSAGES dependent on export of labor to Russia, and its population is heavily reliant on remittances from migrant workers; in addition, • Khatlon region offers potentially significant it routinely faces severe winter energy constraints despite its comparative advantages in its ability to produce early large energy-generation potential. season crops, access to abundant water resources, Map 1. Khatlon: Railway and Road Links relatively low labor costs, the potential for air freight from three airports in proximity to most production sites, and preferential access to existing markets within the CIS as well as growing access to the south Asian markets. • There are a number of risks that could seriously impede the growth in Khatlon: realizing the potential of the region is threatened by the nexus of regional insecurity, poor governance and weak institutions. • Key reform imperatives for stimulating growth in Khatlon include: (i) promoting cities and internal connectivity to build labor skills, realizing scale economies, and diversifying output; (ii) harnessing the potential of agriculture for exports; (iii) reshaping public policies to encourage entrepreneurship and reduce corruption; and (iv) retooling free economic zones to build in internal supply chains and conform to modern management practices. Source: Central Asia Regional Economic Cooperation, CAREC (ADB). The Khatlon oblast is geographically remote from the main Agro-processing (fruit and vegetables) and textiles and cloth- markets of Western Europe and the Asian side of Russia, and ing offer the most promise for development in terms of poten- is separated from China by largely impassable terrain. It is, how- tial scale of impact and numbers in employment. There is no ever, favorably well located for the markets of South Asia. regional or national strategy for agro-processing. A strategy The oblast is predominantly rural but contains two major cities, should consequently be developed to provide a framework for Kurgan-Tube and Kulyab, and several smaller ones, including policy and other reforms. The full exploitation of early season Nurek, Sarband, and Dangara. In that context, policies that crops requires much closer attention to logistics factors. promote urbanization with the objective of export diversifica- Although there is abundant air capacity, liberalization in civil tion offer a promising approach that could yield economic aviation will be needed to attract additional private investment. benefits for Khatlon’s local population as well as for Tajikistan Khatlon’s comparative advantage in this area is bolstered by as a whole. access to three international airports within close proximity to A Strategy for Transforming Development in the Oblast several of the region’s production sites. However, the liberaliza- tion of air services and the provision of third-freedom rights are At the request of Tajikistan’s central and regional governments, necessary to attract private investment, especially if the rapid the World Bank and the International Finance Corporation (IFC) transport of perishable, high-value agricultural products is to be conducted a joint analysis of economic growth prospects in facilitated. Khatlon oblast, focusing particularly on ways to promote and facilitate private sector development. The report, “Reinvigorating Growth in the Khatlon Oblast”, offered a number of observations about the current economic situation in the oblast and potential obstacles to growth, and also provided recommendations to inform future reform efforts. The diversification potential of Khatlon, together with the sparseness of the current population and economic activity densities, calls for efforts to promote economic agglomeration. In particular, the effects of agglomeration could be magnified if connectivity were to be developed within the two free economic zones being established in the oblast in Dangara and Nizhni Pyanj. These zones could stimulate growth in production and exports by reducing the governance, economic, tax, and regula- tory costs of doing business and, through supply chain linkages with the rest of the oblast, help accelerate overall economic growth. Rising production would seek to exploit the transport links with the capital Dushanbe and beyond as well as with northern Afghanistan, which could offer access to the huge There will be no progress on developing the participation of the South Asian markets. private sector in the oblast without improved safeguards for The main barriers to investment in Khatlon are weak govern- property rights and contracts. Private investments require com- ance, widespread corruption, tenuous property rights, and plementary public investments in infrastructure and in human frequent energy shortages. As a consequence, in the free capital. Although such private investments may be facilitated economic zones, the legal regime, the application of laws on by progress in legislation on public-private partnerships (PPPs), property rights and governance of businesses, leadership and experience shows that successful and durable PPP transactions administration, and the supply of infrastructure will have to be take place only when supporting public institutions are fully of a wholly different order than what is found in the rest of the credible and private confidence in the security of property rights country. Every effort should be made to ensure that the man- and the sanctity of contracts is high. agement and regulatory authority of the zones has the capacity, It is also particularly important that Khatlon reform its border resources, and ability to be independent and professional, and procedures and practices with respect to Afghanistan and decisions on entry into the zone should be made on thoroughly Uzbekistan. The absence of a system of payment guarantees objective grounds. forces the oblast to use convoys at high fees and generally large Khatlon offers several comparative advantages: the ability to logistical and time costs, as these convoys must be formed, produce early season crops, access to abundant water re- transported, and cleared as a group. To realize the full potential sources, low labor costs, the potential for air freight from local of food and agribusiness exports as well as those in new light airports, and growing access to the South Asian markets. manufacturing industries, road and freight logistics constraints must be addressed. Also, a number of steps in customs reform and trade facilitation are necessary. KNOWLEDGE BRIEF > www.worldbank.org/eca Corruption within the customs system, long government- Over the past five years, there has been a significant rise in the imposed delays at borders (especially at the Uzbek border), and number of small enterprises or businesses as measured by the more or less obligatory inspections, regardless of risk consid- number of patents issued. As the number of functioning small erations, are impediments to formal and informal trade. and medium-sized enterprises (SMEs) has risen only slightly Labor migration within the region into the cities could trans- over this period, it appears that the degree of informality has form the shape of growth. With the number of labor migrants grown. If entrepreneurship in Khatlon is to prosper, this trend constantly on the rise, an unofficial unemployment rate at must be arrested. around 30 percent (especially among the youth), and only mod- est job creation, labor migration from Khatlon is there to stay. Exacerbated by a very low level of investments in the region (including foreign direct investment [FDI]), remittances are by far the largest source of foreign exchange and income when compared to exports, official development assistance, FDI, and public expenditures. What is more, in view of the high fertility rate during the last 20 years and the large share of youth (ages 15–29) that are primarily unemployed or self-employed in agri- culture and/or petty trade, labor migration should be treated as a labor market pressure relief strategy. The key policy consid- eration should therefore be about giving the younger genera- tion employment alternatives rather than focusing on concerns about labor export. Risks that Could Hold Back Growth in Khatlon There are a number of risks that could seriously impede de- velopment growth in Khatlon. First, narrow political participa- Fifth, Khatlon can be the energy power battery of the country, tion as a legacy of the civil war and the resulting fragile polity but continuing energy shortages restrict growth. Tajikistan has remains a latent threat. The Khatlon oblast was the focal point large hydro potential estimated at 264 terawatt hours (TWh) of the civil war, which took place during 1992–93 and contin- per year, or over half of the hydro potential of the whole of ued with lower intensity until 1997. The war ended through a Central Asia. Much of this potential lies in Khatlon, but unfor- national peace agreement with protocols on military unification; tunately only about 6 percent of this potential is developed. progress has been made on the formation of a national army, Paradoxically, in a country with abundant hydropower potential but fair and equitable political participation and division of and a strong inherited Soviet tradition of engineering in the power remain highly contentious throughout the country. sector, electricity supplies are notoriously deficient and unreli- able. Energy shortages are exacerbated by the privileged access Second, the geopolitics of security and the narcotics trade accorded to a large aluminum smelter. With too-low tariffs and represent serious threats. The importance of the Khatlon oblast large energy losses, the sector runs deficits that have conse- as a front line against extremism and the war on drug traffick- quences involving inadequate operations, maintenance, and ing grows in light of the planned withdrawal of NATO forces capital spending, and arrears in taxes and payments to suppliers. from Afghanistan in 2014. The Afghan-Tajik border—which is Both infrastructure improvements and management reforms, 850 miles long—is highly porous. Attaining firm command over including transparency in accounts and financial controls paid the border will require investments, electronics and detection for partly by rational tariffs, are essential. equipment, and improvements in human capacity and skills in all aspects of border control. Recommendations Third, heavy bureaucracy, underdeveloped institutions, and The proposals for reform provided in the World Bank/IFC report pervasive corruption hamper efforts to improve competitive- make clear that Khatlon’s rise in strategic significance has to ness and limit growth prospects in the entire country, including be matched by responses in public policy and a strong upturn Khatlon. Corruption is a product of state capture by a highly in private investment to strengthen the oblast’s economic centralized, unitary administration that exercises discretion prospects. A summary of the main reform areas that will need with few checks and balances. A patronage system and clan- the attention of the authorities is presented in the box below. based hiring weaken institutions and sap competence in public The report’s findings and recommendations, which have been administration. If Khatlon’s institutions are to be strengthened, discussed at both the central and regional levels with the strong there must be a substantial effort to build up the demand side participation of business and donor communities, will lay the of governance. foundation for a new strategy of regional development for Khatlon. Fourth, entrepreneurship is constrained by rising informality. KNOWLEDGE BRIEF > www.worldbank.org/eca Box 1. Summary of Major Policy Recommendations ABOUT THE AUTHORS Reforms to Attract and Reforms to Boost the Risk Mitigating Measures Retain Private Investments Potential of Free Economic Zones FRANCISCO CARNEIRO is Lead Economist and Sector • Focus on institutions • Clarify the purpose of • Prepare a medium-term Leader for the Caribbean in the Latin America and and markets. Attention zones and strengthen reform program to bolster Caribbean Region; he was the should be given to land zone institutions to im- oblast and raion (region) main author of the report. use, public services, and prove governance, reduce revenues, reduce volatil- infrastructure quality. corruption, strengthen ity in revenues, and attain MARINA BAKANOVA property rights, and re- greater predictability in is the Senior Country • Improve safeguards Economist for Tajikistan and for property rights duce energy shortages. both transfers from the was the co-author of the and contracts. • Make the management central budget as well as report. of the zones independent donor inflows. • Rehabilitate roads and feeder roads and professional. • Deepen post-conflict connecting cities to • Improve transport and tel- reconciliation and broaden the hinterland. ecom connectivity within representation in govern- the two free economic ment and civil service in • Simplify customs support of stability. and border procedures. zones. • Develop a stratetgic, • Enhance security control • Increase public in- at the border with Afghan- vestments in energy inter-linked approach to infrastructure needs in the istan with better equip- generation to raise ment and better human energy-efficiency zones. capital. and thermal genera- • Build stronger links be- tion investments. tween the zones and the • Stimulate the mar- cities in the oblast. ketability of land fol- • Allow the free movement lowing reform of the of labor across the oblast land code to unlock and zones. The findings, interpretations, and conclusions expressed herein are the potential of the • Invest in training and skills those of the author(s), and do not necessarily reflect the views of the rural land bank. development. International Bank for Reconstruction and Development /The World Bank • Ease urban zoning • Create and develop labor and its affiliated organizations, or those of the Executive Directors of transactions. migration support infra- The World Bank or the governments they represent. The World Bank • Adopt measures to structure. does not guarantee the accuracy of the data included in this work. The raise labor skills to • Strengthen local executive boundaries, colors, denominations, facilitate migration capacity in the oblast to and other information shown on any map in this work do not imply any to new urban op- manage migration. judgement on the part of The World portunities. Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. To access the full report, please visit: http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2013/09/19/000356161_20130919144213/Rendered/PDF/785250REVIS ED00atlon0pub08019013web.pdf “ECA Knowledge Brief” is a regular series of notes highlighting recent analyses, good practices, and lessons learned from the development work program of the World Bank’s Europe and Central Asia Region http:/ /www.worldbank.org/eca KNOWLEDGE BRIEF > www.worldbank.org/eca