K-News - Deputy Chairman of the EDB Management Board: Poverty Should not Be Associated Only with Problems

02 December 2013

K-News is publishing the second part of the interview with Deputy Chairman of the Management Board of Eurasian Development Bank Sergey Shatalov, who has shared his views on the prospects of our Republic in the framework of the Customs Union (CU) and the ways to fight poverty.

Mr. Shatalov, Kyrgyzstan’s accession to the Customs Union is very much discussed today. Among other things, the focus is on the risks of such accession.

Yes, I often hear from my colleagues in Kyrgyzstan about the risks of joining the CU. But let us take a composed and sober look at the benefits the Republic will get from joining the union. First, it is not related only to unimpeded flows of goods, but to free movement of services, capital, and labour. There are a lot of Kyrgyz labour migrants both in Russia and in Kazakhstan, and at the next stage of the Customs Union development and its transformation into the Eurasian Economic Space, they would acquire the national status on the territory of the EES member countries.

Second, we should keep in mind that Kyrgyzstan is a WTO member, and its tariff level is very low. Russia has also acceded to the WTO and has launched the process of reducing its tariffs to bring them to the very low level recommended by the WTO. That process is to be completed by 2018. And Kazakhstan is now at the cusp of joining the WTO. Low tariffs are always good, they mean open trade, which creates new opportunities for business. I am saying that to stress that the Customs Union should not be viewed as sort of a fortress, walled up with barriers, restrictive rules, and bans. The CU is a living body, whose aim is to make borders as open as possible. A country can generate wealth only through having open borders. The objective of the Customs Union is not to insulate itself from everyone—both east and west—with high walls, it is exactly the opposite. The more open an economy is, the more competitive it is.

Now about the risks. Let us think along the following lines: for certain industries in Kyrgyzstan there are concerns that their Russian competitors have greater resources and, thus, it will be difficult for Kyrgyz producers to compete with them. But we shouldn’t forget that the CU also involves free movement of capital that means that we’ll be getting additional investment in Kyrgyzstan. Thus, Kyrgyz producers will be competing not just as small businesses in the market, they would be getting additional chances to develop partnerships with large investors from the CU member states, new opportunities would open for them. And these investments are already flowing into the country.

In other words, do you think that our country will be competitive in the framework of the Customs Union?

I could be talking for hours about the Kyrgyz goods that can be competitive in the markets of Russia, Kazakhstan, and Belarus. Such goods do exist; Kyrgyz producers make attractive goods, which are already in high demand in the Russian and Kazakhstani markets. The brand of Kyrgyzstan is well known.

The common image of the Republic is that of an agrarian country and that its whole potential lies in the production of high-quality agricultural products. I spent a couple of years in the north of Kazakhstan, in Astana. And I know that in Astana—a rich city, the capital of a petro-state—consumers come to the market place specifically asking for organic produce of Chuisk oblast farmers. They ask for it specifically because it differs much from the industrial products, full of chemicals and pesticides, offered by other exporters. But there are also very interesting examples of high-tech enterprises that can be developed in Kyrgyzstan.

Here is a vivid example: a project is currently being developed in the city of Tash-Kumyr to build an enterprise, which would use the coal production wastes to make high-value aluminium ferrosilicon alloys from coal slag. These alloys are in high demand for the production  of top- quality steel. This is a purely high-tech production, the technology for which has been developed in Kazakhstan. And now, a partnership with a South Korean firm is being discussed to build such a plant in Tash-Kumyr. The alloys will be produced from Kyrgyz materials, on the Kyrgyz territory, by Kyrgyz experts and will meet the demand not only in the CU member states, but world-wide. South Korea, for instance, stands ready to buy the full volume of the plant’s output.

I think, Kyrgyzstan will also maintain its positions as a gold exporter, inter alia to the CU markets. It is important to understand that in this case, we are speaking about high-tech production as well. Every new gold-mining project is now extremely complex and requires application of cutting-edge technologies. And Kumtor is no exception: technologically, it is not an easy thing to process 7.5 million tons of ore per year at the altitude of 4.5 km.

The analysts of Eurasian Development Bank are currently looking for niches and sectors where the Republic has competitive advantages. We will be providing advice on which industries to develop. In addition, the Bank’s experts have developed, for example, a unique database on mutual investments of the CIS countries. It is a unique project and even experts of the World Bank show a great interest in it.

And what is the practical application of this database?

Its practical application is very interesting: we are helping business people of the countries, and the countries’ governments find the most efficient cooperation areas, which would be able to raise within the shortest period of time the living standards of our peoples––including the people of Kyrgyzstan, where the per capita income level is still not high.

Speaking about incomes, nearly 40 % of our population are below the poverty line. It is really a lot.

I have had a chance to work in a range of low per capita income countries in different regions of the world, including East Asia, Middle East, and Africa. I can state that all the countries that have successfully overcome poverty did the same thing. It was a combination of three factors that got them out of the poverty trap. First, it was the predictability and stability of their investment climate. Second, it was the low level of corruption. And third, it was the environment that enabled even the poorest citizens to develop their own business.

Don’t you think that it is difficult to expect that a person, who has always survived on bread and water, would all of a sudden turn into a businessman?

You know, there are wonderful cases of such transformations. In Bangladesh, there exists an amazing bank called Grameen Bank. The bank provides micro loans, sometimes as small as US $50-100, to the poorest households. Surprisingly, the share of non-payments under those tiny loans from Grameen Bank is very low. That means that the poorest households honestly repay the debt and get out of poverty because they really strive to achieve that. They want their children to have a better life, to get educated, and to see the world. And this motivation of the people, who live in poverty now, is always a powerful driver of amazingly fast development. Poverty should not be associated only with problems.

Mr. Shatalov, going back to the Customs Union and the Single Economic Space, when would we be able to say that the process of Eurasian integration is completed? When would the CIS countries arrive at something similar to a European Union?

Integration developments are gradual and slow. The first integration community of Western Europe—the European Coal and Steel Community, which became the core of the European Union––was created back in 1952. While Euro was launched only in 2000. It took half a century to come to the point of introducing a common currency.

The Customs Union was established in 2011 by three countries in the framework of the Eurasian Economic Community. And the EurAsEC includes five member states and three countries with the observer status. If we try to introduce a common currency now, there will be grave problems arising from differences in the level of development of our economies. Look at the current debt crisis in Europe – it has been largely caused by attempts to bring such countries as Greece and some Eastern European countries to the level of development of Germany too fast. Integration unions are like trees: they grow slowly.

I do not think that the process of Eurasian integration would be ever completed. I would not be making forecasts now concerning introduction of a common national currency at all. I think no one is prepared now to be discussing this issue. Well, experts may sometimes say: “Let’s introduce a common currency – altyn. After all, Turkic people used to have a common currency called “altyn”, which operated on the whole Eurasian space.” But these are simply rhetorical statements; we are actually absolutely unprepared for that now. It may take 20 years and even longer before a common currency is launched.

While today, the key thing is for the countries to see the benefits of the next stage of integration. The biggest benefit of integration now will come from the dismantlement of barriers for the movement of goods, services, labour, and capital. And that should happen between the CU member states within the coming few years. It is a five-year horizon. And that would generate the most powerful effect.