THE WORLD BANK EUROPEAND CENTRAL ASIA REGION CENTRALASIA COUNTRY UNIT CENTRAL ASIA REGIONAL FRAMEWORK February 20,2004 ACRONYMS AND ABBREVIATIONS ADB - Asian Development Bank AIDS - Acquired Immunodeficiency Syndrome CAKSI - Central Asia Knowledge Sharing Initiative CDD - Community DrivenDevelopment CIDA - Canadian lnternational development Agency CIS - Commonwealthof Independent States DFID - UKDepartment for InternationalDevelopment EBRD - European Bank for Reconstruction and Development ECO - Economic Cooperation Organization EU - European Union FIAS - Foreign Investment Advisory Service FSU - Former Soviet Union GDP - Gross Domestic Product GEF - Global Environment Facility GUUAM - Georgia, Ukraine, Uzbelustan, Azerbaijan, and Moldova HIV - Human Immunodeficiency Virus IDA - InternationalDevelopment Agency IFAS - InternationalFundto save the Aral Sea IFC - InternationalFinance Corporation IFIs - InternationalFinancial hstitutions IMF - InternationalMonetary Fund MIGA - Multilateral Investment Guarantee Agency MDGs - MillenniumDevelopment Goals NGO - Non-Governmental Organization SME - Small and MediumEnterprise TB - Tuberculosis TRACECA- Trans-Caucasus and Central Asia transportation corridor UN - UnitedNations UNDP - UnitedNations Development Program UNEP - UnitedNations EnvironmentPrograin UNODC - United Nations Office on Drugs and Crime USAID - United States Agency for International Development WBI - World Bank Institute WHO - World Health Organization WTO - World Trade Organization Country Director: Dennis de Tray, ECCU8 ACKNOWLEDGEMENTS The paper was prepared by Lilia Burunciuc. Inputswere provided by Luis Alvaro Sanchez, Masood Ahmad, Ritu Anand, Loup Brefort, Marjory-Anne Bromhead, Joana Godinho, EvaMolnar, Chris Lovelace, David Mikosz, Samuel Otoo, Pedro Rodriguez, Sarosh Sattar, Raghu Sharma, Andriy Storozhuk, and Michel Zarnowiecky. Gorton De Mond, Jr. and Gokhan Akinci provided input from the International Finance Corporation and Foreign InvestmentAdvisory Service. Anders Zeijlon provided input from the World Bank Institute. Anthony Cholst, David Pearce, and DanielaGressani provided extensive comments. Inaddition, many colleagues from the ECA region o f the World Bank contributed to the paper with comments and discussions. Nargis Ryskulova formatted the paper. The paper was prepared under the overall guidance o fDennis de Tray, Country Director for Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan. The paper benefited from consultations with the Central Asia Governments and civil society organizations. It was presented at the Senior Officials Meeting on Central Asia Regional Cooperation on November 11,2003 inTashkent, Uzbekistan. The paper was discussed with donor partners such as Asian Development Bank, European Bank for Reconstructionand Development, International Monetary Fund, United Nations Development Program, European Union and others. TABLE CONTENTOF EXECUTIVE SUMMARY ..................................................................................................... i I BACKGROUND . ............................................................................................................ 1 ECONOMIC SOCIALBACKGROUND AND .......................................................................... 1 11 OVERVIEW OFTHE REGIONALISSUES . ...................................................................... 3 CRITICAL ISSUES ............................................................................................................. 3 CROSS-BORDER THEMATICISSUES ................................................................................. 7 I11 LESSONS . .................................................................................................................... 7 IMPEDIMENTSTO REGIONAL COOPERATION .................................................................... 7 PREVIOUS AND EXISTINGEFFORTSREGIONAL AT COOPERATION .................................... 8 LESSONS LEARNED ......................................................................................................... 9 Iv. FRAMEWORKTHE FOR WORLD BANKGROUP PROGRAM ........................................ 9 OBJECTIVES.................................................................................................................... 9 APPROACH INSTRUMENTS AND ..................................................................................... 10 REGIONAL DEVELOPMENT PRIORITIES .......................................................................... 12 REGIONAL DONOR PROGRAMS ...................................................................................... 19 DONOR COORDINATION................................................................................................ 20 ADMINISTRATIVE AGENDA ........................................................................................... 21 EXPECTEDRESULTS ...................................................................................................... 22 LISTOFFIGURES AND BOXES FIGURE1.TRANSITLINKSOF CENTRALASIAREPUBLICSWITH WORLD MARKETS............................. 4 BOX 1. THEWATER AND ENERGYNEXUSON THE SYR DARYA RIVER................................................. 14 LISTOFANNEXES ANNEX1. REGIONAL ECONOMIC COOPERATION INCENTRAL ASIA ANNEX2. REGIONAL PROGRAMSUMMARY ANNEX3 REGIONALDONORPROGRAMS INCENTRAL ASIA ANNEX4. KEY INDICATORS FORCENTRALASLA ANNEX5. MAPOF CENTRALASIA CENTRAL ASIAREGIONAL FRAMEWORK Executive Summary More than ten years after the breakup o f the Soviet Union, five countries inCentral Asia are still strugglingto find suitable arrangements for regional cooperation. On a variety o f fronts, these countries are intertwined - common problems and shared resources necessitate coordinating polices and programs especially incritical areas like water, energy, trade, and transport. Moreover, these countries could benefit substantially from learning from each other as they face up to the challenges o f modernization. Without notableprogress on regional cooperation, it i s difficult to see highand sustained rates o f economic growth and reduced poverty in Central Asia. So far, efforts at cooperation have had limited success as mutual trust i s low. Even in areas where getting along is essential, cooperative schemes have been unstable - e.g., public goods or resources that must be shared due to geography (e.g., the Amu Darya and Syr Darya rivers) or the physical infrastructure inherited from the Soviet Union such as regional power grids, pipelines, canals, highways, and railroads. Cultural and political dimensions o f nation building, increasing isolationist policies o f some countries, different rates o f transition and diverse economic prospects due to different natural resources endowments have made regionalcooperation difficult. Henceforth, a formidable challenge lies ahead for the region's countries insolving the greater problems o f mistrust and negative setbacks. They are not alone inthis effort, however. Donors have long recognized the importance o f supporting regional cooperation among the Central Asia countries, but the scale and complexity o fthe problems and the limited progress on the ground have been daunting. Nevertheless, donors are prepared to provide continued support to regional cooperation and they are looking for new ways to make their assistance more effective. The present Central Asia Regional Framework has three main objectives. First, it will help produce a shared vision o f the regional issues and ways to address them within the World Bank Group; second, it will enhance the effectiveness o f national programs by maximizing synergies between regional objectives and national assistance strategies; third, it will set the basis for a productive dialogue with the countries and donors. Itwill also help advance the efforts started under the CIS-7 initiative by tailoring them to the specific problems o f Central Asia. Given the lessons from past experiences, the framework proposes a cautious approach, based on the premise that reaching real results on the ground will be a long-term effort in which the commitment of a broad range o f stakeholders will be necessary for success. Therefore, the World Bank Group will begin by focusing on areas that are not politically sensitive - analytical work, information sharing, scientific exchanges, and nongovernmental(NGO) exchanges -as a basis upon which to buildregional trust. It will not stay away from more politically sensitive areas, but itwill proceedwith caution, making advances when a critical mass of country support i s inplace. Itwill seek to build 1 its regional programs around local initiatives. While strategies will be developed at the regional level, preference will be given to implementation at the national level. Regional projects will only be pursued incase the country buy-in reaches a critical level and there are clear advantages o f regionalprojects over national ones. The World Bank Group will not wait untilall five countries are ready to cooperate and will provide support if two or three are willing to work together on a particular issue. This framework i s part o f a wider ongoing effort by the donors aimed at improved regional cooperation inCentral Asia. It will be periodically revised to reflect progress and lessons. .. 11 CENTRALASIA REGIONALFRAMEWORK I.Background 1. The Central Asia region consists o f five former Soviet Union republics, namely Kazakhstan, Kyrgyz Republic, Uzbekistan, Turkmenistan, and Tajikistan. Stretching from the Caspian Sea in the west to China inthe east, and from central Siberia inthe north to Afghanistan and Iran inthe south, the region covers an area nearly the size o f Western Europe. But with 57 million inhabitants, this region has only about one seventh o f its population. Central Asia i s defined by its geographic features - impassable mountain ranges and vast expanses o f grasslands and deserts - as well as its remoteness. All five countries are landlocked and distant from the major industrial andpopulation centers o f Europe, the Middle East, and the Far East. The countries share historical, cultural, and ethnic ties along with a rich tradition o f trade along the ancient Silk Road. Central Asia was once a flourishing andbooming region. Today it occupies a marginal position amidst more powerful states, and each country is pursuing an independent approach to its development, often through policies that encourage self-sufficiency. 2. Inthe Soviet Union, the constructionofwater infrastructure andthe canal system, water sharingarrangements, generation, pricing, and trade inenergy, the structure o f production and trade inindustryand agriculture, and fiscal revenue transfers were determinedby the region's function ina larger plannedeconomy. The countries had some o f the Soviet Union's key industrial plants and exported a wide variety o f capital and processed goods. With the breakup o f the Soviet Union, the links have been broken and the integrity o f the infrastructure systems destroyed. 3. As a result, economic links inthe Central Asia countries have dramatically disintegrated. Political, logistical, and bureaucratic obstacles at national levels have limited communication among decision makers, even on issues o f demonstrably mutual interest. When attempts havebeen madeby region leaders to resolve critical inter-state issues (e.g., water sharing), the signed agreements, for the most part, have been unstable. Continued poor coordination among countries will reduce the prospects for economic growth and poverty reduction inthe region. 4. Outside the region, Central Asia is surrounded by important markets (Russia, China, Afghanistan, Iran, Pakistan, India, and Turkey). The future o f Central Asia largely depends on strengthening cooperation with its neighbors. It should take full advantage o f its strategic position at the cross roads between these markets. Economic and Social Background 5. Naturalresources and income levels. The disparity between natural resource endowment and living standards inthe Central Asian region i s striking. The region i s rich innaturalresources, especially oil, gas, precious metals and hydroelectric power. Turkmenistan has, according to some estimates, the world's fourth largest proven reserves o f natural gas and is one o f the world's largest natural gas exporters. Uzbekistan has sizeable reserves o f oil, natural gas, and gold. Kazakhstan already exports 1million barrels o f oil per day and could double its production by 2010. The Kyrgyz Republic and Tajikistan are major producers o f hydroelectric power. Nevertheless, in 2002 the combined Gross Domestic Product (GDP) o f the five countries was only US$39 billion. Per capita income is highest inthe oil-rich, relatively reform-oriented Kazakhstan (US$1650 in2002). Per capita incomes inthe richly-endowed but slow reforming countries like Uzbekistan and Turkmenistan ( U S 3 14 and US$685, correspondingly) remain clearly depressed compared to their potential. Inthe mountainous Kyrgyz Republic and Tajikistan per capita incomes are only starting to recover at a slow pace and from a very low level; in2002 their GDP per capita was correspondingly US$326 and US$1811(see Annex 4). 6. Macroeconomic situation. All five countries have succeeded in curbing hyperinflation and achieving relative price stability. Kazakhstan and the Kyrgyz Republic liberalized prices soon after independence and brought inflation down by pursuingtight monetary policies. Tajikistan, Turkmenistan, andUzbekistan stabilized later and have maintainedprice controls to different degrees.* All countries introduced national currencies between 1993 and 1995 and, with the exception o f Uzbekistan and Turkmenistan, soon thereafter introduced current account convertibility. Uzbekistan did not formally announce current account convertibility untilOctober 20033. Turkmenistan remains the only transition economy without current account convertibility. Although all five countries have grown economically since the late 1990s, the region i s highly vulnerable to exogenous shocks such as world commodity prices. The Kyrgyz Republic and Tajikistan have accumulated high external debts, some o f which had to be rescheduled, and thus their borrowing capacity is severely limited. 7. Structural Reforms. The Central Asia countries have chosen very different paths and rates o f transition to a market economy. Kazakhstan and the Kyrgyz Republic were amongst the most vigorous early reformers inthe entire Commonwealth o f Independent States (CIS). Tajikistan began its structural reform program in earnest only in 1998, after its civil war ended. Uzbekistan has adopted a gradual pace o f reform, and in Turkmenistan very few structural reforms have been implemented. Thus, the economies o f Turkmenistan and, to a significant extent, Uzbekistan still largely operate inthe central planning mode. `Calculated basedon GDP at market prices and market exchange rates for Kazakhstan, Kyrgyz Republic and Tajikistan and at indicative exchange rates for Uzbekistan and Turkmenistan. The indicative exchange rate for Uzbekistan is defined as a weighted average ofthe official (60%), commercial banWconsumer goodslcash (10%) andparallel market (30%) exchange rates. For Turkmenistan, the indicative rate is a weighted average o f the official (70%) and parallel market (30%) exchange rates. Uzbekistan's consumer price inflation (according to official statistics) did not decline from above 20 percent to lower single digits until 2003 and its broader inflationmeasures producer price index and GDP - deflator -are still inthe 20-30 percent range. 3 The sustainability o fpolicies that Uzbekistanused to achieve the exchange rate unification (e.g., trade and cash restrictions) is questionable. 2 8. Poverty. The Central Asian republics were the poorest part o f the Soviet Union and poverty has increased sharply duringthe transitionperiod as a result o f the output contraction and increased inequality inthe distribution o f income (see Annex 4). Rural populations, especially inthe more remote parts o f the region, have traditionally been the poorest. Poverty, together with artificially drawn borders, which cut across traditional transport routes and created a number o f enclaves4,has led to social and economic tensions among the countries and peoples. The situation i s particularly difficult inthe densely-populated Ferghana Valley, shared by Uzbekistan, Tajikistan and Kyrgyz Republic. Ifpoverty and trade barriers are not addressed, the area may well become a breeding ground for future civil and social unrest. 11. OVERVIEW OFTHE REGIONALISSUES 9. Inreviewingregionalissues, it helpsto group them into two categories. Firstare critical issues involvingregional public goods that require cooperative solutions- removing trade and transit barriers, developing more effective ways o f sharingwater and generating energy, managing shared ecosystems, creating more efficient and coordinated transportation networks and preventing communicable diseases. Second are cross-border thematic issues such as human development issues, community linked development and microfinance and private sector development which represent similar concerns as well as opportunities for countries to develop common strategies. Critical Issues 10. Trade and transport. Impediments to trade and transit hamper both intra- regional and international trade and are increasingly becoming a serious constraint on economic activity inthe region. Although over the past decade most Central Asia countries have substantially liberalized their trade regimes and lowered overall tariff levels, inpractice large differences intrade policies remain. The Kyrgyz Republic is a member o f the WTO; Tajikistan has a very liberal trade regime and Kazakhstan has a reasonably liberal one. Turkmenistan's foreign trade regime i s not particularly restrictive on paper butexport-import operations are seriously hamperedby foreign exchange restrictions and state dominance o f the economy. On the other hand, Uzbekistan, a key country to the development o f trade given its central location inthe region, has a restrictive foreign trade regime with hightariff import protection and numerous non-tariff barriers such as border closures. The negative impact of various trade barriers erected by the larger Central Asian countries is exacerbated by corruption and puts a burden on The Soviet Union drew the borders inCentral Asia in 1924 so that residents ofone province hadto cross the temtory of aneighboring republic inorder to reach another province of the same country becauseo f natural barrierssuch as impassible mountains. Almost every country inthe region has so-called enclaves that belong to its neighbors. For example, there are four Uzbek enclaves and one Tajik enclave inKyrgyz Republic, one Kyrgyz enclave inUzbekistan, etc. Inthe Soviet era, when republican borders hadpurely administrative significance, there was no transit problem. With the creation ofnational states and introduction o fvisa and customs regimes after the collapse ofthe Soviet Union, serious transit problems for goods andpeople arose, sometimes leading to open conflicts. 3 smaller countries that are seeking to join the global economy and the small traders (often poor) that rely on cross-border trade for their livelihood. 11. Moreover, transportation costs (withinand outside the region) continue to be prohibitive due to man-made barriers, unpredictable quality o f services and lack o f adequate infrastructure. Today, transportation routes inthe region mirror Soviet-era trade patterns - the network is relatively well developed on the route to MOSCOW, butseverely underdeveloped along alternative trade routes to the east, west and south, where the potential new markets are (see Figure 1). To integrate itself into the world economy, Central Asia should put inplace policies, institutions and infrastructure that facilitate the flow o f goods. Figure1. Transit links of CentralAsia republics with world markets 12. Water. The populations of Central Asia are heavily dependent on water for agriculturalproduction5and energy generation6, making water management andusage critical issues for the region. But Central Asia's massive irrigation systems are in disrepair, and wasteful use o fwater and energy is endemic. Over the past 50 years, water flows into the Aral Sea have been drastically reduced as a result o f irrigation development andpoor water management, with serious environmental and social consequence^.^ Since only 30% of the water diverted for irrigation from the Syr Darya and Amu D a y rivers is actually used while 70% i s lost, the irrigation efficiency needs to be improved significantly. Irrigation accounts 92% of consumptivewater use out of an average annualriver flow of 120billionm3. The share ofelectricity generatedby hydropower i s 97% inTajikistan 92% inthe Kyrgyz Republic 13% inKazakhstan, 12%inUzbekistanand0.1%inTurkmenistan. The Aral Sea's surface area, once 65,000 sq km, is now less than halfofthat, and its increasingsalinity has causedthe devastationof a once thriving fishing industry. The local climate has beenmodifiedand there hasbeenloss of wetland ecosystems and biodiversity. 4 13. On Syr Darya, poor drainage and water management practices leadto unnecessary losses o f about 6.8 billion m3annually. Moreover, about 3 billion m3o fwater is "wasted" annually into the Arnasai depression as a result o f inefficient energy/water arrangements on the Naryn cascade inthe Kyrgyz Republic. Non-optimal operation o f the cascade i s due to the present need o f the Kyrgyz Republic to use water to generate power to satisfy its electricity needs inwinter, while downstream countries (Kazakhstan and Uzbekistan) need water to satisfy their irrigation needs inspringand summer. The integrated nature o f the irrigation and energy systems on the Syr Darya river makes regional cooperation vital. The present water-sharing agreements are fragile and inefficient due inpart to a lack o ftrust between the parties involved, but also because they are complex, difficult to implement, and rely on barter transactions @e., providing coal and gas inwinter in exchange for water insummer). This situation has heightened political tension surrounding water allocations and i s leading countries to plan large, possibly wasteful investments inwater storage, transmission, and energy generation based on sub-optimal designs at the country level. 14. Energy. This i s another area o f disintegration, as the regionaltransmission network developed during Soviet times has separated into parts, and new institutional mechanisms for operating an integratedregional network are not yet developed. Moreover, individual countries are considering embarking on power generation projects without considering the size o f regional electricity markets, potentially leading to an excess supply o fhydro and thermal power. Besides that, it is important to note that the efficiency o fthe national energy systems i s very low, generating significant technical and economic losses. 15. Shared ecosystems. Though less contentious, an additional challenge for regional cooperation is the management o f mountain, steppe, and wetland ecosystems shared among several of the countries. The region includes globally significant trans-boundary ecosystems. First, Central Asia has the largest continuous area o f steppe inthe world, and the highest diversity o fplant and animal species with more than 250 distinct steppe communities.* The Tugai riparian forests, inthe floodplains and river valleys o fthe desert regions, are a second key and endangered ecosystem. Migratory birds and endangered species such as the Bukhara deer are dependent on these ecosystems. Third, mountain and forest ecosystems include the Western Tien Shen, the Pamirs and the Altay Sayan. These include both animals and the wild relatives o f commercially important plants such as tulips, apples, walnuts and medicinalplants. Fourth, the region has shared inland water-bodies, including the Aral Sea and the Caspian. Conservation o f the delta ecosystems o f the Aral Sea are a priority. The Caspian includes important fishery resources and unique wildlife such as the Caspian seal, which are vulnerable to industrial and oil-related pollution and poor river basin management. These trans-boundary ecosystems would benefit from a shared approach to their management. 16. Natural and man-made hazards. The region is subject to extreme weather events (floods and droughts) which have trans-boundary impacts. A shared approach to Rare and endangeredwildlife include the saiga antelope, gazelle, kulan, rare species o f wildcat and birds such as the Houbarabustard. 5 disaster management, includingweather forecasting, hydrometerrologicalmonitoring, public awareness, disaster mitigation and reconstruction, would reduce the human and economic costs of these events. Hazardous mine tailings from abandonedmines inthe upperwatershedspose a special trans-boundary hazard. Collapse ofthese tailings dams due to landslides would cause releaseof toxic wastes, includinguranium andheavy metals, into regionalwater-bodies with serious potential health risks. For example, the uraniummine tailings inthe Mailu Suu area inthe Kyrgyz Republic representa significant environmental and health risk to the populations o f the FerghanaValley. These hazardous areas requireurgent attention. 17. Communicablediseases. Communicable diseases and illicit drugs are taking their toll on the people o f these countries. Tuberculosis is already an epidemic in Central Asia, as multi-drug resistant tuberculosis strains inthe prison system are expanding rapidly to the larger population. Malaria cases have emergedinTajikistan and potentially could spread throughout the region. Outbreaks of HIV/AIDS, related to drug abuse, have been reported inKazakhstan, the Kyrgyz Republic, Uzbekistan, and Tajikistan. Newly reported infections jumped from 88 in 1995 to 6,706 in2003, primarily in Kazakhstan, Kyrgyz Republic and Uzbekistan. Increasesindrug trade and druguse could well trigger a full epidemic inthe region. Recent modeling carried out by the Bank indicate that, even inan optimistic scenario, mortality rateswould increasenearly tenfold from 2005 to 2020, accounting for about a hundreddeathsper month, andthe cumulative number of HIV infected individuals would rise to tens ofhundredsby2020 inthree studied countries (Kazakhstan, Kyrgyz Republic and Uzbekistan). Inthe pessimistic scenario, without any intervention, the spreadof HIV/AIDS would suppress the economy's long term growth rate, slowing it down on average by about 11percent annually in Kazakhstan and inthe Kyrgyz Republic, andby more than 23 percent inUzbekistan through the year 2020. Clearly, the time to address this problem is now ifthe region is to prevent a catastrophic impact on health services expenditures and the well being of the population. 18. Drugtrade. Another regional issuewhich may have an important impact on regional stability and growth is drugtrade. Central Asia is a significant drug trade route from Afghanistan to Russia and Europe, given its long and poorly controlled borders. The drugtrade is serious initself, and for its contribution to crime, official corruption and terrorism. Butbeyondthis, ithas the potential to seriously undermine the social and health fabric of Central Asia. The combination of readily available drugs with limited employment opportunities has ledto increaseddruguse, particularlyamongst the youth. This inturnhas been a significant element inthe increaseinHIV/AIDS and TB. 19. Labor migration. Over the past decade, Central Asia countries have seen a rapid rise in cross-border seasonalmigration both within the Region and to other destinations, mainly Russia. High levels of unemployment, lack of business opportunities at home and the prospects for higher earnings inthe neighboring countries, have forced a significant part of the working-age populationto look for job opportunities abroad. This problem is particularly acute in the poorest countries of Central Asia, such as Tajikistan and the Kyrgyz Republic. The vast majority of labor migrants work irregularly inRussia and other CIS countries, including Kazakhstan, where they are vulnerable to exploitation and 6 suffer considerable hardship. At the same time, their remittances are crucial to the survival o f their families back home. The migration trends affect all aspects o f societies, national economies and government policies and deserve greater attention from both countries and international community. Cross-BorderThematicIssues 20. Inaddition to solving critical cooperation issues inthe region, the Central Asian countries could cooperate on several thematic issues. These areas represent common concerns across the region that deserve greater attention than any one country i s likely to be able to give them. These are areas where, despite different national approaches, policies, or traditions, the synergies o fmutual experience and information sharing or learning are obvious and mutually advantageous (for example, health and education reform, microfinance support, strengthening the role o f communities in development). Within countries, there are examples o fprograms that can serve as models to emulate or models to avoid. Kyrgyz health reforms, for example, provide a good model for improving transparency and efficiency inhealth service delivery. The Tajikistan Pamir Private Power Project ,ajoint project with the InternationalFinance Corporation (IFC), Aga Khan Fund, and the Swiss, sets an example for development o f public-private partnerships to finance critical infrastructure projects. All o f the Central Asia countries could advance their economic development by learning from each other's experiences in a variety o f areas. 21. Knowledgesharing. Limitedknowledge o fmarket economy and low levels of institutional capacity have become a major development constraint inCentral Asia. Today, there i s insufficient communication among countries, especially at the level o f decision makers, even on issues o f demonstrably mutual interest. There i s insufficient knowledge as well about developmentalissues outside the region and about the potential gains from regional cooperation, which partially explains the reluctance o f leaders to pursue it with more vigor. Fosteringknowledge sharing both within and outside the region would provide a much-needed foundation for solving common problems. 22. The above review demonstrates the rationale for emphasizing regional cooperation in Central Asia. Although the countries could continue down independent and isolationistic paths of development, the resulting levels o f welfare would be lower and less sustainable. It would be a big mistake not to take advantage o f more coordinated approaches and stable agreements on critical issues to spur economic growth, reduce poverty and maintain political stability in the region. 111. LESSONS Impedimentsto RegionalCooperation 23. As described inthe previous section, regional cooperation inCentralAsia appears essential. However, the actions o f the governments concerned would seem to suggest that they do not share this view. Even inareas where regional cooperation i s essential - 7 e.g., public goods or resources that must be shared due to geography (e.g., Amu Darya and Syr Darya rivers) or physical infrastructureinherited from the Soviet Union such as regional grids and pipelines, or transport hubs such as canals, highways, railroads and, to a lesser extent, airports - cooperative schemes havebeen unstable. 24. Several factors have hindered regional cooperation, at least in the short- and medium-term, including: Cultural and political dimensions o f nation building, exacerbated by personalrivalries between some o fthe political leaders; 0 Increasingly isolationist policies o f some countries; 0 More and more divergent rates o f transition from government-controlledcentral planning to liberalized mixed market-based economies; 0 Diverse economic prospects, driven by significantly different natural resource endowments and, thus, different opportunities and needs for external capital; and 0 Conflicting interests and pressures generated by the competition o f key external partner countries. Previous and Existing Efforts at RegionalCooperation 25. The Central Asian countries are members o f several regional organizations with overlapping goals and membership. The CentralAsia Economic Community, which was transformed into the Central Asian Cooperation Organization in2002, is supported by four Central Asia Presidents (excluding Turkmenistan). The Economic Cooperation Organization, founded by Iran, Pakistan and Turkey, to which all five Central Asia countries are members, offered a regional trading arrangement that could promote a southward reorientation of their trade from the patterns imposed within the Soviet economy. The Shanghai Cooperation Organization, with Russia, China and the four Central Asia countries (excluding Turkmenistan) has focused on security rather than economic matters. Central Asia countries are part to several other regional organizations, including the recent Ministerial Conference initiative (see par. 78-79). Annex 1presents more details on regional initiatives. 26. More than 200 multilateral and bilateral agreements and contracts have been signed on issues such as economic cooperation, trade, migration, military-technical cooperation, medical and sanitary-epidemiological cooperation, shared water use, and interstate railway transport tariffs. Legislative documents are regularly exchanged, and plans for common actions are prepared on an annual basis. However, to date, none o f these efforts has paid off in terms o f fostering greater cooperation. Yet, it i s important to understand the lessons from these past regional cooperation initiatives before designing future regionalinterventions. 8 Lessons Learned 27. The experience o fthe World Bank and other donors inCentral Asia countries i s that regional projects are generally complex and difficult to implement. The World Bank experience under the first phase o f the Aral Sea Basin Program has been that programs conceptualized at the regional level can be implemented most successfully when specific activities under the program are defined and implemented nationally. The best approach inthe future is likely to be to design programs at the regional levelbutto divide activities into programs at national level, ensuring consistency with regional goals and with regional coordination, butwith implementation by the national Governments. 28. Other lessons include: (a) the need to articulate a "shared vision" among all stakeholders -when the five countries show genuine willingness to work together, cooperation works; (b) the need to be patient and prepared for the long haul through bad and good times, and to identify and work with partners with long-term commitment; (c) the need to understand that creating formal regional institutions i s not as essential as bringingindifferent stakeholders and sharing information; (d) the need to buildprograms around the fact that countries tend to cooperate ifit i s obviously intheir national interest to do so; and (e) the need to find effective catalysts (quick wins, results on the ground) to drive the cooperation process. 29. Hence, the potential role o f the World Bank Group and other donors inobtaining concrete results inregional cooperation should not be overestimated. It requires both time and hardwork to address the factors that hinder regional cooperation identified above. In the end, much depends on the willingness o f the countries themselves to advance the regional cooperation agenda. The World Bank will have to match its actions with the pace set by the countries themselves. Iv. FRAMEWORK FORTHE WORLD BANKGROUP PROGRAM 0bjectives 30. The main objectives o f this framework are to: Help produce a shared vision o fthe regional challenges and ways to address them within the World Bank Group; Enhance the effectiveness o f World Bank Group assistance at the national level b y providing a regional perspective; Provide a formal structure for dialogue with governments, civil society, and the private sector; and, 0 Serve as a platform for dialogue andjoint efforts with other donors. 31. Byworking at the regional level, inthe longrun, the World Bank Group hopes to I contribute to improving the prospects for highand sustained growth, reducing poverty, and to lessening regional tensions. 9 32. Inimplementing this framework, the World Bank Group will seek to maximize synergies between regional objectives and national assistance strategies. Itwill coordinate regional programs with country-level ones. Country assistance strategies will include a regional orientation. The country assistancestrategies for the Kyrgyz Republic and for Tajikistan already include explicit links to regional initiatives. Approach and Instruments 33. Approach.As mentioned, the World Bank Group will approach regionalwork carefully, such that itwill not raise undue expectations, and itwill remain mindfulthat sustained efforts are needed to produce effective results over the long term. The Bank will begin by focusing on areas that are not politically sensitive - analytical work, information sharing, scientific exchanges, and NGO exchanges - as a basis upon which to buildregional trust. The World Bank will prepare the ground for tackling more difficult issues, proceedingwith caution and making advances when a critical mass o f country support i s inplace. Inthis regard, it will seek to build constituencies for regional cooperation. Greater involvement o f civil society and the private sector can help build country commitment. Inaddition, the World Bank Group will seek to build its regional programs around local initiatives. For example, itwill use such initiatives as the Central Asia Business Forum as a basis for its programs. The World Bank Group will go beyond dialogue, analytical and advisory work to regional projects only when and where proven ownership and country buy-in exist. However, the Bank will not wait untilall five countries are ready. Iftwo or three are ready for cooperation on a particular issue, progress can be made. 34. Instruments.The following instrumentswill be usedto implement this framework: 35. Knowledge generation and sharing. Effective intervention at the regional level requires understanding the issues and evaluating alternative solutions. The World Bank has been working towards this end through the CIS-7 initiative, which culminated inan international workshop, held in Switzerland inJanuary 2003, that focused on the economic and development issues facing the poorest FSU countries. The work to be undertaken under the Central Asia Regional Framework, in cooperation with other donors, will advance the issues raised by the CIS-7 initiative by tailoring them to the specific problems o f Central Asia. Itwill include a series o f analytical and advisory activities on the most topical regional issues. 36. To share knowledge, the World Bank Group has launched a Central Asia Knowledge Sharing Initiative (CAKSI), which aims to disseminate information broadly using a variety o f tools, including the internet and global distance learning centers ineach of the Central Asia countries. These initiative will facilitate the dialogue between practitioners inthe region. The World Bank will work closely with existing universities and with the Aga Khan Foundation, which has set up the University o f Central Asia. 37. Moreover, the World Bank Institute has designated Central Asia (with Tajikistan as a pilot country) as a focus area for capacity-enhancement programs, and hasplaced an 10 international staff inthe region to work with the Central Asia team. Regional activities involving government and civil society are being implemented andpromote regional understandingand knowledge sharing. A World Bank Institute planning brief for the region i s scheduled for completion in late fiscal year 2004. Further integration will be encouraged with training programs in other countries such as the World Bank Institute's programs in Moscow. Fosteringknowledge sharing both within and outside the region will provide a much-needed foundation for solving common problems. 38. Regional strategies-national projects. There are two distinct cases here. First are the cases when the regional agenda would provide a strategic framework within which to undertake country-level programs. For example, inthe water management area, country-specific interventions will be designed under a regional umbrella o f improving the use o f water resources inCentral Asia. These programs, although implemented at national levels, will have significant regional benefits. A good model i s the Ferghana Valley Water Management Initiative (see par. 50). Likewise, IFC's initiatives, such as the Central Asia Leasing Project, seek to create a regional framework for leasing activities by working with individual governments to enact similar best practice laws and regulations that may eventually leadto cross border leasing as regional cooperation increases. Second are the cases o f shared problems for which it makes sense to develop common approaches that will inform the design o f national projects. For example, some o f the Central Asia countries are struggling to find a solution to rapidly falling educational standards. Countries and donors couldjoin efforts to develop a common solution to this problem. Such an approach would allow the World Bank Group to benefit from economies o f scale and attract more resources, attention, and brain power than at the single country level. 39. Multi-country facilities and grants. The World Bank will put inplace multi- country credit and grant facilities based on demand. A good example i s the IFC's Central Asia RegionalEnterprise Fund, which i s a credit line available to private enterprises from all five countries. Any proposal which meets the fund's criteria i s approved. Similarly, multi-country grant facilities, such as a possible Regional Education for All Fund, would make grants available to Central Asia countries based on agreed criteria. 40. Regionalprojects. Ifconditions warrant, regional projects will be developed with the participation o f two or more countries. A current InternationalDevelopment Agency (IDA) initiative seeks to support selected regionalprojects byproviding additional funds on top o f the countries' IDA envelope. Potentialprojects could include developing regional infrastructure (water management, energy generation, transport) to facilitate trade integration and growth, promoting regional financial architecture and knowledge sharing, and developing strategies to address negative cross-border factors such as disease, illegal trade, and other issues requiring a regional approach. However, given past experience with the regional projects, they are not likely to be widely used. As mentionedbefore, regional projects will only be pursued ifthere i s a critical level o f country buy-inand ifthere are clear benefits and advantages o f regional projects over national ones. 11 RegionalDevelopment Priorities 41. The Bank will provide support inboth: (i) critical areas where regional cooperation i s vital for economic and security reasons or where common or shared problems can be tackled collectively with greater effectiveness or efficiency; and (ii) cross-border thematic areas where countries could greatly benefit from shared learning. 1. CriticalRegional CooperationAreas: 42. Trade and transport. The long-term goal is to get the Central Asia Region integrated into the world economy through reduced transport costs and better facilitated trade. Inthe near term, efforts will target reforms incustoms, prioritized investments in transport infrastructure, and trade policy at the country level. 43. Inthe areaoftrade policies and institutions, most ofthe work willbe done at the country level through advisory services. However, the regional perspective will provide important guidance for this work. The World Bank will support efforts by Kazakhstan and other countries to accede to the WTO. 44. The priorities foreseen for transport are focusing on regional transport corridors through development o f missing links and rehabilitation o f existing infrastructureto link state capitals, the major trade centers, and the mainports or outlets for exportshmports, as well as harmonization o f the regulatory and tariff framework across the region to promote efficiency o f movement o f passengersand freight. 45. The World Bank has prepared individual Transportand TradeAudits for each country. An overall regional Transport and TradeFacilitation Study i s now being prepared based on these audits. Next steps will include extensive dialogue with the countries, which has already started inthe context o f the Ministerial Conference (see par. 77-79). Ifconditions warrant, the World Bank would support national and regional trade facilitation projects inthe future. For example, based on a recent request from the Kazakhstan government, a Tradeand TransportFacilitation Project could be considered; itwould emphasize customs reform, roadmanagement and financing improvements. Trade and transport facilitation programs at the individual country level (especially in Kazakhstan and Uzbekistan) are likely to have significant regional benefits, especially for the smaller neighbors like the Kyrgyz Republic and Tajikistan. It i s important to note that the World Bank will put special emphasis on the need for an integrated approach to trade facilitation issues, as "customs only" projects would have limited impact on the overall facilitation issues. Emphasis will be placed on (i) all important aspects o f cross border trade, including "access infrastructure" (e.g., roads, overall legislative framework, etc.), (ii) all relevant agencies, (iii) institutionalized partnership with the private sector, an and (iv) a strongly coordinated regional dimension. Such an approach was successfully implementedunder the Trade and Transport Facilitation Project in Southern Europe supported bythe World Bank. 46. Another area o fwork with potential benefit to the region could be the preparation o f a Trade and Transport Facilitation Auditfor Russian Siberia to identify the barriers to 12 Tajik, Kyrgyz, Uzbek and Kazakh exports to this part o f Russia. Moreover, with the current opening inAfghanistan, the World Bank Group has been exploring the possibility o f expanding the ties between Afghanistan and Central Asia. It will also seek to involve other important neighbors such as China, Iran, Pakistan, India as well as nontraditional stakeholders like South Korea and Turkey. 47. Cooperation with other donors and other regions within the World Bank is critical inthis area. The World Bank holds regular consultations with ADB, EuropeanUnion, USAID, and other donors. Inaddition, within the World Bank, the Europe and Central Asia Region has been discussing how to improve cooperation and possibly to develop joint products with the Middle East and North Africa, South Asia, and East Asia regions. TheAfghan Border States Development Framework has provided a start for this work. 48. Water andenergy. The World Bank Group will use its conveningpower to encourage the leadership o f the five Central Asia countries to accelerate work towards the long-term goal o f creating a stable and sustainable system o fwater management and water sharing. The analytical work carried out thus far shows that to reach this goal, it is necessary to improve water management practices inthe region as well as improve the water sharingarrangement on the Syr Darya River. Inthe immediate future, much o f the support will likely have to focus on bi- and tri-lateral cooperation among selected Central Asia countries and on country-specific reforms and investments for improved energy and water management and use. 49. This is not a new area for the World Bank. First, the Aral Sea Basin Program has provided important institutional lessons and can serve as a programmatic foundation for hrther initiatives inthis area.9The Bank prepared a summary paper Improved Water Management in the Aral SeaBasin: Summary of Strategic Directions, which outlined the main strategic pillars for the next.steps inthe Basin. Second, the World Bank has prepared anAssessment of Water Resources and Their Usage in Northern Afghanistan, which shares one of the two main rivers o f Central Asia - the Amu Darya. The results o f this review show that the demand for water innorthernAfghanistan is low and is not likely to grow rapidly inthe next two decades; hence, it does not threaten water use inthe downstream countries. Third, the World Bank, inclose cooperation with donors, has previously provided advice on energy transit and trade options and has financed high- priority investments at the country level, like the Pamir Power Project inTajikistan. 50. The World Bank will continue its support to improved water resource management practices, including to the second phase o f the Aral Sea Basin Program. Because the water management issues are better dealt with at the individual country level, they will continue to be addressed through national programs. The World Bank has completed a note on Irrigation and Poverty in CentralAsia and is developing a Ferghana Valley Water Management Initiative to identify irrigation improvements with important TheAral SeaBasin Program includesnationalinterventionsinwater management, a GEF-fimdedWater and Environment ManagementProgram and support to the Executive Committeefor the International Fund to Save theAral Sea.The Sjir Daca Control andNorthern Aral Seaproject aims to improveregulationo f winter flows resultingfrom energy generation inthe NarynCascade (Kyrgyz Republic) and increase flow capacity ofthe Syr DaryaRiver. 13 conservation effects on regional water usage and the poverty situation inFerghana Valley. Two such projects appear inthe country assistance strategies for Tajikistan and the Kyrgyz Republic and are currently under preparation, The initiative could be expanded to include Uzbekistan in the future. The World Bank will support other country-level investments aimed at improving irrigation and drainage management inthe Aral Sea countries. Box 1. The water and energy nexus on the Syr Darya River The distribution and use o f water and energyresources serves as an exampleo f how better cooperation provides potential gains to all the countries in the region. Both the Kyrgyz Republic and Tajikistan have abundant water resources intwo river basins (the Syr Darya and the Amu Darya, respectively), while Kazakhstan, Turkmenistan, and Uzbekistanare well endowedwith fossil h e l s (coal, gas, and oil). Yet sharingthese resources remainsproblematic; the arrangements createdduring the Soviet Union to integrate water, energy, and agriculture are now subject to sovereigntyas each country exercises its independence.On the Syr Darya River, for example, the arrangement is as follows: the Kyrgyz Republic releases water from the Toktogul reservoir during the vegetationperiod to meet the irrigation demandof Uzbekistan and Kazakhstan.The latter import the resulting excess hydropower from the Kyrgyz Republic and provide compensatorysupplies of fossil fuels inexchange inwinter. To developbetter options for sharing resources owned incommon, the Bank conducteda study of the water and energy nexus in Central Asia countries. Irrigation Mode Power Mode Incremental Values Energy Costs to Kyrgyz 49 14 35 Republic Agriculture Benefits to 86 19 67 Uzbekistan and Kazakhstan However, developinga sustainable framework for cooperation and assuringthe best use o f available resourcesposeseveralchallenges: Introducing monetary compensationsfor water and water servicesand enabling trade in individualcommodities (electricity, gas and coal), while eliminating the current barter approach; Improvingwater- and energy-sectorpolicies at the nationallevel to achievethe bestuse o f resources, protect thepoor, and assure the financial viability o f each enterprise; Implementingconfidence building measuresto ensure sustainablecooperation; Improvingdonor cooperation; and, Settingup appropriate regional institutions to bring about the changes proposed. 14 51. To improve basin management on the Syr Darya a critical issue o fhow best to coordinate the needs o f the upstream and downstream countries needs to be solved. To help solve it, the World Bank has developed a Water and Energy Nexus Paper that explores alternative water-energy trade arrangements based on separating water releases from the energy trade and compensating upstream countries for water storage inwinter and release insummer (see Box 1).A short version o f this paper was discussed with the Central Asia governments at a Ministerial Conference inNovember 2003 where countries reached preliminary agreement on a plan o f action for improving the water-energy trade arrangements on the Syr Darya. It i s important to note that the Presidents o f four Central Asia countriesl'requested the World Bank to play a leadership role inbuildingconsensus on water and energy approaches in Central Asia and help set a regional water and energy consortium. 52. Inaddition, the Kyrgyz Republic and Tajikistan requested World Bank assistance to complete two hydro-power projects started during Soviet times- the KamberAta Dams inthe Kyrgyz Republic and the Rogun andSangtudaDams inTajikistan. The initiation o f these projects would require securing long-term export markets for power, reaching stable water-sharing arrangements, as well as better understandingo f environmental and other safeguards issues. Inthis regard, the World Bank is conducting a Regional Stu4 of the Electricity Export Potentialfiom CentralAsia, which will help to evaluate the two investment projects. The study will also serve as a basis for continued dialogue with the region's leadership on the energy sector reforms, including regulatory reforms. The World Bank has been asked by the governments involved to play the role o f adviser and "neutral broker" for all the parties. Beyond advice, the InternationalFinance Corporation and the Multilateral International Guarantee Agency (MIGA) could play an important role inattracting investments to these projects. 53. Sharedecosystems. Improving cooperation regarding transboundary ecosystems i s already an area o f Bank focus. The GEF-financed CentralAsia Biodiversity Project, focusing on the Western Tien Shan, and including the Kyrgyz Republic, Uzbekistan and Kazakhstan, is supporting improved protectedarea management, greater involvement o f local communities inconservation management, joint information sharing and development of a common approach to conserving these ecosystems and providing a base for sustainable development. The World Bank Group will continue to collaborate with the donors and the GEF on providing assistance inthis area. 54. Natural and man-made hazards. The World Bank has already addressed dam safety in several countries; more support i s needed inthis area, however. The Bank i s preparing a Natural Disaster Mitigation Project to address the most urgent safety issues regarding the Mailu Suu uranium mine tailings inthe Kyrgyz Republic, which it i s hoped will leadto additional support for addressing these and other mine tailings sites, landslides and other natural hazards inthe Kyrgyz Republic. Similar support i s needed for Tajikistan. The Swiss government i s providing support to improved hydro- meteorological management inthe region; this is an area where regional cooperation will "These are the Presidents o f Kazakhstan, Uzbekistan, Tajikistan and the Kyrgyz Republic 15 be o f benefit to all countries, and where greater support by the international community i s warranted. 55. Communicablediseases. The World Bank has commenced three reviews inthis area. First, Country Profiles on HZV/AZDSand Tuberculosis in CentralAsia were recently published and are being disseminated. Second, the Central Asia HIV/AZDS Study has been completed recently; the World Bank has coordinated this work with other partners (especially UNAIDS and the World Health Organization (WHO)). Third, the World Bank i s preparing a Tuberculosis Study infiscal year 2004. Based on these studies, it will develop a dissemination and communication strategy and will encourage participation of key decision makers and the NGO community. The World Bank i s including communicable disease components inexisting and future healthproject on a country-by- country basis. Inaddition, it i s pursuinga regional project with the participation o f Tajikistan, Kyrgyz Republic, Uzbekistan and possibly Kazakhstan. The team will explore partnerships with the UNAIDS, UK Department for InternationalDevelopment (DFID), UNOffice on Drugs and Crime (UNODC) andothers. Moreover, AIDS and tuberculosis issues will be considered inthe context of the emerging regional transport and trade work as greater transportation activity often leads to increased exposure to communicable diseases. 56. Drugtraffickinganduse. The World Bank Group has identified a number of areas inwhich it can prove useful incombating drugs in Central Asia. First, inthe area of trade as already noted, the World Bank may consider providing enhanced customs and trade facilitation support. A key element in any such support would be to increase transparency and information exchanges between border posts, which may act as a deterrent on the illegal drugtrade. Second, inthe area o f health, as already noted, the World Bank is exploring ways o f buildinga regional approach to face the challenge o f communicable diseases. Beyond these two areas, the World Bank has a program o f helping Central Asian states to understand, identify, and control money laundering and terrorism financing. This takes the form o f helping the Governments establish effective anti-money laundering laws, providing a 7-part basic training series via the Global Distance LearningNetwork, publishing a resource book on anti-money laundering issues and conductingvarious workshops on this issue. The Bank and The UNOffice o f Drug Control have recently established a pilot partnership, focusing on Kyrgyz Republic but having wider Central Asia implications, on strengthening their cooperation around these critical issues. 2. CrossBorder ThematicAreas: 57. There are numerous thematic areas where countries could benefit from common strategies and shared learning. However, this paper selects three key areas which, inthe country team's view, need increased attention and could potentially have a great impact on the future o f the Central Asia region. 58. Humandevelopment. The World Bank will support analytical work inhealth, education, and social protection to develop solutions, disseminate findings, and support 16 programs at the individual country level with the immediate goal to arrest the decline in education and health standards in the region. 59. Millennium Development Goals (MDGs). Working with the countries as well as the United Nations Development Program (UNDP) and other partners, the World Bank would support establishing appropriate regionalbaselines and targets for the Millennium Development Goals as well as developing their monitoring and evaluation capacity. In addition country level work could be undertaken (subject to resources) to improve the estimated costing o f achieving the MDGs (this has already been done for the Kyrgyz Republic). The Country Assistance Strategies o f Tajikistan and the Kyrgyz Republic already explicitly take into consideration the relationship between the CAS and MDG achievement. The CAS for Kazakhstan and Uzbekistanwill similarly make this link including the development o f monitorable indicators within the context o f the program, The Bank could propose regional workshops jointly hosted by the UNDP and the Bank for selected MDGs. 60. Education and health. To support reforms ineducation, the World Bank would explore with other donors the possibility o f creating an "Education-For-All Fund" for Central Asia. Such a regional fund would help to pool donor resources for supporting country-level initiatives to improve the delivery o f education services. Support for the Central Asia University, established with the help o f the Aga Khan Fund, or the regional civil service training academy, funded by the European Union and administered by the British Council, are other areas o f possible World Bank involvement. 61. Inaddition, the World Bank, inclose cooperation with other partners, could invest inregionaltraining institutions. For example, itcould support the creationo fa regional School o f Public Health. The basis for such a school exists in Kazakhstan, but other countries will have to be consulted on the feasibility o f this initiative. 62. Labor migration. The World Bank has not done much work on the labor migration issue in Central Asia. Inthe future, it is planning to pay greater attention to it and develop an approach for addressing it inits work Indesigning its approach, it will work closely with other institutions, such as the InternationalOrganization for Migration, which have been active inthis area. 63. To facilitate and guide our human development work inCentral Asia, one o f the World Bank's most senior human development staff has been placed inBishkek as the Kyrgyz Republic Country Manager, with overall responsibility for the human development strategy in Central Asia. 64. Strengtheningthe role of communitiesin development. The World Bank Group i s increasing its attention to community involvement inthe developmentprocess inCentralAsia, with an emphasis on improving service delivery at the local level. A working group on this issue meets regularly to share information and discuss strategies for the work with communities inCentral Asia, mainstreaming it inWorld Bank projects, and sharing experiences with other parts o f the World Bank. The World Bank has prepared a report on Critical Issuesfor Scaling-up the Community Involvement in 17 Development in Central Asia. An interestingpilot i s currently being developed in Tajikistan, where donors agreed tojoin forces for scaling up community linked development. The idea i s to develop a harmonized approach based on experiences in Tajikistan and elsewhere and then to implement it across different sectors. This work i s closely integratedwith the World Bank Institute's (WBI) capacity buildingprograms on community empowerment. 65. Inaddition, the World Bank helda CentralAsia-wide InnovationDay inMay 2003 to support innovative ideas and share knowledgeabout grassroots community driven development. Through the Innovation Day, civil society organizations had the opportunity to meet, share experiences and information, and establish regional networks. The World Bank will monitor closely the selected proposals and, if successful, will seek to replicate them in hture World Bank and donor work. The World Bank will consider repeating more Innovation Days in Central Asia inthe future. 66. Microfinance and businessenvironment. Currently, the microfinance industry inCentralAsia is dominatedbyNGOs and commercialbank "downscaling" programs" ; itis also heavily dependent on external support. This situation is most likely unsustainable over the long haul. The World Bank has prepared a region-wide Study on Microfinance, which developed recommendations on how to better sustain the microfinance industry over the long-term. Inaddition, the World Bank organized a conference inAlmaty on Expanding Microfinance in CentralAsia on April 2-4, 200312. The conference resulted inan agreement among the key donors to form an advisory group, or secretariat, which would ensure that donor microfinance programs follow common approaches and goals. 67. IFC is working to develop a common legal framework inCentral Asia for microfinance. Working together with IFC, the Kyrgyz Republic adopted a best practices microfinance legal and regulatory framework in2002. Similar cooperation with Tajikistan has resulted in a similar legal framework that i s to go before the country's legislative branch for approval inthe near future, and work has commenced with the Government o f Uzbekistan to also develop a best practices legal framework to support the expansion of microfinance. IFC's technical assistance work has been accompanied by financial assistance to individual microfinance providers as well as through a regional facility jointly with EBRD. 68. Monitoring the quality o fbusiness environments will also benefit the countries in the region. Regionalreport cards will be developed based on existing data and planned investment climate surveys. They will be widely disseminated to empower business constituencies and to encourage them to create bottom-up pressure for a better business "USAIDandotherbilateralorganizationshaveprovidedmostofthefundingfortheNGOs,with international NGOsproviding the institutional capacity-building and technical expertise(e.g., the Aga Khan Foundation, which largely funds its own program, Mercy Corps, Finca Intemational and IPC). ADB hassupportedthe formation ofcredit unionsinCentral Asia, andEBRDtogether with IFChave supported micro lendingthrough downscalingby commercial banks. l2The conference was co-sponsoredby the Aga Khan Foundation,the Asian DevelopmentBank, the EuropeanBank for Reconstructionand Development, the Open Society Institute, and USAID. 18 environment. IFC, incooperation with the Swiss government, has developed an annual SMEbusiness environment survey programwhich is now inits second year in U~bekistan'~and its first year in Tajikistan. The survey reports are widely disseminated to promote discussion and implementationo f needed reforms. 69. Business environment related efforts at the regional level, supported by the Foreign Investment Advisory Service (FIAS), would also focus on promoting open exchange and mutual learning among high level public and private sector representatives to increase awareness and understanding o f the need for new investor friendly policies and strategies in the region. Key issues o f focus will be on how can the countries o f Central Asia attract a higher proportional share of the global foreign direct investment. RegionalDonor Programs 70. A large number o fmultilateral andbilateraldonors have been supporting regional cooperation in Central Asia. The Asian Development Bank (ADB), United Nations Development Program (UNDP), and European Union have approved formal regional cooperation strategies. Other donors, such as European Bank for Reconstruction and Development (EBRD), Islamic Development Bank (IDB), United Nations, International Monetary Fund(IMF), United States, Switzerland, Germany, Japan, and United Kingdom have also supported regional programs inCentral Asia. Aga KhanFoundation has been the most active international NGO in Central Asia. 71. The ADB has had a regional assistance program inplace since 1996. Ithas focused on infrastructure (including transport and energy) and trade facilitation (including customs reform). ADB's approach has been to work on doable regional projects aimed at raising awareness o fbenefits from regional cooperation, reducing mistrust, and strengthening the politicalwill among the CentralAsia leaders. The new ADB strategy (under preparation) while retainingits present sector focus and apragmatic project based approach, proposes to expand the geographical scope o f regionalprograms to try and enhance the pay offs from regional projects. It also seeks to increase the awareness o fpotential benefits from regional cooperation by undertaking detailed sector studies and further strengthening the institutional mechanism that i s already inplace. 72. The European Union, notably through its Tacis Programme, has supported regional cooperation in transport, energy and environment. Its Trans-Caucasus and Central Asia transportation corridor (TRACECA) and South Ringprograms have supported the development o f viable, safe, competitive, and efficient transport corridors l3As a result ofthe initial survey inUzbekistan, the Govemment took a number o fconstructive steps towards improving the environment for entrepreneurs, but also implemented a number of changes with mixed impact on the SME sector during 2002. For example, procedures involved inaccessing cash from bank accounts improved for entrepreneurs, leasing and credit union legislation was strengthened, and a number o f tax privileges for entrepreneurs were introduced. On the other hand, 2002 witnessed significant instability in tax legislation, an increase inimpedimentsto foreign trade operations through the raising o f import duties, and an increase of severity inrequirements for wholesale trade operations for both SMEs and individual entrepreneurs. These changes resulted ina significant share of market participants going out o f business. 19 to facilitate trade and transit from East to West across Central Asia. Tacis has also provided assistance to improve the safety and security o f energy networks and improve water resource management. 73. Several institutions from the UNfamily have worked at the regional level. UNDP has implemented the Silk Road Area Development program. Jointly with the United Nations Environment Program (UNEP), it has provided support to the Aral Sea Basin Program and helped the Central Asian countries to develop the Regional Environmental Action Plan. UNAIDS has worked on preventing the spread o f HIV and AIDS inCentral Asia. UNDP's new regional cooperation strategy, approved in2003 has the objectives to promote growth, protect the environment and improve governance in Central Asia. 74. The EBRD has focused on the regionalpromotion o f SMEs, microfinance and facilitation o f trade. The IMF has conducted a series o f studies and dialogue on trade policies and customs reform. The IDBhas provided technical assistance and investments intrade facilitation, transport and energy infrastructure. 75. Among the bilateral donors, the United States, Japan, Germany and Switzerland have been the most active. Their regional programs focused mainly on capacity and institution buildinginwater resource management, energy, trade facilitation and environment. (Annex 3 provides detailed infomiation on regional donor programs in Central Asia.) 76. Giventhe large and growing number o f regional donor programs, their coordination becomes a daunting task. The next section describes an emerging framework for improved donor coordination. Donor Coordination 77. Coordinating the World Bank's regional initiatives with other donors is a central part o f this framework. There are numerous instances o f donor cooperation in specific areas; however, an integrated framework, which provides the basis for harmonizing efforts by governments and donor institutions i s lacking. The World Bank is currently engaged ina renewed coordination effort started at the January CIS-7 meeting and advanced at the Tashkent EBRD Annual Meeting inMay 2003. The ADB, IMF, EBRD, UNDP and the World Bank Group have agreed to develop a unified vision on regional cooperation. These institutions also agreed to create a mechanism for institutingand implementing coordinated and, where possible, joint programs.l4 78. The five multilateral institutions agreed to use an existing institutional mechanism -theMinisterialConference(createdbytheADBtocoordinateitsregionalprograms with the Central Asia governments and their neighbors) as a platform for the donor dialogue with the Central Asia governments. The five multilateral institutions created a working group to develop a vision o f regional cooperation and future direction and to coordinate further analytical and project work. At this point, the working group agreed to l4The ConsultativeGroup meetings will continue to be usedfor coordinating donor assistanceto individual countries, while the regional programswill be coordinatedat the levelof regional forums. 20 focus on such regional issues as energy, water, trade and transport. The multilateral institutions prepared an "inventory paper" and "sector position papers" for the Ministerial Conference which was held inNovember 2003 inTashkent. The inventory paper includes a summary o fdonor regional activities in Central Asia and will be usedto coordinate better donor assistance as well as to identify gaps for further analytical work and regional programs. The position papers identify the regional issues and reform options and serve as a basis for discussion on ajoint regional agenda among the donors and c~untries.'~ 79. The membership o f the Ministerial Conference currently includes Kazakhstan, Tajikistan, Uzbekistan, the Kyrgyz Republic, China, Mongolia, and Azerbaijan. Membership may need to be expanded to include other important neighbors. While the participation o f Turkmenistan is key to regional cooperation, especially on water issues on the Amu Darya river, the country has not yet expressed interest inparticipating inthe Ministerial Conference. Turkmenistan will continue to be invited to all regional cooperation activities. On the donor side, in addition to the five multilateral institutions mentioned above, other multilateral and bilateral donors were invited to the November Ministerial Conference as observers. 80. Itwas agreed among the five multilateral institutions that any regional initiatives and programs would be closely coordinated with other multilateral and bilateral donors and that they would be invited as partners to the initiatives o f their interest. 81. A separate initiative is the harmonizationeffort among the multilateral institutions, currently underway. The Kyrgyz Republic was selected as a pilot at the Rome conference on harmonization in2003. Administrative Agenda 82. Decentralization. Much has already been done to create the organizational basis for implementing the regional programs. To get closer to its clients and partners, the World Bank created the Central Asia Regional Office inAlmaty and placed the director for Central Asia and key sector representatives inthe field in2002. The IFC and WBI also stationed full-time international staff in Almaty. The regional hub will play a central role inregional strategy formulation and coordination. It will also be the focal point for partnership building (an increasing number o f other donors also operate out o f Almaty). 83. Given the growing importance o f the regional agenda inthe World Bank Group's program and the critical need for better oversight and coordination o f ongoing activities, the UKDepartment for InternationalDevelopment (DFID) decided to second a full-time Regional Program Coordinator to the World Bank for two years starting from April 2004. This personwould help design and manage the regionalprograms and strengthen coordination with other donors and regional neighbors such as Russia, China, l5Inpreparationfor the November Ministerial Conference,a SeniorOfficials Meetingtook place in Tashkentduring September27-28,2003. Three position papers on Energyand Water Resources in Central Asia, Transport, and Trade Facilitationwere discussedandpreliminary agreements were reachedon the way forward. 21 Afghanistan, and Iran. The coordinator will work closely with the regional economist based inheadquarters. Expected Results 84. Given the history o f regional cooperation in Central Asia, achieving real results on the ground will take time. As discussed inthis paper, the role o f the World Bank Group and other donor institutions is mainly o f a facilitator nature, trying to change the nature o f regional discussions from process to substance. An important achievement will be the establishment o f an active, constructive and substantive dialogue among the Central Asia countries on the critical regionalcooperation issues. This will notbe possible without a better knowledge base on the regional issues, which will be gained through the analytical work described inthe present paper. 85. Another important success factor will be to achieve a highdegree o f donor cooperation which will involve going from coordination and information sharing to a more substantive level o f cooperation, including harmonization o f donor efforts, development o f a shared vision on policy issues and implementation ofjoint programs. The emerging experience of working together with other donors insupport o f the regional cooperation process under the umbrella o f the Ministerial Conference has been encouraging. 86. Inaddition, the present framework andthe proposedregional activities will inform individual country assistance strategies by providing a regional perspective and important inputs into the country-level programs. The impact o f the regional cooperation will be partially measured as part o f individual country strategy results, including their progress towards meeting the MDGs. To facilitate this, the World Bank Group and will work with other partners to strengthen the consistency and reliability o f MDGbaselines and targets on a regional basis. 87. Finally, since the success o f regional cooperation largely depends on the willingness o f the countries themselves to make real progress, the World Bank Group willwork closely with other donors on creating incentives for regional cooperation, such as financing investments and supplying experience and knowledge. Inthe long run, donors hope that their joint efforts will lead to progress inresolving the water and energy nexus issue involving the Syr Darya river, improving the water management practices on both the Syr Darya and Amu Darya rivers, containing the spread o f communicable diseases, and improving the flow o f goods within and outside the region. Annex 2 includes a detailed description o f the medium-term goals and short term actions and outputs in each o f the areas covered by the present framework. 22 Annex 1. Regional Economic Cooperation in CentralAsia Eurasian Economic Community (formerly CIS Customs Union): Members are Russia, Belarus, Kazakhstan, the Kyrgyz Republic and Tajikistan. InMay 2002 Moldovaand Ukraine were granted observer status. Although inprinciple there should be no trade barriers or tariffs between members, this is not always the case. Unlike other customs unions, all countries can set rates individually for non- members. 0 The Shanghai Cooperation Organization (formerly the Shanghai Five): Members are China, Russia, Uzbekistan, Kazakhstan, Tajikistan, and the Kyrgyz Republic. Its primary mandate is security, but members discussed the possibility o f expanding to incorporate an economic union. InMay 2003, the member states decided to establish a regional anti-terrorism center in Tashkent. 0 CentralAsia Forum (formerly the Central Asia Economic Community): Members are Uzbekistan, Kazakhstan, the Kyrgyz Republic, and Tajikistan. The organization provides a permanent mechanism to discuss mutual economic and political matters and holds regular meetings on issues such as customs, migration, tax policy, water agreements etc. Under the auspices o f the organization, more than 200 agreements have been signed. InJune 2000, the presidents o fthe four member countries signed an agreement to create a common market instages. Economic Cooperation Organization (ECO): Members are Iran, Pakistan, Turkey, the five Central Asia countries, Azerbaijan, and Afghanistan. The ECO aims to promote regional cooperation in six areas: (1)trade and investment, (2) use o fnatural resources and environment, (3) industry and agriculture, (4) transport and communications, (5) tourism and culture, and (6)research and statistics. Various tariff reductions have been agreed upon, but the framework is looser than a customs union. International Fundto Save the Aral Sea: Members are Kazakhstan, Uzbekistan, Tajikistan, the Kyrgyz Republic and Turkmenistan. This was set up to coordinate cooperation on investments and policies relating to the Aral Sea Basin. There i s a rotational leadership every two years. It has approved an Aral Sea Basin Program o f eight sub-programs comprising about 20 projects including a Global Environmental Fund(GEF) project called the Water and Environment Management Project. GUUAM: Members are Georgia, Ukraine, Uzbekistan, Azerbaijan, and Moldova. GUUAMpromotes cooperation inregional security, economic, and political matters. Special importance i s attached to establishing a Trans-Caucasus and Central Asia transportation corridor (TRACECA) and to settling the pipeline energy issues. Page 1o f 2 0 World Trade Organization(WTO): Only one Central Asian country, the Kyrgyz Republic, hasjoined the WTO. Kazakhstan has recently stated its intention tojoin the WTO by the end o f 2004. Membership is not advanced for the other Central Asian countries - Tajikistan's and Uzbekistan's WTO discussions are at very early stages, and Turkmenistan has not applied for WTO membership. Page 2 of 2 m c t 0 3 x a G a a a L t- b0 3 -0 9 e e e e 0 e e e e b 4. 0 m .5 3 T! e r-- < . s . . . . . . e . . . . *0 i; I