The results of the Kyrgyz Republic’s accession to the WTO Over 13 years passed since the entry of the Kyrgyz Republic into the WTO. What is the outcome of the entry? What benefits Kyrgyz Republic has received after 13 years membership in this organization?
Joining the WTO, first and foremost, was aimed at trade liberalization and promotion of free trade principles. What is the nature of free trade, and what advantages does it have? Free trade is a key factor for prosperity growth. A fundamental principle of free trade is voluntary exchange and its mutual benefit. Voluntary market exchange only takes place when all parties involved expect to be better off after the exchange. From this follows a logical conclusion that all existing trade barriers need to be removed.
The free trade advantages:
10. Strengthening peace and stability
Countries with free trade regime are integrated into the global market, which ultimately leads to higher incomes for population in these countries. Long experience shows that developing countries that removed trade restrictions have growth rates three times higher than countries with strict trade restrictions.
Kyrgyz Republic was the first CIS country to join the WTO. Membership in the WTO since 1998 has contributed to some successes in the economy. The main objectives of Kyrgyz Republic’s accession to the WTO were the foreign trade liberalization, trade volume increase, economic growth sustainability and integration into global trade flows. Kyrgyz Republic pledged to reduce and hold tariffs at an average 5.1%.
Kyrgyz Republic’s main benefits from the membership in the WTO:
Kyrgyz goods and services exports enjoy most favored nation treatment in WTO member countries. WTO member countries do not impose restrictive measures detrimental to interests of other WTO members, which mean application of reduced rates for Kyrgyz goods. This policy increases the domestic goods competitiveness in other markets. As a result, trade began to grow at a steady rate since 2003 and increased from USD1.4 billion in 1998 to nearly USD5 billion in 2010, notably more than 3.5 times. Exports in 2010 compared to 1998 increased by almost 3.3 times, imports increased by 3.7 times. This led to a significant increase in trade turnover to GDP ratio from 83% in 1998 to 108% in 2010.
Kyrgyz Republic in recent years has become a regional center of re-export of imported goods to countries in Central Asia and Russia. Large amounts of re-export trade flows go mainly through the largest markets in Central Asia "Dordoi" and "Karasuu" located in Kyrgyz Republic According to the World Bank's data, total turnover on the markets "Dordoi" and "Karasuu" in 2008 amounted to USD3.5 billion or 68% of GDP. The share of re-export of markets "Dordoi" and "Kara-Suu" is 75% and 85% respectively. These markets directly and indirectly employ about 500 thousand people, or about 20% of the working population.
Internal trade and tax legislation is harmonized with the rules and regulations of the WTO, by which 97% of world trade is regulated. Such legislation harmonization was necessary to establish regime to promote trade and investment in the economy. Foreign direct investment (FDI) in 2010 amounted to USD234 million and compared to 1999 increased by more than 5 times. Since 2001 to 2008 FDI level has steadily been growing, and in 2008 reached USD377 million, the highest level since the country’s independence.
Trade policy change towards liberalization has not reduced customs duties revenue for the state budget. According to the data of Ministry of Economic Regulation, for 9 years since the introduction of lower customs duties the revenue increased by more than 3 times.
The imports are composed of more than 60% by intermediate and capital goods needed for production purposes. This emphasizes the importance of low tariff rates to keep competitiveness of Kyrgyz producers. For example, one of the main reasons of the garment industry rapid growth is the importation of cheap textiles and fabrics from China, Turkey and other countries and low custom tariffs. Up to 50% of the garment costing includes textiles and fabrics.
By joining the WTO Kyrgyz Republic improved its international image and provided a broad declaration of the irreversibility of economic reforms aimed at creating a competitive market economy.
Establishment of predictable rules for domestic producers and investors both in trade and services sector. Since 2000 steadily growing service sector contributed more than 45% of GDP in 2010.
Free transit of goods within WTO member countries without additional duties, taxes and prohibitions.
Barriers to full use of the WTO membership advantages:
The isolation and geographical remoteness of Kyrgyz Republic. Considerable distance from potentially attractive markets, underdeveloped transport infrastructure and high transport costs make Kyrgyz goods expensive.
Domestic companies usually produce poor quality products by high cost technology and outdated equipment. For decades, the government has failed to create a favorable business climate, deregulate the economy, eliminate bureaucracy and attract foreign competitive technologies for the development of local production.
The lack of interest from foreign investors because of the property rights weak protection, legislation instability, unpredictability of government decisions, poor infrastructure, etc.
Formal liberal foreign trade regime in practice is accompanied by informal constraints of bureaucracy and corruption. The Doing Business 2012 international report ranks Kyrgyz Republic at 171st position out of 183 countries in terms of ease of doing international trade, which is extremely low.
There is a problem of transit through neighboring and other countries that are not yet WTO members.
It is obvious that Kyrgyz Republic’s accession to the WTO brought many benefits and advantages to the Kyrgyz economy. It is necessary to further strengthen the free trade principles, namely reduction of customs duties, elimination of non-tariff barriers and the adoption of international standards for customs procedures to maintain the positive economic trends.
CAFMI – Central Asian Free Market Institute
Bishkek, Kyrgyz Republic / January 18, 2012