Tajikistan should diversify exports, create jobs to withstand external shocks
The government can speed up the process of structural economic transformation in Tajikistan by addressing several constraints and establishing a business-friendly environment.
It’s a classic case of jobless growth. While Tajikistan has been successful in maintaining GDP growth of 7.2% per annum during 1997-2015, this period also witnessed an abnormally low rate of job creation. More importantly, non-farm jobs, particularly in the industry and services, have remained limited. In the absence of growing employment opportunities in the modern sectors of the economy, agriculture absorbs the bulk of the labor force. However, labor productivity in this sector is low, which explains the low standard of living of the majority of the population.
Tajikistan’s higher growth has mainly emanated from huge inflows of remittances from migrants working in the Russian Federation, which accounted for 41% of GDP in 2015. Besides this, exports of aluminum and cotton have also played a major role in supporting high GDP growth. However, remittances carry with them an element of uncertainty, and the international prices of both cotton and aluminum have also been quite volatile. The reliance on these narrow sources of growth has made Tajikistan vulnerable to external shocks, particularly to the prospects of the Russian economy.
ADB’s latest Country Diagnostic Study published in August suggests that if Tajikistan is to sustain high growth in the years to come, it will have to look for new drivers of growth. More importantly, with the changing global scenario and the poor outlook of the Russian economy, prospects for sustained and higher growth in the medium to long run are limited. Another big challenge is providing decent employment in the domestic labor market. To meet this goal, Tajikistan has to address the problem of low private investment, and diversify and upgrade exports.
To improve private investment and productive employment in the economy, the study identifies 5 major challenges: (i) improving access to finance and reducing its cost; (ii) providing a stable and uninterrupted power supply; (iii) improving the quality of transport infrastructure and logistics; (iv) strengthening governance and the rule of law; and (v) diversifying and upgrading exports.
To address these obstacles, the study highlights the importance of developing a modern industry and export diversification as the key strategy to create employment and sustain high and inclusive growth. So far, Tajikistan has been unable to improve the quality of its export products, and continues to rely on its traditional sources of export revenue – aluminum and cotton. The heart of the problem thus lies in focusing on just a few products which are not in high demand in international markets.
Tajikistan faces a dilemma between maintaining its dependency on remittances inflows and improving the quality and composition of exports. If there is a sudden drop in remittances, then the long-run growth could drop to as low as 4.3% per annum. Such low growth is not sufficient to create enough new jobs in the economy. Export diversification is thus the way forward, anchored on a few key points:
- Tajikistan must address the constraints that private investors face. There are various potential products Tajikistan’s entrepreneurs can invest in, and through public-private dialogue the government can identify product-specific constraints.
- Developing a modern industrial policy is essential. The diagnostics report draws lessons from the successful experience of the Republic of Korea, which reveals the importance of having an industrial policy that changes with the level of development, as well as monitoring and evaluation mechanisms.
- Given the small domestic market size, Tajikistan should improve its connectivity and integration with the international market. In doing so, the emphasis should be on making exports more competitive and discovering new high value-added products. This would also require the government to improve infrastructure, upgrade industries, and develop human resources.
- Finally, Tajikistan should reassess its continuing focus on traditional sectors such as aluminum and cotton. The study posits that for Tajikistan to continue its strong growth momentum in the long run, it needs to upgrade and diversify exports. The successful transformation of the economy will critically depend on creating the right conditions to boost private sector investment in the new industries.
The Tajik government can play a key role in speeding up the process of structural economic transformation by addressing the constraints mentioned, especially through establishing a business-friendly environment.