Unlocking Central Asia's Economic Potential by Integrating into Global Value Chains

Central Asian countries need to expand trade within the region and with other parts of the world. Photo: ADB
Central Asian countries need to expand trade within the region and with other parts of the world. Photo: ADB

By Zulfia Karimova

A free trade agreement could bring the economic and social development benefits of global value chains to Central Asia.

Central Asia, despite its diverse economic composition and wealth, is poorly integrated into global value chains. This limits the region’s economic growth, competitiveness, and development opportunities. 

It is crucial for countries to actively engage in these complex international networks of production and distribution to benefit from spillovers, technological advancements, and diversification.

Central Asia’s limited integration into global value chains is partly attributed to the fact that the sectors and industries in the countries do not work as well together as they could. 

Another obstacle to the region's integration into global value chains is the lack of comprehensive trade governance and cooperation. Issues such as cross-border transport, customs procedures, and inefficient coordination impede trade among countries. 

This, in turn, complicates international trade with states outside the region, particularly for the eight landlocked countries – one of which is one of only two double-landlocked countries globally.

The Central Asia Regional Economic Cooperation group (CAREC), which includes Afghanistan, Azerbaijan, the People's Republic of China, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan, is well-positioned to address this issue. 

CAREC should not merely contend with the trade-off between creating and diverting trade, which can occur when trading blocs adopt trade rules at the expense of trade relations with non-member states. Strengthening trade governance among countries is vital to connect the nations to global markets and enhance trade relations with countries outside the region.
 

Central Asia’s limited integration into global value chains is partly attributed to the fact that the sectors and industries in the countries do not work as well together as they could.

Closer economic integration with non-regional states, in turn, could bolster trade and create new development opportunities in the region.

CAREC member countries’ participation in global value chains actually grew faster than the rest of the world in recent years, according to UNCTAD’s Global Value Chain Participation Index. The average participation of CAREC countries increased about sixfold between 2000 and 2018, compared to a fourfold rise in other countries. 

But this only paints a partial picture. Central Asian countries typically exhibit low trading volumes, which leads to high relative growth rates despite modest absolute growth.

In addition, products exported by Central Asian countries utilize significantly fewer foreign inputs (around 15%) than the global average, where foreign inputs constitute about 25% of exports.

These figures indicate that these countries tend to contribute more at the lower end of value chains, primarily exporting raw materials and intermediate inputs that are then used in manufacturing of processed goods higher up in the value chains. 

This underscores the need for trade liberalization and facilitation in the region, given that the share of foreign inputs in CAREC exports varies considerably across the region but remains low overall. Only Kyrgyzstan and Turkmenistan surpass the global average value of around 23%, with many countries falling significantly below 10%, reflecting weak integration in global value chains.

Enhancing integration in global value chains requires a multidimensional approach involving various regional stakeholders. To do this, long-term structural change is needed. This includes integrated transport corridors, comprehensive regional trade governance, and standardized rules to facilitate trade and transit.

These goals can be achieved by establishing a free trade agreement that reduces trade barriers and promotes unfettered trade among the countries in the region. This could benefit trade among countries in the region and provide the structural and institutional provisions to streamline trade with other regions. This free trade agreement should entail a comprehensive trade governance framework, which provides the rules, regulations, policies, and procedures needed to promote and manage trade in the region. 

The impact of a comprehensive CAREC free trade agreement will hinge on its scope, encompassing aspects like trade facilitation, level of market access, and non-reciprocal concessions. There is compelling evidence that such an agreement could help the region reach its economic goals and create more favorable conditions for governments and businesses.