The September 11 terrorist attacks thrust Central Asian states into the spotlight. As Americans and their allies scrambled to establish military outposts in the region in autumn 2001, some economists expressed hope that Uzbekistan, Kyrgyzstan and others would parley the attention into broader trade and sounder economies. That has not happened.

American leaders have not forcefully tied their aid to economic progress, and Central Asian republics have not clearly applied revenue from aid or from foreign visitors toward projects that stimulate foreign investment or improve national living standards. Kazakhstan and Azerbaijan still pin their hopes on oil and gas revenue, Kyrgyzstan still relies on its mature mining and agriculture industries, and Uzbekistan still charges high tariffs on imports and refuses to make its currency convertible. These policies threaten the same economic stagnation that loomed a year ago. While it has provided cash and attention, the antiterrorism coalition has not spurred re-engineering of these young economies.

Many experts say that Central Asian countries have not sought economic reform in part because their new allies have not pressed them to. Corruption pervades business and government in Kazakhstan and elsewhere; American Congressman Chris Smith (R-NJ) has proposed legislation expressing the US’ "strong disapproval" of Kazakh President Nursultan Nazarbayev’s network of favors. Turkmenistan remains a closed society. Tajikistan and Uzbekistan have enacted some economic reform, though these countries remain inadequately linked to world markets. And Kyrgyzstan, which saw massive civil disobedience and a fatal mining accident in the spring and summer of 2002, looks less poised to grow than it did in the mid-1990s.

American soldiers and international aid workers around the region have lifted local prices around bases, but increasing commerce has not found its way into a system that promotes growth. "Without [market-friendly policies] being first on the agenda and with little internal demand for economic reform, " says Ian Bremmer, head of a consulting firm called the Eurasia Group, "there hasn’t been much forward progress."

As it seeks to squelch the instability that extremist groups can cause, the Bush administration wants to be able to buy oil from sources unlikely to harbor or aggrieve extremist Muslims. That desire could promise steady investment in oil-rich Kazakhstan and other nations near the Caspian Sea. When American military advisors arrived in Georgia over the winter, some observers speculated that the country had become a strategic priority because of its potential carriage of oil and gas to American and European markets. But drilling, delivering and refining fossil fuels cannot foster widespread improvements in living standards if governments do not tie oil revenues into a system of savings and social investment.

Since the anti-terror alliances emerged, the US has declared Kazakhstan a market economy. But despite this status, says Bremmer, Kazakhstan has "backslid," by protecting inefficient domestic companies and discouraging foreign investors. Shortly after Imangali Tasmagambetov became Prime Minister in February, Interfax quoted him as declaring that the state should be "a locomotive" propelling domestic companies and praising the country’s import-substitution program.

While Russia’s energy companies are wooing foreign companies, this posture may weaken Kazakhstan’s growth potential. "I think the investment climate has been made worse by actions of the governments themselves, like the domestic content provisions in Kazakhstan," says Julia Nanay, a director at the Petroleum Finance Company in Washington who studies the Caspian region. "I don’t think the American military presence has any bearing on companies’ investment decisions."

The high stakes of dissent, though, may block economic progress in more subtle ways. Anders Aslund, a senior associate at the Carnegie Endowment for International Peace, says that Kazakh salary-earners witnessing Nazarbayev’s antics have grown disgusted and may soon feed discord rather than prosperity. The opposition, Aslund says, reflects the consensus disappointed professionals "who think Kazakhstan can do better" than a quasi-nepotistic system. Without improving its transparency and making conditions easier for foreign investors, Kazakhstan will continue to disappoint those reformists even if American and other energy companies buy its oil at increasing volumes. Similarly, Martha Blaxall, an independent Uzbekistan expert, worries that Karimov may suppress free speech and transparency while the US needs his support, a stance that could discourage foreign investors and depress entrepreneurship.

To be sure, some pro-business reform has occurred in Uzbekistan. The country has lowered some business taxes, which Brookings Institution scholar Fiona Hill calls a hopeful sign. President Islam Karimov has also made some concessions to free-market forces. "President Karimov has partially liberalized the cotton market, worked to stimulate small-medium enterprise development, and has started to more effectively regulate trade," notes Bremmer. At the same time, anecdotal reports suggest that Karimov’s insistence on high tariffs and inconvertible currency may be blocking the flow of goods in Uzbek bazaars and causing protests that in turn frighten potential investors.

Kyrgyzstan has also given foreign investors reason to flee. Police clashed with demonstrators in the Ak-Sui region in April, leading to five deaths; in early September, protests over the clash were still playing out in marches and arrests. In July, a fatal accident at the Canadian-owned Kumtor mine led to the mine’s closure. That step led the International Monetary Fund to shave three percentage points off its growth forecast for the country on August 21, according to Interfax. The presence of American and allied soldiers near the capital cannot distract observers from Kyrgyzstan’s troubles. While Karimov alternated autocratic moves with receptions for foreign dignitaries, Kyrgyz President Askar Akayev faces increasing unrest from an under-employed population and organized opposition.

Tajikistan has made some progress. The IMF slapped the government for misreporting earlier loan disbursements in February, but Aslund praises it for trying to reduce deficits, keep inflation low and service foreign debt. These are incremental steps rather than watersheds. But even in a context of sudden attacks and shifting military campaigns, economic progress is likely to gain speed or stall through a web of adjustments and patterns.

Like their wider effects, the terrorist attacks’ influence on Central Asian economies will disseminate over time. American dignitaries visiting Central Asian capitals bring images of those capitals to the nightly news, says Bremmer, which can stimulate investors’ curiosity. And if Allied soldiers become fixtures in Uzbekistan and Kyrgyzstan, they may alter economic patterns. Blaxall says the American guests are "starting to procure some things locally, including food" in Uzbekistan. As the character of this war remains unpredictable, so will its meaning and scope for Central Asian incomes.

http://www.eurasianet.org/departments/business/articles/eav091002.shtml