Today, some question the correctness of the decision made in 1996 by the Government of KR( i.e.   the movement towards the WTO).  Sometimes people ask me:  “Was it necessary for us to join the WTO?”  “Was early entry into the WTO for our country, a benefit or a mistake?”  “What did we receive from joining the WTO?”

I have responded and will respond to all that the entry of Kyrgyz Republic into the WTO was a necessary step.  It happened at a proper time, and it was done for the benefit of the country.  Thanks to this, after joining the WTO, Kyrgyzstan received an absolutely new model of economic development and legal base corresponding to international standards.  This provided a basis for helping our economy out of a deep crisis caused by the break-up of the USSR and the world financial crisis of 1998.

Also, the entry into the WTO cleared a  way to the active flow of direct investments into our country, created favorable conditions for a rise in production, expanded the transit of goods and services, and increased export.

The fact is however, during these years, we did not fully utilize all the advantages of an early entrance into the WTO.  We did not use instruments of the WTO to  develop, first of all, our export potential nor our innovative and investment appeal of the country.  This, I consider was a weakness of Government policy of KR. 

What motivated the Government of KR to make such decision at that time?

As you are well aware, after the declaration of independence by the Kyrgyz Republic, like other independent countries formed in the area of the former USSR, we experienced a  period of acute drop in production and trade.

This drop in production and trade was caused by the break down of internal and external economic trade relations based on ineffective trade and payment policy that were rooted in a centralized governmental planning system of the USSR.

At that time (1992-1994), in order to stop this decline of production and trade, Kyrgyzstan signed bilateral agreements on trade and economic co-operation with all the countries of the CIS.  The agreements stipulated mutual deliveries of certain goods and their quantity.  These agreements were implemented through a mechanism of government order (“goszakaz”) with  payments going through clearing centers, and the balance of trade was recorded in correspondent accounts of the central banks.

These agreements, to some extent, softened and stretched the process of the break-up of trade relationships.  There is no doubt that this was a very important period necessary for the arrangement of new economic and trade relationships.   But these agreements certainly could not stop or even support the needed level of intergovernmental trade since they were not based on market mechanisms.  In spite of the measures taken, during the four years after the collapse of the USSR, the volume of production and trade in Kyrgyzstan decreased twice and the budget of the country was reduced by half.

Under these circumstances, it was necessary for the Government of Kyrgyzstan to urgently work out and implement special economic growth revival programs to aid in the recovery of the economy, as well as for the trade and payment system of the country.

Success of such programs, the fate of the new economic policy of the Government of Kyrgyz Republic, the rate and direction of further economic development of Kyrgyzstan was closely dependant on the resources that we could direct into the implementation of this policy as well as the rate we are able to integrate our economy into world economic and trade system.

At that time, the Government clearly understood that there were insufficient resources for the implementation of such programs.  We, unlike our neighbors, did not have ultra-profitable natural resources  such as oil and gas. We also could not count on the replenishment of the treasury and funding this program from the earnings from the development of the hydropower industry, tourism,  and the development of gold deposits at that time.  Enormous resources and time were required before these areas will become start bringing profit.    Under these conditions it was possible to save the country’s economy from a  systemic crisis only by liberalization and rapid integration of the economy into the world trade system.  Kyrgyzstan, by using its particularities of its geographic location and its instruments of liberal trade, could allow a large flow of goods, services, financial resources, people, technologies on route China-Central Asia-Russia-Europe.  This would have attracted the needed resources for the implementation of the programs of rapid economy development.

Understanding this situation in 1995, the President and the Government made the decision to join the WTO.  In November 1995, the Government of KR issued an order to create the Inter-Ministerial Commission (IMC) to begin negotiations with the WTO.  The IMC was given a task to conduct speeded-up negotiations and ensure entry of Kyrgyzstan into the WTO.  In February 1996, the Kyrgyz Republic submitted an official request to the Secretariat of the WTO, expressing its interest of joining this organization.

In its turn the General Council of the WTO, having examined the request of the Government in April of 1996, created a working group and the negotiation process began.

During those three years of negotiations, the IMC responded to more than 400 inquiries regarding Kyrgyzstan’s economic policy and trade regulations for that period from the WTO working wroup and 42 WTO country-members. This commission negotiated bilateral and multilateral agreements on the mutual access to goods and services with the EU, USA and other 28 countries.  During these sessions, the working group often asked questions regarding customs and investment procedure, state ownership and privatization, policy influencing commodity trade, regulation of export, intellectual property, services trade, agriculture and others.

Special emphasis was placed by the working group members on abiding by the principles of transparency with respect to developing draft laws and the submission of proposals and amendments by interested parties.  Careful attention was given to the improvement of legislation in the field of trade liberalization, foreign investments, intellectual property, information technology, intellectual property rights, and state procurement.  Accordingly, in the course of negotiations, the legislative base of the country was brought into line with the standards of the WTO.

In July 1998 the working group had its last session and during that session it made a decision a decision to recommend the General Council to accept Kyrgyzstan into the WTO.  On 14 October 1998, the Kyrgyz Republic became the 143^rd member of the WTO, and on the 20^th of December, this protocol came into effect.  Notably, for Kyrgyzstan, the process of joining the WTO took only 3 years whereas, for instance, China conducted negotiations 14 years, Latvia – 7 years.

  Factors that influenced the relatively quick entry of KR into the WTO:
 

 - Readiness of the republic to integrate into the international trade system.   The president had set entry into the WTO as a priority task for the Government of KR;

 - Absence of disagreement at the national level (the authorities, civil society and opposition were of the same opinion) that allowed to take state-level decisions efficiently and in proper time;

 - Special status, powers of the Inter-Ministerial Commission and high competency of its members.  The commission composition was at the level of first deputy ministers, heads of administrative departments – i.e. people were given powers and control in the field of their activity; questions were settled correctly, efficiently, that promoted taking of timely decision;

- Technical and consultative aid of USAID project during the whole process of entry Kyrgyzstan into the WTO.
 

What lesson can be learned from the experience of Kyrgyzstan’s entry into the WTO by the countries that are in the process of entry?

Joining countries must:

                    - create, a permanently high-level government body which has the power to make decisions when conducting negotiations and coordinate this process;

                    - be ready, in the course of negotiations, to adapt national legislation to standards and commitments of WTO;

                    - be ready to make concessions in negotiations on access to its own market of foreign goods and services, and to accept additional obligations on the liberalization of external trade; 

                     - be ready to face complicated issues such as those policies which influence the country’s external trade and their strategy of development;

                     -  conduct negotiations in such a way that a balanced concession is made –  on one hand, having access to foreign goods and services, and on the other, achieve advantageous conditions for exporting domestic goods and services to the markets of the WTO country-members.  This should be achieved while protecting its priority sectors of production and service from imports;                    

       - be ready to explain the nature of functioning regional agreements (free trade zones, customs union) and their compliance to the provisions of article XXIV of GATT (General Agreement on Tariffs and Trade) and article V of GATS (WTO’s General Agreement on Trade in Services).

What benefits does Kyrgyzstan receive from its membership in the WTO?

First, our export received most-favored-nation treatment in all 153 country-members of the WTO.  Before, it was necessary for Kyrgyzstan to sign bilateral agreements with each country in order to obtain MFNT; but now, after the entry into the WTO, it is provided automatically.  As a result, the total export volume of KR increased from 12.3% (1996) to 38.6% (2007), and in fact, gold export increased from zero (1996) to 213 million dollars (2007).  Trade with the WTO country-members in 2007 amounted to 1326.2 million dollars, a three-fold increase (from 1996).

Second, Kyrgyzstan received the opportunity to conduct bilateral negotiations on accessing goods and services with the countries that want to join WTO.  During these negotiations Kyrgyzstan can require from the joining country concessions for our goods and services, as well to solve trade-related problems with this country.  For example, in the course of bilateral negotiations with China, a very important trade partner to us, Kyrgyzstan obtained some significant concessions for its own goods (zero rate of customs duties for export of electric power, cement, mercury, wool, glass, roofing slate, knitted fabric, antimony, mineral water, incandescent lamp, electrical equipment, carpets and others). During negotiations with Ukraine the issue of debt of intergovernmental settlements was resolved; an issue dating back to 1993.  In the future, using this instrument to our benefit, we can solve other trade problems with Russia, Kazakhstan, and Uzbekistan.

Third, with the entry into the WTO, the USA, with regard to Kyrgyzstan, abolished the amendment of Jackson-Vanik in section 4 of the Law on Trade and Development of USA where our goods used to have a customs duty of 10 times or more; exceeding the usual rate. 

Fourth, we received a more protectionist customs system.  Before the entry into the WTO, we had a unified customs duty – 10% - for all kinds of goods.  Now, after the entry, it has become classified.  For instance, after the entry into the WTO, in order to protect our domestic market, we were able to increase customs duties for import of meat (15%), vegetables and fruits, except citrus plants (20%), sugar (30%), textiles (17.5%) and etc. 

Fifth, the harmonization of domestic trade and tax legislation with the regulations of the WTO promoted the development of trade and attracted investments into economy of the republic.  From 1998 until 2007, the volume of the direct foreign investments grew more than three times (from 136.3 to 436.8 million dollars).

One more important positive moment in the context of joining the WTO is the implementation of the requirements of the Agreement on technical barriers in trade that resulted in the abolishment of many administrative and technical barriers hindering the development of production, trade and attraction of investments.

If Kyrgyzstan had joined the WTO later than its regional partners (China, Russia, Kazakhstan, Uzbekistan), then, as a result of the bilateral negotiations, it would have to accept unfavorable concessions for the country. 

Before 1996 the tariff system of the republic had  not only inflexible unified duty for import of goods at the rate of 10%, but also complicated  tax system.  This created real grounds for contraband import of goods at customs.  Moreover, a number of trade barriers were in effect (export and import licensing and taxation, various preferences for goods imported on several agreements).  All this did not correspond to the principles of open fair trade but instead opened a wide way for corruption.  Without eliminating all these barriers, it would not have been possible to implement a new economic policy to satisfy the principles of the WTO.

After entering the WTO, average weighted customs duties decreased from 10% to 5.2 %.  The effect from the duty decrease resulted in the reduction of the cost of imported raw material, used for local production, and as well consumer goods; which in turn stimulated economic growth.  For example, in industry sector the rate of growth in 1999 was 108.9% and for ten years, the real volume of industrial production grew by 42.7%.  The positive rates of growth since 1999 are observed in almost all the sectors of industry and service sphere.

The attempt to build an open and liberal economy, proof of which is Kyrgyzstan’s entry into the WTO, became not only a motivation for the development of trade and service sphere, but allowed an avoidance of acute economic and social disturbances.  This disturbance would have been provoked by the 70% reduction of material production.  But since the development of the trade and service sphere ensured the employment of about three hundred thousand (300,000) people and took away the tension in the labor market.
 

Problems that hinder Kyrgyzstan from benefiting  from being  a part of the WTO

а)  Small domestic market and the low level of income among the population.  Small domestic market limits quantity of produced goods.  This in turn sets limits on the development and improvement of technology production and decreases production profitability and goods competitiveness.                                                                                                                                                                                   

b) Obsolete standards and metrology.  This factor sets limits on the market and decreases the export potential of KR.  Goods certified in local laboratories that do not have international accreditation are not acknowledged by the majority of markets outside the CIS. 

c) High cost value and expenses. High price for the imported raw materials, fuels and lubricants, worn-out equipment and obsolete technology, and high transportation expenditures, cause significant rise in the prices of goods and limits supply of products. 

d) Low labor efficiency.  In Kyrgyzstan, the volume of output per capita is the lowest in the CIS.  Nominal wage is the lowest among the countries of the CIS.  Employees in Russia and Kazakhstan receive three times more than in Kyrgyzstan; in Armenia, Georgia –  15% more, in China and India – 2.3 times more.  On average, if an Indian company invested a dollar, the profits received would be in the amount of 3.5 dollars.  In contrast, Kyrgyz companies are capable of deriving only 1.5 dollars; the lowest among all the countries of the CIS. 

e) Weak innovative potential. This factor hampers productivity, growth, export quantity and competitiveness.  The private sector does not invest means into innovative scientific-research activity because of the absence of resources.  In our government sector, 213 people are employed in new developments, but, for instance in Georgia, this indicator is 1870 people; in Belorussia – 2317 people. 

f) High level of corruption.  Here, I think, there is no need to make any comments.
 

Recommendations.
 

As it is already noted, in spite of conducting a policy of openness during 10 years of membership in the WTO, Kyrgyzstan did not achieve the expected level of integration into the world economy and trade system.  During 1998-2007, the share of trade in GDP was 5.6% and the negative trade balance with regard to GDP increased by 12.5%.  During 2000-2007, the physical volume of export grew only by 25%, and the physical volume of import grew by 100%.  Thus, for this period, growth of the physical volume of import was 4 times more than the growth of the physical export volume.
 

As the analysis shows, for increasing export and improving of competitiveness in external and domestic markets from the production side, huge efforts are required on the modernization of production, the improvement of the quality of goods, and  a need to find available niches markets of finished commodities.
 

Until we create such conditions for our producers, we cannot build a stable, predictable legal and tax base, attractive investment environment, and a competitive economy.  Until we eliminate corruption in the authority hierarchy and solve the above stated problems, we cannot be successful.
 

Note:  Mr. Esengul Omuraliev at present is the Advisor of the Chairman of Board of directors of “Artis Stroi” Ltd.  In 2005-2007 – Governor of Issyk-Kul oblast of Kyrgyz Republic; in 2001-2005 – Ambassador of Kyrgyz Republic in Ukraine, Romania, Moldova; in 1998-2000 – Vice-prime-minister, Minister of External Trade and Industry of Kyrgyz Republic; in 1996-1998 – Ambassador of Kyrgyz Republic in Republic of Belarus, Poland, Lithuania, Latvia;  Chairman of Inter-Ministerial Commission of Kyrgyz Republic on negotiations with the World Trade Organization.