- Most economies in the CAREC region have natural resource endowments, including arable land, minerals, and energy reserves, that could significantly benefit their low-income majorities. This potential is far from being realized for a variety of reasons but shifting policy orientation and rising global engagement could make important contributions to inclusive and sustained economic growth. Today, most CAREC member economies remain in low-level investment traps, where insufficient productivity and savings combine to discourage domestic and foreign investment. To follow the example of dynamic East Asian exporters, CAREC economies must redouble their efforts to increase labor productivity and attract external investment, globalization’s most potent catalyst for growth. This ADB Technical Assistance (TA) 6806: Strengthening Regional Cooperation on Skills Development under the CAREC Program, is focused on that objective.
- This report offers evidence on effective leveraging of global market access, sustaining inclusive growth and eventual prosperity rather than simply transferring natural resources to foreign countries. The way to make this work, and the primary emphasis of the TA, is to upgrade domestic skills and add rising real wages to a virtuous investment-driven growth cycle. Skill-intensive growth, leveraging external demand and investment, was the winning formula for the Asian Miracle and it can work for CAREC.
- The analysis below applies a new CAREC regional Calibrated General Equilibrium (CGE) model to a variety of alternative policy scenarios, clearly revealing the potential gains from outward oriented development with more determined commitments to education and TVET (Technical and vocational education and training). More extensive scenario work, including assessment with national-level forecasting models, can support detailed policy design and targeting, but these results reveal the significance of skill development to attaining sustained prosperity across the CAREC.
- Skill development across the CAREC region is inherently a multidimensional challenge. Economists know that wages depend on labor productivity, which in turn depends on skills and other factors of production. Thus, labor productivity levels depend on both supply and demand in factor markets, as well as linkages across sectors and borders. To capture these complexities and elucidate the salient options for policy makers, this study applies a CGE forecasting model to examine scenarios representing the primary categories of both domestic and international policy (Table ES-1).
Table ES-1: CAREC Skill development Policy Scenarios
- In addition to a business-as-usual reference Baseline, we begin with a first policy scenario looks at what trade reform, liberalizing border measures and facilitating trade in transit, can offer. In particular, we assume that import tariff and non-tariff barriers are reduced 50% in ad valorem terms, regardless of origin. Scenario 2, we examine role of higher agrifood productivity, assuming 3% annual growth of Total Factor Productivity (TFP) in agriculture and food processing across the remainder of this decade. Scenario 3 evaluates the impacts of improvements in labor productivity across all CAREC economies, as this might result from improved education and training leading to 3% annual labor productivity growth across all sectors. Scenario 4 examines the role of infrastructure investments to support higher growth, where it is assumed that 3% annual productivity growth of capital productivity reduces trade and transport margins, vehicle operating costs, and facilitates more productive logistics, transport, and communication services. Finally, the role of FDI is assessed with a scenario that allows each CAREC economy to liberalize its capital account and attract foreign investment up to at least double or at least rise to 10 percent of GDP by 2030.
- Aggregate and more detailed scenario results are discussed in the main body of the report, but even casual inspection of the aggregate results (Figures ES-1-2) reveals substantial opportunities for dynamic growth in a more skill-intensive and investment-friendly CAREC regional economy. Having said this, trade liberalization alone will not significantly improve growth prospects because of low initial protection and low productivity. In other words, structural policies to increase productivity and investment are needed for superior, sustained, and more inclusive. When FDI’s “Holy Trinity” of growth benefits are available: external savings inflows, technology transfer, and export market access, skill/productivity policies can dramatically accelerate growth across the region.
Figure ES-1: Macroeconomic Impacts – Real GDP
(percent change from baseline in 2030)
More detailed sectoral results (next figure) reveal that human resource development in Central Asia shifts regional trade in more equitable directions, reducing PRC dominance and creating more inclusive grow benefits. Investment diversion permits lower income countries to grow faster than higher income ones, promoting Asian regional convergence through economic integration.
Figure ES-2: Macroeconomic Impacts – Employment by Skill Level
(percent change from baseline in 2030)
- Removing CAREC regional trade distortions but are of limited macroeconomic benefit – As with the vast majority of economywide assessments, trade liberalization reduces price distortions in the liberalizing economies. Baseline protection levels are modest in the CAREC region, however, and removing then confers only small aggregate income and employment gains.
- Policies targeting productivity yield significant skill development benefits – As is argued elsewhere in this report, baseline productivity levels in CAREC agriculture are very low. In former USSR republics, policy reforms have not effectively supported modernization and intensification, with only limited diversification from extensive commodity crops to higher value products. Policies targeting agricultural technology and skills could increase productivity and real wages substantially.
- FDI has the most dramatic potential to improve regional skill development and facilitate growth – By combining foreign capital inflows to supplement low domestic savings, technology transfer to increase productivity, and export market access to supplement domestic demand, FDI can release the CAREC economies from their low-level agrifood investment trap. These results may seem dramatic, but they are actually quite familiar from the experience of East Asian “Miracle” economies who pursued similar strategies.
- Skill Development and FDI can promote economic convergence – The estimates in this study suggest that lower income countries experience higher skill development improvements and per capita growth benefits. In particular, the poorest country in the region, Afghanistan, experiences the most dramatic relative (percent change) benefits in both skill development and per capita real GDP.