Wednesday, December 21, 2011

Is the Game Worth the Candle?

by Nurgul Tilenbaeva

Is the game worth the candle? This is a “number one” question in the minds of economists, politicians, and the general public in Kyrgyzstan with regards to the new railway project “China – Kyrgyzstan – Uzbekistan”. As the name suggests, this new transport line initiated by the respective governments of three countries intends to connect China to Central Asian region, namely Kyrgyzstan and Uzbekistan (see Graph 1). Far from being it, the plan is to subsequently expand the line to connect China to Europe through Central Asia, Iran, and Turkey, thus the project promises to grow into a large-scale enterprise involving more than 10 countries under its umbrella. The role of the Kyrgyz Republic in this case is the role of the transit country for Chinese goods, which are to be transported along the new railway line. With the estimated cost of about 2 billion USD this project risks being too expensive and even loss-making for Kyrgyzstan. Is the risk worth taking?

The Route of the Intended Railway Line “China –  Kyrgyzstan – Uzbekistan”  

According to estimations it will take twelve years of railway operation for the line to become profitable, and it promises annual revenues of around 200 million USD for the Kyrgyz economy. Because of a significant reduction in transportation costs (the new railway line is 268 km long in the Kyrgyz segment as compared to the existing 900 km connection between China and the rest of Central Asia) there are benefits to Kyrgyzstan arising from increased trade flows and boosted cooperation with China. Moreover, the railway line will go through Naryn and Jalalabad oblasts of Kyrgyzstan, which represent the least developed regions of the country. And, as the economic theory suggests (namely, the New Economic Geography model of Krugman) building a road, or in this case a railway line that will subsequently decrease distance between cities, will have a large impact on the distribution of manufacturing production and lead to substantial agglomeration of economic activity in those regions. This will create a lot of new jobs in these underdeveloped parts of the country and attract more people to migrate there. Overall, the theory suggests that this will have huge positive welfare implications for the regions close to the railway line in the form of increased number of manufacturing varieties, higher wages, etc. So far, the railway project “China – Kyrgyzstan – Uzbekistan” sounds like a panacea for all woes solving a whole lot of problems and causing none. This is not particularly true, however.

In addition to expected positive effects of the project, there are negative ones as well. Because of the high cost of actually building the railway line, which was earlier mentioned to be around 2 billion USD the natural question of financing the project arises. This is where most of the problems come into picture. Up to now it has not been decided yet as to how Kyrgyzstan is planning to finance its segment of the railway line. However, there are two options frequently suggested by policy-makers. The first alternative would be to get a long-term, low interest rate loan from China and finance the line from these resources. Then when Kyrgyzstan starts enjoying the benefits of the railway line, it will start repaying the loan from this money. This alternative is not reliable and risky in a sense that it does not provide any guarantees for being able to repay the loan (it only assumes that the country will get expected positive revenues from the railway line operation). The second option in minds of Kyrgyz policy-makers is to exchange mineral resources for the services provided by the Chinese. Under this alternative, three minefields of the Kyrgyz Republic (Jetim-Too iron ore deposit, Sandyk aluminum deposit, and Terek-Say gold deposits) will be given away to China. This last option is even worse, since the socio-political situation in Kyrgyzstan is very unstable, and the idea of giving away ore deposits to China will be perceived by the general public as “selling the Kyrgyz lands” to a neighboring country. With two revolutions in the past ten years, this could easily trigger a social outbreak, which could lead to very negative consequences. Thus, Kyrgyzstan is ended up having two bad financing alternatives, and it will have to choose the lesser of two evils. In addition to all this, it has been reported that the local population of Naryn and Jalalabad oblasts is acting against the project, mostly due to ecological reasons. Moreover, the inhabitants of these regions as well as some experts claim that the value of deposits potentially offered to China is measured in trillions of USD, while the cost of the project is only 2 billion USD. In addition to all this, the great benefits of anticipated agglomeration in Naryn and Jalalabad may not come true because for the policy to have an effect it must reach a critical mass, and it might not happen in this case…

So, coming back to the question raised at the beginning: Is the game worth the candle? It is very difficult to provide a definite answer to this question and it is also probably too early to do that. However, given good policies the railway project “China – Kyrgyzstan – Uzbekistan” has a potential to become a great investment project increasing the welfare of Kyrgyz citizens.


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