Caucasus and Central Asian (CCA) countries need to improve their business environments and worker talent and develop their financial markets in order to raise long-term growth, an IMF paper suggests.

In paper entitled “Avoiding the New Mediocre. Raising Long-Term Growth in the Middle East and Central Asia”, published on March 22, the IMF said the performance of the region’s countries in these areas lagged behind the performance of their peers in the rest of the world. “Yet, these are the areas that bring the largest gains to productivity and physical capital growth. Against the backdrop of large spillovers from the recession in Russia, geopolitical tensions, and, in the case of oil exporters, lower oil prices, reform implementation should be accelerated, targeting reforms to the selected, most effective areas,” the paper recommends.

Developing a more competitive business environment supports productivity by facilitating private sector development, the paper said. “To this end, streamlining of business regulations, tax codes, and bureaucratic red tape would discourage corruption and level the playing field for businesses. Reducing the dominance of state-owned enterprises, in part through privatisation, and raising their efficiency will also be critical for reducing the operating cost of businesses.”

Cultivating worker talent, also underlying productivity, is especially important in the region’s oil importers where educational quality substantially lags other emerging market and developing countries (EMDC), the IMF said. “Re-orienting the education system toward the skills needed for private sector development would be an important step in this regard.” Diasporas made up of labour migrants can be tapped by governments through policy initiatives that facilitate communication networks where emigrants abroad can share their knowledge and expertise with businesses at home, the paper suggested.

“Financial market development, especially when geared toward SMEs, could elevate physical capital growth. Raising access to finance and ensuring the legal rights of investors, against the backdrop of a sound banking system, lay the foundations for such development,” the IMF said.

Substantially higher potential growth can be achieved in the region through these policies, the report suggests.  Current rates (4.25%) could be almost doubled in the region’s oil importers - Armenia, Georgia, Kyrgyzstan and Tajikistan, and raised from 7% to 8% in the oil exporters - Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan.

“Productivity could account for almost half the gains by closing the gap with the average EMDC in the business environment and worker talent, and over the long term, modern production methods. Higher private sector physical capital accumulation, accounting for the rest of the pick-up in growth potential, could be catalysed by elevating financial sector development,” the paper said. “In the CCA oil importers, greater trade and investment integration with large emerging markets would support both growth in capital and employment – with the latter adding further to potential growth.”