J.6_Background_and_Current_Programs.pdf

J.5: Background and Current Programs

RFP # 72011519R00001

Attachment J.5: Background and Current Programs

BACKGROUND

The five countries of Central Asia are diverse, dynamic, rapidly developing, and strategically important. The region’s population of 70 million people, is growing quickly with a large population of youth and young adults who are or will soon enter the labor force. Economic growth rates are generally high, but employment opportunities have not kept pace, and many Central Asians have been excluded from the economic benefits accruing to the countries as a whole. The Kyrgyz Republic and Tajikistan lack the natural resources of their wealthier neighbors, face high rates of poverty, and are largely dependent on the agriculture sector for employment. Men and women often have distinct and unequal employment opportunities and access to the resources necessary to start and grow businesses.

Another key defining feature of the region is the large migrant labor force and, particularly for the Kyrgyz Republic and Tajikistan, reliance on remittance payments from abroad for substantial portions of household disposable income. In 2016, remittances payments to the Kyrgyz Republic and Tajikistan were equivalent to 30.5% and 26.9% of GDP, respectively1. The primary reason for individuals to migrate abroad is the pursuit economic opportunities and high wages that are lacking in their home countries.

Recent terror attacks in the U.S., Sweden, Russia, and Turkey, carried out by Central Asians, highlight the growing concern of laborers migrating abroad where they are potential targets for recruitment by extremist organizations. The lack of economic opportunities in these countries has become a critical political and national security threat that extends far beyond the borders of Central Asia. For this reason, national security is seen as a secondary outcome of the direct economic and employment outcomes resulting from E4.

A lack of skills needed by private sector employers leaves many individuals unable to obtain employment in their home countries, even when opportunities exist. Employers lack qualified workers, but also themselves lack the skills and knowledge to access new markets, increase revenue, and employ more members of the communities where they operate. Many governments in the region also impose self-defeating regulations that serve as a disincentive for firms to grow and become greater employers and drivers of broad-based economic growth.

While Central Asian nations share a common past as former Soviet States, the current status of these countries varies widely with differing levels of economic development, human and natural resources, and political will to undertake needed reforms. Given the variation in Central Asian economies, blanket solutions are not appropriate for all countries and contexts, and instead, development activities must be tailored to each country individually. The uniqueness of each of the five countries is briefly described below.

Kazakhstan

1 (https://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/4549025- 1450455807487/Factbookpart1.pdf)

Kazakhstan is the wealthiest of the Central Asian Republics and has achieved upper-middle income status, but wealth is primarily driven by the development of the hydrocarbon sector.

Substantial revenues from oil and gas and readily-available foreign direct investment for these industries have generated large increases in real GDP per capita and good job prospects for many Kazakhs, but the gains are not evenly distributed and have led to significant income inequality.

Economic diversification is critical for the continued growth of the economy and to mitigate the risks posed by the volatility of world oil and natural gas prices. In particular, Kazakhstan lacks competitiveness in tradable goods outside of the extractives sector.

Kyrgyz Republic The Kyrgyz Republic has benefited from high economic growth rates in recent years, but it remains the second poorest of the Central Asian Republics and faces significant employment challenges in the near future. Like its neighbor Tajikistan, many Kyrgyz households rely on remittance payments from migrant labor, particularly in Russia, since many Kyrgyz workers are attracted to better employment prospects and higher wages abroad. Economic growth is good on aggregate, but job growth has significantly lagged behind overall economic growth, raising distributional concerns. One reason for lagging labor demand is that growth and productivity gains are concentrated in a small handful of large firms, and the growth has not been broad-based or inclusive of many sectors. The economy as a whole has seen a general breakdown between productivity and wages. Furthermore, a high population growth rate means more jobs must be created to absorb the youth bulge as young men and women enter the labor force. Training programs must be careful to keep skills in the country and not result in trainees taking their skills abroad in search of higher wages.

Tajikistan Tajikistan is the poorest of the Commonwealth of Independent States, with 19.5 percent of the population living on less than USD 1.90 a day and 56.6 percent subsisting on less than USD 3.10 a day.2 Despite having only 7 percent arable land, agriculture is a cornerstone of the economy and accounts for 25 percent of gross domestic product and employs 53 percent of the labor force in Tajikistan.3 Moving the agriculture sector from agrarian to agro-industrial in Tajikistan offers a solid foundation for economic development. Of approximately 8 million Tajiks, over 70 percent live in rural, agricultural areas.4 Tajikistan has achieved relatively high growth rates since the end of its civil war in 1997, but employment has not kept pace with the gains in national wealth. Between 2003 and 2013, the World Bank calculates that GDP grew by an average of 7.2% per year while employment only grew at a rate of 2.1% per year. The Tajik economy is an outlier in many respects: the population is not urbanizing as rapidly as other Central Asian countries, remittance payments from migrant labor remain among the highest in the world, and, despite an emphasis within the Tajikistan National Development Strategy on increasing exports and shifting to an agricultural industrial, Tajikistan has struggled to modernize its agriculture sector as a source of economic growth.

Turkmenistan

2 World Bank World Development Indicators 3 Ibid.

4 Ibid.

Turkmenistan has used its vast oil and natural gas resources to generate high rates of economic growth despite a lack of free market reforms. Much of the economy remains under the control of government monopolies and state-owned enterprises, and the market is highly restricted and insular outside of the extractives sector, which makes up 92% of total exports. Serious policy reforms are needed in order for the private sector take root and expand.

Uzbekistan The Uzbek economy has grown at a high and steady rate with GDP per capita growth frequently exceeding 6% per year over the past 15 years. However, much of that growth is the result of aggressive government industrial policy and subsidization of key industries, which raises concerns about sustainability and competitiveness in the long run. Many State Owned Enterprises (SOEs) will need to be privatized and new business creation and entrepreneurship encouraged as the economy continues to liberalize and open up to new markets. Over the past year, Uzbekistan has demonstrated increased interest in market-based reforms, such as the liberalization of its currency exchange system in September 2017, the abolishment of the horticulture export monopoly, UzAgroExport, in June 2017, the issuance of a draft presidential decree in August 2017 on improving business conditions for entrepreneurs. Such reforms offer promise for new business opportunities and private sector growth.

Development Challenge Central Asia faces numerous challenges to economic growth, and prioritizing the constraints to growth is a difficult task. The geography of Central Asia is an obvious constraint with countries landlocked (and double landlocked), markets separated by vast distances, and mountainous terrain that minimizes arable land and increases costs of transportation. But these natural features are a reality and can be overcome. However, the issues most constraining to economic growth are man-made: governance, policy, regulation, and enforcement are generally poor.

Economic opportunity is not always equal between men and women. These issues limit the development of the private sector as well as their ability to serve as creators of meaningful employment. Much of the road and electrical infrastructure is of poor quality and perennially underfunded. The costs to import and export are among the highest in the world, which is partly a result of geography, but is also reflective of bureaucratic hurdles, inefficient border crossings, regulatory requirements, and a lack of regional standards. These are just a few of many examples of the constraints to economic growth in the region.

There is no single binding economic constraint that is consistent across all five Central Asian countries, which further highlights the need for country-specific solutions under the task orders.

Fortunately, the World Bank, the Asian Development Bank (ADB), and USAID have conducted a number of detailed economic growth and labor market studies in Central Asia, much of it within the past few years using the most recently available data. Many of the constraints identified in these studies can be addressed through the scope of work of the E4 IDIQ and its task orders.

In Kazakhstan, the World Bank presented preliminary findings of its Strategic Country Diagnostic at the 2017 Astana Economic Forum. The report identified four main challenges to economic development in Kazakhstan: the advancement of the private sector and reduced state control of business activity, particularly in the extractive industries; a lack of regional integration; poor human capital, particularly the poor quality of the education system; and a lack of economic diversification.

In Kyrgyzstan, the constraints are primarily in governance, finance, infrastructure, and firm competitiveness. Recent economic research includes the World Bank jobs diagnostic (2015), the ADB growth diagnostic (2013), and the GIZ labor market study (2013). A number of common themes arose from these studies with political and governance issues being at the top. Political instability, corruption, and the poor quality of government institutions are major deterrents to private sector growth. Other common themes include the high cost of trading across borders (on both the import and export side), a lack of available financing, inconsistent electricity access, and the overall low productivity of firms, much of it driven by small and medium firms operating in the informal sector. As a remittance-dependent economy, Kyrgyzstan also faces a unique macroeconomic constraint from the fact that the substantial inflow of foreign currency into the country puts upward pressure on the value of local currency and reduces export competitiveness.

Tajikistan also faces a long list of constraints that donors must prioritize. USAID’s 2016 jobs diagnostic identified tax rates and tax administration as the most binding constraint with secondary issues being access to electricity, access to finance, crowding out from low-productivity SOEs, and the high cost of export. The ADB growth diagnostic identified similar issues to growth: access to finance, access to electricity, transport infrastructure, rule of law, and export concentration. The alleviation of these constraints are expected to help modernize the agricultural sector and help people transition from agricultural day labor to better, higher-paying jobs in agribusiness and non-agricultural sectors.

In Uzbekistan, diagnostic research has been limited by a lack of data and low levels of transparency from government institutions. With an understanding of these limitations, the World Bank Strategic Country Diagnostic identified the following as the major constraints to inclusive growth: strengthening allocative efficiency and competition by removing market distortions; establishing a high-quality regulatory environment for firms; promoting reallocation of land towards more productive uses; modernizing public infrastructure; addressing labor market weaknesses; mitigating spatial inequities in access to social services, especially drinking water and sanitation services; and promoting the sustainable use and management of natural resources.

Notable Diagnostic Research Studies by Country Regional OECD Enhancing Competitiveness in Central Asia (2018)

Kazakhstan World Bank Systematic Country Diagnostic (2017)

Kyrgyz Republic World Bank Jobs Diagnostic (2015) ADB Growth Diagnostic (2013) GIZ Labor Market Study (2013)

Tajikistan World Bank Jobs Diagnostic (2016) ETF Labour Market Review (2010) ADB Country Diagnostic (2016)

Turkmenistan None

Uzbekistan World Bank Systematic Country Diagnostic (2016) ADB Private Sector Assessment for 2012-2016 World Bank Country Partnership Framework 2016-2020

CURRENT AND RECENT PARTNERSHIPS AND PROGRAMS

Competitiveness, Trade, and Jobs (CTJ – 2016 – 2021):

USAID Competitiveness, Trade, and Jobs Activity in Central Asia (CTJ) aims to facilitate exports and employment in horticulture and strengthen transport and logistics services across the five Central Asian economies. CTJ and USAID recently agreed to add a third focus sector, which will be tourism. By incentivizing firms to become more regionally competitive and by addressing cross-border impediments to trade, USAID helps to develop a more diverse and competitive private sector and generate export-driven growth. CTJ is a five-year project running from October 2016 through September 2021. There are three main components to the CTJ project:

Component 1: Facilitating Trade

● Partnering with key actors to assess and implement solutions to expand exports and transport and logistics services

● Improving customs and border management

● Organizing the Central Asia Trade Forum, a flagship regional event now in its seventh year that draws over 500 participants from the private sector, government, and civil society from countries across Central and South Asia and Europe.

Component 2: Partnering for Innovation

● Competitively selecting firms to co-finance the innovation and expansion of exports and jobs for horticulture, transport & logistics, skills development, and entrepreneurship Component 3: Expanding Employment in Key Sectors

● Developing business skills

● Fostering entrepreneurship

Component 3 of CTJ, which focuses on employment, is by far the smallest CTJ component, with no in-country presence outside of Kazakhstan. CTJ will provided a limited number of training seminars in conjunction with other international organizations focusing on workforce development. This approach differs starkly from the type of robust, on the ground support that is envisioned under E4.

With the incorporation of the C5+1 initiative, a diplomatic platform involving the five Central Asian nations and the United States, CTJ has taken on a very heavy regional focus, with only a modest amount of bilateral programming. This top-down approach is centered around the idea of fostering regional connectivity. Conversely, E4 has been developed with tailored, country-specific approaches in mind.

Uzbekistan: Agricultural Value Chain Activity (AVC – 2015 - 2020) AVC is the third in a series of horticulture activities funded by USAID in Uzbekistan. It builds on the accomplishments of previous activities to address the standard and quality issues needed to increase access to high end local and export markets, improve production and post-harvest practices, expand investments in agro-processing, expand production of certified planting material, and build efficient extension services through privatized agro input dealers. AVC has a strong private sector orientation and market-driven approach. It focuses primarily on post-harvest issues and markets for fresh fruit and vegetable production.

Kyrgyz Republic: USAID’s Agro Horizons Activity (2014 – 2019) Agro Horizons seeks to raise the incomes of smallholder farmers by making selected value chains more productive through: a) increasing the productivity of agricultural producers and linking them to markets, including potential markets in Eastern Europe, China and the Middle East; b) increasing productivity and markets for agribusinesses; c) improving the enabling environment for horticulture sector growth; and, d) improving the nutritional status of women and children. Agro Horizons will work with vegetables, fresh fruit, egg production, and dairy as well as the value added businesses of dried and canned fruit, sour milk, and yoghurt.

Agro Horizons will strengthen other value-chain actors such as larger-scale farmers, agricultural advisory service providers, and market intermediaries, both to expand markets of agricultural goods and to strengthen links to agricultural producers. The activity will also explore ways to address the problem of farm size through, for example, contract and out-grower arrangements, bulking and aggregation of produce from small farms, and partnering small farms with larger nucleus farms. It will support internationally recognized quality management and certification systems where appropriate, improved access to inputs (including their finance), and B2B networking. A unique feature of Agro Horizons in the region is its support for the development of financial services geared to the needs of the horticulture sector.

Kyrgyz Republic: USAID’s Business Growth Initiative (2014 – 2018) The Business Growth Initiative works with individual firms and stakeholders in the apparel, tourism, and construction materials sectors to improve access to markets and increase sales, expand product offerings, and improve productivity, quality controls and financial management, as well as build other critical capacities to make them competitive in both domestic and international markets. It also seeks to improve access to working capital and equipment finance for value chain firms and provides matching capital to help private-sector partners invest in their businesses by upgrading their production equipment and facilities, management capacities, and product and service offerings.

Kyrgy Republic: USAID’s Enterprise Competitiveness Project (ECP – 2018 – 2021) ECP increases sales and jobs at Kyrgyz small and medium enterprises (SMEs) through inclusive, market-led growth that fosters a system to (1) increase market access and competitiveness, (2) catalyzes investment, (3) unlock opportunities for women and youth, and (4) builds skills, and encourages a more enabling environment. This includes ECP providing support for SMEs to create new jobs, generate additional sales, and lay foundations for systemic change.

Tajikistan: Feed the Future (FTF) Programs Feed the Future (FTF) focuses its activities in the southwestern Khatlon Province, a key region for agricultural production that also has some of the highest rates of undernutrition and poverty in the country. Coordinating with the Government of Tajikistan FTF is implementing land and water reforms. The portfolio also works directly with farmers and agricultural entrepreneurs to introduce and scale new technologies to increase agricultural productivity and crop diversity, strengthen value chains, and expand markets for fruits (including orchard crops), vegetables, and dairy products. The flagship Feed the Future Tajikistan Agriculture and Water Activity (TAWA) plays a key role in scaling new technologies which include new crops, improved seed and tree varieties, integrated pest management, greenhouses, pruning and grafting, fruit drying technology, and improved feed and silage production among others. Through increased harvests, greater crop diversity, and higher quality products, FTF activities are expanding economic potential by increasing incomes and creating jobs. Like Agro Horizons and AVC, TAWA also partners with local entrepreneurs to improve agricultural value chains by developing cold storage and other facilities and is working to improve public and private agricultural extension services.

Tajikistan: Agribusiness Competitiveness Activity in Tajikistan (ACAT – 2018 – 2023) The USAID Agribusiness Competitiveness Activity in Tajikistan (ACAT) strengthens Tajikistan’s economic growth through interventions that improve the competitiveness of Tajikistan’s agribusiness enterprises, leading to increased economic development, employment, and livelihoods. ACAT is improving the economic viability of the agriculture sector so it creates both on and off-farm employment and encourages investment in supportive infrastructure and services in rural areas.