Banking on the Xinjiang model

PUBLISHED : Monday, 24 November, 2003, 12:00am
UPDATED : Monday, 24 November, 2003, 12:00am

On November 14, the International Monetary Fund and the World Bank were out in force at Kazakhstan's conference on financial system reforms. But nobody in the central Asian republic was interested in their proselytising. Instead, attention turned to a new guest - Zhou Xiaochuan, governor of the People's Bank of China.

Central Asia is now looking towards China as a realistic role model for economic reform, based on pragmatism, not ideological fundamentalism. The Washington Consensus prescriptions are now caricatured as 'voodoo economics', representing formulas for cyclical poverty, not development.

Following the collapse of the Soviet Union, the six central Asian republics followed the IMF policies of overnight privatisation, freeing up prices, exchange-rate convertibility and cutting government resources. Throughout the 1990s, US diplomats praised them as beacons of free-market reform. Today, they are economic disasters.

The central Asian republics are desperate for a new development strategy. At the time of the Soviet Union's break-up, they were middle-income states, while neighbouring Xinjiang province, in China's Muslim northwest, was a low-income region. A decade of different economic policies reversed that. Now, Xinjiang is their new role model.

It has enjoyed a decade of 8 per cent gross domestic product growth, on average, compared with negative growth in Kyrgyzstan, Tajikistan and Turkmenistan, while Uzbekistan and Azerbaijan recorded minor GDP rises. Simultaneously, life expectancy in Xinjiang rose, while it dropped in the republics.

Kazakhstan has faired better, with 2.5 per cent growth, largely due to its oil reserves. But life expectancy has dropped from 68 in 1990 (in Xinjiang it is now 67) to 61 last year - the same as in Bangladesh. Kazakhstan has already demanded that the IMF get out of the country, and has embarked on economic policies based on the Chinese and Malaysian models.

The IMF and World Bank policies involved widescale privatisation of industries, without laying down the necessary infrastructure or taking into account management transition. In Kazakhstan, the sudden privatisation of state-owned farms left people asking: 'Where does our fertiliser come from? Where do we sell our produce?' In Kyrgyzstan, the privatisation of state-owned banks ruined the banking system, while debt rocketed.

Uzbekistan is following Kazakhstan, looking towards an Asian model. Turkmenistan has also given up on IMF policies.

The Washington Consensus free-market ideologues believe that if a government spends, the private sector suffers. What they failed to understand is that China's private sector - with an annual growth rate of 25 per cent - is building on infrastructure laid down over two decades of government spending. One should question how western economists could insist on choking government resources in developing and transitional economies when America effectively supports its own growth through government deficit spending. By insisting on cutting government resources in developing countries, Washington Consensus policies effectively emasculate those governments. While the parallel growth of guerilla and civil wars in Africa and Latin America may not be the direct result of such policies, it is certainly open to debate.

The central Asian republics are actively seeking advice from people like Ramgopal Agarwala, chairman of the US-based International Development Policy Institute, who was the World Bank's chief economist for China between 1993 and 1996. 'In 1991, China's 12 years of experience was simply ignored,' he said. 'There was no intellectual excuse for this.' The Washington Consensus mindset then, as now, was 'we have to be right'.

Political and ideological motivations cannot be dismissed as a contributing factor, Mr Agarwala notes. Strategists in Washington probably thought it was too good an opportunity to miss to change the way nations function. Inevitably, by creating new poverty, political opportunities arise to control resources. 'The geopolitics we can understand, but as economists, we must cry because we have brought about so much misery from our policies,' said Mr Agarwala. 'It is painful to go back to these countries and see the slums that have been created.'

There is a sadness in how similar policies are now being applied with equal conviction to Iraq and Afghanistan. Some see the future as obvious. Others do not. Who is going to be next?

Laurence Brahm is a political economist and lawyer based in Beijing