Kyrgyz Republic and Structural Reforms: Twenty Years of WTO Membership

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Kyrgyz Republic and Structural Reforms: Twenty Years of WTO Membership

M. Smeets

M. Djumaliev

Technical Assistance Coordination,

Partnership and Internship Programs Section

at the Institute for Training and

Technical Cooperation at the

World Trade Organization, 154,

Rue de Lausanne, Geneva, 1202, Switzerland

Embassy of the Kyrgyz Republic, Brussels,

Rue de l'Abbaye, 47 Ixelles, Brussels, 1050, Belgium

Annotation

The Kyrgyz Republic joined the WTO twenty years ago with the expectation that structural reforms required for obtaining membership and the application of trade rules would facilitate its transformation from a centrally planned to a market economy and ease its integration into the WTO multilateral trading system. It completed its accession process in record time, liberalized its economy considerably, reduced tariffs significantly, and made substantial commitments in a broad range of services sectors. It adopted legislation in all areas required for WTO membership and created competitive market access conditions for goods and services. Looking back at two decades of WTO membership, there is evidenced that the reform process is paying off. Trade has expanded significantly and new markets have been tapped for imports and exports, thus decreasing its dependency on traditional trading partners. As a result, the economy has grown rapidly. At the same time, many challenges remain to further diversify the economy, take better advantage of opportunities offered in the services trade, attract foreign direct investment, and fully implement all WTO related laws, rules, and regulations. The reform process continues to be essential to Kyrgyzstan's economic policies to deepen and solidify its integration into the world trading system. Keywords: trade policy, negotiations, structural adjustment, post-accession, policy coherence.

Disclaimer. The opinions expressed in this paper are those of its authors. They are not intended to represent the positions or opinions of the WTO or its members and are without prejudice to members' rights and obligations under the WTO. Any errors are attributable to the authors. The authors wish to thank colleagues in the Kyrgyz Ministry of Economy for their inputs in the paper and more specifically Mrs. Rahmanova, Syadat Ormonova and Asel Medetbekova. Our thanks also go to Prof. Dr Sutyrin and Olga Trofimenko for their valuable comments on an earlier draft.

Кыргызская Республика и структурные реформы: двадцать лет членства в ВТО

М. Смитс, М. Джумалиев

Институт подготовки кадров и технического сотрудничества при Всемирной торговой организации, Швейцария, 1202, Женева, Рью де Лозанна, 154

Посольство Кыргызской Республики, Брюссель, Бельгия, 1050, Брюссель, Рью де Л'аби, 47

Аннотация

competitive market investment

Кыргызская Республика вступила в ВТО двадцать лет назад с надеждой на то, что структурные реформы, которые будут проведены для получения членства, и применение торговых правил станут способствовать ее преобразованию из централизованно планируемой экономики в рыночную и облегчат ее интеграцию в многостороннюю торговлю ВТО. Процесс присоединения завершился в рекордно короткие сроки, экономика была значительно либерилизована, тарифы существенно снижены, появились серьезные обязательства в широком спектре сектора услуг. Кыргызстан принял законодательство во всех областях, необходимых для членства в ВТО, и создал конкурентные условия доступа на рынки товаров и услуг. Оглядываясь назад на два десятилетия членства в ВТО, мы видим, что процесс реформ окупается. Торговля значительно расширилась, появились новые рынки для импорта и экспорта, что уменьшило ее зависимость от традиционных торговых партнеров, и экономика росла очень быстро. В то же время остается много проблем для дальнейшей диверсификации экономики, более эффективного использования возможностей, предлагаемых в торговле услугами, привлечения прямых иностранных инвестиций и полной реализации всех связанных с ВТО законов, норм и правил. Следовательно, процесс реформ по-прежнему имеет существенное значение в экономической политике Кыргызстана для углубления и укрепления его интеграции в мировую торговую систему.

Ключевые слова: торговая политика, переговоры, структурные преобразования, поствступление, политическая согласованность.

Предупреждение. Статья содержит точку зрения авторов. Она может не совпадать с позицией ВТО и ее членов и не нацелена на ущемление их прав и обязанностей. Все возможные ошибки допущены авторами. Авторы выражают благодарность за вклад в данную работу коллегам из Министерства экономики Кыргызстана, а также госпоже А.Р. Рахмановой, госпоже С. Ормоновой и госпоже А. Медетбековой. Авторы также благодарят профессора С.Ф. Сутырина и О.Ю. Трофименко за их ценные комментарии в отношении предыдущего проекта.

Introduction

The Kyrgyz Republic was the first Central Asian country to join the WTO in 1998, after gaining its independence in 1991. It applied for WTO membership in 1996 and completed the accession process in a record time of 2 years and 10 months, compared to an average time of nine and a half years needed for most WTO accession negotiations in the past 20 years. As WTO DG Azevкdo stated in a recorded message to the participants to a conference organized at the occasion of the celebration of twenty years of WTO membership: “The Kyrgyz Republic is the pioneer among Central Asian countries and former USSR Republics to take this important step to integrate in the global trading system, further adding that... Kyrgyz Republic holds the record of the fastest accession negotiations in the WTO and that's good, you did it in just two and a half years -- in the world of diplomacy that's light speed” Conference held in Bishkek on 20 December 2018 and was preceded by an academic event organized at the International University of the Kyrgyz Republic in September 2018 with presentations made by the authors of this paper. URL: https://youtu.be/lToCW0m8iLE (accessed: 20.12.2018)..

This achievement is even more remarkable given the complexity of the process of obtaining Membership of the WTO and which implies many challenges for the countries wanting to join. It requires major structural reforms and changes in legislation and trade policies and practices. The government was determined to pursue Membership fast and conduct the necessary economic and legislative reforms and proceed with the transition from a centrally planned economy to a market-based economy speedily, thus unlocking the significant new opportunities that WTO membership was expected to create.

The accession process required a fundamental rethinking of Kyrgyzstan's economic and trade policies, the creation of new institutions designed to implement the policies and major trade capacity building efforts at the technical level to better understand the rights and obligations of WTO membership. Given that the WTO is a system of rights and obligations and that Member's trade policies and practices can legally be challenged, it was important for the Kyrgyz authorities to get it right from the beginning. This meant that it needed to adopt legislation and trade policy measures that would secure the degree of market openness acceptable to the membership and at the same time provide leverage to protect segments in the economy that were not ready to face external competition.

The Kyrgyz Republic, after twenty years of membership is on the wake of undergoing its third trade policy review in 2020, thus providing a good opportunity to take stock of the accomplishments of twenty years of WTO membership and review the reforms undertaken and the key challenges that the Kyrgyz Republic is still facing. This paper will take a closer look at how the reform process was performed and how Kyrgyzstan benefited from it. It will be argued that the domestic reforms undertaken in order to obtain WTO membership have generated tremendous economic opportunities to the Kyrgyz Republic, with significant growth in exports and imports both in goods and services. At the same time, the Kyrgyz Republic continues to face major challenges integrating more fully in the world economy, diversifying its production, reducing its dependency on primary products, raw materials, minerals, including precious metals and being part of the Global Value Chain. The research is largely based on a review of literature and analysis of official economic data and statistics.

In the paper the authors want to test the hypothesis that accession to the WTO requires fundamental structural reforms resulting in a fuller integration into the multilateral trading system and new trade opportunities. In doing so, the paper is structured as follows: it will first address the domestic reforms required for obtaining WTO membership and include a review of recent literature on accessions and economic reforms. This will be followed by a brief discussion of the conditions that apply to Kyrgyzstan's accession to the WTO. It will be shown that by any standards, Kyrgyzstan has liberalized its economy significantly and which provided the basis for obtaining the economic benefits associated with accession. Evidence to that effect will be offered in a subsequent section, discussing the economic performance of the Kyrgyz Republic after it became a member. It will be argued that the economy expanded very rapidly, but challenges remain in terms of economic and trade diversification. Also, it will be argued that while Kyrgyzstan is rapidly integrating into the WTO multilateral trading system, it is in parallel pursuing the avenue of regional integration, including with some of its traditional trading partners. The question of the legal implications for its WTO commitments will be addressed, as a significant number of tariff lines will need to be renegotiated. The one but last section of the paper will look at the future of Kyrgyzstan's trade policies and the main challenges it is currently facing in view of its membership and legal commitments. It will be argued that there is still a significant job to be done, which require further and deeper reforms in several specific areas. The final section offers some of the main conclusions and which confirm the hypothesis that reforms lead to trade expansion. Kyrgyzstan is much better integrated in the MTS then it was at the time of accession. Concrete and measurable economic benefits were generated, leading to a rapid expansion of its economy and trade.

1. How WTO Membership Supports Domestic Reforms?

While WTO membership offers many advantages, one of the key motivations that pushed most formerly centrally planned economies to apply for membership are the underlying structural reforms to be conducted. This certainly was an important driving force for Kyrgyz Republic which applied in 1996, shortly after gaining independence, and launched a drastic reform process. It completed the accession process in a record time, less than 3 years with many of the reforms still on-going today. In 2009, in an interview with the country's chief negotiator with the WTO, former Deputy Prime Minister of Kyrgyzstan, E. Omuraliev, reiterated the main reasons for the country's accession to the WTO: “This was a necessary step that was made in a timely manner and for the good of the country. Through membership in the WTO, Kyrgyzstan received a completely new model of economic development and a legal framework that meets international standards, which became the basis for taking the economy out of the deep crisis caused by the collapse of the USSR and the global financial crisis of 1998” [ICTSD, 2009] Filipova T. (2009) ICTSD, Kyrgyzstan and the WTO: Summing Up the Decade. 23 February. URL: https://www.ictsd.org/bridges-news/MOCTw/news/Kwprw3CTaH-H-BTO-noHBOHn-HTorH-HecnTHneTMn (accessed: 05.05.2019)..

Kyrgyzstan has benefited significantly from WTO membership, but it still has a long way to go to insert itself more fully into the trading system and reap all the benefits WTO membership has to offer [Sutyrin, Koval, Trofimenko, 2014]. In many ways the reform process is a never-ending process. Reforms are necessary to stay ahead of the game, a sine qua non for creating a more appropriate and favorable business environment, conducive to trade, as is underscored by the official statements made by recently acceded members [Smeets, 2017] See also: WTO Accessions 2017, Annual Report by the Director-General (WT/ACC/31, WT/GC/189, WT/MIN(17)6. 29 November 2017. Tables 3 and 4. 7. URL: https://www.wto.org/english/thewto_e/acc_e/dgreport_2017_e.pdf (accessed: 07.05.2019).. According to the WTO's annual report (2016) by the Director-General, out of a total of 36 Article XII members Article XII members are the newly acceded members under Article XII of the Marrakesh Agreement. URL: https://www.wto.org/english/docs_e/legal_e/04-wto_e.htm articleXII (accessed: 07.05.2019)., 18 of them, i.e. half, specifically indicated in their introductory statements in the working party reports that the transition from central planning to market economy was an explicit objective WTO Accessions: 2016 Annual report. 2 December 2016 (WT/ACC/28). Table 1, p. 17. URL: https:// www.wto.org/english/thewto_e/acc_e/dgreport_2016_e.pdf (accessed: 07.05.2019).. Furthermore, and according to the WTO “since the accession agreements, or 'protocols', are international treaty obligations, they have a wide-ranging effect both on the multilateral trading system and on the national economies that have undertaken the reforms. This means that accession negotiations can prove an important instrument, not only for updating multilateral trade rules, but for helping acceding governments to undertake needed domestic reforms” The WTO at Twenty, Challenges and Achievements. WTO Geneva. October 2015, p. 22. URL: https://www.wto.org/english/res_e/booksp_e/wto_at_twenty_e.pdf (accessed: 09.06.2019)..

Bacchetta and Drabek note that “the third reason is the beneficial effect of the membership on domestic policies and institutions involved in the conduct of international trade. Acceding countries are required to put in place a set of norms and institutions, which support the liberalization of markets and increase transparency and promote the rule of law, contract enforcement and the evolution of an independent judicial system. In principle, nothing would prevent government from putting in place these norms and regulations on a unilateral basis. The role of the WTO in this process is to facilitate the introduction of effective reforms not only by reinforcing the credibility of the government's trade policies but also help introduce the policies that are based on best-practices and that must be harmonized ” [Bacchetta, Drabek, 2002].

Separately, following the independence of the CIS countries and Baltic states, there was a strong push from the side of some major international institutions and more specifically by the OECD, the IMF, World Bank and the EBRD for these countries to engage in the structural and economic reform process, accompanied by specific advice on how to conduct the reforms Sometimes the financial support to accompany the reform was made conditional upon the reforms.. The WTO, too, played a key role in consolidating the reforms as it was felt that the WTO membership would anchor the transition to market-based regimes. The recognition that the WTO is the only international organization governing trade with multilateral trade rules was a decisive factor in joining this organization.

In addition to the expected material benefits that trade liberalization would offer, it was increasingly well understood that the cost of staying out of the WTO is too high, certainly at a time with a rapidly growing economic interdependency between nations. One key advantage of membership is the automatic application of the two fundamental non-discriminatory treatment measures of the WTO: Most Favoured Nation (MFN) and national treatment in terms of access conditions to other markets8. These principles create security, stability, predictability and certainty in trade which are key factor for business transactions and allowing Foreign Direct Investment (FDI) into the country and are critical in the decision-making process to Join.

Importantly, the WTO is a rules-based system where the rule of law applies. While the benefits from WTO accession are often associated with the new market access opportunities offered, the real gains are obtained through the domestic structural reforms conducted in order to align domestic policies with international norms and standards. It is well recognized that there is a price to pay for the acceding country, as the accession leads to economic costs resulting from market adJustments following changes in relative prices of goods and services in the domestic market.

The reform agenda requires institutional change and the creation of new facilities in areas as SPS, TBT, customs administration, services, intellectual property rights and ensuring effective competition in the market, significantly adding to the cost as will be shown further. Hence there is a price tag attached to membership and someone needs to foot the bill (World Bank 2001). How to cope with these costs and how to turn the costs into economic advantage is the challenge faced in the reform process. This is part of the policy challenges of each new WTO member.

Another cost aspect is the result of market liberalization performed through tariff reductions and which a priori implies a loss in fiscal revenue. Lower import duties imply lower tax revenue, which need to be offset one way or another. In practice, this foregone revenue should be compensated for by efficiency gains to be obtained by higher competition in the market, lower transaction costs and the cheaper imports of parts and components used in the manufactures of exports. This follows the logic that a tax on imports equals a tax on exports, hence a reduction of costs in imports improves the competitive conditions in the export market. The positive effects are not immediate and will mostly be felt over time. Hence the accession generates short-term costs with the expectation that these will be outweighed by the medium to longer term gains. The practice confirms that the positive outcome is indeed the case, as recently acceded Members have consistently had stronger trade growth performance than the original members. Since 1995, the average trade growth rate of Article XII members was 12.4 %, almost double that of original members (7.4 %), including after the financial crisis of 2008. China's average growth rate for the period 1995-2013 is 16.0 %, which is exceptionally high, and it largely outperforms the other countries. Economic growth in Kyrgyz Republic has also been above the average, as will be shown later. One should nevertheless be cautious in attributing the substantially ⁸ According to Article I, para. 1 of the GATT 1994, the Most Favoured Nation (MFN) Treatment means that “with respect to customs duties and charges of any kind... any advantage, favour, privilege or immunity granted by any (Member) to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other Members”. See also [Van den Bossche, Zdouc, 2017] for further reading (p. 311-340). National treatment is covered under Article III of the GATT 1994, which contains specific provisions prohibiting discrimination in the treatment of any product, domestic or imported, once it has entered the market. Para. states that: “The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transport, distribution or use..” For further reading, see also [Van den Bossche, Zdouc, 2017, p. 341-399]. higher growth rates exclusively to the WTO accession, as there are not only numerous other macro-economic factors that contribute to growth, but equally many developments in the world economy play an important role, often unrelated to WTO accession.

The reform process thus is of critical importance and at the same time very challenging, as the inefficiencies of the domestic markets in the transition economies could and probably will lead to a surge in imports competing with domestic goods of sometimes lower quality and foreign direct investment with the risk of depressing the domestic economy at first. How will the market adjust to those challenges, lay-offs and market restructuring and what accompanying or flanking policies can be put in place by the authorities? How rendering the economy more efficient, facilitating a better integration into world markets, producing and selling higher quality of goods at competitive prices and generating a larger consumer choice? Those are the key questions. Like most other acceding countries, as shown further, Kyrgyzstan experienced initially an economic decline in the first years following its accession, before the positive effects kicked in.

The challenge was making the right policy choices for the country. A related question at the time was whether the reforms should be undertaken rapidly or follow a gradual process. Schools of thought differ widely and so did the approaches adopted by formerly centrally planned economies that acceded to the WTO. Some decided to 'bite the bullet' and move fast, in order to quickly introduce the market-based principles, even if this meant a loss in GDP in the early stages of the transition process, as was the case in Kyrgyzstan. Others decided to opt for a gradual transition process, taking more time to introduce the new laws and regulations to conform to the market-based principles. Which process is better remains an open question, but the facts and figures confirm that those countries that took the necessary actions managed to experience a steady growth in their economies.

2. WTO Membership and Kyrgyzstan's Commitments

As the case of Kyrgyzstan confirms, membership can be obtained fast and is largely determined by the determination of the acceding country. For a country or a territory to obtain WTO membership, the first condition is to submit a specific written expression of interest for membership by the country or territory to the Secretariat According to the Marrakesh Agreement Art XII(1) membership is open to any state or separate customs territory possessing full autonomy in the conduct of its external commercial relations.. WTO membership thus is entirely based on the express desire of a country to Join and hence a voluntary process. Since the WTO was created in 1995, a total of some 36 countries successfully completed the accession process as Article XII members. It takes an average of 10 years and 2 months to complete, compared to the Kyrgyz accession in less than 3 years WTO Accessions 2016: Annual Report by the Director-General'. December 2016. WT/ACC/28. Annex 4. URL: https://www.wto.org/english/thewto_e/acc_e/dgreport_2016_e.pdf (accessed: 20.06.2019). The accession of LDCs on average takes 2 years and 4 months longer than the accession of the other, non-LDC countries..

The process of Kyrgyz Republic accession was officially launched following the application for WTO membership on 13 February 1996. On 16 April 1996, the General Council established a working party to examine the application under Article XII under the chairmanship of Mr Metzger (France), which included a total of 15 WTO Members, counting the EU as one. The terms of reference established were: “To examine the application of the government of the Kyrgyz Republic to acceded to the WTO Agreement under Article XII, and to submit to the General Council recommendations which may include a draft Protocol of Accession”11. In addition to the discussions in the working party, bilateral market access negotiations were conducted with 12 members.

The accession discussions and negotiations of Kyrgyzstan took place on the basis of a Memorandum on the Foreign Trade Regime of the Kyrgyz Republic, which had been submitted in the early phases of accession and questions relating to it WT/ACC/KGZ/2/ 3 May 1996 and Rev.2 18 March 1997. URL: https://www.wto.org/english/ thewto_e/acc_e/a1_kyrgyz_republic_e.htm (accessed: 04.07.2019). Accession of Kyrgyz Republic to the WTO: Memorandum on the Foreign Trade Regime. 23 August 1996. WT/ACC/KGZ/3. UrL: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009DP.aspx?language =E&CatalogueIdList=36603,41578,10911,11148,11146&CurrentCatalogueIdIndex=3&FullTextHash= (ac-cessed: 04.07. 2019). Each accession is conducted through a working party, composed of members that have expressed an interest in following the debates and discussions on the terms of accession of the candidate country. Hence, the composition and number of countries in the working party varies from one accession to the other. The Chairman ofthe working party is appointed by the membership and in close consultation with the applicant country. It is also noted that in addition to the multilateral process, which is conducted through the working party, the applicant conducts bilateral negotiations to agree on the market access conditions, tariff schedules and services commitments with each of the members of the working party. Hence, in the accession process the distinction is made between the multilateral and the bilateral tracks, which are mostly conducted in parallel.. The outcome of the discussions and the negotiations are contained in the Report of the Working Party, as well as in the Annex to the report, which contain the Kyrgyz Republic's tariff schedule with reference CXLII-The Kyrgyz Republic, Part 1-Goods (WT/ACC/KGZ/26/ Add.1) and the Kyrgyz Republic's services commitments in Part II-Services (WT/ACC/ KGZ/26/Add.2)

In the case of the former Soviet Republics, what drove them to do so, according to [Broadman, 2005, p. 30] was “the dismantling of the Soviet Bloc brought economic chaos and a collapse of trade flows, which compelled countries in Central and Eastern Europe to begin to reintegrate into the global economy”. The Kyrgyz Republic was the first of the CIS countries to kick off the process, followed by two Baltic states, Latvia and Estonia, who both initiated their accession process in 1993 and 1994 respectively. Their accessions took Just over 5 years. Latvia Joined the WTO in February 1999 and Estonia in November of the same year. Georgia, which initiated the WTO accession process in the same year as Kyrgyzstan (1996) became a member the WTO member on 14 June 2000, after 4 years of negotiations. The other Baltic States, Caucasus and CIS countries that Joined the WTO initiated their accession process as of 1993. Armenia (1993), the Russian Federation (1993), Lithuania (1994), and Kazakhstan (1996). Lithuania Joined in May 2001, after 7 years of negotiations, Armenia in February 2003, nine years after starting the process and the Russian Federation Joined in August 2012 after 19 years of negotiations. Kazakhstan Joined in November 2015 after nearly twenty years of accession negotiations. Tajikistan applied in 2001 and Joined in March 2013, thus taking nearly twelve years to complete the process. There are still three former republics in the process of accession, including Uzbekistan, which applied for Membership in 1994, AzerbaiJan in 1997 and Belarus, for which a working party was established in 1993.

All three processes are still underway. One country, Turkmenistan, has expressed interest but has still not applied. The two most recently acceded countries are Liberia and Afghanistan, who concluded their accession negotiations to the WTO in December 2015 (MC-X, Nairobi) World Trade Organization, Nairobi Ministerial Declaration, adopted on 19 December 2015 (2015) WT/MIN(15)/DEC., para 18. URL: https://www.wto.org/english/thewto_e/minist_e/mc10_e/ nairobipackage_e.pdf (accessed: 15.06.2019). and officially Joined in 2016, thus bringing the WTO membership to a count of 164 members Liberia formally joined the WTO on 14 July 2016, as the WTOs 163^rd Member, URL: https://www. wto.org/english/news_e/news16_e/acc_lbr_20jun16_e.htm (accessed: 10.07. 2019); followed by Afghanistan which formally joined the WTO on 29 July 2016 as WTO's 164^th Member. URL: https://www.wto.org/ english/thewto_e/countries_e/afghanistan_e.htm (accessed: 10.07.2019).. The membership now represents 98 % of world trade, thus making the system nearly universal.

The conditions for membership are not specifically set out in legal texts of the WTO and are not defined. The relevant provisions in the Marrakesh Agreement (Article XII) simply indicate that membership can be obtained “on terms to be agreed between it and the WTO” which is a rather open notion and can have a different meaning for different countries and situations. There are no specific benchmarks and each accession is unique, reflecting the economic situation of the applicant and the commitments it is willing to make. This also explains why acceding countries are mostly required to assume higher levels of obligations than the original members, often referred to as “WTO plus” provisions for the acceding countries. According to the WTO the newly acceded countries make considerably more concessions both in the area of goods and services, with nearly 100 % of all tariff lines bound, mostly at lower levels and covering far more services sub-sectors World Trade Organization, WTO at Twenty: Challenges and Achievements. WTO (2015). Table 5. URL: https://www.wto.org/english/res_e/booksp_e/wto_at_twenty_e.pdf (accessed: 16.07.2019).. This adds to the pressures of the domestic reforms, including in the regulatory area of services and which directly impedes in market regulation.

A new Member thus needs to provide sufficiently convincing evidence to WTO's membership that access to their markets is ensured in similar ways as the access that they will benefit from to world markets following accession. The logic is that a new member, by virtue of the MFN principle acquires in one stroke all rights and obligations that have been negotiated in the GATT/WTO for over 70 years, thus generating unconditional market access to the world markets Cf footnote 8.. The advantages and the acquired rights thus obtained need to be matched at the domestic level and leading to effective market access. Kyrgyzstan created one of the most liberal trade regimes and market access conditions and made significant concessions in the areas of goods and services, opening its market significantly to competition. The Kyrgyz Republic Joined the WTO with very low tariffs. As is illustrated in Table 1 the simple average MFN tariff is 7.8 %. For industrial products the average MFN duty is 6.6 % It is recalled that the average MFN tariff for industrial products in developed countries is 3.8 %. Hence the Kyrgyz Republic has aligned its tariff rates very close to this average, which is a significant step.. To compare, developed countries have an average tariff binding of less than 4 % for industrial goods. For agricultural products the average MFN duty is 12.1 % in Kyrgyzstan. To put matters further in perspective, on average, Article XII members have bindings for goods (all products) at 13.8 %, including 12.9 % for industrial goods and 20.1 % for agricultural products. In other words, the Kyrgyz Republic made commitments at nearly half the average of other Art XII members and most of which acceded later. Moreover, the Kyrgyz Republic has bound 100 % of its tariff lines, thus substantially offering predictability and stability in market access conditions. Hence its efforts are significant by any standards.

Notes: a -- final bound rates are based on the 2012 tariff schedule in HS07 nomenclature; b -- domestic tariff peaks are defined as those exceeding three times the overall average applied rate; c -- international tariff peaks are defined as those exceeding 15 %; d -- nuisance rates are those greater than zero, but less than or equal to 2 %; e -- total number of bound lines (including partially bound rates); 2006 tariff is based on HS02 nomenclature, 2009 and 2012 tariffs are based on HS07. Calculations for averages are based on national tariff line level (10-digit), excluding specific rates (14 tariff lines falling under alcoholic beverages) and including the ad valorem part of mixed rates.

Based on: WTO Secretariat calculations. Kyrgyz WT/TPR/S/288/Rev.1 21 January 2014. Table 3.7, p. 35. URL: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwjf14SY 3f_lAhWNlIsKHYF3D3wQFjAAegQIAxAC&url=https %3A %2F %2Fdocsonline.wto.org %2Fdol2fe %2FPag- es %2FFE_Search %2FExportFile.aspx %3Fid %3D121920 %26filename %3Dq %2FWT %2FTPR %2FS288R1.pdf &usg=AOvVaw2s7UdkpuV31IpHKQ3G6nMC (accessed: 03.08.2019).

Also, of significant importance is the fact that nearly 20 % of tariff lines are bound at duty free levels. The Kyrgyz Republic has very few tariff peaks and hardly any tariff escalation Tariff escalation occurs when the tariff rates increase with the level of processing and which, thus reducing incentives for adding value in the production process.. Despite the good record, the Kyrgyz Republic faces some main challenges, with approximately 90 tariff lines exceeding the WTO bindings. More recently, the Kyrgyz Republic faces serious difficulties in its tariff schedules following its accession to various regional trade integration initiatives, including customs unions. De facto this implies that it will have to align its MFN duties with the common external tariff of the CU, representing an increase of its (low) MFN duties and thus affecting its WTO commitments. The implications of its regional integration will be considered further below.

In addition to its tariff liberalization, Kyrgyz Republic undertook significant services commitments, including in 136 services (sub) sectors. Only Moldova (147) and Ukraine (137) exceed that number, with all other Article XII members having made fewer commitments WT/ACC/KGZ/2/ 3 May 1996 and Rev.2 18 March 1997. URL: https://www.wto.org/english/ thewto_e/acc_e/a1_kyrgyz_republic_e.htm : Accession of Kyrgyz Republic to the WTO: Memorandum on the Foreign Trade Regime. 23 August 1996. WT/ACC/KGZ/3 (accessed: 04.07.2019).. This observation should be qualified, as the number of services (sub) sectors in itself doesn't say much about the openness of the (sub) sector and the economic significance of the commitments, which can only be understood by reading the commitment itself. Nevertheless, the number gives an indication of the policy orientations of the acceding country and signals its willingness to liberalize the services trade. Services account for less than half of the Kyrgyz Republic's GDP and the government intends to develop the services economy steadily further, as will be discussed further.

Commitments by acceding countries generally go beyond what most original members have committed to, thus pointing at a two-speed process. In addition, most acceding countries have an obligation to initiate the process of Joining the Government Procurement Agreement (GPA) following their accession, thus expanding its membership and coverage. This also applies to the Kyrgyz Republic, which is an observer to the GPA and committed to Join, as will be discussed in the next part.

The market access conditions provided are one side of the coin, as the acceding member needs to prove that all domestic laws and regulations are in conformity with WTO law and ensure that all institutional arrangements are effectively in place to put its legal system into full operation. In Kyrgyzstan a total of 155 legislative and regulatory changes were introduced, as contained in the final working party report presented to and adopted by the General Council on 14 October 1998 WT/ACC/KGZ/26 31 July 1998; WTO Report of the Working Party on the Accession of the Kyrgyz Republic. URL: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&C atalogueIdList=36603,41578,10911,11148,11146&CurrentCatalogueIdIndex=3&FullTextHash (accessed: 14.07.2019).. This seems to be well within the average. Only Ukraine (449), China (2300) and Russia (1166) considerably exceeded that number The WTO at twenty. Table 4, p. 25. 14 July 2019. URL: https://www.wto.org/english/res_e/booksp_e/ wto_at_twenty_e.pdf (accessed: 05.08.2019).. The laws and regulations are scrutinized by the membership during working party meetings dedicated to each accession.

This leads to another challenge, consisting of getting the full support of the law makers within the set time-frame to ratify the WTO Accession Protocol According to Article XII the applicant member has a period of 6 months to complete the domestic ratification process, following completion of the accession negotiations and the adoption of the Protocol of Accession by the membership. This has been particularly challenging in many countries and the WTO has often been called upon to speak to parliaments in acceding countries and hold bilateral meetings with lawmakers to explain the WTO, including the main elements of the WTO rules-based system and possible implications of membership. Personal experience confirms that these meetings often turned out to be decisive in getting the support of Parliament.. It can be and often is a challenge to convince law makers that the long-term balance will tip in the favour of the country Joining the WTO and outweigh the short-term costs It is not easy to measure and quantify in economic terms the benefits that WTO membership brings following the accession process, as many of the advantages are gradually obtained during the accession process, when the domestic reforms are conducted, and laws are introduced. Contrary to a common belief, little immediate change occurs on the day following membership, as most conditions are already met on that day.. Parliamentarians tend to take short term views given their often limited mandates and change during the (long) accession process. Many have little knowledge of the WTO system and rules and regulations, which may mean little to their local constituencies. Indeed, the economic advantages of membership are not immediate and mostly spread over the economy, rather than immediate with clear and demonstrable economic effect on the electorate. It thus becomes a challenge to convince them of the longer-term advantages of membership and accept the short-term costs. This also explains why some accession processes become “dormant”, particularly if the domestic constituency is not convinced of the gains This was the case with Vanuatu earlier, Algeria, Ethiopia, Lebanon and Sudan; the latter three have resumed their accessions.. This was different in Kyrgyzstan where the adoption of the negotiating package was smooth and speedy.

The accession process and timely conclusion thus much depends on the preparedness of a country in engaging both domestically and with its trade partners. This requires a strong domestic set up to facilitate the many structural domestic legislative reforms to be undertaken and conduct consultations at all levels and involving all stakeholders. With a view of getting the necessary support in modifying existing and introducing new legislation, one of the first steps in Kyrgyz Republic included the setting up the institutional and legislative framework and the inter-ministerial coordination mechanisms to ensure coherent approaches. The Ministry of Economy is the central body in the executive given authority for the functions of state policy on tariffs, licensing, investment, and foreign trade WT/TPR/S/288/Rev.l. 21 January 2014: Kyrgyz Decree of 4 June 2013. No. 312. URL: https:// www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwjmm-aHsP_lAhVrkI sKHWz3AtsQFjAAegQIBRAC&url=https%3A%2F%2Fdocsonline.wto.org%2Fdol2fe%2FPages%2FFE_ Search%2FExportFile.aspx%3Fid%3D121920%26filename%3Dq%2FWT%2FTPR%2FS288R1.pdf&usg=A OvVaw2s7UdkpuV31IpHKQ3G6nMC (accessed: 14.07.2019).. It is guided by the Constitution, normative legal acts, international law, and treaties that have entered into force for the Kyrgyz Republic. Several decrees and regulations of the Kyrgyz Republic have established an inter-departmental commission on the WTO in which various ministries and other state bodies have a role in developing WTO-related policy and overseeing obligations The WTO inter-departmental Commission was created in 1999 to coordinate WTO multilateral trade issues. It sets out the distribution and responsibilities of the ministries and other government bodies with respect to the WTO Agreements Kyrgyz Decree of 23 June 2003. No. 374. URL: http://cbd.minjust.gov.kg/act/view/ru-ru/ 54515?cl=ru-ru (accessed: 14.07.2019).. The private sector was also fully associated with the process from the outset and the negotiators had regular interactions with the Parliament. The President of the Republic took a keen and immediate interest in the WTO accession, thus solidifying the political commitment. All issues could be addressed and resolved promptly, which contributed to the adoption of timely decisions and easing the accession.

In addition to preparing and adjusting laws, rules and regulations, the challenges included submitting all legal text in official WTO language, sharing information with private sector and get their feedback on concessions, identify priorities for give and take and establishing red lines, get full support from domestic constituency, including the Parliament, which needs to be briefed regularly, build technical knowledge and expertise on the WTO rules and rights and obligations. The practice shows that WTO Members will always ask for the maximum concessions from acceding countries, which need to be clear as to how far they can go with granting concessions. In other words, they need to establish their “red lines”.

Finally, it should be noted that the accession of the new Members to the WTO works both ways. It is beneficial for the acceding country and in return generates economic growth and stimulates world trade. Equally important, it strengthens the rule of law through multilateral approaches to trade. The reforms undertaken by the Article XII members, especially those with large economies like China, have significantly lowered protection world-wide and expanded trade opportunities over the past 20 years Cf WTO at Twenty. Table 5. URL: https://www.wto.org/english/res_e/reser_e/ersd201710_e.pdf (accessed: 14.07.2019).. Concerning goods trade, acceding members have made binding commitments on virtually all their agricultural and non-agricultural tariffs, significantly improving the certainty and predictability of their trade regimes.

The accession of new members to the WTO has thus been very beneficial economically and stimulated trade and economic growth world-wide, but equally so from systemic perspective. Indeed, the WTO as an institution was genuinely interested to include countries coming from different economic systems, adding to the diversity of the membership. It strongly welcomed and embraced the membership of the formerly centrally planned economies that had moved to applying market-based principles. It triggered a process of considerable trade liberalization and a wider adherence to the rules-based trading system, which was both of economic and systemic significance. This explains why the Secretariat organized a WTO Ministerial Conference for Central Asia and Caucasus countries in Tbilisi (May, 2002), in recognition of the considerable reform efforts undertaken by countries in the region and a similar Conference was held in Croatia for countries in the Balkan, many of whom were negotiating their accession to the WTO following the breaking up of former Yugoslavia and the creation of new and independent countries.

3. Kyrgyzstan's Economic Performance after WTO Accession

It is an established fact that the Article XII members have economically outperformed its trading partners in the world in terms of increase in value of merchandise trade WT/ACC/31.WT/GC/189.WT/MIN(17)/6. Figures 5,6, 7, p. 33-34, Table 6-1 and 6-2, p. 42. URL: https://webcache.googleusercontent.com/search?q=cache:Tll99FXe9DcJ:https://docs.wto.org/dol2fe/Pag-es/SS/directdoc.aspx%3Ffilename%3Dq:/WT/ACC/31.pdf+&cd=1&hl=en&ct=clnk&gl=kg&client=safari; WTO at Twenty, challenges and achievements. WTO, Geneva 2015, p. 27. URL: https://www.wto.org/ english/res_e/booksp_e/wto_at_twenty_e.pdf (accessed: 16.08.2019).. This also applies to the Kyrgyz Republic, which has experienced a strong economic performance since joining the WTO. The economy has undergone a significant structural change since its independence in 1991 and strengthened by WTO accession in 1998, as confirmed at the two trade policy reviews carried out for the Kyrgyz Republic in 2006 and 20 1 3 WT/TPR/G/170 (4 September 2006); WT/TPR/S/170 (4 September 2006), /WT/TPR/M/170 (13 December 2006), WT/TPR7G/288 (1 October 2013); WT/TPR/S/288/Rev.1 (21 January 2014), /WT/ TPR/M/288 (13 January 2014). Official site of Word Trade Organisation. WTO. URL: https://www.wto.org/ english/thewto_e/countries_e/kyrgyz_republic_e.htm (accessed: 16.08.2019).. The structural reforms undertaken allowed Kyrgyz Republic to move from a centrally planned economy to integrate into the world economy on the basis of market-based principles. Its WTO membership has helped the Kyrgyz Republic stabilizing and strengthening some of the economic fundamentals, including inflation, budget deficits and currency stabilization.

Based on data from the World Bank, the development of the GDP of the Kyrgyz Republic can be illustrated in Figure 1 (a, b). The GDP has risen significantly over the past twenty years, except for two years, thus confirming a healthy growth of the economy. There was a noticeable decline in GDP in 2000 to the amount of $200 min, followed by another major decline in 2015-2016 of $800 min compared to previous years. These declines are in part attributed to the effects of a global economic recession, including the Asian and Russian crises in 1998. These are often considered one of the most severe economic crises in the history of Russia -- the main trade and economic partner of the Kyrgyz Republic. In addition, the Kyrgyz economy declined due to domestic political instability, a change in government and constitutional changes.

The Kyrgyz Republic's trade turn-over, including exports and imports evolved rapidly and increased 26 times from 60 to 1.6 bln US$. Imports exceeded exports significantly, resulting in a rapidly growing trade deficit. Merchandise imports in 2017 (4,5 bln US$) are nearly triple merchandise exports (1,8 bln US$). Agriculture represents Just over 11 % of exports and 13.4 % of imports, manufactures 22.7 % of exports and 69.7 % of imports. Exports and imports of fuels and mining products are almost even at around 10 %. Kyrgyz Republic is highly dependent on the imports of manufactures and petroleum oils, other than crude. The main non-agriculture products exported include gold (20 %), precious metal ores and concentrates. Sectors and products that are considered to have an export potential for the Kyrgyz Republic include textile-garments, meat, fruit and vegetables, milk and dairy products and bottled water, given its unlimited natural fresh water supply. The commodity structure of Kyrgyz exports has hardly changed since 2000 and there is overall little diversification, which remains one of the key structural reform challenges for Kyrgyzstan. It remains strongly dependent on resource-based products generating limited skilled employment.

Trade flows of the Kyrgyz Republic following its WTO accession fluctuated considerably. Following a slowdown, trade expanded very rapidly until 2014 and increased by a factor 6, reaching a peak of 7.6 bln US$. It then decreased and somewhat stabilized at a lower level. The volume of trade in goods of the Kyrgyz Republic, according to the data of the National Statistics Committee, in 2017, amounted to 6.3 bln US$. In absolute numbers, between 1998 and 2017, the trade turnover of the Kyrgyz Republic thus effectively increased 4.5 times from 1.4 bln US$ to 6.2 bln US$ (cf fig. 2).

Fig. 1. Growth of GDP in Kyrgyz Republic since 1998 to 2017 B a s e d o n: World bank data. URL: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD? locations=KG (accessed:06.08.2019); World bank data. URL: https://data.worldbank.org/indicator/NY.GDP. PCAP.CD?end=2018&locations=KG&start=1998 (accessed: 06.08.2019).

Fig. 2. Dynamics and structure of the trade turnover of the Kyrgyz Republic in the context of the EAEU, CIS and WTO countries for 1998-2017 (in min of US doll.)