wef scenarios southcaucasuscentralasia report 2014

8/10/2019 WEF Scenarios SouthCaucasusCentralAsia Report 2014

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Scenarios for theSouth Caucasus and

Central Asia

World Scenario Series

September 2014


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2 Scenarios for the South Caucasus and Central Asia

World Economic Forum

2014 - All rights reser ved.

No part of this publication may be reproduced or transmitted in any form or by any means,including photocopying and recording, or by any information storage and retrieval system.

The views expressed are those of certain participants in the discussion and do notnecessarily reflect the views of all participants or of the World Economic Forum.

REF 250814


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3Scenarios for the South Caucasus and Central Asia

Contents

The South Caucasus and Central Asia is a region oftenviewed through a narrow historical lens, in which the Sovietera looms larger than the regions proud history of centrality

to the global economy and as home to cutting-edge thinkers.The region has untapped potential to play an importanteconomic role in the world. As countries reflect on how bestto pursue their economic objectives in transforming thispotential into reality, they must ask themselves what role theirimmediate neighbours will play in supporting their aspirations,and how regional relations can best be shaped to maximizecollective benefits.

Both lingering and new political tensions throughout Eurasiaconstantly clamour for immediate attention, diverting theregion from focusing on its fundamental strengths. It maytherefore seem like an odd moment to suggest raisingour eyes to the long-term horizon of 2035 and discussingopportunities for economic collaboration. In these volatiletimes, conventional thinking postulates that there is an orderof priority between addressing urgent political obstacles inthe short term and pursuing economic opportunities in thelong term. Yet it is precisely at such times that it is importantto consider that to overcome political stalemate, nurturingbudding economic partnerships can contribute to creating thetrust needed to address existing tensions. And it is in timeswhen short-term crises crowd out our thinking that it is mostvaluable to force ourselves to consider the long term, and tofocus on finding common interests, creating a shared vision

on which to build.

To support this strategic, cross-stakeholder thinking, theWorld Economic Forum initiated the Scenarios for the SouthCaucasus and Central Asia. This process was launched witha Strategic Dialogue on the Future of the South Caucasusand Central Asia, held in Baku on 7-8 April 2013, and overthe past 18 months has involved over 500 participants.

The scenario approach that underpins this project supportsdecision-makers in assessing major changes to theiroperating contexts, which are beyond their control, and to

prepare them to both seize relevant new opportunities andpro-actively address potential risks. It also allows stakeholdersto hold a constructive dialogue on current decisions madein the South Caucasus and Central Asia about the future ofregional frameworks based on the deeper factors that willshape the region, rather than merely pitting actors againstone another in a debate for or against specific institutions.

It is hoped that this report will widen the lens through whichthis regions prospects are viewed by serving as a resourcefor stakeholders to create a more sustainable and prosperousfuture.

3 Preface

4 Foreword

5 Executive Summary

7 Introduction: RethinkingProspects for RegionalProsperity

10 Part I: The Case for RegionalEconomic Collaboration

18 Part II: Scenarios for a ChangingEconomic Geography and theirImplications for StrategicDecisions

19 Split Up

23 Southern Gateway

27 Climate Pressure

31 Key Messages andTakeaways

33 Conclusion

34 Using the Scenarios for theSouth Caucasus and Central

Asia

36 Annex 1: The Value of Scenarios

37 Annex 2: Process andStakeholder Engagement

38 Endnotes

39 Bibliography

40 Acknowledgements and ProjectTeam

Espen Barth EideManaging Directorand Member of theManaging Board,World EconomicForum

Preface

Philipp RslerManaging Directorand Member of theManaging Board,World EconomicForum


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The increasing complexity of the world economy bringsopportunities as well as risks. With this in mind, the StateOil Company of the Azerbaijan Republic (SOCAR) supportsthe Forums Scenarios for the South Caucasus and CentralAsia project to gain a better understanding of the changinglandscape in our country and region, and to forge avenues forsustainable prosperity that had not been considered before.

We were particularly pleased to support the Forums StrategicDialogue on the Future of the South Caucasus and CentralAsia in Baku on 7-8 April 2013, which brought together over300 participants from the region with international leadersto engage in constructive dialogue on prospects for regionaleconomic collaboration. The 18-month project has alsoconducted valuable workshops and policy discussions inGeorgia, Kazakhstan, the Kyrgyz Republic, Peoples Republicof China and Turkey, among other places. We are proud tohave helped foster discussions on important regional matters.

These discussions made clear that just as our neighboursdepend on us for their economic well-being, our own

economic future is dependent not only on our own strategyand results, but on those of our partners as well. While asingle economic plan for the whole region is not possiblegiven the differing geographies and resources of constituentcountries, it is realistic to aim for greater coherence, synergyand momentum in the pursuit of collective strategies.

We believe that Azerbaijan has contributed to such aprocess in recent years. Keenly aware of our economicinterdependence with Europe and other immediateneighbours, we have also been particularly open to othereconomic and political partners. We believe we are now a

good example of the type of multi-vector economic foreignpolicy highlighted in this report.

We have enjoyed the opportunity to support the WorldEconomic Forum, with its proud history of raising questionsand initiating strategic dialogue among policy-makers andleaders from business and civil society about the long-termdevelopment of the world economy. We thank the Forum forits thought leadership and convening power throughout thisproject.

Rovnag AbdullayevPresident, SOCAR(State Oil Companyof the AzerbaijanRepublic)

Foreword


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Executive Summary

At a time when the global economy is showing signs offundamental uncertainty in both advanced and emergingmarkets, the South Caucasus and Central Asia regioncould present an unexpected source of economicdynamism on which global investors could build. Forthe purposes of this report, the region comprises Armenia,Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic,Tajikistan, Turkmenistan and Uzbekistan.

As with a start-up, however, a national or regional economycan be successful only by clarifying its economic vision anddeveloping a clear strategy for matching internal resourcesand comparative advantages with the demands of internaland external markets. Over 18 months, the World EconomicForum engaged over 500 stakeholders and experts in adialogue to reflect together on the prospects of regionalcollaboration to attain the economic goals of thecountries of South Caucasus and Central Asia, aiming to:

Maximize the potential of their energy resources

Integrate into global supply chains

Create a diversified economic base Develop a high-standard workforce

This report finds that while short-term wins are achievableby countries acting on their own, the pursuit of these fourgoals will be more sustainable if action is anchored inlong-term regional collaboration.Indeed, as one participantin the project highlighted, unlike individuals, who can moveas they become wealthier, countries cannot change theirneighbours. This means that no one part of the region canbe stronger than its weakest link, thereby making regionalsolidarity a matter of rational as well as ethical importance.

Ironically, the regions current low level of regional economicinterdependence makes it a good candidate for quick andeasily achievable wins in this regard.

Bringing down economic borders in the region, which areamong the highest in the world, could yield transformativeimpact on cross-border trade and domestic growth. It couldalso enhance consumer choice, facilitate home-grownproduction and attract greater foreign investment, all ofwhich would help steer the region in the direction of its statedeconomics goals.

To achieve these gains, countries in the region will needto address their political differences, which have resultedin freezing economic resources, representing a significantcollective loss for the region. Fortunately, as this projectsstakeholder consultation has highlighted, there exists

favourable momentum among regional decision-makersfor expanding the regions formal and informal patterns ofregional economic collaboration.

The development of economic strategies has a long leadtime, however, so strategic decisions must take into accountfuture contexts that are very likely to be different from today.Possible relevant outcomes are explored in three scenarios,helping the region to learn and prepare for whichever

future arises.

Three Scenarios: Future Contexts for the Region in 2035

Split UpIn 2035, the global economy is dominatedby powerful trading blocs centred onthe Atlantic, Pacific and Indian oceans.Members within these blocs collaborateintensively on energy and othercommercial matters, but politics and

protectionism severely limit exchangesbetween the blocs.

Southern GatewayThe global economy of 2035 is digital,knowledge-based and dominated bynewly advanced economies. South-Southtrade, especially in services, has becomemore important. The Islamic Republic ofIran is now open for business and at thecentre of access to new markets for non-

Western producers.

Climate PressureBy 2035, the bubbling effects of climatechange are beginning to cause havocin the global economy. The financialramifications of ever more costlyresponses to natural disasters areleading to a funding shortfall that takesits toll on global economic activity. Theconsequences of these disruptions includea rising demand for environmentally

responsible growth.


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By exploring potential upcoming challenges, the scenariosopen up space to identify robust growth strategies and reflecton the potential of pursuing these strategies collectively orindividually. Each scenario is followed by suggested strategicoptions that include, among others:

Becoming an inter-regional broker:Bordering theEuropean, Russian and Asian markets, the region is ideallypositioned to play the role of a traditional trade corridoror more innovative bridge, convener, or translator

between diverging regional economic blocs. Creating the digital supply chains of the future:The

region may have an invaluable opportunity to leapfrogits integration into physical supply chains and insteadinvest in its digital infrastructure, workforce, and small andmedium-sized enterprises (SMEs) to capitalize on a moreimmaterial 21st-century economy.

Developing green initiatives:The regions potential for

green-economy initiatives, including but not limited to itshydropower resources, is vast and already underway to beexploited. Opting for an environmentally friendly regionaleconomic model could help countries not only hedgeagainst future ecological pressures, but also possiblymitigate them.

An early exploration of the costs and benefits of implementingthese or other potential strategies, whether individually orcollectively, reveals that in most instancesthe benefits ofworking collaboratively appear to outweigh those ofunilateral action.Indeed, working together generallymakes a decisive difference between short- and long-term gains, for while a country can easily achieve quickwins on its own, its longer-term sustainable prosperity will

typically rely on the ability to ensure stability in its immediateenvironment.


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Introduction: RethinkingProspects for RegionalProsperity

When the countries of the South Caucasus and Central Asiaregion for the purposes of this report Armenia, Azerbaijan,Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan,

Turkmenistan and Uzbekistan are viewed together, it isoften through too narrow a prism. In the future, however, theregion has the potential to establish a fresh identity as acentre of activity within a new, 21st-century economy.

For a large part of the last two millennia, the region founditself located at the worlds economic centre of gravity. Itsposition was summed up by a term that continues to havedeep resonance today: the Silk Route. The global economiccentre of gravity was pulled far to the north and west overthe last two centuries (Figure 1) by the Industrial Revolution inEurope and the United States. However, the growth of Chinaand India in particular is poised to pull it back to the east andsouth again, thereby potentially returning the region into thelimelight if it is able to capitalize on this opportunity.

Talk of a New Silk Route has become increasingly common,with growing interest in linking Chinas production capacitiesto Europes consumer market through rail, among other

means. However, the ambition of recreating former tradingglories risks over-reliance on the continuance of externalfactors outside the control of regional decision-makers,such as Chinas westward focus and the domestic growthit relies on. Indeed, while the regions location sitting at theconfluence of the worlds greatest population and economiccentres is a potential advantage given the worlds shiftingeconomic geography, focusing on it too narrowly risksoverlooking transformations in the regions surroundings, orignoring its other potential advantages, such as the power ofits domestic market.

While the Silk Route remains an evocative catchphrasefor branding purposes, attempts to revive this historicalnotion may have taken the concept too literally, andthereby have overshadowed the need for a deeperrethinking of the regions business idea in the worldmarket.

In this context, the World Economic Forumprovides animpartial, forward-looking platform for business leadersand policy-makers to commonly reflect on the prospectsof regional collaboration for achieving its economicgoals.This process started with the World Economic ForumStrategic Dialogue on the Future of the South Caucasus and

Central Asia, Baku, Azerbaijan 7-8 April 2013. Throughoutits course into 2014, it has involved over 500 participants ininterviews, workshops and other Forum events, both withinand around the region. This report which captures the maininsights of the process aims to support further reflectionwithout being confined to an otherwise valuable discussion ofthe specific institutional initiatives that have attempted, eachin their own way, to provide coherence to this region (Box 1).


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Consultations with stakeholders reveal that when countriesin the region envision what it would take to create theirsustainable economic prosperity, four common goalsemerge:

Maximize the potential of their energy resources

Integrate into global supply chains

Create a diversified economic base

Develop a high-standard workforce

Part I of this report begins by exploring whether regionaleconomic collaboration could be a valuable avenue forcountries in the region to better and more quickly reachtheir common goals for achieving sustainable economicprosperity in the region. Part II presents scenarios of threepossible future contexts for the region as well as strategicoptions to help its stakeholders think about how to bestpursue, individually or collectively, the economic goals oftheir countries. The options presented in this report are notintended to be exhaustive. Instead, they serve as a startingpoint to spark further discussion on other possible options forthe region to successfully deliver on its economic goals, andhow best to pursue them.

IstanbulTurkey

November 2013

Workshop in collaborationwith the Atlantic CouncilEnergy and Economic

Summit

TbilisiGeorgia

May 2014

Workshop and paneldiscussion

Timeline: Strategic Dialogue on the Future of the South Caucasus and Central Asia

BakuAzerbaijanApril 2013

World Economic ForumStrategic Dialogue on

the Future of the SouthCaucasus and Central Asia,

and interviews

DalianChina

September 2013

Workshop at the AnnualMeeting of the New

Champions

Tbilisi and AstanaGeorgia and Kazakhstan

May 2013

Interviews with keystakeholders

MoscowRussian Federation

October 2013

Round-table discussionat the World EconomicForum Moscow Meeting

BishkekKyrgyz Republic

June 2013

Workshop in collaborationwith the University ofCentral Asia

Davos-KlostersSwitzerland

January 2014

Public paneldiscussion and high-levelprivate dinner at the WorldEconomic Forum Annual

Meeting

AstanaKazakhstanMay 2014

Panel discussion at theAstana Economic Forum


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Figure 1:Evolution of the Earths Economic Centre of Gravity

AD 1 to 2025

Note: Economic centre of gravity is calculated by weighting locations by GDP in three dimensions and projected to the nearest point on the earths surface. The surfaceprojection of the centre of gravity shifts north over the course of the century, reflecting the fact that in three-dimensional space America and Asia are not only next to

each other, but also across from each other.

Source: McKinsey Global Institute, analysis using data from Angus Maddison; University of Groningen

Reproduced from: McKinsey Global Institute, Urban World: Cities and the rise of the consuming class , June 2012

Box 1: Regional Institutions and the Eurasian EconomicUnion

A choice was made in this report not to focus on theindividual merits of the many institutional initiatives that haveattempted to shape the region to date. Instead, the approachwas to explore the underlying logic for economic collaborationin the region, as well as the exogenous factors that willinfluence the future contexts for stakeholders decisionson institutional agreements. In so doing, this report aimsto promote a common understanding of the regionspotential for a sustainable and prosperous future, ratherthan to engage in a shorter-term and at times politicallytainted debate over the details of singular institutionaldesigns.

Ongoing policy developments within the region at the timeof this writing nevertheless suggest the need to mention onesuch institutional endeavour namely, the Eurasian EconomicUnion (EEU), which is expected to become operational inJanuary 2015. Much of the current debate about the EEUhas, however, been dominated by geopolitical considerations,as illustrated by recent tensions over the future of theUkrainian economy.

An attempt was made throughout this project to addressthis issue through a more economically groundednarrative,as was the case during a round-table sessionheld at the 2013 World Economic Forum Moscow Meeting,which brought Andrey Slepnev, Minister of Trade, EurasianEconomic Commission, and Igor Finogenov, Chairman of theManagement Board, Eurasian Development Bank, togetherwith international economists and business figures.

The scenarios presented in this report help tocontextualize regional stakeholders decisions aboutwhether and which institutions to join, rather thanto prescribe any of them.More broadly, the foresightmethodologies underpinning the report can help stakeholdersreflect on the future of the EEU and other institutionaldevelopments in a more holistic and sustainable fashion thanhas sometimes been the case.

For instance, a number of important uncertainties maywarrant further consideration, such as:

To what extent will economic and political logic ever beseparable in the development of the EEU (or indeed inother examples of regionalism)?

How can the EEU and other regional blocs, including

but not limited to the European Union (EU), interact in aproductive way? Is open regionalism achievable?

Can the EEU prosper if its membership remains limited topost-Soviet states? Under what conditions may countrieswith no shared Soviet past desire to join the EEU?

Need the EEU be forever led by the Russian Federation?How would an economic downturn or other domesticchange within the Russian Federation impact the EEUsfuture?

Only by answering these and other critical questions aboutthe regions longer-term future can stakeholders in the South

Caucasus and Central Asia develop robust strategies for theirinstitutional choices.

Scenarios for the South Caucasus and Central Asia 9


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Part I: The Case forRegional EconomicCollaboration

This section analyses the case for regional economiccollaboration as a means of achieving the regions economicgoals of maximizing the potential of its energy resources,

integrating into global supply chains, creating a diversifiedeconomic base and developing a high-standard workforce.

A countrys capacity to succeed will always depend at first onthe stability and cohesiveness of its immediate environment,especially when considering resilience against downturns thatare either exogenous (such as a global economic crisis) orendogenous (for example, the breakdown of a more fragileneighbour). As one participant in this project highlighted,Unlike individuals, who can move as they becomewealthier, countries cannot change their neighbours.The success of a region, however loosely it may bedefined, indeed depends on the strength of its weakestlink,thereby justifying a form of proactive solidarity andcollaboration, if only for economic ends. In this sense,regional collaboration reinforces all countries prospectsby strengthening each countrys destiny.

Further, economic issues typically serve as the mostachievable routes to collaboration. Their promises of growth

make it easier to identify win-win opportunities to build andlater capitalize on in other areas of relations between states,with potential positive feedback loops.

Economic disparities in the region aresubstantial but that may indicatepotential for remarkable, easy wins

Currently, little sense exists of the South Caucasus andCentral Asia being a common market, or even a coherentone. In terms of competitiveness, according to the WorldEconomic Forums Global Competitiveness Report 2014-2015, the gap in ranking between the highest and lowestperformers in the region is 70 ranks(out of a total of 144countries). As shown in Figure 2, the largest gross domesticproduct (GDP) in the region is over 30 times greaterthan the lowest, and is nearly 13 times greater whenmeasured on a GDP-per-capita basis.At present, theregion is composed of highly diverging economies. In termsof connectedness, the region lags far behind others inintra-regional trade flows,with fully 96% of exports goingoutside the region.1


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Figure 2:The South Caucasus and Central Asia: A Region of Heterogeneity

Figure 3:Differences in Economic Borders

Copyright: World Economic Forum, 2014

Source: World Economic Forum, based on data from World Bank, 2012; World Integrated Trade Solution (WITS)/United Nations Commodity Trade Statistics Database(UN Comtrade), 2012; International Monetary Fund, Direction of Trade Statistics, 2012; Central Intelligence Agency, The World Factbook, 2013; and World EconomicForum calculations

Note:The width of the borders is proportional to a summary measure of each countrys restrictions to the flow of goods, capital, people and ideas with all othercountries. Dark grey areas = insufficient data

Source: World Development Report 2009, World Bank, HSBC

Reproduced from: King, S. The Southern Silk Road: Turbocharging South-South economic growth, HSBC Global Research, June 2011

Extra-regional exports (%)

4= % intra-reg. trade;96= % of trade outsidethe region

The highest GDP in theregion is 31 times largerthan the smallest

Top locally-produced exports per country

While natural resourcesdominate the regionsexport landscape,geographies and models

of tradediverge widely

Armenia

Georgia

Azerbaijan

Kazakhstan

Uzbekistan

Turkmenistan

Tajikistan

Kyrgyzstan

China

IndiaPakistanAfghanistanIran

Caspian Sea

Iraq

Turkey

Russian Federation

4 I96

Gold

Aluminium

Natural gas

Oil

Intra-regional exports (%)

Country GDP ($)

16.1 billion

10.4 billion

73.6 billion

41.9 billion

56.8 billion

8.5 billion

7.2 billion

3 | 97

23 | 77

224.4 billion

4 | 96

7 | 93

7 | 93

Other metals

5 | 95

41 | 59

38 | 62

Data from the World Banks World Development Report 2009:Reshaping Economic Geographyshow that the economicborders between countries in the South Caucasus andCentral Asia region are notably high,as with many earlyemerging countries, compared to advanced economies

(Figures 3 and 4). Building on these data, HSBC GlobalResearch points out that in the 1950s and 1960s, the samecould have been said for those countries now consideredto be in the developed world, and that their example shows

that a concerted effort to collaborate on reducingbarriers to trade and other economic flows can have atransformative effect on domestic economies,particularlythose suffering from small size or a landlocked status. Asshown in Figure 3, the countries in the region share some of

the highest economic borders in the world and, in this sense,represent a type of last frontier for both intra-regional andglobal economic integration.


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Figure 4:Capital Restrictions Highest in Africa, South Asia and Central Asia

Figure 5:Regional Average Intra-Regional Share of Flows by Pillar

Source: Chinn, M.D.; Ito, H., 2006. Reproduced from: World Bank. World Development Report 2009: Reshaping Economic Geography, 2008

Reproduced from: Ghemawat, P.; Altman, S. DHL Global Connectedness Index 2012: Analyzing global flows and their power to increase prosperity, 2012

0 20 40 60 80 100

Central Africa

Western Africa

South Asia

Southern Africa

Northern Africa

Central Asia, Caucasus & Turkey

Eastern Africa

South-East Asia & Pacific

North-East Asia

Eastern Europe & Russian Federation

Western Asia

Central America & Caribbean

South America

Other high-income countries

Organisation for Economic Co-operationand Development countries

Capital restriction index

Collaboration and prosperity often gohand in hand and gains could beparticularly high in this region

As suggested in the DHL Global Connectedness Index

2012 (Figure 5), the wealthiest regions in the world Europe,North America, East Asia and the Pacific are also the mosteconomically connected. Although this does not imply thata direct causal link exists between integration and economic

prosperity, and while affluent regions certainly benefit fromother determinant factors such as strong institutions, it doesappear that the regions with more trade flows also tendto be broadly more economically successful.2The SouthCaucasus and Central Asia region, which is conflated herewith South Asia,3forms the region with the lowest intra-

regional trade flows. If greater intra-regional trade is correlatedwith regional prosperity, then the regions lag may beinterpreted as a sign of great potential economic gains.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Europe North America East Asia & Pacific Middle East & North Africa

South & Central America, Caribbean South & Central Asia Sub-Saharan Africa

Overall

Trade

Capital

Information

People

Pillars


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The economic logic behind this link between greatertrade and wealth is explored by the European Bank forReconstruction and Development (EBRD) in its TransitionReport 2012: Integration across Borders. It points out thatlowering trade barriers should enhance consumer choiceby stimulating greater competition among producers,

which could be vitally important to the South Caucasusand Central Asia.Currently, consumers in the region bearmuch of the cost of high trade barriers, as is, for example, thecase with agricultural products for which consumers pay highexcise taxes, as illustrated in Figure 6.

Figure 6:The South Caucasus and Central Asia: Consumers Losing from Barriers to Trade (the Particular Example of

Uzbekistan)


Source: World Economic Forum, based on data from Anderson, B.; Klimov, Y. Uzbekistan: Trade Regime and Recent Trade Developments, University ofCentral Asia, 2012

In parallel to these benefits for consumers, economiccollaboration also promises to give producers in the regionmore reliable access to higher-quality and/or lower-pricedinputs for production.For example, more collaborationaround natural resource management could mean morereliable electricity supply, while even lower barriers to labour

mobility a metric on which the region already scoresrelatively well could help maximize the regions high-qualityworkforce.

The regions producers and, more generally, its economycould also benefit in that collaborative regions offer largermarkets for both regional and foreign producers,thereby attracting proportionately more investment thannations acting alone.This directly echoes views heard inthis projects stakeholder consultations and represented inthe Frustrated paradigm (Box 2). A concrete example ofhow regional collaboration can be a powerful tool to attractinvestment is captured in the concept of growth polesapplied in The Africa Competitiveness Report 2013, publishedby the Forum in collaboration with the World Bank and theAfrican Development Bank. Growth poles are created bycoordinated investments in many sectors, usually combiningpublic, private and cross-border investment, thus requiringsome form of regional collaboration. The poles are intendedto support self-sustaining industrialization by generatingfurther medium-term investment and employment. Creatinggrowth poles could be a particularly attractive strategy forthe South Caucasus and Central Asia, given the conceptsacute applicability to capitalizing on the regions rich naturalresources.

Furthermore, if using such strategies helps regionalcollaboration to indeed achieve higher investment and agreater fluidity of capital, this could lead to an even moreproductive allocation of investment in a region endowed

with large sovereign wealth funds. This, in turn, couldhelp nations to diversify their economies,as capital tendsto be attracted as a priority to areas of objective comparativeadvantage. As the EBRDs 2012 report points out, this in turncan become a step towards further integration into the globaleconomy, as countries within a regional integration area

can build cross-border production chains by leveraging eachothers comparative advantages and subsequently exportingthe finished product outside that area.

Another way that regional collaboration can help to increaseintegration into global supply chains is through tradefacilitation measures, which seek to simplify trade proceduresand reduce barriers to trade. Supply chain barriers includeall factors that limit trade before and after goods crossthe border, such as the lack of adequate transport andinfrastructure, or heavy administrative procedures.

As highlighted by another recent Forum report,4measuresto tackle these barriers and facilitate trade have a positiveeffect on both trade and economic growth (Figure 7). Indeed,reducing supply chain barriers can have a far greaterimpact than reducing formal trade barriers such astariffs.The report found that if every country in the worldimproved these supply chain barriers just halfway to thelevel of global best practice, global GDP could increase by$2.6 trillion (4.7%) and exports by $1.6 trillion (14.5%). Forcertain countries in the South Caucasus and Central Asiaregion, these barriers are significant, particularly with regardto transportation costs, customs procedures and corruption.The report also found that this region is one of those

set to reap the greatest benefits from reforms to enabletrade:decreasing supply chain barriers could raise exportsby an estimated 65% and imports by 49%, as well as theregions GDP by 8%, which is the second-highest potentialgain in the world.


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Figure 7:Reducing Supply Chain Barriers: A Greater Effect on Trade and Growth than Removing Tariffs

Source: Ferrantino, Geiger and Tsigas, The Benefits of Trade Facilitation - A modelling Exercise. Based on 2007 baseline

Reproduced from: World Economic Forum, Enabling Trade: Valuing Growth Opportunities,2013.

Countries improve trade facilitationhalfway to global best practice

Countries improve trade facilitationhalfway to regional best practice

All tariffs removed globally

The GDP effect of reducing supply chain barriers

is much higher than for tariffs

0

1

2

3

Ambitious scenario

4.7%

14.5%

2.6

1.6

Modest scenario

2.6%9.4%

1.5

1.0

Tariffs

0.7%

10.1%0.4

1.1

Increase in trade* and GDP (in % and trillion )

GDP

Trade

* Based on export value; includes only the ef fect of Border Administration and

Telecommunication and Transport Infrastructure.

Non-economic obstacles to collaborationremain to be overcome

The South Caucasus and Central Asia region is thereforeset to particularly benefit from the payoffs of greater regionalcollaboration or, conversely, to avoid the opportunity costof its absence.5The term frozen conflicts is often appliedto certain of the regions security tensions; less appreciatedis the consequence that the region suffers from what can becalled a syndrome of frozen economic resources due to itsbroader set of political tensions.

Similar analysis has been conducted into the economiccosts of other conflict situations. A World Bank analysis in2013 found, for example, that Israeli checkpoints reducedthe potential GDP of the West Bank by 6%.6In the South

Caucasus and Central Asia region, various studies estimatethe opportunity costs of political tensions and the currentlylimited regional collaboration, and highlight how they channelinto wide-ranging aspects of the economy. According to aWorld Bank study in 2000 and a report by the United NationsDevelopment Programme (UNDP) in 2005, improvements inregional collaboration could lead to GDP growth of 30-38%for the South Caucasus and 50-100% for Central Asia over a10-year period. If transport corridors were developed withinthe region, trade could rise by up to 160% overall, and transittrade could increase by 113%.7These transport corridorscould further induce significant savings in supply chaincosts and create employment. As for the regions naturalenvironment, the aforementioned UNDP report assesses thatimproved regional collaboration could prevent a yearly lossof 3.6% in GDP thanks to better water management. Theseestimated opportunity costs are collated in Figure 8.


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Figure 8:Great Potential Gains from Regional Collaboration and Reducing Opportunity Costs


Source: World Economic Forum, based on data from World Bank, 2000; Asian Development Bank, 2005; United Nations Development Programme, 2005; and SilkRoad Studies, 2007

In each of these cases, settling political tensions will be atthe heart of maximizing economic opportunities.Indeed,while some initiatives primarily at a unilateral and bilaterallevel have improved aspects of the regions economicfluidity in recent years, the South Caucasus and Central Asiaregion remains fraught with political obstacles to greatereconomic collaboration among its nations. Both longstanding

tensions among certain countries within the region andexternal security threats have served as justifications forbarriers to regional trade.

As a consequence of this relative stalemate, the regionas a whole, and many of its parts, currently sufferunnecessary economic losses.The status quo isparticularly insidious because not only have political tensionsdirectly prevented economic gains, but they have alsoprecluded existing or budding exchanges from serving as athawing mechanism, by shunning their potential as shoots oftrust-building developments.

There is momentum behind increasingregional economic collaboration

It is easy to forget that regions which now benefit fromclose collaboration once faced problems that seemedinsurmountable, both from apparent lack of economiccomplementarity and lack of political trust.That theyovercame their own obstacles suggests that the SouthCaucasus and Central Asia region can do so as well, givensufficient desire and political will.

The stakeholder consultations undertaken indicate thatpolitical will exists:more stakeholders were concernedabout the feasibility than the desirability of greater regionaleconomic collaboration (Figure 9). For this project, over500 participants from all eight countries in the region were

engaged, all of whom participated in one or several of thenine round-table, panel or workshop discussions in Baku,Tbilisi, Bishkek, Astana, Moscow, Istanbul, Dalian andDavos-Klosters. In addition to these discussions, nearly200 stakeholders participated in a formal voting exerciseconducted in April 2013 during the Forums StrategicDialogue on the Future of the South Caucasus and Central

Asia, in which 60% thought the regions most likely economicfuture would be one of integration, about 20% indicatedfragmentation and roughly 15% polarization.

Figure 9:Stakeholder Views on the Regions EconomicFuture

Source: Results of voting exercise conducted during two sessions at theForums Strategic Dialogue on the Future of the South Caucasus and CentralAsia in Baku, April 2013

22.0%

62.3%

15.7%

17.5%

65.7%

16.8%

Morning Afternoon


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In addition to these stakeholder perceptions, a closer lookat the data provides cause for encouragement, suggestingthat intra-regional trade is greater than expected for certaincountries in the region, and with regard to non-fossil fuelexports (Figure 10). Although intra-regional trade representsa mere 4% of regional export trade in total, this average

Figure 10:The South Caucasus and Central Asia: More Intra-Regional Trade Than Meets the Eye


Source: WITS/UN Comtrade, 2012

disguises exceptions: in Georgia and the Kyrgyz Republic,for instance, the share is approximately 40% (Figure 2). Thepercentage is also skewed by the dominance of fossil fuelsin the regions export products; without these, the portion ofintra-regional trade nearly triples from 4 to 11%.

These statistics also cover only formal trade. While estimatesvary, informal trade based on goods often imported fromChina, but primarily re-exported within the region is alsobelieved to be significant, at over 250% higher than official

trade figures in the Kyrgyz Republic, and nearly 60% higherin Tajikistan.8This points to a high level of intra-regionalactivity even where it is discrete. In addition, anecdotalevidence exists that cross-border investment is growingwithin the region, with Kazakh investment into the KyrgyzRepublic, Uzbekistan and Tajikistan estimated by some atclose to $900 million in the 2005-2012 period.9

Overall, the Eurasian Development Bank has noted that thelevel of integration in the energy, agriculture and educationsectors is higher in Central Asia than in the rest of the post-Soviet space.10Such exchanges particularly those at agrass-roots level are significant when thinking about future

prospects of regional economic collaboration, as they arehighly resilient to policy volatility or contextual changesgiven their need-driven nature and their multiple pointsof origin.As the report of the Forums first Global Meetingof Regional Organizations (2012) observes: This type ofbottom-up regionalization often leads to more institutionalizedforms of regionalism, as common norms and regulations areneeded to facilitate transaction flows. Once set up, thesetypes of regional organizations often take on a life of theirown. This is also the spirit behind a recent proposal bythe World Bank for the creation of a Levant Private SectorNetwork to represent the influence and interests of business

actors in that regions cross-border economic space. Suchan initiative could be a source of inspiration for private-sectorplayers in South Caucasus and Central Asia, known to beparticularly active both historically and today.

Box 2 provides an overview of some of the recurringarguments heard throughout the projects stakeholderconsultation about the desirability and feasibility of increasedregional economic collaboration. Appetite for more freedoms

among private-sector actors throughout the region, includingin cross-border activities, was evident in the stakeholderconsultations, pointing to the possibility that business actorsat many levels may already trust each other more than theirnon-economic peers. Such a hypothesis would reflectnot only the fact that a degree of trust is necessaryfor commercial exchanges to flourish, but also thatcommerce has often been a vector of trust-generation initself.

As noted earlier, however, such energy will be stifled solong as confidence does not also define the nature ofpolitical relations within the region.In turn, in order for

such sound economic and political relations to exist betweencountries, trust must characterize domestic relations,allowing leaders to encourage free cross-border flowsrather than worrying about their effects on their nationsfutures.


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I am mostly notconvinced by thebenefits of regionaleconomiccollaboration.

I am entirelyfavourable toregional economiccollaboration,but the costs arevery high.

I would like to pursuefurther regionaleconomiccollaboration, butfactors outside of mycontrol limit myability to do so.

Arguments heard

The Frustratedtake a favourable view ofregional economic collaboration but fear

their enthusiasm is not shared by others in

the region, and suspect a new generation of

leaders will have to emerge before it

becomes practical. Their concerns focus on

disappointments owed to a lack of following

for their attempts at leadership, pointing out

that it is doubtful whether one country can

reap the benefits of even the most

challenging reforms if these are not

emulated by neighbours.

Arguments heard

The Dauntedfavour greater collaborationin principle, but are seriously concerned

about the potential implementation costs.

Common arguments include ceding

hard-won national sovereignty too early

after gaining it, the need for strong borders

to tackle illicit trade and terrorism, and the

potential for threats to domestic stability

from pursuing politically and economically

costly reforms.

Arguments heard

The Scepticswere not persuaded by thearguments for regional economic

collaboration. In general, they believe that

the difficulties posed by economic

disparities, lack of trade complementarity

and long-standing political tensions among

countries in the region are so forbidding that

greater benefits are likely to come from

pursuing economic exchanges with partners

outside the region.

The dauntedThe sceptics The frustrated

Box 2: Paradigms of the Nuances of Stakeholder Views

Source: Stakeholder consultations


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Part II: Scenarios for aChanging EconomicGeography and theirImplications for StrategicDecisions

Charting a course to achieve the four goals identified instakeholder consultations as common across the regionscountries maximizing the potential of energy resources,creating a diversified economic base and integrating intoglobal supply chains is not a straightforward task. Thedevelopment of economic strategies has a long lead

time, so strategic decisions must consider futurecontexts that are very likely to be different from today.

Scenarios can be used to help leaders make more robustdecisions about growth strategies (Box 3). Three scenarios whose time horizon is 2035 have been developed todescribe possible future contexts for the region and itsevolving economic geography. While exploring potentialchallenges, each opens up space to reflect on potentialcollaborative growth opportunities. The drivers of changediscussed throughout the conversations that led to thedevelopment of these scenarios were numerous and, as with

all scenario exercises, their potential combinations limitless.The narratives have hence been identified for their abilityto do the following:

Speak to the regions economic goals of maximizingits energy potential, integrating into global supplychains, creating diversified economies and developinga high-standard workforce

Challenge stakeholders assumptions about the futurecontext in which these goals will have to be achieved,including as pertains to the rise of potential newopportunities

Allow stakeholders to reflect on the merits of regionaleconomic collaboration as a means for achievingthese goals

The strategic options presented after each scenario areintended neither as prescriptive policy recommendations noras an exhaustive list of suggestions, but as a guide to helpbegin collaborative thinking about what the best optionsfor the regions sustainable prosperity could be, basedon numerous workshop outputs and other stakeholder

consultations. For each strategy option, this report lays out anumber of supporting arguments for an individual, country-level approach to implementation that is then contrastedwith a more collaborative, regional approach in pursuing thestrategy.

Box 3: Why Scenarios?

When situations are crucial but highly uncertain, it wouldbe unwise to rely on predictions. Yet, it is necessary

to assess what future contexts might look like toassist current decision-making. Scenarios provide thisassessment. They are not forecasts, but plausible views ofdifferent possible futures, opening up the understanding ofhow things could be.Scenarios are not ends in themselves. The WorldEconomic Forum does not provide recommendations.Scenarios provide a framework for stakeholders todevelop new ideas and solutions, and for better-informedand more robust decision-making in the light of futuredevelopments. The process itself allows the building of

social capital to drive change from the learning generatedin the process.


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Split Up


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Impact of the Contextual Pathways on theSouth Caucasus and Central Asia Region

The EUs protectionist turn represents a blow to the SouthCaucasus in particular, as hopes of future membership arebeing laid to rest and existing trading ties curtailed. CentralAsia, for its part, has been badly affected not merely bythe slowdowns of both its Russian and Chinese economicpartners, but by its exclusion from their growing bilateral tiesas well.

Whereas the creation of an Asian Infrastructure InvestmentBank (AIIB) led to hopes of grand Beijing-financed projectsin the mid-2010s, Chinas capital shortage is resulting ingradually fewer investments in the region. Similarly, theRussian Federations own economic slowdown is leading to anationalistic turn against Central Asian migrant labour, hurtingthe remittances it long funded. It is true that the EurasianEconomic Union remains functioning, but its scope is limitedin such a context. Furthermore, whereas Central Asia was for

a time a beneficiary of the Sino-Russian rapprochement asits prime intermediary Chinas economic limitations and theRussian Federations political turn mean that neither partynow sees the need to engage the region in their relationship.

Formal and informal trade flows are being highly impactedby the difficulty of exporting goods from the South Caucasusand Central Asia to most markets. Even where potentialdemand for the regions products still exists, as in Europeor throughout the broad Indian Ocean area, it is becomingdifficult to produce goods that are acceptable to multipletrade partners, due to both the political implications of

economic exchanges and more mundane variations inregulatory requirements.

In general, the region risks being largely left out in the coldeconomically by the protectionist behaviour of the worldsregional trading blocs. Even the regions energy sector isbeing affected by this fragmentation of the global economy.Not only has Chinas demand slowed, but both its needsand those of other East Asian consumers are being cateredto by a Russian Federation that depends more than ever onexporting its own energy resources. European demand isbeing sustained, but is focused on supplies closer to homeor originating from its new trans-Atlantic partnership. SouthAsian energy needs, though repeatedly hailed as a potentialrecipient for Central Asias energy surplus, are being largelycut off from the region by insecure distribution channels, givenAfghanistans lingering security tensions.

Contextual Pathways

In retrospect, by the mid-2010s clear signs had emerged thatthe era of economic globalization was giving way to a newage of economic regionalism. The pace of this fragmentationaccelerated when the EU decided to establish a 20-yearmoratorium on new members. This measure was one ofthe ways in which the EU sought to protect the revival of its

economies that resulted from its long-negotiated but finallysuccessful Transatlantic Trade and Investment Partnership(TTIP) with the United States.

Since then, the world economy has become increasinglyfragmented into regional trading blocs, each with its ownregulations and extensive barriers to both transregional supplychains and inter-regional imports. India, now at the helm of anIndian Ocean Economic Club, finally emerged in the 2020sas a global economic power player, ignoring the lingeringsecurity tensions of a progressively developing but still fragileAfghanistan to its north, and instead choosing to focus on its

ocean-wide influence.

China, facing a slowdown of its growth following the drop inglobal demand for its goods owing to the fragmentationof the global economy as well as a domestic decline inconsumption began efforts to join the bustling Trans-Pacific Partnership (TPP) that had allowed the United Statesand East Asia to sustain their economic health at a highpoint despite geopolitical uncertainties. This East Asianeconomic robustness benefited from a Look East policy ofRussia, among other trends, which attempted to manage aprogressive decline of its economy by expanding its eastwardties through agreements that included privileged access to itsenergy reserves, on occasion at arguably discounted rates.

European energy strategies have also become increasinglymarked by political considerations, seeking to complementtraditional Eastern suppliers with growing North American andMediterranean imports. The year 2035 is one in which it ishard to distinguish economics from politics.

Split UpIn 2035, the global economy is dominated by powerful trading blocs centredon the Atlantic, Pacific and Indian oceans. Members within these blocscollaborate intensively on energy and other commercial matters, but politics

and protectionism severely limit exchanges between the blocs.


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Signposts (Early Indicators of this Future)

Ongoing negotiations for the development of the TTIP and TPP mega-regional trade agreementshave the potential to reshape the map of the global economy (Figure 11).

TPP

TTIP

Eurasian Economic Union

African Free Trade Zone

TPP

Eliminate tariffs and barriers to the trade of goods and services

Facilitate the development of production and supply chains

Improve regulatory coherence

Boost competitiveness

Reduce tariffs

Align regulations and standards

Improve protection for overseas investors

Increase foreign access to services and government procurement

markets

TTIP

CURRENT AND NEGOTIATING COUNTRIES

Figure 11:New Regional Trade Alliances (selected)

Source: World Economic Forum, Global Risks 2014, Ninth Edition

Because of their size and reach, the TPP and TTIP marksignificant steps in the cementing of regionalarrangements as the preeminent locus of tradenegotiations and have triggered interest in a number ofsimilar initiatives The possibility that countries such asBrazil, India, Russia, and Indonesia, largely excluded fromthe mega-regionals, will become more protectionist orobstructive cannot be dismissed.

Uri Dadush, Senior Associate and Director, International EconomicsProgram, Carnegie Endowment for International Peace, March 2014

We welcome the prospect of US liquid natural gas exportsin the future since additional global supplies will benefitEurope and other strategic partners We agree on theimportance of redoubling transatlantic efforts to supportEuropean energy security to further diversify energy

sources and suppliers.

EU-US Summit Joint Statement, March 2014

Establishing closer ties with the Peoples Republic ofChina our trusted friend is Russias unconditionalforeign policy priority. Now Russia-China cooperation isadvancing to a new stage of comprehensive partnershipand strategic interaction. It would not be wrong to say thatit has reached the highest level in all its centuries-longhistory.

Vladimir Putin, President of the Russian Federation, May 2014


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Strategic Options to Consider for thisScenario

1 The region develops its own regional market: Ina world characterized by a trend towards omnipresenteconomic regionalism, the region could opt to maximize theopportunities presented by its 100-million-large consumerbase in 2035 by becoming a regional market of its own. Such

a strategy need not lead to a similarly closed-off market akinto the other regional blocs described in this scenario. Rather,it would simply aim to make the most of intra-regionalmarketscurrently fragmented due to subpar policy andadministrative barriers, in a context where extra-regionaldemand has been made all the more difficult to access. Giventhe close interdependencies between regional collaborationand diversification, such a strategy may help the regiondiversify its economic base in addition to supporting demand.

Reasons for countries to pursue this strategy individually:

Unilateral impact:Economic history shows that

country-level measures, such as unilateral liberalizationof trade, can have notably large effects on cross-bordertransactions even in the absence of reciprocation.

Snowball effect:Such unilateral measures, given theircreation of a basis of trust, could stimulate a snowballeffect leading to progressively reciprocal responses.

Reasons for countries to pursue this strategy collectively:

Mutual concessions:It may be easier to achieve anecessary reduction of tariff and non-tariff barrierscollectively, as plurilateral negotiations can allow for mutualconcessions and facilitate an agreement.

Regional coherence:Intra-regional trade is boostedif countries specialize in different goods, rather than ifseveral among them produce similar or identical goods.Collaboration in developing export strategies is a criticalstep towards this.

Internal mobility:Movement of people within the regionis already high relative to other intra-regional flows, asdiscussed earlier in this report. This may provide a headstart for the development of a common labour andconsumer market.

2 The region becomes an inter-regional broker:To theextent that it remains possible to work with more than oneof the divided regional blocs envisaged in this scenario, theregion is ideally positioned bordering the European, Russianand Asian markets to play the role of a traditional tradecorridor or more innovative bridge, convener, ortranslator between diverging blocs.Such a strategycould help the region overcome the effects of the breakdown

in global supply chains depicted in this scenario by recreatingand positioning itself at the centre of new, albeit weakerbonds among the worlds divided economic blocs.


Diplomatic head start:Each country may have alreadyinvested efforts in building close bilateral ties with a certainregional bloc, which it would be reluctant to give up as itsnational comparative advantage.

Negotiation agility:Though perhaps short-sighted,attempts at balancing between partnerships with divergingregional blocs may be more easily pursued by countries

individually, rather than their having the burden ofcollective alignment.


Collective leverage: Negotiations with regional blocs arelikely to be more challenging for any individual countrywithout the leverage of regional cohesion. Countriesacting alone may specifically find it more difficult to divorcepolitical and economic influences in their discussions withregional blocs.

Open passage:If the region aspires to offer a transit routebetween different regional blocs, it will need collaboration

on common transport infrastructure and openness in itscross-border relations.

Common platform:A degree of collaboration will also beneeded for the region to become a non-physical brokeramong blocs for example, as translator of regulationsand other immaterial barriers to trade.

Diplomatic credibility:The region will have morediplomatic credibility as a broker in the divided worldeconomy if it has demonstrated the capacity to solveits own political disputes and develop trust among itscountries.


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Southern Gateway


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Southern Gateway

Contextual Pathways

Two trends have transformed the world economy since 2014.Firstly, what are now called the newly advanced (formerlyemerging) economies have successfully achieved theirtransition of becoming leaders in the global economy, withan ever-larger share of global trade now being conductedstrictly among themselves rather than with mature markets.

The warming of the Islamic Republic of Irans relationship withthe West in the late 2010s and its subsequent integration intothe global economy served, in particular, as a psychologicalturning point towards a decidedly post-Western economiclandscape.

Secondly, the global economy has become even moreservice-oriented, knowledge-based and digital in nature. Theburgeoning of middle classes in South Asia, the Middle Eastand sub-Saharan Africa, among other places, consequentlypresented opportunities not only for emerging marketproducers, but also for non-Western service providers. In

Eurasia in particular, a tandem composed of the IslamicRepublic of Iran and Turkey sometimes called the SouthernGateway has helped unlock both physical and digital supplychains at the crossroads of three continents.

The transformation of the worlds consulting and digitalindustries in this new economy has become an interestingcase study of how small and medium-sized enterprises(SMEs) in emerging markets have profited from theirproactivity in this increasingly multipolar world. Indeed, in anotable trend, historically-powerful Western consultanciesand digital services providers were progressively blindsidedthroughout the 2020s by competition from emerging-marketfirms that better understood the nuances of non-Westernapproaches and ideas. Examples of being overtaken havebecome common in the new, post-Western global economy.


Significant trade opportunities are opening up for theregions SMEs. Chinas relative wage increases and EastAsias deepening middle-income trap of the early 2020shave created space for the region in manufacturing exports.Meanwhile, new demand for innovative consulting and digital

services is playing to the strengths of the regions high-qualityworkforce and its historical role as a conveyor of knowledgeand ideas.

Some are calling the rise of this more skilled workforce theera of the regions tech nomads, in reference to its historyof population mobility. Social media platforms within theregion including its now-famed ChatEurasia messagingservice are playing a role in this new development, creatinga degree of regional identity with consequences for the fluidityof its labour market. All in all, the increasingly digital nature ofthe world economy is providing the region with the potential

to overcome its landlocked status by leapfrogging intoimmaterial supply chains.

In a similar surpassing of the regions formerly limitedconnectivity, the spectacular rise of SMEs leads to thedevelopment of myriad land-based hubs that together createa more balanced picture of the regions economic geography.This move away from a Soviet heritage of focus on capitalcities represents a renewal of the regions harmonious urbanvibrancy, unseen for centuries.

Both Turkey and the Islamic Republic of Iran, in particular,are serving this trend by becoming important distributors

of the regions goods and services in new Middle Easternand African markets. Iranian investors are reactivating theircountrys historical eastward economic links, while Turkeysrole in the region builds on its ancient affinities throughoutEurasia. Despite that Iranian resources are now competingagainst the regions energy exports (to Europe in particular),the countrys opening is generally being perceived as a netbenefit for the South Caucasus and Central Asia.

The global economy of 2035 is digital, knowledge-based and dominated bynewly advanced economies. South-South trade, especially in services, hasbecome more important. The Islamic Republic of Iran is now open for

business and at the centre of access to new markets for non-Westernproducers.


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will require effort. The benefits of investing in informationtechnology as a means of supporting competitiveness havebeen well documented by the World Economic ForumsGlobal Information Technology Report series. But beyondphysical infrastructure, countries in the region will also needto support softer measures related to the development andtransfer of skills and credentials through mobility and sharedstandards, among other means. SME development will only

be encouraged through shifts in institutional governance aswell.


National values:This strategy is based on workforceand education reform, which relates intimately to culturalvalues that are commonly seen as sensitive national policyareas.

Digital head start: Some countries in the region may seekto capitalize on their head start in digital infrastructure.

External imports:Leapfrogging technologies are mostlikely to be imported from outside the region, thereby

allowing countries to upgrade their capabilities individually. Post-geographic reach:The digital economys immaterial

nature may give individual countries the sense thatthey can pursue their digital supply chain strategiesby leapfrogging, rather than collaborating with, theirgeographic neighbours.


Free exchange:Economies based on innovation havea particular need for the free exchange of informationand ideas, and would hence be at odds with a policy ofisolationism.

Open minds:Knowledge economies are only as strongas the workforce that constitutes them, which makes thevalue of a free and open regional labour market as relevantas ever.

Cultural edge:While educational partnerships withleading but distant academic institutions may supportcapacity building, they will not be able to replaceexchanges with neighbours closer to home particularlyin a world where cultural affinities have become acomparative advantage.

Division of labour:Just as in a physical supply chain,digital supply chains can benefit from an interstate divisionof labour, capitalizing on niche specializations amongcountries.

Infrastructure interdependencies:Underpinning theimmaterial exchanges of a knowledge economy areconcrete elements of infrastructure, such as fibre-opticcables whose laying requires regional collaboration.


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CLIMATE

Climate Pressure


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The worlds liquidity crisis is hitting the regions oil and gasindustry, as foreign oil and gas companies are becomingall the more conscious of preventable costs, such as thoseincurred by shortcomings in institutional governance. This iscreating an impetus to reform domestic business climates.

National oil and gas companies, with another set of mandatesand comparative advantages, are trying to take up the slackleft by more traditional international companies. However, theyare struggling with their relative lack of know-how to upgradeinfrastructure for resilience against climate-related disasters,and are running into difficulties in adequately responding toa growing scrutiny of production methods from increasinglyenvironmentally conscious buyers outside the region.

This is creating a setback for the regions comparativeadvantage in energy, just at a time when the significance of

this sector to the regions economies has grown. Indeed,other facets of the regions economies, including agricultureand fisheries, are being so badly harmed by climate changeand environmental degradation that oil and gas revenues arebecoming ever more needed in response.

With the right governance incentives, however, the regionsees potential in adapting to this new reality. Among otherpromising avenues, Japanese and Korean investmentsare within reach, such that the region can now considerrebuilding its economies on a greener path by harnessing itshydropower resources, among other strengths.

Contextual Pathways

Though haphazard, initiatives at various levels of governanceto curb and mitigate the effects of rising temperatures gavestakeholders hope in the 2020s that they might be able toavert the worst effects of climate change. Soon, however,it became clear that the worsening impacts of climaticdisruptions, originally predicted by forecasting bodies for

the year 2050 and beyond, had already begun makingthemselves felt through a concerning rise in the intensity ofextreme weather events and related natural disasters.

2028 was the worst year on record, with a path of destructionleft across South-East Asia by Cyclone Ursula, soon followedby Hurricane Vincent that devastated swathes of the easternseaboard of the United States. The losses suffered by theglobal insurance and reinsurance industries unexpectedlyexposed systemic risks, promptly coined financial climaterisks, and had a contagion effect on the rest of the financialsystem, even reaching sovereign balance sheets. The

resulting liquidity crisis of 2029-2033 affected borrowersglobally and sparked an economic slowdown that stillcontinues in 2035.

In this environment of reduced economic activity and renewedurgency to limit the impact of climate change, Europes profileof slower but more sustainable and environmentally friendlygrowth has become widely seen as a model, including inthe most carbon-intensive emerging economies. To theeast, Japan and the Republic of Korea, with a head startin transitioning to lower-carbon economies, have takenon a leadership role in Asia as they seek to translate theirexperience into soft power leverage, through various financingmechanisms to support green economies abroad.

Climate PressureBy 2035, the bubbling effects of climate change are beginning to causehavoc in the global economy. The financial ramifications of ever more costlyresponses to natural disasters are leading to a funding shortfall that takes its

toll on global economic activity. The consequences of these disruptionsinclude a rising demand for environmentally responsible growth.


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Strategic Options toConsider for this Scenario

I know a lot about financial risksin fact, I spent nearly mywhole career managing risks and dealing with financialcrisis. Today I see another type of crisis looming: A climatecrisis.

Henry Paulson, US Secretary of the Treasury (2006-2009)

Climate change will have a number of direct effects, whichwill impact human livelihood. Particularly significant willbe the impact on water. Economic development will alsobe impacted, as the South Caucasus and Central Asia aredepending in large parts on climate-dependent sectors,particularly agriculture. Beyond these impacts, a numberof factors may affect social and political relations withinand between states.

Adelphi Research, commissioned by the Organization for Securityand Co-operation in Europe (OSCE), 2010

There are growing calls for pension funds to publish theircarbon exposure as concern builds over the long-terminvestment risks of carbon-intensive portfolios Norways $840bn sovereign wealth fund set up anexpert group in February to assess whether it should stopinvesting in fossil-fuel companies.

Financial Times, June 2014

For years, the global oil majors have been like FormulaOne cars, racing flat-out to grow. Investors now want themto take their foot off the pedal. Pressure has been buildingon them to curb their vast capital spending programmesand return more cash to shareholders.

Financial Times, November 2013

Signposts (Early Indicators of this Future)

1 The region further improves its institutionalgovernance to ensure investor confidence:If climate-related events create a liquidity crisis that increases

competition for investment, the regions business climate andinstitutional governance will need to be highly robust to retainthe interest of international oil and gas companies. Indeed,these companies technical know-how and distributionnetworks will be ever more critical to the regions energyoutput; yet, in this scenario, these actors are pictured ascash-strapped and reluctant to invest in countries with highcorruption costs or risks of political force majeure. This newreality points to a need for the region to further improveits institutional governance in the oil and gas sector at thevery least. But interestingly, doing so would likely lead tosubstantial positive spillover effects into other sectorsof the economy, which could help the region attract theinvestment needed to further diversify its economic base,thereby serving its countries far beyond their oil and gassectors and the inevitable, eventual exhaustion of thosesectors resources.


Unequal starts:Countries that have a stronger trackrecord on governance reforms may not see the value ofcollaborating with neighbours who have further to travel.

Diverse priorities:Areas of the business climate thatneed improvement tend to vary from one country to

another.


Sharing of best practice:The path towards effectivelyimproving institutional governance is not alwaysstraightforward. Countries in the region might thereforebenefit from each others learnings to avoid costlyrepetitions.

Institutional interdependencies:As highlighted in theFrustrated paradigm (Box 2), the value of even the mostsubstantial institutional reforms at a national level can bedramatically limited if such change remains confined to

one nation. Investor perceptions:Persisting poor governance in

even limited parts of the region could negatively affectinvestors perceptions of the region as a whole and limittheir eagerness to engage with it.

2 The region develops green economy initiatives:Ifclimate-related pressures threaten to make the regionsoil and gas exploitation more difficult, investing in thedevelopment of greener economies can serve as both ahedge against and a potential mitigation tool for this future ofenvironmental pressures. The region already has numerous

initiatives to develop its green growth potential, but muchmore can be done.Investing in its hydropower resources,as one leading example, can benefit not only thosecountries with rich hydropower resources, but alsotheir neighbours involved in this energys distribution


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Key Messages andTakeaways

As mentioned in the introduction to Part II, each of thepresented scenarios and suggested strategic options hasbeen identified among a range of conceivable narratives toillustrate important messages aimed at helping stakeholdersboth in and outside the region to avoid the risk of crafting

their long-term strategies based on potential blind spots.These messages, meant to support more robust choicestoday, are summarized in Box 4.

Particularly from the discussion of strategic options, it isclear that most strategies can be pursued individually, and insome cases working alone can speed up taking action. Evenwhen this is not the case, it is still better to pursue an actionindividually than not at all.

In most instances, however, the benefits of workingcollaboratively seem to outweigh those of unilateral

action. Collaborative action typically avoids costlyduplication, favours collective leverage and builds on the

inherent economic benefits of openness, among othergains. Furthermore,if the collective economic potential ofcountries in the South Caucasus and Central Asia wereconsidered as a common resource to be managed andmaximized, then the costs of squandering such great,

latent prosperity by pursuing disparate and at timesconflicting economic policies would become increasinglyevident.In such a perspective, the need for policy coherenceat a regional level would become inevitable.

Indeed, working together is generally the differencebetween short- and long-term gains.Individual countriescan, for example, unilaterally implement governance reformsthat improve their score in rankings such as the World BanksEase of Doing Business Index. However, future regionalinstabilities could drag them steadily back down again. Forprosperity to be sustainable, it needs to be strengthened by

collaboration with neighbours.

Towards Regional Prosperity: Benefits of Individual and Collective Pursuits

Option 1: Pursue individuallyCountry Global Level

Advantages:Faster:more agile

Easier:less alignment required

Option 2: Pursue collectivelyCountry Regional Global Level

Advantages:Higher gains:by maximizing synergies

Greater resilience:through regionalsolidarity and support mechanisms

Country goals to achieve regional sustainable prosperity:Maximize the potential of energy resources

Integrate into global supply chainsCreate diversified economies

Develop a high-standard workforce


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Box 4: Key Messages for the Scenarios

Each scenario and associated strategic options can be mapped out against important messages aimed at supporting theregions current decisions.

CLIMATE

Split Up Southern Gateway Climate Pressure

Scenario Summary

The global economy of 2035 isdigital, knowledge-based anddominated by newly advancedeconomies. South-South trade,especially in services, has becomemore important. The Islamic Republicof Iran is now open for businessand at the centre of access to newmarkets for non-Western producers.

Key Messages

While the region has legitimately beenfocused on its Russian, Europeanand Chinese economic partners todate, it should not underestimateother potential trading partners thatmay emerge and allow the regionto make use of its cross-culturalstrengths.

The growing share of services inthe global economy particularlythose knowledge-based and

digital represents an opportunity,if adequately capitalized on, forthe region to break free from itslandlocked status.

In order to seize such opportunities,however, the region must live upto international expectations forhighly skilled labour, which willinevitably require a premium on socialopenness.

A degree of regional cooperation is

necessary for the region to sustaineven externally facing supply chains,with regard to both their hard andsoft infrastructure requirements.

Scenario Summary

In 2035, the global economy isdominated by powerful tradingblocs centred on the Atlantic,Pacific and Indian oceans. Memberswithin these blocs collaborateintensively on energy and othercommercial matters, but politicsand protectionism severely limitexchanges between the blocs.

Key Messages

The existence of accessible exportmarkets for the regions products,including its most prized oil andgas resources, cannot be taken forgranted.

(Geo)political considerations outsidethe region may increasingly shapeglobal economic decisions, withramifications for the regions relationswith even its closest partners.

The regions internal marketrepresents an underexploited growthopportunity that can be valuablypursued, even without aiming tocreate a strictly inward-looking orsecluded market.

Despite the negative externalities thata fragmented world might bring tothe region, its strategic location at thegeographic and cultural crossroadsof all major economic centres canmake it a resilient pivot for the global

economy.

Scenario Summary

By 2035, the bubbling effects ofclimate change are beginning tocause havoc in the global economy.

The financial ramifications of evermore costly responses to naturaldisasters are leading to a fundingshortfall that takes its toll oneconomic activity. The consequencesof these disruptions include arising demand for environmentallyresponsible growth.

Key Messages

Climate change has the potential torepresent a direct and indirect threatto the region, such that it should beaware of both its contribution and itspotential exposure to this issue.

Even without a complete shift toa global, renewable energy future,the regions oil and gas productionmay run into challenges to both theexploitation and distribution of itsresources.

External pressure for the regionto further collectively improve itsinstitutional governance architecturein the energy sector could havepositive ramifications for its broadereconomic sectors.

While the region is often consideredto be a leader in oil and gas, italso has the potential to developgreen economic initiatives, such asmaximizing its hydropower potential.


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Conclusion

This report has explored whether and how regional economiccollaboration can help the South Caucasus and Central Asiaregion to achieve sustainable prosperity, an objective sharedby its individual nations.

While formidable obstacles to achieving greater regionalcollaboration undoubtedly exist, the process of creatingthis report with over 500 stakeholders involved ininterviews, workshops and other events showed thatmany within the region are well disposed in principle tothe idea.

The strategic options emerging from the scenarios discussedherein make clear that while many policies for achievingsustainable prosperity can be pursued by individualnations, most policies are more robust if undertaken incollaboration with others in the region.

As a changing global economic context poses both threatsand opportunities, regions that can create a coherentbusiness idea and openly address their shortcomings willincreasingly be at an advantage.There will be no place forrelying on legacy, shunning a reaching hand or ignoring theneed for reform.


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Using the Scenarios for the South Caucasusand Central Asia

1. Testing Planned Policies and Strategies

Just as a wind tunnel tests the integrity of an airplanes wings,

the scenarios can be used to test planned policies andstrategies. The aim is to understand under which conditionsthe policy or strategy could be best pursued, individually orcollectively, or could be susceptible to changes in the futurecontext and become a liability. The policies and strategiescan then be modified to ensure they are flexible to addressdevelopments across the scenarios (for example, by beingable to serve multiple purposes). Important questions toaddress include:

Do these policies and strategies help reach the regionsimportant economic goals?

Are they resilient in each scenario? Are they best pursued individually or collectively at aregional level?

2. Exploring Implications and Generating New Options

The scenarios can be used to generate new strategic and

policy options. By considering different future contexts (theopportunities and threats in the scenarios), alongside theweaknesses and strengths of the country, firm or organizationusing them, tailored implications of the scenarios can berendered. The implications can then be developed intooptions for each scenario by asking how the strengths andopportunities can be maximized, and the weaknesses andthreats minimized. From there, these options can be tested,as noted in the first point, to understand which are robustacross the scenarios, and which are contingent and wouldrequire an investigation of choices.


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The following template can be used to generate implications and options:

Template

Implications Split Up Southern Gateway Climate Pressure

Strengths

Weaknesses

OpportunitiesThreats

3. Developing an Early Warning Capability

The scenarios provide different frames, or ways of seeingdevelopments unfolding in the context of the South Caucasusand Central Asia. Without such frames, it is difficult todifferentiate the important signals from the noise. As frames,they help organize the categories of information for monitoringchange. In this way, the scenarios provide an early warningcapability signalling important, emerging changes.

The scenarios can be used in this capacity by consideringwhich developments would be the entrance to each one,signalling their unfolding. Then, scanning processes can beput in place to monitor the possible developments and ensurethe information is regularly analysed and discussed in policyand strategy forums.

4. Enabling Strategic Conversations

The scenarios can be used in discussions and workshopsto help stakeholders understand possible developments in

the future context of the South Caucasus and Central Asia,and to generate options in response. A suggested workshopoutline for using the scenarios in this type of strategicconversation follows:

Sample Half-Day Workshop

Objectives

1. To learn about developments in the future context of theSouth Caucasus and Central Asia by using the scenarios

2. To understand the implications of the scenarios for thefour economic goals underpinning the regions long- term

economic prosperity

Duration

Four hours (e.g. 13.00 - 17.00)

Agenda

13.00 - 14.00 Introduction Economic goals and scenarios

14.00 - 15.00 Breakout group discussions Implications of the scenarios for the South

Caucasus and Central Asia regions

economic goals

15.00 - 15.30 Plenary Report from each breakout group

15.30 - 15.50 Coffee/tea

15.50 - 16.50 Round table Discussion of robust policy options across

the scenarios to promote and encourage theregions sustainable and long-termeconomic development

16.50 - 17.00 Next steps and closing


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Annex 1: The Value of Scenarios

Scenario thinking is a powerful strategic management tool

that can be used in the private, public and non-profit sectors,as well as in a multistakeholder context. While scenarios areoften used to provide public- and private-sector decisio

wef scenarios southcaucasuscentralasia report 2014

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