Since the pandemic and despite global headwinds, governments of Central Asia have worked to simplify tax systems and business procedures, dynamise public-private dialogue and digitalise public services. This section offers ways forward for the region’s governments to consider to further boost private sector development.
Improving the Legal Environment for Business and Investment in Central Asia
Progress Report
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7. Going forward
Abstract
The governments of the region have carried out reforms to support the private sector as a means to achieve more sustainable and inclusive development
Since achieving independence, governments of the region have recognised the contributions of firms of all sizes to employment and growth and have been supporting private sector development. Central Asian countries have made significant reforms in the investment and business climate, developed medium- and long-term business support programmes and allocated significant funds to increase the share of the private sector, and more specifically SMEs, in the economy and to support job creation in the context of dynamic demographic growth. Governments are also increasingly turning to new ways of supporting inclusive and climate-friendly growth through tax incentives for green industries, as well as creating favourable conditions for sustainable start-ups, creative sectors and technology-intensive industries.
The OECD’s assessment of progress achieved over the past three years has shown that the region has made strides in a number of areas to create a more favourable regulatory framework for businesses, to address the infringement of entrepreneurial rights, and to build framework conditions to foster entrepreneurship development. To varying degrees, all five countries have worked to make tax systems more effective, fairer, and more digital; trade smoother; and public-private dialogue more dynamic. FDI inflows and SME performance in the region confirm to some extent the effectiveness of policy measures taken by governments. Improvements in the operational environment for business at the regional level can indeed encourage local businesses to expand within the region but can also increase Central Asia's attractiveness to international investors as a regional market.
Concerted efforts can help address shared challenges
Nevertheless, additional efforts are required for the legal environment for business to become an enabler of diversification and inclusiveness. Whilst each of the Central Asian countries has its own economic model and development path, the OECD has identified a set of challenges common across the region:
Predictability: Governments should particularly ensure the predictability of application and enforcement of business-related legislation and policies for SMEs and investors. Although governments have shown adaptability and flexibility in emergency responses to the COVID-19 crisis and Russia’s war in Ukraine, ensuring the stability and predictability of legislation would benefit SMEs greatly. Further government support to help firms adapt to regulatory changes would also be welcome to increase clarity. This requires establishing effective channels of communication with businesses, as well as mechanisms to run consultations and collect feedback at all stages of the development of policies. Such endeavours will contribute to building business resilience to future economic shocks.
Implementation and consistency of interpretation: In addition to the unpredictability and complexity of the regulatory framework, entrepreneurs also often note the uneven implementation of procedures. As a result, enterprises have to face misconduct, in particular with regard to licensing and taxation. More systematic consultation and communication with businesses and business associations is needed. Training of civil servants could be disseminated at both national and regional levels and conducted directly by public authorities on a regular basis. This can help ensure that civil servants are aware of changes in legislation and can advise and support businesses on their adaptation journey. In parallel, the government should prioritise the development of channels for companies to report mis-implementation cases.
Public-private dialogue (PPD). PPD can promote an inclusive approach to problem solving and policymaking. By joining the private and public sector analysis of bottlenecks, opportunities and possible interventions, it can contribute to strengthening the business and investment environment. To make PPD effective, stakeholders should ensure they identify concrete, measurable and achievable outputs, and include the underrepresented (MSMEs, firms from rural areas, emerging sectors, women- and youth-led companies, etc.).
Regional integration. Trade integration can help address the region’s distance penalty to major markets. Despite significant trade facilitation improvements in recent years, Central Asia falls behind most of the regions covered by the OECD’s Trade Facilitation Indicators (TFIs) in terms of trade integration. Further can be done by the Central Asian countries to improve soft (such as streamlining procedures) and hard infrastructure and ultimately boost regional trade and connectivity.
Competition. Fostering competition promotes consumer welfare and economic growth while making markets more innovative. The large footprint of SOEs in Central Asia’s economies creates a significant fiscal burden for governments and distorts market conditions, hampering the development of the private sector. Improving governance, streamlining subsidies and examining which activities could be better served by the private sector can help level the playing field between public and private firms.
Digitalisation. Interacting digitally with businesses and citizens can contribute to more effective stakeholder engagement. The region has displayed a constant growth of digitalisation in the interactions between government agencies and with citizens and businesses through the provision of digital public services. Governments could adapt digitalisation efforts to local specificities, such as the development of convenient and easy-to-use smartphone applications for tax returns, due to the high percentage of their use among entrepreneurs and try to bridge the digital divide among the population. Mobile-friendly platforms should be prioritised in places where fixed broadband access is limited or faces important barriers.
Data availability for monitoring and evaluation. More and better-quality data can make policy making, monitoring and evaluation more effective. A systematic evaluation of the effectiveness of programmes and strategies for investors and for SMEs will facilitate timely adjustments and achievement of objectives. The countries of the region have started to develop regulatory impact analysis, but implementation remains to be seen. The use of RIA in the development of legal acts, as well as the development of clear methodologies for such application will help countries to cut out in its infancy legislation that does not work and causes harm to business.
Going forward, additional steps to level the playing field and reduce the share of the state in the economy will ensure a more inclusive development path. Establishing clearer, more predictable and stable rules will not only help establish dynamic markets offering better job opportunities to a growing labour force but will also contribute to making the region more vibrant and attractive to foreign investment. Increased cross-border co-operation will also benefit the competitiveness and attractiveness of Central Asia as a region. Ultimately, a bolstered private sector will only serve to increase the resilience of the region to trade and climate change headwinds.