Many countries of the former Soviet Union rank highly in the Human Capital Index, thanks largely to long-term investment in education and health services. Prior to its collapse in the early 1990s, the soviet system had ensured universal access to education and healthcare, which led to eradication of illiteracy and to well-educated populations.
Yet, today, economic output per worker in several of these countries remains low in comparison to the global average – which is exemplified by low overall levels of productivity, high levels of outward migration, and sluggish GDP growth.
Why is that so? To find out more, we researched four former Soviet Union countries – Armenia, Georgia, the Kyrgyz Republic, and Tajikistan – to better understand why they are not capitalizing on their human capital potential, and creating more inclusive growth and jobs for economic transformation.
We identified some important trends. Since the early 2000s, all four countries have experienced significant cumulative net migration compared with the size of their labour forces. Georgia, for example, has seen cumulative net migration of more than one-third its 2018 labor force. In Armenia’s case, it has been more than a quarter. Net migration from the Kyrgyz Republic and Tajikistan has been smaller, but this is most likely because much of their labor migration is seasonal and temporary in nature.
In all four countries, remittances have played an essential role in the economy. Over the past decade, both the Kyrgyz Republic and Tajikistan have received remittances equivalent to 30 percent or more of their GDP. In Armenia and Georgia, remittances have averaged between 11 and 18 percent of GDP.
Another common characteristic is low GDP per worker, which is surprising given their levels of human capital. This implies that many workers prefer to emigrate, taking their human capital and earning higher wages abroad.
A reduced labor force caused by worker migration, combined with the receipt of remittances, has important macroeconomic effects for these countries. Their economies shift more towards production of non-traded goods – including services – to meet increased demand, and away from the production of traded goods, which can be mostly imported and funded with remittances.
There is already some evidence of these shifts, mostly in the Kyrgyz Republic and Tajikistan because they are the largest recipients of remittances as a share of their GDP. In both countries, remittance receipts have been accompanied by an increase in total expenditure as a share of GDP, and therefore a larger trade deficit, as well as a rising share of services in GDP.
We know that, when a currency appreciates or strengthens in relation to other currencies, imports get cheaper. This can lead to slower real GDP growth, caused by a fall in net exports and a rise in demand for imports. There is some evidence of real exchange rate appreciation in Armenia and Georgia, and to a greater extent in the Kyrgyz Republic and Tajikistan – although these trends were partially reversed in 2015-18 in the latter two countries due to the impact of the global oil price fall on the value of remittances from Russia and Kazakhstan.
There are also indications that the Kyrgyz Republic and Tajikistan have experienced a loss of external price competitiveness, contributing to relatively poor export performance. Tajikistan has suffered a large fall in its global market share of merchandize exports, while the Kyrgyz Republic recorded only a modest expansion of its global market share of merchandize exports and almost no increase in the share of its services exports.
What can we learn from the trends in these four countries?
Primarily, that sound macroeconomic policies are paramount to ensuring countries can fully capitalize on their human capital. This means implementing structural reforms and strengthening institutions for better governance and accountability. It means boosting private sector investment and creating more and better jobs to entice people to stay and work in their home country. It means helping businesses, especially small and medium scale enterprises to grow, and promoting technology and innovation.
But mostly, it means creating opportunities for a healthy and educated workforce to thrive and contribute fully to inclusive economic growth and job creation.