Executive Summary

Opening Remarks

Keynote Address

Panel I
Challenges to State-Building: Internal Fault Lines and Impediments
Highlights From the Discussion

Panel II
Challenges to State-Building: The Impact of Megatrends on the Regions
Highlights From the Discussion

Panel III
Regional Dynamics
Highlights From the Discussion

Panel IV
View From the Periphery
Highlights From the Discussion

Panel V
Impressions From the Field
Highlights From the Discussion

Panel VI
Concluding Roundtable: The Outlook of the Larger Geopolitical Environment and Key Variables

Appendixes
A. Conference Agenda
B. Participants

Keynote presenter Gen. Anthony Zinni focused on the 10 key challenges facing Central Asia, which ranged from creating a national identity and reconciling the role of Islam in society to coping with political, economic, and military reform. Dr. James Schlesinger made a lunch presentation that cast doubt on the realization of the Baku-Ceyhan pipeline project, given the trade-off between means and ends.

Participants and panelists made a number of salient points during the conference that should be considered by those who analyze developments in the South Caucasus and Central Asia. These observations and judgments, however, do not necessarily represent the views of the conference participants as a whole.

Outside Influences and Relationships

• Central Asia and the South Caucasus are important because their orientation will greatly affect the power and national security planning of large neighboring or interested states (principally, the United States, Russia, China, Iran, Turkey, India, and Pakistan). How these states and others think and act strategically in Central Asia and the South Caucasus will influence geopolitical alignments in the region. It is also important to grasp how these states, and others whose interest is acute though less direct (for example, Israel, Japan, South Korea, some Gulf Arab states), factor Central Asia and the South Caucasus into their strategic thinking.

• Conversely, the states of Central Asia and the South Caucasus are increasingly dealing with countries other than those we tend to see as having the most direct interest and natural advantages--Russia, Iran, and Turkey. The states of Central Asia and the South Caucasus are looking to a number of other states--for example, India, Pakistan, Israel, China, South Korea and Japan--for new trade possibilities and security arrangements. All of these states are increasingly active in both Central Asia and the South Caucasus.

• Strategic dynamics now cascade across geographic regions. Developments in one region can have extensive direct, and second- and third-order consequences other regions. Analysts must broaden their focus and not view the region as a traditionally defined set of states. Central Asia and the South Caucasus are a strategic crossroads. They must be understood and analyzed in the larger Eurasian/Asian context if analysts are to capture all of the cross-regional dynamics that shape these two regions as well as the broader geopolitical landscape around them.

• Iran is potentially the most influential near-term variable. If a normalization of US-Iranian relations takes place, the entire regional picture would change dramatically by changing the strategic calculations of all the regional actors and the major external actors in the two region.

• Russia's policy will not necessarily be more coherent or benign under President Putin. Russia probably will continue to be weak but remain relatively stronger than its neighbors and possess more leverage than other actors in the Central Asian and South Caucasus regions. Several panelists suggested considering the implications for Central Asia and the South Caucasus of a Russia in which power is significantly devolved to its borderlands, or that is even fragmented politically.

• So long as Afghanistan remains in chaos, which it probably will for a fairly long time, it will be a principal contributor to the most worrisome threats facing Central Asia: the conjunction of narcotrafficking and militant Islam, terrorism, and political instability.

Need for Clarification and Differentiation

• Western policy has been, to a large extent, uniform with respect to the states of the former Soviet Union: encourage political and economic reform, minimize their dependence on regional powers, and encourage intraregional cooperation--all with an eye to creating an independent, generally Western-oriented, belt of stability. A number of conference speakers argued that this policy may be too general and too optimistic because the political interests, economic conditions, and security concerns of these states are diverse and changing. Their destinies conceivably could differ substantially as well, as their interests pull them in different directions.

• Regarding the internal developments of the Central Asian and South Caucasus states, one participant observed that analysts have had to adjust expectations on the pace and manner in which these states will move toward democracy and a market economy. These two regions face a very unsteady movement at best and great disillusionment with both democracy and markets because of widespread economic hardships.

• A student of Nongovernmental Organizations (NGOs) noted that the Western tendency to focus on the work of capital-based, English-speaking NGOs leads to misperceptions of civil society in these regions, because these NGOs are in touch with only a small part of the population. The Western models for civil society overlook the importance of clan structures, which are small but extremely influential in these new states. Western-style NGOs also neglect large segments of the population, such as industrial workers, farmers, and pensioners, who need to be brought into the political system.

Social Cost of Transition

• A panel of young scholars with recent experience conducting research in the field gave many illustrations of the socially debilitating and politically destabilizing impact of economic hardship. For example, one researcher noted how traders use children as collateral to be left behind until they return with the promised goods or money. Others argued that pervasive poverty is eroding traditional social and communication networks.

• The long-term implications of a generation growing up in poverty, lacking basic education, and increasingly enmeshed in semicriminalized societies are disturbing and run directly counter to Western goals for the regions.

Uncertain Outlook

• Several participants and panelists noted the uncertain commitment to political pluralism and market reform of the probable next generation of leaders in these countries. Other panelists noted that political strongmen will continue to hold sway for some time.

• Participants from the regions warned that democracy and civil societies must develop within the existing cultural context, not as some kind of unnatural foreign imposition.

• Some participants questioned the long-term viability of Central Asia's current borders, noting that many borders could be redrawn over time.

• This conference report consists of the precis of each speaker's on-the-record presentation, which were provided by the speakers, and a summary of the ensuing not-for-attribution discussions. The report is intended to capture the salient points and original arguments of the proceedings. During the panel discussions no attempt was made to ascertain the general view of the panel or audience. Many of the points highlighted in these summaries of the panel discussions were noted because they were thought provoking or outside of conventional wisdom. They illustrate the richness of the discussion, but they do necessarily reflect accepted or prevailing views at the conference.

CONTENTS

George Kolt,
NIO for Russia and Eurasia, National Intelligence Council

American engagement with Central Asia and the South Caucasus as regions in their own right began only a few years ago. Not surprisingly, there is much we still have to learn. This conference attempts to gain a new and deeper understanding of changes in the political, economic, and strategic orientations of each of the states of Central Asia and the South Caucasus and to explore how these states fit into the larger regional context. The panels were designed to examine the character and extent of these states' internal transitions, and the effects of these transitions on international orientation; explore how and in what directions the states of Central Asia and the South Caucasus could be reorientating both within the region and beyond; and assess the new strategic dynamics that are unfolding throughout Eurasia.

In the past we became accustomed to thinking about Central Asia and the South Caucasus through the prism of Russia. Today, Russia's shadow looms large in both regions but most states have moved in new directions. This conference seeks to move beyond the traditional Russia-centric filter, but is not intended to be anti-Russian in focus. Russia will continue to have a role to play but it will be one among many actors in these regions. Essentially, we do want to explore each of these countries and regions in their own right as well as the connections between them but without equating the two regions.

Presentations are on-the-record and will be included in a conference report. Discussions are not for attribution, thus speakers will be identified only as discussants, panelists, commentators, and so forth. The views expressed by participants and panelists are strictly their own and not necessarily the views of the NIC or the United States Government.

CONTENTS

A US Strategic Perspective on Central Asia

Gen. Anthony Zinni, Commander in Chief,
United States Central Command

US Central Command (CENTCOM) is a newcomer to Central Asia. After the demise of the Soviet Union, several of the military commands sought to bring Central Asia into their area of responsibility. Long deliberations ensued over whether to include the region in the European Command or in the Atlantic Command, both of which lobbied to take over responsibility for the region. CENTCOM, which is largely focused on activities in the Middle East and the Persian Gulf, did not seek out new responsibilities, but the Department of Defense finally decided to grant CENTCOM responsibility for the five Central Asian states in October 1998.

My initial impressions were that the new states in Central Asia are "fragile" but that the region is important as a crossroads for great powers. There are 10 key challenges that must be addressed by the governments in the region.

Fundamentalism and the Role of Islam in Society
The governments must reconcile the role of Islam in society to counter the new fundamentalism emanating from Afghanistan and Pakistan and to mitigate the effects of the turmoil in the North Caucasus. This "new jihadism" that consists of disparate, radical groups coordinating their activities from Afghanistan and Pakistan poses the most urgent threat to stability in Central Asia.

Military Reform
The Central Asian states have inherited Soviet military capabilities--for example, heavy motorized vehicles--that were designed to fight the United States and the West. These systems are not compatible with the security problems that these states face today; the most immediate security concerns are border security, internal security, and narcotrafficking. To counter these threats effectively, the governments in the region need to restructure and re-equip their militaries with light, highly mobile units that can operate in mountainous terrain. This reengineering process will require support in the areas of education, training, and leadership development.

Power Plays in the Region
These fragile states are pulled in all directions by China, Russia, the West, Iran, Pakistan, Turkey, and other actors with an interest in the region. Each actor is driven by a different combination of interests--economic, political, strategic, cultural, religious, or social. Energy pipelines represent an example of the external dynamics that will fundamentally shape Central Asia and the South Caucasus. Which direction will the pipeline go--north, east, south, or west? All the surrounding states seek to secure a stake in Central Asia's energy riches.

Regional Identity
These states do not view themselves through the same prism that we do. We think of them as the "stans," which are part of a discrete region that is defined by various regional organizations, such as GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan, and Moldova) and CIS (Commonwealth of Independent States). It is clear that each country has its own view of the security threats in the region. If security cooperation is to be successful, it cannot be imposed by external actors but rather worked out together by the external actors and the individual states in the region.

Economic Development
The initial euphoria about the energy riches in the region has led to high expectations. Until now, those high expectations have only led to disappointment in the region.

Soviet Legacy
The new states in the region struggle with a love-hate relationship with their Soviet legacy. They seek to discard their Soviet identity, but would like to retain the social protection that the Soviet system provided. Artifacts, such as national borders that poorly correspond to ethnic groups, impede the development of new national identities.

Search for Identity
Each ethnic group is searching for its own identity after years of suppression. Given the constraints within which they must operate, ethnic groups are striving to reestablish themselves. The ethnicity map is a recipe for trouble for the governments in the region as this search for identity unfolds.

Speed of Democratization
The United States is committed to democratization in the region, but there are substantial obstacles.

Environment
The region suffers from the horrific environmental legacy of the Soviet Union. The Department of Defense (DoD) is focusing on water-related problems in the region. Water, not energy, probably will be the cause of a conflict in the region within five years.

Corruption, Crime, and Drugs
Drug trafficking is tied inextricably to Islamic extremism. Afghanistan, as a leading producer of opium, is a source of revenue for extremists in Afghanistan and Pakistan. Corruption-drug- and non-drug-related-continues to plague all the governments across the region.

The United States must pay attention to this region because of its centrality in Asia and its strategic importance. This region will continue to be an area of great power competition. The challenge for the United States is to understand the threats and interests in Central Asia and assimilate them in a way that will intersect with US objectives.

CONTENTS

This panel examined the internal conditions and challenges that the governments across the region face as they modernize their political and economic institutions. The panel also explored how the history of these countries is shaping their future direction and what might be expected of the new generation of leaders who will inevitably be taking control during the next decade.

S. Enders Wimbush (Chairman)
Hicks & Associates, Inc.

Modernizing State Institutions in Central Asia
and the South Caucasus
Gregory Gleason
University of New Mexico

In all of the states of Central Asia and the South Caucasus, the public sector has undergone significant redefinition since national independence. How capable are the new states of the region at promoting their national interests as they approach the close of the first decade of national independence? Have the states accommodated international standards of good governance and best practice? To what extent have the public institutions of these societies redesigned themselves so as to accommodate the emerging challenges of the 21st century? What necessary domestic institutional changes have been avoided or postponed in this first decade, and what do these facts imply? Finally, what are the dynamics at work and the boundary conditions at play in public sector redesign in this part of the world? How can outside actors influence these?

Central Asia and the South Caucasus are political concepts that refer to clusters of countries tied together by interdependencies resulting from political, economic, transport infrastructure, market linkages, and cultural factors. Central Asia includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, and the South Caucasus includes Armenia, Azerbaijan, and Georgia. A survey of the region reveals some strong common tendencies:

• Soviet-era political leadership remains in place in most countries.

• The public sector continues to dominate the private sector.

• Social inequality has grown substantially in all countries.

• Violence and lawlessness have grown substantially within the societies.

• Gray area transnational violence (terrorism and extremism) is growing.

• Regional interstate tensions are increasing.

• Environmental problems (water and air quality, industrial pollution) have not been addressed in any significant measure during the past decade.

• Narcobusiness is growing.

It should also be noted:

• There are no interstate wars in the two regions.

• There has been no revolutionary upheaval after the fall of communism.

• Macroeconomic policies in most countries are standard or acceptable.

• Many of the countries report nearly balanced budgets.

• To what extent has reform of the public sector and the transition of the state been accomplished and contributed to any of these outcomes?

There is a fundamental paradox in the role of the state in a globalizing society: A state that is powerful enough to control the instruments and mechanisms of public affairs is also powerful enough to abuse those instruments and mechanisms. In an effort to discourage abuse by the state, many critics of the modern state argue for a public sector that is reduced in size and scope. They also argue that increased economic efficiency is correlated with decentralization, local control, and local responsiveness. The debate regarding the size and scope of the "post-Communist state" centers around the fact that the state is both the "broker" and the principal actor in the process of post-Communist destratification.

In terms of comparative political theory, the role of the state has undergone substantial reconsideration in recent decades. Forty years ago, many Keynesian economists and public managers regarded the state as the "engine" of development. This view, in conjunction with the failure of markets to provide public goods and services, to effectively regulate the use of public utilities and natural monopolies, and to provide protection for common resources such as fisheries, forests, and rivers, provided a rationale for "strong states" that would be capable of stimulating growth or intervening in markets to protect the public interest.

In some cases increased state intervention in markets led to effective, and publicly oriented policies, but in many cases governments embarked on ill-conceived, grandiose, and fanciful, schemes that led to overextension of the public sector while squandering public resources. Failures of government often led to redoubled efforts through coercion to bring about the desired outcomes. The fusion of government and politics led to easy opportunities for corruption and conflicts of interest.

In a globalized world (that is, post-1990), the preferred model of the effective state is moving away from the role of the state as producer and provider of a wide range of goods and services to a more circumscribed role as information manager. This role emphasizes the provision of core public goods and the facilitation and regulation of the production of private services and goods, toll goods, and common pool resources.

In societies where corruption, bribery, and abuse of public office are commonplace, the reduction in the arena of control of the state may be justified. But at the same time, disestablishing the state can be expected first of all to lead to detrimental effects on the least powerful and least advantaged sectors of the society. Those closest to the state are apt to circumvent the effects of reduced size and influence, transferring the costs of downsizing or functional redesign to those less politically influential. Thus, in Central Asia, reduction in the size of the public sector is not by itself a formula for establishing a more equitable, more competent, less avaricious public sector.

There are a variety of approaches to measuring the public sector vis-a-vis the private sector. The most common are: 1) GDP comparisons; 2) work force comparison; 3) analysis of the government regulatory "footprint"; and 4) public spending ratios. Using these measures, the public sectors in the Central Asian and South Caucasus states illustrate transformations not unlike those of the modern states in other parts of the non-Communist world. "Post-Communist transition" may not be significantly different from the globalization processes we are witnessing in many parts of the world.

Legacies of the Past and New Directions in Leadership:
South Caucasus
Audrey L. Altstadt
University of Massachusetts-Amherst

History
History always matters, whether or not individuals are aware of it. Finding the relevant legacies requires looking deeper into the past than one gets with a mere "outline" or "background." Furthermore, "history" is constructed on the basis of particular questions and selected documents. Myths and memories may also play a part. Thus the "use" of history is neither simple nor straightforward. Sometimes knowing a people's beliefs about the past is more informative in understanding today's motives than in knowing all the details of documented and verifiable history.

In the Caucasus, history, even including remote history, which is difficult to verify, has an immediacy that surprises most Americans. Present-day territorial claims and visions of sovereignty can be shaped by beliefs about events as far back as the sixth or second centuries.

One powerful short-term legacy is that of Russian rule under both tsars and commissars. Russian rule influenced not only cultural features of the Caucasus such as the use of Russian language and the types of schools, but also determined today's borders (aside from the de facto change in the Karabakh region), much of the economic division of labor, and the basic political culture. On the last issue, an authoritarian mentality of control is an enduring feature, both inside and outside governing circles.

Each republic, of course, has its own legacies that are shaped by its native culture, including religion, language, and its history prior to the Russian conquest early in the 19th century. On that basis, each was treated differently under Russian and especially Soviet rule; each today has its own configuration of "friends" and "enemies."

Salient legacies on which democracy and the rule of law can be constructed are profoundly lacking. These include Western traditions seen in the Enlightenment (though rooted more deeply in Western history) of individualism and the belief in the ability of human beings to think and learn rationally, and respect for the rule of law and legality. Whether these can be "imported" is an important and fundamental question for all former Soviet regions.

The New Generation of Leaders
The new generation of leaders in each republic is, of course, shaped by both native culture and beliefs about history, and by the Russian-Soviet legacies. They are also, however, affected by the changing situation of the late Soviet era and the first decade of independence, which thrust these republics into greater regional and global interaction.

The oldest "new" generation includes those leaders who led anti-Soviet or pro-independence reform movements in the Gorbachev era. They were generally people in their 30s in the late 1980s who are now in their 40s. One way to view this younger generation is to determine whether they were "insiders" or "outsiders" with respect to the old system. "Insiders" were not merely party members but those who made themselves successful within the party and old state structure. These people tend to behave like authoritarian Soviet-era leaders. Some "outsiders," however, are prone also to use strong-arm tactics and intimidation perhaps because this was the only political culture they knew--people with power act like people with power. They have not yet entirely integrated their democratic ideas with their personal actions.

The political leaders now in their 30s are even further removed from the Soviet political culture. Consequently, their direction is harder to predict. Some political figures in their 30s exhibit an authoritarian streak, and societal instability seems to reinforce this. Yet the age group is quite mixed, and each individual must be examined separately.

Directions
The directions they may take the Caucasian states are rooted firmly in their own attitudinal and behavioral tendencies, but will most likely be responsive or "reactive." It would be hard for a new generation to initiate innovative policy; it will be forced simply to react to domestic and regional (as well as broader international) pressures.

It would be hard to imagine, to take one example, a scenario in which Armenia came to regard Russia as an enemy or in which Azerbaijan became hostile to Turkey. A warmer Armenian response to cautious initiatives by Turkey (which have already taken place), however, could open the door to improved Armenian-Turkish political and even commercial relations. Armenia would clearly benefit from this, as would other states of the region. It would, however, disrupt the current balances of political influence in the region to Russia's (and Iran's) detriment. Russia might respond aggressively (likely under any ruler, but perhaps more so under Putin) to keep the region from moving too far away from Russian influence. Russia remains a check on such significant realignments of any one state in the region or of all three.

Subtle internal moves could be more effective: market reform, tax reform, and privatization as one "package," and greater political pluralism, institution of the rule of law (and an independent judiciary), and safeguarding of civil rights as a second "package." These packages would slowly "restructure" the Caucasian states individually and move them, de facto, further from Russian influence. Most younger leaders seem inclined to move in this direction but could be derailed by unrest that seems to require authoritarian measures.

Dynamics of Succession
The dynamics of succession have been and are likely to remain stormy. Armenia has had several elections with varying degrees of falsification and coercion. The events of last October show that violence can lurk just beneath the surface. Several parties contend for dominance.

Azerbaijan and Georgia present especially thorny cases because in each, an authoritarian "grand old man" of Soviet and national politics will, within the decade and perhaps in the next year or two, be ending his rule. Each controls a single dominant political party as others strive to gain strength. The instabilities and unrest in each republic in the past show that the loss of the "strongman" can plunge a republic into chaos. A Russian role in such a transition cannot be ruled out. This political puzzle, more even than oil and gas production and pipelines, should be a focal point of analysis of this region.

Legacies of the Past and New Directions in Leadership
in Central Asia
Martha Brill Olcott
Carnegie Endowment for International Peace

In many ways the Central Asian states are frozen in time. In every state but Tajikistan, the old Soviet-era nomenklatura is still in control. This is the sense in which history counts the most--those who were on top at the time of the collapse of Soviet rule intend to stay on top.

This history of the past is being rewritten to make this more possible. In Uzbekistan, Timur the Lame has become the central historical figure, helping to justify Islam Karimov's strong rule. In Kazakhstan, the role of the Great Horde is being emphasized, as this is the group that long dominated the Communist Party. Turkmenistan is creating a synthetic blend of medieval Central Asian and modern Turkish history around the person of Niyazov. The Kyrgyz trumpet the democratic nature of nomadic society.

With the exception of Kyrgyzstan, none of these models provides any basis for transfer of authority from leader to leader or generation to generation. The Kyrgyz model facilitated it, which is one reason why the Kyrgyz seem to have abandoned it. President Akayev sees that his position is threatened by these democratic principles.

In general, the authoritarian and semiauthoritarian nature of political rule in the region has led these societies to be more static than in some of the other Newly Independent States. One of the serious consequences of heavyhanded politics is that a class of independent entrepreneurs has been slow to develop. This is especially true in Turkmenistan and Uzbekistan, where there has been great resistance to radical economic reform. The lack of an economic elite with an independent power base creates pent-up demand in each of these countries and makes it difficult to predict how the inevitable succession struggles will unfold. This makes it very difficult to predict who will come to power, when, and how.

None of the region's leaders are likely to give up power willingly. Yet each country will become vulnerable to interelite struggles as he physically weakens. Tajikistan has already experienced one such struggle, which resulted in a lengthy civil war. The elite structure in Uzbekistan is still complex enough, even after more than a decade of Karimov's rule, to permit serious behind-the-scenes power struggles. The process of coalition-building could lead to the empowerment of a radical alternative elite.

Kazakhstan also has a highly complex pattern of elite relations. There is less a risk of upheaval here, in part because the country is further along in its economic transformation. The size of the country and the tradition of relative isolation of regional (and sector-specific) elites makes it unlikely that there would ever be a coup against President Nazarbayev. Should he try to pass power to the younger generation, however, the "heir" would most likely face a considerable challenge in consolidating power. It is still too early to know how pro-Western or pro-Russian (or pro-Chinese) the next generation of Kazakh leaders will be. Much depends upon the success of economic reform and the speed with which Kazakhstan develops its natural resources.

The pattern of elite relations is less complex in Kyrgyzstan and seemingly so in Turkmenistan as well. In both cases, the ruling family seems to be successfully consolidating economic control, but is doing so in different ways. The different economic patterns in the two states make it difficult to generalize across the two. In a decade or so the Kyrgyz ruling family may decide that conditions in Kyrgyzstan are so bleak that it prefers to move its assets abroad, rather than risk a difficult succession struggle. The "prize" in Turkmenistan is definitely worth the struggle. The shape of the struggle, though, is more difficult to predict as traditional Turkmen society is relatively opaque to the outside observer.

Economic Change and Modernization: South Caucasus
Ben Slay
PlanEcon, Inc.

Despite some common legacies in terms of history, geography, and Soviet rule, the economies of the South Caucasus present as many contrasts as commonalties.

Commonalties
First, the region is at low levels of economic development. When measured at market exchange rates in 1998, Georgia had the highest level of per capita income at $900, followed by Azerbaijan at $540, and Armenia at $500.⁽¹⁾ When measured via purchasing power parity (ppp) exchange rates, 1998 per capita income was greatest in Armenia ($2,700), followed by Georgia and Azerbaijan ($1,900).

Second, all three countries went through a transition shock during the early 1990s, when steep declines in output and high inflation rates were recorded. The output shock reflected a number of factors, including: (1) disruptions in economic activity that accompanied the dissolution of the USSR; (2) inflationary consequences of price liberalization in the context of the ruble zone; (3) weaknesses of nascent economic policy institutions; and (4) military conflicts over Nagorno-Karabakh, Abkhazia, and South Ossetia. The introduction of national currencies in 1993-1994, and the conclusion of agreements with the International Monetary Fund (IMF) and World Bank allowed these countries to sharply reduce inflation rates. But despite the rapid growth recorded by Georgia in 1996-1997 and by Armenia and Azerbaijan in 1998-1999, living standards for much of the population in all three countries probably remain well below pre-1992 levels.

Third, Russia remains all three countries' most important economic partner. In 1998, Georgia's exports to other members of the Commonwealth of Independent States (CIS) was 54 percent, for Azerbaijan this ratio was 38 percent, and for Armenia 37 percent. Azerbaijan had the highest import share (38 percent), followed by Georgia (35 percent), and Armenia (25 percent). When compared with data from 1992, these shares reflect a sharp fall from 80 to 100 percent of both exports and imports.

Differences
Perhaps the largest difference among these three countries lies in the fact that Azerbaijan is endowed with significant hydrocarbon resources while Georgia and Armenia are not. Although much of its potential remains unexploited, Azerbaijan's oil sector accounts for more than 50 percent of industrial production and 10 percent of Gross Domestic Product (GDP). Oil-related investment, trade, and service activities account for additional large contributions to GDP. The approximately $1 billion in foreign investment that Azerbaijan is now attracting annually translates into 33 percent of 1998 GDP. On the other hand, the Azerbaijani economy is potentially quite vulnerable to swings in world energy prices.

By contrast, the nonhydrocarbon economies rely more extensively on agriculture and the service sector. In Armenia, agriculture produces about 40 percent of GDP. In Georgia, agriculture accounts for 26 percent of GDP, and industry and trade account for 12 percent each. Armenia and Georgia are also quintessential small open economies with large current account deficits that are financed by transfers and concessional lending from abroad.

Economic trends during 1998-1999 are a third major difference. Azerbaijan and Armenia were the only two CIS countries to report strong GDP growth in 1998 and 1999. Oil production and oil-related construction projects picked up in Azerbaijan, while a bumper crop in Armenia boosted the all-important agricultural sector. Georgia's GDP growth decelerated sharply from 11 percent in 1997 to 3 percent in 1998, and to about 2 percent last year.

Economic Change and Modernization: Central Asia
Boris Rumer
Harvard University

• As one examines the post-Soviet economies of Central Asia, most exhibit the following characteristics:

• Ossification of the ruling regimes.

• "Primitivization" of the economy.

• Overreliance upon natural resources as the main source of economic growth.

• A lack of rational improvements in the industrial structure.

• The incapacity of domestic investments in the industrial structure.

• The increasing limitations on the ability to attract foreign investment.

• The worsening of the balance of payments.

• The growth of foreign indebtedness.

• Incompleteness of reform in the agrarian sector.

• The use of agriculture as a "donor" to support other sectors of the economy.

• An excessive reliance upon import-substitution-