1.1.4 New Trade Theory and New Regionalism

While old trade theory focuses on commodity trade and prices, new trade theory considers a variety of other effects of trade and mechanisms other than more efficient sectoral allocation of factors of production. New trade theory considers trade-productivity links (i.e. “new growth theory”), imperfect competition, and rent-seeking behavior, especially in considering the issue of regionalism versus multilateralism. Characteristics of new regionalism suggest that their welfare impacts cannot be fully explained using old trade theory. Features of new regionalism that have been prominent in recent literature include:

• technology and knowledge transfers, and technology diffusion, especially

from developed countries to developing countries, that increase productivity,

• dynamic comparative advantage and “learning by doing” efficiency gains

through increased demand from expanded trade,

• elimination of wasteful rent seeking activities through trade liberalization,

• pro-competitive gains from increasing import competition in an environment

of imperfect competition, allowing exploitation of potential economies of scale in production,

• increased geographical dispersion of production through trade that supports

(1) exploitation of different factor proportions for parts of the production process (Ricardian efficiency gains) and/or (2) local economies of scale through finer specialization and division of labor in production (Smithian efficiency gains).

• increased foreign direct investment that carries with it advanced technologies

and hence increases in productivity,

• “challenge-response” increases in efficiency through increased competition

due to expanded involvement in world markets, and

• Schumpeterian innovation and “creative destruction” induced by increased

competition arising from expanded trade.

1.2 Regionalism models in Post-Soviet Area

1.2.1 Formation of Post-Soviet sovereign state institutions

In December 1991, Alma-Ata — the capital city of Kazakhstan — hosted a meeting of eleven leaders of the Soviet republics who signed an historical declaration. The socalled Alma-Ata Declaration formally ended the existence of the Union of Soviet Socialist Republics1. This event signified the beginning of independence for all members of the Soviet Union including five Central Asian republics (CARs). From this moment, newly independent Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan started the formation of their independent policies and sovereign state institutions and began to define their foreign policy orientation. Establishment of their foreign policy institutions, shaping foreign policy and searching for a place in the contemporary system

of international relations became a top-priority task for the republics.

Successful formation of post-Soviet sovereign political institutions such as the Ministry of Foreign Affairs (MFA) and coherent international politics appeared to be one of the most important tests for the Central Asian elite. However, the CARs faced uncertain future because of a number of reasons, including the unexpected quickness of the Soviet Union’s collapse and unreadiness of the national elite to live in an independent state. All Central Asian republics confronted numerous challenging internal and external problems that should have been resolved by their leaders immediately after the collapse.

Internal factors. For the CARs, one of the immediate issues was stabilization of the political environment, especially neutralization of extremist political groups, and resolving of inter-ethnic tensions in the region. Bloody ethnic clashes of pre-independence years (1989-1991) destabilized life in different parts of the region. Continuous escalation of inter-ethnic conflicts threatened to slip out of the republics’ government control. Furthermore, the situation was worsened by emergence of separatist tendencies that spread widely in these multinational and multicultural republics. Meanwhile, the CARs' state institutions, almost paralyzed by Gorbachev's inconsistent reforms and the power struggle between the Centre and peripheries in the late 1980s, vitally needed reinforcement. Maintenance of stability in the rapidly changing political environment was impossible without a strong government policy. The status or the ruling elite and the very existence of the entire political system were challenged the rising strength of numerous opposition groups that embraced a wide spectrum of views - from extreme nationalism to Islamic radicalism. The last but not least issue was a need for creation of the national economic system and transformation of the former

Soviet administrative-command management mechanism into sound and stable market driven institutions.

External factors. Gaining the independence radically changed positions of the CARs in the international arena. As independent entities they entered the difficult international environment of that time. The Gulf War affected not only the Arab world but also the Muslim community of the former Soviet Union and led to a rise of some anti-Western sentiments. The Civil war in Afghanistan not only unbalanced the regional security environment but also undermined prospects of the CARs' economic co-operation with South Asia by blocking almost all trade routes to the south. Additionally, it was expected that the Islamic Republic of Iran would compete with Turkey, India, and Pakistan for influence in the region because of the so-called 'power vacuum' and destabilization of the regional security system created by Russia's military and political departure from the region.¹⁸

The next crucial problem was a need for preservation of the countries' territorial integrity. The existence of mutual territorial claims over artificial boundaries of the Central Asian republics and territorial disputes between the People's Republic of China and Kazakhstan and Kyrgyzstan made this problem quite complicated. Russia’s foreign policy also proved to be extremely unsustainable, greatly affected by the personalities in the Kremlin’s’ circle of power and it experienced several radical changes within the 1990s. Moreover, the Russian radical nationalists claimed a secession of a large part of Kazakhstan's northern territories (between 30% to 40% of the republic’s territory), which were mainly populated by the Russians. Finally, creation of cohesive foreign economic relations was a matter of survival for the countries that previously had been deeply integrated into the SMEA and had produced goods competitive enough only in the rapidly deteriorated Soviet market. The CARs had heavily depended on an external supply (mainly from the Russian Federation) of almost all goods including petroleum, grains, machinery, medicaments, etc. Uncertainty of the internal and external factors of Central Asian development demanded the immediate reaction. What measures were needed to be implemented in Central Asia for stabilization of the internal and external challenges? What are the trends in the formation of the CARs' post-independence foreign policy? And last but not least, what are the future perspectives of the independent development for the Central Asian republics?