Kyrgyz Republic Sytematic Country Diagnostic : From Vulnerability to Prosperity

The purpose of this Systematic Country Diagnostic is to identify the main constraints and opportunities the Kyrgyz Republic faces in continuing to progress towards the World Bank Group’s twin goals. It analyzes trends and drivers of growth, poverty reduction, and income distribution, as well as the policies that underpin them, while assessing the elements constraining more rapid progress and sustainability. The main conclusions of this analysis are as follows: Growth has been driven by an ad hoc, opportunistic adaptation to constraints; These adaptations, which included (1) exporting migrant labor, with remittances fueling growth in domestic consumption and services; (2) exploiting the gold extracted from one major mine;1 and (3) leveraging import-re-export bazaar trade, helped sustain growth, while being far from first-best, deliberate, and policy-guided long-term solutions. This ‘growth model’ led to significant welfare gains, as it rode on the back of the commodity super-cycle. But its lack of coherence in addressing key constraints has implied that vulnerabilities remain widespread. In short, the country now needs a new development model to (i) tackle the sources of low overall productivity—a critical source of sustainable dynamism—and (ii) unleash private investment and job creation, given the limited options for public spending and redistribution. This will require a three-pronged approach to (1) address cross-cutting constraints to private sector development, (2) promote conducive policies in areas where the country has significant unexploited endowments (especially minerals and hydropower), and (3) foster greater sustainability, including by maximizing the efficiency of public policies. This will also require a fundamental departure from haphazard policy making, whereby macro-fiscal policies have failed to support greater poverty reduction and resilience, and weak governance has undermined the effectiveness of reforms.