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Caucasus: Analyst Sees Prospects For Economic Recovery

London, 8 April 1998 (RFE/RL) -- A leading British analyst says Azerbaijan, Armenia and Georgia have begun to recover from the worst economic recessions suffered by any of the former Soviet republics, although living standards may continue to fall.

Michael Kaser, of the Center for Euro-Asian Studies at Reading University, spoke yesterday at a seminar that focused on current trends in the transitional economies.

Kaser says the three Caucasus states experienced a disastrous decline -- he called them economies "in extremis" -- after regaining their independence in 1991. He said the only post-communist country to have experienced worse problems is Bosnia-Herzegovina.

In the mid-1990s, the gross domestic product -- or total output of the three countries -- fell to between one-quarter and less than one-half of what it had been in 1989 during the Soviet era.

Economic problems were exacerbated by regional conflicts. As in Bosnia, Moldova and Tajikistan, all three countries saw an explosion of ethnic hostilities that followed the disappearance of the communist party monopoly and of the repressive machinery of state control.

Conflicts in Nagorno-Karabakh, Abkhazia and South Ossetia; a mass exodus of refugees; and the collapse of law and order added to the regional crisis. So, too, did the earthquake in Armenia and the assassination bids against Georgian President Eduard Shevardnadze.

Hyperinflation in Georgia reached 22,000 percent in 1994; 5,000 percent in Armenia; and 1,600 percent in Azerbaijan. However, today, Kaser says there are many encouraging signs that signal a "remarkable turnaround" in the three Caucasus economies.

Says Kaser: "From countries which had the highest hyperinflations of the CIS, they now have got into a monetary-stabilized period with low inflation. This has been a remarkable turnaround and it has been accompanied by an upswing in industrial production. These countries had the worst recessions after the collapse of communism of any CIS state... So the fact is that they have just recently turned the corner -- it's often spoken of as the bottom of the U-curve. They are now going up again."

Kaser says the growth in output of all three countries reflects greater incentives, privatization, deregulation, a growth in services, and expanding foreign and domestic trade. The central planning of the Soviet era has been replaced by highly decentralized markets.

Kaser says the star performer is Georgia whose 11-12 percent growth rate last year was the highest of any transition economy, and probably in the world (except perhaps Bosnia). Recovery is also well under way in Azerbaijan which recorded 5.8 percent growth last year, a revival expected to be spurred by Caspian oil exports. A more modest growth rate was seen in Armenia: 2.7 percent.

The most remarkable turnaround has been the reduction in Georgian inflation to nine percent last year; to seven percent in Azerbaijan and 15 percent in Armenia. Kaser says these cuts "rank among the best achievements of the transition economies."

Of course, daunting problems remain. Cease-fires (within and between the three states) in the worst trouble spots are holding, but hostilities could yet resume and have caused great physical destruction. About 1.5 million people have been displaced as a result of ethnic conflicts. Hostilities in the region (particularly in Chechnya) have put heavy weapons into the hands of criminals as well as opposition groups. Above all, there is the problem of acute poverty. Some 60 percent of Azeris, 28 percent of Armenians, and 25 percent of Georgians are said to be living below the poverty line. For many, the outlook remains bleak.

Says Kaser: "There is a real danger that living standards may continue to decline in all three countries. There has been a much wider dispersion of income since the collapse of communism and that has meant many more people living in poverty."

Kaser says financial profits made from the growth of industrial output across the region will likely benefit relatively small elites, and will not be spread equally. And poverty is exacerbated by cutbacks in government spending on social support.

Still, Kaser says if he had delivered his paper two or three years ago, he might have entitled it, "The catastrophe of the Caucasian economies." But with monetary stability, lower inflation, and a growth in output, the apocalyptic scenario is no longer appropriate.