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Tajikistan - Competitiveness of Nations Diamond Framework

Tajikistan is a lower-middle income, very small-sized economy in a mountainous landlocked region


in Central Asia with a population of 8 million people. The Russian Empire expanded its cottonproducing area when the American Civil War started driving up significantly the price of cotton.
This spurred cotton cultivation in Tajikistan. Similarly, aluminum production was introduced in
Tajikistan during the Soviet area, with the construction of an aluminum smelter at the Tajik-Uzbek
border in Turzunsoda in 1972.

In 2012 Tajikistan's GDP was USD 8 billion and grew at 7.50%. GDP per capita, in purchasing
power-adjusted dollar terms, is USD 2,205. Inflation in Tajikistan, as measured by the change in
consumer price index, was 5.83% in 2012, versus 12.43% in 2011.

Tajikistan's economy is predominantly services-based. Agriculture accounts for 26.48% of GDP


and employs 55.50% of the population. Manufacturing and industry accounts for 25.91% of GDP
and employs 17.90% of the population. Services accounts for 44.60% of the GDP and employs
35.70% of the population. Tajikistan's government revenues are 24.89% of GDP while its
government spending is 27.03% of GDP. Tajikistan's currency is the Tajikistani Somoni (TJS). The
latest exchange rate, as of 03-Jan-2014, is 4.77 TJS per 1 USD.

With foreign revenue precariously dependent upon exports of cotton and aluminium, the economy
is highly vulnerable to external shocks. The gross domestic product (GDP) of Tajikistan expanded
at an average rate of 9.6% over the period of 2000-2007 according to the World Bank data. The
Tajikistani economy has been gravely weakened by six years of civil conflict and loss of markets
for its products and thus depends on international humanitarian assistance for much of its basic
subsistence needs. The future of Tajikistan's economy and the potential for attracting foreign
investment depend upon stability and continued progress in the peace process.

As of August 2009, an estimated 60% of Tajikistani citizens live below the poverty line. The 2008
global financial crisis has hit Tajikistan hard, both domestically and internationally because many of
its citizens depend on remittances from expatriate Tajikistanis. Remittances from expatriate
Tajikistanis is estimated to account for 30-50% of Tajikistan's GDP.

The determinants of Tajikistan's Diamond

Factor Conditions:

Porter's National Diamond model groups factor conditions into five categories: human resources,
physical resources, knowledge resources, capital resources and infrastructure.

Human Resources
Despite its poverty, Tajikistan has a high rate of literacy due to the old Soviet system of free
education, with an estimated 99.5% of the population having the ability to read and write. In 2003
Tajikistans active labor force was estimated at 3.4 million, of whom 64% were employed in
agriculture, 24% in services, and 10% in industry and construction.

Because of the continued dominance of state farms, the majority of workers are government
employees, although only a small number rely completely on wages. Driven by high unemployment,
in 2006 an estimated 700,000 workers found seasonal or permanent employment in Russia and
other countries. Their remittances, estimated at US$525 million in 2009, are an important economic
resource in Tajikistan. The average wage was US$27 per month. The national unemployment rate
was estimated unofficially as high as 40% in 2006, but in rural areas unemployment has exceeded
60%. The 2002-2005 public spending on education was 3.5% of the GDP. According to a UNICEFsupported survey, about 25 percent of girls in Tajikistan fail to complete compulsory primary
education because of poverty and gender bias, although literacy is generally high in Tajikistan.

Delays in legislating minimum state social standards, the slow pace of reform in social sectors and
the low rate of return on funds that are spent mean that people are being denied access to education
and medical and social services and that the quality of these services is poor. Coupled with a decline
in personal income, this is contributing to a drop in the level of human development in the country,
inadequate receptivity of the public to the latest progressive management techniques and
entrepreneurial experience, and relatively low income among labour migrants. This complicates
progress in the area of human rights, legislation and social justice.

The high rate of population growth (2.2% per year), in spite of continued family planning efforts, is
aggravating the problem of a labour surplus in Tajikistan. The acute nature of external labour
migration problems caused by high unemployment within the country means that the creation of
new jobs and the upgrading of existing jobs, the preparation of migrants for work abroad and
providing protection for the rights and interests of labour migrants in other countries have top
priority.

Capital resources
The primary sources of income in Tajikistan are aluminium production, cotton growing and
remittances from migrant workers. Gross National Savings in Tajikistan has been static at around

10 - 12% of GDP in the last 10 years. Tajikistan has suffered trade deficits throughout the postSoviet era. In 2003 the deficit was US$97 million, based on exports of US$705 million and imports
of US$802 million. In 2004 exports were worth US$736 million and imports, US$958 billion,
creating a trade deficit of US$222 million. The deficit increased again in 2005, to US$339 million,
mainly because cotton exports decreased and domestic demand for goods increased. In 2005 the
current account deficit was US$86 million, having shown a general downward trend since the late
1990s. The estimated current account deficit for both 2006 and 2007 is 4.5% of GDP, or about
US$90 million in 2006. In 2005 the overall balance of payments was US$14 million. The estimated
overall balance of payments for 2006 is US$8 million.

At the end of 2006, Tajikistans external debt was estimated at US$830 million, most of which was
long-term international debt. This amount grew steadily through the 1990s and early 2000s because
of state borrowing policy. In 2004 Tajikistan eliminated about 20% of its external debt by
exchanging debt to Russia for Russian ownership of the Nurek space tracking station, and by 2006
rescheduling negotiations had reduced the debt by about two-thirds as a percentage of gross
domestic product.

In the early 2000s, foreign direct investment has remained low because of political and economic
instability, corruption, the poor domestic financial system, and Tajikistans geographic isolation. In
2003 foreign direct investment totaled US$41 million; it increased to US$272 million in 2004
because of the debt-reduction transaction with Russia. In the first half of 2005, the figure was
US$16 million.

The year 2004 was the first year of budget deficit after three consecutive years of budget surpluses,
which in turn had followed four years of deficits between 1997 and 2000. In 2005 revenues totaled
US$442 million (aided by improvements in tax collection), and expenditures were US$542 million,
a deficit of US$100 million. The approved 2007 state budget calls for revenues of US$926 million
and expenditures of US$954 million, leaving a deficit of US$28 million.

Physical resources
Tajikistan is a mountainous landlocked country and is the smallest nation in Central Asia by area. In
the early 2000s, the major crops were cotton (which occupied one-third of arable land in 2004 but
decreased after that date), cereals (mainly wheat), potatoes, vegetables (mainly onions and
tomatoes), fruits, and rice. Cotton makes an important contribution to both the agricultural sector
and the national economy. Cotton accounts for 60 percent of agricultural output, supports 75
percent of the rural population, and uses 45 percent of irrigated arable land. More than 80% of the
8,800 square kilometers of land in use for agriculture depends on irrigation.

About 5% of Tajikistan is wooded, mainly at elevations between 1,000 and 3,000 meters. No forest

region is classified as commercially usable; most are under state protection. Wood production is
negligible, but local inhabitants harvest non-wood forest products. Streams and lakes produce a
limited amount of fish, and some fish is produced by aquaculture. In 2003 some 158 tons of fish
were caught and 167 tons raised on fish farms.

Tajikistan has rich deposits of gold, silver, and antimony. The largest silver deposits are in Sughd
Province, where Tajikistans largest gold mining operation also is located. Russias Norilsk nickel
company has explored a large new silver deposit at Bolshoy Kanimansur. Tajikistan also produces
strontium, salt, lead, zinc, fluorspar, and mercury. Uranium, an important mineral in the Soviet era,
remains in some quantity but no longer is extracted. Fossil fuel deposits are limited to coal, of
which about 30,000 tons are mined annually. Tajikistans extensive aluminium processing industry
depends entirely on imported ore.

The rivers of Tajikistan, such as the Vakhsh and the Panj, have great hydropower potential, and the
government has focused on attracting investment for projects for internal use and electricity exports.
Tajikistan is home to the hydroelectric power station Nurek, the highest dam in the world.
Tajikistan also has sizable coal deposits and smaller reserves of natural gas and petroleum.

Infrastructure
Tajikistan's infrastructure is relatively well developed. For example, a network of 13,000 kilometers
(8,100 miles) of roads, mostly pavedthough not in the best of conditionscovers large parts of
the country. Despite the extensive road system, however, there is only 1 road linking Dushanbe with
Khudzhand, the second biggest city in the country, which is located in the northern Leninabad
region. Because climatic conditions often make this land route unusable, plans are underway to
build the 13-kilometer (8.1-mile) Anzob Tunnel. The total cost for the project will likely surpass
US$300 million.

The railway system is only 480 kilometers (298 miles) long and connects a few main towns to the
Uzbekistan railway network. A major project nearing completion by end of 2001 is the construction
of a railway from Qurghonteppa to Kulob, the 2 largest towns in the south. The country has 59
airports, 14 having paved concourses, though not all are operational due to lack of maintenance.

The largest airports are in Dushanbe, Khudzhand, and Kulob. International destinations are limited
and travelling on Tajikistan Airlines's dilapidated fleet is considered dangerous. Travel to Tajikistan
from other parts of the world is time consuming, expensive, and cumbersome.

Access to information and communication tools are limited, with only an estimated 38 people out of

every 1,000 having private access to a telephone. Moreover, the existing telecommunications
system is prone to breakdowns and is in dire need of upgrading. Tajikistan was the last country
among the former East European countries and the Commonwealth of Independent States (CIS) that
was connected to the Internet. At least 2 Internet service providers and several cellular telephone
companies of limited range operate in the country.

The 4 most important types of household fuel in Tajikistan are firewood, electricity, cow dung, and
natural gas. Households and industry rely heavily on imported petroleum, natural gas, andto a
lesser extent electricity, primarily from Uzbekistan. Tajikistan has an estimated 5.6 billion cubic
meters of recoverable natural gas reserves, but due to financial barriers, it has been unable to
increase its production. The government is attempting to encourage foreign companies to invest in
joint ventures in the extraction of natural gas. The country's own oil production is about 3,000
barrels per day, while the consumption need of the country is more than 29,000 barrels per day.
Tajikistan could be one of the world's leading per capita producers of energy if it were to expand its
system of dams and hydroelectric plants.

In Tajikistan the Ministry of Finance is budgeting a healthy US$1.6 billion for transportation
projects in the period from 2013-2014. These include construction and reconstruction of roads,
highway and railway bridges, and tunnels. Further details will be available in due course as to the
roads and highways being built.

Knowledge resources
Tajik State University has faculties of mechanics and mathematics, physics, chemistry, geology,
and biology. In 198797, science and engineering students accounted for 17% of college and
university enrollments. In the same period, Tajikistan had 666 scientists per million population
engaged in research and development.

In Tajikistan, the higher education sector employs more than half of the country's researchers
(according to 2007 figures), followed by the Academy of Sciences, the Ministry of Public Health
and the Academy of Agricultural Sciences.

The level of investment in R&D is low given that on 16 organizations out of 67 concentrate most of
the budget for scientific equipment and machinery. Material and technical support for science is
sorely inadequate and most scientificequipemt is obsolete. Tajikistan devotes just 0.06% of GDP to
R&D, the weakest effort in all of Central Asia (2007).

Much of the R&D conducted by Tajik scientists finds practical applications in the major branches

of the national economy, such as agriculture, construction, mettalurgy, the chemical industry, water
power engineering, computer facilities, geology and public health services. As a result, Tajik
scientists have succeeded in recent years in developing new materials, industrial objects and
medicines, in furthering risk prevention for earthquake hazards and in improving dam construction
to increase agricultural productivity.

Demand conditions:
Tajikistan's internal market is quite small in value terms, being limited by its population size,
around 8 million, and low GDP per capita, estimated at $2,066 in terms of purchasing power parity
in 2004 (IMF, 2012). The domestic market does not therefore provide adequate conditions for
producers in many industries to realise economies of scale.

Firm strategy, structure and rivalry:


Tajikistan inherited from the former Soviet Union features of socialist corporate governance and an
autocratic management system designed for performance within a planned economy which are
completely inappropriate and inefficient in the new market environment. During the transition
period since 1991, Tajikistan has made significant progress in transferring state owned large and
small enterprises into private ownership as well as in improving corporate governance and
enterprise restructuring. By 2002, most of the large state owned enterprises in Tajikistan had been
privatised, including the telecommunication, transport and electrical distribution networks. It is
absolutely crucial to adopt efficient corporate governance and management systems in newly
created or privatised firms to make them competitive. An environment that encourages companies
to set corporate goals targeted to improvement of competitiveness should be created. The
management mechanisms that are needed to achieve these goals should also be put in place.

Related and supporting industries:


The low level of industrial clustering and virtual non-existence of related and supporting industries
is perhaps the weakest corner of Tajikistans diamond. During the Soviet era, the centrally
planned economy did not provide the necessary conditions for the creation of clusters through
vertical and horizontal relationships amongst suppliers, buyers, common customers, distribution
channels or technologies. Normally, all these relationships between firms within an industry or
among industries were co-ordinated and managed by ministries responsible for a sector and so there
was a lack of horizontal cooperation between companies or industries. Somehow, during
preparation of plans or realisation of industrial projects, vertical cooperation and sharing of
technological advancements with related and supporting industries would be implemented so long
as directives to that effect were sent from the central government. However, efficient relationships
among microeconomic actors and, especially, effective geographical concentration of industries
were lacking.

After gaining independence, all former relationships in related and supporting industries, as well as
Tajikistans trade ties with the former Soviet republics, collapsed. This forced most Tajikistann
enterprises with industrial potential to be without traditional suppliers of raw materials or other
industrial inputs, transportation companies, or buyers, which were situated in different parts of the
former Soviet Union. This meant that it was impossible for Tajikistan to inherit clustering from the
previous socialist system and to build on the achievements of a planned economy. Instead, entirely
new relationships have had to be created.

The governments role in enhancing competitiveness:


Porter argues that government has the greatest direct influence on national advantage in the factor
and investment-driven stages. Tajikistan, like most transition and developing countries, is still in the
factor-driven stage of development.

All the successful export industries, such as diamonds and jewellery, food processing, tobacco,
drinks, and mining, are based on such comparative factor advantages as cheap semi-skilled labour,
natural resources, certain agricultural crop inputs and so forth. Therefore, the governments role in
this stage should be to upgrade basic factors and help create advanced factors, particularly through
upgrading the countrys infrastructure and educational system and beginning the development of a
technological base including the acquisition of contemporary technologies and/or licences.

The government should also play a role in creating and developing industrial and export clusters, as
well as in generating and maintaining domestic rivalry and efficient corporate governance which
stimulates dynamism and innovation.
To this end, the broad policy measures that are recommended are:

creation of a geo-political environment that is favourable to sustainable economic growth;

maintenance of a stable macroeconomic environment;

continuation of the transition reforms aimed at improving the business environment;

creation and development of export-based industrial clusters and adoption of a policy for
efficient clustering;

creation and development of conditions for innovative-driven clusters;

provision of conditions for the growth of foreign direct investments and foractive operations
of multinational companies.

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