KR Textile and Apparel Cluster Final May 4 2012

42 Pages·2012·3.23 MB·English

by  Umar Shavurov

Textile
 and
 Apparel
 Cluster

in
 Kyrgyzstan

Laura
 Birkman

Maria
 Kaloshkina

Maliha
 Khan

Umar
 Shavurov

Sarah
 Smallhouse

Harvard
 Kennedy
 School

Harvard
 Business
 School

May
 2012

  1
Table
 of
 Contents

Executive
 summary
 ..................................................................................................................................................
 3

1
  Competitiveness
 of
 Kyrgyzstan
 .................................................................................................................
 4

1.1
  Country
 Overview
 ...................................................................................................................................
 4

1.1.1
  History
 and
 Modern
 Political
 Economy
 of
 Kyrgyzstan
 ..................................................
 5

1.1.2
  Kyrgyzstan
 Economic
 Performance
 .......................................................................................
 7

1.1.3
  International
 and
 Regional
 Trade
 ........................................................................................
 11

1.2
  National
 Competitiveness
 Analysis
 ..............................................................................................
 12

1.2.1
  Endowments
 .................................................................................................................................
 12

1.2.2
  Macroeconomic
 Conditions
 ....................................................................................................
 13

1.2.3
  Microeconomic
 Conditions
 .....................................................................................................
 14

2
  Kyrgyz
 Textile
 and
 Apparel
 Cluster
 .....................................................................................................
 20

2.1
  Highlights
 and
 Economic
 Performance
 ......................................................................................
 20

2.1.1
  History
 of
 Cluster
 Development
 ...........................................................................................
 23

2.1.2
  Textile
 and
 Apparel
 Cluster
 Value
 Chain
 ..........................................................................
 25

2.1.3
  Regional
 Competitors
 of
 the
 Cluster
 ...................................................................................
 27

2.1.4
  Cluster
 Map
 ....................................................................................................................................
 28

2.2
  Textile
 and
 Apparel
 Cluster
 Business
 Environment
 Analysis
 ..........................................
 29

2.2.1
  Context
 for
 Firm
 Strategy
 and
 Rivalry
 ...............................................................................
 30

2.2.2
  Factor
 Conditions
 ........................................................................................................................
 32

2.2.3
  Demand
 Conditions
 ....................................................................................................................
 34

2.2.4
  Related
 and
 Supporting
 Industries
 .....................................................................................
 34

Recommendations
 .................................................................................................................................................
 36

  2
Executive
 summary

 This
 report
 is
 an
 analysis
 of
 the
 textile
 and
 clothing
 cluster
 in
 the
 Kyrgyz
 Republic.
 This
 has

been
 the
 fastest
 growing
 segment
 of
 the
 economy
 over
 the
 last
 decade
 and
 holds
 special
 promise

as
 a
 contributor
 to
 future
 economic
 development.

Kyrgyzstan
  is
  a
  parliamentary
  republic,
  the
  only
  one
  in
  the
  region.
  It
  has
  undergone

considerable
 political
 turmoil
 since
 its
 independence
 in
 1991,
 and
 has
 suffered
 multiple
 regime

changes
  and
  enjoyed
  little
  continuity
  of
  leadership.
  The
  current
  government
  has
  adopted

liberalization
  and
  privatization
  policies,
  and
  has
  prioritized
  infrastructure
  development
  and

attracting
  foreign
  investment.

  Corruption,
  low
  productivity
  and
  little
  available
  capital
  are

obstacles
 that
 must
 be
 overcome.
 There
 is
 a
 new
 hopefulness
 about
 what
 is
 possible
 even
 though

many
 challenges
 remain
 for
 this
 economy.
 Medium
 and
 long
 term
 strategies
 must
 be
 developed

and
 consistently
 implemented
 to
 achieve
 sustained
 competitive
 advantages.

Kyrgyzstan
 is
 a
 small
 and
 low-­‐income
 country
 bordered
 by
 much
 larger
 and
 wealthier

countries.
 It
 has
 turned
 this
 into
 an
 advantage
 by
 adeptly
 participating
 in
 regional
 trade.
 While

local
 demand
 for
 products
 remains
 limited,
 Russian
 and
 Kazakhstani
 demand
 is
 quite
 large
 and

consumers
 have
 shown
 a
 preference
 for
 products
 from
 Kyrgyzstan.
 The
 textile
 and
 apparel
 cluster

has
 grown
 rapidly
 by
 focusing
 on
 these
 markets.

The
 study
 concludes
 with
 some
 specific
 recommendations
 for
 the
 government,
 the
 private

sector,
 and
 not-­‐for-­‐profit
 organizations
 that
 will
 accelerate
 further
 development
 of
 this
 cluster.

  3
1 Competitiveness
 of
 Kyrgyzstan

1.1 Country
 Overview

  Kyrgyzstan
 covers
 198,500
 square
 kilometers
 of
 Central
 Asia,
 bordered
 by
 China,
 Tajikistan,

Uzbekistan,
 and
 Kazakhstan.
 The
 estimated
 GDP
 (2011)
 is
 $4.7
 billion
 USD,
 with
 real
 annual
 GDP

growth
 rate
 of
 roughly
 5.7%
 over
 the
 past
 five
 years.1
 The
 population
 is
 5.5
 million
 with
 a
 GDP
 per

capita
 (adjusted
 for
 purchasing
 power
 parity)
 of
 $
 2,4302
 placing
 it
 183rd
 in
 the
 world.3

 It
 is
 a

mountainous
 country
 with
 mineral
 and
 water
 resources,
 but
 highways
 over
 passes
 close
 under

heavy
 winter
 conditions,
 and
 miners
 contend
 with
 glacial
 flows.
 There
 is
 only
 one
 rail
 line
 and
 one

international
 airport,
 which
 is
 located
 in
 the
 nation’s
 capital
 of
 Bishkek.

Kyrgyzstan
 has
 a
 highly
 multi-­‐ethnic
 population,
 with
 over
 80
 different
 ethnicities.
 Slightly

over
 a
 third
 of
 its
 people
 live
 in
 urban
 areas.
 Bishkek,
 located
 in
 the
 north
 near
 Kazakhstan,
 and
 is

the
 country’s
 largest
 city.
 It
 is
 located
 on
 the
 ancient
 Silk
 Road,
 the
 most
 important
 historical
 over-­‐
land
 trade
 route
 in
 Asia.
 Osh
 is
 the
 second
 largest
 city,
 and
 is
 located
 near
 the
 southern
 border

with
 Uzbekistan.

Employment
 is
 principally
 in
 agriculture
 (48%),
 with
 industry
 employing
 12.5%
 and
 services

39.5%.
 Gold
 is
 the
 most
 important
 export
 product,
 and
 oil
 the
 largest
 import.

1
 EIU
 statistics,
 2001

22

 IIbbiidd

33

 CCIIAA

 WWoorrlldd

 FFaaccttbbooookk

  4
1.1.1 History
 and
 Modern
 Political
 Economy
 of
 Kyrgyzstan

The
 history
 of
 the
 country’s
 territory
 goes
 back
 many
 centuries
 and
 has
 known
 many
 rulers

and
 formed
 part
 of
 the
 Chinese
 and
 Russian
 Empires
 before
 it
 joined
 the
 Soviet
 Union.

In
 1924,
 the
 Kara-­‐Kirgiz
 Autonomous
 Region
 was
 formed
 (renamed
 Kirghiz
 Autonomous

Region
 in
 1925),
 creating
 the
 borders
 of
 what
 is
 present-­‐day
 Kyrgyzstan.
 Traditionally
 the
 people

led
 a
 nomadic
 lifestyle
 of
 herders,
 but
 Soviet
 land
 reforms
 in
 the
 1920s
 and
 1930s
 dramatically

changed
 the
 traditional
 way
 of
 life.
 Many
 formerly
 nomadic
 people
 settled
 as
 part
 of
 the
 land

reforms.
 In
 1936,
 the
 Kirghiz
 Soviet
 Socialist
 Republic
 (SSR)
 –
 also
 known
 as
 Kirghizia
 –
 became

formally
 a
 constituent
 republic
 within
 the
 USSR
 and
 part
 of
 the
 planned
 economy.

The
  region
  remained
  stable
  for
  decades
  until
  1990,
  when
  a
  state
  of
  emergency
  was

imposed
 after
 several
 hundred
 people
 were
 killed
 in
 inter-­‐ethnic
 clashes
 between
 Uzbeks
 and

Kyrgyz
 in
 the
 southern
 capitol
 of
 Osh.
 Askar
 Akaev,
 a
 reformist
 liberal
 member
 of
 the
 Kyrgyz

Communist
 Party,
 was
 elected
 to
 the
 newly-­‐created
 post
 of
 President.

In
 1991,
 the
 Kyrgyz
 Republic
 declared
 its
 independence
 after
 the
 collapse
 of
 the
 USSR
 and

joined
 the
 Commonwealth
 of
 Independent
 States
 (CIS).
 President
 Akaev
 won
 another
 term
 in

office
 that
 same
 year.

 In
 1992,
 Kyrgyzstan
 joined
 the
 UN
 and
 the
 OSCE
 and
 launched
 its
 first

economic
 reform
 program.
 In
 1993
 the
 som
 replaced
 the
 Russian
 ruble
 as
 the
 main
 unit
 of

currency.

In
 1995,
 Akaev
 won
 another
 term
 in
 office
 with
 nearly
 70%
 of
 the
 vote
 and
 anchored
 his

position.
 Soon
 thereafter,
 with
 the
 help
 of
 a
 referendum,
 he
 approved
 constitutional
 amendments

to
 concentrate
 more
 power
 in
 the
 hands
 of
 the
 presidency
 and
 reduce
 powers
 of
 the
 legislature.

In
 1998,
 a
 constitutional
 court
 approved
 Akaev’s
 appeal
 to
 run
 for
 a
 third
 term
 in
 2000,
 and
 in

  5
November
 he
 was
 re-­‐elected
 for
 another
 five
 years
 (though
 international
 observers
 deemed
 the

election
 results
 suspect).

Increasing
  dissent
  with
  the
  government
  marked
  the
  early
  2000’s
  and
  a
  number
  of

opposition
 leaders
 were
 arrested
 and
 given
 long
 prison
 sentences
 for
 alleged
 abuses
 of
 office.
 In

2002,
 opposition
 protestors
 marched
 on
 Bishkek
 demanding
 President
 Akaev’s
 resignation.
 In

early
 2003,
 a
 referendum
 approved
 another
 constitutional
 change
 intended
 to
 hand
 some
 of
 the

president’s
 powers
 back
 to
 parliament,
 but
 was
 seen
 by
 many
 as
 a
 farce.
 Protests
 amplified
 as

numerous
  independent
  and
  opposition
  candidates
  were
  prevented
  from
  participating
  in
  the

parliamentary
 elections.
 Masses
 rioted
 demanding
 Akaev’s
 resignation,
 and
 he
 fled
 to
 Moscow.

Parliament
 appointed
 the
 opposition
 leader,
 Kurmanbek
 Bakiev,
 the
 acting
 Prime
 Minister.

Bakiev
 became
 President
 in
 a
 landslide
 victory
 in
 2005,
 but
 political
 upheaval
 continued.

There
 were
 five
 prime
 ministers
 in
 four
 years.
 Protests
 demanding
 Bakiev’s
 resignation
 took
 place

and
 when
 constitutional
 changes
 were
 made
 in
 the
 latter
 half
 of
 2007;
 many
 opposition
 members

considered
 it
 a
 step
 closer
 to
 authoritarian
 rule.

Turbulence
 between
 2005-­‐2009
 finally
 came
 to
 a
 head
 in
 a
 full-­‐blown
 revolution
 in
 2010.

Bakiev
 was
 forced
 to
 resign
 and
 fled
 to
 Belarus.

 In
 ensuing
 days
 of
 political
 power
 vacuum

hundreds
 of
 people
 were
 killed
 and
 thousands
 displaced
 in
 clashes
 between
 the
 Kyrgyz
 and
 Uzbek

ethnic
 communities
 of
 Osh
 and
 Jalalabad.
 Roza
 Otunbaeva
 served
 as
 interim
 President
 until
 2011,

when
 Almazbek
 Atambaev
 was
 elected.

The
 President
 was
 the
 undisputed
 leader
 in
 Kyrgyzstan
 until
 2010
 when
 a
 constitutional

referendum
  moved
  the
  country
  to
  a
  parliamentary
  system,
  placing
  greater
  power
  in
  the

parliament
 and
 the
 cabinet
 and
 less
 in
 the
 presidency.
 Conditions
 in
 Kyrgyzstan
 have
 steadily

  6
improved
  under
  the
  new
  system.
  The
  new
  Prime
  Minister-­‐
  Omurbek
  Babanov
  has
  shown

commitment
 to
 building
 the
 economy
 through
 market
 forces
 and
 the
 economy
 is
 recovering
 from

what
 was
 a
 destructive
 and
 violent
 period.
 His
 administration
 is
 showing
 fiscal
 restraint
 and
 has

kept
  inflation
  in
  check.
  It
  has
  begun
  implementing
  policies
  aimed
  at
  further
  liberalizing
  the

economy
 and
 strengthening
 trade
 relationships.

 Most
 industry
 has
 been
 privatized,
 and
 there
 is
 a

concerted
 effort
 to
 stimulate
 foreign
 direct
 investment.
 Infrastructure
 investment,
 diversification

of
 the
 economy,
 and
 improved
 governance
 are
 the
 highest
 economic
 development
 priorities.

The
 turmoil
 of
 the
 last
 ten
 years,
 while
 harmful
 to
 growth,
 remarkably
 did
 not
 deter

progress
  in
  all
  areas.
  Literacy
  remained
  consistently
  high
  and
  savings
  and
  investment
  both

increased.
 Prior
 investments
 in
 physical
 infrastructure
 have
 improved
 key
 logistics.
 But
 power

outages,
 limited
 capital,
 and
 exogenous
 factors
 (notably
 Russian
 immigration
 policy,
 Russian
 and

Kazakhstani
 FDI,
 and
 the
 prices
 of
 gold
 and
 oil)
 continue
 to
 contribute
 to
 ongoing
 economic
 and

political
 vulnerability.
 Perception
 of
 corruption
 continues
 to
 be
 a
 serious
 concern.

1.1.2 Kyrgyzstan
 Economic
 Performance

Kyrgyzstan
  had
  erratic
  real
  GDP
  growth
  over
  the
  last
  decade,
  with
  a
  brief
  period
  of

negative
 growth
 in
 2010,
 due
 to
 political
 instability
 and
 a
 down-­‐cycle
 of
 the
 Kumtor
 gold
 mine4,

however
 in
 2011
 real
 GDP
 growth
 was
 9%.5
 Inflation
 peaked
 sharply
 in
 2008
 and
 2011
 following

years
 of
 major
 revolts,
 exacerbated
 by
 high
 international
 prices
 for
 food
 and
 fuel
 (Figure
 1).

4
 The Kumtor gold mine generates 30% of country’s foreign currency reserves and 9% of Kyrgyzstan’s GDP.
5
 Economist
 Intelligence
 Unit

  7
Figure
 1:
 Real
 GDP
 Growth
 and
 Inflation
 Rate
 in
 Kyrgyzstan

Real
 GDP
 growth,
 %

10
5
0
20012002200320042005200620072008200920102011
-­‐5
CPI,
 %
30
20
10
0
20012002200320042005200620072008200920102011

Source:
 Economist
 Intelligence
 Unit

Difficulties
 raising
 revenue
 and
 high
 levels
 of
 social
 spending
 have
 produced,
 and
 are

expected
 to
 continue
 to
 produce,
 budget
 deficits.
 FDI
 inflow
 has
 been
 volatile
 and
 stayed
 below

10%
 mainly
 due
 to
 political
 instability
 in
 the
 country
 and
 failure
 to
 enforce
 investors’
 rights.
 The

government
 has
 embarked
 upon
 an
 anti-­‐corruption
 drive
 to
 make
 the
 country
 more
 attractive
 to

foreign
 investors.

Remittances
 constitute
 a
 high
 and
 increasing
 percentage
 of
 GDP
 –
 27%
 in
 2010
 (Figure
 2).

The
 sources
 of
 remittances
 are
 transfers
 from
 Kyrgyzstan
 citizens
 working
 abroad
 as
 well
 as

unregistered
 trade.
 Remittances
 increases
 have
 coincided
 with
 an
 increase
 in
 the
 trade
 deficit

likely
 due
 to
 growth
 in
 unregistered
 exports.
 What
 is
 both
 captivating
 and
 potentially
 dangerous

about
 remittances
 is
 how
 they
 “simultaneously
 represent
 the
 ability
 of
 vulnerable
 populations
 to

help
 themselves
 and
 reflect
 the
 danger
 of
 institutional
 capture
 of
 a
 phenomenon
 that
 should
 be

  8
uniquely
 the
 realm
 of
 vulnerable
 populations”.6
 In
 other
 words,
 remittances
 cannot
 be
 part
 of
 a

country’s
 sustainable
 growth
 strategy.

Figure
 2:
 Remittances
 to
 Kyrgyzstan
 as
 percent
 of
 GDP

Remittances,
 %
 of
 GDP
30
20
10
0
20012002200320042005200620072008200920102011

Foreign
 trade
 balance,
 %
 of
 GDP
20
0
20012002200320042005200620072008200920102011
-­‐20
-­‐40

Sources:
 World
 Bank,
 Economist
 Intelligence
 Unit

Labor
 productivity
 (GDP
 per
 employee)
 remains
 a
 key
 challenge
 in
 Kyrgyzstan,
 with
 the

country
  lagging
  behind
  its
  regional
  neighbors
  as
  well
  as
  other
  prominent
  textile-­‐producing

countries
 such
 as
 India,
 China
 and
 Turkey
 (Figure
 3).
 According
 to
 the
 Global
 Competitiveness

Report,
  Kyrgyzstan
  also
  lags
  behind
  the
  same
  countries
  in
  its
  competitiveness
  scores,
  which

encompass
 basic
 requirements,
 efficiency
 enhancers,
 and
 level
 of
 sophistication
 of
 the
 economy.

6
 Rosser,
 Ezra,
 Remittances
 (October
 24,
 2007).
 American
 University,
 WCL
 Research.
 Available
 at
 SSRN:

http://ssrn.com/abstract=1024177

  9
Figure
  3:
  Productivity
  and
  competitiveness
  scores
  of
  Kyrgyzstan
  in
  comparison
  to
  other

economies

Labor
 productivity*,
 current
 USD
30,000
  29,016

GDP
 per
 employee
GDP
 per
 capita
20,000
  17,551

GDP
 per
 capita
 @
 PPP 14,491

10,000
  6,632

1,845
  2,064
  2,122
  2,870
  3,156
  3,954

-­‐
Tajikistan Kyrgyzstan Vietnam Pakistan India Moldova China Kazakhstan Russia Turkey
%
 of
 U.S.

productivity 1.9% 2.1% 2.2% 3.0% 3.2% 4.1% 6.8% 14.9% 18.1% 29.9%
Competitiveness
 scores
6 5.3
3.8 3.5 4.2 3.6 4.3 3.9 4.2 4.2 4.3
4
2
0
Tajikistan Kyrgyzstan Vietnam Pakistan India Moldova China Kazakhstan Russia Turkey

*Labor
  productivity
  =
  current
  GDP
  /
  (labor
  force
  x
  (1
  –
  unemployment
  rate))

Source:
 Global
 Competitiveness
 Report
 2011-­‐12,
 World
 Bank

Even
 more
 worrisome
 is
 the
 stagnation
 of
 labor
 productivity
 over
 the
 past
 decade
 (Figure

4).
 The
 productivity
 drop
 in
 the
 beginning
 of
 the
 90’s
 can
 be
 partially
 explained
 by
 the
 growth
 of

the
 informal
 economy
 after
 the
 Soviet
 Union
 collapse.
 50%-­‐60%
 of
 the
 economy
 in
 Kyrgyzstan
 is

informal,
 and
 thus
 output
 and
 productivity
 are
 underestimated.
 Additionally
 entrepreneurs
 have

been
 attracted
 to
 less
 productive
 labor-­‐intensive
 industries,
 such
 as
 trade
 and
 apparel,
 as
 these

sectors
 have
 had
 low
 barriers
 to
 entry.
 And
 finally,
 the
 general
 use
 of
 modern
 technology
 is
 low

and
 equipment
 is
 often
 obsolete.

The
 widening
 gap
 between
 labor
 productivity
 and
 salary
 growth
 can
 likely
 be
 explained
 by

social
 policy.
 In
 2002
 the
 share
 of
 the
 population
 living
 for
 less
 than
 $2
 a
 day
 (PPP)
 was
 67%,
 which

  10