Isolationism in Uzbek Economic Policy as
an Obstacle for Water-Energy Consortium
By Jean-Paul Azam and Galym Makhmejanov
Toulouse School of Economics, the University of Toulouse 1 Capitole
May, 2010
Abstract
This paper represents an analytic narrative of the isolationist policy of Uzbekistan. It explores the fact that at the end
of 1990s, the Uzbek government in the face of growing Islamist threat conspicuously switched its policy from
regional integration (i.e., participation in water-energy cooperation, open trade with neighbors, transparent borders)
to politico-economic isolationism. Water shortage, in the absence of efficient water-energy exchange in the region,
and secured Uzbek borders minimizing state losses from smuggling provoke considerable outside migration from
Uzbekistan to neighboring countries. This paper argues that blocking the fundamental project for integration in
Central Asia, the Water-Energy Consortium (WEC) between Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and
Uzbekistan on exploiting the Aral Sea basin (containing the Syr Darya River), can be explained by the Uzbek
regime’s political instability. Our simple dynamic game of perfect information predicts that the absence of
cooperative solution in water-energy exchange between upstream and downstream players takes place basically
because of low probability of survival of the latter, which is characterized by relatively low discount factor.
This is a preliminary draft. All comments are welcome1.
1. Introduction
The frontier fence along Uzbek external borders built after a series of terrorist attacks
speaks eloquently of the isolationism in Uzbekistan’s policy. Sometime in 1990s this country
positioned itself as a pro-integration regional leader, adapting the popular slogan: “Turkestan is
our common home”, but since the end of the 1990s there has been a hairpin in Uzbek policy. In
1997 the president of Uzbekistan, Islam Karimov, wrote: “…the integration of the nations of
Central Asia is not a dream or a project for the future, it is a reality2…” Just eleven years later,
1
Please address to Galym Makhmejanov, Toulouse School of Economics (TSE)/ARQADE, University of Toulouse
Capitole, 21 Allée de Brienne, 31000 Toulouse, Franсe. E-mails: [email protected],
[email protected]
2
Karimov (1997).
1
during his April 2008 visit to Kazakhstan, he declared that the Central-Asian union would be
“unacceptable for Uzbekistan”3.
It is well known that the key aspect of integration in Central Asia is the water issue,
namely the regulation of the Aral Sea basin and especially its most disputed part, the Syr Darya
River. Ninety three percent of the mean annual water flow of the Syr Darya basin is currently
regulated by storage reservoirs along the river (Antipova et al. 2002). Since the Soviet time this
issue has become a classic example of trans-boundary water mismanagement causing increasing
concern to the international community. The gravest consequence of mismanagement is the
widely-known ecological tragedy of drying of Aral Sea.
Leaving aside the ecological questions, in this paper we focus on politico-economic gains
and losses of Central Asian young independent states stemming from river management. In
particular, the management of the Syr Darya River consists in a certain trade-off between the use
of water for hydropower generation and the consumption of water for agricultural production.
Upstream Kyrgyzstan generates electricity by means of the Toktogul reservoir, whereas
downstream Uzbekistan and Kazakhstan consume water from the river for irrigation using their
own reservoirs. Obviously, much higher demand for electricity in winter gives Kyrgyzstan the
incentive to store the summer inflows in its reservoir and release water during the winter season.
In contrast, the downstream countries need more water in the vegetation (summer) period and
less during the non-vegetation (winter) period.
In the Soviet Union, when the river flow was regulated by Moscow, Kyrgyzstan
discharged the reservoir during the summer; in return the downstream countries bought extra
3
Panorama weekly newspaper. № 15, 25 April 2008.
2
electric power generated by the former in the summer period and sent energy sources, like coal
and gas, to Kyrgyzstan during the winter months. During the post-Soviet period there have been
several attempts to reach new cooperative agreements between the newly-independent states. The
Almaty treaties of 1992 left the Soviet schema of flow regulation valid. However, those out-ofdate agreements could not fully work because of obvious discrepancies in economic interests.
After a series of diplomatic moves, another agreement of 1998 to settle water and energy
relations between the countries failed for lack of required implementation mechanisms.
The credibility of the agreements was always a weak point, since upstream countries
wanted to develop further their hydro-power facilities, whereas the downstream countries were
sceptical of these claims, warning about possible ecological consequences. As a result, upstream
Kyrgyzstan ignored its commitments and produced more electricity in the winter, releasing water
during the non-vegetation period. Given the naturally limited conveyance capacity of the river in
winter, excessive waters inflicted enormous damage to Kazakhstan and Uzbekistan, where every
year flood destroyed a number of villages. The downstream riparian countries, facing enormous
losses, had to react and finally built additional reservoirs. However, as shown by Abbink et al.
(2005), a downstream player4, even with new reservoirs, “does not achieve self-sufficiency in
irrigation water”, and “economic efficiency still requires regional cooperation”.
Eventually, in the late 2000s the parties were on the way towards creation of the WaterEnergy Consortium (WEC) of the five republics of Central Asia, which would cover all aspects
of Aral Sea basin management. Unfortunately, Uzbekistan withdrew from the negotiation process
and simply refused in 2008 to sign new agreements, and, the same year, Kazakhstan’s deputy
prime-minister Umirzak Shukeev publicly accused Uzbekistan of blocking WEC5. Tashkent
4
5
They meant Uzbekistan’s new reservoirs built in violation of International Law (Kemelova and Zhalkubaev, 2003).
Koksaray stanet kazakhskim Arnasaem. Izvestia-Kazakhstan. 19 March, 2008.
3
always insists that it is totally unacceptable to pay for trans-boundary waters, considering them as
common endowment. These days Uzbekistan ignores meetings on water issues, does not provide
any transfers, refuses to buy Kyrgyzstan’s electricity, and threatens to quit the common Central
Asian regional energy system (and it is very likely that Uzbekistan will go through with this
threat). On the other hand, downstream Kazakhstan, despite its additional water storage capacity,
supports WEC, seeing in it the perfect opportunity to achieve real cooperation in Central Asia6.
Why is one downstream country in favor of cooperation? Why does another downstream riparian
simply block the cooperation, regardless of severe punishment in terms of damage and water
shortage? Apparently, the answers to these questions are not complete without careful
justification for a downstream player’s strategy.
Most studies on river sharing among different agents (countries, cities etc.) approach the
issue through a mechanism that produces an efficient water allocation. Dinar and Wolf (1994)
propose a market mechanism, Rogers (1993) sees appropriateness of joint development projects
within this framework, Kilgour and Dinar (2001) develop a flexible mechanism of Paretoefficient water allocation that takes into account the volatility of inflows. A series of papers by
Ambec and Sprumont (2000), Ambec and Ehlers (2006), and Ambec and Ehlers (2007) provide
comprehensive analysis of the problem by means of coalitional games, taking into account legal
aspects. The World Bank reports (2004a, 2004b, 2004c) use the Aral Sea basin as a case study
and develop recommendations for improving water-energy management and cooperation in
Central Asia. Raskin et al. (1992), and Antipova et al. (2002) provide technical models that seek
6
Unbending rigid position of Uzbekistan urged other parties to cooperate without Uzbekistan. For example, water
relations in Central Asia took a significant step forward on 26 July 2006 when the Commission of Kazakhstan and
Kyrgyzstan on the Use of Water Management Facilities of Intergovernmental Status on the Rivers Chu and Talas
was inaugurated. The Chu-Talas Commission offers a mutually beneficial way for Kyrgyzstan and Kazakhstan to
share responsibility for the water infrastructure used by both countries. Following a bilateral agreement from 2000,
Kazakhstan has agreed to contribute to the operating and maintenance expenses of a number of Kyrgyz dams and
reservoirs that supply water to both countries. See Bo Libert (2008).
4
to optimize operation modes for the major reservoirs of the Syr Darya basin. Abbink et al. (2005)
run a laboratory experiment, which also models the Syr Darya case using real data. They claim
that the absence of a cooperative solution is due to lack of trust between the parties, which is hard
to establish in “the present strategic environment”.
An important common point in these papers is that non-cooperative use of water is
typically inefficient and the agents can gain if they agree on how to allocate water with monetary
compensations. In our particular case, inefficient river regulation also affects regional security
(Wegerich, 2004); and only fair water-energy exchange between countries can shield the region
from potential conflicts. Our paper mostly corresponds to Moller (2005), who uses the fair
exchange principle in examining a possible role for multilateral development banks in reducing
conflict and providing stability for the whole region. We take a step further and treat the issue
through the prism of the stability of existing ruling regimes in riparian states, the regimes which
are mostly driven by survival as a factor for cooperation (Collins, 2008). This approach in the
spirit of “analytic narrative” conception by Bates et al. (1998) enables us to analyze whether
threats and promises of future actions can influence the countries’ strategy, depending upon their
survival potential.
In our basic model there are two players, upstream and downstream, who use the trigger
grim strategy. A simple dynamic game of perfect information justifies the behavior of the players
from the long-term perspectives. Punishment to the downstream player in case of noncooperation is the main aspect of water-energy exchange. Our result predicts that low probability
of survival of the latter characterized by a relatively low discount factor, may explain the absence
of a cooperative solution. Therefore, the isolationist behavior of Uzbekistan is linked to the
stability of the current Uzbek regime.
5
The paper is organized as follows. Section 2 gives briefly the historical background for
current Uzbek clans’ ‘status-quo’ and challenges to the ruling ‘mega-clan’ with a short
description of some features of economic policy in Uzbekistan linked to this. The basic model is
presented in Section 3. Section 4 expands the basic model for the post-Soviet period. Section 5
concludes.
2. Uzbek Transition Path to Isolationism
The water-energy exchange between Central Asian (CA) states is the fundamental aspect
of the integration process in the region (Petrov, 2009). In fact, water has been always a vital issue
here, a subject for tight cooperation or potential conflicts. Nowadays, it acquires more
importance, first, because of growing local population, second, as a result of the development of
irrigation and hydropower activities in the area of the Aral Sea basin. Thus, when we talk these
days about integration in CA, first of all, we imply the creation of the comprehensive WaterEnergy consortium (WEC) that would take into account all countries’ interests.
Obviously, Uzbekistan is part and parcel of this project. This is actually the country with
the highest population7 and the second biggest economy in the region8. Uzbekistan possesses
large resources of oil, gold, uranium etc., and most importantly it is still the sole supplier of gas
to neighboring Kyrgyzstan, Tajikistan, and the southern provinces of Kazakhstan9. The Uzbek
economy is basically agrarian, specializing in cotton cropping; cotton sales give around 50-60
7
According to 2010 official statistical estimates, the population of Uzbekistan is around twenty eight million people.
To compare, the overall population of Central Asia is approximately fifty million.
8
EBRD gives 2008 estimation of Uzbekistan’s GDP of around USD28 billion or about USD1000 per capita. To
compare, Kazakhstan’s GDP for the same year is USD135.6 billion or USD8719 per capita.
9
Kazakhstan is currently building the construction of gas pipeline West-South that is supposed to release the region
from dependence on the only Uzbek gas supply.
6
percent of Uzbek export revenues10. Owing to its agricultural specialization, Uzbekistan is the
main regional water consumer whose intake, in particular, from the Syr Darya River is more than
50 percent. This is not surprising since the country comprises almost 60 percent of entire irrigated
area (or 2.14 million hectares) of Syr Darya basin, and more than half of it depends on transboundary sources of water11. All these factors make Uzbekistan a key player and the most
interested party in efficient functioning of the water-energy exchange.
Looking Inwards
However, since the end of the 1990s there has been noticeable turn in Uzbek policy from
regional cooperation towards politico-economic isolationism. Economic integration within
Central Asia currently seems to be at the bottom of Uzbek list of national priorities. The fence
along Uzbek borders and the fact that Uzbekistan has withdrawn from the negotiation process for
the creation of the consortium on exploiting the Aral Sea basin (containing the Syr Darya River)
– clearly correspond to this policy. We may distinguish two periods in Uzbekistan’s modern
history. The first period is the relatively benign 1990s, when Uzbekistan was a pro-integration
regional leader participating in water-energy exchange and encouraging free trade with its
neighbors. And the second post-nineties period that has lasted up till now, when, under
permanent threat to the existing ruling autocratic regime, the Uzbek government began isolation
of the country, especially from the economic point of view.
10
Uzbekistan has been specializing in growing cotton since the Russian colonization and later the Soviet time.
Unfortunately, inappropriate cotton cropping and irrigation practices have led to ecological problems, like
desertification in the Aral Sea basin. Thereupon the Uzbek government decided to get rid of cotton ‘curse’. In 1990s,
through a system of implicit taxation every year the Uzbek government extracted large transfers from cotton sector to
import substituting industries. As a result wages for farmers were a quarter of those in industries and there was
considerable underinvestment in the sector’s infrastructure. According to EBRD transition report of 2000 the Uzbek
cotton sector was implicitly taxed at a rate of around 75%. After 2000, despite the reverse trend towards improving
production incentives through increased output prices for cotton, the implicit taxation declined but still takes place
(according to World Bank estimates of 2004, around 30% of gross farmers income). Thanks to these measures the
share of agricultural sector in Uzbek GDP has actually fallen since last decade from 30% in 1999 to 20.8% in 2008.
11
The data are from CAWater-info, the internet portal for water and environmental issues in Central Asia, the link:
http://www.cawater-info.net/index_e.htm.
7
The current ruling political regime in Uzbekistan can reasonably be associated with its
unchallenged leader, president Islam Karimov. Like his Kazakh counterpart Nursultan
Nazarbayev, he belongs to the last generation of Soviet communist top-managers of Gorbachev’s
team. Perhaps, due to common Soviet parentage, Kazakhstan and Uzbekistan followed similar
transition paths from a relatively benign regime to autocratic governance based on clans.
Ilkhamov (2007), by comparing national ideology, social and economic policy, and political
traditions of two countries distinguishes between them by calling the current Uzbek regime “hard
neo-patrimonial” in contrast to the Kazakh autocratic ‘soft’ version. The former is characterized
“by the maximal concentration of power in the hands of the ruler…, the extensive use of coercion,
the top–down imposition of national-patriotic ideology12, and the toughest restrictions on civic
freedoms”, whereas the latter is “built… on ‘clan’ pacts and a kind of social contract”.
Islam Karimov came to power just two years before the disintegration of USSR, when the
Soviet empire was torn by economic collapse and numerous ethnic conflicts. At the time of his
rise to power, Islam Karimov had no solid clan behind him, but a little support of Moscow13; so
later, in the early post-independence years of his term, he had to rely upon a clan system inherited
from the Soviet times14. The release of former Uzbek Soviet officials convicted in 1980s under
12
The clear example is an allusion to the progenitor of the Uzbek state as Tamerlane’s Empire. Tamerlane’s cult is
pervasive: all Uzbek cities are full of his statues, the streets, squares named after him, billboards with his (true or
false) citations. Bisenbayev (2003).
13
It was mentioned once by Mikhail Gorbachev. See Shermatova (2009).
14
The clan networks in Uzbekistan have an explicit regional sub-ethnic basis that makes them fairly firm and
conservative. The ruling Samarkand-Bukhara clan comprises most of contemporary Uzbek top-politicians including
president Karimov. Today’s Uzbek clans represent following regional groups: Tashkent, Ferghana-NamanganAndijan (FAN), Surkhan Darya-Kashka Darya (SurKash), Khorezm, Karakalpak, and the most powerful SamarkandBukhara-Jizak (Grozin, 2005). Apparently, the conservatism in clan formation takes roots in the recent past. The
Soviet Uzbekistan was founded on the basis of poly-ethnic and poly-linguistic societies of three separate de facto and
de jure political entities: the Bukhara emirate, the Khiva and the Kokand khanates (Roy, 2005). The regional identity
plays very important role even in everyday life. For instance, there are still evident distinctions between spoken
dialects and traditions among Uzbeks from different regions. The endogamy of Uzbek families is not infrequent, so a
traditional Uzbek marriage is a marriage between people from the same region or even closer group of relatives
living next to each other called mahallya.
8
“cotton-gate” helped him to gain enormous support from the regional elites of that period
comprising the old communist nomenklatura. In his public discourse Karimov was relatively
liberal; he often criticized clannishness and regionalism, considering both as a serious threat to
national security. His regime in the early years of independence was relatively benign and
democratic: there were officially registered opposition political parties, opposition newspapers
etc. On the regional level Uzbekistan positioned itself as a pro-integration Central Asian leader,
adapting the popular slogan of that time: “Turkestan is our common home”.
February 16, 1999, the day when a number of bomb explosions in the Uzbek capital
Tashkent killed 15 people, can be perceived as the turning point in the Uzbek regime’s policy.
Later on, the Islamic Movement of Uzbekistan (IMU) linked to al-Qaeda15 was blamed for these
bomb blasts. Since then the terrorist attacks in Uzbekistan have continued on a regular basis and
Islamist groups there have sprang up all over. Another transnational Islamist movement with a
Middle East origin, Hizb ut-Tahrir, was suspected of being involved in the Tashkent bomb
attacks of summer, 2004. In the Andijan massacre of 2005 there was an Islamist sect Akromiya16.
Later on, in 2008, the Uzbek regime unmasked another extremist chain, ,urchi, hidden in
Turkish language centers17.
With every new event the Uzbek authorities launched a surge of purges among the elites
and civil population, justifying harsh measures by the fight against the Islamist threat, a menace
for the whole Central Asia. Taking into account the facts mentioned above, the current Uzbek
regime seems to be driven by survival interest and seeks to avoid the possibility of being
15
In his 20 September 2001 speech to Congress ex-President George W. Bush named just two international groups
linked to al-Qaeda: the Egyptian Islamic Jihad and the Islamic Movement of Uzbekistan (IMU).
16
Human Rights Watch. Bullets were falling like rain, the Andijan massacre, May 13, 2005, Vol 17, No 5(D), 2005.
Available at http://hrw.org/reports/2005/uzbekistan0605/.
17
Mostly known as the Gülen movement, it is a transnational civic society movement inspired by the teachings of
Muslim scholar Said Nurci (1878-1960) and Turkish Islamic theologian Fethullah Gülen.
9
overthrown by using its repressive machine to crack down on any form of opposition - militant or
clan. Since then the Uzbek regime has not hidden its harshness and abusive use of violence in its
fight for survival. The result is amazing: the importance of clans (other than the ruling one) has
been diminished; the institutional capacity of local elites has been limited to a minimum. At the
end of the story, we have a “hard” patronage network with a ‘mega-clan’ at the top in terms of
Samarkand-Bukhara group18 and president Karimov’s family19 that mainly determine government
economic policy in its own interest.
Exploring the transition path of Uzbek economy, one may see that changes to the
economic domain for the last two decades have been dominated by specific reforms policy. In
contrast to its regional competitor – Kazakhstan, which has followed an aggressive strategy
during the transition period, since the beginning the Uzbek government has pursued a cautious
policy on market reforms, arguing against shock therapy20. The slow pace of privatization with its
predominantly insider corrupt nature, bureaucratic obstacles and low degree of competition
throughout the country – altogether had a little impact on the behavior of enterprises. For
example, under the privatization program the government was mostly reluctant to offer majority
18
The ruling Samarkand-Bukhara clan is believed to consist of the Uzbeks with Persian (Tajik) origin. In fact, the
three historical states that formed cotemporary Uzbekistan were principally Turkic but they comprised considerable
Persian (Tajik) speaking population. In the end of ethnic territorial realignment and mass Sovietisation of Central
Asia, Tajikistan was separated from Uzbekistan and in 1929 became a Union Republic. However the Tajik-Persian
culture centers, famous Samarkand and Bukhara, with its relatively well educated Persian (Tajik) population
remained in Uzbekistan. The Tajiks of Uzbekistan were the object of a discreet but persistent policy of Uzbekisation.
As a result, Uzbekistan, where today 80% of its population are ethnic Uzbeks, contains a minority group of Tajiks
who were signed up as Uzbeks (this is apart from 5% Tajik population of Uzbekistan) and these ‘Uzbeks’ of
Samarkand and Bukhara form a separate and very powerful clan. Perhaps, there is no coincidence that president
Karimov loves to repeat the famous slogan: “Uzbeks and Tajiks are one nation speaking two different languages”.
For more information an inquisitive reader can refer Roy (2000).
19
Ilkhamov (2007) argues that a key role in economic policy of the ‘mega-clan’ belongs to the president’s family,
whose business and patronage empire has grown very rapidly with the administrative support. As he points, the
underlying logic in the capital accumulation by the ‘mega-clan’ lies in different strategic goals: it is put to use for
networking with other regional and global business and political networks; concurrently, it is considered as a
retirement and insurance package in case of either Islam Karimov’s departure from office. The only way to preserve
at least a part of the ‘mega-clan’s assets would be to legalize them in the form of foreign property not accountable to
Uzbek laws. This is simply short-run strategy.
20
Alam A. and Banerji A. (2000).
10
stakes to strategic investors21. Even in privatized companies where the government holds today
small minority stakes the state can intervene by a legal provision granting veto rights over
restructuring decisions. The same thing takes place in the banking sector22, agriculture, and
especially foreign trade.
For an agrarian country like Uzbekistan, where almost two-third of population lives in
rural areas23, the reforms in the agricultural sector are especially crucial. Again, in spite of market
restructuring state involvement here also remains substantial. The land has been distributed
(leased) to the farmers, but it cannot be an object for trade and must be used only for its original
purpose. In addition, the government still maintains the old Soviet-style system of state orders
and targets24. The supply of inputs and distribution of agricultural products are in the hands of the
state, with the government providing the all-important water supply; finally, the government
practically fixes the price for agricultural production being de facto the sole purchaser25. All
foreign trade of export-oriented goods and commodities are under state monopoly. Besides the
government’s close supervision over strategic trade of oil and gas, all agricultural export has also
been effectively centralized in state marketing agencies. In this context, it is remarkable that the
Uzbek economy still carries on its international trade in the absence of free currency
21
Most of facts and figures are taken from EBRD Transition Reports for 2000-2008 years.
In 2004, the overall state share in banking assets was around 70 percent. EBRD (2008).
23
CIA: The World Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/uz.html
24
Another shameful piece of evidence of state control is child labor used in cotton industry. At harvest time, local
Uzbek authorities in veloyats (provinces) mobilize thousands of schoolchildren and students to pick cotton. In 2009,
some international cotton retailers refused to buy cotton collected by children in inhumane conditions. This
demarche had forced the Uzbek government to sign International Labor Organization conventions that commit the
country to stop using child labor.
25
For instance, the government owns all cotton gins, which turn raw cotton into exportable fibre and thus the state is
the sole purchaser of raw cotton in the country. Sadler (2006).
22
11
convertibility26 and traders with access to hard currency at the highly overvalued official rate can
make handsome profits.
Voting with Feet
Of course, such total state control of the economy drew an expected response from those
who were not affiliated to the ruling regime in terms of extensive smuggling to the neighboring
countries27. In particular, cotton smuggling from Uzbekistan to Kazakhstan, where the purchasing
price some years was 2-3 times the price offered by the Uzbek government, caused big
distortions in statistics. Sadler (2006) reported estimates that smuggled cotton from Uzbekistan
accounted for 25-50 percent of Kazakhstan’s officially recorded cotton output in early 2000s. The
Uzbek government found the simplest solution for the smuggling problem, i.e. isolation of the
country’s borders. Since the events of 1999, Uzbekistan has concentrated attention and resources
on security of external borders28 (e.g., laying explosive mines, or the construction of the fence
along the frontier) justifying it by the fight against Islamist terror. However, in reality this is a
way to reap to the maximum the benefits of government semi-market reforms.
Overall state monopoly, isolationist Uzbek economic policy including blocked waterenergy cooperation and secured state borders have ultimately led to evident failures in social
policy and economic impoverishment. As for 2003 EBRD estimates, 76.7% of the Uzbek
26
In 1997, the multiple exchange rates regime was officially institutionalized, such that the Uzbek foreign exchange
market was split into three segments: two officials and one unofficial. The highly overvalued official ‘auction rate’
and ‘commercial bank rate’ were used for converting export revenues under the obligatory surrender requirements.
Those rates also applied to selected importers, giving them privileged access to foreign exchange. The widely-used
black market exchange rate was notably higher than the formal rates. Despite the multiple exchange regime was
officially abolished in 2003 Uzbek government simply refused to follow IMF and World Bank recommendations to
remove restrictions on currency exchange.
27
In fact, there is some evidence that smuggling is to some extent tolerated by some corrupt Uzbek officials for a
kickback. Then smuggling can be seen as relatively efficient way of handing over extra-benefits from agricultural
activity to the local population by bypassing the corrupt government.
28
The Uzbek government seems to think the least about possible consequences that might stir up tension in the
region. Today, casualties are not rare along the borders, Uzbek troops have intruded into neighbors’ territory several
times in clumsy raids stamping out perceived insurgents or smugglers.
12
population lived below the poverty line, a fact that clearly explains large scale migration outside
the country29. The character of migration dynamics is well seen from Table 1 that represents the
migration balance between Kazakhstan and Uzbekistan. As can be seen, the dynamics coincide
with the turn in Uzbek policy towards isolationism. In late 1990s the balance of migration
between two countries was relatively small (in 1997 it was even positive for Uzbekistan), and
then after 1998 the migration from Uzbekistan to Kazakhstan simply soared becoming almost a
‘one-way traffic’30.
Table 1 Uzbekistan Migration Balance with Kazakhstan31, people
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Emigration
8153
5458
5975
7215
12810
18783
24602
31191
35795
44648
32620
24940
Immigration
5796
6701
2682
2269
1277
1032
960
982
678
619
608
451
One can give in outline the graphical representation (Figure 1) of this phenomenon in the
spirit of Harris-Todaro (1970). Imagine a simple agricultural economy endowed with population
,, where peasants can either grow cotton, practice smuggling, or migrate abroad to receive an
expected alternative wage level ‫ݓ‬
෥. During the first post-Soviet period there was no significant
labor movement, since the expected migration benefits were almost equal to labor remuneration
on the local market. In this period Uzbekistan through ‘post-Soviet inertia’ cooperated with
neighbors, participated in water-energy exchange that prevented any water shortage. Thus, the
equilibrium condition in the first period (before 1999) with full employment can be written
∗
∗
, ‫ܫ‬ଵ ሻ = ߠ݂ ሺ݊ௌଵ
, ‫ܧ‬ଵ ሻ, where: 1) ߠ݂ሺ݊ௌ௜ , ‫ܫ‬௜ ሻ is farming gain with price for agricultural
as ‫ݓ‬
෥ = ݈ ሺ݊ௌଵ
29
Junadullaev (2009) argues that this migration is a positive externality since it lessens the tension and consequently
the risk of open conflict in conservative overpopulated Ferghana Valley and helps to solve demographic problems in
neighboring Kazakhstan and Russia. We do not cover this effect in our model.
30
Another main destination for Uzbek migration, Russia, is capable to absorb much more labor. According to
different estimates, around 3-5 million of Uzbek citizens are working abroad (USDS, 2007; IMFa, 2008); and 80%
of them have settled down in Russia (IMFb, 2008). The amount of remittance sent to Uzbekistan from abroad
accounts for 8-12% of GDP (World Bank, 2008). For example, according to the Central Bank of Russia, in 2007
Uzbek citizens sent USD1.7 billion, that is 10% of GDP and it is 3.5 times higher than direct foreign investment to
the country the same year. Cited from Junadullaev (2009).
31
Based on the data from the Agency for Statistics of the Republic of Kazakhstan.
13
product ߠ and the farming productivity function ݂ ሺ∙ሻ, which is increasing in both arguments number of smugglers ݊ௌ௜ in the period i and ‫ܫ‬௜ that represents a regime of water flow regime in
the same period; 2) ݈ሺ݊ௌ௜ , ‫ܧ‬௜ ሻ is the labor demand in smuggling sector that describes the expected
gain from this illegal activity, decreasing in both arguments, ݊ௌ௜ and parameter ‫ܧ‬௜ , which
represents the ‘security regime’ on the border in the period i or borders ‘permeability’. More
precisely, better secured borders lead to higher cost of passing the frontier for smugglers, which
refers to downwards shift of this line. If we scale on the horizontal axis the number of smugglers,
then the function ݈ሺ∙ሻ is drawn with a negative slope providing decreasing marginal returns and
the farming gain ߠ݂ሺ∙ሻ as a function of ݊ௌ௜ is increasing convex line. In the second period, under
isolationism policy with an ‘iron curtain’ on the borders and water shortage in absence of proper
water-energy exchange, the two curves move downwards. The expected benefits from migration
became very high with respect to the gains inside the country, and this effect entails that the
excess labor supply is absorbed by outside migration ݊ெଶ .
14
݈ሺ∙ሻ, ߠ݂ሺ∙ሻ
ߠ݂ሺ݅, ‫ܫ‬ଵ ሻ
ߠ݂ሺ݅, ‫ܫ‬ଶ ሻ
‫ݓ‬
෥
݈ሺ݅, ‫ܧ‬ଵ ሻ
݊ெଶ
0
݊ௌଶ
݊ௌଵ
݈ሺ݅, ‫ܧ‬ଶ ሻ
ܰ
Figure 1
As we can see, in its fight for survival the Uzbek ruling regime invests a great deal of
effort in setting up its monopoly over the main economic benefits of the country. The state bodies
responsible for security, law enforcement, tax collection, custom, finances and export
procurement serve just one exclusive ‘mega-clan’. Despite negative side effects (i.e., outside
migration) of the isolationist policy and semi-market reforms the Uzbek government remains
unwilling to relinquish control of economy.
In what follows we attempt to explain Uzbek isolationism through the prism of regional
cooperation on water allocation. The next sections develop the model describing this fundamental
issue for integration in Central Asia as a water-energy exchange between the upstream player
(Kyrgyzstan and Tajikistan) on the one side and the downstream (Kazakhstan, Uzbekistan, and
Turkmenistan) on the other.
15
3. Basic Model
3.1 The Water-Energy Exchange Game
In this section we represent a simple game-theoretic model describing the water-energy
exchange32. There are two players: the player U, which refers the upstream player; and the player
D refers the downstream player. Without loss of generality, the situation with the two players can
describe well enough the incentives for a player to cheat. A period of one year is split in 2 parts:
݅ = ሼ1, 2ሽ, where ݅ = 1 is the vegetation (summer) season and ݅ = 2 is the non-vegetation
(winter) season. The upstream player produces electricity using water (but not consuming it). The
hydro-power electricity production function takes the simple form:
‫ݕ‬௜ = ‫ݍ‬௜
(1)
The value of flow ‫ݍ‬௜ in (1) is the quantity of water used in generating electricity. Note ‫݌‬௜ as a
price (given exogenously) for energy at season i that characterizes demand for electricity in the
upstream country. We reasonably assume a higher price for electricity during the cold winter
season since it is more in demand at that time, so ‫݌‬ଶ > ‫݌‬ଵ . Denote ܳത = ܳଵ + ܳଶ total annual flow
of water in the river of Syr Darya. If we define the upstream key reservoir capacity R, then the
regulated stream during the first period is limited, i.e. ܳଵ − ܴ ≤ ‫ݍ‬ଵ ≤ ܳଵ . In other words, the
player U is technically restricted within these limits. Given ‫ݍ‬ଵ , the amount of water used to
produce electricity in winter is the remainder, i.e. ‫ݍ‬ଶ = ܳത − ‫ݍ‬ଵ .
Definition 1: A regulation mode is a pair of ‫ࢗۃ‬૚ , ࢗ૛ ‫ ۄ‬of seasonal water flow chosen by river
regulator.
Normalizing the operational cost to zero the annual payoff of player U writes as:
32
This basic framework is mostly based on Moller (2005) settings.
16
Π௎ = ‫݌‬ଵ ‫ݕ‬ଵ + ‫݌‬ଶ ‫ݕ‬ଶ = ‫݌‬ଵ ‫ݍ‬ଵ + ‫݌‬ଶ ሺܳത − ‫ݍ‬ଵ ሻ
(2)
The downstream player benefits from oil and gas export and partly uses water for
electricity production and consumes water during vegetation period for irrigation in agricultural
sector, which comprises mostly cotton, fruits and vegetables. We neglect hydropower activity of
player D. Then, let’s denote ‫ ܪ‬as the exogenously given value of hydrocarbon resources sold
during the whole year. Player D’s profit from irrigation activity is described by the
function ‫ܤ‬௜ ሺ‫ݍ‬௜ + ‫ݎ‬ሻ, which is expressed in monetary units. It depends on ‫ݍ‬௜ , the volume of water
to be used, and ‫ݎ‬, the downstream reservoir capacity33. The assumptions for the benefit function
are: ‫ܤ‬௜′ ሺ∙ሻ > 0, and ‫ܤ‬௜′′ሺ∙ሻ < 034. The irrigation activity takes place just during the summer,
so ‫ܤ‬ଶ ሺ‫ݍ‬ଶ ሻ ≡ 0, and we omit for simplicity the index i in the irrigation benefit function from now
on. The downstream reservoir capacity is restricted in size, such that: ܳଶ < ‫ܳ < ݎ‬ଶ + ܴ.
Consequently the water flow in the second period above this capacity causes damage for the
downstream player, since the ensuing flood destroys villages in the downstream country.
Formally, we introduce the loss function ‫ ܿߛ = ܮ‬ሺ‫ݍ‬ଶ − ‫ݎ‬ሻ, where ܿ ሺ∙ሻ ≡ 0 for ‫ݍ‬ଶ ≤ ‫ݎ‬, and ܿ ᇱ ሺ∙ሻ >
0, ܿ ᇱᇱ ሺ∙ሻ > 0, and in particular ܿ′ሺ0ሻ = 0 (See Figure 2). Hence, the downstream player’s payoff
is:
Π஽ = ‫ ܪ‬+ ‫ ܤ‬ሺ‫ݍ‬ଵ + ‫ݎ‬ሻ − ߛܿሺܳത − ‫ݍ‬ଵ − ‫ݎ‬ሻ
(3)
Player U, in the absence of the downstream player, would solve the following program35:
max௤భ Π௎ = ‫݌‬ଵ ‫ݍ‬ଵ + ‫݌‬ଶ ሺܳത − ‫ݍ‬ଵ ሻ
(4)
33
We assume as in Moller (2005) that during previous period, say 0, the downstream reservoir was replenished.
In most of the papers on this topic the agents have single-peaked benefit functions, where the peak consumption
corresponds to an agent’s satiation point. Here we omit this property, so the benefit function is always increasing.
35
As Ambec (2002), we apply the theory of Absolute territorial sovereignty (ATS).
34
17
s. to ܳଵ − ܴ ≤ ‫ݍ‬ଵ ≤ ܳଵ
(5)
‫ܤ‬−‫ܮ‬
‫ܤ‬ሺ‫ݍ‬ଵ + ‫ݎ‬ሻ
0
ܳଵ − ܴ
ܳത − ‫ݎ‬
ܳଵ
‫ݍ‬ଵ
‫ܮ‬
‫ܮ‬ത = ߛܿሺܳଶ + ܴ − ‫ݎ‬ሻ
ܳଵ − ܴ
ܳത − ‫ݎ‬
ܳଵ
‫ݍ‬ଵ
Figure 2
௎
= Π௎ ሺ‫ݍ‬ଵாோ ሻ = ‫݌‬ଵ ܳଵ + ‫݌‬ଶ ܳଶ +
Since ‫݌‬ଶ > ‫݌‬ଵ , player U would choose ‫ݍ‬ଵாோ = ܳଵ − ܴ with Πாோ
ሺ‫݌‬ଶ − ‫݌‬ଵ ሻܴ. So, the upstream player generates electricity benefitting from the full river flow
during two seasons, and in addition she receives extra-gains from price differences using the
whole storage capacity ܴ of its reservoir. We call the regulation mode ‫ݍ‬ாோ = ‫ܳۃ‬ଵ − ܴ, ܳଶ + ܴ‫ۄ‬
as the energy regime of the river flow regulation (ER). Note that under ER, the downstream
player receives minimum benefits ‫ ܤ = ܤ‬ሺܳଵ − ܴ + ‫ݎ‬ሻ, but maximum flood-caused loss ‫ܮ‬ത =
஽
= ‫ ܪ‬+ ‫ ܤ‬− ‫ܮ‬ത. Given the exogenous nature of
ߛܿሺܳଶ + ܴ − ‫ݎ‬ሻ, and her total payoff becomes Πாோ
18
terms, the values ‫ ܤ‬and ‫ܮ‬ത are constant and it is believed that ‫ܮ > ܤ‬ത. This mode in general is
typically inefficient, since two agents can do better if they agree on how to allocate water with
monetary compensations, which was the case when the countries were provinces of the USSR.
3.2 Soviet Time Regulation
In Soviet time, the social planner, namely the Moscow authorities, was supposed to maximize
the common social welfare function, as a sum of two players’ payoffs. By choosing arbitrary t,
the compensation payment to the upstream player, the social planner makes up the losses of
player U corresponding to any deviation from the energy regime. The program is the following:
max௤భ Π௎ + Π஽ = ‫ ܪ‬+ ‫݌‬ଶ ܳത + ‫ܤ‬ሺ‫ݍ‬ଵ + ‫ݎ‬ሻ − ߛܿ ሺܳത − ‫ݍ‬ଵ − ‫ݎ‬ሻ − ሺ‫݌‬ଶ −‫݌‬ଵ ሻ‫ݍ‬ଵ
s. to ܳଵ − ܴ ≤ ‫ݍ‬ଵ ≤ ܳଵ
௎
Π௎ + ‫ ≥ ݐ‬Πாோ
(6)
(7)
(8)
Inequality (8) defines the minimum level of transfer t required to fulfill player U’s participation
constraint. The first order condition (FOC) for an interior optimum is:
‫ܤ‬′ሺ‫ݍ‬ଵ∗ + ‫ݎ‬ሻ + ߛܿ ᇱ ሺܳത − ‫ݍ‬ଵ∗ − ‫ݎ‬ሻ = ‫݌‬ଶ −‫݌‬ଵ
(9)
The sum of marginal benefit and marginal loss corresponding to an increase of the first-period
flow is proportional to the price difference between the two periods. The Kuhn-Tucker theorem
here entails three possible cases:
1. If ‫݌‬ଶ − ‫݌‬ଵ > ‫ܤ‬′ሺܳଵ − ܴ + ‫ݎ‬ሻ + ߛܿ ᇱ ሺܳଶ + ܴ − ‫ݎ‬ሻ, then ‫ݍ‬ଵ∗ = ܳଵ − ܴ, and the player D
faces the maximum damage ‫ܮ‬ത = ߛܿሺܳଶ + ܴ − ‫ݎ‬ሻ.
19
2. If ‫ܤ‬′ሺܳଵ − ܴ + ‫ݎ‬ሻ + ߛܿ ᇱ ሺܳଶ − ܴ + ‫ݎ‬ሻ ≥ ‫݌‬ଶ − ‫݌‬ଵ ≥ ‫ܤ‬′ሺܳଵ + ‫ݎ‬ሻ, then ‫ݍ‬ଵ∗ = ‫ݍ‬ଵ ሺܳത , ‫ݎ‬, ‫݌‬ଶ −
‫݌‬ଵ ሻ, which is defined by condition (9).
3. If ‫ܤ‬′ሺܳଵ + ‫ݎ‬ሻ > ‫݌‬ଶ − ‫݌‬ଵ , then ‫ݍ‬ଵ∗ = ܳଵ , i.e. the upstream player stores nothing, which
inflicts no damage to the downstream player.
From (9) within the relevant range one can derive that:
ௗ௤భ∗
ௗሺ௣మ ି௣భ ሻ
=
ଵ
஻′′ሺ∙ሻିఊ௖ ᇲᇲ ሺ∙ሻ
<0
(9.1)
And:
ௗ௤భ∗
ௗఊ
=
ିఊ௖ ᇲ ሺ∙ሻ
஻′′ሺ∙ሻିఊ௖ ᇲᇲ ሺ∙ሻ
≥0
(9.2)
Therefore, a decrease in the seasonal difference in demand for electricity in the upstream
country, as well as a decrease of ߛ that characterizes better efficiency of the irrigation system in
the downstream country in preventing the damage, will tend to increase the optimal flow of water
in the summer. Since the benefit function is strictly concave, FOC is necessary and sufficient.
The corresponding optimal river stock regulation regime is ‫ݍۃ‬ଵ∗ , ܳത − ‫ݍ‬ଵ∗ ‫ۄ‬. In particular, if we
assume that the marginal benefit from irrigation activity is higher than the marginal electricity
production (namely when ‫ܤ‬′ሺ‫ݍ‬ଵ + ‫ݎ‬ሻ > ‫݌‬ଶ − ‫݌‬ଵ ), then the social planner always chooses ‫ݍ‬ଵ∗ =
ܳଵ. In this case the social planner arbitrarily guarantees a transfer ‫ݐ‬ҧ = ሺ‫݌‬ଶ − ‫݌‬ଵ ሻܴ. Then it is
profitable for the downstream player to consume the maximum possible flow during the
vegetation period.
Hence, in the Soviet time the flow of the Syr Darya River was regulated in common
interests, such that the central planner made the decision on when and how much water to release
from the upstream reservoir. In general, upstream Kyrgyzstan discharged optimal volume of
20
water from the reservoir during the summer; in return the downstream countries provided
corresponding transfer in several ways (i.e., they bought in advance extra electric power
generated in the summer and supplied coal and gas in winter)36.
4. Post-Soviet Equilibria
In the post-Soviet period there is no longer cooperation between the players. Upstream
Kyrgyzstan, in response to the rigid position of the downstream countries, has switched to the
energy regime of the river flow regulation producing more electricity in the winter (i.e., releasing
water during the non-vegetation winter period). Given naturally limited conveyance capacity of
the river in winter, excessive waters inflicts enormous damage to Kazakhstan and Uzbekistan.
Then the Uzbek government, without notification, in violation of International Law, has built
additional reservoirs. Technically, the new Uzbek reservoirs have considerably decreased the
capacity of Kazakh water storage facilities, so the latter has built its own additional reservoir
Koksaray37.
As for Uzbekistan, Tashkent ignores the negotiation process on WEC insisting on the
unacceptability of paying for trans-boundary waters and considering them as common
endowment. These days Uzbekistan does not provide any transfers, refuses to buy Kyrgyzstan’s
electricity, and threatens to quit common Central Asian regional energy system. As we see, this
downstream riparian simply blocks cooperation, regardless of severe punishment in terms of
damage and water shortage.
36
Until 1991, as compensation for not using the Toktogul Hydroelectric Station during the autumn and winter
months, Kazakhstan and Uzbekistan supplied Kyrgyzstan with a billion cubic meters of natural gas, a million tons of
coal, and 400,000 tons of heating oil annually. Moreover, the USSR budget contributed roughly $600 million to
Kyrgyzstan’s budget annually, for maintenance of water installations as well as for the general social and economic
needs of the country (Kemelova and Zhalkubaeva, 2003).
37
Koksaray stanet kazakhskim Arnasaem. Izvestia-Kazakhstan. 19 March, 2008.
21
We argue that the underlying reason for such behavior is the Uzbek regime’s instability.
The geopolitical situation in Afghanistan, the religious tension in the Ferghana Valley38, the
disputable position of Karimov’s Bukhara-Samarkand clan39 backed by a sub-ethnic minority –
these factors compel the ruling regime to behave just in the interest of survival, seeking to avoid
the possibility of being overthrown.
Thus, we can get some insights into the structure of behavior if we let the players interact
repeatedly every year. That brings out the dynamics that may trigger a switch from one type of
policy to another. Since the players’ actions are observed at each period, it is possible for them to
condition their play on the past play of the opponent. Of course, there is a simplification in our
modeling since, as any repeated game, ours does not allow for past play to influence the feasible
actions or payoffs in the current period. Nevertheless, we find this framework to be a good
approximation for such long-term politico-economic relationships as the water-energy exchange,
where the matter of “trust” is very important, as well as the “survival” of the autocratic regimes
in Central Asia. So, we can assume that after each year, the players think that they will continue
for an additional period. First, we reconsider the stage game for an independently acting player
that allows us to take into account the infinite horizon in our modeling.
38
The most potentially dangerous Central Asian “powder keg”– the overcrowded Ferghana Valley with its
religiously conservative and mainly farming population. This overpopulated key area brings about serious problems
to Karimov’s regime, which claims to fight against Islamist movement.
39
In fact, there is a permanent tension and considerable opposition among Uzbek elites against the ruling
Samarkand-Bukhara clan that is thought to be a sort of alien group of Tajiks who have been signed up as Uzbeks
(Tarantsev, 2009). The most recent example is Uzbek-Kyrgyz political crisis of December 2009, when Uzbekistan
started frontier demarcation in the absence of any signed agreement between two countries that caused obvious
anxiety on Kyrgyz side. However, in private conversation with former Kyrgyz president Bakiyev, Islam Karimov
tried to convince his colleague that this move was not against Kyrgyzstan, but against an opposing Tashkent clan
which benefited from the control of this part of Uzbek border. Vremya ,ovostey Vostochnoe Mnogobor’e,
16/06/2009.Available at http://www.vremya.ru/2009/103/5/231213.html.
22
4.1 Stage game
Since the collapse of USSR, the new players have acted independently, using threats and
promises in their strategy. Since then it has been the downstream player who should propose
conditions for possible cooperation. Then player D solves:
max ‫ ܪ‬+ ‫ ܤ‬ሺ‫ݍ‬ଵ + ‫ݎ‬ሻ − ߛܿ ሺܳത − ‫ݍ‬ଵ − ‫ݎ‬ሻ − ‫ݐ‬
(10)
௎
Π௎ + ‫ ≥ ݐ‬Πாோ
(11)
௤భ
and (7).
The condition (11) rewrite:
‫ ≥ ݐ‬ሺ‫݌‬ଶ − ‫݌‬ଵ ሻሾ‫ݍ‬ଵ + ܴ − ܳଵ ሿ
Then the solution for this program becomes as in (9). We define the pair ‫ݍۃ‬ଵ∗ , ܳത − ‫ݍ‬ଵ∗ ‫ ۄ‬as the
irrigation regime of the river flow regulation (IR). The upstream player will always have
௎
Πாோ
= Π௎ ሺ‫ݍ‬ଵாோ ሻ receiving transfer:
‫ ݐ‬௖ = ሺ‫݌‬ଶ − ‫݌‬ଵ ሻሾ‫ݍ‬ଵ∗ + ܴ − ܳଵ ሿ ≤ ሺ‫݌‬ଶ − ‫݌‬ଵ ሻܴ = ‫ݐ‬ҧ
(12)
23
‫ ܤ‬− ‫ܮ‬, ‫ ݐ‬௖
‫ܤ‬−‫ܮ‬
‫ ݐ‬௖ ሺ‫ݍ‬ଵ∗ ሻ
‫ܩ‬ሺ‫ݍ‬ଵ∗ ሻ
‫ = ݐ‬ሺ‫݌‬ଶ − ‫݌‬ଵ ሻሾ‫ݍ‬ଵ − ሺܳଵ − ܴሻሿ
‫ ݐ‬௖ ሺ‫ݍ‬ଵ∗ ሻ
ܳଵ − ܴ
‫ݍ‬ଵ∗
ܳଵ
‫ݍ‬ଵ
.
Figure 3
The downstream player’s payoff will comprise optimal benefit from irrigation activity in
this case ‫ ܤ = ∗ ܤ‬ሺ‫ݍ‬ଵ∗ + ‫ݎ‬ሻ and damage ‫ ܿߛ = ∗ܮ‬ሺܳത − ‫ݍ‬ଵ∗ − ‫ݎ‬ሻ. This implies the following annual
downstream player’s payoff under IR:
஽
஽
≥ Πாோ
= ‫ ܪ‬+ ‫ ܤ‬− ‫ܮ‬ത
Π஽ ሺ‫ݍ‬ଵ∗ ሻ = ‫ ܪ‬+ ‫ ∗ ܤ‬− ‫ ∗ܮ‬− ‫ ݐ‬௖ = Πூோ
(13)
It is obvious that the characteristics of a prisoner’s dilemma have a certain relevance to
our trade-off between use of water for energy production and consumption of water for
agricultural production. As shown in (13), the non-cooperative equilibrium is inefficient, whereas
the efficient outcome would require cooperation. In other words, the Soviet-era allocation of the
water resources of the Syr Darya River was optimal and it was reasonable for the parties involved
to continue this regime after independence.
In the next section we describe the behavior of a downstream player from the long-run
perspective extending the stage game to a dynamic one. Hence, the water-energy exchange, as a
repeated game with perfect information, can explain how threats and promises of future behavior
can influence the way in which players act.
24
4.2 Solution of the Dynamic Game
Since the condition (11) holds, the upstream player is indifferent about deviating from the
cooperation equilibrium. However, the downstream player can be punished by the upstream
player in case where the former does not provide the due transfer, since in that case the player U
is obliged to turn to the energy regime in order to meet the demand for electricity. To describe the
behavior of the players we apply the trigger grim strategy for dynamic games with perfect
information. We introduce the discount factor that represents as well the possibility that the game
may terminate, namely the probability of survival of a player. As before, we take one year as a
unit period that comprises 2 seasons. The strategy of the upstream player is described by
following:
“At date 1, I will give you the volume of water ‫ݍ‬ଵ∗ . I will give ‫ݍ‬ଵ∗ at date k if I received the
compensation ‫ ݐ‬௖ at the previous period; otherwise I give ‫ݍ‬ଵாே = ܳଵ − ܴ for all the years to come
(turn to ER forever).”
The upstream player’s payoff in case of cooperation, including the transfer, is:
ଵ
௎
ܸ஼௎ = ଵିஔ Πாோ
(22)
In case of non-cooperation or isolationism of the downstream player, player D pays no
transfer to player U. The downstream player does better in this period by defecting instead of
௎
cooperating. However, next period, player U, who switches to the energy regime, receives Πாோ
,
஽
determined in the Section 3.1.
and the downstream player earns Πாோ
௎
ܸே஼
=
ଵ
ଵିஔ
௎
Πாோ
− ‫ݐ‬௖
(23)
25
௎
It is easy to see that ܸ஼௎ > ܸே஼
for any δ. As for the downstream player, his payoff in case of
cooperation rewrites as:
ଵ
ܸ஼஽ = ଵିஔ ൣ‫ ܪ‬+ ‫ ∗ ܤ‬− ‫ ∗ܮ‬− ‫ ݐ‬௖ ൧
(25)
If player U does not cooperate, then she benefits the same period by receiving optimal quantity of
water. However, next period she is punished by the upstream player:
஽
= ‫ ܪ‬+ ‫ ∗ ܤ‬− ‫ ∗ܮ‬+
ܸே஼
ஔ
ଵିஔ
ൣ‫ ܪ‬+ ‫ ܤ‬− ‫ܮ‬ത൧,
PROPOSITION 1: In the long-run, there is the value ߜ =
(26)
௧ ೎ ሺ௤భ∗ ሻ
,
ீሺ௤భ∗ ሻ
where ‫ ݐ‬௖ ሺ‫ݍ‬ଵ∗ ሻ = ሺ‫݌‬ଶ − ‫݌‬ଵ ሻሾ‫ݍ‬ଵ∗ +
ܴ − ܳଵ ሿ and ‫ ܩ‬ሺ‫ݍ‬ଵ∗ ሻ = ‫ ∗ ܤ‬− ‫ ∗ܮ‬− ൣ‫ ܤ‬− ‫ܮ‬ത൧, such that for ߜ ∈ ൫ߜ ௅ோ ; 1൯ there exists a subgameperfect cooperative ,ash equilibrium of the water-energy exchange game.
Proposition 1 helps us to understand when it is impossible to enforce mutually beneficial
exchange. When the players use trigger grim strategy in this infinitely repeated game, for the
discount factor sufficiently close to 1, even though the downstream player could do better in the
short-run by defecting instead of cooperating, for a patient player D this short-run gain is
outweighed by the prospect of future punishment. Our diagnosis is thus that the Uzbek regime is
in the situation where the discount factor that reflects the probability of survival is too low.
஽
gives the
The proof of this proposition is straightforward; since the condition ܸ஼஽ ≥ ܸே஼
set of values for the discount factor that makes it preferable for the downstream player to
cooperate. The denominator ‫ ܩ‬ሺ‫ݍ‬ଵ∗ ሻ of ߜ gives basically the value of the gain that the downstream
player receives if he cooperates, whereas the numerator is the cost of such cooperation. Thus, the
cut-off value ߜ of discount factor can be interpreted as the marginal price for cooperation in terms
26
of gains. It is evident that ߜ < 1, since ‫ ݐ‬௖ ሺ‫ݍ‬ଵ∗ ሻ < ‫ ܩ‬ሺ‫ݍ‬ଵ∗ ሻ. The latter is true because of the strict
concavity of the function ‫ ܩ‬ሺ∙ሻ, as seen from Figure 3. ‫ ܩ‬ሺ∙ሻ and ‫ ݐ‬௖ ሺ∙ሻ become zero as ‫ݍ‬ଵ∗ reaches
for its minimum ܳଵ − ܴ. At this point, cooperation and non-cooperation payoffs are identical for
player D, both bring the same outcome and entails no expense.
Using Proposition 1 one may define the cooperation equilibrium range for the discount
factor. We can analyze the impact of the demand for electricity, i.e. of the price difference ሺ‫݌‬ଶ −
‫݌‬ଵ ሻ on equilibrium. For further analysis we use the downstream player gain from cooperation
defined in Proposition 1. Without loss of generality one can replace ‫ݍ = ݏ‬ଵ − ሺܳଵ − ܴ ሻ as the
amount of water stored by the upstream player and released in summer, which obviously cannot
exceed the capacity of the upstream reservoir R. In fact, this is the variable that the two players
trade on - how much water to release from the upstream reservoir during the vegetation period.
Eventually, the solutions of the problems found above remain the same (see Figure 4) and the
ௗ௦∗
condition (9.1) holds as well, therefore ‫ݍ = ∗ ݏ‬ଵ∗ − ሺܳଵ − ܴ ሻ. Note that ௗሺ௣
మ ି௣భ
ௗ௤∗
= ௗሺ௣
ሻ
మ ି௣భ ሻ
, as
well as ‫ܩ‬′ሺ∙ሻ = ‫ܤ‬′ሺ∙ሻ + ߛܿ′ሺ∙ሻ > 0, and ‫ܩ‬′′ሺ∙ሻ = ‫ܤ‬′′ሺ∙ሻ − ߛܿ′′ሺ∙ሻ < 0.
‫ܩ‬ሺ∙ሻ, ‫ݐ‬
‫ܩ‬ሺ‫ݏ‬ሻ
‫ܩ‬ሺ‫ ∗ ݏ‬ሻ
‫ = ݐ‬ሺ‫݌‬ଶ − ‫݌‬ଵ ሻ‫ݏ‬
‫ ݐ‬௖ ሺ‫ ∗ ݏ‬ሻ
‫∗ݏ‬
ܴ
‫ݏ‬
Figure 4
27
PROPOSITION 2: The following cases will occur:
ௗఋ
1.
ௗሺ௣మ ି௣భ ሻ
ௗఋ
2.
ௗሺ௣మ ି௣భ ሻ
≥ 0 for the cooperation gain function ‫ܩ‬ሺ∙ሻ.
= 0 for a ‫ ܩ‬ሺ∙ሻ with constant elasticity with respect to ‫ ∗ ݏ‬.
ீሺ∙ሻ
Proof: Write ε for the value of the elasticity of ‫ ܩ‬ሺ∙ሻ with respect to ‫ ∗ ݏ‬, ߝ = ௦∗ீ′ሺ∙ሻ, and write
Ε=−
ீ′′ሺ∙ሻ௦∗
ீ′ሺ∙ሻ
for the absolute value of the elasticity of the slope of the function ‫ ܩ‬ሺ∙ሻ with respect
to ‫ ∗ ݏ‬. The cut-off value for discount factor rewrites:
ߜ≥ ߜ=
ሺ௣మ ି௣భ ሻ௦∗
∗
஻ሺொభ ିோା௥ା௦ ሻିఊ௖ሺொమ ାோି௥ି௦ ∗ ሻି൫஻ሺொభ ିோା௥ሻିఊ௖ሺொమ ାோି௥ሻ൯
=
௧ ೎ ሺ௦ ∗ ሻ
ீሺ௦ ∗ ሻ
(27)
The functions ‫ ܩ‬ሺ∙ሻ and ‫ ݐ‬௖ ሺ∙ሻ are both affected by the change in seasonal price difference ሺ‫݌‬ଶ −
‫݌‬ଵ ሻ, so within the relevant range using (9.1) one can derive that:
ௗఋ
ௗሺ௣మ ି௣భ
=
ሻ
డఋ
డሺ௣మ ି௣భ
+
ሻ
డఋ
ௗ௦ ∗
డ௦ ∗
ௗሺ௣మ ି௣భ
=
ሻ
௦∗
ீሺ∙ሻ
+
ሺ௣మ ି௣భ ሻሾீሺ∙ሻିீ′ሺ∙ሻ௦∗ ሿ
మ
൫ீሺ∙ሻ൯ ீ′′ሺ∙ሻ
(28)
Then using the fact that ሺ‫݌‬ଶ −‫݌‬ଵ ሻ = ‫ܩ‬′ሺ‫ ∗ ݏ‬ሻ, and taking into account the definitions for elasticities,
ௗఋ
one can receive that ௗሺ௣
ଵ
మ ି௣భ ሻ
> 0 if Ε > 1 − ఌ . The latter is always true because ߝ < 1 for strictly
ଵ
concave function ‫ ܩ‬ሺ∙ሻ (see Figure 4), except for the case of constant elasticity when Ε = 1 − ,
ఌ
which implies that
ௗఋ
ௗሺ௣మ ି௣భ ሻ
= 0■
Proposition 2 for non-constant elasticity is depicted in Figure 5. In fact, the positive shock
in seasonal price difference tends to increase cooperation transfer, and this effect is captured by
the first term in (28). At the same time any rise in winter price or fall in summer price for
28
electricity tends to reduce ‫ ∗ ݏ‬, the optimal amount of water to be released, and this effect is
represented by the second negative term in (28). In general, the positive effect dominates the
negative, knowing the values of elasticities of the function ‫ ܩ‬ሺ∙ሻ. Apparently, one can expect a
ௗఋ
positive sign for ௗሺ௣
మ ି௣భ ሻ
, therefore, a high shock in seasonal difference of demand for electricity
is supposed to increase the marginal price for cooperation (namely ߜ). Increasing the cut-off
value ߜ, below which cooperation is no longer preferable for player D, rises eventually, shrinking
the range for the cooperative solution. As price increase becomes too high, then it is too
expensive for the downstream player to participate in the water-energy exchange. In fact,
if ‫݌‬ଶ − ‫݌‬ଵ ≥ ‫ܤ‬′ሺܳଵ − ܴ + ‫ݎ‬ሻ + ߛܿ ᇱ ሺܳଶ + ܴ − ‫ݎ‬ሻ, we know that ‫ = ∗ ݏ‬0. At this point cooperation
is meaningless since the seasonal price difference for electricity is so high that for the
downstream player it is optimal to pay no transfer to the upstream player and receive the
minimum flow of water in summer bearing the highest damage in winter. And it is true for any
value of ߜ except for one particular case, namely ߜ = 1 for ‫݌‬ଶ − ‫݌‬ଵ = ‫ܤ‬′ሺܳଵ − ܴ + ‫ݎ‬ሻ +
ߛܿ ᇱ ሺܳଶ + ܴ − ‫ݎ‬ሻ, when cooperation happens without any transfer.
δ
1
Cooperative equilibrium
௧ ೎ ሺோሻ
ீሺோሻ
Cooperative equilibrium fails to exist
‫݌‬ଶ −‫݌‬ଵ
0
‫ܤ‬′ሺܳଵ + ‫ݎ‬ሻ
‫ܤ‬′ሺܳଵ − ܴ + ‫ݎ‬ሻ + ߛܿ ᇱ ሺܳଶ + ܴ − ‫ݎ‬ሻ
Figure 5
29
But of course, we are far from blaming only one side. The second argument refers to Kyrgyzstan
for a too high difference in seasonal demands for electricity. Namely, for ‫݌‬ଶ −‫݌‬ଵ ≥ ‫ܤ‬′ሺܳଵ − ܴ +
‫ݎ‬ሻ + ߛܿ ᇱ ሺܳଶ + ܴ − ‫ݎ‬ሻ there is no cooperative equilibrium, since it is too costly for the
downstream player to participate in the water-energy exchange with the upstream player. Next, it
is important to remember that in Kyrgyzstan the demand in winter is steadily increasing. It may
be related to natural condition, but our model does not allow any shock in weather. The other
possible sources of this increase may be population growth, or the growing criminalization of the
Kyrgyz electricity industry, where ‘technical loss’ (simply stealing) of electricity is estimated at
around 40 percent40. The involvement of Kyrgyzstan in NATO operations against the Afghani
Taliban movement, the appearance of new military bases on the territory of Kyrgyzstan also
tends to increase the demand for electricity.
As for the cases of constant elasticity of ‫ ܩ‬ሺ∙ሻ, one can find that the value of ߜ increases
with ‫݌‬ଶ −‫݌‬ଵ as far as ‫݌‬ଶ −‫݌‬ଵ ≤ ‫ܤ‬′ሺܳଵ + ‫ݎ‬ሻ that shrinks the cooperative range as in the previous
case. Beyond this point, the cooperation set of values stays unchanged for the case of constant
elasticity of ‫ ܩ‬ሺ∙ሻ, and this makes the cooperative range bigger compared to the case of nonconstant elasticity (the dashed area). Figure 5 can tell us how the equilibrium range varies with
respect to the reservoir volumes. For example, the increase of the essential upstream reservoir
volume R will move the crucial point rightwards, beyond which there is no cooperative
equilibrium, it will increase the corresponding cooperative equilibrium range that will influence
mostly the downstream player with high ߜ. If the downstream reservoir volume r grows, it
decreases the cooperative range moving the critical point leftwards. However, Abbink et al.
40
Sobyanin and Myasnik (2007).
30
(2005) yields that although the new reservoirs alleviate the downstream country’s problems,
basin-wide efficiency still requires regional cooperation.
Thus, to play non-cooperative strategy for the downstream country may be profitable
either because of too low discount factor (probability of regime survival) of player D or in case of
too high seasonal price difference in the upstream country. The first argument reveals the shortrun behavior and refers to Uzbekistan with its enormous Islamist threat that the official
government is encountering. Therefore, despite the severe punishment in the long-run, it may
partly explain why Uzbekistan gave up the idea of the water-energy consortium. The second
argument implies some distortions in the normal functioning of Kyrgyzstan electricity industry,
but this problem is beyond the scope of this study.
5. Concluding Remarks
This paper analyzes the main obstacle to real economic integration in Central Asia, the
politico-economic isolationist policy of Uzbekistan. In particular, we consider the absence of
efficient regulation of the waters of the Syr Darya River as an obstacle to achieving real
cooperation in the region. One can distinguish two periods of contemporary Uzbek history: the
first is before the end of 1990s, when Uzbekistan followed the regional integration policy with
the famous slogan - “Turkestan is our common home”; and the later second period, when the
Uzbek government, in the face of a growing Islamist threat, changed its policy to politicoeconomic isolationism. The latter entails non-participation in Water-Energy Consortium, creating
obstacles for open trade with neighbors, the fence along the borders. Water shortage in the
absence of WEC, better secured Uzbek borders in order to minimize state losses from smuggling
31
– altogether as a side effect provoke considerable outside migration from Uzbekistan to
neighboring countries.
We found that blocking the fundamental project for integration in Central Asia, the
Water-Energy Consortium (WEC) between Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan,
and Uzbekistan on exploiting the Aral Sea basin (containing the Syr Darya River), can be
explained by the Uzbek regime’s instability. Our simple dynamic game of perfect information
predicts that the absence of a cooperative solution in the dynamic water-energy exchange game
between upstream and downstream players takes place basically because of the low probability of
survival of the latter, which is characterized by a relatively low discount factor.
Next, another important factor that may preclude the cooperative equilibrium is too high
seasonal price difference for electricity in the upstream country. Say the winter demand for
electricity in Kyrgyzstan may be related either to natural conditions, such that any climate shock
or fast-growing population, or to growing criminalization of the Kyrgyz electricity industry. The
presence and appearance of new military bases (e.g., NATO Manas transit centre) on the territory
of Kyrgyzstan also tend to increase demand for electricity. This paper points at cooperation of all
parties in the water-energy consortium. However, under the existing ruling regime in Uzbekistan,
such cooperation seems quite hopeless, at least in the short-run.
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