Doing Business In Kyrgyz Republic

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Issyk-Kul Lake is the second largest mountain lake after the Lake Titicaca in South America and the second largest saline lake in the world after the Caspian Sea. It is one of the most sacred places for Kyrgyz nation. Since olden times our ancestors asked for blessing from the lake, infertile women prayed before Issuk-Kul and asked for baby. The most eminent and notorious poets and writers of Kyrgyz nation like Alykul Osmonov and Chingiz Aitmatov glorified Issyk-Kul Lake in their novels and poems. There are many legends and tales about it in our folklore. Thus, Issyk-Kul is the pearl, pride and national patrimony of Kyrgyz people.

Today many environmental protection organizations are sounding the alarm because Issyk-Kul Lake is in danger. Its water level is sinking by 5 centimeters on average every year! [12] The melting of glaciers is the main cause of shrinking of our national pride. Ecologists are concerned with the eventual sinking by two to three meters which will have inconceivable ruinous consequences for wildlife in the region. Ecologists believe that human activity is the main reason for such a drastic decrease in mountain ice. Kyrgyz Canadian gold mining company Kumtor is one of the companies specialists blame for ecologic disaster. Suited up in the very high altitude, Kumtor company generates wastes that are not recycled. These wastes reach the peaks of glaciers and make them melt!

Another issue is a sharp increase of hotels and guest houses on the shore of Issyk-Kul. I had a chance to interview one of the members of Kyrgyz Association of Tour Operators (KATO) who emphasized that majority of these hotels and guest houses do not exploit purifiers or any type of cleansing facilities to recycle trash and chemicals. So, these entrepreneurs that rapidly arose like mushrooms after rain on the shore of Issyk-Kul are trouble entrepreneurs . One would question why we have such irresponsible trouble entrepreneurs. What forces or causes them to be so indifferent to the circumstances of their deeds? To fully understand the cause one should first analyze the conditions of doing business in Kyrgyzstan.

Status Quo: Doing Business in Kyrgyz Republic

Unfortunately, today business ethics are not the strongest quality of Kyrgyz entrepreneurs. According to World Banks Ease of Doing Business rank, Kyrgyzstan holds the 97th place out of 125 countries all around the world. Out of 125 countries Kyrgyzstan holds the 120th place when measuring the compliance with the rule of law. According to corruption control index, one can find that corruption is almost not controlled in Kyrgyzstan, indeed our score is 119; the protection of physical property index in 114. [5] Unfortunately, these indexes objectively reveal the situation and problems within the Kyrgyz Republic. From this fact one can make a conclusion that the biggest issues of Kyrgyzstan are the absence of the rule of law, fragile protection of physical property rights and flourishing corruption.

Truly, one of the sore points is property rights protection. The most recent cases of Kumtor Gold Operating Company, Kyrgyz Telecom (the largest provider of telephone communication), Kyrgyz Severoelectro (the largest electricity distributing company) prove this argument. Kumtor is the largest contributor to Kyrgyz GDP from private sector. [8] However, when new authorities came to power after the Tulip Revolution of March 2005, the existence of Kumtor company was put under the question. New authorities annulled Kumtor s contract with previous authorities and declared that it will be nationalized. The court trail has been in progress until our second President- Kurmanbek Bakiev on the 7th of April, 2010 was overthrown. Recently, the Interim Government that came to power has declared that Kyrgyz Severoelectro and Kyrgyz Telecom will be privatized with the list of many other companies that were sold to private sector during the administration of former President Bakiev.

Probably the most burning problem in Kyrgyzstan is corruption. Corruption is detrimental for entrepreneurship because it destroys fair competition. Thus, in corrupted society companies that base their competitiveness on corruption and sell their products through corruption destroy other more efficient companies that want to enter the market. The worst thing about corruption in Kyrgyzstan is that people are used to it and perceive as normal everyday practice. According to Human Development Report of UN, 47, 5% of all income in the country belongs to 20% of population [3]. However, many economists claim that these figures in reality are worse: thus, 90% of all income within the country belongs to 5% of the richest percentile of population. According to UNDP Poverty Reduction Program about 40% of population in Kyrgyzstan lives beyond the poverty line. [10] People are deprived from ordinary living conditions: minimal nutrition, most primitive forms of medical examination, higher education and etc.

Under the Poverty Reduction Program in Kyrgyzstan I had a chance to survey villages in the southern part of the country. One of the most precious things about Kyrgyz culture is that people are very hospitable. So, whenever someone visits your house, average Kyrgyz family would offer the visitor to stop by and have a tea. Thus, people show respect and hospitality. While survey many households would invite our team to drink tea. However, many of that tea drinking turned out to be real tea drinking- people had nothing else to offer but for bread and tea. Again, naked truth- many can t afford meat, fruits, vegetables and other vital products.

Another national disaster is the high rate of unemployment which is the impeding barrier for country s economic development and solution of social issues. Our working force is forced to move to other countries. According to the National Statistical Committee of Kyrgyz Republic here are approximately one million Kyrgyz immigrants in Russian, Kazakhstan and other CIS countries seeking job and better life [6]. Another crucial moment is that unemployment and corruption force brightest minds of my nation to move to other countries where they have better chances to accomplish their dreams. This is due to the fact that many companies, especially those in public sector hire their relatives and friends or simply those who offer more money for job vacancy. So, nepotism and cronyism unfortunately, are a common practice.

High corruption, absence of the rule of law, nepotism, unemployment and poverty cause political instability. Political instability has disastrous consequences on business. Since 2005 Kyrgyzstan faced two detrimental for business revolutions. After the revolution of 7th of April, 2010 due to severe lootings in Bishkek, capital of Kyrgyz Republic, over 134 big and medium size businesses, over 400 small size businesses, about 10 government buildings were ruined. The approximate damage is $12 million. Today, many of those businesses that were looted are totally destroyed and burned down. Many are not considering starting business again.

The last issue that I would like to mention is an inefficient tax system in Kyrgyz Republic that creates room for corruption and waste of entrepreneur s time and money. According to World Bank s Doing Business ranking, Kyrgyzstan scored the 156th place out of 183 economies. This ranking was estimated in compliance with the frequency of payments that medium sized business has to make (75 payments per year) and waste of time to prepare and file tax returns and to pay the corporate income tax (202 hours or 8.4 days per year) [5].

From the described status quo we can reveal the following problems: unprotected property rights, severe corruption, political instability and heavy taxation.

Now we should question whether any entrepreneur would like to start his venture in such instable political conditions where corruption blossoms, laws decide nothing, burdensome taxes are suffocative and where any political authority as easy as the snap of fingers can take away everything you have created, built and grown with sweating your guts out. How can we even talk about responsible entrepreneurs or business ethics? Such conditions are the cause of the absence of long-term responsible entrepreneurs because here they are never sure what will happen to business tomorrow, whether it will be nationalized, looted or simply taken away by chunky representative of authorities. Therefore, businesses as soon as they start functioning are rushing to cover initial investments and are not caring about social issues.

The role of entrepreneurs in resolving social issues:

Surely, resolving social issues is not something that can be quickly achieved; in fact social issues require long-term commitment. It should be noted that any business that is projecting long-term prosperity will be strategically interested in resolving core social issues of its community. This is because companies by responsible attitude directly benefit by establishing long-term customer relations and thus raising demand for its products, creating company s goodwill and indirectly by raising the purchasing power of its current and potential customers. For example, when the corporation s social strategy is to fight poverty, the successful outcome of this strategy will mean that some portion of population that before couldn t allow this company s products will be able to do so. Thus, the role of entrepreneurs in communities where the rule of law is the king and where property rights are guaranteed by Constitution is immense. Entrepreneurs are the engines of economy because they create value, competition, innovations, working places and thus, by directly pursuing their own interests contribute indirectly to economic development and thus solution of social problems. A man cannot survive without oxygen, the same with entrepreneurship: society can t exist without entrepreneurs. Entrepreneurship is vital for human capital development, and therefore should be protected, supported, promoted, encouraged and rewarded as much as possible.

However, the most significant contribution of entrepreneurship is what was first stated by one of leaders of the Austrian School of economics, Ludwig von Mises, in his book Liberty and Property where he considered a very fundamental question of any free society - the right to vote [7]. Ludwig von Mises found certain causation between the right to elect governmental officials and the right to choose goods in the market. He argues that the capitalistic Western market structure gave an opportunity for ordinary people to choose any goods in the market. He indicates that in free market an average person is a selector. The same happens in politics because when consumers have a right to choose goods in the market they will have a chance to elect politicians. So, entrepreneurs are the ones who offer us an opportunity to choose. Therefore, their role within the society is to ensure our civil rights and thus, democracy.

Because entrepreneurs resolve social issues as unemployment; facilitate to the development of innovations and human capital, governments should be interested in encouraging and extending entrepreneurship. Unfortunately, Kyrgyz government has been unsuccessful in doing so. From the paragraph where we discussed problems of doing business in Kyrgyzstan, we can conclude that traditional business in Kyrgyzstan is lacking foundations of conducting business and this is the major cause why businesses in Kyrgyzstan don t contribute to society. Indeed, why would any entrepreneur lift a finger and care about society which in turn doesn t care about entrepreneur?

So, what should be done in order to stimulate business for long-term commitment? Firstly, basic conditions vital for conducting business such as property rights protection, fair competition and rule of law should be provided, so businesses would desire to contribute to the development of their community if not directly but at least indirectly by creating jobs, value and innovations.

Combating heavy taxation:

There is no such thing as a good tax

- Winston Churchill

As it was written above, one of the obstacles that prevent entrepreneurs to start business and thus prevent them from contributing to society is non-transparent and heavy taxation. So what should be done in order to encourage entrepreneurship development in Kyrgyzstan? The government should make the tax code as simple and transparent as possible. Thus simple taxation system will avoid loopholes for extra corruption opportunity because every citizen will be able to comprehend the meaning on the words in the tax code. Transparency is also necessary to avoid taxation without representation. Thus, one of the most equitable and at the same time efficient taxes is one sales tax of 10% for instance. One tax is easy to administer and also transparent. In addition low tax rate will boost economic growth because one of the economic effects of taxation is that it distorts prices, wages and incomes from optimal levels, thus causing deadweight losses.

Another innovative method of combating unnecessary and burdensome taxes was proposed in the Liberty Act of the Government of Georgia where it says: No new taxes or increase in the tax rates may be imposed other than following an affirmative vote in a nationwide referendum . [2] From my viewpoint this type of tax referendums would really cope with the main purpose of taxation: fair redistribution of income from poor to rich and prevention of tax abuse.

Combating violation of property rights:

Just as man cannot exist without his body, so no rights can exist without the right to translate one s rights into reality, to think, to work, and keep the results, which means: the right of property.

Ayn Rand, Atlas Shrugged

Private property is one of the fundamental elements of the development of entrepreneurship and therefore, government must ensure the full protection of property rights through clear and simple interpretation of legislation. The Law On investments in Kyrgyz Republic prohibits the nationalization or expropriation of property by the state except when national interests are under threat. But how national interest is defined? Such loopholes in legislation should be described in detail.

Combating corruption as a responsible business practice:

Since authorities are the ones who are involved in corruption, they cannot fight against themselves. Therefore, the most efficient way of combating corruption and at the same time being responsible towards society is when an entrepreneurs themselves combat corruption. Thus, corporations could apply anti-corruption strategy by spreading the corporate culture of transparency, accountability, honesty, responsibility and whistle-blower protection. Another way to resolve the issue of corruption is to unite in business associations. According to Gagik Poghossin, one of the founders and the Deputy Chairman of the Board of Association for Foreign Investment and Cooperation (AFIC) in Armenia, most businesses would prefer to operate in a competitive, corruption-free environment, but often they are deterred from doing so by a prisoner s dilemma: if one business refrains from corruption but everybody else does not, that business finds itself at a competitive disadvantage . [9] The solution is to resolve the common problem collectively. An excellent example of such association in Kyrgyzstan is the International Business Club (IBC) which acts as an intermediary between government and business. Today this association is advocating for tax system reforms due to its complexity, heaviness and also loopholes that create opportunities for corruption. Such associations need further promotion among businesses.

So far we have discussed issues within the traditional entrepreneurship because of myriads of problems within it. However, one should keep in mind that traditional entrepreneurs contribute to society s development indirectly by directly pursuing their own interests. There is a clear difference between traditional and social entrepreneurship. Bill Drayton, the founder and chair of Ashoka nonprofit organization devoted to developing of social entrepreneurship emphasized that: "Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry."[1] Thus, the primary distinction between traditional entrepreneur and social entrepreneur is that the first touches upon social issues indirectly, whereas social entrepreneur uses the income generated directly for his mission. Surely, social entrepreneurship should be a paradigm of any business venture since the objectives of socially oriented business are sublime. But how to create favorable conditions so entrepreneurs with exalted powers will spring up all over?

In Kyrgyzstan education could be one of methods of encouraging social entrepreneurship.

Kerry Smith, in his research work named Social benefits of education: Feedback effects and environmental resources discovers relationship between education and environmental protection. [11] Thus, author argues that the more literate society is the more it is likely to be concerned with environmental protection. Today, many secondary schools in Kyrgyzstan teach classes that are remnants of USSR and therefore are not in demand anymore. One example is the mandatory course named Prewar training where high school students are taught how to carry arms, how to blow up grenades and etc. Why not teach courses that are truly in demand? My solution is that secondary school students instead of Prewar training should be instructed courses where they will be taught principles of entrepreneurship, business ethics and leadership. So, according to K. Smith, if we educate our youngsters, soon we will be able to reap the fruits of socially oriented entrepreneurship since new generation will be more concerned with environment and other social issues in general.


If one to evaluate the status quo of entrepreneurship in Kyrgyzstan, due to many problems he/she will be sorry for my nation. However, one must understand that Kyrgyzstan doesn t lack traditional and social entrepreneurs. Rather entrepreneurship activities exist, but are not wisely managed and provided with basic conditions for realization of and therefore is not conducive to economic development.

Our country due to its celestial mountains, virgin forests, magnificent flora and fauna is called second Switzerland . Truly, there are still many natural resources and thus, entrepreneurial opportunities that are yet to be discovered. For social entrepreneurs, there are many community issues that are waiting to be resolved. Ludwig von Mises made a witty comment when stated that the business of business is business . So, let s allow our business to do their business. I strongly believe that if government could provide basic conditions for conducting business, entrepreneurs will contribute more. The only thing we need to do as Christopher Columbus noted is to find courage to leave old shores. So, I invite you to have an incredible sailing towards new shores, new opportunities!

Thank you for your attention!