_3. A MODEL OF STRUCTURAL CHANGE AND INTEGRATION_ and climate favor two major export crops, cotton in the south and wheat in the north.<sup>7</sup> High trade costs and the regional economic disintegration that has reduced access to large markets for sparsely-populated countries can explain the lack of economic diversification. The geography of Central Asian countries, which are all landlocked countries with limited connectivity in all directions except North, and the poor quality of transport infrastructure and policies lead to high transport costs and poor transport connectivity (Pomfret, 2016). While high subsidies have allowed traditional crops (cotton, and wheat from northern Kazakhstan) to be exported, high trade costs especially hurt small farms and other agriculture products have been deterred from being exported. In addition to recent liberalization efforts due to new political contexts, new transport and border investments would support production diversification and trade in more profitable crops and agricultural goods.<sup>8</sup>

# **3 A model of structural change and integration**

In order to quantify the consequences of reductions in transport time, we use a quantitative economic geography model of the distribution of economic activity across regions and sectors within countries. We build on Fajgelbaum and Redding (2018) enhanced with labor mobility frictions and later apply it to develop counterfactual scenarios.

The distribution of economic activity across regions and sectors is determined by productivity and relative prices, where these prices depend on both external and internal transport costs. The economy consists in three sectors: manufacturing, agriculture, and non-tradables. It consists of a set of locations _l_ ∈ Λ that differ in terms of their position and natural endowments. The transport network and border requirements defines the trade cost for each location to access a main transport hub (seaports, air ports, or dry ports) that have direct access to world markets at exogenous prices {{ _Pg_<sup>∗</sup> }<sup>_G_</sup> _g_ =1<sup>_,P_</sup> _M_<sup>∗}thatdependonexternaltransportcosts.Weassumethat</sup> Central Asian economies are small enough relative to world markets for the world prices to be exogenous. Each location has a land area _L_ ( _l_ ) that can be allocated among the different sectors.

In addition, individuals are assumed to be imperfectly mobile across regions. The model incorporates a large number of potentially asymmetric locations that differ in terms of their

> 7Following Russia’s conquest of Uzbekistan in 1875 with the fall of Khiva and the American Civil War which created a shortage of cotton, the Tsarist regime developed the cotton sector and built railroads to transport cotton to Russia. The most productive wheat farming is in northern Kazakhstan, while other Central Asian countries expanded their wheat area after independence in a quest for greater food self-sufficiency, but their wheat is of lower quality than Kazakhstan’s. The traditional livestock sector that shrank drastically after 1991 could revive as incomes increase and diets change, and niche products could also be developed.

> 8In Uzbekistan the new president has been pushing for traditional production of raw cotton and poor-quality wheat to be replaced by higher specialization in the new comparative-advantage products of horticulture. The recently-elected president is pushing for reforms to modernize the economy. At the end of 2017, the convertibility of the currency was seen as a main step to open the country, boost exports and attract potential investors.

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