Contrasting contexts for entrepreneurship: capitalism by Kyrgyz decree compared to gradual transition in Uzbekistan.
While post-communist entrepreneurship in Eastern Europe (Dana, 2005; Obloj, Obloj, and Pratt, 2010; Vaduva, Keillor, and d'Amico, 2005), China (Kshetri, 2007; Tan, Yadong and Oded, 2005; and Xiaohong, 2009), and other emerging countries in Asia (Dana, 2002) have raised much research interest, there has been relatively less research about the nature of entrepreneurship in the formerly Soviet republics of Asia. Whereas independence from the Soviet Union enabled the economies of the Baltic States--that had a history of capitalism and independence prior to communist rule--to flourish with a prosperous firm-type sector, the situation in Central Asia reflects a variety of different models.
Between China and Russia lie Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. In 1991, at a meeting in Almaty--the capital of Kazakhstan at the time all five ex-Soviet countries of Central Asia joined the Community of Integrated States (CIS), which in 1993 came to include all of the formerly Soviet republics with the exception of the three Baltic states, namely Estonia, Latvia and Lithuania. O'Driscoll, Holmes and Kirkpatrick (2001) described Turkmenistan and Uzbekistan as "repressed" relative to Kazakhstan, the Kyrgyz Republic and Tajikistan.
What has been published is largely focused on single country studies, for example, Azerbaijan (Rustamov, 2009), Kazakhstan (Dana, 1997; Price, 2006), the Kyrgyz Republic (Dana, 2000), and Turkmenistan (Miller, 2009). Comparative studies are few (e.g., Kazakhstan and the Kyrgyz Republic: Luthans and Ibraveva, 2006). The countries of the Central Asia region are marked by different economic and entrepreneurship contexts.
This article focuses on two of the five Central Asian countries that became independent with the demise of the USSR in 1991--the Kyrgyz Republic and Uzbekistan--and describes how different transition models might be related to different levels of political stability, and to a different path of economic evolution. Our study presents an overview about transition, emergence and nature of entrepreneurship in a world's region that displays amongst the most important energy resources in gas and oil.
The Kyrgyz Republic
The Kyrgyz Republic neighbours China, Kazakhstan, Tajikistan, and Uzbekistan. This was formerly the land upon which 40 Kirghiz tribes led nomadic lifestyles. It was annexed by Russia in 1864, and Russians and Ukrainians introduced sedentary agriculture to the area. In 1918, the Kirghiz homeland became a part of Turkestan--an Autonomous Soviet Socialist Republic (ASSR), within the Russian Federative Socialist Republic (RFSR). In 1924, the Kara-Kyrgyz autonomous region was carved out of Turkestan to become, in 1936, the Kirghiz Soviet Socialist Republic. This became one of the constituent Soviet socialist republics of the USSR; it was commonly referred to as Soviet Kirghizia.
In 1928, the script of the Kirghiz language was changed from the Arabic alphabet to the Roman one. Collectivisation also began in 1928, putting an end to the traditional nomadic lifestyle of the Kirghiz, but resistance to collectivism was exceptionally strong. Rather than transfer their flocks to collective farms, many Kirghiz herdsmen slaughtered their sheep-as did the Kazakhs. In 1941, the nation's script was changed yet again.
The Kyrgyz Republic became independent in 1991 and has since implemented considerable reforms. Yet, in contrast with Uzbekistan, the Kyrgyz Republic is not self sufficient in food and energy (Saidazimova, 2009).
The Republic of Uzbekistan
The Republic of Uzbekistan borders Afghanistan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and the Aral Sea. It is home to historically significant trading centres.
Already in the 2nd century, Samarkand was a wealthy trading centre, prospering thanks to its location at the junction of caravan routes. The Mongol conqueror, Tamerlane the Great implemented his imperial capital in 1369. His dynasty lasted until the 16th century, when Samarkand was controlled by a new Turco-Mongol people--the Uzbeks. The Uzbek language used Arabic script until 1929, and the Roman alphabet from 1929 until 1940-when Stalin imposed Cyrillic. In 1994, the state began to phase out the use of Cyrillic.
The Russians became interested in the area during the early 18th century and, in 1868, the Russian Empire absorbed the country. The Uzbek Soviet Socialist Republic was created in 1924. After WWII, the Russians imposed cotton planting on the Uzbeks, replacing traditional mixed farming. This was a short-sighted strategy because cotton needed water. Similar to Kazakhstan, the Soviets set up an irrigation system, but this caused the Aral Sea ecological disaster.
Uzbekistan became independent on August 31, 1991. Years after independence, the country still displays scars of the Soviet regime. While the Uzbeks are the largest Turkic group outside Turkey, their country is ethnically diverse. Eight out of ten people here are ethnic Uzbeks. The others include remnants of the German, Korean and Tatar communities, as well as Kazakhs, Russians, Tajiks, and smaller ethnic groups.
Uzbekistan has the largest open-pit gold mine and the fourth largest gold reserves in the world. Cotton accounts for 80% of the nation's exports. Uzbekistan is the world's fourth largest producer of cotton and second largest exporter, and is self sufficient in food and energy (Saidazimova, 2009). However, the industry has been under attack for abusive child labour. Agriculture is supplemented by large exports of gold, natural gas and oil.
Pasquero (1988: 184) suggested that quantitativists often let themselves be carried away by strict but limited methods and by unrealistic assumptions, so they "miss a true understanding of real-world behaviours in alien cultures." Indeed, the dominant paradigm in the administrative sciences has been positivist, with hypothetico-deductive methodology, imitating that of the pure sciences. This involves pre-selected constructs in an attempt to obtain meaningful quantitative data which is easily analysed by means of sophisticated statistical software. Survey results are analysed relative to an average. However, Berry (1986), Kuhn (1962), Morgan (1983), Tinker, Merino, and Neimark (1982), and Von Bertalanffy (1968), among others, emphasised that hypotheses are value-laden, and this limits research findings. An alternative to traditional, positivist, hypothetico-deductive quantitative research, is the holistic-inductive qualitative option which is already the dominant paradigm in anthropological research. It relies on naturalistic inquiry, i.e., the research setting is naturally occurring with no manipulation by the researcher (Willens and Rausch, 1969).
Peterson (1988) argued that international and cross-cultural research in small business and entrepreneurship is much desired, but extremely difficult to conduct. In particular, for developing countries or emerging economies, there is a lack of existing sources and research needs to be done on location. Consequently, we began with no hypotheses and no research question other than the objective to collect information on entrepreneurship in Central Asia. It is an exploratory study about entrepreneurship in places where little empirical research has been conducted.
For our study, the word "entrepreneurship" refers to the economic undertaking of entrepreneurs. This is based on the classical definition of the word, which can be traced to the German Unternehmung (literally: undertaking) and to the French entreprendre; the agents of entrepreneurship are entrepreneurs, from the French entrepreneurs (literally: between takers).
The data for this study were collected by ethnographic methods during visits to each of the countries of our study. Methodology included participant observation, and open-ended interviews with entrepreneurs and government officials. The field research reported below is completed by published and unpublished government sources. (Statistics unless specified, were provided by government sources.) Information about the Kyrgyz Republic was largely based on information obtained from: the Ministry of Agrarian Policy; the Ministry of Agriculture and Foodstuffs; the Ministry of Culture; and the Ministry of Industrial Policy. Information about Uzbekistan was largely based on information obtained from: the Ministry of Agriculture; the Ministry of Finance and Economy; the Ministry of Foreign Affairs; the Ministry of Foreign Economic Relations; the Ministry of Industry, Fuel, and Power; and the Ministry of State Property and Privatisation.
Entrepreneurship by Decree in the Kyrgyz Republic
After independence in 1991, there were doubts as to whether the Kyrgyz Republic would embrace a Western-style market system. In September 1991, The Economist suggested that conditions could lead to Islamic fundamentalism, but the Islamic Renaissance Party was outlawed in the Kyrgyz Republic. Pragmatic people, the Kirghiz were much less preoccupied with religion than were the Uzbeks. Foreign investors were welcomed and joint ventures created jobs in Bishkek (formerly Frunze), the national capital. But while joint ventures triggered employment in the nation's capital, efforts to foster transition diverted attention from indigenous entrepreneurship.
In 1992, the Kyrgyz government established the State Commission to increase the effectiveness of SME policies. The Commission, also known as the Fund for SME Support, made available loans to SMEs. The Kyrgyz Republic proved itself right at the forefront of economic reform. Germany, Japan, the Netherlands, Switzerland, Turkey, the United States, the European Bank for Reconstruction and Development, the European Union, the International Monetary Fund (IMF), and the World Bank poured assistance into this new country.
As prices were liberalized, in 1992, monthly inflation reached 50%. Also in 1992, the Roman alphabet was re-introduced. In 1993, a new constitution was adopted and (as part of an International Monetary Fund anti-inflation scheme) a Kyrgyz currency was introduced (the som). By mid-1993, inflation had been reduced to a monthly average of 17%. Soon, the som established itself as one of the most stable, freely convertible currencies in the Central Asian region. Unpublished sources at the State Property Fund of the Kyrgyz Republic claim that inflation fell from 1,360% in 1993 to 87% in 1994.
From 1993 on, privatisation policy led to the sale by auction of enterprises with less than 100 employees and the new Law on Foreign Investments introduced tax incentives. Larger firms evolved into joint stock companies, producing in 1995 already 370 joint ventures in the Kyrgyz Republic. Reform in the Kyrgyz Republic also encouraged the development of an elaborate banking infrastructure. Joint ventures included the German-Kyrgyz Orient Industrial Bank and the Kyrgyz-Swiss Joint Commercial Bank called Adil.
Capitalism ushered a variety of imports into the Kyrgyz Republic, and these were especially visible in the bazaars and smaller markets of Bishkek. However, prices generally became unrealistic considering that, during the late 1990s, pensioners were receiving a monthly pension equivalent to approximately $15, and during some months pensions did not arrive. This made it necessary to rely on offspring and/or other sources of income for subsistence.
Where possible, families, even when they live in the city, have a small vegetable garden and sometimes a cow along with a couple of sheep. The distribution of opportunities remains very uneven, as international aid and foreign investments have been arriving predominantly in the national capital, Bishkek, marked by a rapid urbanisation. Mass migration to Bishkek has also had a negative impact on other areas being depleted of people, leaving houses abandoned and fields overgrown with weeds. In Min-Kush, for example, the former industrial heartland of the Naryn Oblast, mass unemployment is frequent. There is a still serious mismatch between market demand and skills available in the workforce.
Unlike its neighbours, the Kyrgyz Republic became a member of the World Trade Organisation in 1998 (Yalcin, 2009). Literature describes the Kyrgyz Republic as having less black market activity than any of its neighbours and to being more open to foreign investment than any other country in Central Asia (O'Driscoll, Holmes and Kirkpatrick, 2001).
Indigenous Entrepreneurship and Urban Enterprise in the Kyrgyz Republic
While the Kyrgyz Republic experienced a rapid rate of transition, social issues and rural entrepreneurship were neglected. Agricultural land was promptly privatised, but not grazing pasture.
Natural pastures cover over 85% of the nation's land area (nine million hectares). When the co-operatives were dissolved, individuals were given title to livestock, but uncertain about their access to pastures, many farmers opted to slaughter their sheep for immediate profit. Yet, goats and sheep would have been an ideal investment among the agricultural and pastoral communities. The State Commission on Foreign Investments and Economic Assistance, in Bishkek, claimed that farming employed two-fifths of the population in 1998, and contributed about 40% of the GNP. However, this traditional and primary natural resource was given insufficient priority. In these rural areas where bears, snow leopards and wolves roam wild, traditional entrepreneurs set up remote yurt encampments.
Although Stalin's collectivisation ended traditional nomadic lifestyle, the herdsmen still ride on horseback, tending to their livestock much as their ancestors did centuries ago (summer pastures in the rolling grasslands on mountain slopes; winter pastures near the farms). Camels, cattle, goats, horses, and sheep are raised for their milk, meat, fibres, skins and pelts; in addition, horses are useful to carry people while camels are good to transport heavier items, such as a yurt, in its entirety. In addition to indigenous black sheep, the wool from which is good for making carpets, white sheep are also kept. All of the above are potentially a very valuable resource; however, this is not exploited to its full potential due to lack of knowledge in nutrition, health care and breed improvement. Currently, in the Kyrgyz Republic, there is a problem of low productivity in the livestock sector. This can be traced to disease, lack of thrift, poor husbandry and underfeeding.
Water pollution is also a problem, as is the increasing salinity of the soil, a result of faulty irrigation practices. Unjustifiably, there is a lack of technical support to farmers. As a result of the demand for wood, coupled with overgrazing, many mountain pastures no longer have any woody species. Yet, one must not expect a market orientation in the bazaar, as transactions lack a formal framework. As noted by Jaworski and Kohli (1993), there are several antecedents of a market orientation and these are lacking here.
Rapid reform in the Kyrgyz Republic accelerated the creation of new urban enterprise opportunities for formal firms operating in the firm-type sector. Nevertheless, the gap between rich and poor has widened and, despite economic growth, only a minority of entrepreneurs prospered.
The Uzbek Model of Gradual Transition
Rather than precipitate transition, this republic has opted for a gradual approach to economic reform. While independence from the USSR prompted people in other former Soviet republics to focus their efforts on the economic realm, millions of Uzbeks viewed independence as an opportunity to focus on religion. In 1991, mosques were being opened across Uzbekistan at the rate of ten per day.
Uzbekistan did not rush into market economy and established policies opposed to the shock policy approach. The Uzbekistan Communist Party changed into the Popular Democratic Party and with the same people in power reform was slow. We observe a persistence of Soviet-style economy with subsidies, price controls, and centrally planned production. However, this buffered the economy from the sharp falls in output experienced elsewhere, but export taxes complicated international trade.
A harsh Enterprise Tax Law was issued in 1991 and subsequently amended in 1992 and thereafter. The 1992 constitution clearly stated that while the one state language of the Republic of Uzbekistan shall be Uzbek, the state "shall ensure a respectful attitude toward the languages, customs and traditions of all nationalities and ethnic groups living on its territory, and create the conditions necessary for their development." Chapter 9 guaranteed the right to own property (Article 36) and the right to choose an occupation (Article 37).
Until 1993, Uzbekistan had a conservative privatisation programme. The state sold primarily non-transferable shares, to employees only, and at a fixed price. In 1993, Uzbekistan was expelled from the Russian rouble zone. A vast parallel economy arose. In 1994, the sum was introduced, but the new currency experienced rapid devaluation. However, problematic enterprises were required to pay taxes based on sales until 1995 with the consequence that sales were not necessarily proportional to profits. Finally, in April 1995, a tax on profits was introduced and prices were liberalised in 1996. But even if the model of gradual transition was continued, the 1990s in Uzbekistan were characterised by pains of transition. The monthly salary of a university professor was equal to the cost of a single tank of petrol in the parallel economy. Due to disputes with Kazakhstan, Uzbekistan frequently cut off the flow of gas to its neighbours. In turn, Kazakhstan disrupted telephone service. In 2002, farmers were still ordered what to grow, and their harvest continued to be collected by the state.
While independence allowed the Kyrgyz Republic to pursue unprecedented economic reforms, in contrast, Saidazimova (2009) found that the Uzbek government failed to create favourable conditions for SMEs. Suhir (2004) found the number of SMEs in Uzbekistan dropped from 40,000 in January 2001 to only 15,000 in June 2001. Saidazimova (2009) noted the majority of Uzbek SMEs do not receive any bank loans, often lack start-up capital and have limited access to capital markets. In 2004, the World Bank announced concern about corruption in Uzbekistan. Meanwhile, Uzbek labourers have left their country to work illegally abroad (Yalcin, 2009). Referring to economic freedom as "the absence of government coercion or constraint (Beach and O'Driscoll, 2001, p. 43-44), O'Driscoll, Holmes and Kirkpatrick (2001), described Uzbekistan as rather repressive for economic freedom and the government in Uzbekistan to impose greater fiscal burdens than Kazakhstan, the Kyrgyz Republic, Tajikistan, and Turkmenistan.
Environment for Entrepreneurship in Uzbekistan
In 1994, measures were issued to facilitate the protection of private ownership and to develop entrepreneurship. However, entrepreneurship in Uzbekistan is seldom Schumpeterian (1912; 1928; 1934; 1939; 1942; 1947; 1949) in nature, and innovation is limited. Although the Uzbek Soviet Socialist Republic produced excellent engineers, hundreds have moved away. Conditions in Uzbekistan give rather rise to entrepreneurs in the Kirznerian (1973; 1979; 1982; 1985) sense. Individuals identify opportunities for arbitrage and taking risks, as described by Cantillon (1755) and Knight (1921). Often, self-employment is merely a means to survival, but is not a desired activity, and often a part-time effort, required to supplement a low salary. According to the November 10, 2001, issue of The Economist, doctors in Uzbekistan were earning the equivalent of $15 per month at the time. The bazaar is thriving with social as well as mercantile activities, as was the case during the zenith of the Silk Road. At the market, prices often rise as the day progresses, reflecting decreasing supply. Typical of the bazaar, segmentation refers to the clustering of sellers. There is no brand differentiation. Each has his clientele based on relationships. The focus is not so much on the product or service, but on personal relationships.
The nature of entrepreneurship today differs widely between the Kyrgyz Republic and Uzbekistan as a result of a complex mix of Soviet heritage, pluralism and cultural values, government policy related to transition, and the promotion of entrepreneurship.
The Kyrgyz Republic embarked on a model of transition by decree, including a scheme that favours privatisation after independence, entrepreneurship laws, incentives for foreign investments, enhancement of the transportation infrastructure, emerging tourism, coordinated development with Western companies, and deregulation. Meanwhile, Western-style capitalism has been imposed, causing rapid urbanisation and related social problems. Agriculture must no longer be viewed as a stagnant industry; it is affected not only by changing weather patterns and demographic shifts, but also by changing technology, government intervention, competition, and market demands. However, a certain number of potential threats in the future merit mentioning. A threat to development is an emerging problem concerning ethnic minorities. A minority in this new country, Russians have been feeling threatened and many have emigrated, taking with them their skills. In 1989, one out of four residents was Russian; today, the Russian minority has been reduced to less than one out of six. Russians perceive themselves as being treated as second-class citizens, while the Uzbeks--who are more traditional and who value cultural identity over economic reform--claim that they are third-class citizens. A major concern is the exodus of Russians from the Kyrgyz Republic.
The use of culturally insensitive theories, from the West, has contributed to a resentment of what is being called "cultural imperialism." Perhaps then, decision-makers should increase their sensitivity to the culture of this nation and the psychology of its people. Given that the indigenous Kirghiz have been successful herders for centuries, manifesting their entrepreneurial spirit in the countryside, why replace this by urban enterprise? Yet, in 1995, Parliament introduced a new tax on pastureland and another tax on land used to grow hay. Taxing traditional herdsmen should not be the means to reduce state deficits. Rather, these traditional entrepreneurs should be allowed to prosper.
Also problematic is energy distribution. Although the Kyrgyz Republic exports electricity, the nation relies on imported fuel, which is often scarce, especially in rural regions. Allowing the impoverishment of indigenous entrepreneurs can induce social, cultural and political crises, as well as uncontrolled urbanisation, in addition to the growing pains of the existing economic crisis. Both rural and urban sectors can be encouraged to evolve. The creation of free economic zones may be a solution. Such zones exist in Bishkek, Karakol and Naryn Oblast. Yet, research on their effectiveness is lacking. Future research might focus on evaluating concessions made to foreign investors and entrepreneurs. Future research might also speculate on the establishment of more free economic zones. In the Issyk-Kul Oblast, for instance, produce-processing industry could possibly be developed through the establishment of a free economic zone.
In contrast to the Kyrgyz Republic, Uzbekistan proceeded slowly with privatisation and transition to a market economy. With slow reforms, currency crisis and shortages of energy are factors that have a negative effect on the development of entrepreneurial activity. Self-employment is frequently a means to supplement a low salary. There are over 250 airports in Uzbekistan, but most have unpaved runways. As Soviet bureaucracy survived the demise of the USSR, the Uzbek economy is still crippled, as potential investors are discouraged by restrictions on currency movements.
This study has surveyed the evolution of transition and entrepreneurship in two former Soviet republics of Central Asia. Our objective was to provide an overview about the nature of entrepreneurship in these emerging countries of the region between China and Russia. The Kyrgyz Republic has implemented significant reform to improve the environment for SMEs. As observed already by Saidamova (2009), Uzbekistan remains a closed country where all economic and business contexts with the outside world are strictly controlled by the government.
This overview about emerging countries in Central Asia suggests that a variety of models lead to different results. This is where more research is needed. Perhaps transition should not be viewed so much as an end in itself, but rather a means to something beyond. Classic theories cannot simply be taken and injected into transitional economies, in neglect of the environment in which they are to be placed. Historical, socio-cultural and economic contexts appear to be important factors affecting the environment for business; societies cannot all adopt legitimate entrepreneurial systems at an equal pace, nor should they be expected to. Although governments recognise the importance of entrepreneurship, the emphases of their respective promotion efforts differ greatly, reflecting national priorities, demographic factors and cultural values. Likewise, the entrepreneurship sector reflects historical and cultural factors, as well as public policy. In addition to public policy, social norms and education have an influence on entrepreneurship.
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Frank Lasch, GSCM-Montpellier Business School
Leo-Paul Dana, University of Canterbury & GSCM-Montpellier Business School
For further information on this article, contact:
Frank Lasch, GSCM-Montpellier Business School, 2300, Avenue des Moulins, 34 185 Montpellier
Cedex 4, France
Phone: +33 4 67 10 28 18
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Leo-Paul Dana, University of Canterbury & GSCM-Montpellier Business School, Christchurch, New Zealand E-mail: email@example.com