Hunting for the Central Asian Tiger.
At first our Asian country "used trade and exchange rate policies to limit external competition. There were tariffs, a fairly high set of effective rates of protection, and multiple exchange rates, most of which represented an overvaluation. All foreign exchange had to be turned over to the Central Bank, and demand for foreign exchange greatly exceeded supply at the prevailing exchange rates. Public sector imports were given a preference ... the import substitution syndrome appeared in full regalia."(1)
These quotes describe both Taiwan and South Korea in what may be called their "proto-spurt" stage. From early on, their human capital measured in schooling levels had been high relative to the physical capital stock After their liberation in 1945 from Japanese rule, American military assistance and markets helped strengthen their independent economies. Only late in the 1950's and early 1960's did these two countries begin to dismantle controls and offer incentives for export-led growth at accelerated rates. In view of these two countries' low trade participation around 1960, though, it may have been more important that their governments subsidized and coordinated private investments as well as increasing the investments and output share of public enterprises.(2) Quite possibly, those investments complemented accumulated human capital and led to high productivity gains and hence also export possibilities during the world trade boom of the 1960s.
Table 1: Trade Participation in South Korea and Taiwan
Exports plus imports as percentage of GDP 1955 1960 1970 1980 South Korea 13 17 32 63 Taiwan 19 31 53 95
Source: World Bank statistics, U.N. Yearbook of National Accounts
Mutatis mutandis this description of South Korea and Taiwan can also be applied to Uzbekistan, now entering its second decade of independence from Soviet Russia with a development model consciously influenced by Korea and the southeast Asian tigers.(3) Much of the success of any development model, however, seems to depend on the mode of implementation and monitoring-and the willingness to adjust policy when mistakes appear.(4) East Asian states have had competent and fairly uncorrupt bureaucracies. Can Uzbekistanis reasonably hope for a similar transition to a prosperous market economy (and increasing democracy)?
Among the successor states of the former Soviet Union, Uzbekistan has adopted the most unusual approach to economic development-neither the "shock therapy" recommended by the so-called Washington consensus nor the gradual transition as practiced in China or Hungary. Rather, the "Uzbek Road" is parallel to its past Communist trajectory, yet distinct in important ways. As under Gorbachev's perestroika, the state figures as the "chief reformer." But independent Uzbekistan's leaders reject both Marxist socialism and political Islam as ideologies in favor of nationalism. For the first phase of transition, they have put priority is on "stability at any cost," rather than maximum growth. To achieve this stability, Uzbekistan's authoritarian regime subsidizes employment, works towards self-sufficiency in energy and food supplies, preserves some price controls on essential goods and services like energy, and only gradually privatizes some state-owned enterprises. This pattern is similar to the gradual transition in China though without the strong opening to foreign investment. After a brief survey of the geographical and historical starting point for the "Uzbek Road," we describe and analyze its main directions in Sections III-VIII, and then survey the results so far in Section IX.
Table 2: A Geographical Note
For those unfamiliar with Uzbekistan, a few facts may be useful. With 447,400 sq. km of area, this semi-arid country is slightly larger than California. Doubly landlocked, it borders on Kazakstan on the north, Turkmenistan on the west, Kyrgyzstan on the east, and war-torn Tajikistan and Afghanistan on the south. Uzbekistan's valley agriculture is irrigated by the Syr Darya, Ainu Darya, and smaller rivers. They rise in the Tien Shan mountains in Kyrgyzstan or the Pamirs in Tajikistan and empty, much depleted, into the Aral Sea. Agriculture provides about one-quarter of gross domestic product (GDP), industry about one-sixth. Uzbekistan is one the world's greatest producers of cotton and is also a major source of gold, natural gas, and several non-ferrous minerals, notably copper and uranium. Its population is 23.8 million, growing at 1.3% per year.(5) About 77% are ethnic Uzbeks; about 12% other Central Asians; only 5% are Russians. Adult literacy in Uzbek or Russian is said to be 97%.
I. Soviet Background
Just as Japan's rule in Korea and Taiwan had several long-term benefits, such as setting up agricultural research stations and the Bank of Korea, Russian hegemony in Central Asia was positive in some material ways, too, at least compared with the independent countries just to its south.(6) Under Soviet rule since the 1920s, Uzbekistan's level of literacy, public health, education for women, and infrastructure all markedly improved.(7) Uzbekistan became the chief cotton supplier to the rest of the Soviet Union. Its peasants found ready markets for fruits and vegetables in Siberia. Substantial investments were made in industrial enterprises. For example, during World War II the well-known Chkalov aircraft factory began operating in Tashkent. Gas discoveries made the country mostly self-sufficient in energy. Impressive urban facilities were constructed, including an excellent subway in Tashkent. After an earthquake in 1966 the capital was largely reconstructed. Moscow continued to subsidize investments, pensions, and local government in Uzbekistan up to the end of the USSR in 1991, when the estimated transfer from the Union budget was 18.5% of GDP,(8) This pattern has been termed "welfare colonialism." The sudden cutoff of subsidies in 1992 and the end of ruble credits by 1993 were serious jolts to all the countries of Central Asia.
Despite these benefits, President Islam Karimov and other Uzbekistani spokesmen stress the negative side of their erstwhile association with the Soviet Union. Cotton monoculture(9) contributed to the ecological disaster of the Ami Sea, as well as deterioration of the soil in the Fergana Valley. Wasteful irrigation practices still cause Uzbekistan lately to use more fresh water per capita than any other country in the world. Uzbekistan suffered disproportionally from reduced Soviet growth rates and investments during the 1970s.(10) Uzbekistan's stock of textile and other machinery was not renewed. Its estimated net material product fell from 61% of the Russian level in 1970 to 38% in 1990.(11)
In Uzbekistan, as elsewhere in the Soviet orbit, the centrally administered planning system meant slow and uneven technical progress, low efficiency, and many goods of quality too poor for export outside the CMEA market. Uzbekistan's trade was almost exclusively with the other Soviet republics, whose undemanding markets required little development of Uzbek capabilities in modem design, production and distribution.
II. The "Uzbek Road"
The economic strategy adopted by Uzbekistan for its domestic economy can be characterized as a kind of gradualism. As in China, the Uzbeks have no precise blueprint, despite the rhetoric of "stage by stage" progress towards a market economy. Because many state-owned enterprises are not commercially viable and must be subsidized to survive, privatization must be quite deliberate and selective. Agriculture and rural industry are emphasized in state-directed investment plans. In contrast to China, however, Uzbekistan has carved out no enclaves for preferential treatment of foreign or ethnic investors, there being no diaspora of rich Uzbekistani investors and no Hong Kong nearby. Despite some efforts, Uzbekistan has received vastly less foreign investment than has China. A much smaller market than China's and more remote, Uzbekistan also must introduce competition deliberately, rather than depending on spontaneous interregional rivalry.
Islam Karimov, then First Secretary of the Communist Party of Uzbekistan, had visited southeast Asia even before his country's independence. Once elected president, he expressed the desire to learn from southeast Asia, China, as well as Turkey, a secular Muslim state which had also modernized from the top down. Having abandoned Marxism-Leninism as the guiding ideology; he promoted Uzbek nationalism by all means available.(12) Like more famous proponents of "Asian values," Karimov admires "collective mindedness" and the traditional respect for authority and elders which had characterized Central Asian culture from time out of memory.(13)
President Karimov's national development strategy, the "Uzbek Road,"(14) was laid out in yearly book-length publications. His vision preserves the state as "chief reformer," albeit with a legal foundation.(15) Stability, the early principal goal, is to be secured by pro-employment economic policies, public education, child allowances, and welfare allotments to neighborhood associations (mahallah) run by elders. Once self-sufficiency in energy and food has been secured, government guidance and investments will pursue growth by developing backward linkages into more extensive cotton processing, textiles, food processing, petrochemicals and plastics, and agricultural machinery. Imported equipment and technology are essential to this investment strategy, which if successful would increase exports of semi-fabricated and manufactured goods.
Main Elements of the "Uzbek Road"
 Gradual reform, while maintaining social and political stability
 State role preserved in shaping industrialization priorities
 Self-sufficiency in energy and food
 Legal basis established for reforms and private sector
 Social protection of rural, dependent, and low-income groups
For the most part, Karimov's regime has followed the Uzbek Road he mapped out, though with one very important detour--inconvertibility since late 1996 of the national currency, the soum. Owing to poor macroeconomic management and a poor cotton harvest in 1996, Uzbekistan suspended convertibility of the soum, though with repeated promises to return since then. We discuss this in Section VI below. The next sections discuss how the main sectors of the economy have been transformed since 1991.
III. Agricultural Policy
A very important feature of the Uzbek Road has been the preservation of collective agriculture as source of funds for industrialization and welfare programs.(16) All the roughly seven hundred Soviet-era state farms (sovkhozy) were turned into cooperatives, since it was argued that irrigation does not lend itself to individual peasant holdings.(17) Rather, in exchange for deliveries of cotton and grain according to state orders at below world market prices, the peasants receive a private plot and can sell above-quota output on favorable terms.(18) While cotton acreage has been held constant, about 11-15% of total acreage is in these 23,000 peasant plots as of 1998, and that share is increasing. The implicit export tax on cotton--at least 1/3 ad valorem(19)--is similar to recommendations made by many economists to Russia for extracting taxes from its mineral and energy exports. Because of forceful institutional arrangements, including monopolistic ginning, the export tax has not hurt the total cotton crop much, allowing for seasonal variation.(20) Moreover, by ceasing to promote mechanization artificially or provide fuel prices well below world prices, the government has induced Uzbek agriculture to absorb more labor than before. Hand-picked cotton is also superior in quality to the formerly machine-harvested crop which sold at a discount on world markets. Export volumes have followed production figures fairly closely so far, but over the long-term, Uzbekistan's strategy is to use more of Uzbekistan's cotton in domestic industry. Only about 14% of the crop is currently so used.(21)
Table 3: Agricultural Output
1993 1994 1995 1996 1997 1998 1999 (est.) Production (million tons) Cotton 4.2 3.9 3.9 3.4 3.6 3.2 3.8 Wheat 0.9 1.4 2.3 2.7 3.1 3.6 3.7 Cultivated area (mln hectares) Cotton 4.2 4.2 4.2 4.0 4.1 4.0 4.0 Wheat 0.7 1.0 1.2 1.3 1.5 1.5 1.4
Source: Ministry of Macroeconomics and Statistics, IMF Staff estimates for 1999 provided by authorities. IMF, Recent Economic Developments, Table 5.
Outside the cotton area leaseholds predominate. The Paxta Bank, established in 1995 to lend to rural enterprise, has helped increase rural employment, as has the two-year tax holiday on small producers and the fairly large program of loans to small business.(22) Debt repayment has been delayed. Better prices for basic foodstuffs like flour and oil have already reduced dependence on imports nearly to zero.(23) As a result of some astute policy and World Bank grants to support environmentally superior methods, Uzbekistani agriculture has barely shrunk at all during the 1990s, as compared with a very noticeable fall in industrial output during the first years of independence.
These agricultural policies are supposed to increase employment and moderate income inequality, both politically desirable goals for the regime. While incomes are certainly down from 1989, people have migrated from cities back to the rural areas, where the cost of living is less and family supports more reliable. Private plots furnish more than half of total rural incomes, including in kind produce. In addition, more women are engaged in unpaid household work and petty trading than before. Overall, Uzbek agriculture contrasts starkly with the dire agricultural situation in neighboring Kazakstan and Kyrgyzstan, where extensive privatization of land and livestock has left the peasants without credit or means to invest and the state without any institutional device to extract taxes.
Table 4: Sectoral Shares in Uzbekistani GDP
Shares of GDP at factor cost (%) 1993 1994 1995 1996 1997 1998 1999(*) Agriculture 31 37 32 26 32 31 32 Industry 24 19 20 21 18 18 18 Transport, 17 15 16 17 16 16 16 communication, construction Trade 7 8 6 8 9 9 11 Services 22 22 25 27 24 25 25 (incl. govern- ment)
(*) IMF staff estimate for 1999.
Source: Recomputed from IMF, Recent Economic Developments, Table 7.2.
Privatization of state-owned enterprises has proceeded very slowly in Uzbekistan, except for residential housing, small trade, and catering establishments.(24) For industrial enterprises, the ideal method would be to sell to a new active owner who would invest, increase efficiency and quality, and provide more employment.(25) Voucher privatization, a much quicker method adopted in the Czech Republic and Russia, was rejected as unworkable. Fair valuation would be impossible, it is said, and majority-control ownership unavailable. What is more, Karimov argued, privatization prior to establishing competition through demonopolization would have adverse consequences.
Accordingly, sales of small and medium-sized consumer goods enterprises and mechanical engineering shops began only in 1996.(26) By 1997, the 80% of all enterprises still in state hands represented all but 1% of sales. Mining and banking concerns have all so far been retained in state hands. The largest firms (greater than 200 employees) are generally offered to the public through the Privatization Investment Funds Program, but only minority shares are made available. Management structure and personnel have not changed thereby. Only four companies have been listed on the attractively housed new stock exchange in Tashkent, according to the latest figures. Foreign involvement was supposed to be important, particularly in telecommunications, but so far there have been no breakthrough sales.(27) In sum, 451 state properties were sold during 1998, yielding $93 million, less than one per cent of GDP. Privatization revenues fell in early 1999 from the year before, with only 293 enterprized privatized through September. Clearly, "big" privatization is going to be a lengthy project in Uzbekistan.(28)
Mainly as a result of "small" privatization, though, by mid-1995 about four million people were employed in the non-state sector in about 83,500 enterprises.(29) By 1997 more than 100,000 small and medium private enterprises were registered, not counting 19,500 dehkan (family peasant) farms. Many of these smaller firms may be connected to the active bazaar sector, trade proprietorships operating in the huge common urban marketplaces. Various business insurance and consultantships have been established to help them. But Uzbekistani proprietors often lack cash and find taxes heavy and unpredictable. Settling with one tax collector will not oblige his successor. One experienced professor at the Tashkent University told me, "The time is not ripe for private investment."(30)
The ability of a country to sustain material growth depends to a large extent on its ability to make both physical and intangible investments. Most of the ex-Soviet countries have experienced a sharp fall in investment rates, especially in industry and agriculture. These countries had depended on the state for most of their investable funds before the 1991 breakup of the USSR. Uzbekistan has been noticeable among CIS countries in maintaining state investment levels and even increasing them.(31) The official estimates of 27.6% of GDP devoted to gross investment in a 1995 may be exaggerated because the Uzbekistanis count current enterprise and budgetary spending not normally considered investment elsewhere. Even so, the IMF's own estimate of 23% is still impressive,(32) if private (and mostly unreported) housing and petty service investments be added.(33) Private investments in manufacturing have been as scanty as elsewhere in the CIS.(34) Enterprises and individuals provide nearly half of finance for total investments, the government budget about a quarter, and foreign sources another fifth, leaving only about 5% from financial institutions. Uzbekistan's banks are not functioning to mobilize private savings, which often go into private hoards of dollars, as they do in Russia.(35)
Industrial enterprises borrow at concessionary rates and may also obtain foreign currency inputs at the official (overvalued) rate. During the first decade investment priority has gone to basic industry, including phosphate production, industrial and agricultural chemicals, alcohol, and fuels. Of all Uzbek investment reported, 60% goes to industrial facilities (almost all to state-owned ones) down from 68% in 1997 but still quite sizable.
VI. External Policy
Uzbekistan has adopted an external strategy similar to all its Central Asian neighbors: export globalism. Insofar as possible, foreign currency inputs are obtained mainly by exporting staple raw materials(36) and energy to world markets in exchange for capital goods and luxury consumer goods. All the Central Asian states are seeking Western assistance in developing deposits of oil, gas, gold, and other highly salable materials, as well as appropriate pipelines, roads, and other transport facilities. Eventually, by this strategy, backward integration will allow domestic development of textiles, metal products, and other semi-fabricates, first for domestic consumption and later for export.(37) No special trading preference is to be given to neighboring Central Asian states; most-favored-nation treatment and low tariffs are the norm in the World Trade Organization, which all seek to join. Widely bruited plans for Central Asian regional cooperation remain mostly on paper.(38)
This globalist strategy has served Uzbekistan's desire to get out from under Russia's economic overlordship. Trade turnover with non-CIS countries has grown by selling cotton and gold on world markets rather than at lower Russian purchase prices. Not only that, Uzbekistan is trying to replace Kazakstani grain with its own grain and with cheaper foreign supplies. Except for shuttle trade through Almaty, imports from the rest of Central Asia are down. Much of what remains is state-traded energy and water (electricity from Kyrgyzstan, coal from Kazakstan) in exchange for natural gas. The former Soviet countries now account for only 25% of Uzbekistan's exports, down from 62% early in the 1990's, and 54% of its imports, down from 77%. Investment priority to petroleum refining and industrial and agricultural chemicals may reflect a desire to avoid dependence on former Soviet partners as much as a preference for import substitution overall.(39)
Export promotion and some import substitution with modest tariffs had been compatible with rapidly rising trade turnover, just as they were in Taiwan and South Korea.. According to World Bank and IMF figures, exports plus imports of goods alone were about $3 billion in 1992 and had jumped to $8.8 billion in 1997. Services would add nearly another $800 million, and informal shuttle trade and smuggled cigarettes, CDs, and alcoholic beverages-all publicly displayed in Tashkent--are undoubtedly undercounted.(40) In 1998, however, Uzbekistan's exports had to endure the Russian crisis and devaluation, as well as continued industrial decline of the Kazakstan and Ukrainian markets. Uzbekistan has also suffered from non-payment of gas bills from CIS customers. Cotton and gold prices have also been in decline since 1995, while energy prices have only just begun to recover. Despite promises, therefore, the authorities found they could not return to a convertible soum. For the remainder of the decade inconvertibility has more and more hindered decentralized trade, at least the recorded part. As a result, the regime continued administratively restricting consumer goods imports, and official trade figures declined markedly through 1999.
As shown in Table 6, there have been small surpluses or deficits each year in the goods and services balance of trade. Details differ according to source. Whatever the exact figures on current deficits may be, Uzbekistan's accumulated net foreign debt is still small--less than 10% of GDP. Gold and foreign exchange reserves are state secrets, but the well-informed IMF representative estimates gross official reserves have been $1-2 billion in every year since 1993. Poor cotton harvests in 1996 and 1998 put pressures on these reserves. Without assistance from the IMF, still being withheld, external financing has proved expensive.
Table 6: Balance of Payments (in billion of U.S. dollars)
1993 1994 1995 1996 1997 1998 Exports 2.9 2.9 3.5 3.5 3.7 2.9 Imports -3.2 -2.7 -3.2 -4.2 -3.8 -2.7 Net services -0.1 -0.1 -0.3 -0.3 -0.5 -0.3 Capital account 0.9 -0.1 0.2 0.6 0.1 0.0 Overall balance 0.5 0.3 0.4 -0.1 -0.5 0.0 1999([conjunction]) Exports 1.8([conjunction]) Imports -1.9([conjunction]) Net services -0.3([conjunction]) Capital account 0.3([conjunction]) Overall balance 0.0([conjunction])
([conjunction]) = first three quarters
Source: IMF and official figures.
Uzbekistan, like all Central Asian states, recognizes the need for a convertible currency and low inflation. In his earlier works President Karimov stressed the importance of stabilizing the soum and making it convertible to hard currencies. However, since 1996 this desideratum is absent from his main works. Uzbekistan has had an awkward system of multiple exchange rates, with the "commercial" rate for the U.S. dollar more expensive than the official one and obtainable only by a few favored entities. In addition there is a curb or black market, where by this year the rate for the USD rose to some 4 to 5 times the official one! As in Russia, a share of Uzbekistan's hard currency export proceeds (50% at present for "free exports") must be surrendered to the state bank, though hardly anyone imagines this is enforceable in the presence of false invoices and foreign bank accounts.
Quite recently, some tentative steps towards convertibility have been taken. Foreigners and Uzbek citizens traveling abroad can obtain a modest allotment of hard currency at a sharply depreciated rate, close to the curb quotation. While four state-owned banks will be allowed to buy and sell dollars in the open market, there is no assurance about the supply of hard currency the government will choose to make available.
VII. Foreign Investment
Although Uzbekistan has made some gestures to welcome foreign investors,(41) its effort and success have been distinctly less than in neighboring Kazakstan and Kyrgyzstan. Foreign direct investment recorded from 1989 through 1997 was less than $250 million(42)--much below the proclaimed goal of $1 billion--and only 4% of the Uzbekistani investment total. Unlike Kazakstan's attitude in the boom years of 1995-97, only small stakes in Uzbekistan's gas and oil potential have been on offer, not always successfully.(43) Prominent investments have been made by Daewoo of South Korea in vehicle assembly and consumer electronics and also by Samsung in small electrical equipment. Newmont gold mines, British-American Tobacco, and Coca-Cola are well established in the country. Several American firms have negotiated deals for agricultural equipment, too.(44) Most foreign deals, however, involve hotels, tourist services, and retailing of imported consumer goods, not manufacturing or utilities.
Development aid has also been exceedingly small--around 0.1% of GDP. In the last year or so, though, there has been an upturn. The Asian Development Bank lent Uzbekistan $110 million, and the USA has pledged $30 million for demilitarization, modernization of chemical plants, and economic reform.(45)
VIII. Government Finances
No ex-Soviet country has drawn much financial benefit from the sale of state-owned enterprises. During Communist times profits from these enterprises had furnished the bulk of state revenues. Nowadays to collect taxes from newly formed companies or individuals has proved much more difficult. This is the heart of the fiscal crisis of the post-Communist state. Despite recent difficulties, Uzbekistan has avoided this fiscal stringency more than most.
Despite the loss of contributions from the Soviet Union's budget, Uzbekistan's post-independence government has endeavored to maintain essential programs, including social protection, defense and police, schools, public transportation, and irrigation. Public consumption has remained about 25% of GDP, with health, education, and welfare constituting about a third of the total budget. Spending on education, especially on stipends for students, has held up well, though buildings have been neglected.(46) Regional, local, and neighborhood authorities distribute child allowances and support for the disabled and elderly at small administrative expense. On the other hand, real unemployment benefits have fallen more than the numbers of jobless since the early 1990s. Pensions have also fallen somewhat after taking inflation into account, and subsidies on consumption goods discontinued. These economies have assisted the government in reducing the budgetary deficit from 12% of GDP in 1992 to around 2% lately.(47)
Even so, the "Uzbek Road" requires considerable governmental revenues. Relative to West European states, nominal tax rates are high: 40% is the top personal rate, 35% the maximum corporate rate, a 20% VAT, and a 40% rate on payrolls. Despite appearances, though, these direct tax rates are not prohibitive. Personal income and wage taxes yield very little in practice. Although the required single bank account is intended to prevent it, tax evasion is reported to be prevalent. The main collectible taxes are those on corporate profits (on mostly state-controlled enterprises), the VAT, excise taxes on legally imported cigarettes, and the export excise on cotton and gold.(48) A land tax in rural areas is soon to replace profit and indirect taxes. Relying on a land tax conforms to common advice by Western economists to less developed countries with limited tax-collection capabilities.
With reduced fiscal deficits to finance, inflation rates have come down in Uzbekistan, though not as far or as fast as elsewhere in the CIS. Soon after all these countries gained independence most prices were released, with a very dramatic effect on the overall price level and supplies. Uzbekistan's government soon stepped in to prevent exports of essential staples, and price controls imposed to protect the mass consumer. Inflation has come down from very high rates of nearly 1000% yearly at retail and more at wholesale to about 30% lately.(49) Price controls have been gradually lifted, leaving only controlled prices of bread and flour and utilities.
Two other non-conventional methods of financing should be mentioned. The government delays payment of obligations, most obviously wages and pensions, and also issues treasury bills to the banks under its control. Favorable tax treatment allows these banks to make some positive return despite the negative real rate of interest. Individuals are reluctant to hold soum accounts owing to the poor nominal returns and uncertain (but probably high) rates of inflation.
Mention should also be made of the organized form of corruption characteristic of Uzbekistan. By insider reports, which of course cannot be confirmed in documents, the hierarchical regime allows a certain amount of rake-off from local institutions at each level of the government. Regional hakims (leaders) can take somewhat less than the central power-district leaders still less. Officials have been sacked for exceeding their "level" of corruption. According to two first-hand observers, "entrepreneurial corruption" at lower levels of officialdom is limited, as compared to Kazakstan.(50)
As in Taiwan and South Korea during a parallel stage, the multiple exchange rate system allows those who can obtain dollars at the overvalued official rate to make high profits and presumably to pay off high officials to continue the deal. It is an open secret in Tashkent that major trade monopolies require part-ownership for the Karimov family and its close associates. But to maintain his rule Karimov, a Samarkandi, must allow a certain payoffs to political bosses in Tashkent, Andizhan, and other powerful regional centers.(51) On the other hand, local and particularly non-Uzbekistani "mafia" racketeers are brutally suppressed, making small business in Uzbekistan a feasible venture, unlike the situation in Russia. Although income inequality increased sharply in the early 1990s,(52) there is relatively little flaunting of wealth, as compared with, say, Kazakstan or Russia.
IX. How Have They Done So Far?
Uzbekistan's "transition depression" was less severe than in any other country in Soviet Central Asia. By its own official figures, Uzbekistan's total peak-to-trough depression from 1991 through 1995 was about 30% in aggregate output, versus more than 50% in Kazakstan, which of course suffered from tighter integration into the Russian industrial complex and more unfavorable change in its terms of trade. EBRD estimates indicate that by 1997 the shortfall below the previous peak year (1989) was only 13%, versus a 44% average for the CIS and 40-60% elsewhere in Central Asia.(53) All in all, by mid-1999, Uzbekistan's material output was less than 10% below its Soviet peak. No other ex-Soviet republic, with the exception of Estonia, has done as well on this measure. Kazakstan and Kyrgyzstan remain about 50% below that peak. For this relative success doubtless one must credit in part Uzbekistan's low degree of industrialization and ability to continue export of cotton, for which world market prices during the early 1990's were reasonably stable,(54) but this required institutional stability in the crucial cotton-growing regions. Growth since then cannot be so explained.
Since 1995 or 1996 aggregate growth has been reestablished, with annual rates averaging over 3% per annum, according to various international sources. (see Table 5 above) Official growth estimates have been are subject to reasonable doubts.(55) For example, official GDP growth for 1997 was 5.2%, but only 2.4% by the CIA estimate. Lately, the possible overstatement has been much less, though, and whether we accept the official or the scaled-down estimates, Uzbekistan suffered much less growth slowdown than has occurred in Kyrgyzstan and Kazakstan with the Russian economic crisis and falling commodity prices.
Table 5: Growth Rates and Uses of GDP
1992 1993 1994 1995 Real GDP -11.1 -2.3 -5.2 -0.9 growth rate (%) Investment n.a. n.a. 24.2 23.0 share (% of GDP) Government n.a. 46.4 35.3 38.7 expenditures (as % of GDP) 1996 1997 1998 1999 Real GDP 1.6 2.5 4.4 4.1 growth rate (%) Investment 18.9 1.6(*) 31.2(**) n.a. share (% of GDP) Government 41.6 32.3 34.2 n.a. expenditures (as % of GDP)
n.a.= not available
Sources: IMF, Tables 7.1; World Bank Table 1.1; (*)EBRD; (**)EIU estimate for early 1999
Growing income inequality has characterized all the transition economies of the CIS, even though some privileges of the former Communist nomenklatura never appeared in statistical accounts before 1989. Uzbekistan is not an exception, though the extent of gross enrichment appears much less. According to the most careful study, the Gini coefficient of money incomes grew from 0.26 to 0.31 between 1991 and 1995.(56) Median real income fell from 173 rubles in 1991 to 83 by 1993 and then recovered to 122 by 1994, though the deflation to constant rubles during high inflation is unavoidably precarious. Apparently the reduction in money incomes absorbed much of the transition depression, as total employment hardly declined during 1991-94, and the government did not force firings or bankruptcies despite low capacity utilization. This also moderated the move towards greater inequality. Indicators of public health, such as life expectancy and infant mortality, have improved, as contrasted with the deterioration of health in Russia.
As elsewhere in post-Communist societies, the capital city is doing much better than smaller towns and villages. Tashkent consumption is roughly three times the Uzbekistan average. The general urban/rural differential has increased, measured in money income but not deflated for the cost of living(57)
President Karimov likes to say, "We don't throw down the old house until the new one is built." Politically, Uzbekistan does still resemble a Communist regime without proletarian internationalism.(58) Much as we may disapprove of suppression of dissent and political opposition, the "Uzbek Road" appears to be a limited success in its own terms. The main objectives, social stability and slow but steady growth, have been achieved so far. By elite preferences, at least, independence should come before democracy,(59) and public infrastructure before privatization.(60) Export revenues and macroeconomic stability come before complete liberalization of trade and payments. These priorities derive in part from the conservatism of the Uzbek leadership, in part from close observations of the debacles in Russia, Ukraine, and elsewhere in the post-Soviet world.
Uzbekistan's prospects for state-guided evolutionary growth based on gradual import substitution and backward linkages into textiles and food processing are not guaranteed, but they are far from negligible.(61) The rather rapid decline in birth rates will mean less population pressure in future decades, though the labor force will continue to grow at about 2% yearly for the foreseeable future. A gentle decline in Uzbekistan's market position as a cotton exporter can be offset by any improvement in gas and minerals prices. From a material point of view, at least at the development stage, an authoritarian regime has some advantages. Based on the East Asian experience, Amsden and her co-authors state,
"An authoritarian state ensures stability and predictability, propagates ideologies of national unity and common goals, mobilizes society through a one-party system, forestalls and creation of mass alliances against its goals (labor unions in particular), and represses opponents. It is able to discipline not only labor but also capital.(62)
We should remember that the Soviet Union lasted 80 years with a far larger military burden and collapsed only because of imperial ambitions far beyond the dreams of neo-Stalinists now in power in Uzbekistan.
Recalling the southeast Asian successes, much will depend on efficient and honest implementation of Karimov's strategy(63) and on the willingness of Western institutions and firms to keep an open mind about the next turn in the silk road. So far policy implementation has been "better than any other of the larger CIS countries," according to one expert view.(64) To effect the requisite learning, Uzbekistan's legal and financial environment for foreign and domestic investors in manufacturing must be improved, especially by restoring convertibility and reducing bureaucratism in approving new projects. The bureaucracy must be insulted from political interference. Perhaps unwittingly, Uzbekistan has tracked the East Asian tigers' pre-spurt stage of development. Now will it move on to emulate the policies of their second stage?
(1.) Henry Bruton, "A Reconsideration of Import Substitution," Journal of Economic Literature, Vol. XXXVI (June, 1998), pp. 921-23. For confirmation, see Yoon Je Cho, "Government Intervention, Rent Distribution, and Economic Development in Korea," in M. Aoki, H. Kim, and M. Okuno-Fujiwara, eds., The Role of Government in East Asian Economic Development (New York: Oxford University Press, 1997), pp. 20910. Yoon says some of today's major chaebols began in the 1950s with those rents.
(2.) Dani Rodrik, "East Asian Mysteries: Past and Present," NBER Reporter, Spring, 1999, pp. 7-11. Rodrik shows the relative prices of exportables in South Korea and Taiwan in the early 1960s did not increase, hence export performance cannot be ascribed to any artificial increase in export profitability. For a contrary view, see Nam in Takatoshi Ito and Anne O. Krueger, eds., Growth Theories in Light of East Asian Experience (Chicago: University of Chicago Press, 1995). Export credit financing played a "critical role in promoting the export industry." Yoon, p. 212. These credits may not appear in the price of exportables. According to Lawrence Lau, Taiwanese leaders decided late in the 1950's to direct new investments to the private sector; South Korean leaders did likewise a few years later. But little privatization of existing investments occurred in either country. L. Lau, "The Role of Government in Economic Development: Some Observations from the Experience of China, Hong Kong, and Taiwan," in Aoki et al., Role of Government, p. 48.
(3.) Rafts Abazov, "Central Asia in Transition," Slavic Research Center Occasional Paper no. 61 (Sapporo: Slavic Research Center, Hokkaido University, 1998), pp. 5455.
(4.) Bruton, pp. 924-26; Howard Pack and Larry E. Westphal, "Industrial Strategy and Technological Change," Journal of Development Economics, vol. 22, no. 1 (March 1986), pp. 87-128; Hilton L. Root, Small Countries, Big Lessons: Governance and The Rise of East Asia (New York: Oxford University Press, 1996).
(5.) The rate of natural increase (about 2% yearly now) and the total fertility rates have been declining rapidly during the 1980s and 1990s, and there is some net emigration of non-Uzbeks. About half of the Russians, Jews, and Tatars, and nearly all the Germans, have now left.
(6.) Alec Nove and J.A. Newth, The Soviet Middle East (New York: Praeger, 1967).
(7.) Life expectancy for men and women at birth is 70 years, as compared with 44 in Afghanistan, 60 in Pakistan, 64 in Mongolia, 68 in Iran, and just 64 in Russia. The maternal death rate in childbirth and the infant mortality rates (28/thousand) are low for a country of low to medium income. Enrollment in secondary and higher educational institutions continues high. Uzbekistan counts 1760 scientists and engineers per million of population in research and development--a figure comparable to New Zealand's--but emigration of skilled Slavs can be expected to REDUCE THIS FIGURE CONSIDERABLY.
(8.) IMF Staff Country Review 95/23, p. iv.
(9.) Unal (Cevikoz, "A Brief Account of the Economic Situation of the Former Soviet Republics of Central Asia," Central Asian Survey, vol. 13, no. 1 (1994), pp. 45-50. In 1913, only 19% of the sown area was in cotton, with 70% in grain, while by 1989, 47% was sown to cotton, only 21% to grain. Heavy use of fertilizers and pesticides (including DDT) to increase cotton yields in response to Soviet orders has lead to soil contamination and salinization, causing many health disorders.
(10.) Soviet capital growth rates, adjusted for inflation, had averaged 7 1/2% from 1966 76 but fell to less than 5 1/2% growth during 1977-87. Robert L. Kellogg, "Inflation in Soviet Investment and Capital Stock Data," in Measuring Soviet GNP: Problems and Solutions (Washington, D.C.: CIA, 1990), Table 6.
(11.) Because of subsidies, estimated per capita consumption was only 46% below Russian standards. With capital per worker 44% below the Russian level, labor productivity was roughly 60% of that level in 1989-90, according to CIA estimates.
(12.) Replacement of Russian by Uzbek in the Latin script, glorification of "Uzbek" heroes from the remote past like the Mongol Tatar Tamerlane, patriotic roadside slogans, and demonstrative moves to distance the country from Russia were just four means of doing this.
(13.) Though Kazakstan's President Nursultan Nazarbaev flirted with "shock therapy" for a while, he eventually came to a similar set of ideas, termed "enlightened authoritarianism Nulsultan Nazarbaev, Kazakstan 2030: Prosperity, Security and Welfare Improvements for all Kazakhstanis , first published in Kazakhstanskia Pravda, October 10, 1997, since reprinted.
(14.) I.A. Karimov, Uzbekistan: svoi put' obnovleniia i progress (Tashkent: Uzbekiston, 1992) ["Uzbekistan: Its Own Way of Renovation and Progress"]; I.A. Karimov, Building the Future (Tashkent: Uzbekiston, 1993); I.A. Karimov, Nasha tsel': svobodnaia i protsvetaiushchaia rodina (Tashkent: Uzbekiston, 1994). ["Our Goal: a Free and Prospering Homeland"]; I.A. Karimov, Uzbekistan po puti uglubleniiia ekonomicheskikh reform (Tashkent: Uzbekiston, 1995); ["Uzbekistan along the Road of Deepening Economic Reform"]; Islam Karimov, Stabil `nost' i reformy. Stat'i i vystupleniia (Moscow: Paleia, 1996) ["Stability and Reforms. Articles and Speeches"]; Islam Karimov, Uzbekistan on the Threshold of the Twenty-first Century: Challenges to Stability and Progress (New York: St. Martin's, 1998).
(15.) The main emphasis, it must be said, is on perfecting state legislation and enforcing contracts, not restraining the arbitrary intervention of bureaucrats and police. In the latest pronouncement, however, we read that the state will decrease eventually and that the middle class is the "backbone of civil society." Karimov, Uzbekistan on the Threshold, p. 119.
(16.) A.R. Khan and M. Herman have estimates the transfer out of agriculture to be 8-10% of GDP during 1995-96. Cited in Richard Pomfret, "Agrarian Reform in Uzbekistan: Why Has the Chinese Model Failed to Deliver?" Economic Development and Cultural Change, January, 2000, p. 277.
(17.) The irrigation system, however, is wasteful and deteriorating, according to a World Bank report. Uzbekistan Social and Structural Policy Review (Washington, D.C.: World Bank, 1999).
(18.) In times of low harvests, though, the state quotas may be difficult to fill and thus 65-75% of the cotton and wheat harvests may have to be sold at state order prices.
(19.) IMF, Republic of Uzbekistan: Recent Economic Developments. IMF Staff Country Report no. 00/36 (March, 2000), p. 13. Since the purchase price is set at 80% of the world market price at the official exchange rate, effective tax rate on exports depends critically on the exchange rate used in converting soums paid to producers,.
(20.) The bad crop in 1998 appears to be an exception; acreage was not responsible, yields were.
(21.) Eshref F. Trushin, "Uzbekistan: Foreign Economic Activity," in Boris Rumer and Stanislav Zhukov, eds., Central Asia: the Challenges of Independence (Armonk, N.Y.: M. Sharpe, 1998), pp. 208-28.
(22.) Reportedly 2.5 billion soums in 1996-roughly $50 million.
(23.) A record grain crop was reported in 1998-3.6 million tons as compared with 2.5 in 1994.
(24.) 80% complete by early 1995. The Uzbekistan Basic Law ([sections] 53) proclaims the equality of all forms of property. Even casual inspection shows, however, that the common areas and grounds around residential property suffer from lack of ownership and supervision.
(25.) Except for social and environmental projects, where state control would be retained. Some of these active owners turned out to be former Komsomol and Party activists.
(26.) As in East European countries, too, some privatization was to holding companies or state-controlled banks and financial groups. The prevailing Uzbekistani instrument for privatization is about 50 Privatization Investment Funds, which are supposed to buy up shares in actual enterprises. Announcements about small offerings of these to the public are posted in the Tashkent subway.
(27.) In a resolution of November 18, 1998, the Council of Ministers proposed three telephone companies for majority foreign ownership. The Tashkent Airport, Almalyk Mining, Uzcabel, and the National Bank for Foreign Economic Activity for 25-50 per cent foreign ownership.
(28.) Both South Korea and Taiwan found that their state firms could be industrial leaders. Privatization is by no means a panacea, nor state-control a curse in post-socialist circumstances. Alice Amsden, Jacek Kochanowicz, and Lance Taylor, The Market Meets Its Match (Cambridge, Massachusetts, Harvard University Press, 1994), chapters 4 and 5.
(29.) M. Shchetina, ed. Uzbekistan za gody nezavisimosti [Uzbekistan in the Years of Independence]. (Tashkent: Uzbekiston, 1996). In addition, as of mid-1996 1235 enterprises, mostly in the import business, had foreign participation.
(30.) Interview with Prof. D--[name withheld], June, 1997.
(31.) Michael Kaser, The Economies of Kazakstan and Uzbekistan (London: Royal Institute of International Affairs, 1997). Kaser is referring to the increase shown in 1995 over 1994..
(32.) By World Bank figures, all the Central Asian states decreased their investment share in 1997-Kazakstan to 23% and Kyrgyzstan to 19% of GDP.
(33.) In 1997 the rate decreased, perhaps temporarily or owing to recalculation. The Economist Intelligence Unit, in a distinctly skeptical review for early 1999, nevertheless gave an investment figure of 31.2% of GDP.
(34.) The Commonwealth of Independent States, a post-Soviet grouping, includes all 12 of the former titular republics of the USSR except Estonia, Latvia, and Lithuania, who did not join in 1991.
(35.) The Central Bank of Uzbekistan serves in practice as controller of enterprise accounts and access to cash and foreign exchange. It carries out governmental policy and regulations.
(36.) Cotton provides a little more than one-third of Uzbekistan's export revenues, energy about one-eighth.
(37.) Preferences for capital goods imports somewhat parallels the successful experience of Taiwan and South Korea. Linsu Kim, "National System Innovations: Dynamics of Capability Building in Korea," in R.R. Nelson, ed., National Innovation Systems: A Comparative Analysis (New York and Oxford: Oxford University Press, 1993).
(38.) Asian Development Bank, Regional Economic Cooperation in Central Asia (Washington, D.C.: DAI, 1998). The present author was one of the team which compiled this report.
(39.) Islam Karimov, "My budem tverdo sledobat' kursu reform," ["We will firmly follow the line of reform"], Speech of February 29, 1996, in Stabil `nost' i reformi ["Stability and Reform"] (Moscow: Paleia, 1996), pp. 489-508.
(40.) Legally all imports and exports have to be registered by the Central Bank of Uzbekistan, to prevent asset stripping and capital flight. This takes about a month! As is the case for GDP, various international agencies adapt official figures in different ways not adequately explained in their publications. But the overall trends and features are clear.
(41.) In 1994 the Foreign Investment Agency was established and legislation established protection from expropriation and guaranteed repatriation of profits, and made joint ventures exempt from customs duties. In practice, though, making the Uzbek soum inconvertible in late 1996 vitiated the force of some of these provisions.
(42.) EBRD, op.cit., Table 1.5. Uzbekistan's statistics tend to include purchases of foreign capital goods, however financed. This eccentric statistical practice exaggerates foreign-owned investment in the country. By 1997, officially reported FDI had grown to $1.3 billion.
(43.) British, Australian, Japanese, and Canadian firms have expressed interest in the deposits of gold, silver, and tungsten in the west of Uzbekistan; the better explored eastern deposits are to be maintained as state property.
(44.) Interview with John Bridenstine, commercial attache, U.S. Embassy, Tashkent, July, 1997.
(45.) See Karimov, Uzbekistan on the Threshold, published in 1998.
(46.) Richard Pomfret and Kathryn H. Anderson, Uzbekistan: Welfare Impact of Slow Transition (Helsinki: UN University/WIDER, 1997).
(47.) The IMF disagrees with certain Uzbekistani accounting practices and considers the latest budget deficit to be closer to 5%. Part of the difference is interest on treasury bills; another is the quasi-fiscal deficit from losses of state-owned entities.
(48.) Richard Pomfret, The Economies of Central Asia (Princeton, N.J.: Princeton University Press, 1995), ch.5.
(49.) The CPI rose only about 6% during the first half of 2000, but a scheduled 50% raise for state employees in August will almost certainly raise that rate to double digits.
(50.) Pomfret and Anderson, p. 30. On the other hand, the Business Performance and Enterprise Study of the EBRD indicated that 46.6% of firms operating in Uzbekistan "always or frequently" offered bribes, averaging 5.7% of firm revenue. These figures compare with 23.7% and 4.7% in Kazakstan; 26.9% and 5.5% in Kygyzstan; and 29.2% and 4.1% in Russia.
(51.) Shahram Akbarzadeh, "Nation-building in Uzbekistan." Central Asian Survey, vol. 16, no. 4 (1997), pp. 517-42. Sacking of government officials for alleged corruption is quite frequent in Uzbekistan, but whether this is more than a pretext for a purge of political opponents cannot be known from the outside.
(52.) According to Kazer, the interdecile ratio rose from 3.5 to 8.7 within about three years of independence. We should remember, however, that Party apparatchiki benefitted from many free and subsidized privileges under Communism; this kind of income almost certainly never appeared in statistics of income and wealth.
(53.) By World Bank figures, Uzbekistan lost about 3.5% of its per capita income each year from 1990 through 1997, while Kyrgyzstan (despite relatively much larger international support) lost 12.7% yearly, Kazakstan 10.5%, and Turkmenistan, 9.5%.
(54.) Gunther Taube and Jeromin Zettlemeyer, "Output Decline and Recovery in Uzbekistan: Past Performance and Future Prospects," IMF Working Paper, WP/98/ 132 (September, 1998).
(55.) Food prices as collected by UN and IMF missions show a clearly higher rate of increase than do official figures. Local economists assert there are confidential figures available to governmental officials; these are less favorable than the published ones. In addition, it is asserted that officials tend to report output and price figures which conform to governmental targets. Electricity production has been trending down somewhat since 1992, and cement and steel production has been stable; on the other hand, automobile and electronics production, as well as non-cotton agriculture, is up, so no definitive correction can be made based on individual output series. It seems, on the other hand, that much petty trading and some quality improvements are under-reported, as elsewhere in the CIS.
(56.) Agafonoff, Alexander; Isamiddinova, Dilnara; and Sidova, Galina, eds., The Labor Market, Wages, Income and Expenditure of the Republic of Uzbekistan (Seattle: Treadgold Papers, Jackson School of International Studies, 1997).
(57.) Institute of Macroeconomic and Social Research, as quoted in Uzbek Economic Trends, p. 13.
(58.) For the record of increased press censorship and suppression of political dissent, see William Fierman, "Political Development in Uzbekistan: Democratization?" in Dawisha, K., and Parrott, B., eds., Conflict, cleavage, and Change in Central Asia and the Caucasus (New York: Cambridge University Press, 1997), pp. 360-408. Fierman makes the point that since Karimov has reduced political participation, the regime's legitimacy will depend all the more on its economic success and national identification. A public opinion poll by USIA in 1994 indicated majority support for the idea of limiting political rights and freedoms in order to solve economic problems.
(59.) The few public opinion surveys available indicate broad support for social and political stability among the broad populace, though many admit to being uninvolved with public affairs.. About two-thirds of respondents said the economic situation was "good," and 70% said it would improve. Steven Wagner, "Public Opinion in Uzbekistan 1996," IFES, 1997. In a country where global television and the demonstration effect are not raising expectations to unreasonable levels. Few citizens have traveled to Europe or North America, and the Islamic and Central Asian cultural legacy militates against rapid modernization in the American style.
(60.) One would have liked to say "demonopolization comes before privatization," a shrewd piece of advice, in the author's opinion. But aside from a few promises, Uzbekistan has done more to preserve monopolies in its markets than many other ex-Soviet countries.
(61.) One well-informed Middle Eastern commercial attache, after detailing various frustrations with Uzbekistani business practices, said the possibilities are "tremendous ... the market's almost untouched.!"
(62.) The Market Meets Its Match, p. 185.
(63.) According to an influential World Bank survey, Taiwan and South Korea benefitted by competitive and well-monitored allocation of investment capital by their bureaucrats. The East Asian Miracle, Economic Growth and Public Policy (New York: Oxford University Press, 1993), pp. 19-23., 280-84, 308-310.
(64.) Pomfret and Anderson, p. 33.
Martin C. Spechler, The views expressed are personal and do not represent any sponsoring organization.
Department of Economics, IUPUI Russian and East European Institute, Indiana University.
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|Author:||Spechler, Martin C.|
|Publication:||Comparative Economic Studies|
|Article Type:||Statistical Data Included|
|Date:||Sep 22, 2000|
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