UZBEKISTAN’S ECONOMIC REFORMS AND THEIR CHALLENGES
The security of Central Asia partly depends on the ability of these countries to transition from the state-controlled and inefficient command economic systems they inherited from the Soviet Union to more dynamic free-market economies, which can more easily attract foreign investment and generate employment and economic growth. These enhancements could reduce potential sources of domestic alienation and provide their governments with more resources to support regional security initiatives in Afghanistan and elsewhere. The Silk Road strategies of the U.S. and other countries also would achieve greater success if the Central Asian countries were more dynamic and better integrated into global economic processes. Uzbekistan and its recently announced economic reforms is a case in point.
BACKGROUND: Uzbekistani officials state that they are seeking to create a modern economy on the basis of the rule of law. The government has recently introduced a number of legislative and judicial reforms toward this end. For example, recent laws provide guarantees of freedom of entrepreneurship, reduction of inspections of business entities, and specify the rights and responsibilities for a new form of entrepreneurship: family business.
Uzbekistan’s government has also been striving to diversify the economy, attract more foreign direct investment and technology, and make its exports more competitive. Its import substitution strategy needs foreign companies to establish production facilities in the country. The government has spent some US$ 100 million to construct the high-tech Navoi Free Industrial and Economic Zone and the Angren Special Industrial Zone, which aim to encourage local high-technology startups and attract more foreign direct investment.
The diversification campaign has had some success, with cotton now accounting for a much smaller share of Uzbekistan’s exports than the 70-80 percent share it held two decades ago. At present, cotton, metals, energy and petroleum products amount to slightly more than half of the country’s total exports, while machinery and equipment account for almost half of all national imports. Some Uzbekistani firms have been able to leverage their natural endowments with late-comer advantages to find a comfortable niche on international markets.
According to Uzbekistan’s calculations, oil, gas, and petrochemicals represent more than half the country’s future economic activity. But Uzbekistan’s central location also makes it a useful base for exporting throughout Eurasia. For example, General Motors sells the more than 100,000 engines it manufactures annually in Uzbekistan throughout the CIS region. Uzbekistan’s government offers GM strong support in the form of tax benefits, preferential loans, and help in developing the local market.
The recently adopted Asian Development Bank (ADB) partnership strategy (CPS) with Uzbekistan for 2012-2016 affirms Uzbekistan’s goal to become an upper middle-income country by 2020. The CPS aims to promote balanced growth, economic diversification, private sector development, and more jobs. Priority development sectors include transportation, energy, municipal services, water, and access to finance. The CPS also seeks to improve governance, regional cooperation and integration, private sector development, knowledge management, and gender equality. At present, the ADB supports 35 joint projects at an aggregate cost of more than US$ 3.8 billion.
Even before the recent reforms, Uzbekistan has been experiencing strong growth rates of 6-8 percent annually for the past few years, while the government has kept its annual budget deficit and overall public debt relatively low. The International Labor Organization calculates national unemployment at a very low 1-2 percent.
IMPLICATIONS: One reason for Uzbekistan’s strong performance is the country’s growing economic ties with China. The PRC is Uzbekistan’s second largest foreign trade partner after Russia, with mutual trade amounting to US$ 2.5 billion in 2011. Chinese nationals have made substantial direct investments in Uzbekistan to help develop the country’s natural resources, including in the gold as well energy sectors. Uzbekistan has some 400 joint enterprises with PRC investment. According to its new contract with China in May 2012, Uzbekistan will export about 2-4 billion cubic meters (bcm) of gas to China this year via the Central Asia-China transit pipeline that runs through Turkmenistan and Kazakhstan. Uzbekistan, the largest producer of cotton in Central Asia, recently surpassed the U.S. as the main source of the PRC’s cotton imports. In addition to cotton fiber and energy products from the Caspian Basin, other Uzbek exports to China include metals, minerals, and food products.
Uzbekistan’s government has a program of modernization, technical and technological upgrading of key industries for the 2009-2014 period that anticipates some US$ 20 billion of foreign direct investment. China is the logical source of such investment. The PRC offered the SCO’s Central Asian members billions of dollars in easy short-term credits to help them manage the regional implications of the global financial crisis. According to the Uzbek government, their country has used these interest-free and long-term soft loans from the Export-Import Bank of China to support some 20 infrastructure projects worth more than US$ 600 million. Although China’s increasing assistance is welcome in many respects, the aid often supports Beijing’s priorities while offering insufficient guarantees against corruption and misappropriation, thereby serving as a means to evade implementing necessary domestic reforms.
Economic ties between Russia and Uzbekistan also remain strong. Russia is Uzbekistan’s largest trading partner. According to the State Statistics Committee of Uzbekistan, its share of the country’s trade turnover was 24.3 percent during this reporting period. Uzbekistan’s total turnover in January-September 2011 amounted to US$ 18.8 billion (compared to US$ 7.7 billion with other CIS countries).The trade between Russia and Uzbekistan grew by 5.6 percent year-on-year in January-September 2011, to US$ 4.6 billion. During this period, Uzbekistan exported US$ 2.9 billion worth of goods and imported US$ 1.6 billion. GM Uzbekistan was the tenth largest seller of cars in Russia during the January-October 2011 period.
The Russian company Mobile TeleSystems (MTS) claims that Uzbek authorities unfairly deprived MTS of its subsidiary Uzdunrobita, a US$ 700-million concern that MTS bought in 2004. (See 10/17 issue of the CACI Analyst) But Lukoil, the largest foreign direct investor in Uzbekistan, is eager to help develop the country’s natural gas industry. According to Uzbekistan’s government, only one fourth of the country’s total hydrocarbon resources have been extracted. Lukoil’s four concessions in Uzbekistan (Southwest Gissar, Aral, Kungrad and Kandym-Khauzak-Shady) account for 54 percent of Lukoil's total marketable gas output outside Russia. The company recently announced a major discovery at its Shurdarye field. Another constraint on Tashkent regarding Moscow is the presence of a large number of Uzbek migrant laborers in Russia, who are vulnerable to persecution and expulsion.
In June, the Russian and Uzbekistani governments signed a memorandum of understanding on Uzbekistan’s accession to the CIS free trade zone that was established by most former Soviet republics on October 18, 2011. According to the latter document, Tashkent would close negotiations on its accession to the free trade zone by the end of 2012 and join the zone from 2013 on. Uzbekistan’s central geographical location makes the country of key importance for current Russian efforts to promote economic integration in the post-Soviet region. Without Uzbekistan’s participation, Russia cannot develop direct economic ties with Tajikistan and Kyrgyzstan, which have already expressed their intention to join the Russian-Belarusian-Kazakh Customs Union.
The World Bank ranks Uzbekistan 166 out of 183 in terms of “ease of doing business.” Although some Doing Business scores are increasing, Uzbekistan is making slower progress than many other countries. Many structural difficulties result from Uzbekistan’s relative geographic isolation as a doubly landlocked country and the structural distortions from its gradualist government-led development strategy. Pending further diversification, moreover, Uzbekistan is vulnerable to a decline in the world prices for its cotton, copper, gold, and energy exports as well as constraints on the remittances from its migrant workers, which constitute a large share of Uzbekistan’s national GDP.
CONCLUSIONS: Uzbekistan’s economy could perform better if the government modernized the national infrastructure more rapidly, improved all levels of education, allowed for a freer flow of information, developed a sound insurance market, relaxed its rules on currency conversion, did not require a 100 percent prepayment for all purchases, made it easier to secure long-term visas for foreign employees, further developed its banking sector, increased transparency of government procurement and regulatory processes, permitted foreign firms to repatriate more profits, and reduced formal and informal barriers to trade with neighboring countries. Other challenges to Uzbekistan’s socioeconomic development include maintaining security in the country despite the turmoil in neighboring Afghanistan, averting regional conflicts over access to water and energy resources such as by using both resources more efficiently, ending child labor, and raising national productivity and the delivery of essential public services in rural areas.
AUTHOR’S BIO: Dr. Richard Weitz is a Senior Fellow and Associate Director of the Center for Future Security Strategies at the Hudson Institute.
