Wednesday, 27 March 2002

CHALLENGES TO SMALL & MEDIUM ENTERPRISE DEVELOPMENT IN UZBEKISTAN

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By Douglas L. Tookey (3/27/2002 issue of the CACI Analyst)

BACKGROUND: Uzbekistan's leadership often stresses the importance of small and medium enterprise development. In a recent speech to Uzbekistan's Cabinet of Ministers, President Islam Karimov  stated that in 1991 SMEs accounted for 1.5% of Uzbekistan's gross domestic product, and that by 2000 this figure increased to 31%, with 3 million people employed in the same  sector.

BACKGROUND: Uzbekistan's leadership often stresses the importance of small and medium enterprise development. In a recent speech to Uzbekistan's Cabinet of Ministers, President Islam Karimov  stated that in 1991 SMEs accounted for 1.5% of Uzbekistan's gross domestic product, and that by 2000 this figure increased to 31%, with 3 million people employed in the same  sector. He noted that because approximately 60% of the Uzbek population live in rural areas and most of these individuals have some connection to the agricultural sector, SMEs can benefit the agricultural sector, which in turn will increase the country's export potential. He stressed the role of SMEs in promoting social stability, in giving citizens an ownership interest in their communities, in contributing to the economic health of the country, and in helping Uzbekistan to compete in the world market. In recent years Uzbekistan has passed several laws related to the promotion of SMEs. One of the most important was the May 2000 "Law on Guarantees of Freedom of Entrepreneurial Activity". Article 5 of this law states that a medium enterprise employs not more than one hundred individuals, a small enterprise employs not more than forty individuals, and a micro-enterprise employs not more than ten individuals. This law is comprehensive and is meant to provide a solid legal basis for SMEs, addressing all aspects of SME creation, development, and legal protection. For example, Article 8 details the rights of entrepreneurs, including the right to sell products at prices the entrepreneurs determine, and the right to engage in foreign trade. Article 34 is meant to eliminate unnecessary government involvement in entrepreneurial activity, while Article 39 mandates that state inspections of SMEs should be reasonable and not disruptive of SME activity. In addition to government support for SMEs, many international organizations and Tashkent-based foreign embassies actively support the development of SMEs. These groups include the United States Agency for International Development, the Asian Development Bank, the United Nations Development Programme, the European Bank for Reconstruction and Development, the Organization for Security and Cooperation in Europe, and the European Union's Tacis Programme. Their programs usually focus on developing micro-credit sources, and providing SME training for entrepreneurs. Uzbek NGOs, such as the Business Women's Association and the Tashkent Business Club, are also active in SME development activities.

IMPLICATIONS: In spite of the Uzbek government's recent actions promoting SMEs, through the adoption of SME-related legislation as well as its support of the SME development work of international organizations and Tashkent-based foreign embassies, significant obstacles must be overcome if such enterprises are to thrive in Uzbekistan. Many entrepreneurs are not aware of Uzbekistan's legislation concerning SMEs, and there is a great need for this legislation to be widely distributed to increase the legal literacy of entrepreneurs. Often these entrepreneurs do not know their legal rights, or how to protect these rights through administrative or judicial processes. Some entrepreneurs also point to complicated registration procedures for SMEs. The state bureaucracy is less than transparent, and negotiating its various levels proves to be a daunting task for even experienced professionals. Even though some Uzbek banks and international organizations provide sources of credit, the process of obtaining this credit is often complex, and in the end many beginning entrepreneurs lack start-up capital. For many of those businesses that are able to get started, there are additional challenges in terms of obtaining modern technology, and this problem is compounded by the unwillingness of many foreign companies to invest in Uzbekistan, as the national currency (the soum) is not convertible. Many entrepreneurs also cite unfounded and numerous inspections by various state authorities as an obstacle to SME development. Other Uzbek entrepreneurs point to the need for ongoing training opportunities in accounting, financial analysis, and marketing. Finally, some entrepreneurs indicate they do not trust in the government's ability or political will to provide a friendly environment for SMEs, and that the opportunity to develop a business remains open only to the select few with government connections. Although these obstacles are formidable, factors that will help Uzbekistan as it seeks to develop SMEs include its well-educated population and high literacy rate. Many potential entrepreneurs have good ideas and they are willing to work hard to develop a business. Some examples of successful micro-enterprises include those related to the sale of candy, clothes, fruit, and farm animals. Successful small enterprises include those related to the sale of Uzbek handicrafts, and the operation of greenhouses, restaurants, and hotels. Other examples are bakeries, and household construction and renovation businesses. Successful medium enterprises include those related to the production of soft drinks and dairy products.

CONCLUSIONS: If the Government of Uzbekistan follows through on its promises to make SME development a priority in its economic policy, then SMEs may indeed increase in Uzbekistan. However, the government's recent public statements in support of SMEs must be matched with concrete actions that nurture the development of SMEs. These actions include the enforcement of SME legislation meant to protect entrepreneurs, the establishment of new sources of credit for entrepreneurs, and the elimination of unnecessary government involvement in the SME sector. Uzbekistan has a rich resource base, both in terms of natural resources and human resources, to aid in SME development. Perhaps most importantly, there is a tremendous desire on the part of many first-time entrepreneurs and young people to establish their own businesses. This desire may prove to be the decisive factor in whether or not SMEs flourish in Uzbekistan.

AUTHOR BIO: Douglas L. Tookey is the Economic & Environmental Officer at the Organization for Security and Cooperation in Europe (OSCE) Centre in Tashkent, Uzbekistan. Prior to working for the OSCE in Uzbekistan, he worked as an Environmental Law Liaison with the American Bar Association's Central and East European Law Initiative in Kiev, Ukraine. The views expressed in this article as those of the author alone, and not those of the OSCE.

Copyright 2001 The Analyst. All rights reserved

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