Uzbekistan's Economic Dilemma

A new programme to promote private enterprise appears to be a move to reduce Uzbekistan’s dependence on raw commodities, but analysts say powerful vested interests are likely to be a major obstacle to changing the profile of the economic system.

Last month, President Islam Karimov approved a programme to help improve the business environment, in year that has been designated the Year of Small Business and Private Entreprise.

The plan envisages sweeping away the bureaucratic barriers standing in the way of setting up new businesses, and giving them access to loans and a range of tax breaks and other privileges.

The authorities seem particularly interested in fostering small-to-medium-sized manufacturers which produce goods of a high enough standard to export as well as for the domestic market, and which create new workplaces and thus improve the standard of living in the process.

John Andrew, an analyst who covers Uzbekistan for the London-based Economist Intelligence Unit, EIU, told IWPR that it remained to be seen whether the strategy would be put into action in any meaningful way, or whether it was just rhetoric.

Uzbekistan is heavily reliant on the revenue it earns from cotton, natural gas and gold, and like many raw-materials exporters, it suffered from falling demand and prices when the global economy slowed down in recent years.

“The reliance on export revenue from basic commodities makes Uzbekistan extremely vulnerable to fluctuations in global prices and demand,” Andrew explained. “Given that the state sector cannot provide enough jobs or sufficient living standards for the population, there are clear risks to the regime's survival. Popular protest among the underemployed, impoverished population could increase, and could spiral out of control if the regime were to falter in any way.”

Some commodity markets have since recovered, but the Uzbek economy remains inherently sensitive to changing external conditions.

“Uzbekistan has benefited from high global cotton and gold prices, particularly in 2010, and from the rapid increase in gas export prices that it has agreed with its main markets in recent years. But gas exports to Russia have been more problematic in 2009-10, as they depend on Russia's demand for gas to send on to its own export markets,” Andrew said.

The government may well have come to realise the need to expand private-sector manufacturing, given the risks of focusing on extracting and exporting commodities, and the fact that even Uzbekistan’s economically dominant state sector cannot generate enough jobs for the growing population.

But changing direction so radically is no easy task, and there is a danger that it will be achieved artificially, through cross-subsidisation.

Dilmurat Kholmatov, an economist based in the Uzbek capital Tashkent, warned that since the business environment was not conducive to foreign investment, the only source of funding to boost local manufacturing was natural resources. The net result might be simply a shift of funds from one part of the economy to another.

In Kholmatov’s view, the real solution to Uzbekistan’s economic imbalance is “liberalisation of the business environment, a reduction of state controls and improvement of our investment reputation”.

But therein lie other obstacles – the existence of powerful commercial interests close to government that have benefited from monopolistic positions for many years and will not welcome the emergence of competitors.

“Meaningful support for the private sector has never formed a part of the Uzbek regime's economic policies,” Andrews said. “The regime's state-directed model allows it to maintain the economic patronage networks that help to keep it in power. Any radical and genuine shift towards support for free enterprise could therefore jeopardise its survival.”

Creating a business environment for free and fair competition would, Andrews said, call for “a far more effective crackdown on corruption than has hitherto been the case”.

“Corruption and patronage networks are closely interlined, which makes this a difficult balancing act,” he added.

In a speech he gave in January, President Karimov claimed the Uzbek economy was performing well thanks to prudent measures that had insulated his country from the problems afflicting many other states.

Andrew expressed caution about the upbeat figures presented by Karimov, saying the EIU estimated that economic growth last year was half the claimed 8.5 per cent, while the inflation rate was probably twice the official figure of 7.4 per cent. Although the automotive industry seemed to be doing well, most of the increase in export revenues reflected rising world prices rather than higher production volumes, he said.

“Despite officially reported rapid economic growth, and a job-creation programme that the authorities claim created almost one million new jobs in 2010 – a preposterous claim – Uzbeks continue to migrate to Russia and other countries in large numbers in search of jobs and higher wages,” Andrew said.

Dmitry Alyaev is a journalist from Uzbekistan now living in Russia.

This article was produced jointly under two IWPR projects: Building Central Asian Human Rights Protection & Education Through the Media, funded by the European Commission; and the Human Rights Reporting, Confidence Building and Conflict Information Programme, funded by the Foreign Ministry of Norway.

The contents of this article are the sole responsibility of IWPR and can in no way be taken to reflect the views of either the European Union or the Foreign Ministry of Norway.