Analytical materials / Uzbekistan

Rafael Sattarov: Is the Uzbek Development Model a path towards true modernization?

25.11.2016

“Uzbek institutions can be viewed as examples of crony capitalism (capitalism to benefit one’s own close allies). This model is divorced from reality. There is no intellectual foundation and no open discussion between experts or political and economic circles on how to adapt to the demands of modernity,” – Rafael Sattarov, an independent political analyst, sheds light on the idiosyncrasies of Uzbekistan’s economic model in this CABAR.asia exclusive.

sattarovEver since the collapse of the Soviet Union, a strange politico-economic system has taken shape in Uzbekistan. This system is in some ways similar to and in other ways very different from that of other post-socialist countries in the region. The system of checks and balances has no institutional character but is rather based more on personalities, in which the configuration of elite groups and conflicts of interests are constantly in flux and incredibly confused.

The Interim President of Uzbekistan, Prime Minister Shavkat Mirziyoyev, has initiated a procedure for simplifying the business environment. As such, on October 5th, he signed the executive order “On additional measures to ensure the rapid development of business, all-round protection of private property and the qualitative improvement of the business climate.”

The main goal of the document is to prevent the initiation and conduct of illegal inspections, particularly in cases of unsubstantiated suspension of a business’s activity leading to losses from the illegal actions of government agents. Simply put, law enforcement officials and government bureaucrats are prohibited from making life a living nightmare for businesses in the country. The adoption of measures such as these was necessary for Uzbekistan due to its unique “distributive economic type” that had taken shape. The economy is characterized by a shrinking domestic market and inconsistent, unpredictable economic policies. Moreover, Uzbekistan’s economy, much like the economies throughout Central Asia, can be best be described as statist in that state-owned banks and enterprises maintain a large share of economic activity.

The “cotton thorns” problem

Uzbekistan’s first president, Islam Karimov, developed the current politico-economic model. According to Karimov’s book “Uzbekistan – An Individual Model For Transitioning To Market-based Relations”, the Uzbek model for development is based on five well-known principles:

  1. The de-ideologization of the economy.
  2. The state as the leader of reforms.
  3. The rule of law.
  4. A strong social policy.
  5. A phased transition to a market economy.

Under the Soviet planned economic model, the Uzbek economy was designed for cotton monoculture above all else. The cultivation and harvesting of cotton played a key role in the economic life of the country. Regardless of the fact that gigantic industrial, metallurgical, knowledge-intensive enterprises were created in the country during the Soviet system, implementing national cotton harvest plans was considered by Moscow to be the primary measure of success. As a result, the political and economic elite of Uzbekistan formed around cotton production. This entire corrupt system of registering and manipulating statistics, which are characteristic of modern realities, traces its origins to the Soviet period.

After the collapse of the USSR, the first task facing the Uzbek authorities was freeing the economy from “cotton thorns”. A few months ago, the Kazakhstani economist Kassymkhan Kapparov presented some incredibly interesting statistics, in which he compared the opportunities for economic diversification in Kazakhstan and Uzbekistan. In his opinion, cotton exports accounted for 86% of Uzbek exports in 1992, but these exports had already dropped to 6% by 2014. Meanwhile, automotive exports have risen to 7% of total exports. Meanwhile, Kazakhstani oil exports accounted for 16% of all exports in 1992, but this number grew to 67% by 2014. This figure rose from 61% in 2010 despite a multi-million dollar economic diversification campaign.[1]

As Kapparov noted at that time: “Acknowledging the threat of Dutch Disease, in 2000 Kazakhstan created a National Fund to eliminate excess foreign exchange earnings in an effort to support the manufacturing sector. Since then, the Government has vigorously invested money in this fund, which has grown to 64 million USD. Our neighbor, Uzbekistan, did not create a fund like this, even though their mono-export of cotton was more pronounced than our own. The Uzbek Government spent all hard currency earnings on building industrial facilities and subsidies for other economic sectors including automobile manufacturing. They also successfully implemented oil and grain import substitution. Kazakhstan built regional financial centers and invited a never-ending parade of foreign experts. Uzbekistan introduced a ban on the repatriation of foreign currency earnings and ignored all recommendations. Kazakhstan increased oil exports while Uzbekistan increased the labor force.[2]

To a certain degree, Uzbek authorities were truly successful in their attempts to free their country from a cotton mono-export and, in this way, expanded exports of manufactured goods and chemical products. Though, it cannot be said that this successful policy of moving away from a mono-export has led to a large influx of foreign direct investment. Unfortunately, many foreign investors are still unsatisfied with the image of the country as being unwilling to guarantee the inviolability of investments and non-transparent in the activities of government services. The World Bank’s “Doing Business – 2016” report, which evaluates regulations and rules that promote or limit the expansion of business activities, notes that Uzbekistan is in 87th  place out of 189 countries in the quality and effectiveness of its regulations.

  • Uzbekistan is in 25th place in the quality of procedures for registering new businesses.
  • 38th place in contract enforcement.
  • 44th place in access to loans from banking establishments.
  • 138th place in taxation.
  • 138th place in international trade.

Cotton cultivation, which provides large foreign currency earnings, continues to add to the country’s negative image. The new President will be required to correct and reform these areas, which draw intense international criticism. While the agricultural sector is dominated by cotton exports and provides the state with reliable foreign currency earnings, it is currently under constant and vicious attack by human rights defenders for Uzbekistan’s systemic use of child labor as well as the forced labor of teachers, doctors, and others dependent on state subsidies.

Corruption and administrative barriers

The problems of the Uzbek economic model include growing inequality, stagnation in production, and the tyranny of petty bureaucrats and law enforcement. These factors significantly constrain the economic growth and potential of the Uzbek economy, which could be able to break out as a regional leader with the proper approach and reforms. Much has been written on the role of administrative limitations and their ineffectiveness. Analyses of this phenomenon have shown that an increase in government and administrative meddling in private businesses leads to a corresponding decrease in protections for private property and a rise in the arbitrariness in how bureaucrats and law enforcement interact with the business community.

When a regime is dominated by the authority of a president, the only remaining path for any reform is reliant on leading figures realizing that removing internal barriers is necessary for the sake of development that would naturally allow the state to pull out of stagnation as a result. No matter how many times so-called “statesmen” have repeatedly said otherwise, the only real instruments to fight corruption are the rule of law and equality before the law for all citizens, the development of civil society, democratic values, and freedom of speech. Only these have the capacity to provide the pressure needed for the establishment of hard guarantees for private property as well as the effective implementation and enforcement of laws in the country.

Public and social groups that have been practically unable to defend their own interests have not recognized what principles are truly worth defending. It should be clearly noted that, unlike countries such as the Baltic states, Georgia, Ukraine, Russia, and Azerbaijan, the Central Asian states did not fight for their own independence and were not all interested in the collapse of the planned economy with its diktats from Moscow.

It is noteworthy that the recently enacted laws aimed at encouraging business activity as well as policies aimed at preventing bureaucratic and law enforcement interference have only just begun to gain momentum. Time will tell how effective they will truly be. As is seemingly standard operating procedure for post-Soviet countries, Uzbekistan has moved to institute reforms after entering a period of decreasing growth and after having already become bogged down in economic stagnation. There has been a delay in implementing management reforms, which could very likely remain in a state of partial implementation.

Capitalism to benefit one’s close allies

As has been noted earlier, not one single principle of the Uzbek model of development has been pursued forcefully in the intervening years. The economy never became a political priority. The principle of a phased implementation of reforms can best be represented as а car sliding along without wheels or tires. This model and Uzbek institutions can be viewed as examples of crony capitalism (capitalism to benefit one’s own close allies). This model is divorced from reality. There is no intellectual foundation and no open discussion between experts or political and economic circles on how to adapt to the demands of modernity. Of course, economic diversification can be considered a relative success of this development model, but even this is only a relative success as the state’s foreign currency earnings are still tied to the export of raw materials: gas, cotton, gold, and uranium. Small and medium enterprises are not free in their activities, which further slows economic development.

Many are already talking about a level liberalization in the Uzbek economy, but this liberalization as of yet only truly relates to a change in the rules of the game between the authorities and business. For now, it is difficult to say to what degree these initiatives can work, because the incredibly rapid pace in changes to the rules of the game can actually slow even these most basic initiatives. It is necessary to observe how effective these anti-corruption measures will be in the education system, law enforcement, and within the bureaucracy. Rectifying this situation requires measures that are obvious to everyone. Before we can even begin to talk about the economy in the language of “economics”, timely reforms in public administration are needed above all.

Some statistics

According to the data from Tax Committee chief Botir Parpiev, there are about 4,000 unplanned inspections conducted every year in Uzbekistan. These inspections lead to 1.5 billion Uzbek sums (according to the Uzbek National Bank’s official exchange rate, 3,102.18 Uzbek som equals 1 USD) in fines levied against businessmen, 4.4 billion Uzbek som worth of goods are confiscated, and 1,500 items are sent to the courts. Every year, roughly 200 businesses suspend their activity, which has led to annual losses rising to 25 billion Uzbek som. Meanwhile, there are more than 1,500 annually.[3] For this reason in particular, punitive measures against business such as these can only be reduced after public administration reforms have been implemented.

Of course, there is a large degree of uncertainty in Uzbekistan’s currency market. For now, the Government is doing its best to not notice the “black currency market,” although its status as being a black market is conditional. Everyone has long grown accustomed to it, and “currency hucksters” operate quite openly and safely in their own niche. Naturally, much depends on to what extent the new Prime Minister and President will be prepared to introduce certain corrections to an area that is quite painful for citizens and businessmen, who suffer the most from the som’s lack of convertibility. You can explain this situation with complicated financial jargon and refer to certain formulae and economic theories, but the inconvertibility of the sum will be maintained due to the whims of a few people that derive incredibly large profits from this situation.

Uzbekistan only recognizes external debt as part of the national debt. According to the IMF, Uzbekistan’s national debt in 2015 rose to 11.6% of GDP from 8.5% in 2014. According to the European Bank for Reconstruction and Development (EBRD), external debt comprises 15.3% of Uzbekistan’s GDP.[4] In practice, Uzbekistan had $14.297 billion USD in outstanding external debt or %15.8 of GDP in 2015 respectively. In 2016 it rose to $14.553 billion USD, which is 20.7% of GDP. According to IMF projections, this number will be $14.701 billion USD or 19.7% in 2017 and $14.634 billion USD or 18.7% in 2018.

Massive changes in the character of the Uzbek economy could also impact the agricultural sector, which has been subjected to merciless, sustained criticism in the international arena. Shavkat Mirziyoyev has already called for a reduction in the area allocated for cotton cultivation, the transfer of that newly vacant land to growing vegetables and fodder, and the creation of intensive gardens and greenhouses. The need to reform the agricultural sector necessitates a rational use of land and water resources. According to Mirziyoyev, it would be preferable to reduce cotton cultivation in the fields where the cotton yield is low, and plant vegetables, legumes, fodder, and vineyards in the place of cotton. In the Surkhandarya region alone, 18,000 hectares of cotton and wheat fields will be repurposed in this way in 2017.[5]

What is next?

As the current situation shows, the country needs radical changes towards a more modern economic model, because none of the Uzbek model’s five principles of good development have ever been even close to fully implemented. Going point by point, beginning with the de-ideologization of the economy and the rule of law to a phased transition to a market economy, the model languishes in last place in global rankings. This can, of course, be attributed to the machinations of external powers that are envious of Uzbekistan’s success or a “liberal monetarist conspiracy”.

Nevertheless, many of the model’s problems and the approach to administration by the bureaucracy and law enforcement agencies are noted in the electoral platform of Uzbek Interim President Shavkat Mirziyoyev. Economic stagnation and a further preservation of the old model will intensify any weakness and isolation in relation to the leading global economies. Isolation in the education sector, lack of integration with the modern world, corruption, parochialism, nepotism and chaebolization[6] of the national economy will lead to the country losing access to the latest technology. It is also impossible to maintain long-term stability under conditions of a growing technological gap and shrinking personal incomes and GDP. Therefore, the following measures, which are not disputed by Uzbek officialdom, must be enacted to bring real modernization to the country:

  1. For successful modernization to take place, large investment is required, either internal or external, and measures must be taken to improve investor confidence.
  2. The implementation of real, not declarative, institutional reforms is needed in the judiciary, tax collection, and educational system.
  3. True democratization of the country, improving protections for free speech as well as approval of and not resistance to investigative journalism, in particular journalism aimed at investigating conflicts of interest within the Government and business community.
  4. Real conditions must be created for competition and a level playing field for small and medium enterprises. Steps must be taken to reduce the arbitrariness of the bureaucracy and law enforcement.

References:

[1] Alexander Simoes. “What Does Kazakhstan Export? (1992)” Observatory of Economic Complexity. (accessed 23 November 2016).  http://atlas.media.mit.edu/en/visualize/tree_map/sitc/export/kaz/all/show/1992/

[2] Kassymkhan Kapparov. Facebook post, 27 June 2016. (accessed 23 November 2016).  https://www.facebook.com/kkapparov/posts/10157000870185507

[3] Rafael Sattarov. “Как могут измениться взаимоотношения власти и бизнеса в Узбекистане? [How can cooperation between the authorities and business in Uzbekistan change?]” vlast.kz. 11 April 2016. (accessed 23 November 2016). https://vlast.kz/politika/20056-kak-mogut-izmenitsa-vzaimootnosenia-vlasti-i-biznesa-v-uzbekistane.html

[4] European Bank for Reconstruction and Development. “Transition Report 2016-17.” (accessed 23 November 2016). http://2016.tr-ebrd.com/countries/#

[5] Sputnik Uzbekistan. “Мирзиёев: вместо хлопковых полей будут созданы интенсивные сады [Mirziyoev: intensive gardens will be created instead of the cotton fields].” 24 October 2016. (accessed 23 November 2016). http://ru.sputniknews-uz.com/economy/20161024/3957240/mirzieev-shlopok-sokrashenie.html

[6] Translator’s note: Chaebolization refers to the South Korean phenomenon of family and clan run private conglomerates (chaebol) that control large swathes of the national economy.

Author: Rafael Sattarov, independent political analyst (Tashkent, Uzbekistan)

The position of the author does not necessarily reflect the position of the CABAR.asia editorial board.

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