“With the relatively successful implementation of at least part of the necessary reforms, there is hope for the formation of more or less effective inclusive market institutions, for the creation of conditions for sustainable economic development, the formation of a “middle class” and civil society. The “middle class” and civil society will become a social support for further economic, legal and political reforms in the future,” mentioned Yuliy Yusupov, director of the Center for Assistance to Economic Development (Tashkent), in an article written specifically for the analytical platform CABAR.asia.
As an independent state, Uzbekistan appeared on the world map in 1991. Reforms began in the country that were supposed to create the foundations for the functioning of a market economy. However, in 1996, the economic course was strongly changed towards increased government intervention in the economy and import substitution policy. In order to accelerate industrial development, the state redistributed huge flows of material, financial, currency and labor resources through:
- direct resource allocation, administrative regulation of commodity prices, interest rates and exchange rates,
- high taxes and government spending, including significant government investment,
- limited access to the official exchange rate, which is favorable for currency buyers (usually 2-3 times different from the market one),
- creation of artificial monopolies by restricting market access for new players and providing conversion, tax, credit, and other relief schemes to individual enterprises or groups of enterprises,
- direct (“manual”) management of enterprises,
- restriction of imports by tariff and non-tariff barriers.
As a result, there is an extremely low level of economic efficiency and rates of economic growth (not drawn 8-9%, but real), a high level of unemployment and external labor migration, widespread corruption.
GDP per capita, in US dollars, nominal growth – in times. World Bank data
Because of the current policy, market reforms were curtailed, market mechanisms were partially replaced by command-and-control regulation. Restricted competition, high costs of doing business, insecurity of property rights and transactions did not allow the creation of competitive industries. Incredible benefits and a high level of monopoly stimulated corruption, quick rental profits and the export of money capital. All this negatively affected the employment and income of the population.
In this vein, according to the results of a sociological survey conducted in the summer of 2018 (there are no earlier data) with the labor force of about 18.8 million people, employment in the official sector of the economy amounted to 5.3 million people (less than 30% of the labor force), in the informal sector – also about 5.3 million people (including 1.6 million employed in temporary one-time and seasonal jobs), the number of external labor migrants exceeded 2.6 million people.
Note that the indicator of the number of external migrants is apparently significantly underestimated.
Time for reforms
With the coming to power of the new president of the country, economic reforms began in Uzbekistan. The most crucial ones (2017-19) are:
- Liberalization of foreign economic activity.
The country’s government introduced free conversion of the national currency for current transactions, eliminated a number of administrative barriers to the movement of goods and people (primarily with Uzbekistan’s neighbors), significantly and reduced customs payments, which are the most important achievements of reforms in Uzbekistan.
- Reform of the banking sector and monetary circulation.
In recent years, there has been a deregulation and commercialization of the banking sector in Uzbekistan. The Central Bank has significantly restructured its activities in terms of control and regulation of commercial banks, regulation of money circulation and the foreign exchange market. Banks have become more customer-oriented, the cost has dropped significantly, the quality has improved, and the range of banking services has expanded. Administrative restrictions on the purchase of foreign currency and the circulation of cash were removed.
- Tax reform.
The old tax system left the country’s economy no chance for development. It was characterized by[1]: burdensome for business, high tax burden on the economy and very complex tax rules; extremely uneven distribution of the tax burden between enterprises of different taxation regimes (which did not allow business to grow) and different sectors of the economy; widespread use of taxes on proceeds (from turnover), which negatively affect the social division of labor and building long value chains. These problems became the key reasons for the low level of official employment of the population, did not allow deep processing of raw materials, create competitive industries by taking advantage of economies of scale and narrow specialization, forced the business to go into the “shadow”, split into parts, and destroyed the competitive environment.
The tax reform carried out in 2019 made it possible to solve partially or completely many of the above-mentioned problems. Particularly important achievements can be considered: a radical reduction in taxes on labor (by 1.5-2 times); a significant reduction in the tax burden on enterprises of the general taxation regime; a significant reduction in the sphere of influence of turnover taxes (before the reform, almost all enterprises paid these taxes, now medium and large enterprises do not pay them at all, and small firms can choose between turnover tax and VAT). Currently, work is underway to eliminate a huge number of tax incentives and exemptions, equalize taxation conditions for all economic entities.
- Reduction of a number of administrative costs of doing business.
In recent years, the leadership of Uzbekistan has done a lot to improve the business environment and reduce transaction costs. This is primarily due to a decrease in the tax, customs, and administrative burden, with the abolition of many anti-market restrictions on economic activities, with the simplification of procedures for export-import operations and obtaining various types of permits, with the improvement of the work of the money circulation system and the banking sector.
Late 2019 – early 2020 a number of new important reforms were outlined, including agrarian reform, restructuring and privatization of state-owned enterprises, a new stage of banking reform, etc. However, due to the coronavirus epidemic, most of these reforms were slowed down or frozen.
Is there a market economy in Uzbekistan?
Did the reforms of 2017-19 allow to form a market economy in Uzbekistan? I’m afraid not, the economy is still predominantly non-market. Why do I think so?
- There is still a very high level of direct government intervention in the economy.
The vast majority of large enterprises and 85% of the banking sector’s assets are state-owned. The Agency for State Assets Management claims that “the share of state-owned companies in the country’s GDP is 55%. In Singapore – 15%, the average value in developed countries – 20-25%. ” One more comparison: in “communist” China, only 12% of GDP is generated at enterprises of the central government, another 24% at enterprises of local authorities. The latter, as a rule, operate like ordinary commercial companies, in a highly competitive environment. State-owned enterprises in Uzbekistan tend to be extremely inefficiently run. They are de facto “privatized” by their managers and their curators in the government, who extract the corruption rent.
- The level of state participation in the redistribution of GDP is very high.
At the end of 2018, the expenditures of the consolidated budget of Uzbekistan amounted to 35.2% of GDP, and taking into account the quasi-fiscal expenditures of state enterprises (that is, expenditures that should be carried out from the budget, but they are “hung” on state-owned enterprises), the volume of state expenditures was at least 41 , 2% of GDP. However, here they have not yet considered (they simply cannot be counted) the quasi-fiscal expenses of the private sector (this is when entrepreneurs are “asked” to repair a bridge or to plant greenery in a neighborhood).
In any case, this is a fantastic value, comparable only to that of the very wealthy countries of Western Europe. No successfully developing country can afford anything close. So, in successfully developing countries of East Asia (including the richest, such as Taiwan, Singapore, Hong Kong, South Korea), the fiscal burden on the economy rarely exceeds 15-20% of GDP. Officials satisfy all their “Wishlist” with these modest resources. Accordingly, the bulk of the income is spent by the private sector. Unlike Uzbekistan, where the economy continues to be ruled by bureaucracy.
Consolidated government spending in Uzbekistan, % of GDP, 2018. World Bank data .
- Methods of state regulation of the economy are still predominantly anti-market in nature.
In a market economy, the state must perform its functions (create favorable conditions for the economic activity of people, ensure the production of so-called public goods, correct the “failures” of the market) very carefully so as not to interfere with the work of market mechanisms, and even more so not to replace the market where it copes with its “duties”.
The main trouble in the economic development of Uzbekistan is that the regulation of the emerging market relations is carried out through the system of public administration, which has not actually been reformed since Soviet times and does not in any way correspond to the objective requirements of the time. In addition, the overwhelming majority of officials do not know and do not want to know the laws of the market. They manage the economy in accordance with their usual principles and approaches of import substitution and protectionism, as well as traditions of “manual management” of the economy.
There is no understanding of the importance of separating the functions of public administration from the practice of doing business, the need for the state to play the role of an “arbiter”, determining the rules of the game for business, and not being a direct participant in economic processes. There is no single team of reformers that clearly and equally understands the goals and directions of reforms, methods of their implementation. On the other hand, the positions of industry and individual lobbyists who defend corporate and private interests are very strong.
By and large, our officials use mainly two core methods of influencing the economy:
- Carry out the development and implementation of various kinds of industry and sectoral development programs, which is a set of “good” wishes for the growth of production, exports, and investments in certain categories of products. Programs, as a rule, are built on the gross principle “the more, the better”, the numbers, most often, are taken from nowhere and do not take into account either the real needs of consumers, or the real capabilities of producers, and even more so the real competitiveness of production plans to expand. At best, programs remain on paper. In the worst case, new enterprises are built in accordance with them, existing production facilities are expanded, which, as it often turns out later, can only exist with limited competition, benefits and / or inflows from the state. These industries turn into a suitcase without a handle, that is a pain to carry around, and a shame to throw away. Financing this kind of political projects places a heavy burden on the shoulders of taxpayers and consumers, does not allow redirecting limited resources to more competitive industries.
- They create artificial monopolies by restricting competition, including through the provision of various kinds of benefits (tax, credit, when purchasing resources, etc.) to individual enterprises or groups of enterprises, which puts economic entities in unequal conditions; various kinds of direct financing (targeted programs and soft loans) of selected enterprises; restriction of competition with imports (through tariff and non-tariff barriers). All these actions not only destroy competition, but also lead to the flourishing of corruption, and ultimately make our economy uncompetitive.
The government’s economic bloc is overblown and dysfunctional.
As a result, the state drives out independent private business from the economy or replaces it with a business operating under the patronage of officials or oligarchs, and a “strong hand” replaces the “invisible hand” of the market and legal mechanisms, which does not allow the formation of stable institutions of self-regulation of socio-economic processes. Everything continues to depend on the personal preferences and decisions of officials.
The government’s economic bloc is overblown and dysfunctional. Central departments that solve essentially the same task –assistance to accelerate economic development – several dozen, including four deputy prime ministers, three supra-sectoral ministries, seven central sectoral ministries and departments, and an uncounted number of quasi-state former Soviet sectoral departments (renamed associations, concerns, joint-stock companies, etc.). The latter simultaneously perform absolutely incompatible functions in one organization: they actively participate in the planning and implementation of state policy at the industry level, issue various kinds of permits and exercise control over the activities of economic entities, represent the interests of enterprises in the industry, and even engage in commercial activities. Complete conflict of interest.
- Some strategic sectors of the economy have not yet been reformed.
We are talking about such industries as agriculture, energy, oil and gas and chemical industries, rail and air transportation, utilities, automotive. State ownership dominates there, or directive state administration is preserved (for example, in the form of a mandatory state order for agricultural products). Currently, most of these sectors have developed draft reform programs. However, their implementation is in every possible way emasculated, dragged out and hindered by the bureaucracy. The success and timing of these programs is questionable.
- Poorly protected property rights and transactions.
The existing regulatory framework, government regulatory practice and the judicial system very poorly protect businesses and individuals from the arbitrariness of officials and other “powerful” of this world. Redistribution of land, raider seizures, revision of the results of privatization, other forms of property seizure, weak legal protection of transactions are a widespread practice in modern Uzbekistan. And without legal protection of property and transactions, the market economy cannot function effectively. In recent years, the country’s leadership has been trying to turn the tide in this direction, including taking measures to strengthen property rights to land, bans on revising the results of privatization, liberalizing economic legislation, etc. However, a decisive turning point is still far away.
What is to be done?
And yet, reforms are underway in the country, albeit not always consistently and systematically. With the relatively successful implementation of at least part of the necessary reforms, there is hope for the formation of more or less effective inclusive market institutions, for the creation of conditions for sustainable economic development, the formation of a “middle class” and civil society. The “middle class” and civil society will become a social support for further economic, legal and political reforms in the future.
The movement towards a market economy could be facilitated by reforms in the following areas:
- denationalization of the economy and the privatization of huge state assets. A privatization program for the coming years already exists. The question is in implementation. At the same time, it is very important to fix and ensure the most transparent privatization rules. And this requires a rejection of social and investment obligations (with rare exceptions). The sale of state property should be carried out only through open auctions (again, there are rare exceptions to this rule) to the one who is ready to pay more.
- drastic cuts in government spending, primarily exorbitantly inflated economic ones, without which it is impossible to reduce the tax burden on the economy.
- a radical reduction in the number of government departments responsible for the conduct of economic policy and their powers; cardinal revision of their functions and powers in the direction of rejection of the directive management of the economy.
- strengthening and protecting property rights, primarily through an inventory of the regulatory framework, cardinal judicial reform, as well as through the creation of effective mechanisms of public control over the judicial system and the work of government departments.
- developing competition and creating a level playing field for business, increasing the external openness of the economy. This requires a decisive de-monopolization of artificial monopolies (such as the auto industry); radical revision of all benefits, barriers that destroy competition and create unequal conditions for doing business; maximum acceleration of the process of accession to the WTO; reducing tariff and non-tariff barriers to imports in industries where these barriers restrict competition.
- a radical change in the field of land relations. This implies a complete rejection of the mandatory state order and the formation of free markets for products and resources in agriculture (which is already being implemented); strengthening of property rights (ownership, disposal of land), including the possibility of sublease and mortgage of land, resale of ownership rights; creation of transparent rules for the initial allocation of land and the resale of rights to it. And, of course, land reform is closely related to the reform of the water economy, where it is necessary to introduce market principles for the distribution of the most valuable resource in our country – water.
- continuation of banking reform, including privatization of small and medium-sized state-owned banks, introduction of strategic investors into large state-owned banks; the maximum reduction in the practice of concessional lending; removal of administrative restrictions on the registration of new banks and the development of the non-bank credit sector; elaboration of the rules for the legislative implementation of the principles allowing Islamic financing.
- reform of the so-called “natural monopolies” – energy, transport, utilities. In these sectors, it is possible and necessary to develop market competition, privatize enterprises, and introduce the principles of public-private partnership. To do this, it is necessary to clearly separate the real natural monopolies (for example, the power transmission network) and the areas where competition can and should be developed (power plants, retail sale of electricity).
[1] See: https://www.fergananews.com/articles/9965, see also other publications: http://ced.uz/samoe-glavnoe-predstoyashhee-sobytie-2018-goda-nalogovaya-reforma/