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BIWEEKLY BRIEFING         Wednesday/September 26, 2001

 

RECENT ECONOMIC REFORMS IN UZBEKISTAN
Richard Pomfret

Uzbekistan is considered to be one of the least reformed of all former centrally planned economies and its superior economic performance is therefore considered surprising. Official statements about reforms are often treated with skepticism, especially by the IMF and World Bank with whom relations have been frosty. Recent measures concerning external economic policy and private sector development should, however, be treated as genuine reforms, and as components of an established strategy of gradual reforms and cautious but sound government which has served the country relatively well.

BACKGROUND: Since independence in late 1991, Uzbekistan has been ranked as a slow reformer. In league tables based on the EBRD transition indices or similar liberalization indicators, it is often linked with Belarus and Turkmenistan as the least liberalized among Soviet successor economies. In 1993, Uzbekistan was the penultimate country to introduce a national currency and was relatively slow in stabilizing the hyperinflation of the early 1990s. Large-scale privatization has been glacially slow. In fall 1996, despite commitments to currency convertibility, the government responded to a balance of payments crisis by imposing draconian exchange controls. Since then, relations with the IMF, never good, have been dismal.
The consequence of the foreign exchange controls was, predictably, the emergence of a large black market premium on foreign currency. In January 2000, the market rate of just over 800 sum per US dollar when the official exchange rate was 140 sum/$. The government has, however begun to seriously address this situation since May 2000, when the official rate was devalued to 233 sum/$ and then allowed to fall steadily. In addition, by extending the use of a commercial rate, introduced in June 2000, to an increasing number of transactions, the premium on many foreign exchange transactions had been cut to less than ten percent by August 2001. The present situation is not the same as having a unified exchange rate and a convertible currency, but the extent of the costs of exchange controls has been substantially reduced and the combined measures are widely viewed as steps towards exchange rate unification and currency convertibility.
Fears that easing of the exchange control regime would be accompanied by backsliding on trade policy have not been realized. Uzbekistan had a fairly liberal trade policy by 1996, but its impact has been masked by the forex controls that could be used discretionarily to protect domestic producers. Tariff reductions in March 2001 indicate that Uzbekistan is serious about trade liberalization, and is preparing to be more active in pursuing its application for WTO membership. The second major policy innovation has been the emphasis on small and medium-sized enterprises (SMEs). This was heralded by the 2000 National Human Development Report, prepared by the Center for Economic Research, a well-connected and influential Tashkent think-tank. The theme was taken up in major speeches by President Karimov in 2001 and incorporated in a Presidential Decree which mandated all government departments to consider how to assist SME development and how to ease constraints faced by private enterprises, with the goal of doubling the share of SMEs in total output from around 30% to 60%. Whatever the feasibility of the numerical target or nature of specific measures still to be implemented, the July 24^th decree represents a significant policy shift, because emphasis on SMEs implies a more hands-off approach to private enterprise and consequently an easing of the import-substituting industrialization (ISI) strategy pursued since independence. Large enterprises remain state-owned, but the economic costs of favoring the dinosaurs will be reduced and a private sector may grow around them under the new strategy.

IMPLICATIONS: Together these two sets of policy changes show a willingness of the government to accept and reverse previous policy errors, and to do so before the costs have become too high. In crucial respects, Uzbekistan repeated the errors of many developing countries whose import-substitution policies in the 1950s and 1960s were accompanied by exchange controls and other restrictions on enterprise. The difference is that the policies are being reversed before vested interests become powerful enough to resist changes; such policy sclerosis characterized most developing countries from the 1960s to the 1990s, but not South Korea or Taiwan, who managed to reverse their ISI policies after a decade or so.
The pattern of policy reform in Uzbekistan in 2000-01 is not new. In 1992-93 Uzbekistan ignored external advice to stabilize and privatize quickly, and insisted on pursuing a gradual transition strategy. Once convinced of the dangers of hyperinflation and the need for monetary stringency, however, Uzbekistan adopted a classic IMF-style macroeconomic policy in 1994 and succeeded in taming inflation through orthodox means by 1996. Despite introducing export controls and maintaining many price controls in 1992 – again contrary to prevailing external advice – these were gradually lifted during the early and mid 1990s as the government came to recognize their costs. Small-scale and housing privatization proceeded steadily in the early 1990s, even as Uzbekistan gained a reputation as a non-reformer due to slow movement on the more contentious privatization of large enterprises.
The main exception to this cautious learning process has been a stubborn refusal to end state orders for the two main crops, cotton and wheat. A key reason for this is that the implicit taxes, especially on cotton for which farmgate prices are well below world prices, account for a large part of government revenue. The Uzbekistani state has been successful in maintaining its revenues as a share of GDP at a much higher level than have other transition economies. Even if the method of achieving this goal would not meet the approval of many economists due to the long-term negative incentive effects on cotton producers, the upside is a continuing ability to provide core public services.

CONCLUSIONS: The role of the state is part of the explanation of Uzbekistan’s economic success over the last decade. The government has provided competent governance. Even if some policies have been misguided, they have not yet been calamitous. Even if corruption is widespread, it is grease rather than sand in the wheels, and public services continue to function more effectively than in most other transition economies. The relatively successful social security system has provided an effective safety valve through the tough economic times of the 1990s.
Uzbekistan has been the most successful Soviet successor state in terms of output performance over the past decade. This is primarily due to competent governance, maintaining the economic and social infrastructure. The government has made policy errors, but has been willing to learn and to correct them. The foreign exchange and SME policy innovations of 2000-01 continue this tradition and are positive signs for the country’s economic future.

AUTHOR BIO: Richard Pomfret is a Professor of Economics at Adelaide University, Australia. His most recent book, Constructing a Market Economy: Diverse Paths from Central Planning in Asia and Europe, will be published by Edward Elgar in December 2001.

Copyright 2001 The Analyst. All Rights Reserved.