ECONOMICS OF UZBEKISTAN

ECONOMICS OF UZBEKISTAN

Uzbekistan is an agrarian nation with large oil, gas, gold and uranium reserves. The Uzbekistan economy is reliant on the production of cotton and raw materials. The largely Soviet-era infrastructure and industry of the country—roads, irrigation networks, chemical plants, machine factories—were all set up to support the cottons industry. Uzbekistan doesn’t produce so many finished goods that anybody wants.

As a result of being but a cog in the centrally-planned Soviet economy, all the Central Asian nations have economies that are too specialized and too dependent on Russia for markets and supplies to make a real go of it on their own without some serious changes. Uzbekistan has the most diversified economy in Central Asia. Despite the repressive political situation, Uzbekistan’s economy continues to grow on the back of gas, cotton and gold exports, reportedly expanding by 8.1 percent in 2014.

Uzbekistan is a dry, landlocked country; more than 60 percent of the population lives in densely populated rural communities. Export of natural gas, gold and cotton provides a significant share of foreign exchange earnings. Despite ongoing efforts to diversify crops, Uzbekistani agriculture remains largely centered around cotton; Uzbekistan is now the world's fifth largest cotton exporter and sixth largest producer. The country is beginning to enforce a ban on the use of child labor in its cotton harvest and is trying to address international criticism for its previous use of this practice. [Source: CIA World Factbook =]

According to Azimov, Mutalova, Huseynov, Tsoyi, Rechel: “Uzbekistan’s economy is mostly oriented towards services and industry, with a diminishing share of GDP generated by agriculture. Despite being a dry and landlocked country, 11 percent of Uzbekistan consists of intensely cultivated, irrigated river valleys. After the break-up of the Soviet Union, Uzbekistan experienced a significant fall in its GDP. Since then, GDP has been increasing again, with annual growth rates exceeding 8 percent in 2007–2012. In 2013, 49 percent of GDP was generated by services, 32 percent by industry and 19 percent by agriculture. [Source: “Uzbekistan: Health System Review” by Azimov, Mutalova, Huseynov, Tsoyi, Rechel, Health Systems in Transition, 2014 ^=^]

Economic Statistics for Uzbekistan

GDP (purchasing power parity): $170.3 billion (2014 est.), $159.1 billion (2013 est.), $147.4 billion (2012 est.), country comparison to the world: 67. GDP (official exchange rate): $63.08 billion (2014 est.). [Source: CIA World Factbook =]

GDP - real growth rate: 7 percent (2014 est.), 8 percent (2013 est.) 8.2 percent (2012 est.), country comparison to the world: 20. =

GDP - per capita (PPP): $5,600 (2014 est.): $5,300 (2013 est.) $5,000 (2012 est.), country comparison to the world: 162. =

Gross national saving: 31 percent of GDP (2014 est.), 30.9 percent of GDP (2013 est.) 32 percent of GDP (2012 est.), country comparison to the world: 27. =

GDP - composition, by sector of origin: agriculture: 18.5 percent; industry: 32 percent; services: 49.5 percent (2014 est.). GDP - composition, by end use: household consumption: 55.6 percent; government consumption: 22.7 percent; investment in fixed capital: 24.4 percent; investment in inventories: 0 percent; exports of goods and services: 26.9 percent; imports of goods and services: -29.6 percent (2014 est.). =

In 2004 Uzbekistan’s GDP was estimated at US$10.3 billion, an increase of 3.7 percent over the 2003 figure. In 2005 the GDP increased by 3.9 percent to US$10.7 billion, a rate of US$399 per capita. In the first half of 2006, the rate of increase was 6.6 percent, based on a six-month GDP of US$6.1 billion. In 2003 agriculture’s contribution to GDP was 38.7 percent, the share of the services sector was 35 percent, and manufacturing and construction contributed 26.3 percent. (Contributions by sector after 2003 are not available.) [Source: Library of Congress February 2007 **]

Gross National Product (GNP): In 1993, US$31 billion, or US$1,346 per capita. In 1994 growth rate -4 percent. Cautious reform avoided major post-Soviet declines of other Central Asian states; strong resource base promises prosperity given systemic reform. [Source: Library of Congress, March 1996 *]

Fiscal year: calendar year

Unemployment and Inflation in Uzbekistan

Uzbekistan suffers from high inflation. Food and fuel prices have continued to increase in 2014, as the local currency (Uzbek Soum) continues to lose value in relation to the U.S. dollar. Inflation rate (consumer prices): 12.1 percent (2014 est.); 12 percent (2013 est.). These rates are based on official data; based on independent analysis of consumer prices, inflation reached 22 percent in 2012. [Source: CIA World Factbook =]

Inflation statistics for Uzbekistan are unreliable because of inconsistent reporting techniques. Throughout the post-Soviet era, inflation control has been a low priority of government planners. After reaching 26.6 percent in 2001, the estimated inflation rate for 2003 was 13.1 percent. In 2004 the official inflation rate was 3.7 percent, but international agencies estimated a rate of approximately 15 percent. The official rate for 2005 was 7.8 percent. [Source: Library of Congress February 2007 **]

Unemployment rate: 4.9 percent (2014 est.); 4.9 percent (2013 est.), country comparison to the world: 47. These rates are based on official data, another 20 percent are underemployed. =

The unemployment rate is estimated to be 40 percent in some places. The situation is expected to only get worse. A large portion of Uzbekistan’s population are under 19. As they reach working age they will need jobs that have not materialized. The government and large factories have failed to create many jobs. Many people get by on trade or selling things that they produce in their gardens.

Unemployment rates are very high in all five Central Asian countries but there are no reliable figures on exactly how high. In 1997, the official unemployment rate was at 0.3 percent. Young people have difficulty getting jobs without connections. The streets are full of idle young men. There are concerns that these young men will be recruited by terrorists.

Government Policy and the Economy of Uzbekistan

Following independence in September 1991, the government sought to prop up its Soviet-style command economy with subsidies and tight controls on production and prices. A sharp increase in the inequality of income distribution has hurt the lower ranks of society since independence. While aware of the need to improve the investment climate, the government continues to intervene in the business sector and has not addressed the impediments to foreign investment in the country. [Source: CIA World Factbook =]

In 2003, the government accepted Article VIII obligations under the IMF, providing for full currency convertibility. However, strict currency controls and tightening of borders have lessened the effects of convertibility and have also led to some shortages that have further stifled economic activity. The Central Bank often delays or restricts convertibility, especially for consumer goods. Uzbekistan's growth has been driven primarily by state-led investments and a favorable export environment. =

In the past Uzbekistani authorities have accused US and other foreign companies operating in Uzbekistan of violating Uzbekistani laws and have frozen and even seized their assets. At the same time, the Uzbekistani Government has actively courted several major US and international corporations, offering financing and tax advantages. Diminishing foreign investment and difficulties transporting goods across borders further challenge Uzbekistan’s economy though it recently has intensified economic ties to Beijing. Tashkent began exporting natural gas to China and Chinese investments in the country have substantially increased. =

Government Budget and Taxes in Uzbekistan

Budget of Uzbekistan: revenues: $18.67 billion; expenditures: $19.27 billion (2014 est.). Budget surplus (+) or deficit (-): -1 percent of GDP (2014 est.), country comparison to the world: 58. Public debt: 7.5 percent of GDP (2014 est.), 6.3 percent of GDP (2013 est.) country comparison to the world: 157. [Source: CIA World Factbook =]

Taxes and other revenues: 29.6 percent of GDP (2014 est.), country comparison to the world: 92. Businesses have to pay a tax of 67 percent on their sales, 25 percent of their profits and a 5 percent property tax.

The tax system was reformed with addition of value-added and profits tax, beginning 1992; main revenues of 1993 state budget from value-added tax, corporate income tax, cotton marketing, and individual income tax; 1993 state budget deficit 200 million rubles, 12 percent of revenue. [Source: Library of Congress, March 1996 *]

In 2006 the Uzbekistan government planned revenues of US$3.3 billion and expenditures of US$3.6 billion, incurring a budget deficit of about US$300 million. In the first half of 2006, the government reported revenues of US$1.64 billion and expenditures of US$1.57 billion, yielding a surplus of US$70 million. The deficit for 2005 was US$100 million, based on expenditures of US$2.9 billion and revenues of US$2.8 billion. The approved 2007 budget called for a deficit of US$189 million. A series of tax rate reductions decreased direct tax revenues somewhat beginning in 2004. [Source: Library of Congress February 2007 **]

Sectors of the Uzbekistan Economy

GDP - composition, by sector of origin: agriculture: 18.5 percent; industry: 32 percent; services: 49.5 percent (2014 est.). GDP - composition, by end use: household consumption: 55.6 percent; government consumption: 22.7 percent; investment in fixed capital: 24.4 percent; investment in inventories: 0 percent; exports of goods and services: 26.9 percent; imports of goods and services: -29.6 percent (2014 est.). =

Agriculture: Cotton remains primary crop, requiring heavy irrigation; entire system geared for its production. Failure to expand grain culture has led to heavy food imports. Other crops wheat, oats, corn, barley, rice, fodder crops, fruits, and vegetables. [Source: Library of Congress, March 1996 *]

Industry and Mining: Slow diversification, early 1990s, from Soviet-era specialization in cotton-related and mineral-processing operations. Heavy industry, centered in northeast, mainly petroleum and mineral processing, machinery, ferrous metallurgy, chemicals, and electric power. Light industry dominated by fabric and food processing. Gold, copper, zinc, lead, tungsten, uranium, molybdenum, and fluorospar mined.

Energy: Large untapped natural gas reserves, small coal and oil production; two newly tapped oil fields have high potential. Coal mainly in northeastern industrial region. Hydroelectric power system well-developed on three major rivers; thermo-electric stations burn natural gas or coal.

Cotton and the Uzbekistan Economy

Despite ongoing efforts to diversify crops, Uzbekistani agriculture remains largely centered around cotton; Uzbekistan is now the world's fifth largest cotton exporter and sixth largest producer. The country is beginning to enforce a ban on the use of child labor in its cotton harvest and is trying to address international criticism for its previous use of this practice. [Source: CIA World Factbook =]

Photographer Carolyn Drake wrote in National Geographic: “The heart of Uzbekistan’s sanctioned economy is cotton. People are forced to work their lands and sell their yield at low cost to the government, which exports it at great profit—and unfair system made possible by a network of poorly designed, environmentally dangeorus canals that effectively carve the country into fiefs.”

Traditionally a raw materials supplier for the rest of the Soviet Union, Uzbekistan saw its economy hard hit by the breakdown of the highly integrated Soviet economy in the 1990s. Factories in Uzbekistan could not get the raw materials they needed to diversify the national economy, and the end of subsidies from Moscow was exacerbated by concurrent declines in world prices for Uzbekistan's two major export commodities, gold and cotton. [Source: Library of Congress, March 1996 *]

Economies of Central Asia

There are hopes that Central Asia could reemerge as the crossroads for a new Silk Road, providing transportation links for a variety of goods between Asia, the Middle East and Europe. Nations with oil and gas need pipelines to get them out. Those without oil and gas hope to profit by having pipelines cross their territory.

As a result of merely being cogs in the centrally-planned Soviet economy, all the Central Asian nations have economies that are too specialized and too dependent on Russia for markets and supplies to make a real go of it on their own without some serious changes.

Unemployment rates are very high in all five Central Asian countries but there are no reliable figures on exactly how high. Young people have difficulty getting jobs without connections. The streets are full of idle young men. There are concerns that these young men will be recruited by terrorists.

Regional economic cooperation, another type of unity that has received substantial lip service in the 1990s, has failed to materialize on a large scale. All five republics joined the Economic Cooperation Organization (ECO) shortly after independence, and Kazakstan, Kyrgyzstan, and Uzbekistan established a limited common market in 1994. But Uzbekistan vetoed the membership of unstable Tajikistan, and Turkmenistan refused to join. Existing arrangements within the free-trade zone have not significantly promoted large-scale commerce within the group of three. For all five republics, Russia remains the top trading partner because much of the emphasis in their agricultural and industrial infrastructures remains the same as when the republics had assigned roles in supplying Moscow. Those roles and dependence on Russian trade are changing slowly in the mid-1990s, however, as diversification occurs. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

Several factors encourage economic rivalry rather than cooperation. Water, a crucial resource for agriculture and power generation, has been the object of bitter bilateral and multilateral disputes both before and after independence. In the 1990s, the republics at the headwaters of major rivers, Kyrgyzstan and Tajikistan, have chafed at apportionment of water consumption favoring downstream consumers Turkmenistan and Uzbekistan, and Turkmenistan has complained about excessive water consumption by the Uzbekistanis upstream. Kyrgyzstan and Uzbekistan have come close to conflict over water in the Fergana Valley, where vital agricultural reform and land privatization programs are endangered by unresolved water disputes.*

The republics still offer a similar range of commodities for trade. Their common emphasis on cotton, natural gas, and oil limits the potential for advantageous commerce within the group and fosters rivalry in trade with outside customers. Some of the commercial relationships that have developed--such as the sale of fuels to Kyrgyzstan and Tajikistan by the other three fuel-rich republics--have been one-sided and subject to shutdown in response to nonpayment or in attempts to gain economic and political leverage.*

Economic Problems in Central Asia

The five republics have several major problems in common. All remain in the economic, military, and political shadow of their giant neighbor to the north. In the mid-1990s, Russian policy makers, encouraged by a very vocal nationalist faction in the federation, speak openly of recapturing influence in the "near abroad"; Central Asia usually is the first region cited as an example. In the first two years of independence, the five republics remained in the ruble zone , their monetary activities restricted by the nonconvertibility of the old Soviet ruble that remained the currency of that grouping. In 1993 all but Tajikistan introduced new currencies with limited convertibility. Russia had attempted to keep Kazakstan and Uzbekistan in a new Russian ruble zone, but ruble distribution problems and harsh conversion conditions forced those republics to follow the independent course of Kyrgyzstan and Turkmenistan. The Tajikistani ruble (for value of the Tajikistani ruble) introduced in 1995 remained closely connected with its Russian counterpart. In 1996 Kazakstan and Kyrgyzstan established a new customs union and other economic ties with Russia and Belarus, hoping to gain selected advantages while avoiding large-scale concessions that would increase Russian influence. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

The Soviet legacy includes an economic infrastructure in which all republics depend heavily on other republics for vital inputs. A complex Soviet-designed system of pipelines and electric cables connects the five republics. Pending completion of Turkmenistan's new line to Iran, only one railroad line leading out of Central Asia connects the region with a destination other than Russia (the one line goes only to the Xinjiang Uygur Autonomous Region in China). Heavy industry in all five republics also has depended heavily on local Russian skilled labor.*

The Central Asian republics also suffer common geographic disadvantages. All are landlocked and located far from potential markets outside the Commonwealth of Independent States (CIS) and the Middle East. Nations such as Azerbaijan and Afghanistan, through which goods must travel overland to reach Western markets, still are quite unstable, and others such as China and Russia are powerful neighbors with a history of taking advantage of weaker nations that need commercial favors. Kazakstan and Turkmenistan, both in need of a route to move oil and gas to Western customers, have been especially frustrated by Russia's failure to support new pipelines. The landlocked position also presents a national security obstacle.*

Although the region is blessed with ample arable land, most of that land becomes useful only when irrigated. Large-scale irrigation, in turn, has taken a huge toll on the hydrological systems of the region--in the most obvious case, the system that feeds the fast-disappearing Aral Sea. Regional cooperation on the Aral Sea problem, recognized as one of the most serious environmental crises in the world, received much lip service and little action in the first half of the 1990s. By 1995 an estimated 36,000 square kilometers of the sea's bed had been exposed, and an estimated 3 million inhabitants of nearby Turkmenistan, Uzbekistan, and Kazakstan had developed chronic health problems associated with that process. In October 1995, a United Nations (UN)-sponsored regional conference produced the Nukus Declaration, which resulted in the promise of intensified joint efforts to stabilize the sea and a pledge of US$200 million from the UN and the World Bank for regional development and aid. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

Economic Conditions of Central Asia

The traditional place of business has been open air markets and bazaars. Central Asians are used to the market style of commerce and being choosy shoppers rather than the Soviet style of waiting in lines and buying stuff from shops with limited choice. The market buildings today are not like bazaars from the Silk Road era. Many are housed in Soviet-era concrete structures supported by exposed girders.

Among other Central Asia, Uzbeks have a reputation of being traders and businessmen. They were merchants on Silk Road and shopkeepers in the Soviet era.

The possessions of many people consist primarily of carpets. Wealth has traditionally been kept in the form of carpets jewelry and gold, which has been regarded as a hedge against inflation. The pickings at the local stores are pretty slim. Canned goods are sometimes more than a year old and the best goods are kept under the counter for customers who are friends of the store manager or who are willing to pay extra.

“Immediate face-to-face relationships are the determining factors for most action among all Central Asian cultures, and rules take a backseat to subjective obligations. Most are very polychromic...and mostly re highly risk adverse.”

Economic and Business Customs in Uzbekistan

Uzbekistan is a cash economy. Among other Central Asia, Uzbeks have a reputation of being traders and businessmen. They were merchants during the Silk Road period and shopkeepers in the Soviet era.

Many people get by on trade or selling things that they produce in their gardens. Photographer Carolyn Drake wrote in National Geographic: “With so few jobs, survival for many depends on deeply unofficial activities such as smuggling, doing business in the black markets, and growing unapproved crops.

The constitution guarantees the right to own private property. This is not always the reality in practice. English is not widely spoken even in the business community. Russian is widely understood.

Food and fuel prices increase as the local currency (soum) continues to lose value in relation to the dollar. Black markets for the dollar are widespread in the bazaars and throughout Tashkent, although many vendors openly accept dollars. Although the black market exchange rate is substantially higher than the legal exchange rate, the practice is illegal, and the person engaging in black market currency exchange runs the risk of receiving counterfeit bills. Markets also can serve to identify a person as a potential victim for violent and property crimes.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated April 2016

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