ECONOMIC HISTORY

ECONOMIC HISTORY

The Uzbeks have traditionally been merchants, brokers, businessmen and traders as evidenced by their role in Silk Road trade. Among other Central Asia, Uzbeks have a reputation of being traders and businessmen. They were merchant during the Silk Road period and shopkeepers in the Soviet era.

Samarkand in present-day Uzbekistan was arguably the grandest city on the Silk Road. It was located at about the halfway point between China and the Mediterranean and situated where the routes from China converged into a single main route through Afghanistan, Iran and the Middle East. Samarkand and other Central Asian, Silk Road cities such as Bukhara and Khiva — also in present-day Uzbekistan — were centers of art and scholarship, full of poets, astronomers, and master craftsmen.

The Russians and Soviet traditionally viewed Central Asia as a place to produce cotton and grain and fruits and vegetables that needed a warm climate. Cotton production has left a terrible legacy of pollution and environmental damages but still remains an important sector the economy.

Soviet-Era Economy of Uzbekistan

During the Soviet-era, Uzbekistan was a cog in the centrally-planned Soviet economy. Its economic sectors—such as cotton production— were very specialized. Uzbekistan was dependent on the rest of the Soviet Union for markets, goods and supplies. Industry and mining didn't really get cranked up until after World War II. Much of the development of the oil industry has taken place since the break up of the Soviet Union

The Central Asian republics were the poorest republics in the Soviet Union. Those without oil wealth remained that way after independence. The Soviets opened stores and cooperatives but the majority of business continued to be carried out in open air markets and bazaars.

Uzbeks tended to be concentrated in agricultural and light industrial sectors while Russians dominated heavy industry and key government and party positions. This tended to change in the later Soviet period as unemployment among Uzbeks rose, when Uzbeks demanded more economic autonomy and their skill levels rose.

Economy of Uzbekistan in the Post-Soviet Era

The economies of Central Asia declined in the years after independence. Their leaders had little business sense or grasp of market economic fundamentals. There were shortages, production declines, negative growth, high inflation, declining standards of living, unpaid workers, starving pensioners and professors driving taxis. Because the economies of Central Asia had traditionally been were very specialized and were dependent on Russia for markets, goods and supplies, they have had difficulty making goods of their own.

Uzbekistan suffered less economic shock from the dissolution of the Soviet Union than did most other former Soviet republics because it produces large amounts of cotton and gold, commodities of value on world markets, and because the government stressed development of import-replacement industries in the post-Soviet era. In the 1990s, oil and gas production increased significantly, providing limited exports of natural gas and eliminating the Soviet-era need to import oil. In the same period, the expansion of grain cultivation reduced food imports. Although cotton remains the most valuable agricultural product, cotton output has declined since the mid-1990s. [Source: Library of Congress February 2007 **]

Uzbekistan’s economy has retained many elements of Soviet economic planning. Economic policy remains under state control; the government has strictly limited foreign direct investment, and little privatization has occurred aside from small enterprises. Several economic models have been tried and rejected in the post-Soviet era, and experts generally conclude that the overall economy is in decline. In the early 2000s, agriculture remained the most important economic sector, but the contribution of industry was rising. Informal economic activity accounts for between one-third and one-half of output. **

Inflation averaged over 80 percent between independence and 1994. The economy shrunk less in Uzbekistan than the economies of other former Soviet republics. In 1997 the GDP was 85 percent of 1990 level compared to 45 percent in Kazakhstan and 62 percent in Russia. The Uzbekistan currency plunged 100 percent in the months that followed the Russia currency crisis in August, 1998.

Uzbekistan’s Economy After Independence

Besides the agricultural base that yields cotton, vegetables, and grain, Uzbekistan's economy is blessed with gold, several other valuable minerals, and substantial reserves of energy resources, especially natural gas. In the mid-1990s, the economy still is based primarily on agriculture, following substantial increases in irrigation-dependent output in the 1970s and 1980s. Cotton remains the most valuable crop, and Uzbekistan is the fourth-largest cotton producer in the world. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

In the early years after independence, investment and foreign credits had to be attracted, a formidable challenge in light of Western restrictions on financial aid to nations restricting expression of political dissent. For example, the suppression of internal dissent in 1992 and 1993 had an unexpectedly chilling effect on foreign investment. Uzbekistan's image in the West alternated in the ensuing years between an attractive, stable experimental zone for investment and a post-Soviet dictatorship whose human rights record made financial aid inadvisable. Such alternation exerted strong influence on the political and economic fortunes of the new republic in its first five years. *

In the early 1990s, Uzbekistan's economy was one of the most stable in the Central Asian region, and foreign investment activity there was the highest in the region. In December 1995, the United States Overseas Private Investment Corporation agreed to provide US$500 million to convert the Soviet-era military industry, and United States oil companies committed US$1.3 billion of long-term investments in the oil and gas industry. Uzbekistan is the regional distribution center for electronic and domestic appliances from Dubai, based on a favorable tariff system that places no tax on most imports (a 15 percent tariff was levied on electronics in 1996). A large Daewoo (South Korean) television and videocassette plant in Tashkent is the most visible foreign electronics enterprise. The British Massey-Ferguson firm plans an agricultural machinery plant at some future date, and the British Quickstop supermarket chain opened outlets in Tashkent in 1996. Although some improvement has been made in Uzbekistan's tax and legal system, the dominance of the state bureaucracy continues to complicate foreign investment. *

Economic Despair in Uzbekistan in the Early 1990s

In the 1990s, chief among the causes of dissension and despair in Uzbekistan was the country's economic situation. According to United Nations (UN) figures, in 1994 Uzbekistan was one of the poorest of the developed countries in the world, with the average monthly wage less than US$50. But vast natural resources suggest the potential for Uzbekistan to become one of the most prosperous countries in Central Asia, provided the necessary reforms can be made to unleash that potential. At the end of the Soviet era, Uzbekistan was rated as one of the least industrialized Soviet republics. Government reform, with the theoretical goal of achieving a market economy, moved cautiously and unevenly in the directions of industrialization and market reform in the early 1990s. By the mid-1990s, signs indicated a more serious reform effort. [Source: Library of Congress, March 1996 *]

In the first five years after independence, Uzbekistan's GDP fell about 20 percent, compared with the Central Asian average of 50 percent. Part of that moderation results from Uzbekistan's initially more favorable situation in 1992. Because the cotton monoculture gave Uzbekistan a commodity with sales value worldwide (in 1995 some 75 percent of cotton exports went outside the CIS) and because Uzbekistan was less dependent on foreign trade and imported energy supplies than the other Central Asian countries, the end of the Soviet Union imposed fewer economic hardships. The 1995 cotton crop, expected to set a record, was significantly below forecast levels, however. Meanwhile, in 1996 the republics of the region continued nominal efforts to improve the Aral Sea environmental disaster, amid significant doubts that Uzbekistan would sacrifice cotton irrigation water from Aral tributaries to achieve that goal. *

Unemployment and Inflation in Post-Soviet Uzbekistan

In the 1990s, unemployment rates were high, especially among young men. High unemployment has been blamed on outbreaks of ethnic violence such as that that occurred in 1989 and 1990 between Uzbek and Meshketian Turks and between Uzbeks and Kyrgyz.

Uzbekistan suffered from hyperinflation in the 1990s: 1,100 percent in 1993, and 270 percent in 1994 after a second-half slide of the som's value. Government controls were placed on the prices of basic commodities and fuels, but prices of other items rose very fast after decontrol in 1992 and 1993. The provisional currency unit, the som, was introduced November 1993, made permanent in July 1994. In 1996, official exchange rate was thirty-five som per US$1 while hundreds of som to the dollar was available on the black marekt. The some stabilized and convertibility was liberalized in 1995; full convertibility was promised 1996. [Source: Library of Congress, March 1996 *]

Uzbekistan suffered from high inflation, mainly because the state has continued Soviet-era social protection programs, bank credits for unprofitable enterprises, budget deficits, and price supports that required expanding the supply of money. As inflation redistributed wealth, many Uzbekistanis suffered substantial losses of real income. By 1994 annual inflation reached 1,300 percent, but government restrictions in 1995 lowered the year-end figure to 77 percent. [Source: Glenn E. Curtis, Library of Congress, March 1996 *]

Uzbekistan Economic Reforms

With the collapse of the Soviet Union, Uzbekistan faced serious economic challenges: the breakdown of central planning from Moscow and the end of a reliable, if limited, system of interrepublican trade and payments mechanisms; production inefficiencies; the prevalence of monopolies; declining productivity; and loss of the significant subsidies and payments that had come from Moscow. All these changes signaled that fundamental reform would be necessary if the economy of Uzbekistan were to continue to be viable. [Source: Library of Congress, March 1996 *]

Throughout the post-Soviet period, a primary goal of Uzbekistan's economic reform policy has been to avoid the disruptions associated with rapid transition. While proclaiming the eventual goal of a market economy, economic planners have moved very slowly in privatization and in the creation of a Western-style financial sector that would offer economic incentives and encourage private entrepreneurial initiative. This strategy has succeeded in reducing the transition shocks experienced by other post-Soviet societies. *

In late 1995, the IMF lent the regime US$260 million for economic reform, the first money accepted by Karimov from the IMF. In its evaluation at that time, the IMF noted that Uzbekistan's structural reform had been slow, notably in the banking sector, but that its tight monetary policy had slowed the economy's previous runaway inflation and liberalization of foreign exchange had been effective. Inflation for 1995 was 77 percent; the IMF year-end inflation target for 1996 was 21 to 25 percent; the exchange rate of the Uzbekistani som fell from thirty to the United States dollar in 1995 to thirty-five to the dollar in 1996. The Economist Intelligence Unit forecast a 1996 drop in GDP of 1 percent, followed by growth of 1 percent in 1997. The projected budget deficit for 1996 was 3.5 percent of GDP, which conforms with IMF loan guidelines. An IMF credit of US$124 million was granted in December 1995. *

In 1996 the Karimov regime became noticeably less cautious in its approach to economic reform. Karimov criticized some bureaucrats for hindering execution of reform decrees, and the president began advocating private enterprise as the surest path to individual and national prosperity. Overall foreign trade goals still included expanded commercial agreements with East Asia and the West, but by 1996 Uzbekistan had expressed willingness to join a customs union with Belarus, Kazakhstan, and Russia, which already had reached a series of commercial accommodations early in 1996. Self-sufficiency in oil, gained for the first time in 1996, freed Uzbekistan from dependence on Russia in a key area. *

Structural, Currency and Legal Reforms in Uzbekistan

From the time of independence, Uzbekistan's political leaders have made verbal commitments to developing a market-based economy, but they have proceeded cautiously in that direction. The first few years were characterized mainly by false starts that left little fundamental change. The initial stages of reform, instituted in 1992, were partial price liberalization, unification of foreign-exchange markets, new taxes, removal of import tariffs, and privatization of small shops and residential housing. Laws passed in 1992 provided for property and land ownership, banking, and privatization. Modernization of the tax system began in 1992; the first steps were a value-added tax (VAT) and a profits tax designed to replace income from the tax structure of the Soviet period. [Source: Library of Congress, March 1996 *]

In its first effort at price liberalization in 1992 and 1993, the government maintained some control on all prices and full control on the prices of basic consumer goods and energy. A wide range of legislation set new conditions for property and land ownership, banking, and privatization--fundamental conditions for establishing a market economy--but in general these provisions were limited, and they often were not enforced. International financial institutions initially were encouraged to believe that structural adjustments would be made in the national economy to accommodate international investment, but later such promises were rescinded. In 1994 the government maintained control of levels of production, investment, and trade, just as Moscow had done in the Soviet era. *

Several agencies, most notably the State Committee for Forecasting and Statistics, the State Association for Contracts and Trade, the Ministry of Foreign Economic Relations, and the Ministry of Finance, inherited responsibility for planning, finance, procurement, and distribution from the Soviet central state system. Economic policy making remains based on a national economic plan that sets production and consumption targets. State-owned enterprises remain in virtually all sectors of the economy. In 1994 no laws had established standards for bankruptcy, collateral, or contracts. But by 1995 Uzbekistan had made some significant movement toward reform, which experts interpreted as a possible harbinger of wider-ranging changes in the second half of the decade. *

According to some experts, a turning point came in late 1993 after Uzbekistan and Kazakhstan were expelled from the ruble zone, in which Uzbekistan had remained with vague plans to adopt an independent national currency at some time in the future. Following the example of Kyrgyzstan, which already had created its own currency the previous May, in November 1993 Uzbekistan issued an interim som coupon. The permanent currency unit, the som, went into effect in the summer of 1994. The introduction of the som was followed by an improving domestic economic situation, including some progress toward economic stabilization and structural reform. Beginning in late 1994, the national economy achieved substantial price liberalization, a reduction in subsidies, elimination of state orders on most commodities, and some freeing of state controls in the agricultural sector. In 1994 the som was one of the weaker new currencies in Central Asia; it lost two-thirds of its value in the second half of 1994. By the end of the year, however, inflation had leveled off, and the free-market exchange rate of the som stabilized by January 1995. In July 1995, the government announced plans to make the som fully convertible by the end of the year. At the beginning of 1996, the som's value was thirty-six to US$1.

Privatization in Uzbekistan

Privatization of the large state industrial and agricultural enterprises, which dominated the economy in the Soviet era, proceeded very slowly in the early 1990s. The initial stage of privatization, which began in September 1992, targeted the housing, retail trade and services, and light industry sectors to promote the supply of consumer goods. [Source: Library of Congress, March 1996 *]

Beginning with the 1991 Law on Privatization, a number of laws and decrees have provided the policy framework for further privatization. A state privatization agency, established in 1992, set a goal of moving 10 to 15 percent of state economic assets into private hands by the end of 1993. Movement in that direction was slow in 1992, however, with only about 350 small shops being privatized. In the same period, housing was privatized at a somewhat faster pace by outright transfers or low-cost sales of state housing properties. By 1994 about 20,000 firms in small industry, trade, and services had been transferred from state ownership to the ownership of managers and employees of the firms. Nearly all such transfers were through the issuance of joint-stock shares or by direct sale. *

Agricultural privatization, which began in 1990, has moved faster. Since the state began distributing free parcels of land that could be inherited but not sold, the number of peasant farms has risen dramatically (cotton-growing lands were excluded from this process). Between January 1991 and April 1993, the number of private farms rose from 1,358 to 5,800, promising a significant new contribution from private farms to Uzbekistan's overall agricultural output. Another government program, initiated in 1993, transfers unprofitable state farms to cooperative ownership. A law permitting the transfer of privately owned land was planned for 1995. *

In the mid-1990s, the role of the state was gradually reduced in the productive sectors, except for energy, public utilities, and gold. The government's privatization program for 1994-95 emphasized the sale of large and medium-sized state-owned construction, manufacturing, and transportation enterprises. A set of guidelines for large-scale privatization, which went into effect in March 1994, contained several contradictory provisions that required clarification, and privatization also was slowed by the need to change the monopoly structure of state-owned enterprises before sale.

In mid-1995, the government reported that 69 percent of enterprises (46,900 of 67,700) had been privatized. Most firms in that category are relatively small, however, and all heavy industry remained in state ownership at that stage. Although the government has promised accelerated privatization of larger firms, experts did not expect the slow pace to improve in the late 1990s. *

Economic Policy Under Karimov

Independence was supposed to unleash economic reforms, privatization and prosperity. Since the country is rich in resources and has a relatively small population everyone was supposed to prosper. This has not happened. Instead economic reforms have not taken place and only the well connected have gotten rich while the general population has gotten poorer or stayed about the same.

Karimov believes in paternalistic government with economic reforms taking place gradually, under the tight reigns of the government. Worried that rapid economic reforms could destabalize the county, he didn't launch many economic reforms and those that were introduced came agonizingly slowly. A limited privatization program was launched in 1993. Small business and light industries and services were mostly in private hands by 1995.

Privatizing large industry began in 1994 and proceeded slowly, with the government retaining stakes in profitable enterprise. Among the industries that were auctioned off and privatized were Tashkent Aviation Plant and Tashkent Tractor plant. Mines, energy and agriculture, the largest and most profitable sectors of the economy, remained largely under state control. Land reform has been slow. Collective farms are still plentiful. In many cases workers there earned the equivalent of $2 a month in the early 2000s. Karimov cronies and family members have monopolized key industries and enriched themselves.

In the early 2000s, Karimov’s economic policies took a turn for the worse. The Karimov regime imposed price controls on cotton sales, imposed taxes on small businesses and restricted small traders. Borders were sealed, tariffs of 70 percent were imposed and bazaars selling imported goods were shut down to protect unprofitable local businesses. Rather than take measures to improve the economy Karimov blamed Uzbekistan’s troubles on Islamic extremist.

After September 11th , Uzbekistan saw an influx of money in the form of loans from the U.S. and other countries. Relatively little money comes from taxes because people earn so little money. Most of the money that keeps that Uzbekistan economy and the Karimov regime afloat comes from the export of natural gas, gold and cotton.

Lack of Economic Reforms Under Karimov

Uzbekistan has failed make significant economic reforms. The prices of basic commodities such as flour and gasoline have been kept artificially low through complex trade and currency controls in part to keep people placated enough to keep Karimov in power.

Some businesses went bankrupt because government regulations prevented them from converting relatively worthless local currency into dollars. Some businesses such as Daewoo were allowed to change some som into dollars at an official rate about half of the black market rate. Uzbekistan regulations were also unpopular with Uzbekistan’s neighbors, which were swamped with cheap Uzbek good but were unable to get a good prices for their goods. Uzbekistan has also been hampered by poor transportation and shortages of electricity and water

Businessmen and entrepreneurs that thrived in the Soviet era have been hindered by the break up of the Soviet Union. Traders that moved freely between the Central Asian republics in Soviet Union times had to cross borders, show visas, pass through customs and often pay bribes. Traders entering Uzbekistan by car in the early 2000s were required to pay $45 for insurance, a lot of money for many in Central Asia , and pass through customs station with X-ray equipment, interrogation rooms and bomb-sniffing dogs. Businesses that get received materials from another Central Asian nation had to pay stiff tariffs on those materials..

Reforms businesses wanted to see included a reduction of the profit tax to 10 percent and an elimination of currency controls so that the official rate was more in line with the black market rate. The IMF broke its ties with Uzbekistan due to a lack of reforms in April 2001, especially over Karimov's broken promises to liberalize foreign-exchange laws.

Stagnation Under Karimov

By the mid 2000s, political and economic repression, delays in market reforms and strict state control of the economy was producing a state of stagnation and widespread discontent. The per capita income in 2005 was around $450, about five times lower than in neighboring Kazakhstan. Monthly salaries were at about $30 a month. Analysts were predicted these conditions could lead to destabilizing violence.

The Karimov regime seemed to be living in a dreamworld, ignoring depressingly low wages and high rates of unemployment, and low productivity, while working on ways to hold on to power and enrich the regime at the cost of large dissatisfaction among the masses and potential explosive unrest.

In November 2004, thousands of people took the streets in a rare demonstration to protest the low supply of gas and regulations requiring licences for importers, who provided many of the goods used in Uzbekistan. The Andijan massacre in 2005, which left hundreds dead, was triggered as much by these economic policies as religious discontent.

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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