Uzbekistan-U. S. Economic Relations: Problems and Perspectives

Uzbekistan-U. S. Economic Relations: Problems and Perspectives

Uzbekistan-U. S. Economic Relations: Problems and Perspectives

An Independent Study by Mamurjon Rahimov,

Economics Department, the University

 of Illinois at Chicago

Foreword

            A lot of foreign and international companies and organizations have long been reluctant to rely on Uzbek statistical data. In fact, right before the brake-up of the Soviet Union, there was a large investigation by authorities from Moscow about notorious statistics manipulation by Uzbeks in cotton production and delivery to Russian textile factories. Millions of rubles (Soviet currency) changed hands, echelons of EMPTY trains traveled all the way to Moscow, large amounts of bribes were paid to special interest groups, mafia was involved - and at the end the cotton in the statistics was never produced. Therefore it was labeled "Pahta Ishi" (i.e. Cotton Conspiracy). The main investigator, Mr. Gdlian died in an airplane crush - reportedly set up after the roots of the case led him back to Moscow.

            Therefore, I did insert some key data, and proceeded on to "paint" a big picture of the situation. Besides simple statistics such as population size, inflation, unemployment, and many other key statistics have been extensively manipulated. I myself started working for the largest new economic sector of Uzbekistan - automotive industry in 1999. As an insider I learnt grave violations in simple economic statistics such as: Cars produced in Uzbekistan were shipped out of the country, and their dollar amount was immediately written down as AUTOMOTIVE EXPORTS - regardless they were never sold. I was told by a witness who traveled to Russia, main market for Uzbek cars, that thousands (!) of cars shipped there in 1997 were rotting in storage places - under snow and rain! Is that exports? Main website for info on Uzbekistan, www.gov.uz has economic data up to 2001. Most other sources make their own estimates. Therefore I did not concentrate on statistics and went on to highlight major issues.

Summary

Uzbekistan is a key US ally in the Central Asian region in the international war against terrorism  efforts to counter illegal narcotic traffic and also is an important U. S. economic partner in this region.  Uzbekistan continues to rebuild its economy after gaining its independence from the former Soviet Union in 1991.  Improving international trade ties and attracting more foreign direct investment into the country remain on the top list for policy makers of Uzbekistan, and policymakers there are attempting to design strategies to boost Uzbekistan’s international competitiveness. 

Introduction

The United States and Uzbekistan have maintained close relations since Uzbekistan gained its independence in 1991, cooperating in a large array of areas, such as defense and security, designing measures against illegal narcotics trafficking, liberalization of trade, promotion of democracy in the region, and, more recently, combating international terrorism.  Uzbekistan- U. S. economic relations can not be viewed separately from all of the above, since Uzbekistan is a new country and requires strong international support in facilitation of development in almost every field.

Uzbekistan at the time of gaining independence

At the time of gaining its independence from the former USSR, Uzbekistan’s economy was in shambles and ill-prepared for an independent functioning.  The fact that this independence was gained by default and/or inertia partially contributed on the lack of preparedness of the economy.  For decades until this break-up, Uzbekistan’s economy was, just like that of any other “little-brother” republics’ (i.e. except Russia, the “big brother“), geared towards working like a small wheel in the Soviet mega-economy.  Mainly, Uzbekistan was a producer of cotton for the textile industry of the former USSR.  Besides that, Uzbekistan supplied other raw materials such as silk, wool, produce; and natural gas.  Instead of building on its existing strengths, which was the recommendation of various think tanks and foreign advisors, Uzbekistan chose to remain a raw-material supplier as before, and ventured into new fields such as automotive manufacturing.

            Shortly after independence, Uzbekistan imposed a strict control over hard currency convertibility (mainly dollar), and since then economists and lay-people alike accused hard currency inconvertibility as the main cause of Uzbekistan’s economic problems.  However, time showed that this was not so true: Uzbekistan eventually removed its restrictions on hard currency exchange, but most problems did not go away.

The U. S. Department of State says the following about the factors that hinder the growth of Uzbekistan’s economy:

Although it is difficult to make an accurate estimate of economic growth in Uzbekistan--because of the unreliable nature of government statistics, which often serve political rather than economic ends--economic growth is far below potential due to:

·        the country's poor investment climate;

·        failure to attract foreign investment;

·        an extremely restrictive trade regime, implemented in order to meet a strategy of limiting imports of consumer goods;

·        failure to reform the agricultural sector of the economy, potentially the engine of economic growth for this largely rural economy; and

·        the price system in Uzbekistan, which is not functioning properly due to government intervention in markets.

Population Statistics and GDP per Capita

Uzbekistan has not conducted a population census since 1989.  Although there was a very intensive migration during post-Soviet years, for instance many Russians and other ethnicities left the country, Uzbekistan’s population size is still only estimated, and in most cases it is believed to be underestimated.  According to the opinion of some economists of Uzbekistan, consistent underestimation of Uzbekistan’s population mainly serves one purpose: to exaggerate GDP per capita.  It is well known that GDP per capita is an important economic indicator for any country’s economy.  Since population comes in the denominator of this indicator, the smaller population - the higher the GDP per capita.

Uzbek Government might have used this tactic to exaggerate its economic growth achievements, and to attract more foreign investors. 

What are the factors that make Uzbekistan an attractive partner in Central Asia?

After the break-up of the Soviet Union, five independent republics appeared on the map of Central Asia: Kazakhstan, Kyrgyzstan, Turkmenistan, Tajikistan, and Uzbekistan.  Various countries have been actively trying to establish themselves in this region, and this competition in regional hegemony was called the Great Game. The United States has joined the race quite early.  So what attracts the USA in Uzbekistan?  These factors probably are: abundance of natural resources, large consumer base and labor resources, and strategic location.  Uzbekistan is the most populous country in Central Asia. It has over 25 million people, concentrated in the south and east of the country,  who are nearly half the Central Asia’s total population.  Uzbekistan is rich in oil, gas, uranium, and gold.  Since 1991 Uzbekistan has reached self-sufficiency in oil and oil products.  The republic was the third largest producer of natural gas in the former Soviet Union behind Russia and Turkmenistan, producing more than 10 percent of the union's natural gas in the 1980s (Library of Congress, 1998).  Uzbekistan is the fifth largest producer of cotton in the world (and second largest exporter of it), and also the eighth largest producer of gold (ECO, 2004). 

Table 1.  Selected Economic Indicators for Uzbekistan’s Economy:

1995-2001

Source: Ministry of Macroeconomics and Statistics

Table 2. TOTAL FOREIGN DIRECT INVESTMENT (mln US $)

(as compared to other countries in the region)

Source: ECO, 2004.

Neighboring Kazakhstan, mainly due to huge oil reserves plus more liberal approach to transition to market economy - got almost 10 times more FDI.

Uzbekistan Trade and Investment Patterns

Table 3.  Uzbekistan’s Major Trading Partners: 2000 and 2001

Uzbekistan has been able to retain some of the most important trading partners from the former bloc: Russia, Kazakhstan, and  Ukraine have been traditionally major trading partners for Uzbekistan. At the same time, it was successful in establishing trading relations with the some of the most developed countries of the world.  South Korea, the largest investor in Uzbek economy, has been able to accomplish this mainly through now-bankrupt Korean giant “DAEWOO” - the joint venture with Uzbek government, represented by Uzavtosanoat, “Uz-DAEWOO Auto Co.” has been producing passenger cars since 1996.  South Korea has invested in Uzbek economy over 1 billion dollars (Minmacroeconomstat, 2004) - the lion‘s share of which is attributed to DAEWOO.  In 2001, American auto corporation GM purchased DAEWOO, and this indirectly has placed the US one step closer to Uzbekistan (Lee, 2001).  Even though GM did not purchase the manufacturing plant of DAEWOO in Asaka, Uzbekistan, it has been partnering with Uzbekistan through sales of parts.

Key Macroeconomic Indicators

(Percent)

Table 4.

Source:  Asian Development Bank:  Asian Development Outlook 2002.

a:  Pricewaterhouse Coopers:  Uzbekistan: A Business and Investment Guide 2002

Economic Growth

(percent)

Table 5.

Source:  Asian Development Bank:  Asian Development Outlook 2002.

a:  Growth figures prior to 1996 are taken from IMF: Uzbekistan:  Recent Economic Developments 1998

b:  Average pertains to 1993-96

The External Sector

Table 6.

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