Aziz Klebleyev
National Savings as the Determinant of Growth: Case of Uzbekistan
Unlike many countries that were negatively affected by the current economic crisis, Uzbekistan’s economy
grew by 8.5 in 2010 and according to the ADB estimates was set to reach 9 percent growth rate in 2011 (ADB,
2010). What is even more intriguing is that Uzbekistan has shown a similar resistance to crisis and relatively
healthy growth in the aftermath of the Russian Default in 1998. (Gonzalo & Damjanovic, 2001) Uzbekistan’s
heterodox economic policies have been criticized on numerous occasions by the International Financial Institutions.
(Pomfret, 2000) Understanding the factors behind its current relative success will allow us to understand whether
Uzbekistan’s case provides a viable alternative development model for other states in transition.
In this paper, I show that economic growth in Uzbekistan is highly correlated with the growth of public
savings. I argue that it is the later that has the causal effect on the former. Firstly, I seek to identify the methods that
were used by the Uzbekistan government to effectively mobilize capital. These methods included maintenance of
positive balance of trade, gradual privatization of state owned assets, retention of state monopoly over mining and
hydrocarbon industries, implicit taxation of agricultural output and effective collection of tax revenue.
Secondly, I examine how these resources were directed towards the economic growth. Incentives for
capital accumulation provided by government included over-valued exchange rate that subsidized importers of
capital equipment, high tariff and non-tariff barriers for consumer goods, preferential loan rates for domestic
producers, and tax deductions for producers of exported goods.
The main contribution of this paper is that the findings support arguments made my numerous economists
on the importance of public savings in ensuring economic growth. (Nurkse, 1970; Krieckhaus, 2002) The paper also
identifies government policy instruments that have defined Uzbekistan’s development model.
1. Introduction
In the past century China, Korea, Japan, and other East Asian countries, despite the lack
of major natural resources, were able to achieve exceptional growth rates. One of the most
prominent theories used to explain their success is developmental state theory. There are
different views on what particular policies the developmental state theory entails. They vary
1
Aziz Klebleyev
from simply ensuring of macroeconomic stability to heavy government intervention in trade and
industrial policy (Akyuz & Gore, 1996; Johnson, 1982; World Bank, 1993). This paper looks at
the argument that developmental state theory entails an active government role in mobilization
and allocation of resources. It seeks to examine various resource mobilization mechanisms as
well as the reasons why they are successful. The paper looks at the experience of Uzbekistan,
and tries to draw comparisons with the neighboring countries.
The second section of the paper covers background on the developmental state theory.
This section also examines the change in the perception of state’s role in the economic
development. The third, fourth, fifth and sixths sections examine the case of Uzbekistan. The
third section analyzes how the increase in public savings affected the economic growth. The
fourth deals with various strategies used by the state to increase public savings, while the fifth
section examines the methods the Uzbekistan government used to direct the savings into the
economic development. The sixth section deals with the political and social conditions that were
behind the relative low local resistance to the government efforts to raise public savings. Finally,
section seven concludes the paper.
2. Literature Review
Fritz and Menocal (2007 ) trace the evolution of international donor community thinking
on the state role in development. Their timeline helps us understand how the attitudes of
international donor community towards the role of the state have evolved. At the same time it
would be useful to see how this evolution reflected on the policies and recommendations of the
International Financial Institutions. They divide the process into three phases, the first one
starting in 1960s when the states were viewed as engines of development and thus provided with
financial resources. This phase led to a considerable amount of disappointment as many such
2
Aziz Klebleyev
experiments in the developing nations failed due to oppressive regimes and widespread
government corruption. This led to a radical shift in international community thinking resulting
in the second phase that lasted throughout 1980s and 1990s. The second phase was characterized
by more market oriented approach to development, also known as the Washington Consensus.
The final phase, according to Fritz and Menocal, has started in 2000s, it is characterized by the
recognition of the need for state to play a role in the development; however, authors point out
that there is no firm agreement as to what exactly the role of state should be.
According to Evans (1998), East Asian development model has been interpreted in three
ways: the ‘market-friendly mode’ exemplified by World Bank’ East Asian Miracle Report; the
‘industrial policy’ model, exemplified by Johnson study of MITI (Ministry of International Trade
and Industry); and the ‘profit-investment nexus’ model put forward by Akyuz and Gore (1996).
The first model limits government involvement to providing macroeconomic stability and
ensuring transparency and predictability of the “rules of the games”. Bureaucrats according to
this model should resist urges to get involved in the industrial policy through preferential
treatment such as subsidies and protectionism (World Bank, 1993). It seems that this model only
partially reflects the actual experience of the East Asian countries and is used mainly to support
the Washington Consensus policies promoted by International Financial Institutions.
The second model involves a deeper involvement of bureaucracy through the
maintenance of stable macroeconomic environment, but more importantly through industry
specific policies that support most promising sectors and divert capital from those providing
declining returns (Johnson, 1982). It seems that this model most closely reflects the actual
experience of the East Asian economies.
3
Aziz Klebleyev
The third model is in a way a middle road between the first and the second, as it argues
that state policy should not be limited only to the maintaining favorable macroeconomic
environment, but at the same time sees bureaucracy as less active than the second model. The
model sees the main role of the state in creating policies that incentivize increase of overall
levels of investment in the economy. This is achieved through measures to limit consumption
and encourage re-investment and capital accumulation by corporations (Akyuz & Gore, 1996).
Evans (1998) argues that all three models require highly capable and coherent national
bureaucracy that maintains close ties with the private sector in order to understand the needs and
interests of business as well as to ensure accountability. At the same time, all models emphasize
the importance of avoiding the capture of bureaucracy by the private sector, and maintaining the
‘embedded autonomy’.
Another transferable lesson that Evans points to is the egalitarian character of East Asian
growth. He argues that even if achieving the first condition seems somewhat within the reach of
developing countries, the second one presents a considerable challenge taking into consideration
the post-WTO international conditions.
Krieckhaus (2002) has attempted to develop further the theory of developmental state, by
emphasizing not only the incentives provided by the state for capital accumulation but also the
actual mobilization of resources conducted by the state. Krieckhause in essence combined
Johnson’s active bureaucracy approach, (Johnson, 1982) with the emphasis on savings and
capital accumulation put forward by Akyuz and Gore (1996). Krieckhause’s argued that since in
modern states government expenditures comprise a considerable part of national economy it is
unreasonable to ignore the saving and investment power of the government. His study also
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Aziz Klebleyev
showed that growth of public savings was highly correlated with the economic growth, and that
the former seemed to be causing the latter.
3. Influence of Savings on Growth
This section examines the impact of all the savings that were accumulated through the
government policies. Uzbekistan’s economic growth in the 20 years after independence can be
divided into 3 discernable stages. The first stage started in 1991 and ended in 1995. This was the
period of crisis and negative economic growth. Prior to the collapse of the Soviet Union,
Uzbekistan’s economic growth was already slowing down. It decreased from 9.1 percent in 1988
to 1.6 percent in 1990. In 1991, the year Uzbekistan declared its independence, the economy
shrank by 0.5 percent. Economic growth remained negative till 1995. The lowest point of this
period was 1992 when severance of economic links and change in terms of trade caused an 11.5
percent decline (World Bank, 2010). Only in 1996 did the Uzbekistan economy start growing
again. The GDP growth of 1.6 percent in 1996 was preceded by an almost doubling of the level
of national savings.
The period of economic decline was followed by the second period that lasted from 1997
to 2003. This period saw moderate economic growth averaging 4 percent annually, despite the
occurrence of the Russian economic crisis in 1998. In 1999, eight years into its independence
Uzbekistan’s GDP finally reached 96 percent of its 1991 level, considerably faster than other
former Soviet Union states (Alam & Banerji, 2000). The proportion of national savings remained
was around 18 percent of GDP during this period. The only exception was a nearly 50 percent
increase of national savings in 2003. The next year, in 2004, Uzbekistan’s economy grew by 7.7
percent, almost twice the rate in the previous period.
5
Aziz Klebleyev
The third period started in 2004 and has been in effect up to the present. This period is
characterized by a relatively rapid economic growth that averaged 8.1 percent per year. The
Asian Development Bank (ADB) 2010 Outlook predicts 8.5 and 9 percent growth in 2010 and
2011 respectively (ADB, 2010). During this period national savings rate averaged 39 percent.
As we can see from the chart and table below, Uzbekistan’s GDP growth increases were
antedated by the increases in the national savings rate.
40
35
30
25
20
Adjusted savings: net
national savings (% of GNI) - --
15
GDP growth (annual %)
9.1385823 3.091294 1.6 0.492
10
5
-5
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
-10
-15
Data: World Bank, 2010
Year
Adjusted savings: gross savings (% of
GNI)
GDP growth (annual %)
1992
1993
1994
1995
1996
1997
1998
1999
3.6
17.8
14.5
27.1
22.3
17.9
19.6
16.7
-11.2
-2.3
-5.2
-0.9
1.7
5.2
4.3
4.3
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Aziz Klebleyev
2000
2001
2002
2003
2004
2005
2006
2007
2008
18.2
18.9
21.8
29.2
34.6
40.2
41.3
38.6
40.5
3.8
4.2
4
4.2
7.7
7
7.3
9.5
9
Data: World Bank, 2010
4. Capital Mobilization Methods
After the collapse of the Soviet Union, Uzbekistan’s government approached economic
liberalizations cautiously. Despite IMF and World Bank pressure, Uzbekistan was slow to give
up government control of the economy. (Pomfret, 2000)
Alam and Banerji in their work analyzed the differences between the reforms that took
place in Kazakhstan and Uzbekistan as well as the effects of these reforms. (Alam & Banerj'i,
2000) Liberalization in Kazakhstan in areas such as trade, price setting, interest rates and
privatization proceeded at a much faster rate than in Uzbekistan. At the same time Uzbekistan
has outperformed Kazakhstan in terms of aggregate output growth. As the post-Soviet downturn
of Uzbekistan’s economy was relatively mild, its GDP had by 1999 returned to its 1991 level.
By that time Kazakhstan has achieved only 63 percent of its pre-independence GDP level. The
fact that the country was less affected by the crises allowed Uzbekistan government to be more
selective in the reforms that it implemented. In his work analyzing the ‘Uzbek growth puzzle’
David Kotz argues that Uzbekistan had followed the recommendations made by the IFIs only
where it considered them appropriate. It privatized housing and small enterprises as well as
liberalized prices on a wide range of items. The only exception was made on energy, cotton and
grain prices. At the same time privatization of large enterprises was conducted much slower as
the country’s leadership has followed a gradual transition model. This approach was widely
7
Aziz Klebleyev
criticized by both World Bank and IMF. A quote from World Bank report (World Bank, 1993b)
that author provides in his work:
In the absence of comprehensive reform, the few scattered and partial reforms that
the Government is implementing would have no major impact. This muddle
through scenario would imply that none of the sectors is restructured significantly.
This failure to adjust would lead to a supply-led contraction of the level of
economic activity, reduction in savings and investment, and unnecessary hardship
on the population in the medium term represented by a decline in consumption
per capita of no less than 30 percent by 1997.
Kotz emphasizes that despite these grim predictions the downturn in Uzbekistan’s
economic performance was the mildest in the region and its economy started growing in 1996.
(Kotz, 2004) Moreover, 2001 Uzbekistan’s GDP was 3% higher than the pre-independence level.
Uzbekistan had achieved this level much faster than other CIS countries.
Despite the overall policy aimed at economic liberalization, Uzbekistan’s government
retained a large number of instruments through which it was able to mobilize resources needed
for industrialization. The Uzbekistan government mobilized resources by maintaining positive
balance of trade, gradually privatizing state owned assets, dominating exploration and extraction
of hydrocarbons and minerals, implicitly taxing agricultural output and ensuring high degree of
tax compliance.
Positive Balance of Trade
8
Aziz Klebleyev
Uzbekistan’s government made it a priority to achieve a positive balance of trade. One of
the immediate goals that Uzbekistan’s leadership set for itself after attaining political
independence was to achieve food and energy independence. This was motivated by the need to
decrease its losses of foreign currency and allow the accumulation of funds to be invested in
industrialization.
During the Soviet Union, Uzbekistan despite availability of oil reserves was a net oil
importer; it also depended on grain imports from other countries of the USSR. After achieving
independence, Uzbekistan found itself in a situation, where it had to pay for imported goods at
market prices. The country had to spend over $1 billion a year on the import of oil and grain,
which comprised around 40 percent of the cost of all its imports. As the development of its oil
fields required considerable investment the Uzbekistan government led the investment in the
industry which it financed with credits under sovereign guarantee. Heavy investment in the oil
and gas sector paid off quickly and Uzbekistan achieved energy self-sufficiency by 1995.
Similarly, the government used administrative command methods to make farmers grow wheat
instead of cotton. Wheat self-sufficiency was reached in 1998 and the amount of wheat grown in
the country has increased five-fold since achieving independence. Although initially these
measures were criticized as contradicting comparative advantage, and losing foreign exchange
revenue from possible cotton sales, soon policy makers were vindicated as cotton prices have
fallen. (Ruziev, Ghosh, & Dow, 2007)
Spechler et al. show that Uzbekistan’s decision to substitute cotton with grain, although
criticized by IFIs as costing the country 50 million dollars in foreign exchange earnings, besides
contributing to the elimination of current account deficit, also has had other positive effects.
Wheat independence contributed to food self-sufficiency, created conditions for lower use of
9
Aziz Klebleyev
water and higher income for farmers. It also was beneficial to the environment as the continuous
cultivation of cotton had deteriorated the quality of the land (Spechler, Bektemirov, Chepel, &
Survankulor, 2004).
Privatization
Another factor that accelerated capital accumulation in Uzbekistan is the way
privatization was carried out. Privatization of small and medium enterprises was conducted at
similar pace with Kazakhstan and Russia, the only difference was much slower privatization of
the larger enterprises. Because government of Uzbekistan was not in a hurry to privatize large
enterprises, it made sure that new owners of large enterprises took considerable investment
obligations upon themselves as a result of privatization. The Uzbekistan avoided using voucher
or coupon system that was implemented in Kazakhstan for privatization (Duberman, 1997). Fast
pace of privatization in many transition countries created a lot of supply on a market where
demand was relatively limited to begin with. Thus many state assets were sold at rates below
their market value.
The Uzbekistan government not only kept the ownership of many state enterprises but it
also invested heavily in meany of them in an attempt to diversifying country’s industrial base.
Spechler et al. have pointed out that state investment and subsidies to the industrial sector were
much more successful in Uzbekistan than in other economies in transition. Also, effective export
and taxation of commodities has helped offset a slowdown in other sectors of economy. The
ability of government to carry out these measures is seen as a sign of institutional effectiveness.
(Spechler, Bektemirov, Chepel, & Survankulor, 2004)
10
Aziz Klebleyev
Despite the unwillingness to follow the rapid liberalization path, Spechler et al. state that
in many respects Uzbekistan did go ahead with reforms. Thus, subsidies and free loans to
enterprises were gradually reduced. Privatization of large enterprises also took place, and
although it was gradual, authors point out that a similar approach was adopted by Poland,
Hungary and Slovenia. Government industrial policy led to diversification and the expansion of
machine building and consumer goods production. For the first time in history Uzbekistan was
producing refrigerators and TVs. One of the most prominent areas where Uzbekistan government
was able to achieve visible result was the automobile production industry in cooperation with
Daewoo Auto and more recently with General Motors Company. Car production didn’t exist in
Uzbekistan prior to independence.
Uzbekistan: Export structure, 20045-2009 (export value in thousands USD)
1
2005
% of
exp
2006
% of
exp
2007
1,211,224
32%
1,439,638
27%
1,440,380
616,829
16%
845,126
16%
950,909
% of
exp
2008
% of
exp
792,415
11%
544,930
10%
15%
2,293,395
32%
2,621,051
49%
22%
2009
% of
exp
2
Cotton
Metal fuels, oils,
distillation, etc.
3
Copper
291,264
8%
405,354
8%
507,709
8%
430,559
6%
284,968
5%
4
Vehicles
315,641
8%
499,528
9%
791,658
12%
768,408
11%
229,956
4%
5
Precious stones, metals
272,701
7%
185,481
3%
215,507
3%
398,724
6%
148,056
3%
6
Edible fruits
219,777
6%
377,003
7%
280,778
4%
207,919
3%
218,542
4%
7
Inorganic Chemicals
179,758
5%
264,591
5%
482,822
7%
325,488
5%
403,375
8%
8
Edible vegetables
115,747
3%
122,072
2%
147,899
2%
68,526
1%
94,446
2%
9
Fertilizers
52,715
1%
34,648
1%
94,109
1%
291,512
4%
58,156
1%
10
Iron and Steel
46,786
1%
44,850
1%
89,379
1%
88,705
1%
20,037
0%
11
Plastics
90,107
2%
109,060
2%
117,174
2%
103,653
1%
68,005
1%
12
Zinc
28,492
1%
89,690
2%
157,179
2%
110,123
2%
53,344
1%
3,760,890
100%
5,371,823
100%
6,469,815
100%
7,180,237
100%
5,347,569
100%
Total Exports (Uzbekistan)
Source: International Trade Center, 2010
As can be seen from the table above, from 2005 to 2008, vehicle exports moved from the
fourth to the third position, only slightly below cotton, the traditional foreign currency earner.
11
Aziz Klebleyev
Despite the decrease of demand for Uzbekistan cars on the international market, GM Uzbekistan
was able to maintain its previous production levels due to doubling of domestic sales in 2009
(Times of Central Asia, 2011).
State Control over Mining and Hydrocarbon Industry
Uzbekistan’s government was also able to retain full control of Navoi Integrated Mining
and Metals Combine (NGMK), a major producer of gold and uranium. Muruntau Mine, operated
by NGMK, was the largest gold producer in the Soviet Union and was responsible for almost 30%
of its gold production. In the period from 1991 to 2003, NGMK was able to increase its gold
production by 25% to around 60 ton/year, with the total gold production in Uzbekistan reaching
93 tons in 2004. The gold industry development program drafted by NGMK envisions a 20%
rise of gold production by 2010. In addition to gold, Uzbekistan was the largest source of
uranium in the Soviet Union. In 2003, Uzbekistan’s uranium output comprised 7% of the world’s
total, all of it has been exported to the United States. In 2004, Uzbekistan’s government
announced a $6 million investment that would allow increasing uranium production at NGMK
by 33% (Levine, 2003). The export of gold and uranium has had a positive effect on the balance
of trade and had provided the Uzbekistan government with resources to conduct industrial policy.
Similarly, Uzbekistan’s energy needs were satisfied with its own natural gas reserves, and since
1991 the country was able to increase natural gas production by 35 percent while decreasing
imports of energy resources by 85%. (Blackmon, 2005)
Implicit Taxation of Agriculture
The gradual pace of reforms in Uzbekistan has ensured mild recession in agricultural
output while agricultural production in neighboring Kazakhstan and Kyrgyzstan has suffered
12
Aziz Klebleyev
major depressions. According to Spechler et al. (2004), in the initial stage of reforms in
Uzbekistan, cotton provided over 40 percent of foreign exchange earnings, with the share falling
to 30 percent in 2000. As industrial output decreased from 26 to 13 percent, agricultural output
remained relatively stable and contributed around a third of GDP growth. As government has
monopolized the cotton trade, it bought cotton from farmers at prices considerably lower than
market rates, using the difference to finance industrial development. In 2000, even taking into
consideration government loans and various subsidized services to farmers, transfers from
agriculture to industrial development comprised around 4 percent of GDP (Guadagni, Raiser,
Crole-Rees, & Khidirov, 2005). At the same time these transfers comprised around 50% of gross
farmers’ income. The role of state in agricultural output in Uzbekistan was even more important
due to the climatic conditions. About 15 percent of Uzbekistan’s arable land depends on
irrigation, thus, maintenance of 190 000 km long irrigation system was impossible without
government involvement. The transfers from agriculture have decreased in the recent period but
in 2004 still comprised 1.4 percent of GDP. With the transfers from agriculture, government was
able to finance industrial expansion and construction of road and energy infrastructure.
13
Aziz Klebleyev
Source: Guadagni, Raiser, Crole-Rees, & Khidirov, 2005
Source: Guadagni, Raiser, Crole-Rees, & Khidirov, 2005
Tax Collection
Government expenditures were also possible due to the relatively efficient collection of
taxes. The new tax system required all enterprises to open an account with state banks. Taxes
were deducted from the enterprise accounts by the banks themselves. (Kotz, 2004) Splechler
(2000) pointed out that in Uzbekistan banks serve as controllers of enterprise accounts as well as
tax collectors. The table below provides VAT collection data for several CIS countries. As all the
countries represented in the table have the same value-added tax rate of 20 percent, it can be
assumed that the tax/GDP ratios would also be similar (Schaffer & Turley, 2000). Nevertheless
the differences between VAT collection rates are substantial. In this case, Uzbekistan has a VAT
tax collection rate comparable to that of Baltic States and higher than those of other CIS
countries. Schaffer and Turley attribute this disparity to the differences in quality of tax
administration across countries.
14
Aziz Klebleyev
Country/Year
Estonia
Latvia
Lithuania
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
Moldova
Ukraine
Uzbekistan
Tajikistan
Russia
Source: Stepanyan, 2003
1992
7.3
3.3
7.8
5.9
6.7
8.6
10.4
VAT Revenues (in percent of GDP)
1993
1994
1995
1996
8.9
11
10
10.1
6
8.6
8.8
9.1
6.2
5.2
6.3
7.2
5
2.7
3.3
3.3
8.1
3.3
1.7
3.4
0.5
1.2
1.6
2.3
3.7
2.5
3.2
3.8
4.4
4.3
4.4
5.3
4.4
3.6
7
7
11.5
11.4
8.3
7.8
9.3
5
5.7
6.4
1.7
6.7
7
6.4
7.1
1997
10.4
8.7
8.7
4.9
4.1
3
3.5
5.6
9.4
8.1
7.5
1.5
6.9
1998
8.7
8.8
8.4
6.2
4.4
4.4
4.6
5.8
11.1
7.1
9.4
1.9
6.2
1999
8.5
8.1
8.1
6.9
4.8
4.4
4.4
4.1
6.9
6.4
7.3
2.3
6
5. Directing Resources towards Economic Development
Multiple Exchange Rates
Kotz argues that Uzbekistan ‘success’ was in a way due to a crisis that took place in 1996.
A fifteen percent fall in cotton harvest as well as the fifteen percent fall of world prices on cotton
have led to the decrease in the foreign exchange revenues from exports, as cotton comprised
almost half of Uzbekistan’s export earnings. This decrease has severely affected country’s
current account balance. The large current account deficit lead Uzbekistan government to turn
away from the recommendations of Washington International Financial Institutions and follow
its own path that eventually lead to growth.
These measures included multiple exchange rates, where black market rate was at one
point 500% above the government rate. The Uzbek currency, soum, was highly overvalued,
which has stimulated import of goods into the country. This was done in order to make it easier
15
2000
9.7
7.8
7.6
6.5
4.9
4.4
4.8
7.5
5.6
7.5
2.5
6.5
Aziz Klebleyev
to borrowers to service their foreign debts as well as subsidize imports of machinery and
equipment. To avoid over-flooding the economy with the imported goods the Uzbekistan
government has restricted access to foreign exchange. Trade was not liberalized as imports of
consumer goods were artificially suppressed through tariff and non-tariff barriers. Industries
perceived as strategic were allowed to obtain foreign exchange at favorable rate to import
machinery and spare parts. While another post-Soviet state, Kazakhstan has moved to full
currency convertibility in 1996, Uzbekistan started implementing multiple exchange rates since
1997. It had moved to currency convertibility only in 2003.
Tariff and Non-tariff barriers and Their Effects
Heavy state intervention in foreign trade created a very favorable low-competition
environment for local producers, thus allowing them to gain higher returns than would have been
available under perfect market competition. The goal was to provide companies with resources
for further upgrading of their production processes and increasing their chances to successfully
compete with foreign counterparts in future. Blackmon (2005) points out that Uzbekistan’s
ability to resist liberalization of trade was due to the relatively low level of Uzbekistan’s
economic integration with Russia. (Blackmon, 2005)
The study done by the IMF’s Zettelmeyer in 1998 echoes this point. Zettelmeyer argues
that Uzbekistan’s lack of over-industrialization and, availability of cotton and energy selfsufficiency allowed it to achieve relatively stable development even without the liberalization of
its economy and privatization of major state-owned enterprises. (Zettelmeyer, 1998)
The Uzbekistan government took an especially hard line on controling trade and implementing
various tariff and non-tariff bariers. Thus, Uzbekistan as of 2005 levied excise taxes on ice cream (200%),
16
Aziz Klebleyev
mineral water (100%), juices (70%), poultry meat (50%), cheese and yoghurt (50%) and soap (20%)
(Asian Development Bank, 2006). Moreover, all trading activities in Uzbekistan were made subbject to
licensing and access to foreign exchange for trading purposes. While these rules have formerly
liberalised in late 2005, the access to foreign exchange is still subject to a complicated approval process.
In addition the Uzbekistan government went a long way in order to limit smugling goods across the
border. These measures included limiting border passings into neighboring Kazakhstan and Kyrgyzstan.
Also in order to avoid Uzbekistan citizens to buy goods in Kazakhstan, a section of the road connecting
Samarkand and Tashkent was closed as it was crossing through a Kazakhstan’s teritory where a whole
roadside market had appeared catering to the needs of Uzbekistan consumers. The European Bank for
Reconstruction and Development attributes the highest score of 4+ to the Kyrgyz Republic for trade and
foreign exchange rate liberalisation against scores of 4− in Kazakhstan, 3+ in Tajikistan, 2 in Uzbekistan
and 1 in Turkmenistan (Grafe, Raiserb, & Sakatsume, 2008).
Uzbekistan also limited the importation of luxury goods. This policy made economic
sense but it also created a sense of equity. Most of Central Asian countries, including Uzbekistan
have experienced economic growth at the beginning of 2000s. GDP growth was mainly due to
consumption growth, as government investments have declined and growth of government
purchases was only marginal. Kotz (2004) shows that the growth in consumption was plausible
as the rise in real income comprised 17.8 percent per year. He acknowledged that this growth
was uneven among the population. The consumption was coming mainly from the upper strata of
the Uzbekistan society. At the same time, he points to the fact that while in Kazakhstan and other
CIS countries the elite consumed mostly imported goods, in Uzbekistan, due to the trade regime
that was in place, the goods that were consumed were produced locally. Kotz points out that
machinery and equipment, foodstuffs, chemical products and plastics, metals and energy
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Aziz Klebleyev
comprised three-fourth of Uzbekistan’s imports throughout this period. A prohibitive 90 percent
tariffs was an average for most of the imported consumer goods. A simple example that Kotz
provides is the fact that while Mercedes cars became ubiquitous on the streets of Kazakhstan and
Russia, in Uzbekistan elite as well as middle class were driving locally produced Daewoo cars,
providing extra support for the local car industry (Kotz, 2004).
6. Political and Social Environment
Considering the amount of capital transfers that took place especially in the agricultural
sector it would be logical to ask how such policies were possible and how government was able
to keep any dissent under control. This was possible due to the relative cohesion of elites, as well
as government support for the poorest strata of the society.
Uzbekistan’s leadership remained the same from the times of the Soviet Union.
Bureaucracy in Uzbekistan was not familiar with market economy and thus at the very beginning
they faced a high levels of uncertainty. A new national ideology was adopted relatively quickly.
It has glorified local historical figures and labeled Russian Imperial and Soviet occupation as
colonialism.
One of the reasons why the search for the national identity in Uzbekistan was not as
complicated as in other neighboring post-Soviet states was the fact that Uzbeks comprise over 75
percent of the population of Uzbekistan. Thus, unlike in Kazakhstan or Kyrgyzstan where the
new ideology had to accommodate a relatively large Russian-speaking population, in Uzbekistan
this issue was not as significant. Uzbekistan’s elite consisted almost exclusively of Uzbeks.
Before the collapse of the Soviet Union, Russians were prominent in various management posts
throughout Uzbekistan. With the Declaration of Independence, personnel decisions that
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Aziz Klebleyev
previously needed to be confirmed by Moscow, had come under the full jurisdiction of the
Uzbekistan’s president. Many Russians who worked in the management positions either
voluntarily left their jobs or were pressured out of them. Thus new elite who came to power
owed their status personally to the president who had the power to award or dismiss them. The
slogan “Uzbekistan is a country with a great future” was coined and widely promoted starting
from the first year of the independence. This goal could unite people around the leadership, but
was vague enough to allow for various choices as of the pace and type of reforms.
The legacy of communist party politics has played a role in cementing Karimov’s rule as
a new president. Before the collapse of the Soviet Union, the local Uzbekistan political elite have
experienced major setbacks after attacks by Gorbachev and his reform movement. Previous local
leaders were sacked under corruption allegations and Karimov was brought in as a new Uzbek
Communist Party Secretary. Some of the local elites viewed the struggle with Moscow in terms
of ethnic struggle, but because Karimov was an ethnic Uzbek he was still viewed as one of their
own. Another factor that strengthened Karimov’s position was that he was not a party
functionary but a technocrat. An engineer by education, he had served as a finance minister as
well as the leader of one of the regions and was neither personally connected with Gorbachev nor
involved in the power struggles that ensued in the 1980s.
Kobil Ruziev in his analysis of Uzbekistan’s economic development since
independence points out that in the initial stage the country considered emulating three different
development models: South Korean model with export lead growth, Turkish model with heavy
government involvement and Chinese model of gradual reforms from agriculture to industry.
(Ruziev, Ghosh, & Dow, 2007) Yet, due to Uzbekistan’s initial economic conditions none of
these models seemed to totally fit and the government turned to its own model of development.
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Aziz Klebleyev
Ruziev reiterates some of the arguments made by previously examined authors about low
industrialization, availability of marketable commodities and ability to achieve self-sufficiency
in grain and energy.
One of the new arguments that he makes concerns the reasons why reforms and
privatization processes in Uzbekistan and other CIS countries proceeded at different pace. In
states with small and weak opposition, the leaders needed fewer resources to hold onto power,
while in countries with more vocal opposition and strong political competition leaders had to
look for resources for appeasement or defeat of opposition. Thus, author compared Uzbekistan
and Kazakhstan pointing out that because Kazakhstan leadership faced strong opposition it was
forced to conduct swift privatization of major state assets. While Uzbekistan due to a lower
political contestation could afford to conduct privatization process at a slower pace.
Alam and Banerji hypothesize that because transition takes time and can be socially and
politically destabilizing, Uzbekistan leadership chose a slower pace of reforms in order to ensure
social and political stability. As poverty rates in Uzbekistan were among the highest in Soviet
Union, and over half of its population was under the age 16, shock therapy the way it was
conducted in Poland could lead to major social catastrophe. Thus, the state took upon itself the
role of entrepreneur and investor. Thus, to a certain degree Uzbekistan government had little
choice but approach liberalization of economy gradually and had to maintain most of the state
expenditures on welfare. One of the outcomes of this measures was maintainance of social
cohesion and trust in government policies.
According to Kotz, throughout the early 1990s the Uzbekistan government maintained a
relatively high rate of investment and government purchases which, although it fell by 10 percent
20
Aziz Klebleyev
initially in 1992, after that it remained relatively stable. Exports were growing at 3 percent per
annum which provided a boost for the economy. Government investments and purchases as well
as direct credits to the industrial enterprises served as a cushion that prevented economy from
rapid slowdown. (Kotz, 2004)
Similarly to Kotz’s argument Spechler (2000)argues that the fact that the government
maintained large state sector has contributed to economic growth as the government spent
around 8 and 3.4 percent on education and health care respectively. These social expenditures
were conducive to long-term growth and provided some cushion for losers in the process of
reforms. Although, the safety net was among the expenditures that were severely decreased at the
outset of reforms, government has come up with a creative method for delivering the aid
effectively. Social safety net support was distributed through the neighborhood system. In
neighborhoods of several hundred families elders knew the households that consisted of elders
and single parent families. This system allowed targeted and more effective delivery of social
safety net benefits.
7. Conclusion
The paper began by providing a brief description on evolution of international-donor
community thinking on the state role in development. It also reviewed three main models used to
describe the developmental experience of East Asian nations. It described the arguments made
by Krieckhaus (2002) on the role that public savings play in spurring the economic growth. The
main contribution of this paper (a) has shown that Uzbekistan has experienced a dramatic rise in
national savings over three periods, which in turn led to the increases in economic growth rates,
(b) it demonstrated policy instruments that were used by the Uzbekistan government to increase
national savings and mechanims of directing these savings into economic development. (c)
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Aziz Klebleyev
Finally, the paper has also analyzed the political environment that enabled government to
proceed with its policies amid relatively weak opposition.
Government involvement in the economic development on the level it had taken place in
Uzbekistan requires significant administrative capacity. Thus, more research needs to be done on
the nature of bureaucracy in Uzbekistan and dynamics of its interaction with the private sector.
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