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The Uzbek government claims that the former Soviet country’s economy is booming: nothing short of an economic miracle, in fact. But the official statistics are belied by the fact that almost a third of working-age Uzbeks choose to work abroad.
In his book Uzbekistan: Its Own Model for Transition to a Market Economy, published in the early 1990s, the country’s first and only president Islam Karimov outlined five core principles of the republic’s economic development: freeing the economy of ideology; the state as the main reformer; the rule of law; a strong social policy; and gradual reform to adapt to the market.
According to the World Bank’s calculations—which are forced to rely on Uzbekistan’s official statistics due to a lack of transparency in the country’s government—GDP growth has been a steady 7–8 percent for a number of years, and there is no sign of a slowdown.
Inflation-adjusted GDP has tripled since the early 1990s. Industrial output and agriculture increased in 2015 by 8 percent and 6.8 percent, respectively, along with trade. Unemployment remains low at 5.2 percent. Household incomes are on the rise (officials claim that they’ve increased ninefold since the country became independent from the Soviet Union).
However, the situation on the ground doesn’t quite seem to match the official figures. One-third of working-age Uzbeks work abroad, and the rest make $150–$300 a month. So where are the effects of the economic miracle that the government has been trumpeting for the last few years?
Uzbek authorities can always point to significant population growth since independence when trying to explain the discrepancy between the statistics and the low standard of living for ordinary people. Uzbekistan’s population has almost doubled in the past twenty-five years and now exceeds 30 million. But in reality, all the errors in building the “Uzbek economic model” suggest that the real economic indicators are a far cry from official statistics.
The mistakes made by the government are rooted in the very same five principles promulgated in Karimov’s book. As long as its only objective is to preserve the current regime, the state will resist efficient market reforms. Uzbekistan has remained true to the Soviet economic system, merely replacing the communist ideology with the president’s personality cult and the so-called uzbekcilik (a unique national path).
True, Karimov and his ministers can take credit for achieving one of Uzbekistan’s long-standing objectives: ridding itself of the Soviet-era economy’s dependency on cotton exports. According to official data, the proportion of cotton in Uzbekistan’s exports fell from 59.7 percent to 7.7 percent. Exports of energy resources and oil products have increased and now amount to over one-third of the country’s total exports. Both cotton and energy resources remain under the control of state-run companies.
The government’s efforts to shift the economic focus away from agriculture paid off. Agricultural production accounts for 17.6 percent of the country’s GDP, while the industrial sector makes up 24 percent. The prime beneficiary of this policy, however, has been the sluggish service sector and its bloated bureaucracy, which is now responsible for 53 percent of GDP. More than half of the Uzbek population is employed by that sector, although Uzbekistan still needs workers in manufacturing and agriculture due to the lack of advanced technologies in these sectors.
And in other aspects, economic reform has been less effective. While the Uzbek government acceded to market prices, it also instituted a rationing system for certain foodstuffs. Most import tariffs were lifted, but foreign trade remains under tight control: Uzbekistan’s national bank is directly involved in over 70 percent of the country’s foreign trade.
Although Uzbekistan now has many private agricultural ventures, the government still sets quotas for staples such as cotton and grain, and for fruit and vegetable production. Land privatization has been incomplete: small producers have only received 20 percent of the country’s available land. Essentially, the government tells private landowners what to plant and whom to sell to, and it sets purchase prices that don’t even cover production costs.
Pervasive corruption has thwarted entrepreneurial activity. No business can survive in Uzbekistan without connections to the president’s inner circle or the security forces that control all walks of life. Foreign businesses face countless bureaucratic obstacles, which scare off potential investors. Direct foreign investment in the country’s economy amounted to only $3.1 billion in 2015, despite the abundance of natural gas, gold, and uranium. Investments in neighboring Kazakhstan were five times greater, before falling drastically in recent years. At the same time, the Uzbek government has no qualms about expropriating foreign capital, as in the case of Oxus Gold, the British gold mining company that lost $400 million.
In recent years, cash deficits—especially of foreign currency—have plagued Uzbekistan. Workers have long gotten used to salary delays, even at major state enterprises.
The black market currency exchange rate is almost twice as high as the official rate, and the government has long restricted dollar and euro amounts for bank transfers. Uzbeks can only withdraw foreign currency deposits made into their accounts in the national currency and at the official exchange rate.
The black market is flourishing, and the police turn a blind eye to currency dealers, knowing they are protected by a higher authority. By attempting to take control of all of the country’s currency transactions, the government has lost potential tax revenues from a major cash flow that now affects prices, regardless of what the government does.
At the end of last year, a sharp increase in the black market dollar exchange rate was almost immediately followed by 10 to 20 percent food price increases. Obviously, none of these increases made their way into official inflation statistics. According to Karimov, it was just 5.6 percent in 2015. Western estimates were twice as high.
Perhaps this discrepancy reveals the true secret of the Uzbek economic miracle. Even the ultra-cautious local spin masters occasionally make mistakes that allow us to see how much the government figures may be distorted.
In February 2013, Uzbekistan’s Statistics Committee reported a 5.1 percent decline in exports on its website. The page was promptly removed, since it contradicted Karimov’s earlier speech where he talked about a “substantial, 11.6 percent increase in exports” in 2012.
According to Uzmetronom news site, Karimov also mentioned that the export growth had ensured a $1.1 billion foreign trade surplus, although the Statistics Committee reported a $2.2 billion surplus. Since the 2011 surplus was $4.5 billion, both figures indicate drastic shrinkage.
Evidently, most of Uzbekistan’s economic indicators are subject to these statistical manipulations, be it a 90 percent voter turnout for presidential elections or refrigerator manufacturing, where a 50-fold increase was reported. In this context, numbers on labor migration out of the country shed more light on the efficiency of Karimov’s economic model than all of his statistical data.
When the Karimov government was first creating its economic model, people from neighboring countries, including now prosperous Kazakhstan, flocked to Uzbekistan to buy food and consumer goods and to work. Now, Kazakhstan’s GDP is about four times higher than Uzbekistan’s, and it is Uzbeks who are trying to get to Kazakhstan.
Ironically, migration peaked in 2013—the year the president declared a Year of Prosperity and Well-Being.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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