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.

Source:  Asian Development Bank:  Asian Development Outlook 2002.

a: Ministry of Macroeconomics and Statistics

b:  Economic Cooperation Organization:  Annual Economic Report 2000

Figures in bracket are growth rates.

Trends in Foreign Trade

Table 7

Source:  Asian Development Bank:  Asian Development Outlook 2002.

a: Ministry of Macroeconomics and Statistics

Figures in bracket are growth rates.

Major Exports (2001)

Table 8

Source:  Ministry of Macroeconomics and Statistics

Destination of Exports

Table 9

Source:   Ministry of Macroeconomics and Statistics

Uzbekistan- U. S. Economic Relations

Main export and import items between Uzbekistan and the USA (2001)

Table 10

            The United States recognized Uzbekistan’s  independence in December 1991.  In 1992, various of United States aid programs were launched. Operation Provide Hope delivered an estimated US$6 million of food and medical supplies for emergency relief of civilians affected by the Tajik civil war; the Peace Corps sent its first group of about fifty volunteers to Uzbekistan; an agreement with the Overseas Private Investment Corporation (OPIC) began encouraging United States private investment in Uzbekistan by providing direct loans and loan guarantees and helping to match projects with potential investors; and humanitarian and technical assistance began to move to a wide range of recipients. In 1993 the United States granted Uzbekistan most-favored-nation trade status, which went into force in January 1994. In March 1994, a bilateral assistance agreement and an open lands agreement were signed. In 1995 a variety of investment and other treaties were under discussion, and several United States non-governmental organizations were initiating joint projects throughout Uzbekistan.

            In the first two years of Uzbekistan's independence, the United States provided roughly US$17 million in humanitarian assistance andUS$13 million in technical assistance. For a time, continued human rights violations in Uzbekistan led to significant restrictions in the bilateral relationship, and Uzbekistan received significantly less United States assistance than many of the other former Soviet republics. Because Uzbekistan was slow to adopt fundamental economic reforms, nonhumanitarian United States assistance was largely restricted to programs that support the building of democratic institutions and market reform. By the end of 1995, however, United States-Uzbekistan relations were improving, and significantly more bilateral economic activity was expected in 1996 (U.S. Department of State, 2004).

Major Issues in Uzbekistan- U. S. Economic Relations

Aral Sea Crisis

            The former Soviet Union, in an effort to become self-sufficient in cotton, diverted tributaries of the Aral Sea, Amu Daria and Sir Daria, for massive irrigation of cotton fields throughout then-Uzbek SSR. The result has been environmental devastation: since 1960, the sea level has dropped 50%. Residents of Uzbekistan and Turkmenistan are paying the price, as winds whip tons of contaminated dust from the dry seabed into the air, leading to respiratory infections, diarrheal diseases, and some of the highest rates of tuberculosis in the former Soviet Union.  Besides health problems, Aral Sea disaster has made hundreds of acres of agricultural land unfit for use.  If the issue shall not be resolved in the nearest future, the Aral Sea disaster’s impact on Uzbek economy will be devastating.

             The USA could have extended long-term, substantial credit lines for Uzbekistan to implement major projects to solve the Aral Sea  problem, but that did not take place to the date.  American involvement with the Aral Sea problem remains at superficial level - mainly through some international organizations. 

How does the current situation in Afghanistan affect Uzbekistan’s economy

Fight Against Terrorism: Soft Ways

            Militant Islamic groups, such as Islamic Movement of Uzbekistan (IMU), have been causing problems in Uzbekistan long before the USA faced Taliban of Afghanistan.  In fact, removal of Taliban regime had been a blowing impact towards IMU as well, since they lost many fighters and training centers in Afghanistan.  Besides the current military presence in the South of Uzbekistan, namely in Khanabad Military Base of Karshi region, the United States has been actively using and teaching “soft” ways of combating terrorism, such as economic development in the region.  Ferghana Valley of Uzbekistan has been the most volatile region in the entire Central Asia.  Below is an excerpt from Beth Jones, Beth Jones, Assistant Secretary for European and Eurasian Affairs:

In Central Asia, poor economic and social conditions are contributing to the appeal of extremist Islam in the volatile Ferghana Valley. We seek to head off conflict by improving infrastructure, creating employment opportunities, and helping develop and strengthen civil society. We are creating jobs through marketing assistance and establishing credit for agricultural processors. We are maintaining a high level of student and professional exchanges.

            Therefore the US presence in Uzbekistan, both military and economic can be seen as a positive factor in Uzbekistan’s economic development.  On the other hand, the USA’s presence in the region did not prevent Afghanistan from becoming number one producer of narcotics (UN Press Release AFG/269 SOC/NAR/917 ), and notably a major portion of this dreadful crop passes through Uzbekistan.  Uzbekistan take pride for being at the crossroads of the ancient Great Silk Road that until the discovery of seaways, connected the East with the West.  In reality, the ancient Great Silk Road has turned into an undercover Great Narcotics Road.  Truckloads of narcotics are passing through Uzbekistan into other former Soviet   republics and on to Europe.

Below is a brief statistics on Afghan Narcotics Production:

Table 11.  Fact Sheet - Afghanistan Opium Survey 2004

Source: www.un.org/ UN Press Release AFG/269 SOC/NAR/917

            The figures are appalling.  If we add to that the words of Mr. Costa that “… drug developments in Afghanistan contradict trends in the rest of the world. Drug production is decreasing on every continent,” - then we can realize how horrible the situation is.  Firstly, Uzbekistan is a major drug-trafficking route for the Afghan narcotics industry.  Second, large portion of Afghan narcotics settles in Uzbekistan and causes numerous social and economic problems.

            It is well-known that corruption is widespread in Uzbekistan, and that comes handy for drug traffickers.  Therefore, the USA has to commit some serious assistance in strengthening customs control at Uzbek-Afghan border - but to the date the USA did not get involved in this matter.

U.S. Assistance to Uzbekistan – Fiscal Year 2004 (U.S. Department of State, 2004)

            Since the independence was gained in 1991, Uzbekistan’s government has been overwhelmed with myriad of issues that it has to deal.  This is explained by the fact that the government structure of Uzbekistan had been designed by the Soviet Headquarters in Moscow mainly as an executive body, with little or none authority for on-site problem solving.  Although Uzbekistan’s government built itself many new offices, and re-named most of its former governing bodies, much of the government structure and its main executives remain the same.  The fact that the U.S. financial assistance to Uzbekistan comes to predetermined fields makes it more effective. 

            Another positive thing is that according to Section 568(a) of the FY 04 Foreign Operations Appropriations Act requires the Secretary of State to determine that Uzbekistan is making “substantial and continuing” progress in meeting its commitments towards improving respect to human rights, ensuring free and fair elections (all the elections and referendums of Uzbekistan since the Independence had been criticized by international observers as unfair), multi-party system (Uzbek political life is still “owned” by People’s Democratic Party, former Communist party of Uzbekistan, headed by the President Karimov), freedom of speech and independence of media.  For instance, in July 13, 2004 U.S. Department of State threatened to suspend its financial aid to Uzbekistan due to its poor record (Press Statement # 2004/766 of U.S. Department of State).

Below is the information from the U.S. Department of State on how this aid is distributed among various programs.

            The Uzbekistan assistance program focuses on micro-credit and agribusiness development, health and education reform, democracy, human rights, and community development. Security, nonproliferation, and law enforcement programs address narcotics smuggling, improved treatment of suspects and detainees, trafficking in persons and weapons, and the proliferation of nuclear and biological materials and expertise. The Secretary of State’s decision not to make the determination required for assistance to the central Government of Uzbekistan by section 568(a) of the Fiscal Year 2004 Foreign Operations Assistance Act affected a range of security assistance programs, including but not limited to Foreign Military Financing (FMF) and International Military Education and Training (IMET) programs using FY 2004 funding.

            The estimated $50.6 million budgeted by all U.S. Government agencies for assistance programs in Uzbekistan in Fiscal Year 2004 is allocated roughly as follows based on information available as of the date of this fact sheet:

Democracy programs in Uzbekistan focus on strengthening the institutions of civil society, supporting human rights, and addressing the problem of torture. Civil society centers provide training, grants, and technical assistance to indigenous non-governmental organizations (NGOs). The program supports human rights through training, grants, resource centers throughout the country, and a growing dialogue between officials of the Government of Uzbekistan and human rights defenders. Funding also supports a judicial reform program, a human rights law clinic, several legal assistance centers, training for legal professionals, and development of law school curricula.

             U.S. Government assistance seeks to improve citizen participation and transparency through community development, housing associations, and civic advocacy. Community development programs mobilize stakeholders to improve social conditions through small-scale infrastructure projects such as rehabilitating schools or irrigation canals. Print and broadcast media programs seek to strengthen independent media outlets. Anti-trafficking in persons programs are carried out in close cooperation with the Government of Uzbekistan and focus on public awareness, law enforcement education, identification and protection of victims, and prosecution of perpetrators.

            Training and exchange programs reach out to the next generation of Uzbek leaders and give them first-hand experience with the day-to-day functioning of a market-based, democratic system. Last year, the U.S. Government sent over 475 Uzbek citizens to the U.S. on academic and professional exchange programs. Since 1993, the U.S. Government has funded the travel of over 2,900 Uzbek citizens to the U.S. on these programs. The U.S. Government also promotes access to information through programs like the Internet Access and Training Program.

            In an effort to counteract the deterioration of the basic education system, a new program trains teachers in interactive teaching methods and in integrating critical thinking and learning techniques into curricula and teaching materials. Other program goals include increasing parent and community involvement, strengthening school administration, and improving school infrastructure.

            The U.S. Government is developing models of primary health care that emphasize essential care to families at the community level. Infectious disease programs are fighting the spread of Tuberculosis, HIV/AIDS, and hepatitis B. A maternal-child health program works to improve pre- and post-natal health care for mothers and newborns. A drug prevention program targets vulnerable groups with information and counseling on the dangers of drug use and abuse.

            Market reform assistance focuses on small and medium enterprise (SMEs) development, microfinance, credit union development, and agribusiness development. U.S. assistance helps the Government of Uzbekistan reach its goal of accession to the World Trade Organization (WTO). A new water user’s association project will focus on increasing community participation in efficient water use and irrigation management systems. Using FY 2003 funds, the U.S. Government provided a grant to the Uzbek Agency for Communications and Information for technical assistance to implement an E-Government plan and taxation pilot project. The grant will allow the Government of Uzbekistan to further its goals of greater online communication between government ministries as well as facilitate communication and transparency for Uzbek citizens.

            The U.S. Government also provided a grant to the National Bank of Uzbekistan that funded a U.S. consultant who helped in the preparation of projects to be financed under a $50 million U.S. Export-Import Bank credit line for Uzbek SMEs. Under this credit line, Uzbek SMEs will be able to access U.S. equipment and technology to assist them in their development efforts.

            Using FY 2004 funding, security and nonproliferation assistance continues to focus on supporting military reform, improving Uzbekistan’s counter-proliferation capabilities, promoting regional cooperation, and improving border security to help stop the flow of illegal narcotics, weapons of mass destruction (WMD), and other illicit items through Uzbekistan. Our Export Control and Related Border Security Assistance (EXBS) program continues to work with Uzbek export control officials, customs, and border guard to improve their prevention capabilities against weapons proliferation and other illicit trafficking. The U.S. also provides nonproliferation assistance for Uzbekistan, including funding to secure biological pathogens and to conduct joint research and disease surveillance activities with biological and chemical scientists. The U.S. funds science centers and bio-chem redirect, and bioindustry initiative programs and works through the multilateral Science and Technology Center in Ukraine to engage scientists in transparent, sustainable, cooperative civilian research projects. The U.S. also provides nonproliferation assistance to the Civilian Research and Development Foundation (CRDF). The Department of Energy is helping to secure nuclear materials.

            Law enforcement assistance programs seek to strengthen counter-narcotics capabilities, help reform and restructure the Prosecutor’s Office and law enforcement agencies, and introduce Western methods and standards for the conduct of criminal investigations and prosecutions. U.S. Government funding promotes proper treatment of prisoners through prison service training and seeks to prevent the use of torture in the course of police investigations. Initial assistance to the Uzbek border guards and customs services has been provided to begin interdicting narcotics trafficking across the Uzbek/Afghan border.

            Humanitarian programs are shipping approximately $10 million in privately donated medicines, pharmaceuticals, medical equipment and supplies, emergency shelter items, school equipment and supplies, food, and clothing to the most needy individuals, families, and institutions.

Uzbek - US economic relations could be considered to be on a very basic level.  The relations are far from Win/Win situation, and probably Lose/Win at best.  A lot of issues are still waiting to be seriously addressed.