Measuring Uzbekistan’s Market Reforms
Nov 23, 2020
Since he came to power in 2016, Uzbek President Shavkat Mirziyoyev has committed his country to a series of market reforms. That reform agenda has earned Uzbekistan plaudits in media and policy circles, with the Economist naming it its “Country of the Year” in 2018.
This shift came following the death of Uzbekistan’s first president, Islam Karimov, in 2016. The dissolution of the Soviet Union in 1991 prompted Karimov to adopt a mercantilist-style economic plan, in which he limited currency convertibility in order to accumulate funds for state projects. The model also called for the state to become the main economic driver and included social programs to protect vulnerable populations, such as the elderly, children, and the poor. Karimov’s isolationist policies shielded Uzbekistan from much of the fallout of the economic recessions of the 1990s and ensured that Uzbekistan enjoy a period of sustained economic growth. Kazakhstan, on the other hand, experienced a 36 percent drop in GDP from 1990 to 1995 and industrial production fell by 60 percent in Tajikistan during the same time frame. While Karimov’s policies largely protected Uzbekistan from these recessions, the country came to have one of the least liberal economies in the former Soviet Union. Furthermore, government interference in business and a climate dominated by large state-run enterprises led to a considerable outflow of labor from the country.
President Mirziyoyev is enthusiastic about his reforms to transition Uzbekistan from an isolationist model to a hybrid-market model but there are barriers that must be overcome to achieve success.
Mirziyoyev’s most significant market reforms were enacted in 2017. In this year, the Central Bank lifted its ban on converting the Uzbek som into foreign currency and Mirziyoyev signed two decrees to lower tariffs and reduce the corporate income tax. Mirziyoyev’s 2017 reforms effectively opened Uzbekistan to foreign direct investment (FDI) and allowed for the country to bolster its trade ties with partners across Asia, the Middle East, and Europe. According to the World Bank’s “Ease of Doing Business Rank”, Uzbekistan climbed from 146th in 2013 to 69th in 2019. In addition, Uzbekistan ranks 8th in ease of starting a business due to the minimal time, cost, and capital required to begin. Foreign direct investment has also experienced a spike from 2017 to 2019. The flow of FDI to Uzbekistan jumped from $1.8 billion in 2017 to $2.3 billion by 2019. Moreover, the number of greenfield investments also increased from 10 in 2017 to 45 by 2019. Mirziyoyev’s reforms have contributed to an improved economic environment evinced by a greater interest by the international community in investing in Uzbekistan.
While Mirziyoyev has implemented a slew of economic and political reforms to liberalize the market, these reforms are similar to those enacted in other hybrid economies like China, Kazakhstan, and Singapore. For example, Mirziyoyev has strengthened his legitimacy with Uzbekistan’s populace by providing favorable social, economic, and political conditions without ushering in revolutionary changes. Entrenched interests have proven reluctant to cede controlover the bureaucracy, and inefficient institutions to clamp down on corruption, impeding Mirziyoyev’s reforms from becoming as effective as they might be.
President Mirziyoyev’s reforms have also been met with criticism from some among Uzbekistan’s traditional elites. Mirziyoyev’s attempts to accede to the World Trade Organization (WTO) have worried some oligarchs that the prerequisites to join the WTO will unnerve Russia and disrupt their economic relationship with their regional partner. At the same time, greater involvement with China through the Belt and Road Initiative (BRI) increased Uzbekistan’s external debt to China three-fold since 2016. China surpassed Russia as Uzbekistan’s largest trading partner, with a total of $1.9 billion in bilateral trade in 2018 compared to $1.34 billion with Russia. Mirziyoyev’s reforms to liberalize the Uzbek economy have unseated Russia as its largest trading partner and allowed the country to expand its commercial relations with new partners.
This year, the COVID-19 pandemic put Mirziyoyev’s reforms to the test. Mirziyoyev was quickly able to provide financial assistance for the approximately 2.5 million Uzbeks residing abroad in Russia, a feat that would most likely not be possible under Karimov’s isolationist policy. In addition, while many migrants in Russia were left stranded, Uzbekistan made considerable efforts to repatriate its citizens. There were also extensive collaborative attempts to ensure that trade and essential travel could be maintained amidst the pandemic. The shift to an agenda focused on mutual cooperation over past isolationist policies allows Uzbekistan to serve an important role in the Afghan peace process, the easing of barriers to labor migration, and increased trade. With the disruptions to the global economy, Uzbekistan’s GDP is expected to grow by 0.5% in 2020. Beyond staving off contraction this year, forecasts predict that in 2021 Uzbekistan will return to the robust growth it experienced pre-COVID, with GDP growth to the tune of 6.5%. Despite the critiques of Mirziyoyev’s reforms, they have allowed Uzbekistan to serve a new role in the regional and international community and withstand substantial shocks to its economy.
President Mirziyoyev has transitioned Uzbekistan from an isolationist state to a country that embraces FDI and improved trade relations. Mirziyoyev’s reforms have created an environment that attracts investors and governments in aiding in Uzbekistan’s economic development. However, the reforms have also resulted in criticisms from a variety of different groups. The elite circles have voiced their concerns over losing the status quo and are opposed to acceding to the WTO and receiving further investment from China. The post-Karimov reforms have effectively opened Uzbekistan up to the global economy but stop short of forming a new economic model.