Silk road paper
Small Business and Private Sector Development
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2018-04-Tsereteli-Uzbekistan
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Small Business and Private Sector Development Since the first years of independence the small business sector has played a significant role in the Uzbek economy. Indeed, President Karimov considered it to be a priority area of economic development. To a greater extent than in any other area of the economy the reforms currently underway are a continuation of past “best practices.” Since the start of the new millennium, small businesses and entrepreneurs have played an increasingly important role in sustaining the country's high rates of economic growth, constantly increasing their contribution to Uzbekistan's GDP growth. They grew from 30 percent of GDP at the start of the millennium to more than 50 percent of GDP by the end of 2011, 40 and to 56.9 percent by 2016. Over the same period their share of industrial production grew from 12.9 to 38.9 percent, their share of exports rose from 10.2 to 26.9 percent, and their share of total employment expanded from 49.7 to 78 percent.
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Nearly three out of every four employed persons in Uzbekistan work in small businesses, and more than 60 percent of those jobs are in rural areas.
Thus, the development of small businesses is important both to the country’s economy and security. The Uzbek government has a solid appreciation of the role of small businesses in the creation of new jobs. In fact, this is a top priority in the government’s reform agenda. To this end, President Mirziyoyev as early as October, 2016, signed a decree "On Additional Measures to
Ensure Accelerated Development of
40 Remarks by ADB Vice President Xiaoyu Zhao, International Conference on "The Role and Importance of Small Business and Entrepreneurship in the Implementation of the Socioeconomic Policy in Uzbekistan" , September 14, 2012, Tashkent, Uzbekistan, Asian Development Bank, https://www.adb.org/news/speeches/international-conference-role-and-importance-small-business- and-entrepreneurship 41 “Share of small businesses in Uzbekistan’s GDP reaches 56.9% in 2016”, Uzdaily, February 27, 2017, (https://www.uzdaily.com/articles-id-38558.htm)
Mamuka Tsereteli
36 Entrepreneurial Activities, Full Protection of Private Property, and Qualitative Improvement of the Business Environment." 42
and obtaining permits, complements the reform and modernization of banking mechanisms and activities. Those measures seek to prevent administrative interference in the activities of commercial banks, including their credit policies. Such international financial institutions as the Asian Development Bank, the European Bank for Reconstruction and Development, the Islamic Development Bank, and the German Development Bank also consider the simplification of lending procedures for small business to be an important priority, and are prepared to provide lines of credit and technical assistance to commercial banks in Uzbekistan in order to upgrade and expand their lending to small businesses. As noted above, EBRD alone provided the National Bank of Uzbekistan with a $100 million line of credit for small business projects. By the end of 2017 over 90 percent of Uzbek enterprises were under private or corporate ownership and were accounting for more than 80 percent of industrial output. All wholesale and retail trade and services are now owned and operated by the private sector, which produces one third of all industrial products and gives rise to more than half of all GDP growth. As a result of the structural changes in the country's economy, the share of small businesses in total industrial production grew to 37.3 percent, compared to 18.8 percent in 2000.
42 “On additional measures to ensure the accelerated development of entrepreneurial activity, comprehensive protection of private property and substantial improvement of business climate”, uza.uz, October 7, 2016. (http://uza.uz/en/documents/on-additional-measures-to-ensure-the- accelerated-development-07-10-2016)
The Economic Modernization of Uzbekistan
37 Figure 3. Poverty, GDP per capita, and Small Business Development 43
These trends suggest that private enterprise will increasingly be the driver of the job creation and the expansion of production that are central to the government’s economic agenda. The state must now gradually privatize large state-owned enterprises, expand competitiveness and liberalize the pricing of energy. Further expansion of the private sector growth and the development of small and medium enterprises will not only strengthen the economy and increase its international competitiveness but will generate the new jobs that will raise the well-being of the population at large.
Uzbekistan has excellent conditions for the development of agriculture, including land, water, favorable climatic conditions, and skilled human
43 Sources: National poverty line is minimum food consumption equivalent to 2,100 calories per person per day and it does not include non-food items. Note: Poverty is national data, as lack of access to microdata meant the World Bank could not verify/validate official figures after 2003. See World Bank Group, “Migration and Mobility”, Europe and Central Asia Economic Update, October 2017. (https://openknowledge.worldbank.org/bitstream/handle/10986/28534/9781464812194.pdf?sequence=4 &isAllowed=y)
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38 resources. The World Bank confirms that agricultural output has been robust since 2003, with average annual growth rates of 6.5 percent. To be sure, the role of agriculture in Uzbekistan’s GDP has steadily dropped, from 28.8 percent of the total in 2003 to 16.8 percent in 2015. However, this decline was due not to a drop in agricultural production, but to faster growth in other sectors of the economy. Agriculture still sustains 27 percent of the employed population, making it the single largest sector in terms of employee numbers; obviously, it is of crucial importance across Uzbekistan’s large rural regions. Moreover, between 2003 and 2014 the number of people employed in agriculture increased by almost 15 percent. 44
Uzbekistan’s great challenge, like that of other new states that were formerly part of the USSR, is to overcome the Soviet legacy. Communist planners in Moscow, like tsarist bureaucrats before them, assigned Uzbekistan the role of cotton producer. Even today Uzbekistan is the world’s fifth exporter of cotton. The environmental consequences of cotton monoculture are well known, and go far beyond the Aral Sea disaster. 45 Uzbek leaders have been acutely aware of the problem. Speaking in 2014, Islam Karimov noted that “in Soviet times, agriculture in Uzbekistan was targeted exclusively on cotton production, so the soil grew poorer decade by decade, and was poisoned with chemicals; crop rotation did not exist … the first and foremost task after achieving independence was to diversify agricultural crops, revitalize the soil, and modernize the agricultural sector.” 46 A further consequence of the Soviet era’s one-sided focus on cotton is that Uzbekistan
44 World Bank, “Systematic Country Diagnostic for Uzbekistan,” May 20, 2016. (http://documents.worldbank.org/curated/en/304791468184434621/pdf/106454-REVISED-PUBLIC- SecM2016-0167-1.pdf) 45 Iskandar Abdullaev, Mark Giordano and Aziz Rasulov, ”Cotton in Uzbekistan: Water and Welfare”, in Deniz Kandiyoti, ed., The Cotton Sector in Central Asia: Economic Policy and Development Challenges, London: SOAS, 2005 46 ”FAO top executive sees Uzbekistan food conference as key to boost agricultural production”, Food And Agriculture Organization of the United Nations, June 6, 2014. (http://www.fao.org/director- general/newsroom/news/detail/en/c/234098/)
The Economic Modernization of Uzbekistan
39 did not produce enough grain to feed its population. During the first years after independence it had no choice but to import annually five million tons to supplement its meagre half million tons of domestic production. 47
From the outset, the government of independent Uzbekistan focused successfully on the expansion of domestic grain production. As a result, the United Nations’ Food and Agriculture Organization reported that in the first decade and a half of independence Uzbekistan increased the area allocated for grain production by 200 percent. 48 The country now produces over eight million tons of grains, mainly wheat, with rapidly increasing yields.
49 The problem, as noted above, is that cotton provided, and still provides, important income for Uzbekistan’s cash-strapped economy and remains a major factor in all economic planning there. This calls for a measured transition to a more diversified agricultural economy, and not a reckless crash program. The World Bank has noted that Uzbekistan’s cotton production has remained stagnant since 2008, while the value of its wheat crop has increased rapidly. During the past decade the ratio of wheat prices to cotton prices has also shifted in favor of wheat. Cotton now accounts for only 9 percent of total exports. As this happened, the priority shifted from cotton to ensuring self-sufficiency in wheat production. 50 The government has also encouraged the expansion of horticulture, which now accounts for about 18 percent of arable land. This growth has occurred mainly on land formerly used for growing cotton. The World Bank estimates that fruits and vegetables now account for 50 percent of the value of all crops and over 35
47 Stanislav Zhukov, “Central Asia: Development under Conditions of Globalization”, in Boris Rumer, ed., Central Asia: Gathering Storm?, Armonk: M.E. Sharpe, 2002, pp. 333-375. UNDP, Food Security in Uzbekistan, Tashkent, 2010, p. 32. 48 FAO, Regional Overview of Food Insecurity: Europe and Central Asia, 2015. 49 Chris Lyddon, ”Focus on Uzbekistan”, World-Grain.com, July 14, 2015. (http://www.world- grain.com/Departments/Country-Focus/Country-Focus-Home/Focus-on-Uzbekistan-2015.aspx?cck=1) 50 World Bank, “Systematic Country Diagnostic for Uzbekistan.” Mamuka Tsereteli
40 percent of the value of all agricultural exports. Interestingly, horticulture is significantly more remunerative for farmers that either wheat or cotton. 51
value of these exports increased by 38 percent in 2016 and by more than 50 percent in 2017. 52 However, Uzbekistan is far from fully realizing its potential in international markets. Further expansion will require meeting the stringent quality and food safety requirements of the major foreign markets, as well as addressing logistical and organizational challenges, notably storage. Similarly, the potential for improvements in the cotton sector is also considerable. Yields are only 35-50 percent of those of other producing countries, reflecting inadequate fertilizers, irrigation, and sub- standard seeds. Looking ahead, Uzbekistan can benefit greatly from local cotton spinning, expanded canning and processing industries, and from privately owned and managed marketing, distribution, and storage companies. Agribusiness has the potential to increase Uzbekistan’s exports, expand employment, and contribute to more balanced regional development. Against this background, it is no accident that an entire section of the Strategic Development Strategy of Uzbekistan for 2017-2022 is focused on agriculture. Among the stated goals are: to deepen structural reforms; to ensure food security; to increase exports; to reduce cotton acreage; to invest in modern processing, storage, distribution, and marketing; and to restore the quality of land and mitigate risks arising from environmental changes. A significant element of the present agricultural reforms has been to allow textile factories to buy raw cotton directly from farmers, without the intermediary “Uzpakhtasanoat,” the former Soviet state monopoly in
51 Ibid.
52 “Uzbekistan Increases its Horticultural Exports”, Eurofresh-distribution.com, January 24, 2017. (https://www.eurofresh-distribution.com/news/uzbekistan-increases-its-horticultural-exports)
The Economic Modernization of Uzbekistan
41 charge of all sales of cotton fibers. 53 In his address to the parliament, President Mirziyoyev excoriated the inefficiency of the existing system and spoke favorably of successful pilot programs to create cotton-textile clusters in the Navoi, Bukhara, and Syrdarya regions. 54
The President argued, further, that the US $1.5-2 billion value of annual fruit and vegetable exports is only 10 percent of the country’s potential. The only way to raise production and export is to improve the overall efficiency of agriculture. Only private investment will be able to develop necessary infrastructure. Only private agribusiness firms have the potential to lower production costs and shift the current focus from the production of raw crops into higher value-added products through technology-based production. This change of focus, he argued, will generate income for producers and create jobs in textile and agro-foods in local and regional markets. With much of the male labor force working abroad, many farms are now managed by women; growth of the agro-food industry will expand job opportunities for women in rural areas. An example of these new trends is that in September 2017, Uztrade (a subordinate organization of Uzbekistan’s Ministry of Foreign Trade) opened a trading house in New York and began for the first time to export melons to the U.S.. 55 In November, the EBRD’s announced a $10 million loan to JV Agromir Juice, the Bank’s first agribusiness project in Uzbekistan in a decade. The country’s largest juice manufacturer will use these funds to construct a modern warehouse equipped with an automated management
53 “Shavkat Mirziyoyev signs decree allowing textile firms to purchase cotton straight from farmers”, Tashkent Times, December 15, 2017. (http://tashkenttimes.uz/economy/1815) 54 Kamila Aliyeva, ”Uzbekistan Reforms its Cotton, Textile Industries”, Azernews, December 15, 2017. (https://www.azernews.az/region/124018.html) 55 “Uzbekistan Exports First Fresh Melons to the US”, Ferghana News, October 25, 2017. (http://enews.fergananews.com/news.php?id=3558&mode=snews)
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42 system. 56 These examples confirm that the potential for further development of the agricultural sector is considerable. New Regional Economic and Trade Policy A greater openness to trade, foreign economic relationships, and international investments is an important component of President Mirziyoyev’s reform agenda. His understanding of the main weaknesses of the Uzbek economy in this area has led him to focus on restructuring export- import regulations, on streamlining of procedures, and on reducing administrative requirements. Some of the trends that emerged during 2017 are noteworthy. At a press conference on December 27, 2017, Deputy Minister of Foreign Trade Sahib Saifnazarov reported that Uzbekistan’s exports had grown by 15 percent in 2017, and that the country had signed export contracts worth US $11 billion during meetings with representatives of over 60 states and international organizations. He added that Uzbekistan had already begun delivering products under some of these contracts. 57 He also stressed that the “Concept for the Development of Exports for 2018-2022,” committed Uzbekistan to increasing the volume of exports by 2022 to US$30 billion, double the 2017 figure. Uzbekistan also committed to restart the long-stalled negotiations for membership in the World Trade Organization membership in 2018. 58
Other presidential decrees have instituted new policies for registering and licensing firms involved with foreign trade. These eliminate prepayment requirements, relax contract requirements, establish a single time period for
56 Anton Usov, “EBRD in US$ 10 million loan to Uzbekistan’s Agromir”, EBRD, November 9, 2017. (http://www.ebrd.com/news/2017/ebrd-in-us-10-million-loan-to-uzbekistans-agromir.html) 57 Uzbekistan plans to increase exports’ volume to $30 bln by 2022, UZDaily, https://www.uzdaily.com/articles-id-42156.htm 58 “Talks on Uzbekistan's accession to WTO to begin in 2018,” Azernews, February 26, 2018. (https://www.azernews.az/region/125623.html)
The Economic Modernization of Uzbekistan
43 currency repatriation, eliminate the requirement to obtain permission to re- export goods, and give export-import traders more flexibility. 59 As noted above, these reforms now allow private Uzbek firms to sell agricultural products directly to foreign buyers. As part of his new emphasis on foreign trade and investment, President Mirziyoyev has assigned economic policy a central place in his overall diplomatic efforts. Richard Weitz’s Silk Road Paper on Uzbekistan’s changing foreign policy points out that during his first months in office Mirziyoyev hosted numerous working visits from leaders of neighboring states and paid state visits to Turkmenistan, Kazakhstan, Russia, and China. 60 All of this diplomatic activity has had a strong economic focus. In March 2017, Mirziyoyev and Turkmen President Gurbanguly Berdimuhamedov signed an agreement on strategic cooperation and discussed joint initiatives in energy, security, and transport, including the proposed Turkmenistan- Uzbekistan-Tajikistan-Afghanistan-Pakistan (TUTAP) project to deliver electricity from Central Asia to South Asia. 61 The Beijing visit highlighted China’s economic importance for Uzbekistan, as well as Uzbekistan’s interest in China’s Belt and Road Initiative. 62
hence Uzbekistan’s reintegration into regional and continental economic life. In their March 2017 meeting at the Turkmen-Uzbek border, Presidents Berdymukhamedov and Mirziyoyev opened rail and road bridges across
59 Gulnur Bekmukhanbetova and Curtis Masters, “Steps to Liberalize Uzbekistan’s Export-Import Regime”, Global Compliance News, December 8, 2017. (https://globalcompliancenews.com/uzbekistan- export-import-regime-20171208/#page=1) 60 Richard Weitz, Uzbekistan’s New Foreign Policy: Change and Continuity Under the New Leadership, Washington & Stockholm: CACI-SRSP Silk Road Paper, January 2018. (http://www.silkroadstudies.org/resources/pdf/SilkRoadPapers/1801Weitz.pdf) 61 Catherine Putz, “Uzbek President Makes First Official Trip Abroad to Turkmenistan,” The Diplomat, March 2017, https://thediplomat.com/2017/03/uzbek-president-makes-first-official-trip-abroad-to- turkmenistan/. 62 “Uzbekistan: President’s China Trip Yields Giant Results”, EurasiaNet, May 16, 2017. (https://eurasianet.org/s/uzbekistan-presidents-china-trip-yields-giant-rewards) Mamuka Tsereteli
44 the Amu Darya River. In Astana in March, Presidents Nazarbayev and Mirziyoyev announced the first scheduled high-speed passenger rail service between Tashkent and Almaty, and in July the direct Tashkent-Samarkand road passing through Kazakhstan was re-opened. The words and symbolism of these events attested to the economic reintegration of Central Asia. To be sure, Mirziyoyev and Nazarbayev issued warnings to upstream nations that any water projects must follow international norms in recognizing the rights of downstream nations. Nevertheless, Mirziyoyev extended an early welcome to Kyrgyz President Atambayev in Tashkent, and made a state visit to Bishkek in September, 2017; both countries value cooperation with China and seek China’s support for a rail link from Kashgar through Osh and the Ferghana Valley to Tashkent, and thence to Afghanistan. As for Tajikistan, long the most contentious of Uzbekistan’s bilateral relations, in April 2017, Uzbekistan Airways resumed Tashkent-Dushanbe flights after a quarter-century hiatus, and in March 9-10, 2018, President Mirziyoyev paid a state visit to Tajikistan, significantly boosting the bilateral political and economic relationship. Mirziyoyev’s administration took a softer line on bilateral water and energy disputes with Tajikistan and Kyrgyzstan, and discussions are underway with both countries about mutually beneficial joint projects, including the development of energy and transportation infrastructures and measures to encourage bilateral trade. 63
Asian neighbors that is already observable is a major achievement of Uzbekistan’s new foreign policy. As Mirziyoyev puts it, “Uzbekistan is a supporter of resolving existing differences and strengthening mutual trust.
63 “Uzbek president’s visit expected to result in signing of more than twenty cooperation documents”, News.tj, February 21, 2018. (http://news.tj/en/news/tajikistan/politics/20180221/uzbek-presidents-visit- expected-to-result-in-signing-of-more-than-twenty-cooperation-documents); Tajikistan and Uzbekistan Learn How to Be Friends Again, EurasiaNet, March 12, 2018, https://eurasianet.org/s/tajikistan-and- uzbekistan-learn-to-be-friends-again The Economic Modernization of Uzbekistan
45 It is precisely on the basis of the principles of good-neighborliness and mutually beneficial partnership that the states of the region will be able to realize their potential in the trade-economic, transport-communication, cultural-humanitarian areas, security and stability issues.” 64
as a major part of his regional agenda. During President Ashraf Ghani’s first presidential visit to Uzbekistan in December 2017, the two governments signed 20 bilateral cooperation agreements regarding trade, transportation, communications, education, and other spheres. Additionally, Uzbek and Afghan businesses signed some $500 million worth of contracts. 65 They also agreed to extend the existing Hairatan–Mazar-i-Sharif railway to the Afghan cities of Sheberghan, Maymana, and Herat. 66 Furthermore, the two governments authorized direct flights between Kabul and Tashkent. 67
The first direct flight from Kabul to Tashkent, in November 2017, took an hour and a half. Previously, passengers from Kabul had to travel to Tashkent via Istanbul or Dubai, which required from seventeen to thirty- two hours. The twice-weekly schedule is designed to connect with flights to Europe, as well as with flights to Samarkand, Bukhara and Urgench. And to Mazar-e-Sharif and Herat in Afghanistan. In November, 2017, as part of the Regional Economic Cooperation Conference on Afghanistan,
64 Shavkat Mirziyoyev, “Opening remarks by Shavkat Mirziyoyev at Central Asia: Shared Past and Common Future, Cooperation for Sustainable Development and Mutual Prosperity conference,” (opening remarks, Samarkand, November 11, 2017), The Tashkent Times, http://tashkenttimes.uz/national/1670-opening-remarks-by-shavkat-mirziyoyev-at-central-asia-one- past-and-a-common-future-cooperation-for-sustainable-development-and-mutual-prosperity- conference. 65
“Documents have been signed,” Press Service of the President of the Republic of Uzbekistan, December 5, 2017, http://president.uz/en/lists/view/1315. 66 “Uzbekistan, Seeking Sea Access, Signs Railway Deal with Afghanistan,” RFE/RL, December 6, 2017, https://www.rferl.org/a/uzbekistan-seeaking-sea-access-signs-railway-deal-afghanistan-hairatan- mazar-e-sharif/28899419.htmlt. 67
https://www.rferl.org/a/afghanistan-uzbekistan-direct-flights-kam-air/28886184.html.
Mamuka Tsereteli
46 Uzbekistan committed to build a new electricity line to the Afghan province of Baghlan. This important project will transmit up to 1,000 megawatts to Afghanistan, almost as much as the country presently receives from Uzbekistan, Iran, Turkmenistan, and Tajikistan combined. 68
Uzbekistan’s strategy of increasing openness and facilitating trade, investments, and transport. In his year-end address to the Oliy Majlis, President Mirziyoyev announced that Central Asia would henceforth be the main priority in Uzbekistan’s foreign policy, and promised further measures to improve regional connectivity and economic ties through improved hard and soft infrastructure. 69
dynamics in Uzbekistan’s foreign economic relations, and has already led to increased trade with other Central Asian countries. Overall trade turnover with foreign countries increased by over 11 percent in 2017, as exports grew by 15.4 percent and imports by 7.2 percent. Volumes of trade with all major foreign trade partners grew considerably: an increase of 16.8 percent with China, 16.1 percent with Russia, 51.6 percent with Kyrgyzstan, 20 percent with Tajikistan, 15 percent with Afghanistan, 27 percent with South Korea, and 31 percent with Turkey. 70
global and regional economies, Uzbekistan will have to significantly upgrade both its hard and soft transportation as well as its logistical infrastructure. President Mirziyoyev noted to the Oliy Majlis that many
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30, 2017, https://www.azernews.az/region/123125.html. 69 Address of the President of the Republic of Uzbekistan Shavkat Mirziyoyev to the Parliament, Oliy Majlis, December 22, 2017 http://www.ut.uz/en/politics/for-the-first-time-in-the-history-of-our-country- the-president-of-the-republic-of-uzbekistan-shavkat/ 70 “Summary of 2017 in foreign trade policy of the Republic of Uzbekistan”, Embassy of Uzbekistan, January 26, 2018. (http://www.uzbekembassy.in/summary-of-2017-in-foreign-trade-policy-of-the- republic-of-uzbekistan/) The Economic Modernization of Uzbekistan
47 exports utilize routes though Kazakhstan and especially through the “Saryagash” station, but that the process of transshipment through that station is very inefficient efficient. Major problems there include a lack of electric locomotives and out-of-date terminal facilities, which cause long and costly delays. In order to improve efficiency here and along other slow corridors, the President called diversifying routes and for competition among them. To this end the President announced his plan to come to agreements with Turkmenistan, Iran, Kazakhstan, Russia, Azerbaijan and Georgia. By February 2018, Georgia had granted to Uzbekistan a 50 percent discount on transit cargo through its territory. 71
among the proactive steps Uzbekistan has taken to open the country to trade. On February 5, 2018, President Mirziyoyev signed a decree “On Additional Organizational Measures to Create Favorable Conditions for the Development of the Potential for Tourism of the Republic of Uzbekistan.” 72 The decree ordered that citizens of Israel, Indonesia, South Korea, Malaysia, Singapore, Turkey and Japan could now visit Uzbekistan without visas for a period of 30 days. It also simplified the procedure for issuing tourist visas for citizens of 39 additional states, including the United States and EU member countries. Tourism, which can attract foreign investment, create jobs, and generate income, has been designated a strategic priority in Uzbekistan’s economic development. In December 2016, the President issued a decree, “On Measures for Ensuring Accelerated Development of the Tourism Industry of the Republic of Uzbekistan,” which named tourism as a strategic sector
71 “Georgia grants Uzbekistan discount on transit of all types of cargo via railway”, Trend News Agency, February 25, 2018. (https://en.trend.az/casia/uzbekistan/2865531.html) 72 “Uzbekistan introduces visa-free regime for citizens of 7 countries”, Embassy of Uzbekistan to the United States, February 5, 2018. (http://www.uzbekistan.org/news/archive/9808)
Mamuka Tsereteli
48 of the economy, and set up a State Committee for the Development of Tourism.
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