The Uzbek puzzle revisited: an analysis of economic performance in Uzbekistan since 1991

Abstract

During the early years of transition output fell dramatically in almost all transition economies. However, the Uzbek experience was an exception to this rule. Output fell only slightly, soon to be followed by small but positive and persistent economic growth. This extraordinary performance, known as the Uzbek Puzzle, was explained in the literature by favourable economic conditions such as the dominance of agricultural production, the low level of initial industrialisation and the rich natural resource base.1 An alternative explanation of the Puzzle is that the relative resilience of the Uzbek economy during the early period of transition and its reasonably stable performance since the mid 1990s was due to the style of economic management which the Uzbek policy-makers adopted at the time.2 This paper analyses the economic performance of Uzbekistan since independence. We look at initial conditions, reform choice strategy and structure of the economy and its performance. The main concern of the Uzbek authorities during the early period of transition was the prevention of dramatic output loss, strong social protection and modernisation of the economy through strengthening the industrial sector. In a way, these multiple objectives influenced the authorities’ choice of reform strategy. While announcing their commitment to market reforms, they had to keep firm control over priority sectors of the economy. This meant that, although reforms in small-scale enterprise and retail sectors were fast and successful, the centralised control over the ‘commanding heights’ of the economy was never truly abolished. To finance ambitious investment projects in priority sectors by simultaneously maintaining production in ailing enterprises, the government needed considerable financial resources, which were partly and endogenously created by the state-controlled banking sector, and partly attracted from abroad. In addition to this, considerable amounts of resources were reallocated from the agricultural and energy sectors to the priority sectors of the economy through old-fashioned strategies of price controls and other direct administrative methods. We argue that the current semi-centralised structure of the economy leads to misallocation of scarce resources, damages property rights and reduces the market incentive mechanism, which in the end breeds inefficiency. Although the centralised management system played the foremost role in explaining the extraordinary performance of the economy in the early years of transition, the continuation of these policies created unfavourable conditions for the long-term prospects of the Uzbek economy. Therefore, under the current regime it will not be possible to realise the true potential of the economy. The introduction of further reforms that can facilitate transition to a market economy and transform banking and financial institutions, will be the key, at this stage, to achieving sustainable economic growth in the future. The paper is organised as follows. First, the initial conditions of the Uzbek economy before transition will be discussed briefly. We will then examine the country’s choice of reform strategy and path of transition. Along the lines of these arguments, we will then discuss the current structure and functioning of the economy and highlight some important issues such as resource allocation, price distortions, and the degree of centralisation in the economic process. Finally a summary and conclusions will be presented.