How to accelerate economic reforms in Uzbekistan

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Political economist, PhD and a specialist in the field of social and public sector innovations in his interview with the Uzbek Review shared his thoughts on what slows down economic reforms and how to improve the investment climate in Uzbekistan.

In Mr. Bakhrom Rajabov’s view, positive changes in the economy of Uzbekistan started with the introduction of free convertibility of the national currency – sum. However, serious disputes arose in the conversion issue itself. Even among the decision makers, there were those who asked to postpone free conversion, i.e.:

  • those who benefited from the existing status quo and had access to cheap currency;
  • those who feared that liberalization of exchange rates would lead to unpredictable consequences for the economy, and against this background, to socio-political upheavals.

In the second case, the fears were groundless. People and business have long lived and worked at a real, not government-set, rate. It is possible that for those who benefited from the status quo, the argument of the latter was just a convenient excuse.

What slows down economic reforms in Uzbekistan

Lack of predictability

When the new government had just begun to carry out reforms, the business came to a standstill. Everyone was eager to know how the new authorities would behave, what the new “rules of the game” would be. One problem, which is not so easy to be solved quickly, is the reduction of the shadow economy. The state is aware that most of the business is in the shadows. The business knows that the state knows this. The introduced tax reform, in particular, was aimed at stimulating the business to emerge from the shadows. Meanwhile, this has not been completely successful so far: there is not enough predictability for business; there are not enough decently paid jobs in the non-informal sector.

High state-controlled share in the economy and ill-conceived social lending

There are many problems connected with the reduction of the state’s share in the economy, the so-called natural monopolies and much more. The programs directed to support family business and credit financing of a number of infrastructure projects give rise to questions. 

Not everyone can easily become an entrepreneur. It would be much better to lend a part of the money allocated for such programs directly to business, possibly at higher interest rates, so that it creates more jobs. I agree that loans should be available but entrepreneurship can be stimulated in a different way. The state spends large funds on infrastructure projects and programs, offers concessional loans. Such policies are pursued in the aftermath of crises, wars, famines in order to maintain demand or provide people with work when there is no work at all.

Lack of reformers

At one meeting, American business people expressed their fears asking one more question: “Are there enough technocrats (in a good sense) in Uzbekistan who can provide support for reforms and understand how the market economy should work?”

The number of such technocrats is obviously insufficient, as evidenced by

1) frequent personnel changes;

2) reluctance of compatriots to return from abroad and work in the homeland.

Where could the new generation of competent technocrats come from? A small part of the returnees (for example, Atabek Nazirov, Odilbek Isakov and others), despite holding positions of responsibility, have not yet made up a critical mass capable of making changes. The process is underway, but at the moment, in my opinion, the number of such people is definitely insufficient. I believe it is necessary to drop a group of technocrats into a certain field appointing them to leadership positions with relevant mandates. Then there may be an effect.

Nepotism

Many things in the local market so far depend on connections and acquaintances, and not on competencies and victories based on free competition. This is not out of the question in developed economies as well. One can name a lot of books and cases when some business or start-up became successful thanks to a good acquaintance. However, the truth is that in developed countries competence is still more important to win a competition.

What is needed to improve the investment climate

Strong institutional reform

It is necessary to strengthen the institutions that are crucial for normal functioning of a market economy, i.e. independent and professional courts, parliament, media etc. It is important to create mechanisms that will improve business climate in the country. One of the main conditions for ensuring sustainable economic growth is elections and provision of administrative authorities’ electiveness. The election institution needs to be improved and strengthened. Besides, it is necessary to reduce the role of the state and to eliminate a number of committees and departments:

  • The newly created Ministry of Mahalla and Family Affairs. In its original form it did not work. And I don’t think it will work better now.
  • Departments that conduct business in a monopolistic way, inefficient and expensive for the consumer (for instance, in the field of aviation, roads and transport). The number of such monopolies is over a hundred so far. If they are not eliminated, then the sphere must be completely reformed and put into fair competition.

There is an opinion that we also do not need the Ministry of Higher Education, but actually, it seems somewhat radical to me.

Judicial reform

Processes are underway to strengthen the role of judges in Uzbekistan these days: additional powers of the Prosecutor’s office are being transferred to courts; the work of Judiciary board is being improved. Practical support of private property right should be at the forefront. Without this, it makes no sense to talk about reforms.

For the independence of the courts, it must be guaranteed that the executive branch cannot interfere in judiciary affairs. It is necessary to increase the professionalism of judges, to ensure their financial independence, and so on. The judicial system should be able to manage their funds and personnel independently, i.e. to decide where to spend money and whom to appoint. Perhaps it makes sense to introduce the election of judges, trial juries. Besides, it is crucial to secure openness of courts to media. That is stipulated in the law, however not always done by judges themselves.

Fiscal discipline enhancement 

The Law “On Budget” of 2020 should become an effective tool in this area. It establishes restrictions on the use of the state budget funds, the Reconstruction and Development Fund by increasing the public debt for large investments to ensure macroeconomic stability.

Attention should also be given to the distortions or imbalances that do not allow the economy to function properly. Thus, we have to:

• enable large-scale privatization

• guarantee the inviolability of private property in reality

• continue the price liberalization policy in various sectors of the economy, increasing the attractiveness of these sectors

• make the changes in tax policy practically applicable to business

• liberalize foreign trade and

• reform the banking sector.

These are just some of the areas. And if they are successfully reformed, it will definitely have a positive economic effect.

Expert’s expectations

Many things are changing for the better in economic matters and in the spheres affecting it. I expect positive changes in the following areas:

  1. Public administration. I expect that the administrative reform will work and people will be given jobs in the civil service according to the principle of meritocracy (for their competencies). Public services will become even more accessible and innovative, and documents will move, not people. The government will adopt the Laws “On Government Service”, “On Open Data”. The state will follow the path of efficiency and leave the economy in those areas where business can really cope more efficiently.
  2. Capital market growth, as this kind of market is only at the beginning stage in our country. For its proper development, investing should become profitable. It is necessary to create various instruments in the financial market that would bring income and profit. Reforms should take place in the banking sector, and the “savings – investment” mechanism should start working. Then the population will begin to invest their savings, and not to keep them “under the pillow”.
  3. Antitrust sphere. I see great progress in this area. Several conclusions and decisions of the antimonopoly committee (including those that caused controversy) have already been taken. What I can mention here: criticism of the preferential terms for the Russian company supplying gas meters (which limited competition), or the rights protection of the electricity consumers when installing electric meters. Besides, I was pleased to hear the initiative of the committee concerning drugs and the unreasonable increase in their prices.

  One should not forget about social guarantees. The free market towards which Uzbekistan is heading will not be able to ensure the welfare of citizens by itself. Here we need a sound state policy. The function of the state in this case is a fair redistribution. The market does not care about social issues. Therefore, the state should take care of the “rules of the game” in the market, giving minimum social guarantees for people.

It is commonly known that GDP growth may not translate into an improvement of human well-being. In the development economics, there is an idea that GDP does not fully reflect real development. It will be good if the state plays its role in terms of social policy and does not interfere with the market.

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