Uzbekistan

Uzbekistan is Central Asia's most populous country. Its 24 million people, concentrated in the south and east of the country, are close to half the region's total population. Uzbekistan had been one of the poorest republics of the Soviet Union; much of its population was engaged in cotton farming in small rural communities. The population continues to be heavily rural and dependent on farming for its livelihood. The predominant ethnicity is Uzbek. Other ethnic groups include Russian 5.5%, Tajik 5%, Kazakh 3%, Karakalpak 2.5%, and Tatar 1.5%. The nation is 88% Sunni Moslem and 9% Eastern Orthodox. Uzbek is the official state language; however, Russian is the de facto language for interethnic communication, including much day-to-day government and business use.

The educational system has achieved 99% literacy, and the mean amount of schooling for both men and women is 11 years. However, due to budget constraints and other transitional problems following the collapse of the Soviet Union, texts and other school supplies, teaching methods, curricula, and educational institutions are outdated, inappropriate, and poorly kept. Additionally, the proportion of school-aged persons enrolled has been dropping. Although the government is concerned about this, budgets remain tight. Similarly, in health care, life expectancy is long, but after the breakup of the Soviet Union, health care resources have declined, reducing health care quality, accessibility, and efficiency.

Located in the heart of Central Asia between the Amu Darya and Syr Darya Rivers, Uzbekistan has a long and interesting heritage. The leading cities of the famous Silk Road--Samarkand, Bukhara, and Khiva--are located in Uzbekistan, and many famous conquerors passed through the land. Alexander the Great stopped near Samarkand on his way to India in 327 B.C. and married Roxanna, daughter of a local chieftain. Conquered by Muslim Arabs in the eight century A.D., the indigenous Samanid dynasty established an empire in the 9th century. Its territory was overrun by Genghis Khan and his Mongols in 1220. In the 1300s, Timur, known in the west as Tamerlane, built an empire with its capital at Samarkand. Uzbekistan's most noted tourist sights date from the Timurid dynasty. Later, separate Muslim city-states emerged with strong ties to Persia. In 1865, Russia occupied Tashkent and by the end of the 19th century, Russia had conquered all of Central Asia. In 1876, the Russians dissolved the Khanate of Kokand, while allowing the Khanates of Khiva and Bukhara to remain as direct protectorates. Russia placed the rest of Central Asia under colonial administration, and invested in the development of Central Asia's infrastructure, promoting cotton growing, and encouraging settlement by Russian colonists.

In 1924, following the establishment of Soviet power, the Soviet Socialist Republic of Uzbekistan was founded from the territories, including the Khanates of Bukhara and Khiva and portions of the Fergana Valley that had constituted the Khanate of Kokand. During the Soviet era, Moscow used Uzbekistan for its tremendous cotton-growing and natural resource potential. The extensive and inefficient irrigation used to support the former has been the main cause of shrinkage of the Aral Sea to less than one-third of its original volume, making this one of the world's worst environmental disasters. Uzbekistan declared independence on September 1, 1991. Islam Karimov, former First Secretary of the Communist Party, was elected president in December 1991 with 88% of the vote; however, the election was not viewed as free or fair by foreign observers.

The government has been extremely cautious in moving to a market-based economy. Since independence, the government has stated that it is committed to a gradual transition to a free market economy. Although the government has significantly narrowed the gap between the black market and official exchange rate, its restrictive trade regime has crippled the economy. In addition to the urgent need to rescind its draconian trade measures, the government needs to achieve full current account convertibility. Substantial structural reform also is needed, particularly in the area of improving the investment climate for foreign investors and in freeing the agricultural sector from smothering state control. Until now, continuing restrictions on currency convertibility and other government measures to control economic activity, including the implementation of severe import restrictions and closure of Uzbekistan's borders with Kazakhstan and Kyrgyzstan, have constrained economic growth and led international lending organizations to suspend or scale back credits. The recent closure of the borders with neighboring Kazakhstan and Kyrgyzstan has almost paralyzed Uzbekistan's consumer market.

The government has made some progress in reducing inflation and the budget deficit, but government statistics understate both, while overstating economic growth. There are no reliable statistics on unemployment, which is believed to be high and growing. The economy is based primarily on agriculture and agricultural processing; Uzbekistan is a major producer and exporter of cotton. It also is a major producer of gold with the largest open-pit gold mine in the world and has substantial deposits of copper, strategic minerals, gas, and oil.

GDP and Employment
The government claims that the GDP rose 4.2% in 2002; however, it is believed that it was no greater than 2%. Unemployment and underemployment are very high, but reliable figures are difficult to obtain, as no recent credible surveying has been done. Underemployment in the agricultural sector is particularly high, which is important given the fact that 60% of the population is rural-based. Many observers believe that employment growth and real wage growth has been stagnant, given virtually no growth in output.

Labor
Literacy in Uzbekistan is almost universal, and workers are generally well-educated and trained. Most local technical and managerial training does not meet international business standards, but foreign companies engaged in production report that locally hired workers learn quickly and work effectively. Foreign firms generally find that younger workers, untainted by the Soviet system, work well at all levels. The government emphasizes foreign education and each year sends about 50 students to the United States, Europe, and Japan for university degrees, after which they have a commitment to work for the government for 5 years. Reportedly, about 60% of the students who study abroad find employment with foreign companies on their return, despite their 5-year commitment to work in the government. Some American companies offer special training programs in the United States to their local employees.

In addition, Uzbekistan subsidizes studies for students at Westminster University--the only Western-style institution in Uzbekistan. In 2002, the government "Hope" Program is paying for 98 out of 155 students studying at Westminister. For the next academic year, Westminster is expecting to admit 360 students, from which Umid is expecting to pay for 160 students. The education at Westminster costs $4,800 per academic year.

With the closure or downsizing of many foreign firms, it is relatively easy to find qualified, well-trained employees, and salaries are very low by Western standards. Salary caps, which the government implements in an apparent attempt to prevent firms from circumventing restrictions on withdrawal of cash from banks, prevent many foreign firms from paying their workers as much as they would like. Labor market regulations in Uzbekistan are similar to those of the Soviet Union, with all rights guaranteed but some rights unobserved. Unemployment is a growing problem, and the number of people looking for jobs in Russia, Kazakhstan, and Southeast Asia is increasing each year. According to official Ministry of Labor estimates, around 100,000 citizens of Uzbekistan work abroad.

Prices; Monetary/Fiscal Policy
Inflation was approximately 50% in 2002. From 1996 until the spring of 2003, the official and so-called "commercial" exchange rate were highly overvalued. Many businesses and individuals were unable to buy dollars legally at these rates, so a widespread black market developed to meet hard currency demand. However, by mid-2003, the gap between the black market, official, and commercial rates had been reduced to approximately 8%. The government claims that it will reach currency convertibility in the near future. Liberalization of the trade regime, however, is a prerequisite for Uzbekistan to proceed to an IMF-financed program.

Outstanding external debt reached $4.7 billion at the end of 2002. Tax collection rates remained high, due to the use of the banking system by the government as a collection agency. Technical assistance from the World Bank, Office of Technical Assistance at the Treasury Department, and from the UNDP is being provided in reforming the Central Bank and Ministry of Finance into institutions, which conduct market-oriented fiscal and monetary policy.

Agriculture and Natural Resources
Agriculture and the agroindustrial sector contribute more than 40% to Uzbekistan's GDP. Cotton is Uzbekistan's dominant crop, accounting for roughly 45% of the country's exports. Gold is second at 22%. Uzbekistan also produces significant amounts of silk, fruit, and vegetables. Virtually all agriculture involves heavy irrigation. Farmers and agricultural workers have very low incomes because the government uses the difference between the world prices of cotton and wheat and what it pays the farmers to subsidize highly inefficient capital intensive industrial concerns, such as factories producing automobiles, airplanes, and tractors.

Consequently, agricultural productivity is low, with many farmers focusing on producing fruits and vegetables--for which supply and demand determine the price--on small plots of land, as well as smuggling cotton and wheat across the border with Kazakhstan and Kyrgyzstan in order to obtain higher prices.

Minerals and mining also are important to Uzbekistan's economy. Gold is Uzbekistan's second most important foreign exchange earner at 22%. Uzbekistan is the world's seventh-largest producer, at about 80 tons p.a., and holds the fourth-largest reserves. Uzbekistan has an abundance of natural gas, used both for domestic consumption and export; oil almost sufficient for domestic needs; and significant reserves of copper, lead, zinc, tungsten, and uranium. Inefficiency in energy use is extremely high, given the failure to use realistic price signals to cause users to conserve energy.

Trade and Investment
Uzbekistan has adopted a policy of import substitution. The multiple exchange rate system and the highly over-regulated trade regime has led to both import and export declines since 1996, although imports have declined more than exports, as the government squeezed imports to maintain hard currency reserves. Draconian tariffs and border closures imposed in the summer and fall of 2002 led to massive decreases in imports of both consumer products and capital equipment. Uzbekistan's traditional "trade" partners are NIS states, notably Russia, Ukraine, Kazakhstan, and the other Central Asian countries. Non-NIS partners have been increasing in importance in recent years, with the U.S., Korea, Germany, Japan, and Turkey being the most active.

Uzbekistan is a member of the IMF, World Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development. It has observer status at the World Trade Organization, is a member of the World Intellectual Property Organization, and has publicly stated its intention to accede to the World Trade Organization. It is a signatory to the Convention on Settlement of Investment Disputes Between States and Nationals of Other States, the Paris Convention on Industrial Property, the Madrid Agreement on Trademarks Protection, and the Patent Cooperation Treaty. In 2002, Uzbekistan was again placed on the special "301" Watch List for lack of intellectual copyright protection.

Uzbekistan's lack of currency convertibility has caused foreign investment inflows to dwindle to a trickle. In fact, Uzbekistan has the lowest level of FDI per capita in the CIS. Since Uzbekistan's independence, U.S. firms have invested roughly $500 million in Uzbekistan. Large U.S. investors include Newmont, reprocessing tailings from the Muruntau gold mine; Case Corporation, manufacturing and servicing cotton harvesters and tractors; Coca Cola, with bottling plants in Tashkent, Namangan, and Samarkand; Texaco, producing lubricants for sale in the Uzbek market; and Baker Hughes, in oil and gas development. No large new investments have taken place from the United States in the last 5 years.