PRIVATIZATION OF CORPORATIONS IN UZBEKISTAN IN COMPARISON WITH TRANSITIONAL ECONOMIES OF CENTRAL AND EASTERN EUROPE

Jahangir KAKHAROV


Jahangir Kakharov, Lecturer at the Faculty of Economics, National University of Uzbekistan; consultant to the Asian Development Bank (Tashkent, Uzbekistan)


Introduction

The demise of the Berlin Wall and the collapse of the U.S.S.R. signaled a rush to privatization in Central and Eastern Europe and the former Soviet Union. The governments of these countries are trying to privatize, i.e. transfer state-owned-and-operated enterprises to private owners and/or managers in order to create a viable private sector, capital markets and other institutions and processes, which describe a free market capitalist system.

There is no historical precedent for the kind of transition from a central-planning socialist economy to a free-market economy that is now occurring in the republics of the former Soviet Union and Central Eastern Europe. Political structures and processes are changing at the same time as economic institutions and processes. Given this and social upheaval in these countries, it is not surprising that the privatization process has been inconsistent in application, chaotic, and generally difficult. Different approaches, techniques and mechanisms have been employed with varying degrees of success and results. Whereas some of the Central and Eastern European countries are considered to be far ahead in privatization process, Uzbekistan lags behind its former peers from socialist campCzech and Slovak Republics, Hungary, Poland, Estonia and some others.1

The Uzbek government considers that it has adopted a unique transition strategy of gradual, state-guided development, in which stability and equality are principal objectives and an approach to large-scale privatization is mainly case-by-case and opportunistic. Pomfret and Anderson characterize Uzbek economic policies as inconsistent gradualism, which have appeared, in many circumstances, reactive, rather than part of a consistent strategy.2 Despite earning a name of a slow reformer, Uzbekistan is a transition country that has achieved certain significant changes in development of a market-oriented economy and a privatization process in comparison to the point when it started its existence as a sovereign state.

Initial Conditions and Their Influence on the Privatization Process

The introductory essay in Earle et al. argues that the diversity in the formulation and implementation of the privatization process across Central and Eastern Europe stems from differences in the economic and political development of these countries under socialism.3 Disenchantment with central-command system led to creation of property-like entitlements for managers and workers in Hungary and Poland in the 1980s. After the fall of communism, the desire of the insiders to convert these entitlements into formal ownership rights influences significantly the structure and the process of privatization. In Hungary, by the time the first post-communist government came to power in 1990, most property-like entitlements to socialized assets had already devolved to enterprise and company managementa process termed spontaneous privatization. Both large and small-scale privatization in Poland is marked by special treatment of insidersthanks to the privileges won by Solidarity in fighting against Communist authorities in the 1980s. It is at that time Solidarity succeeded in shifting control over socialized enterprises from the authorities to insiders/workers. By contrast, different levels of greater centralization of economy before the collapse of communism in Czechoslovakia and Romania resulted in the authorities taking full control over the privatization process. This significantly limited the role of insiders in privatization in these countries. However, despite similar centralized approaches in Czechoslovakia and Romania, the degrees of success measured by speed, revenues, and post-privatization economic development are notably different in these two countries.

Privatization and post-privatization economic development in the CIS, including Uzbekistan, is in even less favorable, compared to the Central European countries, conditions because of the following reasons:

  • Memory of capitalism is much weaker in the CIS, because it is further removed in time;
  • Deeper militarization of the economy in the former U.S.S.R. This increases the number of steps to be undertaken before privatization to include restructuring of military complex enterprisesa daunting task by itself;
  • Collapse of the COMECON market is accompanied by the dissolution of the former Soviet Union and disruption of almost all the horizontal and vertical economic ties of the enterprises;
  • Worldwide economic recession in 1989/91 coincided with the political revolutions in the former Soviet Union. For example, Michael Kaiser points out that in 1993 the United Nations Economic Commission for Europe (ECE) found that restrictive actions against eastern imports had been taken by Western governments against Central Europe (12 cases) and the former Soviet Union (8 cases).4 These actions were taken in response to the economic recession;
  • Another important factor was the geographic remoteness from the attractive Western markets;
  • Reliance on exports of oil, gas, metals and minerals in the U.S.S.R. led to the creation of unbalanced economies for the newly independent states.

These negative factors resulted in economic decline, which was much larger in the CIS than in CEE. According to EBRD, while for all the transition countries of CEE and the former U.S.S.R. output decline was 29 percent, in the CIS only, this figure was equal to 44 percent.5 Although Uzbekistans GDP in 1997 stood at 87 percent of 1989 level,the smallest decline for the former Soviet republics, it is clear that major decline had been prevented mainly due to the particularities of the Uzbek economy based on exploitation of natural endowments. Uzbekistan was able to sustain on a due level the production of raw materials and minerals. It is common knowledge that production of raw materials and minerals is much less complex and does not suffer from disruption of economic ties as much as production of more complex products does.

Uzbekistans starting position is quite different from the conditions of other former U.S.S.R. republics. For instance, at independence, Uzbekistan was the third in terms of population, and the second poorest republic of the former Soviet Union6. For the Soviet economy, Uzbekistan served as a supplier of raw materials (cotton) and minerals (gold and uranium). In most of Central Asia no modern institutions of market economy ever existed, while Central Europe and Baltic states had experienced market system before communist rule. Even Russia and Ukraine had been briefly exposed to capitalism before 1917.

Furthermore, prior to gaining independence none of the Central Asian countries had exercised significant influence over their economy. For example, Kazakhstan government claims that before 1991, 90% of its industry was controlled from Moscow via all-Union ministries. Therefore, at independence, there were no national institutions with experience of developing and managing industrial policy or of supervising state-owned enterprises.7 Before embarking into reform process, Uzbekistan, as well as other Central Asian countries, had to start with formation of sovereign state,8 creating government institutions able to grasp fully the economy of the country. This inescapably led to a new list of problems on top of the usual list the reformers engaged in privatization in transition states face.

Another key factor is the structure of economy that the Uzbek government inherited from the Soviet Union. The volume of industrial production in Uzbekistan remains very low in both absolute and per capita terms.9 Reliance on cotton, gold, and minerals make it possible for the government to put privatization lower in the priority list of reform steps. Since the share of industrial sector, with which privatization is mostly associated, is not as big as in most of the Central Europe (see Table 1 below), it is, apparently, more difficult for it to win closer attention of policymakers compared to sectors engaged in production of cotton and gold.

Table 1

Structure of the GDP and Work Force (in %)

Country

Indicator

Sector

1990

1991

Uzbekistan

Share of GDP

Agriculture

33.1

37

Industry

22.4

22.4

Construction

10.5

10.5

   

Services

34.0

26.5

Kazakhstan

Share of GDP

Agriculture

34.5

28.1

   

Industry

 

20.8

   

Construction

 

12.0

   

Services

 

32.7

Kyrgyzstan

Share of GDP

Agriculture

33.7

37.0

   

Industry

27.0

28.5

   

Construction

7.9

6.6

   

Services

31.4

27.9

Czech Republic

Share of GDP

Agriculture

7.2

5.6

   

Industry

50.0

54.9

   

Construction

8.6

6.3

   

Services

34.5

33.1

Slovakia

Share of GDP

Agriculture

7.4

5.7

   

Industry

49.9

52.7

   

Construction

9.2

7.4

   

Services

33.5

34.5

Hungary

Share of GDP

Agriculture

12.5

8.0

   

Industry

26.7

26.9

   

Construction

6.0

5.1

   

Services

54.8

60.0

Poland

Share of GDP

Agriculture

8.5

9.3

   

Industry

43.6

39.2

   

Construction

9.5

10.9

   

Services

38.4

40.6

Russia

Share of GDP

Agriculture

19.9

 
   

Industry

42.2

 
   

Construction

12.7

 
   

Services

25.2

 

Sources: Central Asia: Challenges of Independence; EIU country reports.

Since Uzbekistan has to start from such a low base, it seems hardly possible for the government to afford a more ambitious privatization program à la Central European countries. Thus, not only initial conditions play a crucial role in shaping up ownership profile of privatized enterprises, but they also determine the pace and the speed of privatization as well. However, initial conditions are not the only determinants of privatization progress in Uzbekistan. Governments formulation of goals for privatization also influenced the privatization process.

Goals of Privatization in Central Eastern Europe and Uzbekistan

Former Prime-Minister of the Czech Republic Vaclav Klaus maintained that privatization in Western countries, e.g. Thatcherian privatization in the U.K., has almost nothing to do with the task that Central Eastern Europe is facing. On the one hand, privatization in Central Eastern Europe is a process of establishing property rights structure that previously either did not exist, or was very strange. On the other hand, in the West, the privatization could be viewed as a reform process when a standard shift of property rights between well-defined economic agents takes place.10

As to objectives of the governments in the privatization process, these include, first of all, a complex economic transformation, rather than the maximization of the proceeds from the sale of its assets. The speed of the process is absolutely essential. The slower the pace of privatization, the lower is the proceeds from privatization. Hence, the main goal of privatization is restructuring the economy. In other words, the principle goal of privatization is to improve resource allocation. The individual restructuring of enterprises will follow after privatization.

Similarly, Colin Jones, comparing privatization programs in Central and Eastern Europe, industrialized countries and developing nations, concludes that in Central and Eastern Europe and the former Soviet Union privatization is part of the process of creating afresh a market economy and all its legal, commercial, financial and institutional infrastructure. Moreover, private ownership and private property rights are perceived to be a bedrock of a democratic society. By contrast, in industrial countries, privatization is a marginal adjustment in ownership rights in established economies.

Unlike the central planning, market economy based on private ownership disperses the risks and reduces the magnitude of the consequences of an error. Private ownership also subjects businesses to the threat of bankruptcy or take-over and so fosters competitive environment. Furthermore, the resources are likely to be allocated more efficiently by decentralized competition, rather than by the bureaucratic processes of centralized planning.

However, Colin Jones opposes hasty privatization schemes. Since privatization is part of the process of economic transformation, it will succeed only when accomplished in complex with other economic reform measures. Privatization is not feasible without prior macroeconomic stabilization and creation of the legal and institutional infrastructure for a market economy. In other words, the first step is demand adjustment: liberalization of prices and foreign trade; establishment of realistic exchange rates and internal convertibility of the local currency; and tightening of the monetary and fiscal policy. The next step is creating a framework of civil and commercial law; independent judicial system; competitive banking and financial system11.

However, almost all the CIS countries, unlike Poland and former Czechoslovakia, introduce only price decontrol at a strokeand the Russian government is alone in adding in current account convertibility and mass privatization to its respective programs of transition.12

Financial and legal infrastructure for trade in property remains undeveloped throughout the CIS. High proportion of shares held by management and workers protects employment, defers restructuring and foreign investment.

Martin Spechlers conclusion on the pace and goals of privatization differs from that of Colin Jones and Vaclav Klaus. According to him, a gradual mixed strategy of transition and privatization would be more acceptable to more people than would doctrinaire of shock therapy.13 Slow approach, sensitive to hardships of people, would make a privatization scheme more popular among ordinary citizens and gain support of a population. Wide support and less severe consequences for the people will improve the results of privatization and restructuring.

It seems that Martin Spechlers approach is somewhat similar, in certain instances, to the Uzbek governments strategy of economic reform. The creation of a socially oriented market economy and step-by-step transition are parts of state-led reform agenda in Uzbekistan. It is based on the five principles formulated by President Islam Karimov:

  • The economy has priority over politics;
  • The main agent of reform is the state;
  • Priority is to be given to law and legal obedience;
  • Adherence must be given to a strong social policy, which takes into account the demographic structure of the nation;
  • Transition to a market economy must come through evolutionary means.14

Privatization policy based on this strategy has accentuated the general privatization process. In Uzbekistan, small-scale private activity, both legal and illicit, had been quite well developed.15 Therefore, the governments first priority, at the inception of privatization process, became small privatization. From late 1992 until mid-1994, 53,000 businesses had been sold or leased mainly to employees. By the end of 1996, small privatization had been complete.

However, the first wave of privatization has not led to a logical next steplarge-scale privatization. The mass privatization launched in 1996 has not given controlling stakes in industrial companies to private owners. Private Investment Funds (PIFs) are bidding for minority stakes not exceeding 30% in 150 medium-to-large scale companies.

Within the past two years the Uzbek government has indicated several times its intent to move more decisively to attract foreign investments. In 1998, Uzbekistan announced international tenders for some of its largest industrial assets. However, only one large chemical plant had been sold. In 1999, tender for Almalyk copper plant, one of the largest and potentially profitable enterprises in Uzbekistan was cancelled.16 Pace of large-scale privatization still remains slow. There are many problems, which slow down privatization process in Uzbekistan, such as, unrealistic price expectations, difficult investment environment, nonconvertibility of the local currency, and slump in commodity prices. However, the main reason for this, in addition to difficult initial conditions, seems to be the perception of privatization goals by Uzbek reformers. While for Central European reformers the speed of the process is the main objective, Uzbek reformers seem to be more concerned with maintaining control over the enterprises being privatized, which, in fact, contradicts to the idea of privatization itself.

Conclusion

Privatization will play crucial role in the ongoing transformation process in Central Eastern Europe and Uzbekistan. Through privatization the governments can create incentives for enterprises to increase production and improve quality fuelling economic growth. Privatization should create political constituency of new owners and commercial lenders who would exert political pressure for putting in place governance mechanisms.

Whereas some of the Central European and former Soviet republics are almost finishing up their privatization programs, Uzbekistan has been often criticized for the lack of political willingness to press ahead with large-scale privatization in the fear of higher unemployment and bankruptcies. However, evaluation of Uzbek privatization performance should be considered in the context of initial conditions at the outset of transition and policy objectives, which, sometimes, are determined by these conditions. Initial conditions remarkably slowed down large-scale privatization in Uzbekistan at the start of reforms. They not only influenced policy goals of privatization notably at a later stage, but also, to a certain extent, limited options for Uzbek reformers. As the Uzbek government declared adherence to socially oriented market economy and a strong social policy, which takes into account the demographic structure of the nation, it has become increasingly reluctant to give up ownership control over large enterprises and determined to increase privatization revenues.17 Apparently, the Uzbek government perceives that by maintaining ownership control over enterprises, it could avoid increase in unemployment. It seems that the Uzbek government also expects that a privatization windfall would assist in easing budget deficit and help meet increasing amount of external debt obligations.


1 Progress in privatization of medium-sized and large-scale enterprises is measured by EBRDs transition indicators in EBRD Transition Report, 2002, p. 20.
2 R. Pomfret, K. Anderson, Uzbekistan: Welfare Impact of Slow Transition, U.N. University, World Institute for Development Economics Research, Helsinki, 1997.
3 See: J. Earle, R. Frydman, A. Rapaczynsky, Privatization in the Transition to a Market Economy: Studies of Preconditions and Policies in Eastern Europe, Pinter, London, 1993.
4 See: M. Kaiser, Privatization in the CIS, Russian and CIS Program, Royal Institute of International Affairs, London, 1995.
5 From EBRD table published in Financial Times, 5 August, 1998.
6 See: R. Pomfret, The Uzbek Model of Economic Development, 1991-1999, The Economics of Transition, No. 8 (3), 2000, pp. 733-748.
7 See: J. Henley, Restructuring Large-Scale State Enterprises in the Republics of Azerbaijan, Kazakhstan, the Kyrgyz Republic and Uzbekistan: The Challenge for Technical Assistance, University of Edinburgh, Dept. of Business Studies, Edinburgh, 1995.
8 See: B. Islamov, State-led Transformation and Economic Growth in Central Asia: From Plan to Industrial Policy, Hitotsubashi Journal of Economics, No. 39 (2), December 1998, p. 102.
9 See: Central Asia: Challenges of Independence, ed. by B. Rumer, S. Zhukov, Sharpe, Armonk, New York, London, 1998.
10 See: A. Bohm, M. Simoneti, Privatization in Central and Eastern Europe, C.E.E.P.N., Ljubljana, 1994, p. 8.
11 See: C. Jones, Privatization in Eastern Europe and the Former Soviet Union, Financial Times Business Information, London, 1992.
12 See: M. Kaiser, op. cit.
13 See: D. Iatridis, J. Hopps, Privatization in Central and Eastern Europe: Perspectives and Approaches, Praeger, Westport, Conn.; London, 1998.
14 See: I. Karimov, Uzbekistansobstvennaia model perekhoda na rynochnye otnoshenia, Tashkent, 1993, pp. 37-38.
15 A definition used by M. Kaiser in The Economies of Uzbekistan and Kazakhstan, Russian and CIS Program, Royal Institute of International Affairs, London, 1997.
16 For more detail, see: EBRD Transition Report, 1999.
17 It should be noted that the two tasks do not seem to reconcile with each other well. One cannot have their cake and eat it.

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