Economic Reform

Economic Reform

Since independence, Kyrgyzstan has undertaken significant structural reforms of its economy; in 1994 the International Monetary Fund (IMF--see Glossary) ranked Kyrgyzstan fourth among former Soviet republics (behind the three Baltic states) in the pace of economic reform, but positive results have not been forthcoming. As elsewhere in the former Soviet Union, one of the most significant reforms is privatization. The goal of privatization, a high priority in the early 1990s, has been to create new productive enterprises with efficient management systems while involving the population in the reform program at a fundamental level. The process began in December 1991 with the adoption of the Privatization and Denationalization Law and the creation of the State Property Fund as the agency to design and implement the program. In late 1992, a new parliamentary "Concept Note" reoriented the program toward rapid sale of small enterprises and ownership transition in larger enterprises by vouchers and other special payments. By the end of 1993, about 4,450 state enterprises, including 33 percent of total fixed enterprise assets, were fully or partially privatized. By mid-1994, nearly all services and 82 percent of assets in trade enterprises, 40 percent of assets in industry, and 68 percent of construction assets were in private hands.

However, the practical results of those statistics have not been nearly so positive. Most privatization (and almost all privatization in industry) was accomplished by creation of joint-stock companies, transferring enterprise shares to labor groups within them. Almost no public bidding for enterprise shares occurred, and the state maintained significant shares in enterprises after their conversion to joint-stock companies. Also, because the sale of shares was prohibited, shareholders wishing to leave the company had to return their holdings to the labor collective. The 1994 Law on Privatization remedied this situation by providing for competitive bidding for shares in small enterprises (with fewer than 100 employees) as well as long-term privatization of medium-sized (with 100 to 1,000 employees) and large enterprises by competitive cash bidding among individuals. The new law also provided for the auctioning of all enterprise shares remaining in state hands, over an undetermined period of time. In 1994 and early 1995, voucher privatization moved toward its goals quickly; by the end of 1994, an estimated 65 percent of industrial output came from non-state enterprises.

Privatization was not the final step in economic success, however. After that step, many firms needed drastic restructuring--most notably in management and technology--to function in a market environment. Because the commercial banking system had not been reformed substantially, enterprises found little financial or technical support for such upgrading (see Financial System, this ch.). On the other hand, enterprises (especially state enterprises) have not been discouraged from defaulting on loans because they often are closely associated with banks, whose pliable loan policy is backed by the National Bank of Kyrgyzstan. Plans called for establishment of an intermediary agency to distribute foreign and international funds to privatized enterprises until the banking system is able to take over lending activities. A stock exchange opened in Bishkek in May 1995 and was considered an important step in expediting this process.

In the early years of independence, a major cause of Kyrgyzstan's economic distress has been corruption and malfeasance. In a January 1993 speech, President Akayev reported that as much as 70 percent of the money that the country had invested in its economy had been diverted into private hands. Meanwhile, a poll of the country's few entrepreneurs found that 85 percent of them reported having to offer bribes to stay in business. The truth of Akayev's statement was difficult to verify, but reports in newspapers and elsewhere suggest that it could be correct. Official data indicated that since independence at least 100,000 tons of cast iron, steel, aluminum, and zinc had been sold abroad without legal permission, and that a credit for 1.7 billion rubles for the purchase of grain had vanished. Other anecdotal evidence of corruption, often connected with local centers of political power, was plentiful (see Structure of Government, this ch.).

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