Structural and Legal Reform of the Economy
From the time of independence, Uzbekistan's political leaders have made verbal commitments to developing a market-based economy, but they have proceeded cautiously in that direction. The first few years were characterized mainly by false starts that left little fundamental change. The initial stages of reform, instituted in 1992, were partial price liberalization, unification of foreign-exchange markets, new taxes, removal of import tariffs, and privatization of small shops and residential housing. Laws passed in 1992 provided for property and land ownership, banking, and privatization. Modernization of the tax system began in 1992; the first steps were a value-added tax (VAT--see Glossary) and a profits tax designed to replace income from the tax structure of the Soviet period.
In its first effort at price liberalization in 1992 and 1993, the government maintained some control on all prices and full control on the prices of basic consumer goods and energy. A wide range of legislation set new conditions for property and land ownership, banking, and privatization--fundamental conditions for establishing a market economy--but in general these provisions were limited, and they often were not enforced. International financial institutions initially were encouraged to believe that structural adjustments would be made in the national economy to accommodate international investment, but later such promises were rescinded. In 1994 the government maintained control of levels of production, investment, and trade, just as Moscow had done in the Soviet era. Several agencies, most notably the State Committee for Forecasting and Statistics, the State Association for Contracts and Trade, the Ministry of Foreign Economic Relations, and the Ministry of Finance, inherited responsibility for planning, finance, procurement, and distribution from the Soviet central state system. Economic policy making remains based on a national economic plan that sets production and consumption targets. State-owned enterprises remain in virtually all sectors of the economy. In 1994 no laws had established standards for bankruptcy, collateral, or contracts. But by 1995 Uzbekistan had made some significant movement toward reform, which experts interpreted as a possible harbinger of wider-ranging changes in the second half of the decade.
Privatization of the large state industrial and agricultural enterprises, which dominated the economy in the Soviet era, proceeded very slowly in the early 1990s. The initial stage of privatization, which began in September 1992, targeted the housing, retail trade and services, and light industry sectors to promote the supply of consumer goods.
Beginning with the 1991 Law on Privatization, a number of laws and decrees have provided the policy framework for further privatization. A state privatization agency, established in 1992, set a goal of moving 10 to 15 percent of state economic assets into private hands by the end of 1993. Movement in that direction was slow in 1992, however, with only about 350 small shops being privatized. In the same period, housing was privatized at a somewhat faster pace by outright transfers or low-cost sales of state housing properties. By 1994 about 20,000 firms in small industry, trade, and services had been transferred from state ownership to the ownership of managers and employees of the firms. Nearly all such transfers were through the issuance of joint-stock shares or by direct sale.
Agricultural privatization, which began in 1990, has moved faster. Since the state began distributing free parcels of land that could be inherited but not sold, the number of peasant farms has risen dramatically (cotton-growing lands were excluded from this process). Between January 1991 and April 1993, the number of private farms rose from 1,358 to 5,800, promising a significant new contribution from private farms to Uzbekistan's overall agricultural output (see Agriculture, this ch.). Another government program, initiated in 1993, transfers unprofitable state farms to cooperative ownership. A law permitting the transfer of privately owned land was planned for 1995.
In the mid-1990s, the role of the state was gradually reduced in the productive sectors, except for energy, public utilities, and gold. The government's privatization program for 1994-95 emphasized the sale of large and medium-sized state-owned construction, manufacturing, and transportation enterprises. A set of guidelines for large-scale privatization, which went into effect in March 1994, contained several contradictory provisions that required clarification, and privatization also was slowed by the need to change the monopoly structure of state-owned enterprises before sale.
In mid-1995, the government reported that 69 percent of enterprises (46,900 of 67,700) had been privatized. Most firms in that category are relatively small, however, and all heavy industry remained in state ownership at that stage. Although the government has promised accelerated privatization of larger firms, experts did not expect the slow pace to improve in the late 1990s.
According to some experts, a turning point came in late 1993 after Uzbekistan and Kazakstan were expelled from the ruble zone (see Glossary), in which Uzbekistan had remained with vague plans to adopt an independent national currency at some time in the future. Following the example of Kyrgyzstan, which already had created its own currency the previous May, in November 1993 Uzbekistan issued an interim som coupon. The permanent currency unit, the som, went into effect in the summer of 1994 (for value of the som--see Glossary). The introduction of the som was followed by an improving domestic economic situation, including some progress toward economic stabilization and structural reform. Beginning in late 1994, the national economy achieved substantial price liberalization, a reduction in subsidies, elimination of state orders on most commodities, and some freeing of state controls in the agricultural sector. In 1994 the som was one of the weaker new currencies in Central Asia; it lost two-thirds of its value in the second half of 1994. By the end of the year, however, inflation had leveled off, and the free-market exchange rate of the som stabilized by January 1995. In July 1995, the government announced plans to make the som fully convertible by the end of the year. At the beginning of 1996, the som's value was thirty-six to US$1.
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