Uzbekistan: Economy

The economy is based primarily on agriculture and natural resource extraction. Uzbekistan is a major producer and exporter of cotton, but natural gas has replaced it as the dominant source of foreign currency earnings. It also is a major exporter of gold, uranium, and strategic minerals. (Uranium is Uzbekistan’s largest export to the U.S.) Manufacturing has become increasingly important, particularly in the automotive sector, which is aimed primarily at export to the Russian market. Since independence, the government has followed a policy of gradual transition to a free market economy but most large enterprises are still state owned or controlled.

It is difficult to accurately estimate economic growth in Uzbekistan due to unreliable government statistics. Economic growth has been strong in the past few years, but wealth is strictly held by the elite. According to the CIA World Factbook, approximately 26% of Uzbeks live below the poverty line.

The government implements a strict import substitution policy to control foreign trade and prevent capital outflow. Substantial structural reform is needed, particularly in the area of improving the investment climate for foreign investors and liberalizing the agricultural sector. Although the government has committed itself in theory to the provisions of the International Monetary Fund's (IMF) Article VIII regarding currency convertibility for current account operations, in practice firms can wait months or even years for currency conversion. Convertibility restrictions, difficulty withdrawing local currency from bank accounts, and other government measures to control economic activity, (e.g., import and export restrictions, and intermittent border closings) have constrained economic growth and led international lending organizations to suspend or scale back credits.

GDP and Employment
The International Monetary Fund estimates the 2010 GDP growth figure as 8.5%. The IMF projects 2011 GDP growth of 7%. Unemployment and underemployment are very high, but reliable figures are difficult to obtain, as no recent credible surveying has been done. Unofficially, unemployment is estimated around 8% and underemployment around 25%. Underemployment in the agricultural sector is particularly high--which is important given the fact that 62% of the population is rural-based. Many observers believe that employment growth and real wage growth have been stagnant, given virtually no growth in output.

Labor
Literacy in Uzbekistan is almost universal, and workers are generally well-educated and well-trained. Worsening corruption in the country's education system in the past few years eroded Uzbekistan's advantage in terms of its human capital, as grades and degrees are routinely purchased. Additionally, elementary and secondary students in the remote provinces have poor access to basic education. 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. Uzbekistan subsidizes studies for students at Westminster University--one of a few Western-style educational institutions in Uzbekistan.

The government has implemented salary caps in an attempt to prevent firms from circumventing restrictions on the withdrawal of cash from banks. Some firms had tried in the past to evade these limits on withdrawals by inflating salaries of employees, allowing firms to withdraw more money. These salary caps prevent many foreign firms from paying their workers as much as they would like. Labor market regulations in Uzbekistan are similar to those once used in the Soviet Union, with all rights guaranteed but some rights unobserved. Unemployment and underemployment are persistent problems, and a significant number of people continue to look for jobs in Russia, Kazakhstan, the Middle East, and Southeast Asia. Business analysts estimate that a high number of Uzbek citizens are working abroad. Estimates range from lows of 3 million to highs of 5 million Uzbek citizens of working age living outside Uzbekistan. Uzbekistan signed a labor agreement with Russia in 2007 to facilitate the temporary migration of Uzbek workers and the taxation of their income.

Prices and Monetary and Fiscal Policy
Macroeconomic performance has been strong over the last 3 years and resulted in a positive trade balance. Real GDP growth was high, and official reserves continued to rise. Inflation is expected to be between 7%-9% in 2011. In order to combat inflation, the government has exercised strict currency controls, causing periodic shortages of cash. Reacting to the weakening of the dollar to the Euro, the government recently switched to the Euro for its accounting and financial management. The hospitality sector is following suit.

Gross official reserves in 2010 were estimated at $13.5 billion. In 2007, the World Bank and the UN Development Program (UNDP) provided technical assistance to reform the Central Bank and Ministry of Finance into institutions that conduct market-oriented fiscal and monetary policy. But official economic data on Uzbekistan is still often unreliable and not always available. Bank reform is very slow and inhibits the ability of citizens or private companies to obtain credit and other banking services.

Agriculture and Natural Resources
Agriculture and the agro-industrial sector contribute about 17% to Uzbekistan's GDP. Cotton is Uzbekistan's dominant crop, accounting for roughly 11% of the country's GDP in 2009. Uzbekistan also produces significant amounts of silk, wheat, fruit, and vegetables. Nearly all agriculture involves heavy irrigation. In 2008, the President signed a decree on enlargement of private farms, which has led to the redistribution of small farmers’ land in favor of large farms. Farmers and agricultural workers earn low wages, which the state seldom pays on a regular basis. In general, the government controls the agriculture sector, dictates what farms grow, and sets prices for commodities like cotton and wheat. Most farms grow wheat and cotton to meet the state order, and farmers can face losing their leased land if they do not meet state quotas.

Natural resources, minerals, and mining are integral to Uzbekistan's economy. Natural gas is Uzbekistan's most important foreign exchange earner, estimated at around 24% (2010). Gold is another important source of foreign earnings (about 7%-10% of total exports). Uzbekistan is the world's seventh-largest producer of gold, mining about 80 tons per year, and holds the fourth-largest reserves in the world. It produces oil for domestic consumption and has significant reserves of copper, lead, zinc, tungsten, and uranium.

Trade and Investment
Uzbekistan's export/import policy is based on import substitution. The highly 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 sporadic border closures and crossing "fees" decrease legal imports of both consumer products and capital equipment. Uzbekistan's traditional trade partners are from the Commonwealth of Independent States (CIS), notably Russia, Ukraine, and Kazakhstan. Non-CIS partners have been increasing in importance in recent years, with the European Union, China, South Korea, Germany, Japan, and Turkey being the most active.

Uzbekistan is a member of the IMF, the World Bank, the Asian Development Bank, the Islamic Development Bank, and the European Bank for Reconstruction and Development. It has observer status at the World Trade Organization (WTO) and has publicly stated its intention to accede to the WTO. It is a member of the World Intellectual Property Organization and 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 2008, Uzbekistan was again placed on the special "301" Watch List for lack of intellectual copyright protection.

Since Uzbekistan's independence, U.S. firms have invested roughly U.S. $500 million in Uzbekistan. In 2007 GM-DAT, a Korean subsidiary of GM, entered Uzbekistan when it signed a joint venture agreement with UzDaewoo to assemble Korean-manufactured cars for export and domestic sale, including Chevrolets. This plant in Asaka now produces many lines of cars under the Chevrolet nameplate for export to Russia as well as the domestic market. General Motors also signed a deal to begin producing powertrain engines in Uzbekistan at a new plant just outside Tashkent. As of August 2010, the plant was in the construction phase and was scheduled to begin operations in late 2010. Boeing also has a longstanding relationship with the national airline of Uzbekistan, Uzbekistan Airways. Coca Cola, Baker Hughes, Nukem, Hewlett Packard, and other U.S. companies conduct small-scale operations in Uzbekistan as well. Nonetheless, some foreign investors are departing Uzbekistan because of declining investor confidence, harassment, and currency convertibility problems.

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