The process of reform in the Commonwealth of Independent States CIS

1
The process of reform in the Commonwealth of
Independent States (CIS)

• Week 5

2
The Role of the SME

• Dynamic flexible organisation
• Reacts to new innovation
• Able to adapt to market changes
• Frequently absorbs new technology

3
Barriers to development

• Burden and complexity of taxes
• Difficulties in obtaining permits and licences to
  begin trading
• Excessive direct intervention by officials
• Difficulties in obtaining sufficient credits to
  set up and develop businesses
• Lack of business knowledge
• Difficulties in assessing business information
• Lack of supportive environment

4
Kyrgyz Republic privatisation

• Jermakowicz Pankow (1994)
• 47 of each enterprise remains in state ownership
• Arbitrary distribution of shares to existing
  managers (social obligation)
• ? new companies closed form cannot sell
  shares
• Subjective management of programme

5
Kyrgyz Republic privatisation

• Clauses in privatisation contracts limit owners
  in product choice and employee levels
• No bankruptcy legislation State fund cannot deal
  with companies operating at a loss
• Government failed to educate population
• Significant gaps and inconsistencies in
  legislation.
• Lack of co-ordination.
• Contradiction in decrees.

6
3 Level Process

• State controlled planned sector
• Formal firm-type sector
• The bazaar
• Competition not between sellers
• Competition is between buyer seller
• Micro-entrepreneurial
• Trade is a social activity

7
Case study of Uzbekistan

• Transition Process Gradualist
• Western criticism of pace of reform
• EBRD suspension of funding in 2004
• President Karimovs Socialist market-oriented
  economy based on self-sufficiency

8
Karimovs 5 Principles of Reform

• Place economic priorities over the political
• The state as main architect and guarantor of
  reforms
• (This has meant Karimovs regime held the right
  to define the leading priorities of economic and
  political development)
• Need for rule of law
• (Everybody without exception to adhere to
  constitutional and legislative acts)
• Emphasis on strong social policy
• Gradualist approach in methods of reform

9
Economic priorities

• Development of
• Oil and Gas Industry
• Electro-Energy
• Metallurgy
• Machine Building
• Gas-Chemical Production
• Manufacturing

10
Currency issues

• Until 1994 no separate currency part of the
  Rouble Zone
• Introduction of the Som in July 1994
• Fall in Output
• Hyperinflation

11
Programme of economic reforms

• Aims
• Minimization of economic and social discontent
  during transition process
• Successes
• Reduced fiscal debt
• Brought down inflation
• Re-established growth

12
Privatization

• Does slowness quality?
• By 1996 94 of all SOEs had been transferred to
  private hands
• But State retained indirect control by
• Share holdings of state structures
• (sectoral ministries and state owned banks)
• State Property Committee

13
Arguments are

• The state has had negative influence on efficient
  corporate governance and enterprise restructuring
• Without market knowledge the state has moved
  reforms through
• World Bank says Designated share owners have had
  little incentive to trade the shares they
  received through the initial allocation

14
Methods to assist businesses in the 1990s

• UZGOSFUND
• Managed by State Property Committee (SPC)
• All privatization proceeds go to SPC, 50
  transferred to Uzgosfund
• 40 of these funds lent at attractive rates to
  businesses (usually 1 year loans)
• BUSINESS FUND
• Receives other 50 of proceeds and provides
  business services and arranges longer loans
  through commercial banks.
• Aimed at smaller-scale ventures particularly in
  agriculture

15
1996 the mass-privatization of medium sized
enterprises

• Problems
• Bureaucracy
• Shortage of skilled managers
• Low level of competition
• Led to
• Bankruptcies and unemployment

16
Banking and Capital Markets

• Underdeveloped and Inefficient
• No culture of capital markets
• Uzbek government under no compulsion to develop
• Reliance on foreign borrowing

17
Banking

• State-owned banks dominate
• 85 of banking sector assets are controlled by 4
  state-owned banks
• 30 small commercial banks
• Activity limited as unable to operate according
  to market principles
• Also Central Bank of Uzbekistan has exercised
  lending restrictions on banks

18
Privatization and Agriculture

• Uzbekistan is worlds 4th largest producer of
  cotton
• 50 of all export earnings
• 75 of hard currency export earnings
• Policy is to privatize
• Compulsory state purchase of 50
• Prices guaranteed for non compulsory purchase
  part are well below world levels
• No incentive to produce above compulsory purchase
  amount (very planned economy)
• Shortage of machinery and fuel
• Prohibition of public ownership of land

19
Privatization and Agriculture

• Disadvantages
• Slow
• Advantages
• Economy has not suffered the ups and downs of
  other transition economies
• Can learn from mistakes of neighbours
• Time frame of 30 years- is this more realistic?

20
Government Arguments

• Macroeconomic reforms must be gradualist or
• Rapid devaluation currency and resulting high
  inflation would negatively impact on the standard
  of living, particularly in rural areas,
  undermining social stability.
• Rapid devaluation would put further strain on
  large state enterprises which have foreign debts.
• To implement rapid devaluation without adequate
  financial assistance to cushion the negative
  impact would be impossible

21
How to push reform forward?

• Liberalization of trade and foreign exchange
• Trade and FX restrictions can prevent firms in
  potentially profitable industries from developing
• Taxes on regional exports are very damaging as
  they prevent expansion and economies of scale
• Financial sector liberalization
• Need end of directed lending under Government
  guarantees
• Hard budget constraints for borrowers

22
Business Growth

• In July 2002
• 224,100 Registered Small and Medium-sized
  businesses
• 449,000 Registered businesses and entrepreneurs
• First half of 2002 saw creation of 198,900 new
  workplaces

23
Analysis - chronological

• Gradualness of reform takes into account
  societys actual readiness to accept market
  relations
• Recognition of need to preserve state sector in
  management of enterprises and regulating market
• State and government must be main reformer
• Must determine priorities and sequence at each
  stage of reform
• Plyshevskii (1993)

24
Uzbek model of economic development 1991-96
(Pomfret 2000)

• What are the elements of the Uzbek model?
• Caution is reflected in macroeconomic policy
• Price reform was cautious too, and this clearly
  delayed the introduction of market forces
• Caution also characterized the privatization of
  state assets
• Uzbekistan has benefited from good governance in
  the economic sphere, at least by a narrow
  definition of economic management and by the
  generally low standards of the CIS
• Although reasonably well administered, the
  general strategy is flawed
• The longer that change is delayed, however, the
  more severe the shock of reform will be and the
  more unpredictable and uncontainable the negative
  consequences.

25
Does GDP tell the whole story?
26
Michael Spechlers view (2004)

• Though subject to arbitrary taxes and even
  takeovers by privileged individuals, small
  businesses have managed to multiply, as
  everywhere else in the region.
• Consequently, Uzbekistan suffered the shallowest
  dip in output of all states in the Commonwealth
  of Independent States (CIS)only 17.5 percentand
  has recorded steady 4 percent real growth each
  year since 1996
• Accordingly, Uzbekistan was the first CIS member
  to exceed its pre-independence level of output.

27
How was this achieved?

• Virtually no outside help
• External debt (about 4.6 billion) considered
  moderate by World Bank standards
• Part of Uzbekistans independence policy has been
  diversification of its export and import partners
• Russia/US/Europe
• Trade with the China totalled 130 million in
  2002 (up 20 on previous year
• More than 100 Chinese-Uzbekistani joint ventures
• More than any other Central Asian country,
  independent Uzbekistan still resembles its Soviet
  predecessor.
• Considering the alternatives, that is not
  necessarily bad from a material point of view.

28
No change in Tashkent

• Belarus and Uzbekistan provide a better answer
  than a counter-factual conjecture.
• They still are state-managed command economies .
  . . but are not subject to endemic repressed
  inflation.
• They have a small private sector, without
  extensive privatizations have fairly open trade
  and foreign exchange regimes.
• Over the last ten years they have performed
  better than any former Soviet republic.
• They are neither a statistical delusion nor a
  desirable alternative, but are a feasible command
  economy.
• Nuti (2004)

29
Converse view UN (2005)

• Although it is difficult to make an accurate
  estimate of economic growth in Uzbekistan--because
  of the unreliable nature of government
  statistics, which often serve political rather
  than economic ends--economic growth is far below
  potential due to
• the country's poor investment climate
• failure to attract foreign investment
• an extremely restrictive trade regime,
  implemented in order to meet a strategy of
  limiting imports of consumer goods
• failure to reform the agricultural sector of the
  economy, potentially the engine of economic
  growth for this largely rural economy and
• the price system in Uzbekistan, which is not
  functioning properly due to government
  intervention in markets.

30
Converse view UN (2005)

• The government claims that the GDP rose 4.1 in
  2003
• U.S Government does not think it was greater than
  0.3
• 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 have been stagnant, given
  virtually no growth in output
• But consider working population in shadow
  economy
• Uzbekistan 33
• Azerbaijan 51
• Kyrgyzstan 29
• In Kaser (2004)

31

• China scores 6.5 on Freedom Index
• Sudan has posted 7 annual growth since mid 1990s

32
The premise of attracting FDI

• Failure to attract FDI
• FDI averaged only 0.5 of GDP between 1992 and
  1996
• Kazakhstan attracted 87 of all Central Asian FDI
• How to attract FDI
• Show greater commitment to economic reform
• Unify exchange rate
• Appear more welcoming to foreign investors
  (import substitutions only in Uzbek policy)

33
So is it all going fine then?

• A delegation from the London Chamber of Industry
  and Commerce arrived in Uzbekistan, Uzbek TV
  reported on 4 November 2002.
• The aim of the visit is to closely study economic
  opportunities in Uzbekistan, meet the country's
  business circles and determine prospects for
  cooperation.
• "The London Chamber of Commerce and Industry
  builds its activities within the framework of
  giving all-round support to businessmen and
  assisting them when necessary. The chamber also
  works towards establishing mutual cooperation
  with business circles in various countries of the
  world. There are 13 British companies in the
  delegation and they are from the banking and
  financial sectors, chemical, oil and gas
  industries, tourism, aircraft-building and
  telecommunications. The British embassy in
  Uzbekistan has prepared a special programme for
  all the delegates. Based on the itinerary, we
  will have talks with government officials, heads
  of ministries and departments, local
  entrepreneurs and businessmen and consider
  important aspects of further expanding
  cooperation."

34
Uzbek Government fights corruption!

• According to regular reports from the
  press-centre of the country's Prosecutor's
• Office a campaign aimed at cleaning the branches
  of executive power from corruption is in full
  swing
• "The more we will reinforce the controlling
  functions of the state, create extra state
  inspecting structures and bodies the more will
  the tyranny of officials and corruption grow.
  For this reason we do not have any other way out,
  another alternative - we must strengthen public
  control and society's control over the state
  performance, including the activity of
  power-wielding structures in every possible way."
  
• (From President Islam Karimov's address at the
  ninth parliamentary session)

35
Uzbek Government fights corruption!

• Pravda Vostoka, Tashkent, 30 Oct 02
• Officials from the small and medium sections are
  falling into the department's net with a striking
  regularity and unprecedented intensity until
  recent times, and judges are passing severe
  punishments even on their recent colleagues from
  the country's remote parts without hesitating.
• It would seem that one should welcome this
  enthusiastic work. However I have a feeling that
  the sensational attack launched against
  corruption is nothing but a kind of public
  relations exercise which is said to demonstrate
  the authorities' firm intention to nip bribery in
  the bud.

36
Summer continues cycle of child labour in
Uzbekistan

• For thousands of Uzbek children, the absence of
  daily school bells this summer means they can do
  in the open what they secretly do all year. But
  instead of taking summer holidays, these children
  work.
• The incidence of child labour spreads so broadly
  throughout the country that national law
  discourages efforts to change it.
• Officially, Uzbek law sharply discourages child
  labour. Unofficially, the economy which is still
  struggling, overwhelms its obligations to
  international standards
• Uzbekistan carries norms and laws that are
  harsher than the international standards but also
  are more general. But these laws are laxly
  enforced, and run counter to traditions
• EurasiaNet (2002)
• In October last year, a minister with
  Uzbekistan's public education department admitted
  that at least 44,000 senior pupils and students
  had been mobilised to help pick the country's
  cotton.
• BBC (Feb 2005)