BACKGROUND: In the dozen years following independence, critics have predicted little success for Karimov’s “zig-zag” development policies. Yet Uzbekistan has outperformed expectations. President Islam Karimov has made quite clear, in numerous elaborations of his government’s domestic and foreign policy, that Uzbekistan faces considerable security challenges that limit the degree and pace of liberalization his government can afford to pursue. Civil wars in Tajikistan and Afghanistan have generated and strengthened destabilizing forces, as the influx of refugees, drug traffickers and militant political Islamic groups has been bolstered by such conflicts. With the exception of Tajikistan, Uzbekistan has faced the gravest threat of militant Islamic insurgency of any of the Central Asian republics. Similarly, Karimov has had to balance the overweening interests of such powerful states as Russia, the United States and Saudi Arabia—a formidable task in a tough political arena where missteps could result in severe constraints on Uzbek sovereignty. Just as the maintenance of political independence has required adroit maneuvering between superpowers, so too has preserving economic sovereignty and stability meant pursuing a significant measure of autonomy vis-à-vis sources of Western aid. As Hugh Pope reported in 1997 in the Wall Street Journal, officials are “committed to open markets, foreign investment and free trade…but look in horror at the social dislocation…ballooning debts and loss of control that (liberalization policies) have brought to their neighbors.” In the face of these challenges, the Karimov government has retained and centralized a great deal of power. Numerous analysts decry the repressive control of the government. Yet it is facile and even cynical to assume that Karimov is solely or even primarily concerned with the maintenance of his own ascendant position. The actions of the regime indicate a much more complicated interplay of influences and actions, both pro and anti-liberalization.

IMPLICATIONS: While President Karimov’s public pronouncements should not be confused for official policy, they are revealing of the Uzbek leader’s assessment of the forces shaping his country’s future. Karimov has openly proclaimed the creation of an open, democratic market economy as a long-term goal. But Uzbekistan’s development strategy envisions a long path to this liberal democratic end. Karimov has chosen a cautious approach, favoring stability over the uncertain results of a rush to liberalization. Interestingly, a 1996 public opinion survey conducted by the International Foundation for Electoral Systems found that only 17% of the Uzbek population found the pace of change too slow. When people were asked why they were satisfied with their situation, the most common answer (19%) was because of “stability, peace and security.” The Karimov government has taken steps to liberalize Uzbekistan’s economy and spur development. Three crucial economic policies—monetary policy, privatization, and small and medium-sized enterprise (SME) support—reveal successful efforts to further Uzbekistan’s development progress. Regarding Monetary policy, the Uzbek government in October 2003 lifted currency restrictions and shelved the practice of administering multiple currency rates. These acts ended a foreign exchange and currency regime that had been roundly criticized as a significant barrier to FDI and exports, and thus a drag to development. While monetary policy has remained relatively tight, inflation has responded by declining significantly, with forecasts of decline from 24% in 2002 to 14% in 2003 and 11% in 2004. Crucially, tightening fiscal and monetary policy has not been accompanied by the undermining use of the currency (som) to finance an increasing budget deficit. Rather, the deficit for the first 10 months of 2003 has been reported as less than 0.1% of GDP. Equally encouraging are forecasts of expected exchange rate stability: 971 som to the US dollar in 2003 is expected to rise to 1,043 som/$1 USD in 2004 and 1,150 in 2005. It may be that Uzbekistan has managed, like Kazakhstan, to build a sound economic platform, while avoiding the initial collapse in output endured by Almaty and the other Central Asian republics. Uzbekistan is pursuing a modest set of privatization policies as regards privatization and investment. For example, the government plans to sell loss-making state enterprises, offering investors an exemption from income tax. Also proposed is the sale of a majority stake in Uzbektelekom. However the primary engines of the Uzbek economy remain under state control. As of 2002, the Uzbek private sector accounted for 45% of GDP, as compared to 25% for Turkmenistan and 65% for Kazakhstan. Agriculture, Uzbekistan’s largest employer, is not liberalized, with the government exercising an unsurprising “cotton monopoly,” as this crop is the country’s largest single export earner. Likewise, Uzbekneftegaz, the central oil and gas company, also remains in state hands. One can surmise that this limited privatization expresses the intersection of efforts towards liberalization and steps to preserve sovereignty, for the government has preferred to fund development programs through external debt rather than allowing foreign equity. While FDI rose by 1.7% in 2003, reaching 27 billion som for the 1st half of the year, it still represents the lowest level of foreign per capita investment in the region. However, foreign aid and loans close this gap. U.S. aid to Uzbekistan has increased sharply in recent years, going from US$85 million in 2001 to $300 million in 2002. Bilateral lending and investment in the energy sector, particularly from Russia and the Ukraine, comprise another source of significant development capital. In 2001, the Government made support of Small and Medium Size enterprises a cornerstone of its economic development strategy, calling on the administration to back the goal of doubling the share of GDP represented by such enterprises. By mandating such a focus, the government aims to address problems of unemployment, create a broader foundation for continued growth, and thus further enhance Uzbekistan’s social and economic stability. Though it is too early to analyze the outcome(s) of such a policy, the decision certainly represents a move toward economic liberalization and a significant development choice.

CONCLUSIONS: Karimov’s gradualist approach may be seen as a careful merging of policies for economic stabilization and liberalization. As a result, Uzbekistan is indeed making development progress. Second only to Kazakhstan in levels of per capita social spending, Uzbekistan was the only Central Asian country able to return to 1989’s level of GDP by 2001. Uzbekistan’s economy has shown consistent growth in the last 12 years. And perhaps most importantly, average wages and household incomes have increased, albeit slowly, and the country’s human development indicator shows the highest gain in the period 1990-2000 of any country in the region. Uzbekistan’s critics may need to reconsider more positively the ‘Uzbek model’ of development.

AUTHOR BIO: Andrew S Buchman is a graduate of the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University. He currently resides in Baku.