Academic journal article The European Journal of Comparative Economics

How Tight Is Too Tight? A Look at Welfare Implications of Distortionary Policies in Uzbekistan

Academic journal article The European Journal of Comparative Economics

How Tight Is Too Tight? A Look at Welfare Implications of Distortionary Policies in Uzbekistan

Article excerpt


Since independence in 1991, Uzbekistan has pursued a gradual approach to the transition from planned to market economy. This approach relied heavily on trade controls, directed credit, and large public investments. In addition, a number of financial sector measures were instituted that distorted resource allocation and increased transaction costs. As a result, while possibly preventing the contraction of output in the early 1990s, these policies led to disappointing economic outcomes and social conditions later on. The paper reviews the underlying distortions and presents survey-based evidence to support their existence and their detrimental impact on economic activity. Looking forward, the paper-using a representative agent framework to model existing financial sector distortions-offers some guidance regarding the likely implications of eliminating these distortions on key aggregate variables. It suggests that the elimination of these distortions will be welfare enhancing and will lead to higher levels of investment and capital stock.

JEL Classification: E50, P23, P27

Keywords: financial sector distortions, transition, Uzbekistan

(ProQuest Information and Learning: ... denotes formulae omitted.)

1. Introduction

Uzbekistan is strategically located in Central Asia, at the crossroads of the ancient Silk Road between China and Europe. Of the 15 independent states that emerged from the breakup of the Soviet Union in 1991, Uzbekistan is the third largest in population (about 26 million) and the fourth largest in land area (448 thousand square kilometers). During the Soviet period, Uzbekistan was developed as a leading center for cotton production, capitalizing on its vast water resources for irrigation.

Since independence, the Uzbek authorities have opted for a gradual approach to reforming their economy. Their strategy aimed at building a socially oriented market economy, and developing industrial and manufacturing capacity in a predominantly agricultural economy using substantial and direct central guidance. To that end, the government has adopted an import-substitution strategy, particularly since 1997, that has relied heavily on administrative intervention and a restrictive foreign exchange and trade regime.

Unfortunately, this gradual reform strategy relied heavily on three interventionist pillars, most of which have their roots in Soviet planned-economic practices: exchange and trade controls, directed resource allocation, output targets (especially agricultural) and sizable public investment. Some of these controls and restrictions, discussed in detail in the paper, are quite unique. As a result, while these policies may have prevented output from contracting in the early 1990s, they led to disappointing economic and social conditions later on.2 Industrial growth was very low and uneven. While some new industries were promoted, many others have ceased operations or are operating below capacity. Production and exports witnessed little diversification. The government's presence remains strong in many areas, with governance and capacity issues providing reasons for concern to the international community.3 Furthermore, the opacity and unpredictability of government policies continue to hinder domestic economic activity (IFC, 2004) and foreign investment. Uzbekistan lags behind most transition economies in terms of market development, large-scale privatization, and corporate governance.

Zettelmeyer (1998) found that Uzbekistan's good output performance during the early 1990s was mainly due to a combination of low initial industrialization, (scale of) cotton production, and self-sufficiency in energy. These three elements more than offset the impact of the government's poor macroeconomic and structural policies. This conclusion that the government's public investment and gradualist reform program were not the driving forces behind the relatively favorable output performance is also repeated in Taube and Zettelmeyer (1998). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.