President Islam Karimov’s reelection has been followed by his statement that in Uzbekistan economic liberalization and privatization will now follow. Currency controls on the Uzbek som and its less than full convertibility, have been the greatest roadblocks to the overall development of the Central Asian trading block, called the Central Asian Union, that includes Uzbekistan, Kazakhstan, Kyrgyzstan, and Tajikistan. If barriers including bilateral trade tariffs can be overcome, the Central Asian Union holds the greatest potential to reanimate regional trade throughout the Central Asian region.

Background on Uzbekistan Economic Liberalization Problems

In 1993-1994, the World Bank and the IMF strongly supported Uzbekistan’s impressive fiscal policy. However, a poor cotton harvest and lack of hard currency reserves led the authorities to increase government control over the national currency, the som. The Central Bank sharply limited and continues to limit the amount of cash soms in circulation. Virtually all transactions by enterprises, with the exception of wages and travel, must be paid by interbank transfer rather than in cash soms. While these controls, together with a prohibition against hard currency transactions outside the banking system, have restrained inflation and subsidized state purchases of priority imports, they are substantial barriers to Central Asian intra-regional trade. They have also created a pricing system where the price for goods in interbank transfers runs up to three times the cash som price, resulting in a sizable black market.

Other restrictions on bilateral trade are evident. Uzbekistan requires that all import transactions be registered with the Ministry of Foreign Economic Affairs, and it charges both import tariffs and a VAT of 20 percent. In October 1996, the IMF announced a suspension of the Stand-By Arrangement pending the establishment of corrective measures to the economy.

While these barriers and tariffs are greatly impeding trade in the region, there is an instrument already in place Central Asia that could serve to establish regional economic cooperation and integration. This is the Central Asian Union (CAU), founded in 1994. The CAU was proposed by President Karimov in reply to Kazakhstan’s President Nursultan Nazarbaev’s 1994 proposal of an EurAsian (also called Euro-Asiatic) Union. Both proposals were a response to the failure of the CIS Foreign Trade Agreement of September 1993. The CAU now includes Uzbekistan, Kazakhstan, Kyrgyzstan, and Tajikistan. It is in the best interests of the Central Asian nations to reinvigorate the CAU as a trading bloc and as an organization for the economic integration of the region.

Implications for Uzbekistan Economic Liberalization Policy

The greatest roadblocks to the overall development of the Central Asian Union have been the currency controls on the Uzbek som and its less than full convertibility. According to the World Bank, regional trade preferences can stimulate interstate trade and reduce adjustment costs during a transition phase without compromising the objective of wider integration of the countries in the international trading system. The CAU has held periodic summits and taken thoughtful decisions, but practical cooperation has been hard to implement on any significant scale.

Aside from economic cooperation and trade expansion, the Aral Sea problem and general water usage have been another main focus of CAU attention. Since the mid-1990s the countries in the region have sought to introduce comprehensive watershed management with the assistance of international institutions. However, it is difficult to foresee a diminution of water usage, since altogether 45 million people depend economically upon the Amu and Syr Darya rivers. National policies in the region are frequently decided without reference to such international resource constraints.

One obstacle to further cooperation in Central Asia is diplomatic competition between Uzbekistan and Kazakhstan. For the Central Asian Union to work effectively, the Union members, and in particular Uzbekistan and Kazakhstan, must resist the temptation to make the Central Asian Union an instrument to enlarge their spheres of influence in Central Asia. For example, should Uzbekistan use it position in the CAU to attempt to bolster its regional power, then Kazakhstan might be induced to draw closer to Russia for economic as well as political motives. Such a move, understandable as it may be, would not in the long run benefit Central Asia as a whole.

Conclusions on Uzbekistan Economic Liberalization Prospects

Central Asia has a window of ten to fifteen years to bring itself together economically. It is probable that that political leadership in the region will not change much between now and then but their economic policies are sure to change. Tariff barriers as well as non-tariff barriers that now impede the increase in regional trade must be lifted to help the countries integrate into the world economy. This cooperation is economically mutually beneficial and politically necessary. In fact, it will be vital to the region’s future stability whether China remains in one piece and extends its economic influence into the region or progressively disintegrates into regional autonomies thus experiencing the same fate of the Soviet Union.

It is almost a decade since the Soviet Union fell apart. The question now is what kind of legacy the current Central Asian leaders wish to leave. If they do not come together, they will be weak single entities, without much clout on the world arena. The success of President Karimov’s announced intention for Uzbekistan economic liberalization, privatization and marketization is essential to Central Asia’s future well-being. Without such actions, mutually beneficial regional cooperation will continue to stagnate.