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Mon. October 22, 2018
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Lessons for Uzbekistan from ROK’s Development
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Introduction

This paper explores whether the development miracle of the Republic of Korea (hereafter referred to as ROK) holds any lessons that can be applied to the development of Uzbekistan in the post-Soviet era.  After the collapse of the Soviet Union, Uzbekistani policymakers reached out to the ROK for advice on how to move the Uzbek economy forward to greater prosperity. Yet, it is not clear whether Uzbek policymakers either received feasible advice or implemented what was offered. Nevertheless, working upon the premise that Uzbek policymakers were at least sincerely interested in potential lessons for Uzbekistan from the ROK experience with development, this research paper  assesses whether elements of the ROK development might still be belatedly useful to Uzbekistan today.   

First, this paper will briefly outline the major aspects of ROK’s development in the post-World War II period. Then the paper turns to Uzbekistan to set out the economic conditions that it inherited from the Soviet system, and to discuss the developments that occurred during the period of Uzbek national autonomy. Finally, the paper argues that while much of the ROK’s development experience was shaped by specific historical and geopolitical circumstances, there are nevertheless some basic policy lessons that Uzbekistan could have followed. These are the establishment of firm property rights for land, and business and state support for entrepreneurship. 

Major aspects of ROK’s economic development in the post-World War II period

This section is dedicated to three prime points of the ROK development experience which placed its development into the miracle category. These are (1) United States (USA) financial aid; (2) strong interventionist state; and (3) land reforms. First, let us examine the question of extensive civilian and military financial support for ROK’s economic transition.  At the time of ROK’s initial post-war independence from Japanese colonialism, it was essentially an agrarian country.[1]  ROK’s development miracle since the coup d'état of 1961, based on export-oriented industrialization, has been accepted as one of the most successful escapes from the Third World to modernity and prosperity.  Its economic growth is testimony to possibilities for transition from a poor, war-damaged, and mainly rural state to a newly developed industrial society in not much more than a single generation.  In this feat, ROK recorded one of the highest sustainable economic growth trajectories ever achieved with a gross national product (GNP) growth rate of approximately 9 percent annually and 7.1 percent per capita on average in a 25 year span between 1965 and 1990.[2]

From the USA’s perspective, there was every reason to back rapid development financially in ROK to prevent communism spreading in East Asia. The USA wanted ROK to become an advanced “showcase” economy with developed capitalism as a counter to Soviet and Chinese communist influence in the region. [3]

ROK was poorly endowed with natural resources. Its path to development required building a national capitalist economy by absorbing foreign resources and technologies. The initial two decades of ROK’s economic development are comparatively unique in development patterns given the extent of foreign capital infusions to finance imports of technologies. The USA’s direct investments equaled USD 418 million between the years 1962 to 1982.[4]   Foreign direct investment is considered a more recent phenomenon in ROK [5] and had not been important compared with other third world nations. In ROK, foreign companies’ participation had been enlisted mostly in joint ventures. Foreign capitalists’ instrumental position in introducing production technology and management techniques facilitated the transfer of overseas experience and knowledge.

The second major ingredient of ROK’s success derives from the role of the state in facilitating the economy to greater prosperity.[6]  It is quite clear that the state in ROK’s development was instrumental in directing external financial aid towards ROK’s chaebols (large family-owned or family-managed business conglomerates).

Park’s wise policy on creating a formula based on a comprehensive developmental state; a tight alliance between the state and the chaebol, and offering favorable conditions for foreign capital, brought three decades of extraordinary economic revolution.  Under the comprehensive developmental state policy, a series of successful five-year economic development plans with export success arose as the chosen strategy for industrialization of ROK in order to modernize its war-torn economy. [7]

The results of President Park Chung-Hee’s target in building up the Economic Planning Board (EPB) to allocate scarce capital and capitalist policy fundamentals such as property rights, land reform, and rule of law, were a major contribution to unprecedented growth in ROK making it one of the most developed and dynamic economies on earth in less than fifty years.[8]  ROK’s mature scheme of economic development was initiated with the launching of its Five-Year Economic Development Plan in 1962.[9]  When the EPB started its activities, it executed planning and coordinating functions supported by budgetary and foreign capital inducement functions.[10] Therefore, the EPB represented the key authority in formulating and realizing economic development strategies.

What makes ROK’s economic development unique is the state played a key role in orchestrating the world’s fastest miracle.[11] Hagen Koo (1987) summarizes why the state initiative was such a key ingredient of ROK's economic development: “The South Korean economy is one of the capitalist world's most tightly supervised economies, with the government initiating almost every major investment by the private sector. South Korean development is thus often defined as state-led industrialization.”

The third key component of ROK’s rapid capitalist development is the fact that land reforms were conducted within the country to create a foundation for individual property rights. Korea’s land reform was promoted as part of the USA’s anti-communism strategy for countries it temporarily occupied in the immediate   aftermath of World War II. ROK was internationally known as one of the most successful cases of American foreign policy. In fact, land reform was rapidly implemented, resulting in the elimination of landlords as a social class who had dominated rural communities.  ROK’s successful land reform has contributed to industrialization and the creation of the market economy since the 1960s. The American military had a significant effect on leading ROK’s land reform. Before dealing with the land reform, the devolving property redemption policy was examined as one of the main policies of the USA military. The actual amount of redistributed land was about 245,554 hectares, or 91.4% of the land available for distribution. The land was distributed based on the following: “1) farmers already cultivating the farmland; 2) farmers, agricultural laborers and refugees from North Korea or abroad; and 3) experienced farmers living near the farmland.” Most of the land was allocated to farmers already farming on the land, which was planned on the part of the USA to prevent misallocation of land or rent seeking.[12] President Rhee Syngman was a prime figure in passing the land reform law through the National Assembly on April 26, 1949 and, simultaneously, on implementing land reform  specified in the Constitution. Along with Japan, China and Taiwan, ROK  achieved both land reform and economic growth at the same time. It was not by chance that they achieve both land reform and economic growth.

Uzbekistan Development and Its Soviet Inheritances

This section analyzes Uzbekistan’s post-Soviet economy through the prism of state authoritarianism that was a key element in creating a new economic platform in the country. Uzbekistan, a central Asian republic, announced its independence in August 31, 1991. Despite being part of the former Soviet socialistic empire, Uzbekistan suffered little from the collapse of the former USSR. It renovated its GDP to pre-independence levels as early as 2002, and the country has since experienced a protracted phase of sustained economic growth. Uzbekistan’s current income is equal to a medium-low income ranking, and living conditions within the country have considerably improved, though mostly y in urban areas.

Uzbek national autonomy in the period of President Islam Karimov was used to comprise preferences to ameliorate its economy, accounting for setting-up a system based on import substitution under strict state control rather than liberalize its economy and adopt the economic reforms as suggested by international financial institutions. Uzbekistan chose to follow “an evolutionary approach to the transition process from an administrative-command to a market system of regulation [...] acting in line with a well-known principle of President Karimov –’do not destroy the old house until you build a new one’”.[13]

According to the IMF, Uzbekistan succeeded in economic transition which can be attributed to several factors; (1) the country's relative low degree of initial industrialization; (2) domestic cotton production; and (3) the country's self-sufficiency in energy.[14] The country's economic policies have been relatively successful since subsidized sectors were small, and the country could count on cheap sources of energy and on revenues from exports of commodities such as gold and cotton.

The resource wealth of Uzbekistan[15] gave it an advantage that protected the country from external shocks. However, this led to a relatively inefficient system where state interference in the economy was the rule rather than the exception.  Uzbek foreign trade is mostly dominated by gold, gas and cotton exports, and exchanges with Western World are very limited.                                  

Unlike neighboring countries, especially Kyrgyzstan and Kazakhstan, Uzbekistan adopted a very cautious approach to economic reform and generally preserved the economic and financial settings of USSR. President Islam Karimov openly sounded off about the free market-oriented approaches applied by neighboring countries in his 1992 book, “Uzbekistan, its Road to Independence and Progress”, judging such policies inappropriate for Uzbekistan. President Karimov continually stressed that “the own model of reforming and modernization adopted in Uzbekistan [...] has meant from the onset the denial of the methods of shock therapy, which were persistently imposed on us, as well as naive and deceptive conceptions about the self-regulating nature of market economy”.[16]

Against all predictions and criticism, Uzbekistan's economy displayed a decent growth rate in the late 1990s, reaching a rate of 5.2 % from 1997 onwards. Uzbekistan economic expansion underwent a sustainable real growth rate averaging 8.15 % per annum in the 2005-2016 period.[17] By 2002, the country's GDP was gradually higher than it had been in 1989, making Uzbekistan the first former Soviet Union republic to regain its pre- independence levels.[18]

However, Uzbekistan also endures some obvious – and some less obvious – drawbacks. Uzbekistan, geographically, lacks an access to the sea[19]  and is a “doubly landlocked” [20]– a distinction it shares only with Liechtenstein. Due to this drawback, external trade appears both more difficult and expensive. Although the country has great potential for economic success, this is far from being realized.[21]

It is no secret that Uzbekistan has not instituted land reforms, which means that all land belongs to the state. Farmers are obliged to lease land and are indirectly state employees.

Applicable Lessons from ROK to Uzbekistan  

After stated before, having gained its independence, Uzbekistan was inspired by several models of development including those of the ROK. It is obvious that Uzbekistan could not duplicate ROK’s economic development model exactly since much of the ROK development experience was shaped by specific historical and geopolitical circumstances. In particular, ROK was considered of strategic significance to the USA in the post World War 2 era. However, there are still key points that could be applied to Uzbekistan in the current period of globalization to lead it towards greater economic prosperity.  In ROK’s development, foreign unconditional investment played an extraordinary role, especially American financial help which is something that cannot be repeated for Uzbekistan as it does not possess an important geographical location. In fact, ROK did not encourage American capitalists to invest. America invested in ROK in order to prevent the spread of communism in East Asia. In Uzbekistan, the government regularly stresses that attracting foreign direct investment is a top priority, but in reality Tashkent follows a very selective approach.[22] There are some basic policy lessons that Uzbekistan could follow however.  First, the creation of a guarantee for property rights for land and business can make Uzbekistan’s economy move forward. It is clear that the state in Uzbekistan could have supported private ownership of land and big business, but compared to ROK, in Uzbekistan, the state and its upper level functionaries appropriated property and business However, ROK’s experience proves that firm support by the government made chaebol owners wealthy, and simultaneously ensured their products sold internationally. The strong, comprehensive developmental state incentivized chaebol owners with free taxation, direct foreign capital investmentsnd provided property rights for entrepreneurship and land, demanding only that chaebols used the wealth to produce price and quality competitive product. Absence of this initiative by the Tashkent government is one of the prime reasons of persisting weakness in the Uzbekistan economy.

In Uzbekistan, a firm guarantee of property rights for land and business was never initiated from the very beginning of independence. President Karimov stressed that Uzbekistan would move to capitalism through “Uzbek Model of Economic Development”.[23] However, it is evident that capitalism demands sustained property rights that are, unfortunately, not fully guaranteed in Uzbekistan even now. World experience shows that without privatizing the land and guarantee of property rights, there would never be successful capitalist development.

Mirziyoyev’s comprehensive reforms, also known as the “Mirziyoyev Model”, in which fighting corruption, economic liberalization, streamlining government and a PR campaign to promote Uzbekistan’s image in the global arena are indispensable part of his policy. His reforms on liberalization of the Uzbek economy certainly have value. Uzbekistan gained a chance to have a strong possibility on attracting foreign investors. But the absence of guarantee of property rights causes most foreign investors to avoid Uzbekistan, which is a main handicap of economic development.[24] Uzbekistan lacks a sustainable entrepreneurial basis which could lead the country to greater prosperity. All this is testimony of the necessity of reforms of  property rights for land and business.

Uzbekistan's road to a market economy with no property rights is still far from complete, and the state retains an almost total control over the country's economy. The system is also relatively murky, driven by elites and characterized by severe economic distortions. The overall business environment, notwithstanding President Mirziyoyev’s targets to soften the situation and create opportunities for business people, is difficult,   and foreign investments are encouraged only in selected cases. Social development has consistently lagged behind economic growth, and poverty has shrunk more slowly than could be expected. Given the high international demand for the creation a market economy, Uzbekistan is likely to proceed with its own unique form of development. Yet it remains questionable for how long a system characterized by dominant state ownership and heavy public officials’ interference can resist before it needs consistent economic and social reforms.

Second, government should take the responsibility of the creation of atmosphere and support for entrepreneurship, which ROK did. In fact, at the outset of Uzbek independence, President Karimov mentioned that in Uzbekistan there will not be wealthy people, but would sustain the middle class. However, soon government officials appeared as the creme de la creme. Notwithstanding this, they did not establish big entrepreneurial conglomerates which could have been miracle makers. Conversely, government officials were the main obstacle to every single entrepreneurial initiative.  It is irrefutable that  the country needed social equality in that time, but it cannot be a reason for dismissing business. However, Shavkat Mirziyoyev sees businessmen as a main element of pushing our economy forward and tries to leverages them for the sake of economy. For instance, for the  first time in the country’s history, the governor of Tashkent is a major  business owner (Djakhongir Artykkhodzhaev).[25] But we need more support and better conditions for entrepreneurship and the creation of a soft competitive business society within the country in order to reach economic prosperity. Moreover, most aspects of the economic life of the country are influenced by corruption or nepotism which President Mirziyoyev has been struggling with since his victory in the presidential elections in 2016. Recently, even the governor of Samarkand region, Turobjon Juraev, has been jailed for his corruptive acts.  Although President Mirziyoyev is trying to develop the economy of the country, he is still encircled by corrupt surroundings. Everyone in the country, even the legislative organ - the so called “Oliy Majlis”(Parliament of Uzbekistan), lacks initiative and are dependent on what President Mirziyoyev says or is engaged in, even small issues such as how to conduct weddings in the country.

Concluding Remarks

What lessons, then, does the development of ROK’s “miracle” economy hold for the economic development of Uzbekistan? As discussed, the ROK’s economic miracle is the result of certain historical and geographical occasions, and it is far from reality to duplicate it. However, Uzbekistan has to make an effort to take some lessons for its underdeveloped economy, which might lead it towards a more developed world. First, it needs a strong interventionist, yet supportive state for business representatives to run their entrepreneurial activity within the country (as seen in theeconomic miracle of ROK). The current Tashkent government should conduct reforms which were not possible for more than two decades. Secondly, a guarantee of individual property rights and firm support for big entrepreneurial society is needed. Uzbekistan’s policymakers should consider the irrefutable fact that they need to cease old attitudes towards property rights and a prospective business society in order to make successful economic development of the capitalistic world.

Khumoyun Akhmadov is currently a senior student at the University of World Economy and Diplomacy, Tashkent, Uzbekistan, majoring in International Relations and an exchange student at Nagoya University, Japan. His research interests lie in the area of development and security. He is also a close observer of new trends and developments in East Asia and Central Asia.

 

References

  1. EunMee Kim. Big Business, Strong State.Collusion and Conflict in South Korean Development, 1960-1990. State University of New York Press, 1997.
  2. Boris Rumer, Central Asia at the end of the transition. New York: Routledge, 2009.
  3. J. Zettelmeyer, IMF Working Paper, The Uzbek growth puzzle, International Monetary Fund,1998.
  4. Ministry of Finance of ROK, Kwan S. Kim. The Korean Miracle (1962-1980) Revisited: Myths and Realitiesin Strategy and                       Development. The Helen Kellogg Institute for International Studies,1991, Table 4-4.
  5. 2012 Modularization of Korea’s Development Experience: Land Reform in Korea. Sejong Special Self-Governing City: Ministry of Strategy and Finance of Republic of Korea , 2013.
  6. Richard Pomfret. “The Uzbek model of economic development”. School of Economics, University of Adelaide: The European Bank for Reconstruction and Development, 2000.
  7. Vladimir Popov, Economic miracle of post-Soviet space: why Uzbekistan managed to achieve what no other post-Soviet state achieved, (Munich Personal RePEc Archive, 2013), Figure 1, p.3
  8. World Bank 1992. EunMee Kim. Big Business, Strong State.Collusion and Conflict in South Korean Development, 1960-1990. State University of New York Press, 1997.
  9. www.theglobaleconomy.com

[1]Immediately prior to the coup d'état which brought military strongman Park Chung Hee to power,  66 percent of ROK’s   workforce   was employed in the agricultural sector and only 9 percent in industry.

[2]World Bank 1992, EunMee Kim, Big Business, Strong State.Collusion and Conflict in South Korean Development, 1960-1990, (Albany: State University of New York Press, 1997), p.1

[3] ROK's geopolitical significance to the  USA played a crucial part during the early phase of development. American loans were important for ROK's economic development, albeit not sufficient in and of themselves. However, ROK's strategic importance to the United States was an historical contingency related to the impending spread of communism at the time. It is not something that ROK  initiated, policy-wise to gain access to foreign capital.

[4] Ministry of Finance of ROK, Kwan S. Kim, The Korean Miracle (1962-1980) Revisited: Myths and Realities,in Strategy and Development, (The Helen Kellogg Institute for International Studies, November 1991), Table 4-4

[5]The government, confident of an improved investment climate in Korea, set itself an ambitious target of attracting USD 2.5 billion in foreign investment during the Fifth Plan period (1982-1986).

[6] ROK’s marvelous  “rags to riches” miracle in the aftermath of the Park Chung Hee  military coup has been treated within the purview of two broad opposing perspectives, that of neoclassical economics or “market centrists”, and that of state theory or “statists”.  Neoclassical economists maintain ROK adopt a market-centered economy to attain development as in Europe and the USA purportedly.   Statists, on the other hand, emphasize  effective state intervention in “governing” the market.

[7]EunMee Kim. Big Business, Strong State.Collusion and Conflict in South Korean Development, 1960-1990, (Albany: State University of New York Press, 1997), p.171

[8] Early period of 1960s was characterized  by the Park regime's Economic Planning Board (EPB) performing a central role by charting out the pace and method of industrialization and by coercing and courting the chaebol in order to enlist their support. ROK implemented four five-year development plans between the years of 1962 to 1981, and particularly during the Park Chung Hee administration 1961-1979.

[9]long-term economic development plan was also formulated by ROK’s founding government, the Rhee Syngman administration. However, it was a plan that had been hurriedly prepared for the purpose of receiving US aid, and President Rhee, a supporter of a liberal economy, did not believe in government-led economic planning. This long-term development plan was eventually scrapped. A long-term national plan was also put together under the President Yoon Bo-Seon and Prime Minister Chang Myon administration, shortly before the late President Park administration, but it was never implemented due to political reasons.

[10] Furthermore,  Park’s support and confidence towards the EPB, and it’s relatively close cooperative ties with the Economic Affairs Office of the President was also one of the prior driving factors that let the EPB to perform its role.

[11] ROK nationalized all banks within the country in order to engender state- Chaebol cooperation. What Park Chung Hee did is he created all opportunities for big business owners, but required that Chaebol owners ensure the global competitiveness of their  products. It was a version of ROK’s state autonomy which started working after first Five-year economic development plan and particularly all Chaebols realized to reach out to global market and most of them became national champions.

[12]2012 Modularization of Korea’s Development Experience: Land Reform in Korea, (SejongSpecial Self-Governing City:

Ministry of Strategy and Finance of Republic of Korea , 2013), p.50-55-61.

[13]Boris Rumer, Central Asia at the end of the transition, (New York: Routledge, 2009), p. 340.

[14] J. Zettelmeyer, IMF Working Paper, The Uzbek growth puzzle (International Monetary Fund,1998).

[15] The country is rich in natural resources (gold, copper, natural gas, oil and uranium) and has a sustainable agricultural base which is the testimony of Uzbekistan’s strong development potential. The country’s size and population (as the most populous Central Asia nation), its large workforce and its position (the country shares a common border with all other Central Asian republics) makes the country a natural regional leader in both political and economic terms.

[16]Ibid. footnote 8

[17]www.theglobaleconomy.com

[18]Vladimir Popov, Economic miracle of post-Soviet space: why Uzbekistan managed to achieve what no other post-Soviet state achieved, (Munich Personal RePEc Archive, 2013), Figure 1, p.3

[19]And not even to the regional larger water basin, the Caspian Sea.

[20]i.e. a country surrounded by landlocked countries

[21] Notwithstanding its GDP growth – even during the global economic recession – Uzbekistan still suffers from its incomplete transition to a fully market oriented system and still excessively reliant upon a handful of commodities (gold, oil and gas and cotton), which represent more than 60 % of its exports as well as a significant share of the country's GDP.

[22] The government generally welcomes foreign capital that is in line with its import-substitution and export-oriented industrialization policies, and discourages investments in import-consuming sectors.

[23]Richard Pomfret, The Uzbek model of economic development, (School of Economics, University of Adelaide: The European Bank for Reconstruction and Development, 2000).

[24] Even billionaires of Russian Federation and Kazakhstan such as AlisherUsmanov, IskanderMakhmudov and FattokhShodiev who have Uzbek descent are afraid of losing their finance and content themselves in Uzbekistan with some charities or benevolent funds.

[25] On the 35th extraordinary session of the Tashkent City Council of People's Deputies on Thursday, JahongirAbidovich Artykkhodzhaev was as a governor of Tashkent city. Jahongir Artykkhodzhaev (born in 1975), graduate of the Tashkent State Economic University (1996). Prior to his appointment he worked as a director of the company "Artel Engineering" and head of the state unitary enterprise Tashkent City. Founder of the group of companies Akfa. In 2015 he was awarded with the Order "Dustlik".

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