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67 4 Connecting Specific Reform Policies to Investment and Business T he previous chapters provided explanations for differences between the reform policies of Kazakhstan and Uzbekistan. This chapter expands upon this analysis by examining how the implementation of reform policies has influenced foreign investment and business decisions in the two countries. Interviews conducted with representatives of U.S. firms that had either invested in or conducted business in the countries confirmed a relationship between higher levels of investment and business and Kazakhstan’s advanced economic reforms in areas such as foreign investment legislation, tax legislation, and banking system reform. Uzbekistan’s lack of progress in these areas has affected the level of investment in the country but has had a smaller impact on the number of firms conducting business, which was an unexpected finding. The results of the interviews show that while firms involved in business transactions in both countries secured financing for their business through an export credit agency—the U.S. Export-Import Bank—the use of this bank was a more crucial part of conducting business in Uzbekistan. This was because firms, in effect, mitigated their risks of conducting business there by using the U.S. Export-Import Bank. Investment and Economic Reform It was widely understood that economic reform would be necessary early in the transition process to encourage foreign investment in the transition economies. 68 CHAPTER 4 Therefore, economists and others advocated reforms aimed at creating a favorable investment climate as a necessary precursor for foreign investment (Fischer and Gelb 1991). Indeed, many studies have shown an important relationship between, on one hand, progress in areas such as political and economic stability and the establishment of a legal and regulatory framework, and on the other, increased foreign investment in the advanced reformers of the Central and Eastern European states and the Baltics (see, e.g., Meyer 1998; Michalet 1997; Bevan and Estrin 2004). Research on foreign direct investment (FDI) into the former Soviet Union states has not been as extensive, primarily because of the comparatively small amounts of investment in these countries and the concentration of early investments in the natural resource sectors (Meyer and Pind 1999). Indeed, the resource-rich former Soviet states (Azerbaijan, Kazakhstan, Russia, and Turkmenistan) generally received higher investment amounts than the other FSU states during the middle to late 1990s, as depicted in table 9. The foreign investment in these countries has been concentrated in the oil and gas sectors. In Kazakhstan, this sector had the largest share of foreign investment for the years 1993–96 and each individual year thereaer through 2001 (IMF 2002, 99; 2003a, 104). With its reserves of petroleum, natural gas, and gold, Uzbekistan has moderate natural resources according to the IMF rankings TABLE 9. NET FDI INFLOWS IN THE FORMER SOVIET UNION SUCCESSOR STATES MILLIONS OF US$ RESOURCE 1994 1996 1998 2000 2002 2004 2006 2008 RANK EST. Armenia poor 8 18 221 104 111 217 340 482 Azerbaijan rich 22 661 1,024 149 1,048 2,351 –1,301 –555 Belarus poor 11 105 201 119 453 163 351 2,143 Georgia moderate 8 54 221 153 122 420 1,115 1,177 Kazakhstan rich 635 1,137 1,136 1,278 2,164 5,436 6,663 10,732 Kyrgyzstan poor 38 47 109 –7 5 132 182 265 Moldova poor 18 23 88 127 132 146 223 679 Russia rich 500 1,665 1,734 –463 –72 1,662 10,753 20,000 Tajikistan poor 12 18 25 24 36 272 66 190 Turkmenistan rich 103 108 62 131 276 354 731 820 Ukraine moderate 151 531 744 594 698 1,711 5,737 9,683 Uzbekistan moderate 73 90 140 75 65 177 174 755 sources: IMF 2000b, 115 (source for resource ranking); EBRD 2001c, 68; EBRD 2009. CONNECTING SPECIFIC REFORM POLICIES 69 (IMF 2000b, 115). Yet Uzbekistan has received markedly less investment than Ukraine and Georgia, also countries with moderate resources. In fact, data on cumulative investment in the former Soviet states for the period 1989–2008 indicate that a country’s endowment in natural resources is only part of the explanation for high or low amounts of investment (see table 10). For example, Turkmenistan and Azerbaijan had less FDI than three nonresource -rich countries (Ukraine, Belarus, and Georgia). An early study on the transition economies surveyed firms that either planned or had undertaken investment projects in the CEE and former Soviet...

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