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Introduction
- Michigan State University Press
- Chapter
- Additional Information
1 Introduction I t has now been two decades since the dissolution of the Soviet Union and the emergence from it of fieen independent republics. These new states embarked on unprecedented transitions from economies in which the government made all economic decisions into market-oriented economies. Indeed, many of these new states had never functioned with any type of a market structure, nor even existed as political units within their current boundaries. In these unprecedented circumstances, the newly independent republics followed various paths toward market economies. The purpose of this book is to explain the divergent economic reform processes of two of these former Soviet republics: Kazakhstan and Uzbekistan. Kazakhstan and Uzbekistan, the two largest of the five Central Asian republics by land area and population respectively, began their economic reform almost in tandem. In 1992, both countries initiated programs to privatize state-owned assets and to liberalize controls in order to allow the market, instead of the government, to set prices for goods. A problem with price liberalization was the likelihood of inflation, as prices of goods formerly controlled were allowed to reach levels determined by the market. Therefore, the transition economies were advised by the IMF and other economic advisors to establish stabilization programs to control inflation. Kazakhstan enacted its stabilization program in January 1994; Uzbekistan followed in November 1994. At this point their progress toward reform diverged, with Kazakhstan proceeding further in that direction, 2 INTRODUCTION and Uzbekistan slowing almost to a halt. Thus the question: Why did Kazakhstan continue its economic reforms, while Uzbekistan did not? Kazakhstan had completed price liberalization by the end of 1994, effectively ending the role of the government in setting prices. Uzbekistan liberalized most prices by the end of 1996, but the government continued to set energy prices and kept the state order system for goods produced domestically, such as cotton and grain (IMF 1995, 13). The countries diverged most markedly in their reform policies in 1996. In that year, Kazakhstan agreed to allow its currency to be completely convertible, meaning that the government would no longer attempt to control its reserves of foreign currency. This single decision was one of the most important economic reforms that the county had implemented to date.1 In that same year, Kazakhstan was also able to secure an advanced loan through the International Monetary Fund that allowed the country to focus on additional areas of structural reform. Uzbekistan, on the other hand, implemented an institutionalized multiple exchange rate regime in 1996 in order to improve its balance of payments and to maintain control over currency reserves. As a result of the decision to continue this distorted exchange rate system, the IMF suspended its only lending arrangement with Uzbekistan in March 1997. Uzbekistan did not until 2003 agree to allow its currency to be convertible. This volume will explain why Kazakhstan continued with economic reform and lessened governmental involvement in the economy, whereas Uzbekistan stopped reform policies and increased governmental involvement in the economy. Relatively early in the transition process, observers began to categorize the former Soviet republics in two groups: the advanced reformers and the later reformers. The countries in Central and Eastern Europe (CEE) and the Baltic states became known as advanced reformers because they had made the most progress in first political and then economic reforms. Political reforms included the change from Communist to democratic governments. The different choices that the former Communist states made about their new political and economic systems were influenced by a number of factors. The CEE and the Baltic states had longer legacies of democratic government and a market economy than the former Soviet republics and wanted to implement policies that would get them closer to membership in the European Union (Orenstein 2001; Orenstein and Haas 2005, 136). In addition to the influence of their pre-Soviet history, the geographical proximity to Western Europe (and Western markets) was an additional reason the CEE and Baltic states proceeded with reform more quickly than the former Soviet Union countries.2 A logical conclusion to draw from the experience of INTRODUCTION 3 these advanced reformers was that the political reform coupled with the economic reform had led to their early success. The early comparative statistical analyses of the transition economies carried out by Anders Åslund, Peter Boone, and Simon Johnson (1996) and Steven Fish (1998) confirmed that a change in political leadership (non-Communist) led to progress in economic reforms. The former Soviet...