During the early years of transition output fell dramatically in almost all transitioneconomies. However, the Uzbek experience was an exception to this rule. Outputfell only slightly, soon to be followed by small but positive and persistent economicgrowth. This extraordinary performance, known as the Uzbek Puzzle, wasexplained in the literature by favourable economic conditions such as the dominanceof agricultural production, the low level of initial industrialisation and therich natural resource base.1 An alternative explanation of the Puzzle is that therelative resilience of the Uzbek economy during the early period of transitionand its reasonably stable performance since the mid 1990s was due to the styleof economic management which the Uzbek policy-makers adopted at the time.2This paper analyses the economic performance of Uzbekistan since independence.We look at initial conditions, reform choice strategy and structure of theeconomy and its performance. The main concern of the Uzbek authoritiesduring the early period of transition was the prevention of dramatic output loss,strong social protection and modernisation of the economy through strengtheningthe industrial sector. In a way, these multiple objectives influenced the authorities’choice of reform strategy. While announcing their commitment to market reforms,they had to keep firm control over priority sectors of the economy. This meant that,although reforms in small-scale enterprise and retail sectors were fast and successful,the centralised control over the ‘commanding heights’ of the economy wasnever truly abolished. To finance ambitious investment projects in prioritysectors by simultaneously maintaining production in ailing enterprises, the governmentneeded considerable financial resources, which were partly and endogenouslycreated by the state-controlled banking sector, and partly attracted fromabroad. In addition to this, considerable amounts of resources were reallocatedfrom the agricultural and energy sectors to the priority sectors of the economy through old-fashioned strategies of price controls and other direct administrativemethods.We argue that the current semi-centralised structure of the economy leads tomisallocation of scarce resources, damages property rights and reduces themarket incentive mechanism, which in the end breeds inefficiency. Althoughthe centralised management system played the foremost role in explaining theextraordinary performance of the economy in the early years of transition, the continuationof these policies created unfavourable conditions for the long-term prospectsof the Uzbek economy. Therefore, under the current regime it will not bepossible to realise the true potential of the economy. The introduction of furtherreforms that can facilitate transition to a market economy and transformbanking and financial institutions, will be the key, at this stage, to achieving sustainableeconomic growth in the future.The paper is organised as follows. First, the initial conditions of the Uzbekeconomy before transition will be discussed briefly. We will then examine thecountry’s choice of reform strategy and path of transition. Along the lines ofthese arguments, we will then discuss the current structure and functioning ofthe economy and highlight some important issues such as resource allocation,price distortions, and the degree of centralisation in the economic process.Finally a summary and conclusions will be presented.
