View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Stirling Online Research Repository Entrepreneurship and Business in Uzbekistan: Historical Perspective and Current Obstacles A thesis submitted for the degree of Doctor of Philosophy Department of Economics By Toshtemir Majidov December 2007 DECLARATION In accordance with the Regulations for Higher Degrees by Research, I hereby declare that the whole thesis now submitted for the candidature of Doctor of Philosophy is a result of my own research and independent work except where reference is made to published literature. I also hereby certify that the work embodied in this thesis has not already been submitted in any substance for any degree and is not being concurrently submitted in candidature for any degree from any other institute of higher learning. I am responsible for any errors and omissions present in the thesis. Candidate: _______________________________ Toshtemir Majidov Acknowledgements Now, having completed the work of four long years, it is a pleasure to thank the many people who made this thesis possible. My greatest debt is to Dipak Ghosh, my principle supervisor, who offered support and guidance well beyond his academic responsibilities. His insightful comments and sharp observations helped to shape, what was a raw idea, into this thesis. I am especially grateful to Sheila Dow, my second supervisor, for her valuable advices and encouragement. She has always been there for me during the whole period and I could not thank her enough for the amount of favours she has done for me. I would also like to thank all the members of staff at the Department of Economics for making my time at the Department a very enjoyable one. Finally, I owe my utmost gratitude to my wife Shahnoza for putting up with me during the most stressful of the time and surviving the ordeal and to my boys Avazbek and Davronbek for sacrificing their important playtimes ‘to let Daddy to do his work’. ii Abstract Entrepreneurship has become one of the most researched areas in recent years. Its importance has increased further by the emergence of the ‘transition countries’, the countries of Eastern Europe and the Former Soviet Union. As the transition countries strived to overhaul their economic and political systems in order to bring them in line with the rest of the market based economies, entrepreneurship and private sector development became the focus of the transition debate among the scholars and policy makers. A major part of the scholarly interest centred on the factors that hindered the development of the entrepreneurial sector. Numerous surveys of entrepreneurs and business owners have highlighted extensive lists of the most common obstacles to the development of enterprises. While the international organizations have concentrated on these reported obstacles, some members of the scholarship community have identified much more fundamental issues that both stifle the entrepreneurship development and encourage rent seeking behaviour. This study has used the theory of the allocation of entrepreneurial talents to explore the roots of the most commonly reported obstacles that the entrepreneurs face in the context of economic and political transition in Uzbekistan. We use historical evidence in conjunction with the iii contemporary survey data and our own interview results to establish the relationship between the ‘rules of the game’ that determine the system of talent allocation and entrepreneurship development. Our conclusions support earlier claims made by Baumol (1990) regarding the importance of the system of incentives and punishments in the development of entrepreneurship. iv Table of Contents Abstract ………………………………………………………………………… iii Chapter One: Introduction ……………………………………………………. 2 Chapter Two: The Theories of Entrepreneurship and its role in economic development …………………………………………. 16 2.1 Introduction ………………………………………………………………… 16 2.2 Evolution of the Term and the Concept of Entrepreneurship ………………. 19 2.3 Entrepreneurial Traits and Characteristics ………………………………….. 27 2.4 Creating Entrepreneurial Environment ……………………………………... 30 2.5 Conclusion …………………………………………………………………. 33 Chapter Three: Entrepreneurship in Uzbekistan: Historical Perspective ……… 35 3.1 Introduction ………………………………………………………………… 35 3.2 Entrepreneurship and Talent Allocation in the 18th Century Central Asia before the Revolution ……………………………………………... 36 3.3 Entrepreneurship and Talent Allocation in Soviet Union …………………… 55 3.4 Uzbekistan during Perestroika ………………………………………………. 91 3.5 Conclusion ………………………………………………………………….. 100 Chapter Four: Uzbek Economy in Transition and beyond ……………………… 103 4.1 Introduction …………………………………………………………………. 104 4.2 General Overview of Uzbek Economy since independence ………………… 115 4.3 Cotton Industry ……………………………………………………………… 125 4.4 Education …………………………………………………………………….. 133 4.5 Conclusion …………………………………………………………………… 135 v Chapter Five: Entrepreneurship and Talent Allocation in Uzbekistan: Implications for SME development………………………………………………. 138 5.1 Introduction ………………………………………………………………….. 138 5.2 The Entrepreneurship and Small Business in Transition ……………………. 139 5.3 The State of Small Business in Uzbekistan ………………………………….. 145 5.4 Obstacles to Entrepreneurship and Business ………………………………... 162 5.5 Conclusion …………………………………………………………………… 165 Chapter Six: Obstacles to SME Growth and its Roots …………………………. 168 6.1 Introduction …………………………………………………………………. 168 6.2 Finance ……………………………………………………………………… 169 6.3 Taxation …………………………………………………………………….. 185 6.4 Regulations and Licensing …………………………………………………. 190 6.5 Conclusion …………………………………………………………………. 199 Chapter Seven: Concluding Remarks ………………………………………….. 201 vi The list of Figures 1. Figure 2.1 The cycle of talent allocation, rent seeking and economic development ………………………………………… 25 2. Figure 2.2.1 Welfare gains from reforms in Transition ………….. 26 3. Figure 3.2.1 Map of Central Asia ………………………………… 37 4. Figure 3.2.2 Central Asia prior to the Russian Invasion …………. 38 5. Figure 3.2.3 Cotton production …………………………………… 43 6. Figure 3.2.4 Trade between Russia and Central Asia …………….. 43 7. Figure 3.2.5 Increase of the acreage under cotton ………………… 50 8. Figure 3.2.6 Allocations of Enterprises across sectors 1915 ………. 52 9. Figure 3.2.7 Industrial Production …………………………………. 54 10. Figure 3.2.8 Industrial Employment ……………………………….. 54 11. Figure 3.3.1 Soviet economic administration ……………………… 76 12. Figure 3.3.2 Share of ethnics Uzbeks in the membership of CPUz .. 83 13. Figure 3.4.1Social indicators in Soviet Uzbekistan ……………….. 94 14. Figure 4.1.1 Production and Consumption in Uzbekistan ………… 112 15. Figure 4.1.2 Production and Consumption of Oil in Uzbekistan ….. 113 16. Figure 4.1.3 Production of Cotton and Wheat in Uzbekistan ……... 114 17. Figure 4.1.4 Gas: Production and Consumption …………………... 115 18. Figure 4.2.1: Export Revenue, Cotton and Gold prices year on year change 1996-9....……………………………………… 116 19. Figure 4.2.2. Foreign reserves …………………………………….. 120 20. Figure 4.2.3: FDI flows and foreign debt stock of Uzbekistan ……. 122 21. Figure 4.2.4 Sectoral Allocation of FDI 1997 ……………………... 123 22. Figure 4.3.1 Cotton prices ………………………………………….. 125 23. Figure 4.3.2 World Production and Consumption of Cotton ……… 126 24. Figure 4.3.3 Uzbekistan’s share of World Cotton market ………….. 127 25. Figure 4.3.4 Cotton yields in Uzbekistan (1994-2005) …………….. 131 26. Figure 4.4.1 Growth rate of Population and Labour Force ………… 134 27. Figure 5.3.1 Number of applications per placement and passing grades at Uzbek IHEs ……………………………………… 159 28. Figure 5.3.2 Common rent seeking transactions involving insider firms 161 29. Figure 6.4.1 Percentage of respondents that were inspected in each year 196 The list of tables 1. Table 3.3.1 The share of the elite in the total income in selected countries… 79 2. Table 3.3.2 Tenure of kolkhoz chairmen in the USSR (%)…….………….. 84 3. Table 3.3.3 Economic Performance of the USSR During Perestroika ….…. 90 4. Table 3.4.1 Adult literacy ratios (% aged 15 and over, 2002) ……………... 93 5. Table 3.4.2 Some Key Economic Development figures for Soviet Republics (Per capita) ………………………………………………. 95 6. Table 3.4.3 Per Capita Investment (USSR=100) …………………………… 97 7. Table 3.4.4 Mechanization of Cotton harvesting in UzSSR ………………... 97 8. Table 3.4.5 Uzbekistan’s Interrepublican Trade Balance (In millions of Domestic Rubles) ……………………………………………. 99 9. Table 4.1.1 Timeline of major events in Uzbekistan 1991 – 1996 …………. 110 10. Table 4.1.2 GDP Growth during the years immediately following the collapse of the USSR (%) ……………………………………………... 111 11. Table 4.1.3 Budget Deficit and Inflation in Uzbekistan (1992- 96) (%) …….111 12. Table 4.2.1 Transfers between Import and Export sectors 1997-99 (in percent) ………………………………………… 119 13. Table 4.3.1 Cotton Taxes (+) and Subsidies (-) in 2004 …………………… 129 14. Table 5.3.1 SME statistics in Uzbekistan………...…………………………...145 15. Table 5.3.2 The importance of the SME sector in the Uzbek economy 2001-2005. …………………………………………………………146 16. Table 5.3.3 Allocation of SMEs across the sectors of the economy (2005, %) ……………………………………………………147 17. Table 5.3.4 the composition of the Uzbekistan’s Legislative chamber ……...150 18. Table 5.4.1 Uzbekistan’s doing business rankings ………………...………...164 19. Table 5.4.2 Top ten operations which the Uzbek SMEs found most problematic to complete during 2003-2005…………………………….165 20. Table 6.2.1 Summary statistics of the banks in Uzbekistan ………………...170 21. Table 6.2.2 Money supply