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SMEs in Uzbekistan:Achievements, Challenges
and the Future
CONTENTS
Abbreviations.....................................................................................................................3
Preface................................................................................................................................4
Part I: SME in Uzbekistan and the World..........................................................................5
Part II: Challenges facing SMEs........................................................................................8
Internal Problems............................................................................................................9External Problems.........................................................................................................10Political Problems..........................................................................................................11
Part III: Recommendations..............................................................................................12
Summary..........................................................................................................................15
Bibliography.....................................................................................................................16
Annexes............................................................................................................................18
Annex A: Main aggregates of SME development in Uzbekistan.................................18Annex B: Official Definition of SME...........................................................................20Annex C: Calculations...................................................................................................21Annex D: Deficiencies of Analysis...............................................................................22
2
Abbreviations
CEEP – Center for Effective Economic Policy
CER – Center for Economic Research
CIS – Commonwealth of Independent States
CPD – Commission on Private sector and Development
ER – Economic Review Journal
GDP – Gross Domestic Product
IE – Individual Entrepreneurship
IFC – International Finance Corporation
MDG – Millennium Development Goals
OECD – Organization of Economic Co-operation and Development
RCSE – Resource Center of Small Entrepreneurship
SME – Small and Medium Enterprises
UN – United Nations Organization
UNIDO – United Nations Industrial Development Organization
3
Preface
On the commencement meeting of the Commission on Private sector and Development (CPD), the
General Secretary of the UN, Kofi Annan, stated that Millennium Development Goals1 could not be
achieved without the help of Private sector (Namazov & Fedyasheva, 2005).
This report investigates the role that Private sector plays in the economy of the Republic of Uzbekistan
in the light of recent developments of Small and Medium Enterprises (SME). The first part of the work
analyzes motives that force governments around the world and, particularly, in Uzbekistan to show an
interest in this promising, but once forgotten, source of economic growth and development. Thereafter,
the discussion of weak and strong sides of business environment of the country is followed. The third
part examines and proposes measures, possibly to be undertaken by the government of Uzbekistan, to
stimulate SME and the whole Private sector’s growth in the nearest future. Annexes A to C contain
supplementary information for the main parts of the Report and Annex D pays attention to main
deficiencies of the carried analysis.
1 Millennium Development Goals are part of the Millennium Declaration, which was approved by world leaders in September 2000. MDG are an ambitious agenda for reducing poverty and improving people’s lives (MDG, 2004).
4
12
14
16
18
20
2000 2001 2002 2003 2004 2005
Sh
are
in G
DP
by
typ
e (%
)
30
31
32
33
34
35
36
To
tal
shar
e in
GD
P (
%)
SME Individual Entrepreneurship Total
Figure 1.1: SME share of GDP (in total and by type)
Note: Data for 2005 are for the first 3 quartersSource: CEEP, 2003-2005; CERE, 2006
Part I: SMEs in Uzbekistan and the World
In many respects success of the country’s development depends on the rightness of the chosen strategy.
The government of Uzbekistan aims at increasing SME share of GDP up to 45% by 2007. Some
organizations say that this is an ambitious project (IFC, 2005a), but this could be mistaken.
According to the official definition (see Annex B), SME include individual entrepreneurs, micro-firms
(up to 20 persons), small businesses (100), dekhan farms and private farms. But this tends to
underestimate the real weight of this sector in the economy. For instance, in Europe (with much less
labour-intensive production!) organizations with less than 250 people could be classified as SME, in
America the number is even higher (500) (RCSE, 2004 & IFC, 2005b), even Uzbekistan’s neighbour,
Kyrgyzstan, has the limit of 200 (Tokochev, 1999). Therefore, if the European definition was applied,
SME share of the country’s GDP could already equal to (or even exceed) the set objective.
But even with this narrow definition, it is easy
to see that this sector plays a significant role
in Uzbekistan. During the last 5 years, its
GDP share rose from 31% to 35.6% (see
Figure 1.1). Besides, in his speech on final
results of 2005 at the Cabinet of Ministers, the
President of Uzbekistan mentioned that SME
share of GDP was as large as 38.2%, what is
approximately 5 times more than that in 2000,
in absolute terms2 (Karimov, 2006). While this
figure is well above that in Belarus or Russia3,
it is still considerably lower than that of developed countries and CIS on average (see Table 1.1).
Table 1.1: Comparison of SME share of GDP in different countries
Europe CIS Uzbekistan Tajikistan Kazakhstan Russia Georgia Belarus
60 40 38.2 38 13 12 10 9
Note: SME share of GDP was found based on the country’s official SME definition, which varies between countries. Source: IFC, 2005c; IFC, 2005d
2 Calculations were made according to the following formula: (SME Share2005 x GDP2005) / (SME Share2000 x GDP2000)3 Who are they, individual entrepreneurs in Russia? See Box 1.1 at the end of Part I.
5
Figure 1.2: SME share of Employment Figure 1.3: SME share of Employment WorldwideSource: CEEP, 2003-2005 & CERE, 2006 Source: CERE, 2006 & IFC, 2005b
5.47.5
49
63.26565
0
10
20
30
40
50
60
70
Europe Uzbekistan Kyrgyzstan Russia Gergia Ukraine
SM
E e
mp
loym
ent
shar
e (%
)
Wojciech Huebner, in his research for the UNIDO, says that “SME sector is important for politicians
and governments because it can replace the government in the difficult task of job creation, which is
one of the most sensitive issues during the transition period, when thousands of people lose their jobs”
(Huebner, 2000). Data for Uzbekistan confirm the verity of his assumption and show that SMEs
accounted for about 66% of total employment in Uzbekistan at the end of 2005 (from 56% in 2003 -
see Figure 1.2) and 85% of newly created working places. “Small businesses and individual
entrepreneurship became the prime source in providing employment and improving living standards in
our country” said Karimov in his February speech (Karimov, 2006). Moreover, unlike in many
countries of the former Soviet Union, SMEs in Uzbekistan play the same social role as they do in
Europe (see Figure 1.3) and other OECD member-countries4 (IFC, 2005b & RCSE, 2003-4).
SMEs are especially numerous in Agricultural sector, where about 67% of all registered SMEs operate
(see Figure 1.4).Their share in Agriculture is constantly increasing, having reached about 135 points in
2005 and made up 85.5% of the total sector’s production (CERE, 2006). This growth can be partly
explained by the adopted Government Program for transformation of former collective farms
(Shirkats)5 into Private and Dekhan ones (CER, 2004). As can be seen from Figure 1.5 significant
growth of SME share is also tracked in Fee-based services. The decline in Industry sector could be
explained by the strong world competition and necessity to have big scales of production to reach
economies of scale and stay competitive, what is practically impossible for SMEs to do.
4 Organization for Economic Co-operation and Development include all most industrialized countries in the world, except Russia, China and India (OECD, 2006).5 Legally, Shirkats are independent of the Government. But in reality, Shirkats are obliged to accomplish government’s orders and subjected to the thorough control by district or regional administrations (CER, 2004 & Centrasia.org, 2006a).
6
Figure 1.4: Distribution of SMEs by industry Figure 1.5: Change in SME share by industry
Note: T&C – Transportation & Communication, T&PC – Trade & Public catering
Source: CERE, 2006
Note: see Annex C for appropriate calculations and explanation
Source: CERE, 2006
In addition to all said, it is commonly accepted, that small businesses could provide flexibility, high-
quality services, innovation and product development for the country (Sloman, 2001). SME segment
stimulates economic growth, by creating new working places and promoting competition and
productivity growth (Namazov & Fedyasheva, 2005).
Referring back to the productivity and flexibility of small businesses, it is interesting to note that for
instance tomato yields increased by only 5% in Shirkats and more than 22% in Dekhan farms between
1999-2003, while share of unprofitable businesses among them was 37.2% and 3.9% in 2003
accordingly (CER, 2004; Pugach & Abdurazakov, 2004).
But the most important role, that was given to SMEs in developed countries and which they play in
Uzbekistan and other developing countries is “formation of new, prosperous middle class layer – the
best-proven factor of a country’s long-term stability and development” (Huebner, 2000 & ER, 2005).
7
Box 1.1: Individual entrepreneurs in Russia, who are they?
“… According to the latest data by ROSSTAT, half of Russia’s trade is realized by one and a half million of individual entrepreneurs. They are especially active in the countryside, where not only retailers, but also highly developed trading companies come rarely and exclusively.
The monthly turnover of an average individual entrepreneur is less than $1000 and about $500 in the countryside. Although this is only the declared rate of turnover, profits of this business are miserable. It is impossible to think about investments here – and what for? For a new and bigger mobile shop? Generally speaking, it is difficult to call this, the business – probably it is one of forms of self-employment for the nourishment of a family”.
Expert, 2005
Box 2.1: Penalties and their consequences
According to legislation, the penalty of 10 minimal wages must be paid for each incorrectly filled invoice. So, for instance, if an account gets wrong the telephone number of a customer in 10 invoices, it would be necessary to pay 940,000 UZS ($712) in fines.
There was a case when the company with the annual turnover of 400 mil. UZS was obliged to repay 300 mil. of penalties.
Anoshkina & Minibaev, 2005
Part II: Challenges facing SMEs
Wojciech Huebner in his report “SME development in countries of Central Asia” (Huebner, 2000),
presented to the United Nations Industrial Development Organization in 2000, draws attention to the
following:
“The success of particular transition economies in SME development seems to originate in adequate
systematic solutions applied within three distinct areas:
- macro-economic conditions that provide incentives to develop business and in which main SME
development barriers are minimized;
- ability to properly train people and develop their entrepreneurial skills; and
- ability to create conductive financial and support infrastructure for SME.”
This part of the report analyzes the current economic and legal environment of Uzbekistan, putting
particular attention to the problems that embarrass development of SMEs.
It is possible to separate SME problems into 3 broad categorizes:
- Internal problems, arising inside the business itself (e.g. poor management skills);
- External problems, appearing on the Government and Business level (legal framework); and
- Political problems resulted due to the absence of the real cooperation between SMEs and the
Government (inability of government bodies to understand problems of Small businesses).
This is briefly summarized in Figure 2.1. The
following discussion is based on the strong belief that
three distinct types of problems are strongly
interrelated with Political and Internal, rather than
commonly believed External problems, defining the
success of development of SMEs. So, for instance, it
is the absence of the real business cooperation and
non-participation in the political life of the country,
that allow the Cabinet of Ministers and other
Governmental bodies to adopt laws harmful for local
8
businesses. It is the absence of sufficient knowledge and trainings that become the main cause of
million penalties (for the real example see Box 2.1).
Figure 2.1: Problems facing SMEs in Uzbekistan
Internal Problems
Internal problems are those that arise on the company (business) level. They include such issues as
poor management, unclear division of labour, lack of legal and practical knowledge and unwillingness
or inability to attend refresher courses. While these are only internal problems, they influence the
performance of the whole company and hence can considerably distort its competitive advantage.
Dmitriy Alaudinov, the General director of the Business Consulting company in Uzbekistan, notes that
an effective maintenance of circulation of documents turns into big problems for many local
entrepreneurs. In its turn, this can lead to the loss of quality control, what according to the research
could cost the company up to 60% of its working time just for eliminating products/services’ faults and
defects (Naumov, 2005).
The overwhelming majority of SMEs in Uzbekistan do not use computer technology in their work
(IFC, 2004), what limits their abilities to receive, communicate and process detailed and up-to-dated
information about their existing and potential customers, track changes in their tastes and preferences
and carry out a purposeful and reliable marketing research.
9
Frequently, an Uzbek entrepreneur does not have
starting capital, except for his diligence and family’s support.
It seems that Uzbek banks are still alien and unattainable for many local businesspeople.
According to IFC only 41% of SME representatives have adequate knowledge of legislation regulating
inspections (IFC, 2005a) and hence numerous law violations by inspecting officials could stay
unnoticed, undetected and undisputed through the courts.
External Problems
Mainly, External problems of SMEs come to the difficulty
with which they:
- compete with other firms (monopolies, companies with
big tax concessions etc.)
- borrow from and transfer money within financial
institutions;
- convert local currency into foreign;
- bear huge tax deductions;
- obtain licenses and certifications;
- encounter during frequent inspections;
- receive necessary information.
Uzbek small entrepreneurs frequently do not have access to
starting capital. Banks are lending money (if at all!) at high
interest rates and only for big amounts (ER, 2005 & The
Economist, 2005). For SMEs and especially individual
entrepreneurs, this is an unbearable burden and many
businesspeople refuse to open a business, even not trying to
work. Banks also perform functions inappropriate for
financial institutions, which damage their reputation and
push off many entrepreneurs (IFC, 2005).
Many representatives of SME sector express their anxiety about Taxation system. Specialists are saying
that tax rates in Uzbekistan are not very high, but the complicated and contradictory tax legislation with
its permanent changes, can make a prosperous firm, needing to pay just 20% tax a bankrupt (ER, 2005
&IFC, 2005).
10
Problems of SME are constantly being discussed, but mainly on paper and without the business itself.
Political Problems
There is a question, why in the country, whose legislation
system and economic results are put as an example for other
countries (IFC, 2005c,d), SME representatives still say that
it is difficult to operate in Uzbekistan (IFC, 2005). The
answer is that, the adopted laws are good on paper, but they
do not work in practice.
Entrepreneurs do not have any sufficient power to influence
on anything. The Liberal Democratic Party of Uzbekistan,
formed as the party of businesspeople and taking up the second place in the past election to the
Parliament, in reality is powerless. All recent decrees and resolutions that had the direct effect on SMEs
and other businesses were issued by the Executive power (President, Cabinet of Ministers, hokimiyats
etc.), rather than Legislature, without their discussion in the Parliament or even the round table with
businesspeople. This type of problems would exist until SMEs did really obtain sufficient power and
start to participate in law-making in all bureaucracy levels.
11
Part III: Recommendations
In the recent work “SMEs, Growth, and Poverty: Cross-country Evidence” of Thorsten Beck, Asli
Demirguc-Kunt and Ross Levine (Beck et al., 2003-4) there is a provocative question of whether SMEs
really do what the world community are expected them to do. While the work does not provide the
definite answer, it concluded that it is the general business environment of the country, rather than
SME sector itself that stimulates economic growth, employment and innovation.
Even if this conclusion is correct, it is SMEs that respond with extraordinary sensitivity to all of the
positive and negative developments in the business environment (IFC, 2004). Therefore, the good
business environment is first of all the environment with thriving and prosperous SME sector. But what
should be done to make it really prosperous?
It is necessary to eliminate or at least reduce and soften problems of SMEs that were discussed in the
preceding part. It seems appropriate to:
1)Encourage the education among SME representatives, by providing tax concessions to
businesses, sending members of their staff to refresher courses and conferences;
2) Assist in developing courses adopted for needs of people deciding to open their own business6;
3)Improve the access of SMEs to financial system by developing microfinance sector (small loans
with low interest rates), as India, Brazil and USA already do (The Economist, 2005);
4)Forbid banks to disclose information about their clients to third persons, except for cases,
established by the law;
5)Improve the tax legislation and forbid introduction of frequent changes that harm businesses
(see Box 3.1 for recent developments in this sphere);
6)Encourage people to open their own small businesses, through educative TV, Internet and other
media programs;
7)Provide fair rules for all businesses, including monopolies and big companies, possessing big tax
concessions
8)Encourage the development of new forms of businesses and enterprises in SME sector
(see Box 3.2 for new promising type of business);
6 The Government is moving in this direction. Since 2004 the new “Management of agricultural enterprises” speciality was introduced in Institutes and Universities of Uzbekistan (Haitov et al., 2005). However, this course, as the majority of others, is prepared for those interested in agriculture. Similar courses for other specialities are required. The UK and EU experience in this sphere seems very successful and appropriate (Sloman, 2001).
12
But this will work and only work if the interests of SME representatives themselves would be taken
into consideration. Therefore the Government’s prime objective in the short-run must become the
establishment and maintenance of good relations with SME sector and all other businesses, through
organizing round-tables, encouraging Business Communities and refusing to take actions individually,
without the consultancy with Business.
13
Box 3.1: New step on the road to local business
According to the latest IFC survey “Business environment in Uzbekistan as seen by small and medium enterprises”, 62% of respondents are not satisfied with the country’s taxation system. Permanent tensions between entrepreneurs and Tax regulation officers, numerous complaints and the vivid slowing down of SME development in 2004 led to January President’s decree “On Drafting a New Edition of the Tax Code of the Republic of Uzbekistan”. The new Tax Code has to provide:
- Reduction of the tax burden;- Equalization of tax treatment; - Enhancement of the role of taxes; - Direct action of the Tax Code; - Stability of the tax system; and- Improvement of tax administration.
Many experts are sure that properly prepared, new Tax Code could solve many today’s questionable issues and improve the general business environment in Uzbekistan. Meanwhile, before the adoption of new Code, the government of the country, as usual, is trying hard to improve taxation system independently. Since 1 of April 2006 businesses, that are engaged in providing auditing, leasing, insurance services as well as services in education and accounting are free from paying tax on revenue and the unified tax for the period of 3 years.
IFC, 2005a; ER, 2005; Centrasia.org, 2006b
14
Box 3.2: Outsourcing. What is it and for whom?
Producers of goods and services frequently outsource their work. They hand operations they used to carry out in-house to outside firms, dividing up growing complexity into more manageable pieces. Production companies outsource production of their goods, banks – their services and even hospitals – some of their functions (such as processing of patients’ medical forms, medical consultancies and simple operations).
According to estimates, outsourcing generates approximately $1.4 trillion worth of goods and services, which is only “8 percent of 50 possible” IBM’s report suggests. With transportation and communication costs rapidly falling, the distance between consumer and producer does not play a big role anymore. This opens big opportunities for developing countries.
Malaysia, China and especially India are already exploiting these possibilities. Foreign companies opened 60 000 factories in China between 2000 and 2003 and doubled the $200 billion country’s export. By 2008, outsourcing could employ over 4 million Indians and generate $80 billion-worth of sales for India.
Having cheap and educated labour force in abundance, why not for Uzbekistan to enter this profitable market? Why not to attract new investments and develop this sector at home? It seems that the start is already given (President’s decree “On measures for stimulation of increasing cooperation between big industrial plants and production of services on the base of home labour” from 05.01.2006), but further steps and actions are required.
The Economist, 2004
Summary
The importance of SME sector in Uzbekistan acquires the increasingly vivid forms. It already
constitutes more than 38% of the country’s GDP, employs two thirds of the labour force and most
importantly, shapes the new country’s middle-class, proving its reliability and enormous potentiality.
Being aware of that, the Government of Uzbekistan is perpetually trying to facilitate the development
of SMEs. Nevertheless, many problems continue to exist, putting considerable pressure on local
businesses and their likely growth. However, not all available instruments have been enabled so far,
hence strong prerequisites of future positive changes in SME and consequently Private sector’s
development remain and hold true.
15
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Annexes
Annex A: Main aggregates of SME development in Uzbekistan
2000 2001 2002 2003 2004 2005GDP (in billion UZS) 3255.6 4925.3 7450.2 9837.8 12190 15100 Percentage share in GDP 31 33.8 34.6 35 35.6 34.3
-Small & Medium Enterprises 13.1 14.8 15.7 16.5 18.6 17.7 -Individual Entrepreneurship 17.9 19 18.9 18.5 17 16.6
Number of Registered SMEs (thousands) 149.3 177.7 215.7 230.6 237.5 261
-Industry - - 19.7 21 20.1 18.9-Agriculture - - 101.7 119.6 146.2 172.8-Transportation & Communication - - 1.9 2 2.3 2.6-Construction - - 11 10.9 10.9 11.3-Trade & Public catering - - 32.6 41.8 41.9 39.1-Other sectors - - 48.8 35.3 16.1 16.3
Employment share (%) - - - 56.7 60.9 65.64Total absolute figures (thousands) 4462.7 4842.5 5086.4 5436.7 6038.3 6627
-Excluding Individual Entrepreneurships 745.3 801.8 900.3 1062.2 1349 1347
SME share by industry (% from total) -Industry 11.3 14.1 14.1 10.9 10.7 9.1
-Medium Entrepreneurship 4.2 6 5.5 - - --Small Entrepreneurship 7.1 8.1 8.6 - - -
-Individual Entrepreneurship 2.9 3.4 4 - - 3.2
-Agriculture 72.4 75.6 76.4 78.1 80.9 85.5-Medium Entrepreneurship 0.3 0.6 0.2 - - --Small Entrepreneurship 72.1 75 76.2 - - 63.2
-Farms 5.1 6.9 9.9 - - --Personal Subsidiary Plot 66 66.3 65.5 - - -
-Retail Services 45.9 45.8 43.8 42.4 41.8 42.9
-Medium Entrepreneurship 3.4 3.8 3.7 - - --Small Entrepreneurship 52.5 42 40.1 - - -
-Individual Entrepreneurship 32.2 32 30.1 - - 27.3
-Fee-based Services 37.9 39.9 41.3 45.4 47.4 50.9-Medium Entrepreneurship 1.3 1.1 1 - - --Small Entrepreneurship 36.6 38.8 40.3 - - -
-Individual Entrepreneurship 32.2 34.1 34.9 - - 44.2
Number of SME participating in the World Trade 2832 2452 2690 3300 3778 3472
Export share (%) 10.2 9 7.5 6.9 7.3 5.8Import share (%) 27.4 26.9 24.9 33 32.7 32.4
Note: Data for all items in 2005, except GDP, are given for the first 3 quarters of the year 2005.
18
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Annex B: Official Definition of SME
According to the Decree of the Republic of Uzbekistan dated August 31, 2003 “On Amending and Expanding the Decree of the President of the Republic of Uzbekistan “On the Development of Private Enterprise, Small and Medium Business” dated April 9, 1998” following businesses and business entities are counted as SME and granted with all concessions and privileges given to SME:
Individual Entrepreneur
A natural person, without the status of a legal entity, engaging in entrepreneurial activities;
Micro-firm
A legal entity whose annual average number of employees engaged in manufacturing sectors does not exceed 20, in services and other non-manufacturing sectors does not exceed 10, in wholesale, retail, and public catering does not exceed 5;
Small Enterprise
A legal entity whose annual average number of employees is greater than that of a micro-firm but is: less than 100 for those engaged in light and food industries, in metalworking, in making instruments, in woodworking, and in manufacturing construction materials; less than 50 in machine building, in metallurgy for fuel/power and chemical industries, in growing and processing agricultural produce, in construction and other industrial-manufacturing sectors; less than 25 in science, provision of scientific services, transportation, communications, services (except insurance companies), trade and public catering, and other non-manufacturing sectors;
Dekhan Farm
A family enterprise engaged in low volume production and sale of agricultural produce. Its family members produce on a family farmstead which is a heritable possession of the head of the family in lifetime. A dekhan farm may be incorporated or unincorporated;
Private Farm
An independent economic entity with the rights of a legal entity based on the cooperative efforts of its members who produce agricultural produce on parcels of land rented on a long-term basis;
Source:
International Finance Corporation (IFC), 2004. Business Environment in Uzbekistan as seen by small and medium enterprises. Tashkent: IFC.
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Annex C: Calculations
Figure 1.5, presented in Part I “SMEs in Uzbekistan and the World” of this report was build using
the following data (Index numbers):
SME share of total production by industry (%) 2000 2001 2002 2003 2004 2005Industry 11,3 14,1 14,1 10,9 10,7 9,1Agriculture 72,4 75,6 76,4 78,1 80,9 85,5Retail Services 45,9 45,8 43,8 42,4 41,8 42,9Fee-based Services 37,9 39,9 41,3 45,4 47,4 50,9
Index numbersIndustry 100,0 124,8 124,8 96,5 94,7 80,5Agriculture 100,0 104,4 105,5 107,9 111,7 118,1Retail Services 99,8 99,6 95,2 92,2 90,9 93,3Fee-based Services 100,0 105,3 109,0 119,8 125,1 134,3
The index number for the year 2000 was taken as 100. The indexes for subsequent years were
calculated according to the following formula:
Index Year n = (Share Year n x Index 2000) / Share Year 2000,
where Year n is the year of interest (2001, 2002, 2003, 2004, 2005)
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Annex D: Deficiencies of Analysis
In this report it was tried to discuss the role that SMEs play and problems they encounter, having
operated in the Republic of Uzbekistan. This work does not tend to persuade anybody in the
correctness of the presented argumentation, but merely tries to sum up already stated opinions and
available statistics for SMEs development, generally, and that of Uzbekistan, particularly, in a coherent
and consistent way.
At the same time, this analysis has its several shortcomings, the main of which are:
1) Usage of secondary data, the accuracy and consistency of which could not be tested or verified;
2) Usage of out-dated information from time to time;
3) Absence of the work experience in SME sector and the real dialogue with local businesspeople and
government officials; and
4) Simplicity of argumentation with omission of some key facts and appropriate numerical analysis.
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