Divergent paths, divergent outcomes: Linking differences in economic reform to levels of US foreign direct investment and business in Kazakhstan and Uzbekistan

Central Asian Survey

Volumn 26, Issue 3, 2007, Pages 355-372

  Blackmon, Pamela ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

BUSINESS DEVELOPMENT; COMPARATIVE STUDY; ECONOMIC REFORM; FOREIGN DIRECT INVESTMENT; TRANSITIONAL ECONOMY;

ASIA; EURASIA; KAZAKHSTAN; UZBEKISTAN; WEST ASIA;

EID: 37549043580     PISSN: 02634937     EISSN: 14653354     Source Type: Trade Journal    
DOI: 10.1080/02634930701702563     Document Type: Article

References (98)

1. Stanley Fischer and Alan Gelb, "The process of socialist economic transformation', Journal of Economic Perspectives, Vol 5, No 4, 1991, pp 91-105.
2. For examples of these studies, see Klaus Meyer, Direct Investment in Economies in Transition (Cheltenham, UK: Edward Elgar, 1998)
3. Charles Albert Michalet, Strategies of Multinationals and Competition for Foreign Direct Investment: The Opening of Central and Eastern Europe (Washington, DC: The World Bank, 1997)
4. Alan Bevan and Saul Estrin, 'The determinants of foreign direct investment into Europe and transition economies', Journal of Comparative Economics, Vol 32, No 4, 2004, pp 775-787.
5. Klaus Meyer and Christina Pind, 'The slow growth of foreign direct investment in the Soviet Union successor states', Economics of Transition, Vol 7, No 1, 1999, pp 201-214.
6. Uzbekistan's oil potential was stated as being 'significant' as a result of the discovery of fields in the Namagan and Fergana regions, although the current production levels were categorized as minor (The World Bank, Uzbekistan: An Agenda for Economic Reform, Washington, DC: The World Bank, 1993, pp 4-5).
7. European Bank for Reconstruction and Development (EBRD), Transition Report Update (London: EBRD, 2005), p 19.
8. International Monetary Fund (IMF), 'Republic of Kazakhstan: Recent economic developments', IMF Staff Country Report, 97/67, IMF, Washington, DC, August 1997, p 5
9. IMF, 'Republic of Uzbekistan: Recent economic developments', IMF Staff Country Report, 97/98, IMF, Washington, DC, October 1997, p 5.
10. IMF, 'Republic of Kazakhstan', op cit, Ref 6.
11. EBRD, Transition Report (London: EBRD, 1997), p 177.
12. For more detailed analysis about historical, political and geographic factors as to why these two countries have continued with economic reform at different levels, see Pamela Blackmon, 'Back to the USSR: Why the past does matter in explaining differences in the economic reform processes of Kazakhstan and Uzbekistan', Central Asian Survey, Vol 24, No 4, 2005, pp 391-404.
13. EBRD, op cit, Ref 8, pp 211-213.
14. IMF, 'Republic of Uzbekistan: Recent economic developments', IMF Staff Country Report, 00/36, IMF, Washington, DC, March 2000.
15. Interviews with representatives from large US firms that had invested or conducted business in Kazakhstan and Uzbekistan were conducted in Washington, DC, from September to October 2003. Specific information on the firms is provided in the section describing the characteristics of the firms, as well as in Table 2. Additional interviews were carried out during this time period, as well as during June 2001 and July 2002, with other members of the business, governmental and policy communities in order to complement the information provided by firm representatives. These interviews were conducted with officials at the Embassy of Kazakhstan, the Embassy of Uzbekistan, the American-Uzbekistan Chamber of Commerce, the US-Kazakhstan Business Association, the US Export-Import Bank, the US Department of Commerce and other trade officials. Interviews with economists from the IMF and the World Bank were also conducted during these time periods in order to provide more specific information about progress in economic reform.
16. Gregory Brock, 'Foreign direct investment in Russia's regions 1993-1995. Why so little and where has it gone?', Economics of Transition, Vol 3, No 4, 1998, pp 349-360.
17. Hans-Peter Lankes and A. J. Venables, 'Foreign direct investment in economic transition: The changing patterns of investments', Economics of Transition, Vol 4, No 2, 1996, pp 331-347.
18. In an interview with IMF economists, they stated that Turkmenistan had made the least progress on economic reforms among the Central Asian States
19. Uzbekistan was second to last (Author interview with IMF economists, 9 July 2002).
20. Theodore Moran, Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition (Washington, DC: Institute for International Economics, 1999), pp 141-143.
21. Anton Pedro Hendrik van Meurs, Petroleum Economics and Offshore Mining Legislation: A Geological Evaluation (Amsterdam: Elsevier, 1971)
22. Theodore Moran, ed., International Political Risk Assessment: The State of the Art (School of Foreign Service, Georgetown University, 1981), p 8.
23. For specific examples of economic and political concerns of investors investing in the fSU states, see Jonathan Stern, 'The perspectives of the different players', in David Dyker, ed., Investment Opportunities in Russia and the CIS (Washington, DC: The Brookings Institution for the Royal Institute for International Affairs, 1995), pp 59-73.
24. For a study detailing the importance placed on the need to 'overhaul' the tax systems in the former communist states to adequately reflect economic activities as determined by market forces, see Liam Ebrill and Oleh Havrylyshyn, 'Tax reform in the Baltics, Russia, and other countries of the former Soviet Union', IMF Occasional Paper No 182 IMF, Washington, DC, 1999).
25. For studies finding that FDI is an indicator of successful reforms, see EBRD, Transition Report (London: EBRD, 2000) - Chart 4.9, p 87 shows a correlation between FDI per capita and progress in transition indicators
26. and see Anders Åslund, Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge: Cambridge University Press, 2002), pp 431-437.
27. Clinton Shiells, 'FDI and the investment climate in the CIS countries', IMF Policy Discussion Paper, PDP/03/5, IMF, Washington, DC, November 2003, pp 1-33.
28. EBRD, Transition Reports (London: EBRD, 1999, 2002).
29. EBRD, 1999, op cit, Ref 21, pp 40, 139-140.
30. EBRD, Transition Report (London: EBRD, 2001), pp 80, 81. This Transition Report was titled 'Energy in transition' and Chapter 4 in particular 'Managing energy resource wealth', details the reform and investment climate challenges of the energy rich countries of the region.
31. For the years 1993-1998, investment from the USA comprised the highest percentage of FDI into Kazakhstan at 32.9%, Gosudarstvennyi komitet Respubliki Kazakhstan po statistike i analizu, Kratkii statischeskii ezhegodnik Kazakhstana (Almaty, Kazakhstan, 1999), p 117. Investment amounts from the USA also comprised the highest percentage for the years 1999-2001 (IMF, 'Republic of Kazakhstan: Selected issues and statistical Appendix', IMF Country Report, 03/211, IMF, Washington, DC, July 2003, p 103). Uzbekistan's governmental authorities do not provide detailed information on their FDI inflows by industry in Staff Country Reports published by the IMF. Information provided to me by an official at the Embassy of Uzbekistan indicated that the industrial sector received the largest share of foreign investment and credits at 69.3%. The second largest sector was transportation at 12.4%, and the sector of 'others' was third at 11.7% (information provided by the Embassy of the Republic of Uzbekistan, 2001).
32. Information on the share of US investment into Uzbekistan is not easily available. However, the cumulative direct investment position of US firms for 1999 (data were suppressed for 1994-1998) was US$167 million (www.bea.gov). Cumulative direct foreign investment in Uzbekistan for the years 1994-1999 was US$567 million (EBRD, op cit, Ref 23, p 68). Direct foreign investment in Uzbekistan for the years 1994-1999 averaged US$94.5 million each year, and US direct investment averaged about US$94.5 million each year; therefore the percentage of US direct investment into Uzbekistan was about 29% for each year between 1994 and 1999.
33. Firms were identified from the following data sources: EBRD, Uzbekistan: Investment Profile (London: EBRD, 2001)
34. EBRD, Kazakhstan: Investment Profile (London: EBRD, 2001)
35. Organization for Economic Cooperation and Development (OECD), Investment Guide for Uzbekistan (Paris: OECD, 1996)
36. OECD, Investment Guide for Kazakhstan (Paris: OECD, 1998)
37. The US-Kazakhstan Business Association, Kazakhstan: An Investment Prospectus (Washington, DC: The US-Kazakhstan Business Association, 2000). Officials at the Embassy of Uzbekistan also provided additional information on firms with investment and business in Uzbekistan (Author interviews with official from the Embassy of Uzbekistan, 11 July 2002; 9 October 2003).
38. For additional detailed information on the firms involved in Kazakhstan, see Richard Pomfret, 'Kazakhstan's economy since independence: Does the oil boom offer a second chance for sustainable development?', Europe-Asia Studies, Vol 57, No 6, 2005, pp 859-876
39. Martha Brill Olcott, Kazakhstan: Unfulfilled Promise (Washington, DC: Carnegie Endowment for International Peace, 2002), pp 128-171, and Appendix 10, pp 261-262.
40. Elite interviews were chosen for this study as opposed to survey research in order to gather information about each interviewee's interpretation of the impacts of areas of reform for their investment and business decisions. For an example of a previous study that utilized anonymous elite interviews with representatives from oil and gas companies, see Pauline Jones-Luong and Erika Weinthal, 'Contra coercion: Russian tax reform, exogenous shocks, and negotiated institutional change', American Political Science Review, Vol 98, No 1, 2004, pp 139-152.
41. Representatives from four service firms, all of which had provided services in both countries were interviewed. However, a representative of one firm informed me that their projects in Uzbekistan 'did not come to fruition'; and furthermore, that 'the project had closed down' (Author interview with a representative of a service firm, 23 September 2003).
42. Author interviews with representatives of service firms, September-October 2003.
43. Author interview with a representative of a natural resource firm, 14 October 2003.
44. Author interviews with representatives of natural resource firms, September-October 2003.
45. Author interviews with representatives of natural resource firms, 30 September 2003a, 30 September 2003b, 14 October 2003. (The a and b references here and following are used to indicate different interviews with different firm representatives on the same day.)
46. Elena Suhir and Zlatko Kovach, 'Administrative barriers to entrepreneurship in Central Asia', Center for International Private Enterprise, Washington, DC, 30 June 2003, p 4.
47. EBRD, Transition Report (London: EBRD, 1996) p 157.
48. IMF, 'Republic of Kazakhstan - recent economic developments', IMF Staff Country Report 96/22, IMF, Washington, DC, March 1996), Appendix II Summary of the Tax System, sections 1.2 and 3.1, pp 55-57. For a comparative analysis about the importance of tax reform legislation to facilitate investment in the energy sector, see Erika Weinthal and Pauline Jones-Luong, 'Energy wealth and tax reform in Russia and Kazakhstan', Resources Policy, Vol 27, 2001, pp 215-223.
49. OECD, 1998, op cit, Ref 26, pp 115-118.
50. Ibid.
51. PSA legislation has also been noted to be a 'key aspect of creating a more attractive investment climate' for investment in the oil sector of the CIS energy-rich states (EBRD, op cit, Ref 23, pp 83-84). For a comprehensive study of the legal framework involved in production sharing agreements and arbitration clauses, see, Daniel Johnston, International Petroleum Fiscal Systems and Production Sharing Contracts (Tulsa, OK: PennWell, 1994).
52. Author interview with a representative of a natural resource firm, 23 September 2003.
53. Ibid.
54. Author interview with a representative of a natural resource firm, 2 October 2003. As early as 1991, Nazarbayev had brought in Western economists to hear their advice on economic reform and privatization. This decision to bring in economists, and to develop a new, younger group of reformers was stated as being very important for Kazakhstan's approach to economic reform (Author interview with a World Bank economist, 12 July 2002; Author interview with an IMF economist, 8 July 2002).
55. Martha Brill Olcott, Central Asia's Second Chance (Washington, DC: Carnegie Endowment for International Peace, 2005), pp 88-90
56. For information on the 'advisability' for US firms to partner with a domestic firm in order to conduct business with the state oil company and its affiliates, see Azhar Kadrzhanova, 'Energy sector overview in Kazakhstan, June 2005', http://buyusainfo.net/docs/x_5598441.pdf (accessed 6 March 2007).
57. Michael Lelyveld, 'Kazakhstan: Western fuel investors face further setbacks', RFE/RL, 29 October 2001.
58. RFE/RL, 'Nazarbayev promises investors no revision of contracts ⋯ but not adverse to voluntary donations', RFE/RL Central Asia Report, Vol 1, No 22, 20 December 2001.
59. EBRD, op cit, Ref 23, p 158.
60. Author interview with a member of the business community, 15 September 2003.
61. Katherina Dittmann, Hella Engerer and Christian von Hirschausen, 'Much ado about ⋯ little? Disenchantment in the Kazak and Caspian oil and gas sectors', in Lutz Hoffmann, Peter Bofinger, Heiner Flassbeck and Alfred Steinherr, eds, Kazakhstan 1993-2000 Independent Advisors and the IMF (New York: Physica, 2001), pp 127-148.
62. Heather Timmons, 'Oil majors agree to develop a big Kazakh field', The New York Times, 26 February 2004, pp W1, W7.
63. Author interview with representative of a natural resource firm, 23 September 2003b. The recent decision of the Kazakh government to agree to export some of its oil via the new Baku-Tblisi-Ceyhan (BTC) pipeline will also increase the country's export potential. President Nazarbayev's official visit to the USA on 29 September 2006, to discuss among other issues, a commitment to increase its oil exports through this pipeline is an indicator of the country's growing geopolitical strategic position to the US as well as other countries in the region, including China.
64. For background information, see Joanna Lillis, 'Nazarbayev visit to Washington: Looking for recognition as a regional leader', Eurasianet.org, 26 September 2006.
65. Author interviews with representatives of natural resource firms, 2 October 2003; 14 October 2003. The latter representative referred to PSAs as 'islands of legality'.
66. Pauline Jones-Luong and Erica Weinthal, 'Prelude to the resource curse: explaining oil and gas development strategies in the Soviet successor states and beyond', Comparative Political Studies, Vol 34, No 4, 2001, pp 367-399.
67. Author interview with an official from the embassy of Uzbekistan, 11 July 2002; 9 October 2003. Author interview an official from the Department of Commerce, 16 October 2003.
68. The World Bank, Uzbekistan: An Agenda for Economic Reform (Washington, DC: The World Bank, 1993), p xvii.
69. Author interviews with representatives of natural resource firms, 23 September 2003; 30 September 2003a; 30 September 2003b; 14 October 2003.
70. EBRD, 1999, op cit, Ref 21, p 282.
71. Tatyana Geller, 'Two views of the new Uzbek laws on investors' rights', BISNIS On-Line, 17 June 1998, available at http://www.bisnis.doc.gov/ bisnis/country/9807uzin.htm (accessed 9 October 2003).
72. See, Law, Republic of Uzbekistan May 26, 2000 No. 77-II, on the introduction of amendments and supplements to Law of the Republic of Uzbekistan 'On foreign economic activity of the Republic of Uzbekistan', Legislation provided by the Embassy of Uzbekistan.
73. Author interview with a representative of a natural resource firm, 30 September 2003a.
74. Author interview with a member of the business community, 12 July 2002.
75. See, IMF, 'Republic of Uzbekistan: Recent economic developments', IMF Staff Country Report 00/36, IMF, Washington, DC, March 2000; Appendix III, 'Overview of the tax system of Uzbekistan', no. 1, pp 95-97.
76. EBRD, op cit Ref 23, p 83, Table 4.2.
77. There was only one firm that did not conduct business with both Uzbekistan and Kazakhstan (author interview with a representative of a business firm, 12 September 2003a).
78. Michael Kuhn, Balazs Horvath and Christopher Jarvis, 'Officially supported export credits: Recent developments and prospects', World Economic and Financial Surveys (Washington, DC: IMF, 1995).
79. Martin Gilman and Jian-Ye Wang, 'Official financing: Recent developments and selected issues', World Economic and Financial Surveys (Washington, DC: IMF, 2003).
80. For further explanation and analysis of the US Ex-Im Bank and its financing support, see, Allan Mendelowitz, 'The new world of government-sponsored international financing', in Gary Hufbauer and Rita Rodriguez, eds, The Ex-Im Bank in the 21st Century: A New Approach? (Washington, DC: Institute for International Economics, 2001), pp 159-189.
81. Information on Ex-Im Bank financing as well as the Bank's position regarding Kazakhstan and Uzbekistan was provided during an interview with a US Ex-Im Bank economist (Author interview with a US Ex-Im Bank economist, 3 October 2003).
82. Author interview, ibid.
83. Ibid.
84. Author interviews with representatives of business firms, 16 September 2003; 24 September 2003; 26 September 2003; 30 September 2003.
85. Author interviews with representatives of business firms, 16 September 2003; 24 September 2003.
86. Author interviews with representatives of business firms, 26 September 2003; 30 September 2003.
87. Author interview with a representative of a business firm, 12 September 2003b; Author's personal communication to representative of a business firm, 1 December 2003.
88. Author interview with a representative of a business firm, 30 October 2003.
89. Author interview with a representative of a business firm, 12 September 2003a.
90. Author's personal communication to a representative of a business firm, 1 December 2003.
91. Ibid.
92. EBRD, Transition Report (London: EBRD, 1995), p 19.
93. Shiells, op cit, Ref 13.
94. EBRD, op cit, Ref 35, p 184.
95. EBRD, op cit, Ref 23, p 211.
96. IMF, 'IMF Executive Board Concludes 2005 Article IV Consultation with Republic of Uzbekistan', IMF Public Information Notice No 05/73, IMF, Washington, DC, 10 June 2005.
97. Author's personal communication with a representative of a business firm, 31 May 2005.
98. In an interview with economists from the IMF they stated that the decision to agree to currency convertibility was 'necessary but not sufficient' to boost economic growth due in part to increased trade restrictions introduced in 2002 (Author interview with IMF economists, 22 October 2003).