Chewing gum, cars, household appliances, and chocolate symbolize Uzbek protectionism and import substitution.

Yuliy Yusupov: author

The issue of high customs duties, which undermine competition and push the economy into the "shadows," as I discussed in one of my recent articles, has deep historical roots.

Import substitution and protectionism instead of a market

1996 marked a turning point in the recent economic history of Uzbekistan. The government essentially abandoned the transition to a competitive market economy in favor of a "special Uzbek path of development." In reality, there is nothing particularly special about this path; it is called import substitution policy, a route that many other countries have already traversed with the same "success."

I have elaborated on what import substitution policy entails and how it differs from export-oriented policy (adopted by successful Southeast Asian countries) in numerous publications, for instance, here, here, and here.

In brief, the key principle of export-oriented policy is to integrate the country into the international division of labor by specializing in the production of goods and services in which the country has comparative advantages over others. To achieve this, the government actively promotes exports, including through the policy of undervaluing the national currency (which makes exports cheaper and imports expensive in local markets), creates conditions to enhance the competitiveness of local products (including low taxes and administrative barriers for businesses), and encourages foreign direct investment. Specialization in export-oriented products becomes the "engine" for the development of the entire economy.

The import substitution policy is directly opposite—it aims to replace imports in the domestic market by maximizing the range and volume of local production, regardless of the presence of comparative advantages in the production of these goods. In other words, unlike export-oriented policy, it does not involve active participation in the international division of labor, as it plans the production of goods and services that are likely uncompetitive in the free market. To implement this policy, the government restricts the import of finished goods through tariff and non-tariff barriers (protectionist policy), grants various individual and sectoral benefits to local enterprises, and actively invests in businesses, while inflating the exchange rate of the national currency (to reduce the cost of importing equipment necessary for import-substituting production).

In the export-oriented model, local enterprises immediately start working in international markets and find themselves in a harsh competitive environment, whereas the import substitution model aims to dismantle competition and create "greenhouse conditions" for local producers. In the first model, the "winners" are ultimately chosen by the market: the best survives. In the second model, the selection of "winners" is conducted by officials, who substitute the market and decide whom to grant benefits and whom to protect from competition.

It is not hard to guess the effectiveness of these two models. Uzbekistan has not been an exception. The implementation of hyperactive import substitution policies in our country from 1996 to 2016 had a profoundly negative impact on economic development—see the table.

In terms of nominal GDP growth per capita, we found ourselves at the very "tail" of the list of former socialist countries (North Korea, Cuba, and Turkmenistan are not included in the list due to the absence or unreliability of statistics from these states). Of course, one might say that "it's even worse in Slovenia," but in reality, that is not the case. Slovenia was and remained the richest country in the former socialist space both in 1995 and in 2019. It is well known that the pace of economic growth in wealthy countries is generally slower than in poorer ones.

The implementation of import substitution policy began in Uzbekistan with the closure of free convertibility of the national currency in the fall of 1996. And who remembers under what slogan the convertibility was shut down? "Look at what we are importing, what we are spending precious currency on. For example, on ... chewing gum. Can't we produce chewing gum ourselves? Let's spend currency not on gum, but on equipment for producing gum..." With such a simplistic thought, they closed convertibility and, in essence, eliminated the emerging market economy.

In addition to limiting convertibility, other barriers for imports were established: high customs duties (tariffs and excise taxes on imports), "intensified" certification of imported goods, etc. If we are to protect "domestic producers," then let’s do it thoroughly.

Thus, for chewing gum, the customs duty is still set at 30%. Interestingly, for "sugar-free chewing gum and/or using sugar substitutes," the customs barrier is set with an additional stipulation of "but not less than $1.80/kg" (usually, this stipulation makes the actual rates of customs duties even higher than declared). What suddenly made our officials so averse to chewing gums, especially sugar-free ones? I would love to know...

Meanwhile, clinical studies show that sugar-free chewing gum is quite beneficial for health: it helps maintain oral hygiene and reduces the risk of cavities (by cleaning the mouth of food and sugar residues, neutralizing acids, and supporting tooth mineralization), helps combat stress and excessive weight, and even positively affects cardiovascular health (dental plaque and poor oral hygiene can be significant risk factors for cardiovascular diseases).

One model showed that increasing the consumption of sugar-free chewing gum by one additional unit per day (seven pieces a week), in addition to a complete oral hygiene regimen, could lead to savings of $4.1 billion annually on dental care worldwide due to cavity prevention. Another study claims that raising the per capita consumption of chewing gum in Germany to the level of Finland (202 pieces of gum per year compared to 111 pieces per year in Germany) could result in annual savings of more than 80 euros per capita (keeping in mind that dental care in Germany is, to put it mildly, not cheap).

It is interesting to consider which specific "domestic producers" our officials are protecting from competition by imposing high duties on sugar-free gum? Dentists, cardiologists, or gym owners? To ensure they have more work? Or has thirty years of protectionism finally led to the emergence of competitive gum production (after all, that was the reason we closed convertibility in 1996)? But if it is competitive, why is it still being protected?

Another favorite product that needs protection from competition, according to officials, has become the automobile. With the launch of the car factory in Asaka, excessively high customs duties on imports were immediately established. They claimed it would only be for three years, until the enterprise got on its feet. But those three years stretched on, as we all know. And the enterprise, in the absence of competition, has not "gotten on its feet," and customs duties and non-tariff barriers (certification) continue to vigilantly protect the market from the penetration of harmful imports. Who would have thought that even thirty years would not be enough to "get on one's feet"...

Liberalization of the economy or the second stage of import substitution?

The revolutionary 2017. Free convertibility of the national currency was introduced in Uzbekistan! Finally... But, as time revealed, the liberalization of the currency market, the opening of borders with neighbors, and significant reductions in tariff and non-tariff barriers for imports do not mean that our officials have abandoned their beloved model of import substitution. They continue to "manage" the economy as they did during the Soviet era and under the first president.

Key decisions in the economy are still made directly or indirectly by the state, not the market. By limiting competition through barriers against imports, providing subsidies and grants, and distributing benefits (tax, customs, credit), officials—not the market—determine who and what will be produced. This is the same indestructible import substitution policy, just in a softer form.

And this policy at the new stage also has two symbols.

The first is high customs duties on household appliances. They were introduced (along with quantitative restrictions on imports by individuals) after one well-known local producer decided to engage in the assembly and sale of these essential goods for people in the 21st century. Well, how could we not support the "domestic producer"...

Today, duties on imported refrigerators, vacuum cleaners, air conditioners, televisions, washing machines, and even incandescent bulbs are set at 20-30%. Usually, there is a stipulation of "not less than such-and-such dollars per unit," which often means higher actual rates in practice. Plus VAT, which is imposed on the customs duty as well. And consumers pay for all this "protection of the domestic producer." The budget also suffers since high customs duties foster smuggling and the illegal sale of household appliances, from which the budget gains nothing.

The second symbol is the duties on chocolate and confectionery products. The same group of companies that produces household appliances launched a confectionery factory in October 2018. Immediately, the import duties on chocolate and confectionery began to rise. If in 2018, the rate was at 10%, by 2019, it increased to 20%, but not less than $0.25/kg for confectionery