Crossroads Asia | Economy | Politics | Central Asia

Assessing Corporate Integrity in Uzbekistan’s Cotton Clusters

The landmark privatization scheme took cotton out of the government’s direct hands and placed it in private “clusters” — but not without significant risks.

Catherine Putz
Assessing Corporate Integrity in Uzbekistan’s Cotton Clusters
Credit: Flickr

One of the key aspects of President Shavkat Mirziyoyev’s overall reform program has been a decided shift in how the Uzbek government approached the issue of forced labor in the cotton sector. Uzbekistan, over the last four years, has moved from denying the problem to working cooperatively with various organizations determined to eliminate forced labor.

Within that shift, a massive privatization project in the sector introduced in 2017 aimed to reduce the government’s role in the industry and address the core drivers of forced labor by creating a  a system of vertically integrated “clusters” operated by private companies. The clusters are regional, encompassing the cotton sector’s range from production of raw cotton to processing and manufacturing of value-added goods for domestic consumption and export. The cluster system ostensibly moved the industry out of the direct government hands, addressing one main complaint — that Tashkent, in setting production quotas and running the industry, drove the use of forced labor with demands not determined by the market.

But rapid privatization comes with a host of different potential problems, including simply outsourcing the forced labor problem into private hands. 

Ulster University and the Uzbek Forum for Human Rights partnered to study the new cluster system and in a new report outline concerns about corporate integrity risks that threaten the cotton sector’s reform progress. 

In a press release for the report, one of its authors, Kristian Lasslett, professor and head of the School of Applied Social and Policy Studies at Ulster University, said that, “the government of Uzbekistan has commenced a bold initiative to address serious issues that have plagued the cotton sector for decades. However, the omission of corporate transparency and corporate good governances measures has left this experience exposed to a range of risks that will deter investors, worry international apparel brands, and threaten the labor gains observed over the past three years,”

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The ongoing debate about the Cotton Pledge — a campaign to boycott Uzbek cotton as long as forced labor exists in the system — and when to rescind it hinges on some of these same issues. Brands in Europe and North America, as Cotton Campaign co-founder and former U.S. Deputy Assistant Secretary of State for Democracy, Human Rights Bennett Freeman told The Diplomat earlier this year, are still not necessarily eager to jump into the Uzbek market because “despite the significant progress there were still at least 100,000 people forced into labor in the cotton fields this past autumn.” But Uzbekistan, Freeman continued, faces a second challenge even outside the issue of forced labor and the hurdle of the pledge: it still has to catch up on two decades’ worth of progress with regard to responsible sourcing and business practices as well as both business and consumer expectations on labor and human rights.

Corporate governance issues fit tightly into that second challenge.

“Opaque ownership structures, lack of managerial transparency, irregular public filings, the use of secrecy jurisdictions, close ties to politically exposed persons, and credible evidence of illegal or improper activity” were among the issues identified in the new report, which analyzed 71 cotton clusters and developed an “integrity scorecard.

The scorecard, with green flags for good practices, amber flags for an absence of data, and red flags for bad practices, was used to assess 20 clusters. There were high proportions of red (41 percent) and amber (49 percent flags). Interestingly, the green flags (10 percent) that were identified were almost entirely earned by a single cluster operator.

The report includes covers two in-depth case studies, which go into the gritty details of bad business practices, including owners with potentially problematic political connections, networks of offshore companies, and accusations of fraud against various owners in their other businesses. 

Private businesses the world over have opportunities to engage in abuse and corruption if not properly regulated (and even then, some still do), meaning that the privatization of the cotton sector will never address every available business and labor sin. Addressing such risks as those outlined the study mandates not just recognizing them and passing appropriate laws, but mustering the political will to enforce regulations and mete out punishments for bad actors.

The study should serve as a guide for the Uzbek government, given that it clearly points out problematic areas and suggests efforts for further reforms. The recommendations are simple and largely based around instilling greater transparency across the cluster system: public records of business entities, beneficial owners, and procurement processes as well as open, competitive selection of cluster operators.