Few things are as closely associated with Uzbekistan as cotton, but hanging over Uzbekistan’s cotton industry is a dark legacy of forced labor. As the country moves forward with a broad reform program pushed by President Shavkat Mirziyoyev, the cotton sector has featured as a high-profile arena for both economic and social reforms. One reforms was the rapid privatization in 2017 of the sector, utilizing a so-called cluster system. Kristian Lasslett, professor and head of the School of Applied Social and Policy Studies at Ulster University, in partnership with the Uzbek Forum for Human Rights, studied the new cotton cluster system with a sharp eye on corporate integrity risks incumbent in the newly privatized Uzbek cotton industry.
Lasslett recently discussed the study’s findings and the state of reforms in the Uzbek cotton sector with The Diplomat’s Catherine Putz.
What is the economic and social rationale to privatize the cotton sector in Uzbekistan?
The Government of Uzbekistan faces three chief economic challenges in the cotton sector. First is the lack of efficiency tied to underinvestment in technology and infrastructure. Second is the failure to capitalize on cotton assets by expanding value-added activity in areas such as textile manufacturing. And the third is restricted market access owing to the cotton pledge. The cotton pledge is a voluntary agreement signed by international apparel brands to not knowingly source Uzbek cotton, owing to the high risk it is tainted by forced labor. Uzbekistan’s government hopes by reducing the state’s involvement in the cotton sector, and incentivizing through state aid substantive new value added activity by the private sector, all of these economic challenges can be addressed.
Can privatization truly address some of the most serious criticisms of the cotton industry in Uzbekistan, like forced labor and corruption? What are the risks generated by or associated with privatization, particularly at such a quick speed?
Broadly speaking the corporate sector has no better track record than governments for respecting human rights and resisting corruption. Like with government, the private sector is a mixed bag of actors. So privatization is in itself no silver bullet solution. The big risk in Uzbekistan is that privatization is taking place rapidly in the cotton sector, without any substantive attention being given to corporate transparency, corporate governance, and business responsibility for human rights compliance. The government has been focused on signalling to the international community that taxes are being reduced, barriers to investment are being removed, and private property rights are being strengthened. This overlooks the fact that in the apparel and garment sector, credible international buyers will be looking at a wider range of issues, including transparency, governance and human rights. The risk is that the government’s failure to address these issues, will on the one hand deter international brands, and on the other open the flood gates to irresponsible corporate actors who will use improper means to turn a profit from Uzbekistan’s significant cotton resource.
In the course of conducting your study, you created a “corporate integrity scorecard” and held 20 clusters against it — finding many “red” and “amber” flags and very few “green” flags. Can you explain the scorecard, how you created it, what informs its metrics, and what you found looking at the 20 clusters?
We studied a wide range of international benchmarks for corporate integrity, set out in good business, due diligence, and risk-analysis manuals issued by bodies such as the OECD, IFC, World Bank, etc. These were used to identify, on the one hand, indicia of corporate structure and practice that is credibly associated with responsible conduct, for which green flags were awarded, and on the other hand indicia associated with improper conduct, for which red flags were awarded. Where information was not available on the public record, which we would expect to see, such as information on a company’s senior manager team, an amber flag was awarded.
Over the study the majority of flags awarded were amber, 49 percent, and red, 41 percent. That tells us that the corporate sector responsible for the cotton cluster system in Uzbekistan is largely opaque, and exhibits qualities in its corporate structures that are associated with improper activity such as fraud, corruption, labor abuse, etc. In-depth case studies were conducted into two of the largest textile groupings charged with responsibility for cotton clusters. A common current cutting across both cases was the use of transnational corporate structures, often marked by significant degrees of secrecy and irregular filings. Once these structures were unpacked through a lot of detective work, we found evidence connecting beneficial owners to fraud scandals, and corruption. This would not appear to be a strong foundation for the economic or social imperatives behind the government’s reform effort.
You note in the report that one cluster earned almost all of the green flags — Indorama Kokand Textile. What lessons could other clusters take from Indorama Kokand Textile’s operations and what issues remain for that particular cluster?
Indorama has been proactive in documenting its ownership structure, its senior management team, and corporate policies. But their history is not wholly unproblematic. They did source Uzbek cotton during a period when forced labor was systemic and systematic, and they do use offshore jurisdictions associated with aggressive tax minimization strategies. However, I think the lesson from this is that when you are a high caliber company with strong policies, responsible owners, and quality management, transparency and accountability ought to be welcomed. When companies are unwilling to open their books and structures to public inspections, its natural enough for negative inferences to be drawn. And as our sectoral study demonstrates there are good reasons to draw negative inferences when companies are opaque and lacking the hallmarks of integrity.
Why is “corporate integrity” important to conducting business in the modern world and can Uzbekistan catch up to contemporary practices?
For markets to function effectively, corporate integrity is essential. Transparency creates secure market environments were investors, customers, and clients can act with confidence. They know who they are dealing with, they know their corporate track record, and they know the company’s broad fiscal health, so risks can be properly assessed. Corporate governance is essential to priming the type of business environment where shareholders rights are protected, directors and management are accountable with rigorous duties, and companies report on their activity in a rigorous manner, so shareholders and the public can scrutinize their activity. Without these type of structures being in place, markets cannot function effectively, which diminishes economic growth and exacerbates inequality. Uzbekistan is in a particularly strong position to set itself apart as a frontier economy, by adopting best practice frameworks for corporate transparency and governance incubated internationally.
What kind of responses have you gotten to the report from the Uzbek government, activists and other observers?
Broadly speaking the government has adopted a refreshingly open and convivial relationship with civil society with regard to cotton sector reforms. With President Mirziyoyev denouncing forced labor and directing his administration to proactively engage, there has been over the past few years ample space to find common ground with civil society, with historic progress being observed. But what sets this cluster report apart is that it provides detailed evidence regarding serious shortcomings in sector reforms that would be confronting for any government attempting to demonstrate their serious credentials internationally.
In the late Karimov era the response would have been to ignore the findings, refuse to engage with civil society concerns, and generally speaking, to play the man not the ball. It’s not really clear yet whether the reform ambitions of the Mirziyoyev government has translated into a mature public culture that can productively engage with this kind of challenging research. Time will tell.
But certainly speaking more widely civil society, the business community, and foreign partners, have been really surprised by the findings. It has put a spotlight on some really problematic features of the privatization process that these stakeholders were not aware of. But also there is a real enthusiasm to support Uzbekistan develop the kind of benchmarks for strong corporate governance that will make it easier to do business in the country, and satisfy the important human rights standards many big international brands have a strong stake in upholding.