Online Consultation for the Preparation of the Uzbekistan Systematic Country Diagnostic
Input to the Country Partnership Framework 2015-2019
August 2015
Presentation Outline
2
1. Preamble
2. Salient features of Uzbekistan’s development
3. The sustainability challenge
4. Selected policy questions (for discussion)
5. Next steps
Preamble
The Systematic Country Diagnostic (SCD)– Designed to be the main analytical input into the Country Partnership Framework (CPF),
which outlines the World Bank Group’s (WBG) medium term engagement strategy in a
country
– Is an analysis produced by WBG teams, benefitting from consultation with government and
stakeholders
– Lays out country opportunities and challenges to:
Eradicating extreme poverty AND/OR
Boosting “shared prosperity” by promoting income growth for those at the bottom 40%
of the income distribution.
Each SCD is adjusted to country circumstances
Main analytical questions for Uzbekistan’s SCD include:– What are challenges to maintaining high GDP growth?
– What are challenges to creating more jobs?
– What are challenges to creating more good jobs?
– What are challenges to improving economic well-being?
– What are challenges to sustaining economic, environmental and social outcomes?
3
Preamble
4
Purpose of consultation:
To solicit feedback on the initial findings and analytical questions of
the SCD, and in particular:
The validity / accuracy of the emerging conclusions;
Any additional considerations, whose omission would affect the
likelihood / pace of progress on poverty reduction or increases in
shared prosperity
Some specific questions readers may wish to comment on can be
found on slides 20, 28, and 30-34. Comments on other parts of the
presentation are of course welcome.
Presentation Outline
5
1. Preamble
2. Salient features of Uzbekistan’s development
3. The sustainability challenge
4. Selected policy questions (for discussion)
5. Next steps
Salient features: endowments
Uzbekistan has much going for it!
In addition Uzbekistan has significant mineral wealth -Natural resources rents are estimated to be 20% of
GDP (Source: World Bank – World Development Indicators)
But there are also challenges:– While Uzbekistan borders all other countries in CA, it is ‘double-landlocked’
– Uzbekistan is highly dependent on water originating in neighboring countries6
A central/strategic position in the region and large
domestic market
A young, growing, relatively well-educated
population
For Central Asia, country populations are in millions. For adjacent countries,
populations figures refer only to populations of regions or districts adjacent to
Central Asia.
Sources: WB World Development Indicators
Source: WB calculations using UN, World Population Prospects,
2012
Salient features: economic performance
Overall, Uzbekistan has done extremely well over the past decade
7
4.2 4.0 4.2
7.77.0 7.3
9.5 9.4
8.1 8.5 8.3 8.2 8.0 8.1
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
20012002200320042005200620072008200920102011201220132014
Uzbekistan OECD ECA
It has achieved high and sustained growth With some economic diversification
Source: Uzbekistan Ministry of National Economy / WDI Source: UN COMTRADE, mirror statistics
GDP Growth
POLICY QUESTION: Can the current GDP growth rates be sustained as: (1) external environment has changed, (2) diversification has come in low-tech products with limited integration in global value chains, and sustainability is questionable.
Salient features: relative poverty
- 100 200 300 400
Bottom 40
Top 60
Bottom 40
Top 60
20
08
20
13
Income by source in 2008 and 2013(in 2008 UZ soum)
Wage income Non-wage earnings
Social transfers Property income
8
Source: Government estimates, GOU
According to official estimates, poverty has been
reduced…
…and shared prosperity has been maintained
27.526.5
27.226.1 25.8
24.923.6
21.8
19.5
17.7
16.015.0
10
12
14
16
18
20
22
24
26
28
30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Official Poverty Rate, in % of population
Note: Real monthly income per capita in 2008 constant UZ soum
Source: Household Budget Survey, Government of Uzbekistan
High growth has translated into improved welfare outcomes
• ANALYTICAL QUESTION: While national accounts statistics and poverty
statistics are not verifiable and subject to methodological uncertainty, one
analytical question is if poverty reduction could have been faster given (i)
high economic growth and (ii) relative initial equality.
• WB estimates that the public sector is at least 40 percent of GDP and 33 percent of employment
• Private sector firms tend to be small, informal and inward looking
• FDI remains limited relative to the size of the economy
Salient features: growth drivers
POLICY CHALENGE: Over the medium run, Uzbekistan will need to identify and
prioritize reforms to gradually increase the private sector's role in:
• Total Factor Productivity (TFP) growth
• Employment creation6
Growth has been driven by capital accumulation, likely coming from
the state sectors
Source: IMF Article IV, 2012 Source: Government of Uzbekistan, National
Statistics
Labor growth and productivity gains are
underutilized with low Total Factor
Productivity growth
The public sector remains very active in
economic activity
Source: Government of Uzbekistan, National Statistics and World Bank
Salient features: changes in employment
10
Uzbekistan’s employment shares have changed as the structure of the
economy has changed
Source: Government of Uzbekistan, National Statistics and World Bank
calculations
Increases in both services and industry
shares had made up for a significant drop in
agriculture share in GDP
However the share of employment in industry
has not increased underscoring that industrial
sectors in Uzbekistan are relatively capital
intensive
Source: Government of Uzbekistan, National Statistics and World Bank
calculations
POLICY QUESTION: Would be sensible from an economic and social perspective for
Uzbekistan to be investing in more labor intensive industries?
Salient features: income
11
Differences in household welfare derive essentially from variations in labor income
and type of employer
0
1,000
2,000
3,000
4,000
5,000
6,000
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5 6 7 8 9 10
In U
Z so
m‘0
00
In p
erce
nt
Population Decile
% of households with positive labor income
Average labor income
Labor compensation is the main source of income in all groups but with sharp variations in remuneration
9%4%
11% 12% 9% 9%
25% 33%
31%
37%48%
36%
30% 24%18%
19%
16%
21%
34%36% 36%
31%23%
31%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Lower 20percent
2 3 4 Upper 20percent
Total
Other Collective firms
Individual Private firms, incl. agric
State-owned enterprise, incl. agric State administration
With significantly higher incomes derived from SOE employment
Source: WB Calculations using CALISS Source: WB Calculations using CALISS
ADDITIONAL EVIDENCE: Officially, in 2012–13 unemployment was 4.9 percent of the working age population and in 2014 it was 5.1 percent, not counting labor migrants abroad. According to Russia’s Federal Migration Service, Russia’s economic slowdown in 2014 caused about 200,000 Uzbek migrants to return home. The number of registered Uzbek workers in Russia declined by 7.3 percent in 2014, from 2.5 million in December 2013 to 2.3 million in December 2014. 12
Salient features: jobs
Jobs are not created fast enough and many are not high quality jobs
Labor force growth is outpacing job
creation…
… with widespread informality in the
economy
Source: Uzbek authorities Source: WB calculations using World Bank/GIZ, Uzbekistan Jobs, Skills,
and Migration Survey, 2013.
Informal salaried work by sector (%)
Salient features: jobs (cont.)
13
Labor force participation drops at the bottom of the
distribution
…as well as labor supply
Although unemployment is low, many at the bottom of the income distribution opt
out of the labor market, and work less
43.1
37.5
20
25
30
35
40
45
50
Top 60% Bottom 40%
Mean hours worked (% of employed 15-54/59)
Source: WB Calculations using CALISSSource: WB Calculations using CALISS
Salient features: gender
14
Women make up only 36% of students in tertiary
education, and choose traditional “female” fields of
study:
Share of women among officially employed is only
40%, and they are concentrated in public service,
which is lower paid:
There are distinct gender patterns in labor market access and participation
OBSERVATON: Life expectancy is higher for women than men – 75 vs. 71, while retirement age is lower - 55 vs. 60; thus the likelihood of old age poverty for women is higher. In agriculture, women comprise over 53%, but only 5.5% of farms are headed by women.
Source: ADB (2014) Uzbekistan Country Gender Assessment, Gender and Development, Central and West Asia, Asian Development Bank
Source:State Committee of the Republic of Uzbekistan on Statistics (2014) Annual Statistical Compendium, Tashkent
0 10 20 30 40 50 60
Communications, construction,transportation
Agriculture
Economics and law
Healthcare and physical training
Education and culture
Share of Women in Tertiary Education by area
0 10 20 30 40 50 60 70 80
Construction
Transports and Communicatoins
Housing and Public Utilities
Industry
Financial Service
Health and Social Security
Education
Share of Female Labour Force by Sector
Salient features: communal infrastructure
15
Source: HBS, GOU (2013)
Some gaps in the provision of communal infrastructures services, but more gaps for
rural than for urban residents
0
20
40
60
80
100
CentralHeating
Natural gas Electricity Hot WaterSupply
Cold watersupply in
and outside
Sewerage(drainage)
system
Access to Services in Urban Areas(in % of population in decile)
Bottom 10% II III IV V VI VII VIII IX Top 10%
0
10
20
30
40
50
60
70
80
90
100
CentralHeating
Natural gas Electricity Hot WaterSupply
Cold watersupply in
and outside
Sewerage(drainage)
system
Access to Services in Rural Areas, in % of population in decile
Bottom 10% II III IV V VI VII VIII IX Top 10%
OBSERVATIONS: (1) Higher income doesn’t not ensure access to basic infrastructure services
(2) Rural access to water and sewerage systems are much lower than in urban areas
(3) Also, access does not ensure regular availability of supply nor quality of services
(4) Water losses are estimated at 42%, and only about 33% of user connections are metered
Source: HBS, GOU (2013)
Salient features: energy efficiency
Uzbekistan has low energy efficiency owing to demand and supply side
inefficiencies and lack of investment. Current polices are likely to result in energy
shortages in the future
Efficiency of electricity usage remains low as measured by GDP per unit of energy
16
Source: World Development
Indicators, 2012 World Bank.
GDP per unit of energy use (constant
2005 PPP $ per kg of oil equivalent)
EVIDENCE: Uzbekistan lost US$2 billion in 2011 or 4.5% of GDP due to energy inefficiency, while 40% of available generation capacity will reach the end of service life by 2017. Additionally, despite rising domestic prices, energy tariffs remain below long-run supply costs.
Salient features: transport and logistics
Transport: poor condition of roads and railways and a lack of logistics affects
“connectivity”, trade flows and thus economic growth
17
Source: Data reported by Uzbekistan Railway, 2012.
Freight Transport Market Share
117
86
39
36
30
27
0 50 100 150
Uzbekistan
Kazakhstan
Chile
Bulgaria
Poland
Turkey
Logistics Performance Index 2012 Country Rankings
Source: World Bank, LPI 2012.
Mode of transport has shifted from rail to roads creating significant rehabilitation backlogs
Rehabilitation backlogs lead to a significant trade barriers, with low logistics quality and a transport network that is not integrated
Salient features: business environment
18
Uzbekistan has recently made progress in
the DB ranking, but some of the DB
indicators need to improve especially if
Uzbekistan were to capitalize on
geographic location
Compared to other countries
Uzbekistan’s poor overall DB ranking
points to the difficulties that the private
sector faces in operating
While business regulations have improved in recent years, Uzbekistan continues to lag in time and cost to comply with basic regulations
Source: WBG Doing Business Indicators 2015Source: WBG Doing Business Indicators 2015
Salient features: macroeconomic and financial policies
19
23.2 23.2 23.4 24.224.3
24.2
17.318.7 22.6 23.8
24.4 25.4 26.7
15.2 16.418.5 19.4 19.6
21.223.3
31.2 1 0.7 0.5 0.4 0.4
0
5
10
15
20
25
30
2008 2009 2010 2011 2012 2013* 2014*
Capital adequacy ratio Monetization ratio (M2/GDP)
Loans/GDP ratio NPLs/Total loans ratio
Source: Government of Uzbekistan Source: Government of Uzbekistan
Prudent fiscal management has allowed debt levels to decrease and
bodes well for the economic management of the country..
But a cumbersome exchange rate system and a small financial sector
have large adverse effects on private initiative
Source: Government of Uzbekistan Source: Government of Uzbekistan
Salient features of Uzbekistan’s development
20
This section has shown
1. High economic growth 2. High savings and investment3. Some economic diversification4. Falling poverty
But concerns over:
1. The sustainability of the growth model
2. A deficit of good jobs created3. Some inequities in access to jobs
and services (across income and location)
This section raised some questions
1. With relatively high savings in Uzbekistan, why are not more jobs created?
2. What policies have prompted high capital intensity?
3. Is high capital intensity relatively more specific to some sectors or regions?
4. What is driving the rising wages?5. Are wage increases relatively
more specific to some sectors or regions?
Presentation Outline
21
1. Preamble
2. Salient features of Uzbekistan’s development
3. The sustainability challenge
4. Selected policy questions (for discussion)
5. Next steps
The sustainability challenge
Natural resources have played a key role in driving economic growth
However utilization and efficiency rates suggest that these trends are
unsustainable
Water intensity and efficiency in agriculture
Energy intensity and efficiency on demand and supply sides
Ultimately those likely to be impacted the most are the poor: they are proportionately
more dependent on natural resources for their livelihoods (e.g. agriculture).
22
The sustainability challenge: net wealth
Uzbekistan is losing wealth (future income) under its current growth model
Adjusted Net Savings (ANS) is negative - after accounting for natural resource degradation and
depletion factors such as energy
Main drivers of natural resource dependence:• Population growth, increasing
affluence• Finite natural resources under
pressure• Water• Fossil and renewable energy• Land/ Forests• Biodiversity
• Climate change
23
-20
-10
0
10
20
30
40
50
% o
f G
NI,
20
10
Source: World Development Indicators, 2014, World Bank.
The sustainability challenge: water
Water: inefficient use is placing pressure on existing stocks that could be
allocated to higher value production or consumption
Only 10% of all land is arable and irrigating this land uses 90% of total water withdrawals
Irrigation efficiencies in certain areas are as low as 30%
Institutional issues: prices are not set at cost recovery levels, water infrastructure is degrading,
and thus service delivery is poor
A cubic meter of water used to irrigate grapes in Fergana generates 625 UZS, compared to 169
UZS for cotton; a cubic meter of water in Samarkand used to grow apples generates UZS 1,829,
compared to 169 UZS for wheat
24
Price (‘000 UZS)
per ton
Water (m3)
footprint per ton
UZS per m3
of water
Fergana grapes 1,500 2,400 625
Fergana cotton 750 4,426 169
Samarkand apples 1,500 820 1,829
Samarkand wheat 350 2,068 169
Water footprint and value generated for sample crops
Source: Larson, D., D. Khidirov & I. Ramniceanu, 2015. "Uzbekistan: Strengthening the Horticulture Value
Chain," World Bank Other Operational Studies 21495, World Bank.
The sustainability challenge: water (2)
In the longer–term, Syr Darya and Amu Darya river flows may decrease by 25-50%
by 2050.
More winter precipitation, higher variability as a result of climate change
Irrigation rates will have to increase to compensate for this loss
Projected increase in mean and maximum irrigation rates to compensate for losses of agricultural crop yield
associated with evaporation increases in the Amu Darya and Syr Darya river basins
Source: Uzbekistan’s Second National Communication, 2008.
25
The sustainability challenge: agriculture
Land available for agriculture is limited as is the potential for increasing irrigated land
Exceptional agro-climatic conditions
and strong support for productive
technologies are the foundation of a
strong and growing agricultural
sector in Uzbekistan, but farmers
need greater flexibility in making full
use of limited land and water
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Wheat Cotton Potatoes Vegetables Melons Fruits and berries Feed crops
Source: State Committee on Statistics, Uzbekistan.
The sustainability challenge: agriculture (2)
Land leases requiring cotton and wheat production quotas keep much of the land locked in old production patterns, even though fruit and vegetable crops are more profitable in some areas
Cabbage Tomato Onion CottonMelon
(PF)Melon
(DF)
Fergano totals
Revenue 6,750 7,700 8,800 2,625 7,200 8,000
Operating Expenses 4,411 4,529 4,864 2,582 4,590 2,389
Gross margin 2,339 3,171 3,936 43 2,610 5,611
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
tho
usa
nd
so
ms
pe
r h
ect
are
Fergana: revenue, operating expenses and gross margins
Source: Larson, D., D. Khidirov & I. Ramniceanu, 2015. "Uzbekistan:
Strengthening the Horticulture Value Chain," World Bank Other Operational
Studies 21495, World Bank.
The International community and CSOs have raised concerns about the practice of using forced and child labor for cotton harvesting. The World Bank, in consultation with the government and development partners, has adopted a multi-pronged approach to address child and forced labor issues in Uzbekistan. These include (i) pursuing continuous country dialogue and collaboration with international/multilateral agencies and donors to address these issues; (ii) performing sector analytic work and policy dialogue to promote diversification away from cotton and mechanization of cotton harvesting; (iii) strengthening project-level mitigation measures and binding provisions, including implementing a Third Party Monitoring (TPM) and Feedback Mechanism(FBM) to help address child and forced labor issues in connection with the project activities or within the project area; and (iv) promoting crop diversification and intensification, and supporting agricultural mechanization through a number of investment operations. This comprehensive effort to address the issue of child and forced labor in cotton harvesting has received wide support and endorsement from development partners and community based organizations.
The sustainability challenge
28
This section has shown
1. Water, agriculture and land use are at threshold levels of use.
2. Energy provision and use inefficiencies are extremely costly to the economy
3. Uzbekistan is poorly connected internally and externally
This section raised some questions
1. How could agricultural diversification reduce the burden on scare water resources?
2. What investments would be needed to improve energy efficiency?
3. How could connective infrastructure improve (i) service delivery (ii) trade (iii) labor mobility?
Presentation Outline
29
1. Preamble
2. Salient features of Uzbekistan’s development:
growth, employment, inclusion
3. The sustainability challenge
4. Selected policy questions (for discussion)
5. Next steps
Selected policy questions
Given the diagnostic above, what policies and/or investments would yield the highest returns in terms of:
(i) Employment creation and productivity growth?
(ii) Opportunities for those at the bottom of the income distribution economic?
(iii) Social and environmental sustainability?
The SCD Analysis proposes the following areas of focus:
Sectoral Policies
• Incentivize firm growth and hiring through reforms to tax and monetary policies
• Promote agricultural diversification and modernization
• Invest in connective infrastructure and public goods
• Develop skills and human capital
Cross-cutting Areas
• Continuing focus on improving the investment climate and promoting e-governance
• Make the foreign exchange and access to cash certain
• Gender inclusion
• Efficient use of natural resources
30
Selected policy questions (2)
Improve the investment climate and nurture private sector development
Despite improvements on the regulatory side, incentives remain skewed against greater private sector participation and formalization.
A policy reform agenda would entail:
1. Promoting ‘healthy competition”
1. Further regulatory reforms with focus on implementation and investor protection
2. Changes to tax policy to incentivize firm growth and formal hiring
3. SOE reform (governance improvements and/or gradual divesture)
2. Removing barriers to trade and technology transfers
1. Lowering tariffs and non-tariff barriers, including foreign exchange restrictions
3. Improving the potential for the financial sector to allocate resources optimally
1. Gradually removing directed credit
2. Making the access to cash certain
3. Further promoting SME access to finance (including alternatives to banks)
4. Further improving the financial infrastructure (change the secured transactions system accordingly to the best practice and built the credit bureau with reputable international vendor)
4. Increase state provision of public goods
1. Building and maintaining key public infrastructure
2. Support knowledge absorption and innovation
31
Selected policy questions (3)
Promote agricultural diversification and modernization
Agricultural development remains critical to the growth / employment agenda, but the potential of Uzbekistan’s agriculture is under-exploited… with specific issues regarding labor deployment.
A diversification / modernization agenda would entail:
1. Improving water use efficiency / irrigation
1. Policies
2. Technologies
3. Infrastructures / Investments
2. Leveraging technological innovation for raising productivity
3. Promoting diversification into horticulture and livestock
4. Developing agro-industrial value chains
1. Infrastructure development (storage, irrigation, transport)
2. Investment promotion (loans, direct, mobilization of other investors)
3. Technical assistance (training, safety standards, environmental and social ecosystems protection)
32
Selected policy questions (4)
Invest in connective infrastructure and public goods
Investments in key infrastructure and connectivity would support growth, inclusion and sustainability.
Strategic investments could focus on:
1. Productive infrastructure
Key priority areas include:
1. Critical power and district heating infrastructure
2. Irrigation infrastructure
2. Connective infrastructure
Key priority areas include:
1. Trade facilitation infrastructure
2. Road and rail networks
3. ICT
33
Selected policy questions (5)
Develop skills and human capital
While Uzbekistan is doing well already there is scope to focus more on those most vulnerable: (i) the youth and women still unable to make the most of labor market opportunities (ii) those left behind of the growth process.
A promotion / inclusion agenda would entail:
1. Building human capital and skills
Key priority areas include:
1. Expanding access to quality ECD
2. Modernizing curricula
3. Improving access to post-secondary education
2. Improving safety nets and social protection
Key priority areas include:
1. Active labor market programs with focus on discouraged workers and women
2. A gradual move to poverty targeted welfare programs
34
Presentation Outline
35
1. Preamble
2. Salient features of Uzbekistan’s development:
growth, employment, inclusion
3. The sustainability challenge
4. Selected policy questions (for discussion)
5. Next steps
Next steps
1. Online consultation till end August 2015
2. Preparation of SCD report in September 2015
3. Preparation of Country Partnership Framework
October 2015
36
ANNEXES
37
Salient features: jobs –drilldown (cont.)
38
Though unobserved, variations in access could also be compounded by differences in the quality of education received
Welfare also appears to be determined and perpetuated by differences in
access to post secondary education
In percent of household HEADS per decile What activities are 16-22 year olds doing?
15
10
11
12
9
57
52
47
46
34
20
21
30
18
26
1
3
4
7
7
6
14
9
16
22
0.0 20.0 40.0 60.0 80.0 100.0 120.0
Bottom 10%
2
3
4
Top 60
Basic and below General Secondary Secondary special
Secondary technical Higher education
41
48
40
37
31
33
15
18
1
1
19
20
27
16
26
25
0% 20% 40% 60% 80% 100%
Bottom 40
Top 60
Bottom 40
Top 60
Mal
eFe
mal
e
In school Working Fulltime homemaker Inactive
Household welfare is strongly correlated
with post-secondary education …
as is the likelihood of children staying in
school longer
Source: WB Calculations using CALISS Source: WB Calculations using CALISS
Constraints
Salient features: internal connectivity
ICT: e-services has significant potential, but is mostly limited to urban areas
Government e-service initiatives are addressing the transparency of public services
and reducing transaction costs
However only about 30% of population uses the Internet, and broadband use (only
4%) is limited to key cities; affordability is also poor (1 Mbps internet = 2 x annual
income, 2011)
39
100%
68%
50%39%
33%26%
20% 16%
4% 3% 0% 0%
Sou
th K
orea
Eston
ia
Arm
enia
Ru
ssia
Geo
rgia
Mo
ldo
va
Kazakh
stan
Aze
rbaijan
Uzb
ekistan
Kyrgyzstan
Tajikistan
Turkm
enistan
Broadband subscription
(% of households, 2012)
1Republic of Korea
5USA
27Russia
38Kazakhstan
91Uzbekistan
96Azerbaijan
99Kyrgyz Republic
e-Government Ranking
(UN e-Government index, 2012)
Source: ITU, 2012Source: UNDESA, 2012