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p. 1 of 6 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006–2010: Uzbekistan

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I. Current Development Trends and Issues

A. Development Context

1. Uzbekistan is the most populous country in Central Asia, with 26 million people, and the second largest economy (gross domestic product [GDP] of about $12 billion) after Kazakhstan. It is centrally located, bordering all the other states in the region: Kazakhstan, the Kyrgyz Republic, Tajikistan, and Turkmenistan. Uzbekistan also borders Afghanistan in the south. Uzbekistan has abundant resources, with a strong agricultural base and self-sufficiency in hydrocarbons and minerals.

2. Uzbekistan faces economic transition¹ and development challenges. The progress of macroeconomic, structural, and institutional reforms, in terms of coherence and effective implementation, has been mixed. Since 2000, the economy has undergone significant macroeconomic adjustment. The contrasting level of coherence in formulating and implementing complementary structural and institutional reforms, especially for private sector development (PSD), is at the core of Uzbekistan’s unfinished transition agenda. Progress in transition as measured by European Bank for Reconstruction and Development (EBRD) indicators shows several areas of reform backlog, including governance and enterprise restructuring, the financial sector, and trade reform,² attributable in no small measure to strong state control over a broad spectrum of economic activities. The development challenges of improving the efficiency and effectiveness of using productive factors are linked with progress in transition. Uzbekistan’s efficiency of investment, as measured by the average incremental capital–output ratio (ICOR), lags behind some other countries in the region.³ Structural reforms in key sectors to reduce the role of the state and increase competition will improve the use of productive factors.

3. The Asian Development Bank (ADB) has been providing development assistance to Uzbekistan since 1996. ADB’s last country operational strategy (COS) for Uzbekistan was prepared in 2000.⁴ Since then, the Uzbek authorities have developed the Interim Welfare Improvement Strategy Paper (I-WISP), the precursor of the national poverty reduction strategy paper. ADB’s corporate objectives have been enhanced and need to be reflected in the country strategy: (i) ADB’s commitment in 2002 to help developing member countries achieve prioritized Millennium Development Goals (MDGs) (Appendix 1, Table A1.1); and (ii) ADB’s enhanced poverty reduction strategy⁵, that requires that all new country strategy and programs (CSPs) have a results orientation that links the constraints on poverty reduction identified in poverty assessments with the proposed program, desired outputs, and expected outcomes. This CSP aims to align ADB’s country operations to the evolving national poverty reduction framework and to ADB’s own enhanced corporate objectives.

B. Economic Growth

4. Recent Growth Developments. Following an estimated 18% decline in output in 1991– 1996, Uzbekistan’s economy grew by 1.6% in 1996. Since then, GDP growth has averaged 4.8%, accelerating in 2004 to 7.7%, according to official estimates (Appendix 1, Table A1.2).

Table 1: Growth Rate, Share in GDP, and Contribution to GDP Growth by Sector

Sector		Average 2000–2004
Agriculture	Growth rate	5.9
	Share in GDP	33.4
	Share in GDP growth	36.3
Industry	Growth rate	3.1
	Share in GDP	17.1
	Share in GDP growth	13.4
Trade and other servicesa	Growth rate	4.9
	Share in GDP	49.5
	Share in GDP growth	50.4
GDPb	Growth rate	4.8

5. GDP Sectoral Decomposition. The factors underpinning growth on the production side have changed in recent years, but agriculture has been a consistent performer, contributing 36% to GDP growth during 2000–2004 (Table 1). Services have contributed 50% but the trade subsector did contract in 2002. The contribution of industry has remained modest notwithstanding the Government’s activist industrial policy that has channeled a significant share of investment resources to the sector.

6. Demand Decomposition. The factors underpinning growth on the demand side have also changed, with growth over the last 2 years fueled by net exports. The recent export boom has been boosted by both commodity (cotton and gold) and non-commodity exports (textiles, machinery, chemicals, ferrous and nonferrous metals). Private consumption has remained flat (real consumption per capita has declined) while investment has picked up slightly. The average investment rate over 2000–2004 was 21.4%, with an uptick in 2004. Public investment has been declining, especially since 2002, and stands at around 8% of GDP. Foreign direct investment inflows picked up in 2004 but still constitute a low share of GDP (1.6%).

7. Growth and Macroeconomic Adjustment. Uzbekistan has undertaken significant macroeconomic adjustment since 2000. Tight fiscal policies have considerably reduced budget and quasi-fiscal deficits; prudent external borrowing policies have improved debt indicators; and until 2004, tight monetary policies had reined in inflation (Box

8. Growth and Employment. Job creation has been slow (2.1% over 2000–2004, compared with the average annual growth in working-age population of 3.2%), with the public sector, especially education and health services, accounting for the largest share of new jobs. Employment in agriculture contracted by 0.2% per annum; in industry it grew by 1.4%, and in services, by 2.5%. As in other developing countries, the service sector is highly diverse. The significant informal sector is engaged in less productive activities, suggesting that there are bottlenecks in labor absorption. Real wages have substantially increased, according to official statistics, but at alternate estimates of inflation or in US dollar terms they have not risen much.⁶ Employment growth in the formal private sector will depend upon structural reforms that can facilitate reallocation of resources to more productive and better-paying activities.

9. Potential Sources of Employment and Growth. A crucial source of private sector-led growth is agriculture. Making better use of the considerable agricultural potential will require giving farmers better incentives and more freedom to decide than under the prevailing state procurement system for cotton and wheat. In industry, Uzbekistan has a potential comparative advantage in labor-intensive light manufacturing, but realizing it will depend upon reducing pervasive state involvement and allowing truly private enterprises to compete on a level playing field. In services, development of skill-based subsectors could be facilitated by a better fit between the education system and labor market needs, and by a well-functioning information and communication technology (ICT) environment. There are also transit economy opportunities, given Uzbekistan’s strategic location. A prerequisite for tapping into these sources of private sector-led growth is an enabling business environment, with a reduction in the current high costs of operating in the official economy.

C. Poverty

10. Recent Trends in Poverty Incidence. Based on the household budget survey (HBS) data,⁷ poverty incidence remained at around 26% in 2000–2003. The headcount ratio declined from 27.5% in 2001 to 25.3% in 2002 before picking up again to 26.2% in 2003 (Appendix 3, section A). Most of the poor (70%) live in rural areas. Inequalities between agriculture and industry wages have risen even though agriculture has been a major contributor to recent growth. Moreover, wage arrears are more prevalent in agriculture.

11. Regional Trends in Poverty. Regional patterns of poverty incidence shifted significantly during 2001–2003. Poverty incidence in the southern region, the country’s highest (47.4%) in 2000–2001, declined significantly (26.4%) while it increased in Ferghana and Mirzachul in the eastern region. The link between regional economic performance and changes in poverty incidence is weak. For example, gross regional product grew at the same rate in the northern and central regions in 2001–2003, but poverty decreased in the northern region and increased in the central region.

12. Changes in Non-Income Poverty Dimensions. Progress on social indicators has been mixed. Uzbekistan has achieved the universal basic education MDG, although the quality of education is a concern. Official data show that the infant mortality rate stands at 15.5 deaths per 1,000 live births, while survey data applying international criteria indicate 62.0 deaths per 1,000 live births.⁸ The maternal mortality ratio, officially estimated at 34 per 100,000 live births, has not improved since the mid-1990s. The incidence of communicable diseases is increasing. The number of registered HIV/AIDS cases has doubled over the past 2 years, and tuberculosis incidence has risen. Table 2 summarizes progress toward the MDGs.

Table 2: Progress Toward the Millennium Development Goals

Item	1992 or near	Recent year
Poverty (% of population below food poverty line)	—	26.2
School enrollment (net enrollment ratio in grades 1–9)	92.5	87.8
Gender equality (ratio of girls to boys in primary and secondary education)	93.8	98.0
Child mortality (under–5 child mortality rate per 1,000 live births)	51.7	24.3
Maternal mortality ratio (per 100,000 live births)	30.1	26.9
HIV/AIDS (infection rates per million people)	0	70.4
Water access (% population using safe water)	—	84.0

13. Characteristics of Poor Households. Poverty is related to educational attainment, occupation, quality of allotted land, and family size. The 2003 HBS suggests that families whose heads do not have secondary education are more vulnerable to poverty. Households where the head is employed in agriculture, in the informal sector, or in the public sector face higher-thanaverage risks of poverty. Land quality is an important factor for living standards. The average poor household is larger than the average nonpoor household. Gender was not found to be significantly associated with poverty. Poverty incidence among female-headed households has dropped more (from 25% in 2001 to 22.2% in 2003) than in male-headed households (from 28.0% to 27.2%).

14. Working Poor. The 2003 HBS shows that 50% of the poor belong to families where the head is employed. An International Labour Organization (ILO) study⁹ notes that the number of working poor is high either because they have too many dependents to support, work for low wages, are subject to involuntary leave without pay or short hours, are paid irregularly, or because of some combination of these factors.

15. Delivery of Services Needed by the Poor. The quality of service delivery to the poor is a bigger challenge than access. Access to basic education, as indicated by enrollment rates, is equal across income quintiles.¹⁰ In secondary education, however, enrollment rates are higher in the top quintile than in the bottom one. With regard to quality, reliable data are lacking on such crucial performance indicators as transition, attendance, and students’ learning outcomes in basic education. Health care service utilization rates do not reveal significant differences between the top and bottom quintiles. However, child and maternal health outcomes are better in the top quintile than in the bottom, indicating that the quality of health service delivery to the poor is a concern. One cause could be the skewed staff distribution, with eight times as many physicians posted in urban than in rural areas.¹¹

16. Mixed Progress on Poverty-related Public Expenditures. Although the overall share of public spending on education is the highest in the region, its composition could be mademore pro-poor by focusing on improving the quality of rural basic education services. Rural schools lag behind urban schools in material (rooms, desk, learning materials) and human (qualified teachers) resources. The Government now recognizes this. The past imbalance in public spending, that was skewed toward senior secondary education, is being addressed under a new basic education reform initiative—the National Program of General School Education Development (NPSED) 2004–2009. Health-related expenditures, that were once biased toward hospital-based care, benefiting the better-off urban population, are being rebalanced toward primary health care. However, the poor still bear a disproportionately high share of out-of-pocket expenses. The Government has introduced, on a pilot basis, per capita financing of primary health care centers.

17. Declining Social Transfers. The poor are dependent on social transfers—over 40% of the money income of the poorest quintile comes from this source. ¹² Some administrative streamlining has decreased social transfers, but targeting and coverage of the poor could be significantly improved even if current spending levels were maintained.

18. Poverty, Growth, and Employment. Overall, growth has not yet translated into poverty reduction, possibly because of the pattern of growth. The economy’s growth increment has not been redistributed broadly. Rather, aggregate demand composition has shifted from consumption to net exports. New, better-paying, private sector jobs for the poor are limited, as in other transition countries in the region. A recent World Bank study¹³ notes that in the Commonwealth of Independent States (CIS) countries, the problem with jobs lies more in their quality—they are less productive and pay correspondingly little. Discouraged by the poor investment climate, private firms have not engaged sufficiently in finding new production niches, investing productively, and hiring more workers.

D. Political Environment

19. Genuine party-based political competition is regulated. Registration requirements for political parties limit the development of new parties and the growth of political competition, allowing concentration of power in the executive branch. On 26 December 2004, the third parliamentary elections since independence were held. A report by a limited observation mission fielded by the Organization for Security and Cooperation in Europe (OSCE)¹⁴ concluded that the elections fell short of OSCE commitments and other international standards for democratic elections. The Constitution guarantees citizens the right to engage in public life by holding rallies, meetings, and demonstrations, although in practice the exercise of this right is highly restricted. The Uzbek authorities are sensitive to some western media’s portrayal of the Andijan events as public protests resulting in civilian casualties, taking the position that they were instigated by criminal elements and militants. The authorities have also rejected calls by the United Nations (UN), European Union, OSCE, Amnesty International, and certain countries to hold an independent, international investigation of the events. In November 2005, the UN’s General Assembly Third Committee (Social, Humanitarian, Cultural) approved a draft resolution by which the General Assembly would strongly call on the Government to cooperate with UN human rights officials and grant permission to establish an international commission of inquiry into the incident.

E. Governance and Institutional Capacity

20. Why Governance Matters. An effective governance structure facilitates poverty reduction by enabling the poor to participate in and benefit from the growth process. Institutional capacity also benefits the poor through delivery of quality services. People’s participation in development can improve social services. The country governance assessment¹⁵ provides a comprehensive analysis of the governance agenda.

21. Policy Development and Coordination. Most ministries and agencies have little or no autonomy, authority, and thus capacity to develop policy. Public administration reforms have been introduced to improve the system’s efficiency and effectiveness. A presidential decree was issued in December 2004 reorganizing several public sector functions and rationalizing the government structure to eliminate duplication and reduce management overheads. These measures need to be complemented by efforts to strengthen the policy analysis and research capability of key economic ministries.

22. Civil Service. The competence of officials at all levels of public administration has improved in recent years, but recruitment and promotion need to be more transparent and meritbased. Uzbekistan still has no independent civil or public service commission responsible for recruitment and promotion standards. Corruption is significant, in part because of low pay. On a scale of 0 (highly corrupt) to 10 (clean), Uzbekistan scores 2.4 on Transparency International’s corruption perception index and its ranking has deteriorated since 2002 to 100 out of 133 countries in terms of corruption.

23. Public Financial Management. Ongoing steps to set up a single Treasury system constitute a major reform of Uzbekistan’s public financial management system. The single Treasury system will replace the myriad individual bank accounts of budget institutions. It will enable the Government to improve cash management, monitor budget execution, and strengthen debt management. This major institutional reorganization of the Ministry of Finance needs to be accompanied by integration of the public investment program process with the budget process.

24. Tax Policy and Administration. The tax system is complex, includes numerous exemptions and privileges that make it difficult to quantify the tax base, and is subject to frequent ad hoc revisions. Tax administration has been improved, including through reform of the inspection system, but entrepreneurs are concerned that the current system does not respond to their interests. The Government is considering a draft revised tax code that proposes, inter alia, to remove special privileges and exemptions; consolidate tax rates, rules, and regulations; and strengthen tax administration.

25. Transparency and Accountability. Progress on public information dissemination, an essential building block of Government accountability, has been slow. Legal provisions simultaneously provide for free access to information and numerous grounds for restricting such access, including the information category “state secrets”. This gives officials considerable discretion in interpretation and application. The law also guarantees public access to all laws and normative acts except those considered secret. Publication of official statistics meeting international standards of accuracy and consistency and “notice and comment” rule-making are among the measures the country governance assessment recommends to increase transparency and accountability.

26. Media and Civil Society. Although censorship has been formally abolished, selfcensorship by the media is common. Civil society organizations whose aims do not coincide with government objectives face difficulties. Registration and, since early 2004, re-registration requirements have constrained the growth of a representative nongovernment organization (NGO) sector.

27. Governance Challenges. Thus, Uzbekistan faces a number of governance challenges: moving toward less centralized and more participative policy-making, improving incentives and performance in the civil service, increasing transparency and accountability in public financial management, and allowing the media and civil society to play a larger role in reflecting communities’ needs.

F. Private Sector

28. Private Sector Size and Structure. Getting a reliable measure of the size and structure of the private sector is difficult. The non-state sector produces around three quarters of the GDP, with farm enterprises constituting the largest subgroup, according to official statistics. However, as the private sector assessment (PSA)¹⁶ notes, a large part of what is officially reported as the non-state sector comprises enterprises in which the state holds a majority or retains control. The private sector has three tiers: (i) large, predominantly state-owned enterprises; (ii) a thin wedge of small and medium-sized enterprises (SMEs), (including state-controlled, privatized, and new firms); and (iii) a substantial informal sector. The PSA finds that the state is dominant even in SME manufacturing. SMEs in the formal sector have not significantly contributed to job creation.

29. Privatization. After good progress during 1991–1997 in privatization of small-scale enterprises, recent progress has been slow. The actual extent of privatization is hard to gauge as enterprises where blocs of shares have been allocated for sale to outsiders and foreigners but that remain unsold, qualify as privatized enterprises. In March 2005, the Government announced its privatization program for 2005–2006, updating the list of enterprises to be privatized.

30. Private Sector’s Perspective on Business Environment. The large and growing informal economy is explained by the high costs of doing business in the official economy. The private sector’s perspective on the business environment is that it is improving but key processes remain problematic. In surveys,¹⁷ enterprises rated the severity of impediments in the following order: (i) tax legislation unstable, (ii) access to cash problematic, (iii) private sector participants under increased pressure from public prosecutor, and (iv) regulatory restrictions relating to export–import operations onerous. The share of the 2003 survey respondents stating that they have not been investing in fixed assets is double the 2001 figure. A fifth of the survey respondents admitted to transferring a portion of their operational resources to the “shadow” economy because of business conditions.

31. Industry Associations and Competition. The PSA identifies industrial associations as a root cause of anemic PSD. In principle, membership in associations is voluntary, and recently their formal powers have been curbed. In practice, their large size and market power continue to undermine competition from non-members. The internal structure of industrial associations weakens corporate governance at the level of the associations and member enterprises.

32. SMEs’ Access to Finance. The SME sector has difficulty accessing credit because of high interest rates, lack of collateral, and paucity of long-term loans. State-owned enterprises constitute the largest borrowing segment although their share has been declining. Banking sector weaknesses that the authorities plan to tackle over the next 3 years include the distinction between cash and non-cash transactions, and performance by commercial banks of functions inappropriate for financial intermediaries, including in tax collection and financial control. Implementation of these announced measures will raise public confidence in the banking system. The privatization of Asaka Bank and the National Bank of Uzbekistan for Foreign Economic Activities (NBU) has been on the Government’s agenda for several years. Recently, a presidential decree was issued, indicating the revised schedules for privatization of these two banks.

33. In 2005, the authorities acknowledged many of the issues affecting the business environment by issuing a number of decrees, including changes to the tax code, reform of the banking sector, inspections and reporting, and curbing cash restrictions. Uzbekistan needs to move beyond partial reform measures and reach for a critical mass of reforms that will improve the business environment. This will help reduce the high costs private firms currently face to operate and grow in the official economy.

G. Regional Cooperation

34. Regional cooperation issues include trade, transport, and the water–energy nexus.

1. Trade. Regional demand for Uzbekistan’s exports is significant. The Russian Federation accounts for the largest share (47.4% of Uzbekistan’s exports and 62.2% of its imports in 2004), followed by, among others, Central Asian neighbors (34.0% of exports and 21.6% of imports). Recently, President Karimov called for the establishment of a Central Asia common market, a laudable goal that will require reduction of nontariff barriers and border-related transaction costs.
2. Transport. Regional cooperation is emerging in the transport sector. The Government envisions Uzbekistan as a transit country for trade between Europe and the rest of Central Asia and with the People's Republic of China (PRC). Transport costs are high, driving Uzbekistan’s quest for alternative regional transport routes. Within the framework of the Uzbekistan–Kyrgyzstan–PRC (east–west corridor) project, highways, and eventually railroads will be built linking Andijan (Uzbekistan) and Osh (Kyrgyz Republic) to Kashgar (PRC). Work is under way to improve transport corridors that will connect Uzbekistan with South Asia through Afghanistan, complemented by the development of internal regional transport corridors within Uzbekistan.
3. Water–energy nexus. Progress on water–energy cooperation has been slow. The water–energy nexus stems from the uneven distribution of water and energy resources within the region, especially in the Syr Darya basin. This causes conflicting needs for water and the timing of its release between countries upstream (Kyrgyz Republic and Tajikistan) and downstream (Kazakhstan and Uzbekistan). Another problem for regional energy cooperation relates to transmission access and arises from the interdependence of these countries for transmission of power from one part of a country to another. Third-party and open access to the transmission grid is limited. These were some factors at play in the failure of the governments of Tajikistan and Uzbekistan to reach closure on the Regional Power Trade Relations Agreement under the Regional Power Transmission Modernization project.¹⁸

35. Thus, progress in regional cooperation has been mixed, perhaps reflecting perceptions among concerned countries that the distribution of costs and benefits is asymmetric.

H. Environment

36. Key Issues. Uzbekistan inherited an environment damaged by decades of unsustainable exploitation of its natural base, but the authorities are trying to address key concerns. ¹⁹ The most critical problems facing Uzbekistan, based on links to health and productivity risks, are the following:

1. degradation of land and water resources because of inefficient use and deteriorating irrigation and drainage infrastructure;
2. air pollution caused by desiccation of the Aral Sea, linked to respiratory ailments in Karakalpakstan, high energy-use intensity, and inefficient abatement technologies at industrial facilities; and
3. deterioration in the quality and quantity of drinking water because of pollution of underground water sources, inadequate maintenance, and reduced river flows.

37. Environment–Poverty Link. The poor are disproportionately affected by exposure to environmental risks. Unemployment at the regional level is correlated with exposure to air and water pollution. Continued land degradation caused by salinization and waterlogging impair rural livelihoods, while limited access to safe drinking water is detrimental to the health of the rural poor.

38. Capacity for Environmental Management. Stronger coordination of environmental policy-making and its mainstreaming with economic and financial planning structures are needed. The Program of Actions on Environmental Protection of the Republic of Uzbekistan for 1999–2005 sets out the Government’s goals and targets for environmental improvement. The environmental information management system needs to be made more relevant for decisionmaking, particularly on environmental health risks and the viability of natural resource systems. Environmental indicators are in Appendix 1, Table A1.4.

I. Gender and Other Social Issues²⁰

39. Gender Gaps in Higher Education. There is no gender gap in basic education but it is increasing at higher levels. Girls account for around 49% of total enrollment in grades 1–9, indicating relative equality, but at the senior secondary level, women constitute only 35% of enrollments in academic lyceums. The share of women in secondary specialized (vocational) education has fallen from 49% to 26%—a matter of concern as female labor force participation is positively correlated with the level of education.

40. Maternal Health Care. Despite high attendance rates by doctors, prenatal care is poor. The primary cause of maternal mortality is from pregnancy and delivery complications. Maternal health care needs to be strengthened. Family planning programs are well established. Contraceptive use has risen while abortions have declined.

41. Female Labor Force Participation. It is low (31%) although gender gaps in earnings are not significant. The proportion of women entrepreneurs is low (14%). Women have access to only a small part of the limited credit. The country gender assessment finds that women are not benefiting equally from the restructuring of shirkats (cooperative farms) into private farms (women represent only 4.8% of the private farmers). Women are more likely to become dekhan (peasant) farmers, with poor-quality plots.

42. Child Labor. Uzbekistan has not ratified ILO Convention 182 to combat the worst forms of child labor. The Labor Code sets the minimum age for employment at 16 years, prohibits children under 18 years of age from working under unfavorable labor conditions, and establishes limited work hours for minors. Still, children have been mobilized to help harvest cotton. The Government has indicated that its ongoing agricultural reforms have obviated the need for involuntary child labor.

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