Countries and Regions

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p. 2 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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II. The Government's Development Strategy

A. Development Goals and Strategy

43. The Interim Welfare Improvement Strategy Paper (I-WISP). The I-WISP is a milestone in the evolving poverty reduction agenda. Covering 2005–2010, it was completed in early 2005 and presented to the boards of IMF and the World Bank in May 2005.²¹ The I-WISP builds on the Living Standards Strategy²² developed in 2004 with ADB technical assistance (TA). The full Welfare Improvement Strategy Paper (WISP) is to be completed in 2006.

44. I-WISP and MDGs. The I-WISP commits to pursuing MDGs relevant to the country. Uzbekistan belongs to a region that has several unique features that influence what targets and indicators are most appropriate (Appendix 1, Table A1.1). The I-WISP provides targets and indicators for poverty reduction, GDP growth, and other macroeconomic aggregates. Poverty incidence is to be reduced from 26.2% in 2003 to 20.0% in 2010. The I-WISP targets 8.0–8.5% GDP growth per annum over 2007–2010. Accelerated growth is expected to be achieved by raising the industry sector growth rate to 11–13%, underpinned by tripling investment growth to 12%. The authorities, however, are projecting slower agriculture sector growth of 4–5%.

45. Four Pillars of I-WISP. The I-WISP identifies four pillars for reducing poverty incidence:

1. High growth rates by maintaining macroeconomic stability and accelerating structural reforms. GDP growth is to be accelerated through rapid industrialization. Key targets for maintaining macroeconomic stability include inflation stable at 4–5% and the share of budget revenues to GDP at 26–27%. The I-WISP discusses a number of structural measures to stimulate private investment, including tax and public expenditure management reforms, improvement of the financial environment, and trade liberalization.
2. Human development and social protection. The quality of social services is to be improved, supported by a substantial increase in public spending on education, health, and social transfers. The quality of education services at all levels is to be increased and a number of measures will augment the physical and human resource base of the education system. Investment in primary health care will remain a priority, especially for maternal and child health. Assistance will target low-income families. The pension system is to be reformed.
3. Reduced interregional inequalities in living standards. This pillar will target investments in physical and social infrastructure in lagging regions. Increasingly decentralized public administration will promote balanced regional development.
4. Improve environment protection. Environmental protection policies and sustainable use of natural and biodiversity resources will be mainstreamed. Incentives will be improved for the sustainable use of land and water resources, NGOs and civil society will be involved in environmental issues, and regional cooperation will be enhanced in trans-border environmental issues.

B. Resource Mobilization and Investment

46. Investment Growth. The I-WISP envisages rapid growth driven by higher and more efficient investment. It requires investment growth to accelerate from 6.5% in 2004 to 10.0– 12.0% in 2010, but does not specify the likely sources of higher investment. The I-WISP also projects that over 2003–2015, the ICOR is to decline from 5.8 to 3.2. The I-WISP does not envisage significant additional mobilization of savings: gross saving as a share of GDP is projected to increase from 25% in 2004 to 26–28% in 2010.

47. Financing. The I-WISP does not cost the proposed priority public actions, much less embed them in a consistent macroeconomic framework, or indicate sources of financing. The IWISP does outline a medium-term budget framework for 2005–2007, maintaining current high levels of social spending, especially in education. It refers to targets for revenues and for current expenditures for the next 3 years but provides aggregate figures only for the latter. State budgetary expenditures are projected to decline by 2.6% of GDP over 2005–2007, but the share of social expenditures is expected to be maintained. Spending shares are projected at 6.60% of GDP for education, 2.50% for health, 0.09% for social security, and 1.40% for social transfers. These social spending estimates do not take into account domestically financed centralized investments.

C. Role of External Assistance

48. Official net resource flows to Uzbekistan have been falling in recent years, from $294.9 million in 2000 to $26.2 million in 2003.²³ The external financing position has improved in the last 3 years in terms of the current account and debt servicing obligations. IMF projects that Uzbekistan will maintain current account surpluses over the medium term, which would indicate the absence of gross external financing needs.²⁴ These projections may need to be revisited once the full welfare improvement strategy is prioritized and costed. This will likely entail scaling up of public investments, domestic resource mobilization, and official development assistance.

D. ADB’s Assessment of the Government’s Development Strategy

49. Pattern of Growth will be Key. To reduce poverty incidence to 20%, sustained high GDP growth needs to be matched with greater focus on the pattern of growth. The I-WISP sets a GDP growth target of 8.0–8.5% for 2007–2010. Although Uzbekistan did see a growth spurt in 2004–2005, maintaining high growth rates will be challenging, requiring both a higher level of investment and an improvement in its efficiency. It is unclear what the likely sources of higher investment (para. 46) will be, with the scope for public investment limited and foreign investors lukewarm. Raising the quality of investment, in terms of higher factor productivity growth and employment for a given rate of investment, will require removal of impediments to the development of a dynamic private sector that can provide new and better-paying jobs. It will also require ensuring greater efficiency and equity in public expenditures.

50. The I-WISP recognizes the importance of PSD. However, it also proposes that Uzbekistan continue its activist industrial policy under the Localization Program and envisages the industrial sector as the main engine of growth. Targets for industrial growth are an extension of the Government’s interpretation of the sources of growth that has at its core the Government’s import-substituting industrialization strategy. Of concern is not the activist industrial policy per se. Productive diversification from traditional to nontraditional products, a developmental imperative, is more likely to take place with an industrial policy that provides an enabling environment for an interactive process of strategic cooperation between the private and public sectors, that elicits information on business opportunities and constraints, and then generates policy initiatives. ²⁵ However, such a system requires a mechanism of transparency and accountability. Otherwise, proactive industrial policies would favor certain firms. It is the absence of transparency and accountability that has inhibited the growth of genuinely private sector firms in Uzbekistan, especially domestic private manufacturing SMEs (para. 28), that could drive industrial growth. The prevailing policy of protecting domestic industries with a capital-intensive bias is less pro-poor than a strategy that fosters greater openness, export orientation, and competition. Reducing the market power of industrial associations would level the playing field for all private sector enterprises and encourage competition (para. 31).

51. Potential for Agricultural Productivity and Growth. Agricultural productivity and rural development must be prioritized to reduce poverty. The I-WISP sets modest agriculture targets as it perceives industry as the engine of growth despite agriculture’s considerable potential. Uzbekistan could achieve higher-than-targeted agricultural growth and productivity if farm restructuring were completed and the state procurement system liberalized to allow farmers greater freedom to make production and marketing decisions. Rural SMEs, particularly in agroprocessing, could play a greater role in labor-intensive rural growth, but this would require linking private farmers and processors.

52. Rural Infrastructure. Efficient rural infrastructure services are important to promote sustainable rural growth. The I-WISP recognizes that irrigation water could be used more efficiently, but the strategy needs to link investment in on- and off-farm irrigation with a liberalized state procurement system for cotton and wheat, and expand autonomous financially self-supporting water users’ associations to encourage farmers to use resources more efficiently. Improving rural access to safe water supply and electricity is also essential.

53. Discussion of Key Governance Issues in the I-WISP. The full WISP should identify specific actions to address governance issues. The I-WISP refers in general terms to the Government’s commitment to strengthen governance, including in public administration, public financial management, corporate governance, and the legal and regulatory environment. However, it stops short of identifying specific governance issues to be tackled. The Government should acknowledge the main problems and develop specific action plans such as an anticorruption strategy. The full WISP should also provide details on how to deepen decentralization while building the capacity of local governments.

54. Likelihood of Achieving the Millennium Development Goals. Although the I-WISP indicates a commitment to achieving the MDGs, it does not discuss the prospects for doing so or the policy and institutional efforts that will be made to this end. Meeting the income poverty target (Figure 1) will require sustained broad-based growth. Uzbekistan has already achieved universal basic education (MDG 2) with no gender gap (MDG 3). Based on official data, Uzbekistan is likely to meet the under-5 mortality MDG. It may meet the maternal mortality MDG with better policies and additional resources. MDG 6 will be challenging because, although policies for prevention and treatment of HIV/AIDS, tuberculosis, and malaria are in place, public resources are inadequate. The gap in sustainable access to safe drinking water (MDG 7) may be closed, but the Government will need to target rural areas, where the deficit is much wider than in urban areas.

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