Regions and Countries

	Table of Contents
p. 4 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

---

IV. ADB's Strategy

A. Summary of Key Transition and Development Challenges

65. Uzbekistan’s prospects for poverty-reducing development are good but depend on prioritizing and implementing public actions to address key transition and development challenges. The link between each dimension of poverty reduction (increasing jobs and income, capabilities, security, and empowerment) and the main transition and development themes (economic growth, human and inclusive social development, governance and institutional development, and regional cooperation) are summarized in Table 4.

Table 4: Summary of Key Transition and Development Challenges

Dimensions of Poverty Reduction		Transition and development themes: Links with poverty reduction
		Sustainable Economic Growth			Human Capital and Social Development		Governance and Institutional Development	Regional Cooperation
		Stable macroeconomic environment	Enabling private sector development	Environmentally sustainable rural development	Education, health, and gender results that impact on MDGs		Public sector management
	Employment and Income	-   Non-distortionary revenue mobilization -   Enhanced efficiency and pro-poor orientation of public spending -   Cash availability maintained -   Current account convertibility unimpeded	- Trade policy regime liberalized to realize export potential - Enterprise restructuring accelerated - Costs of operating in official economy reduced - Oversight functions of commercial banks and cash non-cash distinction abolished	- State procurement system liberalized to improve incentive framework in agricultural production - Private agricultural service providers’ network expands -  Rural nonfarm jobs created - Rural financial services developed	- Quality of basic education and efficiency of schooling system enhanced	- Reduced gender gap in secondary and vocational education - Women’s participation in the labor force raised	- Anticorruption strategy adopted to reduce waste of public resources - Budgetary reform followed through - Procurement reform	- Physical and economic distance to outside markets reduced through efficient transport and customs facilitation - Water–energy cooperation opportunities pursued
	Capability	Macroeconomic incentive framework  (actual price changes, exchange rates, foreign exchange and credit availability) fosters private entrepreneurship and productivity	Access to business development services, market information, and training increased for private small and medium-sized enterprises	- Agricultural extension services for improved technology and information - Rural–urban gaps narrowed in affordable quality basic services (education, health, water supply) - Reliable power supply in remote areas	- Early childhood development services developed - Teacher training programs improved	Business training for women	- Civil service career development programs - Local governments' capacity for service delivery enhanced	Institutional networks to share information and experiences on public policy developed

Transition and development themes: Links with poverty reduction
		Sustainable Economic Growth			Human Capital and Social Development		Governance and Institutional Development	Regional Cooperation
		Stable macroeconomic environment	Enabling private sector development	Environmentally sustainable rural development	Education, health, and gender results that impact on MDGs		Public sector management
	Security	Management of commodity price volatility to protect farmers’ incomes	Transparency in and protection of property rights increased	- Cadastral reform - Environmentally sustainable land and water management policies	- Out-of-pocket cost of education reduced - Adverse financial effects of health problems reduced - Social transfers targeting improved	Protection of women against domestic violence	Improved access to justice (judicial reforms)	Regional coordination in preventing HIV/AIDS, malaria, tuberculosis
	Empowerment	Publication of official macroeconomic statistics meeting international standards	Improved business–government dialogue on issues affecting the private sector	Accelerate pace of institutional reform through water users’ associations in irrigation sector	Community-driven initiatives in human capital development. e.g. early childhood development	Participation of women in public life	- Checks and balances on executive power - Transparency reforms in public financial management - Civil society–government partnership	Regional negotiating machinery in international trade fora

HIV/AIDS = human immunodeficiency virus/acquired immune deficiency syndrome, MDG = Millennium Development Goal.

B. Country Strategy and Program Strategic Focus

66. The development challenges summarized in Table 4 above indicate that the agenda is large and that ADB will need to be selective and make choices in the proposed areas of engagement to leverage its impact. This CSP is anchored in a results framework that will help improve selectivity by linking in a results chain (i) the overall goals of the I-WISP and long-term outcomes; (ii) the opportunities and constraints on achieving those outcomes; (iii) expected CSP medium-term outcomes; (iv) intermediate indicators and milestones to track progress towards those outcomes; and (v) ADB and partner interventions, ongoing and proposed, to support expected CSP outcomes.

67. Based on the constraints on transition and development, the Government’s development vision as reflected in the I-WISP, the lessons learned from ADB’s operations, and the selectivity framework and its application, the new CSP will help promote pro-poor growth by pursuing the following four strategic priorities (Figure 2):

1. Accelerate environmentally sustainable rural development by supporting a diversified, productive, and sustainable rural sector, to create rural jobs and raise rural incomes.
2. Enable PSD by enhancing public sector capacity for PSD reforms and catalyzing private domestic and foreign investment through ADB’s private sector operations.
3. Promote regional cooperation in transport and customs transit by helping develop regional transport corridors and modernizing customs administration.
4. Build the human capital of the poor by improving access to ECD services and quality basic education.

Figure 2: Alignment of CSP Strategic Priorities with the I-WISP Goals

68. Selectivity. The subset of activities to be included under each theme is being carefully selected. For example, in its rural work, while seeking greater coherence across sectors, ADB will keep the number of subsectoral themes to the minimum necessary to exploit synergies and increase development impact. This CSP has identified the areas where ADB will do less, stop its activities, and do nothing (Table 3). The risk of “drift” in making thematic, as distinct from sectoral, choices will be mitigated by anchoring the assistance strategy and program in a results framework.

1. Accelerate Environmentally Sustainable Rural Development

a. Context

69. Poverty cannot be reduced without strong sustainable growth of agriculture and, more broadly, the rural sector. Over 70% of the poor live in rural areas. Agriculture contributes about a third of GDP, over a third of employment, and around 40% of exports. The two main crops, cotton and wheat, are grown on over 80% of irrigated land under the state procurement system. The I-WISP indicates that under the full WISP, a rural development strategy is to be developed, covering agriculture, water management, production and market rural infrastructure, and development of the rural nonfarm economy. A detailed assessment of rural development issues is in Appendix 3, section B–D.

b. Constraints and Opportunities

70. The 3 “I”s. The main constraints on rural development can be broadly classified under three interrelated categories: incentives, institutions, and infrastructure.

1. Incentives. The main constraint on higher agricultural productivity and growth is the state procurement system for cotton and wheat that involves state intervention in inputs, financing, outputs, and marketing of these crops. Farmers’ freedom to decide is restricted. This factor, together with insecure land tenure, provides farmers with few incentives to increase productivity. The main plank of the Government’s rural reform program is the transformation of shirkats into private farms. While this has helped improve incentives and productivity, subjecting private farms to the state procurement system for cotton and wheat— as largely remains the case—means that the impediments to genuinely private farming will remain. The growth of rural nonfarm employment is below potential, limiting rural poverty reduction. The incentive framework for private investments in rural off-farm enterprises is weak because of underdeveloped rural financial services and limited access to market information, among other factors.
2. Institutions. The transition to a market-based rural economy will depend on addressing the following: (i) insecure tenure rights; ³⁰ (ii) input supply and marketing institutions that are de facto Government monopolies and reinforce the state procurement system; (iii) rural financial institutions that are underdeveloped, constraining rural entrepreneurs’ access to commercial credit; ³¹ and (iv) infrastructural institutions that are financially strapped, resulting in poor service delivery.
3. Infrastructure. Rural infrastructure deficiencies constrain growth. Inadequate spending on irrigation and land, and underpricing of water have led to land degradation and inefficient use of water. Irrigation and drainage systems, built to respond to the state procurement system, need to be restructured and focused on market-oriented diversified agriculture. Water users’ associations to manage irrigation in a financially self-supporting manner need to be further developed. The electricity grid has a broad reach but electricity supply is unreliable in remote rural areas. Alternative energy sources suitable for rural areas need to be considered. Rural areas have problems accessing safe drinking water and sanitation because of the dilapidated supply network and low collection rates, harming the health of vulnerable groups, particularly children. The Government recognizes that gaps in rural infrastructure need to be bridged to sustain rural productivity and growth. The Government has prepared a water supply strategy for 90% coverage by 2010. Other rural social infrastructure needs such as education service delivery are of high importance, and dealt with under the subsection on human capital for the poor.

c. Key Strategic and Practical Choices for ADB

71. Rationale. By focusing on rural development, ADB can help Uzbekistan achieve MDGrelevant results, especially enhanced rural jobs and incomes, environmental sustainability, and rural governance. Also, ADB can build on its generally positive experience (para. 56) to promote the rural transition agenda. Continuing involvement by the World Bank in the rural sector is expected, but the vast unfinished agenda allows space for value added by ADB.

72. More Integrated Approach to Rural Development. ADB’s rural development strategy needs to go beyond agriculture and look holistically at other key aspects such as support services, infrastructure, and environmental management. Concerted actions in rural sectors are needed to increase jobs and growth. Another dimension of a coherent rural development strategy within a given resource envelope is shared geographic focus, where possible, between agricultural and nonagricultural activities, to realize potential synergies.

73. ADB’s support for rural development will have the following elements:

1. Agricultural productivity and growth
1. Progress toward market-oriented agricultural policies
2. Improved land and water use management
3. Land administration reform
2. Private rural enterprises and rural finance
3. Rural infrastructure and services

74. Rural Development–Environment Links. Given the serious land degradation and irrigation management problems, ADB support will be vital for environmentally sustainable development. Providing safe water in rural areas is strongly linked to improving the environment and reducing poverty, with an especially strong impact on maternal and child health. ADB has gained valuable experience from rural water supply projects in Uzbekistan and could do more.

75. Integrating Gender into Rural Development Activities. The CSP will focus on increasing jobs for rural women by improving their access to good land, technology for crop diversification and agro-processing, and other income-generating assets. Awareness of gender issues relating to water management in rural areas will be raised. Progress in integrating gender issues will be monitored using appropriate gender-sensitive indicators in the CSP results matrix.

2. Strategic Priority: Enable Private Sector Development

a. Context

76. While the authorities recognize the need to create jobs and earn foreign exchange based on Uzbekistan’s comparative advantage, industrial policy does not provide a level playing field for all entrepreneurs. Shifting the role of the state from lead agent to facilitator of PSD is imperative to sustain high rates of poverty-reducing growth. A detailed assessment of PSD is in Appendix 3, section E.

b. Constraints and Opportunities

77. The cost of doing business in the official economy has been high causing increased informalization of economic activities. Regulatory reforms introduced through decrees need to be followed through with effective implementation. To ensure coherence and maintain reform momentum, a critical mass of reforms is needed, especially the following:

1. an improved business environment to reduce the costs to private enterprises of operating in the formal economy and to stimulate their competitiveness, including enhanced public sector capacity to continuously undertake regulatory reforms;
2. deeper reform of industrial associations so that private firms can access resources based on merit and not their association membership status;
3. banking sector reform that, on the demand side, engenders public trust in the banking system by eliminating inappropriate functions of commercial banks, and, on the supply side, improves banks’ credit risk assessment capacities and incentives so that they perceive private firms with viable projects to be as creditworthy as state enterprises; and
4. trade reform, external and internal, that removes administrative barriers to imported inputs needed by private firms, and ensures that domestic enterprises are exposed to efficiency effects of competing imports.

c. Key Strategic and Practical Choices for ADB

78. Support for Regulatory Reform Capacity. ADB will need to identify a manageable subset of pro-PSD reform areas to support in order to catalyze reform in other areas. Weaknesses in the business environment, particularly high regulatory compliance costs, impede PSD more than lack of financial resources. ADB will therefore focus on building public sector capacities to plan, implement, and review regulatory reform.

79. Prospective Credit Lines under Certain Conditions. OED’s country assistance program evaluation points out that providing credit before ensuring that conditions are in place to allow it to work effectively is not sound (para.58). Provision of new credit lines will depend upon improved performance of the current portfolio, a conducive business environment, and feasibility studies covering market demand and financing issues for enterprises. Specifically, ADB needs to know more about the effective demand for credit, and banks’ willingness to lend to potential borrowers that are not linked to industrial associations.

80. Reform of Industrial Associations. Having identified industrial associations as a major impediment to PSD, the PSA went on to recommend ADB support for a pilot project for integrated and comprehensive reform of the light industry industrial association. At this point, such an initiative may not have adequate traction. The Government does not see this as an issue, and ADB does not have a suitable instrument for intervention. However, ADB can help the Uzbek authorities make enterprises more competitive, including by designing and implementing industrial policy premised on strategic cooperation between the public and private sectors.

81. Financial Sector Restructuring and Privatization. Key considerations in the financial sector include (i) the instrumental role played by the banking sector in the import-substituting industrial policy; (ii) moral hazard in supporting a banking sector where significant distortions exist and financial transparency, particularly in state-owned banks, is lacking; and (iii) the Government’s reluctance to share critical data, including on nonperforming assets. The World Bank’s Financial Sector Institution Building loan included a bank privatization and restructuring component covering the two largest banks, NBU and Asaka Bank. EBRD provided TA to privatize Asaka Bank. However, progress on bank privatization has been slow. ADB has an ongoing TA³² that includes a diagnostic study on the banking sector that will recommend to the Government measures to ease constraints on sector development. The TA results will determine the scope for ADB’s support in the financial sector.

82. Allowing Other Development Partners to Lead in Trade Policy Reform. It is not clear that ADB has a comparative advantage in trade reform, although it recently conducted a study to address concerns that shuttle and small retail traders are discriminated against in terms of tariffs and operating hurdles, and recommends ways to level the playing field for all importers. IMF has undertaken some analytical work on trade policy at the country level. It also heads the Trade Policy Coordination Committee under Central Asian Regional Economic Cooperation (CAREC).

83. Private Sector Operations. Although an ADB–Government private sector framework agreement was signed in 2002, there have been no private sector operations to date. Weaknesses in the investment climate have limited the private sector operations program. This CSP proposes an integrated strategy for PSD, encompassing assistance from the public sector window for institution-building and from the private sector window for selective operations. The relationship between the two is critical: realizing potential private sector operations depends on private investment, which, in turn, depends on investor perceptions of the business environment. ADB’s Private Sector Operations Department (PSOD) will facilitate foreign direct investment through debt and equity investment. It will provide privatization and post-privatization support in selected sectors, particularly infrastructure and utilities. In the financial sector, PSO will focus its activities on private local banks, particularly those oriented toward SME activities.

84. Gender in Private Sector Development. The CSP will support more jobs for women in a competitive private sector. Building on the country gender assessment, analysis of gender differences in accessing credit lines—microcredit and SME—will be undertaken. Activities to help stimulate women’s entrepreneurial activities will also be undertaken, including providing business and skill training programs.

3. Strategic Priority: Promote Regional Cooperation in Transport and Customs Transit

a. Context

85. Given its location and market size, Uzbekistan plays an important role in Central Asia. Regional cooperation to reduce trade costs is a priority for double-landlocked Uzbekistan and the countries in the region, especially Uzbekistan’s immediate neighbors. Uzbekistan’s competitiveness would benefit from regional cooperation initiatives that reduce the physical and economic “distance” from markets, allowing it to offer speedy time-definite delivery of goods and services in which it has a comparative advantage. Uzbekistan aspires to World Trade Organization (WTO) accession, a goal that will have associated competition and efficiencyenhancing effects. An assessment of transport and transit issues is in Appendix 3, section F.

b. Constraints and Opportunities

86. There are significant trading complementarities between Uzbekistan and its regional neighbors that remain underexploited because of policy and institutional barriers, including trade-restricting policies and practices, weak cross-border cooperation, limited availability of multi-modal transport operations, high transit costs, and other “behind the border barriers to trade”.³³ Sectors where Uzbekistan has a potential comparative advantage include food and agro-processing, light manufacturing (including textiles), and natural gas. Reforms in trade policy, customs administration, removal of bottlenecks along transport corridors, and reforms to boost efficiency in sectors with export potential would set in motion a virtuous cycle of greater economies of scale, lower costs, increasing trade, more jobs, and higher growth for Uzbekistan and the region.

c. Key Strategic and Practical Choices for ADB

87. Regional Transport Infrastructure and Transit System. The regional cooperation strategy and program for Central Asia aimed to secure access to profitable markets in large neighboring countries for exports from Central Asian republics, and to reduce transaction costs and facilitate transit and transport across the region. The CSP focuses on regional transport corridors to complement the regional strategy and help Uzbekistan gain better access to regional and trans-regional markets. ADB will pursue synergies in transport infrastructure and trade facilitation by linking investment support for transport projects to transit facilitation.

88. Customs. While Uzbekistan has progressed in modernizing its customs administration, particularly in ICT-enabled customs, customs clearance remains costly and slow. ADB has experience and comparative advantage in this area and can help enhance customs administration efficiency.

4. Strategic Priority: Build the Human Capital of the Poor

a. Context

89. Across the republics of the former Soviet Union, the transition process strained structures that had produced high levels of human development. Uzbekistan has made commendable efforts to mitigate the social costs of transition and to maintain past levels of human development. Uzbekistan’s approach to reforms has been shaped in part by a concern for maintaining social stability. One dimension of this concern is that Government reforms in education, health, and social protection have focused on balancing fiscal sustainability of human development sector programs with maintaining public access to affordable basic services. Uzbekistan’s commitment to education and health, as indicated by public spending, is stronger than the region’s other countries’. Nevertheless, maintaining access to quality human development services, particularly in the underserved rural areas, remains a challenge. Human development issues are assessed in Appendix 3, sections G and H.

b. Constraints and Opportunities

90. Education spending has remained high (9% of GDP) but quality and equity could be improved. The main issues relate to access to preschool education, differences in quality of rural and urban basic education, education sector efficiency, sector governance, and financing.

91. Early Childhood. Preschool enrollment has dropped sharply (below 20%). Rural children have less access to preschools than urban children. This trend is of concern given that the first 2 years of pre-primary education are important in children’s physical and cognitive development. The public health strategy gives insufficient attention to malnutrition, which contributes to ill health of children and mothers, who particularly suffer from anemia and micronutrient deficiencies.

92. Rural–Urban Gaps in Resourcing Basic Education. Closing these gaps (para. 16) will be essential for education to serve as an enabling factor for students from low income families in rural areas to avail of productive employment opportunities. The decentralization of management of most preschools and of primary, secondary, and specialized secondary schools to local governments is not supported by a sufficient transfer of resources.

93. Government’s Priorities. The National Program for Personnel Training, launched in 1997, focuses on senior secondary education. The NPSED 2004–2009 focuses on basic education. The investment costs of NPSED are estimated at $1.2 billion, to be financed by a combination of external and budget financing.

c. Key Strategic and Practical Choices for ADB

94. Early Childhood Development (ECD). ADB should enter this area because a more extensive and affordable ECD network would deliver critical child education, nutrition, and health interventions to poor areas. The 2000 COS recommended that ADB explore options for early childhood but these were not pursued. ADB has established a strong foundation for cooperation with the Ministry of Public Education for entering early childhood education.

95. Basic Education. ADB should continue to be involved in basic education because the Government has demonstrated commitment to sector reform and attaches high priority to its medium-term basic education development program that includes filling resource gaps in school infrastructure, training, and materials. ADB has been the lead external partner in basic education, with results to show. However, ADB needs to be mindful of absorptive capacity constraints. Three ADB projects are under implementation with the Ministry of Public Education (MOPE): the Education Sector Development Program, the Second Textbook Development Project, and the ICT in Basic Education Project. Over the CSP period, ADB will focus its investment lending on poorly resourced rural schools.

96. ADB Priorities for Human Development. ADB will help the Government improve the quality and efficiency of service delivery and enhance equity-oriented policies in human capital services. Priorities for assistance will include the following:

1. Early Childhood Development
1. Strengthened policy framework for providing ECD services
2. Investment in ECD: delivering services to young children, with emphasis on the poor or disabled
3. Promotion of community involvement in service delivery
2. Basic education
1. Rural basic education
2. Strengthened reform management capacity and sector efficiency in basic education

97. Gender Dimensions of the Human Development Strategy. Elements of ECD can help women save time. Women receiving basic education could attend ICT training courses in mahallas (local community organizations).

5. Mainstreaming governance

98. Governance and institutional issues impinge on all sectors (para. 59). This CSP takes the approach that within each of the four strategic priority areas discussed above, a core set of governance and institutional outcomes will be pursued, with progress monitored through the results framework. The contribution of interventions under the strategic priorities to key dimensions of governance and institutional development are summarized below.

Table 5: Strategic Priorities, Governance, and Institution-building

Strategic Priority	Links with governance and institutional development
	Institution-building	Accountability and Transparency	Participation and Partnerships
Accelerate environmentally sustainable rural development	·   Transforming role of local hokimiyats from enforcer of state procurement system to facilitator of diversified rural production system. ·   Institutional strengthening of rural vodakanals for improved planning and financial management in water supply service delivery	Improved cadastre system and transparent and simplified land registration procedures for security of tenure.	·   Community land and water management organizations involved in the management, operation, and maintenance of irrigation and drainage facilities ·   In rural water supply sector, building community participation structures.

Strategic Priority	Links with governance and institutional development
	Institution-building	Accountability and Transparency	Participation and Partnerships
Enable private sector development	·      Government capacity for regulatory planning, management, and review. ·      Institution-building of competition agency	·    Regulatory transparency, accountability, and consistency ·    Transparency in privatization process ·    Reduced private enterprise perceptions of lack of transparency and pervasive corruption	·Institutionalizing public-private consultations on proposed legislation and regulations affecting private businesses. ·Role of industrial associations reoriented to serve as training and information resource centers for private small and medium enterprises
Promote regional cooperation in transport and customs transit	Strengthened capacity of transport and trade facilitation institutions for coordination and cooperation within country and with regional partners	Good governance and sound integrity within customs administration	Information exchange and dissemination of regional best practices in transport sector and customs reforms
Build human capital of the poor	National capacity for education policy formulation, planning, and financial management	Reliability and quality of education information base increased	·Community participation in early childhood development project designs and implementation ·Building private-public partnerships and facilitating private initiative in the education sector

Back III. ADB's Development Experience	Next V. ADB's Assistance Program